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Ethics and the Risk Management Process

Learning Objectives 1. Discuss the definitions of business ethics and the typical sources of

ethical problems. (p. 4)

2. Discuss specific ways to manage ethical behavior in the workplace. (p. 6)

3. Describe topics typically addressed by a code of ethics or code of conduct. (p. 9)

4. Discuss the benefits to an organization of having an ethics program and code of ethics. (p. 10)

5. Discuss the definition of a conflict of interest and steps to manage conflicts of interest. (p. 12)

Preface – What Do You Do?

Ethical Scenario #1: You are a producer in a local insurance agency. It is the middle of December and you have validated your commission bonus for the month and the year. No more bonus money is available to you this year. You then get an order to bind a new account. The new client wants to give you a check for the entire first year premium. What do you do?

Ethical Scenario #2: You are an account executive with a national insurance brokerage firm finalizing the presentation for your largest renewal. Your client asked you to get a renewal quote from the existing carrier, Carrier A, and one other carrier. Both quotes meet your client’s needs and requirements. Both insurers have the highest A.M. Best’s and Standard and Poor ratings. The terms and conditions are very similar, but Carrier B has a few coverage extensions that are beneficial, but you’re not sure the advantage to your client would be significant.

Carrier A’s renewal premium is 5% more than the alternative quote from Carrier B. Carrier B is a new carrier to your office and little business has been placed with them as of yet. The client is happy with Carrier A’s quote and values continuity, even at a slightly higher price. Your CEO says if you place the business with Carrier B, the brokerage firm will send you and your significant other on an all-expense paid vacation to a location of your choice (in the continental U.S., that is). What do you do?

Ethical Scenario #3: You are an independent risk management consultant under retainer with a large organization. You have conducted a comprehensive exposure survey, developed detailed specifications, and distributed the RFP package to several insurance brokers that you and the risk manager have interviewed and qualified. The organization’s CFO, the risk manager’s superior, called and instructed you to include another insurance broker that you did not interview and qualify, giving that broker the “last look” at the other proposals. You are aware the CFO’s brother-in-law works for that brokerage firm. What do you do? Ethical Scenario #4: You are a risk analyst in the risk management department of an organization with a strict corporate code of ethics. Over a period of time, you observed a subordinate co-worker, a single parent with three school-aged children, taking pens, pencils, paper, and other office supplies that appear to have usefulness for school work. What do you do? Ethical Scenario #5: You are the risk manager for a non-profit social services agency. Your broker knows you and your son are actively involved in Little League. The broker offered you a set of family season tickets to the games of the local professional baseball team. What do you do?

Learning Objective #1: Discuss the definitions of business ethics and the typical sources of ethical problems.

I. Introduction to Ethics

A. What is “ethics” and “ethical?” 1. “Ethics” (noun) – the moral principles of a group or

individual as developed over time and with life experiences

2. “Ethical” (adjective) – pertaining to standards of right

conduct or practice arising out of ethics

B. What is “business ethics?” Like “risk” and “risk management,” business ethics has various meanings for many people. For purposes of CRM, “business ethics” can be defined in the following three ways:

1. Knowing what is right or wrong in the workplace and then doing what is right

2. Fundamental ground rules of our work lives

3. The process of instilling into a company’s workforce a sense of how to responsibly conduct business

These definitions focus on managing behaviors in the workplace, not establishing the underlying moral principles.

C. Sources of ethical problems are typically from two human failings: greed and ignorance 1. Lapses in ethical behavior caused by greed are easily

recognized; for example:

a. Taking or offering kickbacks or bribes b. Expense account padding c. Stealing time or materials from the employer

2. Lapses due to ignorance are more difficult to recognize

and often appear with questions of conflicts of interest; for example: a. Accepting gifts from vendors or offering gifts to

customers or prospective customers b. Failing to report significant risks to an underwriter

unless specifically asked about them c. Failing to report information concerning losses

unless specifically asked about them

Learning Objective #2: Discuss specific ways to manage ethical behavior in the workplace.

II. Managing Ethical Behavior in the Workplace

A. The intent of an ethics program is to instill and manage

preferred ethical behaviors in the workplace. 1. Ethical values and intentions are relatively meaningless

unless they generate fair and just behaviors in the workplace

2. Practices that generate codes of ethics or lists of ethical

values must also generate policies, procedures, and training that translate these values into appropriate behaviors

B. Managing ethical behavior in the workplace is a top-down

process. The organization’s ethical behavior begins inside the office of the organization’s highest ranking officer and flows down through every manager to every employee regardless of that employee’s hierarchal status or position.

