Ethical Issues in Insurance

Obeying the law is usually ethical, but ethics and law are not the same. An insurance company, agent or underwriter can stay strictly within the written law but still act unethically. Some of the ethical challenges insurers deal with are universal: discrimination against minorities is wrong in every profession, for instance. Other issues are distinctive to the insurance world.

Critics of the industry say insurers often act unethically when the time comes to pay a customer's claims. A Bloomberg article, for examples, reports that one industry consultant recommends insurers offer an initial claim settlement worth less than the customer's loss. If the customer doesn't accept, the company should become as unhelpful as possible. Even if the customer eventually gets paid in full, any delay gives the insurer more time to earn a return on the money. Insurers denied to Bloomberg that they engaged in such practices.

An insurance agent's customers depend on her to explain their options and offer advice. The LifeHealthPro website says that imposes an ethical obligation on insurers to know their own product. An ethical agent gives her customers good advice and answers their questions. The answers and advice should be clear and understandable, even if the customer doesn't have much financial sophistication. Good agents take the time to figure out which insurance option is the right one for the customer rather than pushing a one-size-fits-all policy.

Most customers are relieved if, after an accident, their rates don't go up. An article on the International Risk Management Institute's website argues, however, that raising rates of bad drivers is more ethical. To cover the added losses from bad drivers, the insurer may have to raise rates for everyone, which penalizes good drivers. Keeping the rate the same gives drivers no incentive to improve. Similar debates crop up over health insurance, such as whether it's ethical to charge higher premiums for customers who make bad health decisions.

It's easy for a knowledgeable agent to use her expertise to exploit less knowledgeable customers. For example, an agent can push the policy that brings in the most money, even if the customer would be fine with a cheaper one. The Dinsmore insurance agency says online that agents can do this within the letter of the law. However, ethical agents, the agency says, honor the spirit of the law, not just the letter, and avoid actions that harm their customers.