Ethics and the Insurance Industry:A Practical Look at Ethics in the Insurance Company EnvironmentIASA Central States Regional Conference

Presenters – Johnson Lambert LLP

Jessica Lasher, CPAPrincipalJlasher@johnsonlambert.com∙ (802) 383-4835

Lauren WilliamsSenior Managerlwilliams@johnsonlambert.com∙ (919) 719-6412

2

Session Learning Objectives

Overall objective – frame a discussion of common (and not so common) dilemmas confronting insurance workers in the context of ethics

Organization:

“Behavioral Ethics”

“Regulatory Ethics”

Best Practices to promote and monitor ethical behavior

3

Why Are We Talking About This?

4

Why Are We Talking About This?

∙ Civil and Criminal Actions

∙ Sarbanes-Oxley –

• Increased penalties for corporate wrongdoers

• Established rules to deter and prevent future wrongdoing

5

Why Are We Talking About This?

∙ Punishment alone can go so far

∙ We study ethics—

• to make better decisions for ourselves,

• to make better decisions for the businesses we work for,

• and the society we live in.

6

Over the long run the tone and ethics behind our actions project to the future almost as much as

our past actions and results.

Behavioral Ethics

7

Organizational Behavior:A New Field of Study

∙ Evolution of B-School curricula

∙ 1970’s - 80’s

• Technical Focus

• Very little in human behavior

∙ Evolution supported by research to Organizational Behavior

• Importance of human behavior (“Soft Skills”)

‒ Leadership

‒ Communication Interpersonal skills

∙ Research shows correlation between organizations with strong “soft skills” cultures and financial performance

8

What is Behavioral Ethics

∙ Organizational Behavior – Studies the impact of:

• Individuals

• Groups

• Structure

∙ on behavior within an organization – for the purpose of applying such knowledge toward improving an organizations effectiveness.

∙ Behavioral Ethics – a subset of organizational behavior that specifically considers behavior when confronted with:

• Ethical Dilemmas and Choices

9

10

Dilemmas

Choices

Classic Behavioral Ethics Example

• There is a runaway trolley barreling down the railway tracks.

• Ahead, on the tracks, there are five people tied up and unable to move. The trolley is headed straight for them.

• You are standing in the train yard, next to a lever. If you pull this lever, the trolley will switch to a different set of tracks.

• You notice that there is one person on the side track.

You have two options:

1. (1) Do nothing, and the trolley kills the five people on the main track.

2. (2) Pull the lever, diverting the trolley onto the side track where it will kill one person.

3. What would you do?

11

Right vs. Wrong

∙ It is not always easy!

∙ Difficulty is compounded by cultural diversity

∙ Requires organizations to define and communicate organizational ethical expectations

• Tone at the Top

• Code of Conduct

• Communication

12

Behavioral Ethics

∙ Not a study of right vs. wrong! Rather, what drives certain decisions in an ethical context.

∙ How do organizations communicate and define ethical expectations?

∙ What causes good people to cross ethical boundaries?

∙ How does that behavior differ from what would have been ideal behavior?

∙ What levers can an entity pull to:

• Change questionably ethical behaviors

• Promote desired ethical behavior

13

∙Exercises:

∙What About Bob!

Was what Bob did unethical?

What was Bob thinking?

How might Bob have handled the dilemma differently?

How will Bob’s actions influence co-workers (boss, peers, subordinates)?

Meet Bob – Your Boss

14

The “White Lie”

• It is Friday and Bob wakes up to a beautiful warm Fall day

• Assume its the last day over 75 degrees for the next six months

• Bob doesn’t have any PTO left

• He decides to call in sick and go play golf.

15

Was what Bob did unethical?

What was Bob thinking?

How might Bob have handled the dilemma differently?

How will Bob’s actions influence co-workers (boss, peers, subordinates)?

Failure to Honor Commitments

• Bob promises you an extra day off if you rush out an important project by a certain date.

• You work late hours and finish the project before the deadline.

• Ready for your day off, you mention it to Bob who responds "No, we have too much work to do."

Was what Bob did unethical?

What was Bob thinking?

How might Bob have handled the dilemma differently?

How will Bob’s actions influence co-workers (boss, peers, subordinates)?

16

Good Intent Gone Bad

∙ Your Company offers you Auto Insurance at a drastically reduced price!

∙ Your Teen backs out of the driveway and totals your new Porsche!

∙ An honest claim but Bob thinks your claim could sink the benefit for the whole company.

∙ Bob believes you should withdraw the claim and take one for the Team.

∙ The claims Department seems to be dragging their feet and you think Bob asked them to delay your claim.

17

Was what Bob did unethical?

What was Bob thinking?

Could you or Bob have handled the dilemma differently?

How will Bob’s actions influence co-workers (boss, peers, subordinates)?

The Catch 22

•You are a Sales Agent for ABC Insurance.

•You drive by the Jones’ house and notices a Trampoline and the 6 Jones kids on the back lawn.

•The Jones are an insured of ABC and you know Trampolines are required to be reported by the ABC Policy.

•Bob your boss, tells you the Jones are good responsible parents, so no reason to report this and risk loosing a good customer.

Was what Bob did unethical?

