Insight on Ethics and The Insurance Industry www.InsuranceCommunityUniversity.com . Insurance forms and endorsements vary based on insurance company; changes in edition dates; regulations; court decisions; and state jurisdiction. The instructional materials provided by The Insurance Community Center and its authors is intended as a general guideline and any interpretations provided by The Community do not modify or revise insurance policy language. Information which is copyrighted and proprietary to Insurance Services Office, Inc. (“ISO Material”) is included in this publication. Use of the ISO Material is limited to ISO Participating Insurers and their Authorized Representatives. Use by ISO Participating Insurers is limited to use in those jurisdictions for which the insurer has an appropriate participation with ISO. Use of the ISO Material by Authorized Representatives is limited to use solely on behalf of one or more ISO Participating Insurers. The authors of these materials, Insight Insurance Consulting and The Insurance Community Center assumes neither liability nor responsibility to any person or business with respect to any loss that is alleged to be caused directly or indirectly as a result of the instructional materials provided. Insight Insurance Consulting 714 803-5830 laurie@insightinsuranceconsulting.com www.insightinsuranceconsulting.com www.theinsurancecommunity.com Copyright 2010 All Rights Reserved www.InsuranceCommunityUniversity.com . 2 What this class will cover 1. The Ethical Requirement for Insurance 2. Background on “ethics” and “morality” from an historical and current day perspective 3. Meaning of Ethics 4. Ethics vs Morality 5. Ethics in the Insurance Industry www.InsuranceCommunityUniversity.com . 3 Ethics Requirement www.InsuranceCommunityUniversity.com . 4 Ethics Requirement for Insurance What does the ethics regulation require? The regulations stated in Section 2188.6(H)(I)&(J) of the California Code of Regulations requires Fire and Casualty broker-agents and Life agents to complete four hours of ethics training during their two-year license term. Personal Lines broker-agents will be required to complete two hours of ethics training during their two-year license term www.InsuranceCommunityUniversity.com . 5 The Foundation of Ethics Socrates Plato www.InsuranceCommunityUniversity.com . Aristotle 6 Foundation of Ethics Impairment Jeff Skilling Bernie Ebbers Dennis Kozlowski Enron Worldcom Tyco www.InsuranceCommunityUniversity.com . 7 2005 Spitzer as attorney general of NY filed suit against AIG and Hank Greenburg Spitzer was inaugurated on 1/1/07 as governor of NY promising to focus on ethical government and the economy. 2008 Involved in a prostitution Scandal Resigned 3/1208 resigned from Governor of NY 11/6/08 federal prosecutors declined to press charges He’s Back!!! www.InsuranceCommunityUniversity.com . 8 Why Should We Study Ethics? High profile cases have raised the question of ethical behavior Businesses can no longer hide Transparency is the new watchword The public demands more from the business relationships In general there are higher standards being placed on behavior www.InsuranceCommunityUniversity.com . 9 Foundation of Ethics www.InsuranceCommunityUniversity.com . 10 The Foundation of Ethics The philosophical background of ethics can be traced to Plato as espoused most notably in the ten books of The Republic (Republico). The Republic was patterned after much of the works of Socrates—a teacher of Plato and carried forward by Aristotle who was a student of Plato at the age of 17 in Athens (367BC). www.InsuranceCommunityUniversity.com . 11 The Foundation of Ethics Aristotle and his peers were among the first “ancient” philosophers who made a serious and systematic study of moral principles that he called ethics “Aristotle believed, our early training and current material circumstances will determine to a great extent our capacity to follow the right path.” Philosophy The Classics www.InsuranceCommunityUniversity.com . 12 A Fable Worth Repeating www.InsuranceCommunityUniversity.com . 13 Socrates and Glaucon In The Republic, Plato recounts a dialogue between Socrates and Glaucon, Plato’s older brother. In it, Glaucon argues that only the fear of detection and punishment prevents a human being from breaking the law and doing evil for the sake of his own self-interest. www.InsuranceCommunityUniversity.com . 