2006: The Need for Ethics in the Insurance Industry

„The Secular Sourcere entering the Age of Reformation“

Speech by Michael Breisky at the Conference of Industrial Insurance Brokers, April 2006, Pottstown, PA

Ladies and Gentlemen!
It is a great honor and pleasure for me to address this distinguished gathering on the issue of ethics – no one among my childhood pals or peers in school and career would have believed I could ever catch anybody’s attention on this subject. I have, therefore, proved that it is never too late to become familiar with ethics.

It is a difficult subject. My brother-in-law brought it to the point when he told me about a seven-year-old asking his father about the essence of ethics. The father, who was an antiques-dealer in London’s Portobello Road, answered like this: Imagine a sweet old lady, obviously not too well off, approaching our stand and paying ten pounds for a teapot. As you want to pocket the money, you notice that a second ten-pounds bill is sticking to the ten-pounds bill she had given to you. Now the question of ethics arises: Will you share this lucky ten pounds with your partner? As you will see, ethics in the insurance business runs a lot like this.

On a more serious note: If you think of your own death, you call on a priest, a rabbi or a mufti. And you call on an insurance broker whenever you think of damage to your life and property. Many other people make death and damage their business: undertakers, doctors, firemen, plumbers and so on. What distinguishes them from priests, rabbis, muftis and insurance- brokers is a simple thing: the former work with losses that have already occurred, while the latter deal with something bad that is happening in the future.

Future losses of life, health and property cause fear, and fear will always affect deep-rooted and pre-rational spheres of our mind. So in the language of the shrink’s world we are talking of Angst. In short: like religion, insurance-business will never be understood if one neglects the mystical and irrational aspects of its nature.

This irrationality in Insurance comes to light at least on two instances:

a)While an insurance agreement should only remedy the material consequences of a damage, there is an enormous temptation on the client’s side to regard his premium also as a “sacrifice” in the truest sense of this word: as “doing something holy” to please the Gods, so the loss will be averted altogether. Of course, nobody will openly admit to have ever fallen to such a temptation, but I doubt whether even the most sober business people are totally immune against it.

b)When religion is invoked to fend off all “evil”, its agents tend to underline their mystical powers by mumbling lengthy and incomprehensible rites – in African tribes they call it “yu-yu”. Compare this habit with the “small print” going over pages and pages of the insurance agreement!

In short, it is only fair to call the insurance agent the secular sorcerer of our times. This is by no means belittling his role, quite to the contrary: like the sorcerer we know from animistic societies, his secular look-alike wields tremendous power – and this power remains amazingly un-controlled. How else could you explain that insurance is the industry making by far the highest profits and paying the highest salaries, as Andrew Tobias documented so well already some 20 years ago in his classic “the Invisible Bankers – Everything the Insurance Industry never wanted you to know”.

Ladies and Gentlemen! We have heard often enough that power corrupts and that absolute power corrupts absolutely. In business life I think there is no other industry proving this saying so well as the enormously wealthy and powerful insurance industry. In the old days such a situation would have made us demand more laws and more government control. And although laws and courts continue to be indispensable the check the secular sorcerer’s power, the thrust of our policy should now be somewhere else: In the 21st century, the control of power must begin in the area of ethics.

Ethics means basically self-examination along trusted moral standards, with view to exercise self-control. So everything in ethics should come from within.

This may sound to many ears like Sunday-school-volunteerism, difficult if not impossible to apply in work-day practice. What makes the difference between practice and theory is the time-factor: while nobody in his right senses will doubt the long-term value of ethics, a much smaller number would be ready to see its short-time rewards. I think, however, that Globalization is making the practical value of ethics more understandable.

Globalization has many definitions and many effects, but what should interest us in the context of ethics is a simple fact: No man and no business can any longer be an island – everything is now connected to everything else on the globe, we all live now in one single context; and hence every action creates chain-reactions that will fall back on the initial action, more and more so in less and less time. Out-sourcing may, therefore, still be a valid financial technique, but in social and ecological terms it has become non-sensical – below the stratosphere there is no outer world left, where you could dump your unresolved problems.

I readily admit that the world has always been “only one” and that everybody could always have found a feedback for his action – you just had to look long enough, sometimes for centuries. What has changed in our era of Globalization, however, is the speed by which this feedback is appearing and more often than not haunting the action. Just think how often one bit of business-news affects first the change of one stock and then, within seconds, other stocks in totally different areas. And just remember a recent event: how the publication of some silly caricatures in a provincial Danish newspaper brought around within days, first, the death of dozens of people in distant Indonesia and Pakistan; and then the loss of jobs in Denmark – many of them had been held by readers of that newspaper.

