Discuss about the case study Interest Policies for Insurance Industry.
A Conflict of interest is a situation in which a person or organisation is involved in multiple interest, financial interest, or otherwise, one of which could possibly corrupt the motivation of an individual or organisation.
Black's Law Dictionary also describes conflict of interest as being in connection with "public officials and fiduciaries and their relationship to matters of private interest or gain to them" in situations where regard for one duty tends to lead to disregard of another. The term "private interest" would mean any tangible benefit accruing directly to the one with a conflict of interest, or indirectly through associates, related organizations, friends, or family members. Tangible benefits can include, for example, direct financial rewards, improved employment, social positioning, public recognition, advocacy and publicity, business referrals, or political influence.
It is a policy that any insurance broker who has the license to operate as a broker is obliged to manage, avoid and disclose situations of conflicts of interest within the organisation.
There are many a number of situations where the conflict of interest may arise and some of these situations may arise where the broker:
- Acts under a binding arrangement
- Is reliant on an insurer(s) for commission as their sole or principle method of income
- Has representatives whose income is solely derived from or contingent upon commission or volume business
- Has arrangement in place for premium funding
Zurich Insurance Group Ltd is an insurance-based financial services provider. Founded in 1872 - and in Canada since 1923 - Zurich has a global network of subsidiaries and offices in North America, UK, Europe, Asia Pacific, Latin America and other markets. Zurich's 60,000 employees serve customers in more than 170 countries. In Canada, they focus on developing unique solutions for Large Canadian Corporations, Canadian based multinationals, Canadian business in manufacturing, real estate, technology, public sector and constructions and groups and associations in niche markets.
Zurich knowledge of U.S. and international insurance and their close working relationship with Zurich colleagues around the world enables them to provide borderless insurance solutions to meet customers’ needs, regardless of their location.
In Canada, they conduct business exclusively through a network of independent insurance brokers.
The FSA has set out high-level requirements in respect of conflicts of interest for insurance brokers. There is the need to identify conflicts of interest in the organization so that it is tackled effectively and it is imperative on the managers, employees and all appointed representatives to help in the identification of the conflict of interest which may occur between them and the and their clients or one client of the firm and another client on the other hand.
Other aspects of the potential source of conflicts of interest have been indicated above but the four main possible sources or the most significant conflicts of interest are indicated below:
The first significant point is where the firm or the employee of the firm is likely to main any financial gain, or avoid a financial loss, at the expense of the client – in this case the firm or employee is not supposed to make any financial gain or even avoid any financial loss at the expense of the client.
For further understanding of this issue which may lead to conflicts of interest, an example of such situation is where there are maximum commission rates that the regulator has advised that insurance companies pay to brokerage firms lets say a commission of 15% is paid to a broker (eg KEK Insurance Brokers) for a motor comprehensive business. The broker as per its duties seeks competitive quotations from selected insurance companies, (competitive quotation here means that the rates are good and equally the insurance company has the ability and capabilities to pay claims when they fall due) and when these quotations are received, the broker is supposed to make known all the rates to the client and then advise them as to which one is best in terms of rates and then ability and capability to pay claims when they fall due but at the point where the broker conceals the rates of other insurance companies and then forwards that of a particular insurance company because the broker knows that it is going to gain much more commission over and above when other insurance companies give, for example 18% in the case of motor insurance businesses, at this stage, the broker has gained financially at the expense of the client who could have gotten better and competitive terms from other insurance companies who were not even approached by the broker.
There are also certain situations which also indicates that the broker is likely to make financial gain at the expense of the client and this is where the firm or the employee receives inducements in the form of money, fuel coupons from other insurance companies so that they place the business with such companies even though they are not competitive.
The second most significant conflict of interest is when the firm or employee have an interest in the outcome to the client or of a transaction carried out on their behalf, distinct from the client’s interest in that outcome. In this case, instead of the brokerage firm or the employee having the interest of the client at heart in the discussion of premium computation and especially in situations where there are claims. For example, the client has made a claim for damage to his/her vehicle and per the duties of the broker, they are supposed to follow up on all repair estimates and make sure that the vehicle is either repaired or when it is a total loss case, the client is properly compensated but because the employee has interest in the outcome or the transaction, it wouldn’t give the best advice to the client, example let’s say a claim has been made and an estimate forwarded to the insurer, the claim is not in respect of a total loss and the client is not even asking for a total loss but because the employee wants the vehicle, they persuade the client to push for total loss and talks to the insurer to issue discharge for total loss even though the client’s interest in not for it to be declared total loss. The employee then after the client has finally agreed for total loss and signed the discharge, the employee will then contact the insurance company for it.
