Business Ethics
Chapter 12
TAX DEFERRAL
There are many varied views on the ethical nature of our tax spending this is not the focus of this course. Additionally, the general citizen has little ability to change how our taxes are spent. However, it is possible to find investments that delay taxation.
The federal government offers tax benefits for a particular type of investment when it wants to encourage one of three things:
When an investor benefits from a tax-advantaged investment, he or she is doing what the government actually wants done because it also benefits the government in some way. It might be building schools, producing an economic safety net, or channeling private investment funds into certain desired areas.
Some types of government projects might, however, go against the ethical views of some private investors. Only the legislators' imaginations limit the range of tax benefits and this means the range of investment aims or goals as well.
Tax-free investments, such as municipal bonds, are investments that offer income in the form of interest or dividends that are not taxed. Some types of government obligations are only partially tax-free. Some types of government investments may be free of state taxes, but not federal taxes.
For the ethical investor who is also safety oriented, the fact that money placed in these tax-advantaged investments can grow quite fast (assuming reinvestment of the interest) is most appealing. In fact, from a purely investment standpoint, there is much that is good about these types of investments. The ethical question is much more difficult to assess than is the investment question.
Since taxation is so very broad, there are sure to be aspects that go against the moral feelings of any consumer. As we well know, however, the taxing entities simply do not ask for our opinions when it comes to taxation. If taxes are assessed, the taxpayer is expected to pay those taxes. In fact, if the taxes are not paid, there are consequences for the taxpayer. It would not be prudent to tell anyone to avoid taxes that are considered due by the Internal Revenue Service or other taxing entities. The best that the investor can hope to achieve is a reduction of taxes, although that is the aim of most taxpayers even if they have no ethical objections to how the money is spent.
There are cases of citizens who withheld portions of their taxes because it represented a specific element of government spending that they strongly opposed. In some cases the citizens are questioning the legal right of the federal or state government to tax its citizens. It is doubtful that their protests are very effective. Their actions are more of a personal statement than an effective protest. Additionally, any citizen that uses what our taxes pay for has a responsibility to also pay their share of the cost. This would include such things as public roads, school systems, and welfare programs.
Daily Living
Each of us must manage our day-to-day lives in the best way we can. This includes the management of our finances. This applies to insurance agents as much as it does to any other person in any other line of work. In some ways, it is especially necessary for those in commissioned sales to practice financial planning since their income has few guarantees.
Those in commissioned sales often tend to overlook necessary financial discipline regarding taxes, Social Security payments, and other types of business requirements. As every agent has heard, there is a very high failure rate in commissioned sales. Some of those failures result not from a lack of sales ability, but rather from a lack of business sense. Most experienced businessmen and women state that their most important asset is their CPA or bookkeeper. Those who have an accountant that is experienced in small business or commissioned sales say they are especially happy with the relationship.
Sometimes it is difficult to locate the people and institutions that offer the type of skills that small business owners, such as insurance licensees, need. It is always worth the time it takes to locate them, however.
Most of us tend to bank with institutions that are easily accessed. That might mean the bank on the corner from the licensee’s office or the credit union that is associated with an organization the individual belongs to. Few people take time the time to determine the goals of the institution when selecting their bank or credit union. This is unfortunate since banks can vary in many areas. For the small business owner or independent agent, it is particularly necessary to understand the opportunities, or lack of them, offered by their bank.
Business ethics involves many things. Certainly one ethical concept is paying bills on time. This is true even in our private lives, of course, but it is especially necessary for a business. Not only may the person the licensee owes money to be a potential policyholder, but he or she may also personally know other clients the licensee currently has. An insurance agent with a bad financial reputation is not going to generate great trust.
Small business owners often overlook one other vital factor in their business: the people they hire. This includes not only insurance agents but also office personnel. It goes without saying that anyone who answers the telephone needs to be courteous. Beyond that, personnel also need to be knowledgeable and display a willing attitude. Probably everyone has, at one time or another, been in a public setting where the person waiting on them obviously was not interested in the duties at hand. Perhaps it was a rude clerk in a grocery store or a clerk who seemed resentful when the shopper requested a personal service. Whatever the incident, such actions always hurt the business they work for. For example, if a clerk in ABC store is rude, the customer does not say: "A clerk named Sue was rude." Rather she states "ABC store is rude."
Nowhere is this truer than in a commissioned business. A commissioned business typically has a great deal of competition; the consumer has many choices of companies and products from which to buy. Insurance agents who seem impatient for the signature or appear rude when a consumer does not wish to purchase a product damages the agency they work for. Chances are the consumer will not remember the individual's name, but they will remember the insurance company or agency that was represented. It only takes one unprofessional agent in an agency to turn numerous sales over to the company’s competitor. Any agency that tolerates such behavior, no matter how much that particular agent sells, will experience reduced business overall.
Due Diligence in Business
Financial responsibilities to others might also be considered an area of ethics. One of those areas is insurer due diligence. Most licensees realize they should deal only with financially sound companies, but locating them requires some time and continued monitoring.
There is both a technical way of locating sound financial companies and a common sense approach to it. Understandably it is difficult for a licensee to research each individual company, although that must be done to a certain degree. Sometimes a common sense approach actually works better because much of the information that an agent may find on any given company will be outdated.