This acceleration of chain-reactions, brought around by Globalization, reduces the time-span which ethical behavior needs to be rewarded by general acknowledgement – and profit. This explains why successful corporate business is increasingly engaged in Corporate Social Responsibility (CSR). A number of American and European retailers, for instance, would not be sending inspection teams to investigate textile factories in Asia, if they would not know that their customers are increasingly concerned whether the products they buy are produced under reasonable social and environmental standards.

In this sense we find it now easier to understand Winston Churchill when he remarked that “the most intelligent thing – I repeat: the most intelligent thing – is to do the decent thing”. Decency becomes here a synonym for common sense, i.e. the abstraction of long-term experience gained from human decisions and their results; it builds on the twofold experience: that nobody can live in total isolation and that “nobody can fool everybody all the time”. Consequently, to act always decently – i.e. ethically – will give you an advantage in a truly Darwinian sense. Which means it will pay off more often than not.

This now brings me to the content of ethics. It is difficult not to remember what religion has to say about this issue. Here one usually thinks first of the biblical Ten Commandments and then of the Judeo-Christian Golden Rule “love your neighbor as you love yourself”. Both hold supreme wisdom, even under purely secular terms: and it is only natural that both find almost identical expression in all other religions. In my view, one can summarize respect for all the Ten Commandments under the Golden Rule. This rule could, therefore, also be called as the religious “mother” of ethics. Immanuel Kant tried – I think successfully – to give ethics also a secular “father”, when he asked “to act always in a way that the essence of your action could become the basis of legislation”. More recently, and in view of man’s many new capabilities to destroy human life altogether, Hans Jonas added to Kant’s “Categorical Imperative” also the secular need for “sustainability”, i.e. the safeguard of a dignified survival of human life. Of course, there are some other formulas for the basics of ethics, all of them with the same goal of promoting social responsibility for your own benefit. Personally, I am particularly attracted by St. Augustine’s commandment “Love, and do what you really want to do” – love meaning full respect for your neighbor and for nature; and whether they are around the corner or at the antipodes, this respect will always keep you away from wrong choices.

While most people would nod approvingly to these formulas, they would still miss indications on how to put them into practice. Here I could think of three basic rules that should govern our actions:

1.“Do not lead us in temptation”; as a direct consequence of this

2.“Do always communicate truthfully”; this goes far beyond the issue of speaking truthfully. While you can also speak where nobody can hear you; communication will also include the aspect of how your message is received and – more importantly – understood. And finally,

3.“Do always try to stay within a Human Scale”. Disobeying this rule induces regularly a violation of the other two rules and is, therefore a hotbed for unethical behavior. Let me explain a little:

Today, the Human Scale is mostly neglected in favor of bigness, with obvious consequences in technology, esthetics or society in general. In our modern information society the key-problem related to Human Scale and bigness is the constant danger of “information over-load” – where individuals or an organizations come to wrong, irrational and/or unethical decisions because their capacity to process information has been exhausted.

This is quite strange: while technological progress has given to most people an abundance of information, we must acknowledge that this has not made it easier for them to make all decisions in accordance with reason.

In its essence this is a biological question. Evolution has provided us with a rather weak capacity to process verbal or abstract information, not more than 16 bytes per second. This can be balanced, however, with “supervision” in the original meaning of this word, meaning the holistic understanding of a situation. “Supervision” is achieved either with our senses, which make us constantly scan the outside world for everything unusual or odd that is outside the focus of our attention, leading to a highly effective holistic “picture” of our environment; or with the input of team-players, who would allow us to share their experience and impressions – including, most importantly, what they think about yourself. So wherever technology allows us to reach beyond the limits of our senses, the team-factor will have to come into play as the best means to check quickly on the correctness of our abstract reasoning. But obviously, our brain’s biological capacity to deal with a high number of players has not changed either since early stone-age. If we want to understand the limits to modern team-work and stay within Human Scale we must, therefore, still look at the social habits and cognitive limitations of our ancestors, the primitive hunters and gatherers.

Ladies and Gentlemen, it is about time I return to the insurance. Ethics remain basically the same, so insurance does not need a separate system of ethics. It is only logic, however, that the insurance industry like any other industry will have to focus on some special areas and to give, so to say, a special dress to the one and only system of ethics. And so I will give some examples on how to apply these 3 rules to the specific needs of our industry.

