Conflicts of Interest in the Insurance Business

Conflict of interest scenarios are common in businesses where multiple parties are involved. In many cases, these conflicts are small and harmless. However, when it comes to insurance, some of these conflicts turn out to be serious. In this article, we will have a look at the various situations in which the different participants related to the insurance industry face these conflicts.

Some of the situations have been listed below:

• The Commission Structure: All across the world, insurance products are distributed by a network of agents. These agents are paid remunerations based on the sales they make, i.e. they receive a commission. The problem is that some insurance products offer more commission than the others. Also, some insurance service providers also more commission than the others. Hence, there is a likelihood that an insurance agent may face a conflict of interest situation. In many cases, the policy that is best for the policyholder may not be the most profitable one for the insurance agent.

  In order to solve this problem of inherent conflict of interest, it has been recommended that the commission based pay structure be dismantled. Instead, the price of the insurance products should be reduced, and individuals should be made to pay a fee to insurance agents when using their services. However, it has been observed that a fee-based structure leads to dropped sales as people are averse to making such payments. This is the reason that the United Kingdom is the only country in the world where insurance agents receive remuneration from customers. In all other countries, this model is considered to be a failure. It has been proposed that the commission for different insurance products by different insurance companies in the same genre must be homogenized in order to avoid such conflicts. However, until now, no action has been taken to that effect.

• Service Providers: In case of general insurance, service providers, i.e. partners of insurance companies are the ones who face the maximum conflict of interest. Let’s understand this with the help of an example. For instance, when a car meets with an accident, the garage, i.e. the service provider is required to repair the car. The insurance company has to pay the bill, on behalf of the customer, to the garage.

  The problem is that since the customer is not paying out of his own pocket, he/she does not seem to care too much about the bill. In such scenarios, service providers face a conflict. They could easily inflate a bill and maximize their returns. However, if they do so, they will be acting against the best interests of their partner, i.e. the insurance company. This issue is not limited to car insurance alone. It is a known fact that hospitals perform unnecessary procedures on insured patients. This helps them inflate the bill and earn more even though it is done at the expense of everyone else.

  In case of medical insurance, it is very difficult to prevent these activities. However, for motor insurance, companies appoint independent surveyors and in-house personnel whose job is to ascertain the degree of loss. To some extent, this has helped reduce the inherent conflict of interest. However, this situation is also not foolproof, and insurance companies are continuously trying to find new methods to prevent such situations from arising. For instance, many insurance companies offer lower premiums when customers opt for policies where there are provisions for co-pay. Hence, if the total bill is inflated, the customer’s contribution also ends up being inflated. As a result, there is no motivation to make inflated claims and customers start paying more attention to what services are being provided and whether a fair price is being charged for them.

• State Owned Insurance Companies: In many parts of the world, it is common for the state to own a significant share in the dominant insurance player. This is the case because, in many countries, insurance companies were earlier owned by the state. Later, privatization happened, and other companies were allowed to sell insurance.

  However, if the government is also a player in the market, while simultaneously being a regulator, there is an obvious conflict of interest. It is likely that the government may create regulations to harm the interests of other players or even the consumers. Hence, to avoid such conflicts of interest, it is extremely important that the government divest its interests in insurance companies and take a backseat when it comes to running them.

  The bottom line is that conflicts of interests are here to stay. It is just how the game is structured. However, the problem is that most buyers are not made aware that such conflicts do exist. Hence, they end up acting in a naíve manner while buying insurance. Educating customers is of utmost importance since that is the only way that their interests can be safeguarded.