“A fish rots from the head.” - old Italian folk proverb

C. Although ethical behavior is the responsibility of each individual in the organization, one person must ultimately be responsible for managing an ethics program.

D. Managing ethical behavior in the workplace is an ongoing

and more process-oriented than most management practices 1. Ethics programs produce deliverables, e.g., codes,

policies and procedures, budget items, meeting minutes, authorization forms, newsletters, hot-lines, questionnaires, etc.

2. Ethics programs encourage continuous reflection and

dialogue that produce and refine these deliverables E. Specific ways to manage ethics in the workplace:

1. Integrate ethical management into all management practices

2. Create and communicate a code of ethics or code of conduct

3. Establish an organizational ethicist or ethics committee

4. Use cross-functional teams when developing and implementing an ethics management program

5. Establish ethical policies and procedures that

a. Promote ethical conduct or behavior

b. Identify potential or actual ethical dilemmas

c. Address and resolve ethical dilemmas

d. Provide periodic training

e. Provide guidelines for measuring ethical behavior

f. Impose consequences for unethical behavior

6. Make ethical decisions in groups and publicly, as appropriate

7. Establish an ethics hotline for anonymous guidance or

reporting

Commentary Ethicists or ethics committees generally have the following responsibilities: 1. Implement and administer a code of ethics or code of conduct 2. Be an advisor to the organization’s personnel on ethical matters 3. Conduct ethics audits or surveys 4. Resolve ethical dilemmas 5. Develop deliverables to employees 6. Work with top management to maintain support for ethical

behavior 7. Act as the point person(s) for any external reviews or investigations

Learning Objective #3: Describe topics typically addressed by a code of ethics or code of conduct.

III. Topics Typically Addressed by Codes of Ethics or Codes of

Conduct

A. Balanced and accurate reporting of all conditions and facts B. Fair and unbiased presentation of information in a way that

does not influence an outcome or decision C. Unauthorized use of the organization’s property and time for

personal use D. Management of conflicts of interest (including the

appearance of conflicts of interest) E. Entertainment and gift policy F. Confidentiality G. Procedures for reporting illegal or questionable activity H. Adherence to what is ethically sensitive to the organization

beyond the legal and regulatory compliance It is not always possible to anticipate, or include a preferred behavior, for every ethical dilemma that might arise.

Learning Objective #4: Discuss the benefits to an organization of having an ethics program and code of ethics.

IV. Ethics Programs and Codes of Ethics

A. An ethics program and a code of ethics are important because a reputation for ethical behavior, full and forthright disclosure, and integrity establish the level of trust that underlies all successful business dealings

B. An ethics program and a code of ethics can have the following benefits within an organization:

1. Promote a high standard of business practices

2. Develop an awareness and sensitivity to ethical issues

3. Integrate ethical guidelines into decision making

4. Cultivate teamwork and employee productivity

5. Encourage voluntary self-evaluation for employees to use in establishing and maintaining ethical behavior

6. Promote a strong positive public image and adherence to good public practice

7. Help avoid accusations of criminal acts and lower possible fines and penalties under sentencing guidelines

Commentary About twenty years ago, the United States Sentencing Commission created the Federal Sentencing Guidelines for Organizations (FSGO). If an organization has an ethics or compliance program that meets the FSGO standards, the penalties are reduced if the organization’s employees are found guilty of certain crimes. Organizations without ethics or compliance programs or organizations or such programs that are substandard under FSGO face harsher penalties. While it may seem illogical to slap the hand of the organization that failed to uphold its professed policy and more severely punish an organization that has not held itself out to be ethical (failing to “walk the walk” is better than failing to “talk the talk”), the FSGO undertook this approach to encourage organizations to define and detect employee misconduct in hopes of lessening the ethical or compliance failures. Originally used only in Federal courts, this approach has spread to over half the states, so both Federal and state sentencing guidelines include a provision for reducing penalties when an ethics or compliance program meeting FSGO standards is in place in an organization. However, critics maintain this approach is no longer effective, as most organizations when confronted with their crimes, enter into plea agreements where the punishment is generally reduced to expedite the resolution of the legal issue.

