Ethical Dilemmas in Insurance

Published by the Financial Planning Standards Board India in their April-May 2013 issue

Sophie’s Choice, an award winning movie produced in 1982, beautifully portrays the difficulties and dilemmas in certain decisions. Sophie and her two children are imprisoned in a Nazi war camp. Sophie is told that one of her children can live and the other must go to the gas chambers. Faced with this choice Sophie chooses that her elder son live and daughter go to her death. Fortunately, the choices in insurance are not so severe. However, in a milder form, dilemmas surround most decisions that advisors and intermediaries take. To a large extent the dilemmas originate from the manner in which intermediaries are compensated. I would like to share a few real life situations that presented practical dilemmas and questions for us. What would you have done in our place?

To what extent should you reduce prices for the client?

Recently a large retail company was in the process of finalizing its group medical insurance. A day or two before the renewal date a senior executive who knew us called and asked that we take a look at the insurance they were about to buy. We did that and were aghast at the expensive terms. For about 300 employees and their families the insurance cost was Rupees 25 lakhs. We worked with a few insurers to get exactly the same benefits for Rupees 9 lakhs. We had initially indicated a cost of Rs 12.5 lakhs to the client. This was 50% cheaper than what they were about to buy but about 40% higher than the rock-bottom price that we could have offered.

The dilemma in this situation was whether to close the deal at Rs 9 or Rs 12.5 lakhs. The client was delighted with the Rs 12.5 lakhs price. It was much lower than what they would buy on their own but we knew we could go lower. However, our own income would significantly decrease if we lowered the price further.

What do you do if the client is determined to buy a sub-optimal product?

A local firm had been mandated by its overseas parent to purchase a Directors and Officers’ liability insurance. When we saw the existing policy contract we realized that it had severe restrictions – an important entity employment practice liability (Entity EPLI) extension was missing. This insures the company against legal suits filed by employees against the company for employment related practices and is the most common cause for claims in liability insurance. Also, for any one claim, the sum assured was restricted to 25% of the total liability limit. We were quite certain that the overseas parent had not realized these fundamental lacunae in the insurance. The issues could be corrected by paying 20% higher premium. In absolute terms this was about Rs 50,000 for a sum assured of over Rs 4 crore – an investment well worth it in our view.

The local office executives heard our perspective but were not willing to explain these nuances to their Head Office as it would reflect poorly on the purchase they had made in the previous year. They asked us to issue the policy with the lacunae.

The dilemma we faced was whether to issue the flawed policy because the client insisted on it or to walk away from the business?

To what degree should procedures and rules be bent for the client?

In group medical insurances a company is meant to inform the insurer within 30 days of a new employee joining. Companies routinely miss this deadline and insurers are generally flexible about accommodating this lapse.

At one of our clients, the cost of group medical insurance was charged back to employees. One new senior employee turned down the insurance because he felt he had adequate personal insurance. However, within a few months the senior employee developed a serious medical situation that was not covered by his personal insurance. The company came back to us and asked us to indicate him as a new employee to the insurer so that his medical costs could be covered.

If we went back to the insurer with this new addition they would not have questioned us. The senior executive would be immediately included in the coverage and his medical expenses paid for. Also, this was a relatively small cost in the context of the insurance and would not have materially impacted the insurer’s economics. However, we would have willfully hidden material client information. If we did not comply with the client’s request we were certain to lose the business and compensation on renewal.

What does one do when an executive in a company asks for a personal favour, implicitly in return for business?

A young executive at one of our clients asked us to get a health checkup done for his parents. The executive had been an important supporter of our firm when we were pitching for business.

On the one hand the costs involved in the tests were marginal. In fact the insurer would pick up this cost and so there was no financial impact on us. On the other hand, paying for the parent’s medical tests could be construed as an indirect favour to acquire future business. If the departmental head were to be made aware that one of his executives had asked for this favour, the young executive would be in trouble.

Many of you face these dilemmas every day. Each one of you would have a different reaction and response. In my mind the important consideration is to not let things happen on their own but to actively make a choice. The principles at stake are to:

  1. Give clear advice to clients but to recognize that the final decision remains theirs.
  2. Ensure real impact for our clients but also to earn a return on the effort we put in. The client should be better off through his association with us.
  3. Not suppress information that we know is material. There is no substitute to building trust by consistently being honest.
  4. Ensure that we treat and deal with client executives the way we would like our suppliers to deal with our executives.

For those of you who are interested in the outcome of the cases described above. We resolved the dilemmas as follows. In the first case we went with the premium cost of Rs 12.5 lakhs rather than Rs 9 lakhs. In the second case we recorded our view on the policy lacunae in writing and then went ahead with issuing the policy that the client wanted. In the third case we refused to suppress information on the senior executive and in the fourth case we had the insurer formally sponsor health check-ups for a small group of executives and their families.

In the movie Sophie’s Choice, Sophie struggles with her choice for years until, ultimately unable to reconcile to the choice she made, Sophie kills herself. Sophie’s choice is an extreme situation. However, in a milder form, we face similar choices frequently. Choosing wisely is essential to having a clean conscience.

Kapil Mehta

Managing Director & Principal Officer,

SecureNow Insurance Broker Pvt. Ltd.

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