What was Bob thinking?

How might Bob have handled the dilemma differently?

How will Bob’s actions influence co-workers (boss, peers, subordinates, clients)?

Is it different if it’s a Pool, Pit-Bull or a different reportable item?

18

Cumulative Impact of Unethical Behavior

∙ Loss of trust and respect

∙ Unethical behavior often leads to more unethical behavior

∙ Erosion of Tone at the Top

∙ Trickle down effect – employees will follow example of their bosses

∙ How can we mitigate?

19

Regulatory Ethics

20

Regulatory Ethics

Laws and Regulations established to provide “ethical” protections to:

• Policyholders

• Employees

• Shareholders

Regulatory Ethics - Examples

∙ Federal

• Sarbanes-Oxley (spillover to private companies)

• DOL

• OSHA

∙ Insurance Industry

• Market Conduct

• Model Audit Rule

∙ CPA –

• State Laws and Regulations (Board of Accountancy)

• AICPA Code of Conduct

22

23

But Regulatory Ethics Can Only Go So Far…

EthicalBest Practices

24

Best Practices

What levers can an insurance company pull to:

• Promote desired ethical behavior

• Change questionably ethical behaviors

Tone at the Top

Code of Conduct

Whistleblower Provision

25

Tone at the Top

∙ Tone at the top is used to describe an organization's general ethical climate, as established by its leadership

26

Building Blocks Tone at the Top

27

Leadership Communication Culture

Consistency

Monitoring

Extent and Nature of Wrongdoing

Use of Anonymity in Incident Reporting

Social Media Reputation

Employee Surveys

Tone of Management Communications

∙Group Discussion

∙Facility Visits

∙Exit Interviews

∙Interviews and Focus Groups

∙Customer Complaints

∙Unannounced document reviews by Senior Management

Can you measure “Tone at the Top”?

28

Bob Makes The

• Part of your job is to pull together loss data reports for the annual external actuarial review.

• Bob calls you in to his office and tells you to exclude from your report case reserves for certain lines of business in a new territory.

• He says that data will also be excluded from the general ledger.

• This does not make sense to you and you push back.

• Bob points out that reported losses in the new territory are much higher than expected, and a decision has been made to cease writing that business.

• If those losses are included in the current year’s data, loss expense will be much higher than budget.

• Bob indicates he plans to “bleed” these losses through the income statement over the next couple years as the claims are paid.

29

The (Continued)

How will Bob’s actions influence co-workers (boss, peers, subordinates)?

How could strong “Tone at the Top” help to mitigate this?

Does it strengthen your confidence to push back?

30

Code of Conduct

31

∙ A code of conduct is a set of rules outlining the responsibilities of, or proper practices for, an individual or organization

∙  

Key Features of Good Code of Conduct

∙ Based on core values such as TRUST and INTEGRITY

∙ Easy to read/Easy to understand

∙ Engaging for employees

∙ Available Digitally

∙ Training and Communication

∙ Make conformity with Code part of contract of employment

32

∙Core Values

∙Financial recordkeeping and reporting

∙Unlawful harassment and discrimination

∙Antitrust, also known as fair competition

∙Anti-Corruption (Foreign Corrupt Practices Act)

∙Reporting (hotline)

∙Insider trading

∙Proper use of intellectual property

∙Privacy

∙Confidentiality

∙Conflicts of interest

∙Gifts and entertainment

∙Whistleblower protection / non-retaliation policies

∙Consequences of violating the code or law

∙Records retention and management

∙Additional company specific topics as needed

Code of Conduct – Content Considerations

33

The Part II

How could a strong Code of Conduct mitigate this?

Is the cumulative impact of Tone at the Top and a Code of Conduct Stronger?

Does it strengthen your confidence to push back?

34

Whistleblower

35

A whistleblower is a person who exposes misconduct, alleged dishonest or illegal activity occurring in an organization.

The alleged misconduct could come in many forms (violation of a law, a direct threat to public interest, fraud, health and safety violations, and corruption)

Whistleblowers may make their allegations

• Internally (for example, to other people within the accused organization) or

• Externally (to regulators, law enforcement agencies, media or to groups concerned with the issues).

Why is a Whistleblower Policy Important?

∙ Prevent retaliation against whistleblowers (legal)

∙ Prevent public disclosure of alleged corporate wrongdoing (practical)

∙ Create a more just workplace (ethical)

36

Whistleblower Policy - Components

Clear definition of whistleblowing

Clear definition of individuals covered by the policy

Nonretaliation provisions

Confidentiality

Process

37

Misstatement of Facts

∙ Bob is the project leader on the implementation of a new automated interface between the claims system and the general ledger.

∙ You and Bob have discussed and agreed that the project is about 8 weeks behind schedule and several significant milestones have been missed.

∙ Shortly after your discussion with Bob, you are in a meeting with the CFO to provide a project status update.

∙ At the meeting, to your surprise, Bob indicates that the project is right on schedule.

How will Bob’s actions influence co-workers (boss, peers, subordinates)?

How would a Whistleblower Policy have impacted this situation?

38

Our Trifecta

39

Tone at the TopC

ode

of C

ondu

ct

Whistleblower

Empower Ethical Behavior

Questions

40