Thirdly, another form of conflicts of interest is when the employee or firm have a financial interest or other incentive to favor the interest of another client over the interest of the client.
Analysis Of How Each Of These Four Conflicts Of Interest Is Mitigated
- Zurich should maintain and operate effective organizational and administrative arrangements with a view to taking all reasonable steps to prevent conflicts of interest from giving rise to a material risk of damage to the interests of the clients.
- Zurich should keep and regularly update a record of the kinds of service carried out by or on behalf of that firm in which a conflict of interest has arisen
- Zurich should have an effective conflicts of interest policy in writing appropriate to the size and complexity of their business.
- Zurich must take all the reasonable steps to identify conflicts of interest.
Recommendations to change business practice to improve the identification of mitigation of conflicts of interest.
Zurich insurance broker as an international firm, it is very important that you continue to operate as transparently as possible. I believe you need to have more understanding of your business operation. By understanding how you operate and how you view the conflicts of interest policy will definitely help your organisation.
The conflict of interest could be best avoided if different stakeholders in the organization can work together to achieve organizational goals and objectives. Zurich insurance is a large organization that has various internal and external stakeholders. The conflict could be best avoided within the organization only when the management can understand the expectations of different stakeholders in the organization. The expectations of the stakeholders could be well understood with the regular communication with them. Therefore. It is important that the organization and the management should arrange for various formal and informal meetings with stakeholders.
I would also recommend counselling your staff and stress the importance of how to identify and orally provide information on conflicts of interest. This should then tie back into written confirmation. Within the procedural manuals write a principle statement on how Zurich brokers will deal with conflicts of interest situations.
In the organization compliance meetings, put a permanent item on the agenda to ensure the compliance officer and responsible managers are constantly monitoring the situation.
According to the FSA’s guideline practice for conflicts of interest are as follows:
- Firms should always be willing to change business practice or exit a particular activity if the conflict risk cannot be satisfactorily mitigated.
- Firms must have a conflict architecture that is able to deliver the mitigation resulting from the review process. Best practices includes:-
- Clear, documented policy on conflicts identification and management governing general business conduct and procedures for managing conflicts where they arise.
- Ownership of conflict resides with business line management, who are responsible for identifying and managing the risk, supported by legal, compliance and other control functions.
- Conflicts clearance processes for routine day to day transactions.
- Clear arrangements for dealing with significant or sensitive transactions that may affect the reputation or financial stability of the firm with the appropriate escalation process.
- Explicit consideration of conflict risk in both the new business take-on process and decision making at a transactional level.
- Good recording of decisions and actions.
- Senior management must lead in ensuring the integrity of the management of conflicts of interest. To do this, the senior management needs to be sufficiently independent of the day-to-day transactions and conduct of business where conflicts may arise.
- Use of appropriate management information
- The culture of the firm must be support effective management of conflicts of interest.
A better understanding of the nature of conflicts of interest and the clearer and fairer formulation of rules can support greater confidence in the Insurance industry. With robust conflict of interest policies in place, organisations can continue to carry out their respective activities not in wary confrontation but in beneficial cooperation with the representatives of industry. It is important that the conflict should be taken as a positive thing within the organization. It appears that the primary conflict among the employees in the organization is with respect to the processes. Some of managers and employees of the organization do not like the existing processes and therefore they do not provide adequate support to the new managers. Therefore, it is important that the leaders and the management of the team should work on the process standardization. The process standardization cannot happen in a day or two. The management must establish a culture where the organization can minimize the people dependency and establish the defined processes. It is also important that the processes should be implemented effectively within the organization. The management should take a top-down approach to implement the processes and to develop a platform where conflicts could be avoided and any conflict could be taken in a positive manner.
(2015) Advanced Insurance Broking 930 textbook by Chartered Insurance Institute. https://www.revisionmate.com Zurich.com