Learning Objective #5: Discuss the definition of a conflict of interest and steps to manage conflicts of interest.

V. Conflict of Interest

A. Under common law, an employee has a duty to their employer to conduct their work with an undivided and unselfish loyalty to the employer without regard to the employee’s own self-interest.

For the purposes of CRM, a conflict of interest is defined as “a situation that places one between the duty to the employer and the employee’s own self-interest, including a situation that has the appearance of a conflict of interest even though an actual conflict may not exist.”

Exercise You are a risk analyst in the risk management department of a large organization. The risk manager invites you to a presentation by an insurance broker soliciting the organization’s insurance coverages and tells you that you will be involved in selecting the insurance broker to write the coverages. Situation 1: One of the presenters lives on your block, and you slightly know them, having met them at a block party last summer. Do you have a conflict of interest? Situation 2: One of the presenters is married to your cousin. Do you have a conflict of interest? Situation 3: One of the presenters is your sister-in-law. Do you have a conflict of interest?

B. Steps to manage conflicts of interest and the appearance of conflicts of interest:

1. Identification

a. Periodic questionnaires or surveys b. Frequent reminders c. Education

2. Avoid the conflict if possible 3. Resolve unavoidable conflicts

a. Disclose the conflict to the appropriate parties b. Recusal from decision making c. Recusal from discussion

4. Formulate appropriate responses to conflicts of interest

Exercise: Using the scenarios and conclusions from the previous exercise, what is an appropriate response for each scenario?

Commentary The investigation into and prosecution of insurance companies, insurance agencies and brokerages and individuals by the New York State Attorney General several years ago highlighted the importance of full disclosure of compensation and the need for transparency in broker compensation. The amount of broker or agency fee compensation is an element of the total cost of risk and, along with commission included in insurance premiums, is an element in the evaluation of brokerage and agency services. Disclosure of contingent commission agreements that provide additional compensation based upon production and profitability of a book of business can be negotiated into brokerage service agreements, and can be offset against fees earned, depending upon the wishes of both parties.

Skills Application Scenario #9 – Conflicts of Interest Sarah and Mary, the CFO and risk manager, know much more about DCRI and its operations than does Rachel and Ralph, the account executive and CSR of Invino Veritas Insurance Brokers, even though Rachel and Ralph have handled the DCRI account for five years. They placed the property and liability insurance coverage with AGEM Insurance Company five years ago when Rachel’s brother, Frank, was the underwriter. At that time, AGEM’s quote was 20% less than the current carrier’s renewal. Frank left AGEM last year, and was replaced by Kim. As they approach the upcoming renewal, Sarah, Mary, Rachel, Ralph, and Kim have their thoughts on these issues: Sarah and Mary are aware of a recent incident involving a missing skier at the Lake Tahoe facility. A skier disappeared while descending the most challenging slope at the complex, the black-diamond Perilous Precipice, and no trace of the skier or his equipment has been found. Some guests commented that they thought he had been drinking at the resort bar early in the morning that he disappeared. Ski patrol and volunteer searchers have scoured the area for the last two weeks, but to no avail. Sarah is aware a lawyer called requesting the status of the current search efforts.

Rachel and Ralph have heard rumors “on the street” that AGEM is having financial trouble because of excessive losses and inadequate and non-performing reinsurance contracts. Currently, AGEM’s A.M. Best’s rating is A+ XV. Frank, Rachel’s brother, has taken a position with Geckko Insurance Company, one of AGEM’s competitors, and is anxious to quote the account. Kim has indicated the current pricing is woefully inadequate and anticipates a 30% increase as a minimum. Kim’s water-cooler grapevine says AGEM is up for sale and that Geckko Insurance Company is buying AGEM stock like crazy. Identify the ethical issues and conflicts of interest, if any, in this set of developments.

Review of Learning Objectives

1. Discuss the definitions of business ethics and the typical sources of ethical problems. (p. 4)

2. Discuss specific ways to manage ethical behavior in the workplace. (p. 6)

3. Describe topics typically addressed by a code of ethics or code of conduct. (p. 9)

4. Discuss the benefits to an organization of having an ethics program and code of ethics. (p. 10)

5. Discuss the definition of a conflict of interest and steps to manage conflicts of interest. (p. 12)