14 Socrates and Glaucon Glaucon thinks that this natural fact is demonstrated by the fable of the shepherd Gyges, who found a gold ring which made him invisible whenever he twisted it on his finger. On realizing the ring’s power, Gyges used it to seduce the queen, murder the king, and take the throne. www.InsuranceCommunityUniversity.com . 15 Socrates and Glaucon Glaucon’s claim then, is that every one of us, however law-abiding and good we might seem, would do as Gyges did, or something else in our self-interest, if we could avoid detection and punishment. www.InsuranceCommunityUniversity.com . 16 Philosophy Branches Metaphysics Existentialism Epistemology Ethics Study of Existence & Nature Aristotle, Spinoza, Descartes Study of Knowledge Descartes, Hume, Kant Study of Good and Evil Plato, Aristotle, Socrates www.InsuranceCommunityUniversity.com . 17 Philosophy Branches Logic Religion and Law Study of Methods of Thinking Study of Societal Existence www.InsuranceCommunityUniversity.com . Misc Augustine Aquinas 18 What Does Ethics Mean? www.InsuranceCommunityUniversity.com . 19 What is Ethics? Various Definitions coming from various disciplines Webster Dictionary: “The discipline dealing with what is good and bad and with moral duty and obligation” Golden Rule: “Do unto others what you would want them to do unto you” www.InsuranceCommunityUniversity.com . 20 What is Ethics? Ayn Rand, Russian-American novelist and philosopher (1905-1982): Ethics is a code of values which guide our choices and actions and determine the purpose and course of our lives.” Cambridge Dictionary of Philosophy, 1995: The word itself is sometimes used to refer to the set of rules, principles, or ways of thinking that guide, or claim authority to guide, the actions of a particular group; and sometimes it stands for the systematic study of reasoning about how we ought to act. www.InsuranceCommunityUniversity.com . 21 Ethics vs. Morality It is not always that simple a decision www.InsuranceCommunityUniversity.com . 22 Ethics vs Morality Often these words are used interchangeably Morals define personal character Ethics stress a social system to which morals are applied. Ethics point to standards of code of behaviour expected by the group to which individuals belong www.InsuranceCommunityUniversity.com . 23 Ethics vs Morality Case in point: a criminal defense attorney. The lawyers personal moral code my find murder immoral and reprehensive Ethics demand the accused client be defended In a court of law past actions of the accused may be kept out of evidence so as not to prejudice the jury www.InsuranceCommunityUniversity.com . 24 Ethics vs. Morality “I think it would be more along the lines of: A Moral man does not steal because it goes against his own beliefs, whereas an ethical man simply wouldn't steal because it's against the law.” (Wisegeek.com) www.InsuranceCommunityUniversity.com . 25 Ethics vs. Morality Often times the conflict with Ethics and Morality deal with very sensitive topics of which there are very divergent “personal” decisions. Abortion Bearing Arms www.InsuranceCommunityUniversity.com . 26 Ethics and Morality This conflict is often at issue in the workplace Example www.InsuranceCommunityUniversity.com . 27 Have you ever….Tell the truth Lied to your parents Lied to your spouse/children Cheated on an exam Lied (about your weight on your drivers license) Cheated on your taxes www.InsuranceCommunityUniversity.com . 28 Ethics of America Josephson Institute 29 www.InsuranceCommunityUniversity.com . Josephson Institute 10-2009 Survey On-Line 6,930 respondents Age groups 17 and under 18-24 25-40 41-50 Over 50 30 www.InsuranceCommunityUniversity.com . Age Matters Young generations more likely to engage in dishonest conduct 17 or under: 51% believe lying and cheating or necessary to succeed Over 50: 10% 17 or under: 31% deceive boss Over 50: 8% 18-24: 7% inflated an insurance claim Over 40: 2% 31 www.InsuranceCommunityUniversity.com . Attitude Matters If the person holds a belief that lying and cheating are necessary (cynics) – that person more likely to lie and cheat Cynics are: Three times more likely to lie to a customer (22% vs. 7%) Inflate an expense claim (13% v. 4%), or inflate an insurance claim (6% vs. 2%) More than twice as likely to conceal or distort information when communicating with their boss (24% vs. 10%). 