Associating temptation to insurance makes you think immediately of insurance-fraud and the need for strict controls of all sorts of claims. This is self-evident and does not need further comment. Where I see a temptation in a much grander way, however, is the way insurance brokers are paid for their services: more often than not, the insurer pays them a fixed percentage of the premium they receive from the client. The temptation should be obvious: as the broker’s reward increases with the rise of premium-payments, he is tempted to procure for his client exaggerated insurance-coverage – either by covering unnecessary risks or by exaggerating the maximum possible/likely risk.

The ethical way to eliminate this temptation is to break the fixed tie between the broker’s fee and the premiums; and then to move to a system of consultancy-fees. Needless to say that calculation of this consultancy fee could continue to reflect also the sum of premium-payments, but the emphasis should be on work and costs occurring on the broker’s side.

Truthful communication is at stake once the insurance industry neglects to ask whether the client has really understood the parts of the agreement that have deliberately been brushed away into small print – the mystical “yu-yu” I have mentioned before.

Of course, genuine insurance always involves big money and the terms of risks and damages must be formulated crystal clear; the typical lawyer’s language will, therefore, hardly be dispensable. But the use of legal terms does not keep you from checking whether a truly average client is likely to understand the significance of these terms. In industrial insurance you should be able to rely on an honest broker (remember the issue of fixed rate- provisions versus consultancy fees!) who has to check the agreement for pitfalls – in private insurance, however, where most agreements are on standardized forms, signed without such independent brokers, ethics require an insurance company to do some kind of a proof-reading by an other truly independent party – like a court-appointed panel – and have this stated on the form.

For the insurance industry to stay within the Human Scale is by no means easy: I cannot think of any other industry that has to bridge such a wide financial gap between penny-twisting needs of clients and the world of zillions the re-insurance companies are dealing with. To handle this gap with the relatively small teams it takes to stay within a Human Scale is almost impossible, even if you establish several hierarchies of teams on the basis strict subsidiarity.

I think the weakness of the client – hampered in addition to the lack of lack of clarity in the contracts by the irrational Angst I have mentioned before – has made it easy for the insurance companies to take the client more or less for granted and to focus instead on relations with re-insurance and the peers of other insurance companies – just the way the antiques dealer of Portobello Road was doing. It is good proof of this state of affairs to watch the ongoing wave of mergers & acquisitions in insurance and see how most of them do not produce the expected synergies and simply fail. Needless to say that such a situation is highly conducive to obfuscate the insurance market and increase temptation for unlawful kick-backs, cartels and other forms of poorly disguised corruption.

In order to re-introduce the Human Scale to insurance we have to strengthen the position of the client. This can hardly be done within the hierarchical pyramid of a big insurance company. Instead, it should help the interests of all parties involved if there is a truly independent third party – possessing all the inside-knowledge of the insurance trade, but hired and paid solely by clients – who would be brokering insurance contracts. So it is moving in this direction, i.e. cutting the coziness of insurer/broker relations, that the Human Scale could be maintained; and that unethical temptations could be kept out of the insurance industry.

And move it must. Coming back to the picture of the secular sorcerer, I see another parallel between him and religious institutions. Just remember the situation of the Catholic church in the 15th century: just like insurance, we see a lot of good being done, but we also see extremely powerful and corrupt popes, bishops and other clergymen. It took a Martin Luther to start Reformation and clean up this mess. Today we see that Reformation is never completed, but political power and corruption in religion is hardly an issue any longer. In this sense the insurance industry could be called a secular church highly in need of Reformation. Maybe its Martin Luther is already working today in New York as a State Attorney.

Ladies and Gentlemen, my final remark goes to the future of the insurance business, and I think it has all the potential to become the lead industry in ethics and CSR. Just remember what I said about ethics as condensed long-term experience and the time-span which ethical behavior needs to be rewarded by general acknowledgement and profit. It just happens that the insurance industry is sitting on an enormous wealth of such experience: the millions of settled cases slumbering in its archives. If you look close enough for the causes leading to damage, you come up with an immensely human conclusions: although disaster can strike the truly good and innocent; it will strike more often than not because someone thought he could profit from doing a short-cut to due diligence in its broadest sense. Ethics, it turns out again, is the most intelligent thing to do.

To some extent this experience is already being used to design special contracts, i.a. reduced premiums in health-insurance for non-smokers or in car-insurance for drivers of a certain gender, age-group or profession. But just imagine the impact on economy and society in general, if insurance companies would reduce their premiums where they can document the results of ethical behavior; be it the experience that children whose parents are living in stable relationship do not fall ill as often; or that companies exercising CSR with their staff will have less strikes and fire incidents.

Is it too optimistic that insurance-industry will generally be held in in highest esteem, because it is the laboratory of applied and profitable ethics?

Thank you.