32 www.InsuranceCommunityUniversity.com . Inflating Insurance Claim Age 18-24 (7%) 25-40 (3%) 41-50 (2%) Over 50 (2%) Attitude Those who believe one has to lie or cheat at least occasionally in order to succeed are three times more likely to cheat an insurance company (6% v. 2%) 33 www.InsuranceCommunityUniversity.com . Lying to a Customer About something significant in the past year Age: 18-24 (18%) 25-40 (12%) 41-50 (8%) Over 50 (6%) 34 www.InsuranceCommunityUniversity.com . Ethics and Self Image Percentage who said they're satisfied with their own ethics and character Age 17 or under (90%) 18-24 (94%) 25-40 (90%) 41-50 (91%) Over 50 (90%) 35 www.InsuranceCommunityUniversity.com . Ethics and Self Image Attitude: • Those who believe one has to lie or cheat at least occasionally in order to succeed are less likely to be satisfied with their own ethics and character than others (87% v. 91%) Religious Beliefs: • People who say religion does not play an important role in their lives are just as likely to be satisfied with their own ethics and character as those who say religion is important (91%). 36 www.InsuranceCommunityUniversity.com . Ethics and Self Image Percentage who said they are more ethical than most people they know: Age: 17 or under (64%) 18-24 (73%) 25-40 (71%) 41-50 (69%) Over 50 (67%) 37 www.InsuranceCommunityUniversity.com . Josephson Six Pillars of Character Trustworthiness Respect Responsibility Fairness Caring Citizenship 38 www.InsuranceCommunityUniversity.com . Influences on Behavior • Family, church, and school provide the foundations for behavior early in life • Greed and power can both influence one’s perception of acceptable behavior • Competition can drive behavior • The actions of business associates can affect patterns of corporate behavior • Fear of discovery can adversely affect individual behavior www.InsuranceCommunityUniversity.com . 39 Common Rationalizations for Not Doing What’s Right • • • • • • • • Everyone else does it Nobody will care The boss does it No one will know I don’t have time to do it right That’s close enough Some rules were meant to be broken It’s not my job www.InsuranceCommunityUniversity.com . 40 It is Often About Perceptions Stereotyping www.InsuranceCommunityUniversity.com . 41 Rank the Following Attorney, Car Salesman, Insurance Agent/Broker, Clergy Rank them according to your perception of their ethical standards. Rank them according to what you believe is the public’s perception www.InsuranceCommunityUniversity.com . 42 Gallup Results Clergy Lawyer Insurance Agent Car Sales Person www.InsuranceCommunityUniversity.com . 43 www.InsuranceCommunityUniversity.com . 44 Ethics in the Workplace • Ethical behavior starts at the top. If leadership and management is not ethical, neither will the organization be as a whole • How many times have you been asked to do something that you know is not right • What did you do? www.InsuranceCommunityUniversity.com . 45 Have you ever??????????? Put something on an application that was not entirely true (500 feet) Not put something on an application because you thought it would result in a rejection (vacant building) www.InsuranceCommunityUniversity.com . 46 Have you ever??????????? Misrepresented Mileage on a PAP Existence of youthful drivers Prior accidents/losses Claims Class Codes Payroll Age/Sq Footage of the building www.InsuranceCommunityUniversity.com . 47 True Statement “I am not a really successful agent because I am just too honest” www.InsuranceCommunityUniversity.com . 48 Have you ever??????????? Been asked to do something that you thought was not right by your boss, manager What did you do? www.InsuranceCommunityUniversity.com . 49 Ethics in the Workplace Factors influencing the reporting of unethical conduct (whistle blowing) • Fear of reprisal (by management) • Fear of reprisal (by co-workers) • Fear of personal reputation • Fear of job loss www.InsuranceCommunityUniversity.com . 50 Ethics in the Workplace Ethical behavior starts at the top. If leadership and management is not ethical, neither will the organization be as a whole Every business should have a Code of Ethical Conduct Education of employees in ethical conduct is essential in preventing unethical conduct www.InsuranceCommunityUniversity.com . 51 Ethics and Insurance www.InsuranceCommunityUniversity.com . 52 Ethics and Insurance The importance of ethics to the insurance professional Insurance is a business of trust Trust anticipates standards of behavior Some standards of behavior are governed by statute Statutory obligations should not be the reason for ethical behavior www.InsuranceCommunityUniversity.com . 53 Ethics and Standard of Care Insurance agent/brokers must meet a standard of care acting in the capacity providing insurance products/solutions The standard of care is three pronged www.InsuranceCommunityUniversity.com . 54 Standard of Care and Ethics Based on Regulations and Law Duties owed to the Insurance Company www.InsuranceCommunityUniversity.com . Duties owed to the insurance customer 55 Basics of Standard of Care Based on Regulations Compliance with such issues as GLBA, Privacy Acts, authority as an agent/broker To the Insurance Company That the submission qualifies for the insurance carrier That you are honest and accurate To the Insurance Customer Ordinary care to obtain the coverages they have requested www.InsuranceCommunityUniversity.com . 56 Code of Ethics www.InsuranceCommunityUniversity.com . 57 Implementing the Code of Conduct Make sure senior management endorses Circulate Code to all employees Regularly review Code with employees e.g. performance reviews) www.InsuranceCommunityUniversity.com . 58 Implementing the Code of Conduct Publicize code externally (clients, insurers) Enforce the Code Incorporate as part of new employee orientation www.InsuranceCommunityUniversity.com . 59 Your Code of Ethics Conflicts of Interest Examines ways to spot and handle complex situations where the employee's personal interests, or the interests of a family member, may compete with the organization's or shareholders' interests www.InsuranceCommunityUniversity.com . 60 Your Code of Ethics Environment An employees' responsibilities to perform their work and maintain their workplace in a safe and lawful manner along with the responsibility to immediately report any injuries or potential hazards. www.InsuranceCommunityUniversity.com . 61 Your Code of Ethics Equal Employment Opportunity (EEO) Provides employees with practical questions to ask themselves to guide them in refraining from comments or actions that could be reasonably considered as harassing or discriminatory. It also teaches that employees should not be retaliated against for engaging in protected EEO activity. www.InsuranceCommunityUniversity.com . 62 Your Code of Ethics Fair Dealings - teaches the rules for fair treatment of customers, vendors, and competitors Financial Integrity - discusses processes to properly account for expenses, hours worked, and other items and how discrepancies in their accounting can impact the validity of the organization's books and records www.InsuranceCommunityUniversity.com . 63 Your Code of Ethics Gifts and Favors - examines the rules for giving to and receiving gifts and favors from vendors, customers, and other employees Confidential Information - discusses safeguarding private information relating to business operations, clients, vendors, and employees www.InsuranceCommunityUniversity.com . 64 Approaches to Ethical Behavior Situation Based Rule Based People Based www.InsuranceCommunityUniversity.com . 65 Ethical Decision Making Situation Based: What is the best possible outcome given these circumstances? Rule Based: Follow the rules, and let the chips fall where they may. People Based: Follow the Golden Rule: what would you have others do if faced by the same situation? www.InsuranceCommunityUniversity.com . 66 Case Studies What Would You Do?? www.InsuranceCommunityUniversity.com . 67 Simplified Moral Approaches Situationism Subjectivism Absolutism Exceptionism www.InsuranceCommunityUniversity.com . Ethical Decisions occur in every phase of the insurance transaction Prospecting What do you say about yourself What does your website say about you Presentations Overstating your abilities or what the policy may cover www.InsuranceCommunityUniversity.com . 69 Ethical Decisions occur in every phase of the insurance transaction Transactional issues Applications Marketing Binders Certs Renewals www.InsuranceCommunityUniversity.com . 70 The case of the Best Set of Drivers--ever About the Application www.InsuranceCommunityUniversity.com . 71 The case of the Best Set of Drivers--ever The insurance agent had several large accounts all of which had fleets of vehicles One of the accounts had a fleet of drivers with excellent driving records and accordingly, the BAP was easy to place and very well priced One of the other accounts the broker wrote had the opposite—terrible drivers www.InsuranceCommunityUniversity.com . 72 The case of the Best Set of Drivers--ever The agent had a great idea—use the listing of good drivers on the second account How could he get caught—it was with a different carrier and he had the MVRs to submit This way he could get his insured a good rate and save his account www.InsuranceCommunityUniversity.com . 73 Outcome Situation Based: The agent knew the company would never really check. He had slipped some by before Rule Based: He knew this was not right but as long as he wasn’t caught he would be ok People Based: His role is to do the best for his client and that what he was doing www.InsuranceCommunityUniversity.com . 74 Outcome The office manager found the mis-statements on the file and forced the agent to re-submit The client was forced to get rid of some drivers At renewal the client found a new agent that would lie for him www.InsuranceCommunityUniversity.com . 75 The Case of the Deep Fat Fryer Renewal Application www.InsuranceCommunityUniversity.com . 76 The Case of the Deep Fat Fryer The insured was a chain of sandwich shops located in office buildings The sandwich shops did no cooking other than to warm up food in a microwave Their insurance was placed with an insurance company that offered a modified restaurant package specifically for businesses that did not do cooking www.InsuranceCommunityUniversity.com . 77 The Case of the Deep Fat Fryer At the second renewal, the insured told their agent that they were doing deep fat frying at their location at Universal Studios. They were limiting it to frying French fries they could serve with their sandwiches. The agent at renewal chose not to include this information on the application because the frying would disqualify them from the program for their entire risk www.InsuranceCommunityUniversity.com . 78 The Case of the Deep Fat Fryer The insured suffered a major fire at the Universal Studio location doing damage to their leased premises; equipment and subsequent fire damage to the building The insurance company denied coverage based on the “increased hazard” section of the policy www.InsuranceCommunityUniversity.com . 79 The Case of the Deep Fat Fryer Company further alleged that they would never had written the account with the frying Additionally the insured had not adequately protected the premises with an approved Ansell system. The client told the company they had advised the agent www.InsuranceCommunityUniversity.com . 80 Outcome Insurance Agent was held responsible for misrepresentation Claim was $950,000 www.InsuranceCommunityUniversity.com . 81 The Young Driver You Should Not Have Told Me www.InsuranceCommunityUniversity.com . 82 The Young Driver Sally and Beth had been friends since childhood and shared raising their kids together Sally also wrote all the personal lines insurance for Beth One day Beth called up Sally to share the news that their son, Ryan, had just gotten his driver’s license www.InsuranceCommunityUniversity.com . 83 The Young Driver Sally was glad to hear the news but now faced the ethical decision as to whether she should tell her excited friend she needed to add him to their policy And we all know what that was going to cost! www.InsuranceCommunityUniversity.com . 84 The Young Driver Situation-based: You were just told this by a friend. You know that the son is covered automatically on the policy Beth has and she can save some money until renewal when the company requires the updated information www.InsuranceCommunityUniversity.com . 85 The Young Driver Rule Based: The rule is that all licensed drivers should be reported to the insurance company. That is an obligation you have to the carrier and that is, after all, how they charge adequate premium. Many companies are obligating the insured by application to notify. www.InsuranceCommunityUniversity.com . 86 The Young Driver People Based: Why lose a friend over this. It was just told to you as a friend. Beth did not call to add Ryan on the policy to begin with. www.InsuranceCommunityUniversity.com . 87 The 5PM Friday Certificate of Insurance www.InsuranceCommunityUniversity.com . 88 The 5PM Friday Certificate of Insurance You are the last one left in the office Your client walks in the front door He needs a certificate “now” or he will lose the deal You tell him to wait and you’ll issue the cert You pull his file and realize it with an E & S Broker www.InsuranceCommunityUniversity.com . 89 The 5PM Friday Certificate of Insurance Trying a long shot, you call the carrier and actually get someone this late on a Friday! But they tell you only the E&S broker listed on the account has the carrier’s authorization to issue the certificate. www.InsuranceCommunityUniversity.com . 90 The 5PM Friday Certificate of Insurance Hanging up, you stare at your desk. You are certain the broker will issue the certificate on Monday without any problem, but what are you to do about your anxious client who is waiting in the outer office? www.InsuranceCommunityUniversity.com . 91 The 5PM Friday Certificate of Insurance Situation-based: Past experience indicates broker, if there, would issue the certificate; you have no doubt that if the broker were in your position, he would elect to help the client, and since possible pain of delay is far in excess of possible downside of not helping client, go ahead and issue certificate. www.InsuranceCommunityUniversity.com . 92 The 5PM Friday Certificate of Insurance Rule-based: You have no authority to issue the certificate, so regardless of the consequences (including potential loss of a valuable client), you must refuse to do so www.InsuranceCommunityUniversity.com . 93 The 5PM Friday Certificate of Insurance People-based: Let’s make an exception—after all look at that distraught client. Procedures are valid for normal situations. The client’s position, you have no doubt you would deeply appreciate the professional service of your agent stepping in to help you out, so you should do the same. www.InsuranceCommunityUniversity.com . 94 The Competition Has Pulled One On You www.InsuranceCommunityUniversity.com . 95 The Competition Has Pulled One On You Your client has told you he is shopping with other brokers You arrive for your appointment to present your renewal quotation and your client tells you he has received a better price www.InsuranceCommunityUniversity.com . 96 The Competition Has Pulled One On You You ask if you might see it and he agrees to show you You realize you represent that same carrier and know it is a great program You are certain your client does not qualify for this program and that the agent trying to steal the account has not told the insurance company the whole truth www.InsuranceCommunityUniversity.com . 97 The Competition Has Pulled One On You Situation-based: Even though the carrier may never find out, the prospect is really getting an unfair advantage; if the carrier does find out, the other agent’s reputation and future ability to place business with that carrier is likely to be impaired. Maybe an informal visit to the agent’s supervisor, can settle the entire issue quietly, leading the other agent to withdraw his erroneous proposal without any damage beyond a possible unhappy prospect. www.InsuranceCommunityUniversity.com . 98 The Competition Has Pulled One On You Rule-based: The underwriting rules has a valid purpose and this insurance should never have been offered. Since you represent this company too, you have an obligation to the carrier to let them know of the misrepresentation before it is too late. www.InsuranceCommunityUniversity.com . 99 The Competition Has Pulled One On You People-based: Don’t you owe some responsibility to your “old” client. After all he is saving money and it is not his fault. When you were new you did the same thing and you are certainly glad no one took away one of your few accounts over such an error. What goes around comes around! www.InsuranceCommunityUniversity.com . 100 I Forgot to Market to That Insurance Company Should that cost me this account? www.InsuranceCommunityUniversity.com . 101 I Forgot to Market to That Insurance Company Your insured is very cost conscience and has asked you to search the market for the “best deal”. You went to several insurance companies and thought you had found the best deal. The day before your meeting with the client, your insured calls to tell you he heard that Cheap and Easy Insurance has really good rates according to his friend. www.InsuranceCommunityUniversity.com . 102 I Forgot to Market to That Insurance Company You did not get a quote from company Cheap and Easy and it is too late for you to ask them as the appointment is tomorrow and the policy renews in a week. www.InsuranceCommunityUniversity.com . 103 I Forgot to Market to That Insurance Company What do you tell your client at the meeting? • Yeah, I checked with them and they didn’t like your loss potential • Sorry, but they were not on my contact list and I did not contact them • I know the market and they would not be a good fit for you • I’ll do a better job next year, but it is too late this year • Is Honesty the Best Policy in this case www.InsuranceCommunityUniversity.com . 104 When All Is Said And Done It is about doing the right thing each and every time Being Honest and Having Integrity www.InsuranceCommunityUniversity.com . 105 Visit me on my website at www.insightinsuranceconsulting .com Coming this fall become a part of The Insurance Community Center. A Center for learning and a Community for Sharing www.insurancecommunitycenter.com www.InsuranceCommunityUniversity.com . 106