A certain amount of technical analysis of historical data is important, especially as a point of reference to start with. To spot a potential problem before it happens, however, a common sense approach is often more effective. Once a potential problem is identified, technical analysis is then appropriate again. The technical analysis will either confirm or deny the suspicion of a financial problem within the company.
Financial due diligence could also be called solvency appraisal. Traditionally this type of appraisal is done from a technical standpoint. An individual that states he or she simply has a "gut feeling" that an insurance company is having financial trouble is not likely to be taken seriously. As a result, even if it is simply a gut feeling, licensees must be prepared to then proceed to the technical detective work that is necessary to validate their feelings. Many "gut feelings" originate from sensing that something has changed or is out of the ordinary. This might be something as simple as delayed claim payments or increased difficulty in other areas. There are some problems or limitations to the technical approach:
First of all, agents rarely conduct their own technical analysis. Instead, we look at what others have compiled. It would simply be too time consuming to personally research each company we deal with and most agents are not willing to spend the amount of time it would require. In addition, few agents would even know where to begin such an analysis.
Most professionals feel that a true technical analysis requires historical data on the company in question. In the past such data was considered important, but with so many rapid changes occurring, the validity of such data may now be questioned.
Even though we do recommend that agents stay with "A" rated companies, there is evidence that the rating services are generally unreliable when it comes to predicting insolvencies. This appears to be true of both corporate bond rating services and insurance rating services. For example, the Baldwin United companies were rated A+ when they became insolvent. Executive Life was also carrying an A+ rating when it became evident that the company was in trouble. It should be pointed out that Executive Life did have substantial resources and has been able to absorb many of the losses. These resources are part of the reason the company carried an A+ rating. As these examples show, the agent cannot totally rely upon the ratings given by services.
One problem with technical analysis lies in the oversimplification of only a few indicators. Agents and consumers alike tend to lock in on only one element of the analysis. The public, for example, may know only about the rating systems and may not understand precisely what those ratings really indicate.
Generally speaking, the company’s management determines its business practices. If the company is not a mutual company, who owns it becomes an important indicator. If the owners of the company are not the managers, then who is managing the company is also very important. Corporate values and culture can often be shaped by a single powerful person. Along this line, if the management of a company changes, the strength and weakness of that company can also change.
Product design is something that agents often do spot immediately, especially if the agent is experienced. Product design tends to be a mirror of those who are running the company. It is a fundamental extension of the leader's vision, desires, and values. Are there gimmicks or sound benefits within the product? Some products seem to utilize a "bait and switch" sort of theory. Common sense should also tell us that a product that puts out more than it takes in will not benefit the companies or its policy-owners.
As we have discussed, replacement selling is more common than ever before. As a result, the risk of adverse news or competitive interest rates can cause disloyal policyholders. This makes distribution a point of common sense. A debt loaded volatile national and world economy does nothing to reduce the risk that could pull a company into insolvency. Distribution of products must, therefore, be considered. Stockbrokers are notorious for rolling their money quickly. If a company does a lot of single premium or asset intense products (such as annuities) distribution can become critical. Insolvency risk is much higher when insurance products are distributed through a limited number of non-insurance distributors.
To recap, the technical approach has some limitations:
Technical analysis is difficult and few agents know how to do it.
Historical data is not always reliable.
Rating services are useful, but not necessarily an indicator of insolvencies.
Technical data is often oversimplified or simply misunderstood by both the agent and the consumer.
The ownership and management of companies that are not mutual companies is an indicator of company practices. Few agents or consumers personally know who is in charge of the companies they deal with.
Product design is a fundamental extension of the company's management, but technical analysis seldom takes this into consideration.
Distribution is critical for the solvency of a company, but it is very difficult to know how products are distributed in many technical analysis.
Despite these limitations, technical analysis is still useful as long as it is combined with common sense. There are many ways that an insurance company can get into trouble. Usually it is a combination of problems; seldom one problem alone. Instead of making little mistakes, the company might make one or more large mistakes, which of course can have severe consequences. Perhaps losses greatly exceed gains and capital and surplus are consumed. When money goes out faster than it comes in, no business or individual can run efficiently. This is called a negative cash flow. A positive cash flow means more money is coming in than is going out. In addition, if one or more of these problems is made public, policyholders may begin to withdraw their money, which only intensifies the existing problems.
The old saying, if something looks too good to be true, it probably is, is a good common sense approach to insurance, as with so many things. The easiest product to sell may well be the very product agents should avoid since doing so might save future embarrassment and liability.
A common sense approach to due diligence is a practical way for many agents to spot potential trouble for themselves and their policyholders. The object is not necessarily to find those companies that are sound, but rather to avoid those companies that are not. Such things as ratings and historical data certainly have their value, but they should not be the only indicators used.
An agent's liability in today's world is growing with every new product that is marketed. Many states are mandating suitability training in an effort to decrease the consumer’s exposure to products that will not address their risk adequately. That does not mean that the product itself is inadequate but rather the product’s applicability to that particular situation may not be suitable. For example, it would not be suitable or applicable to place renters insurance when the policyowners own their home; homeowner’s insurance would be the applicable product. A more difficult situation when it comes to suitability is long-term care insurance. While the product is known to be beneficial for those who can afford the premiums, it would not be beneficial if the buyer cannot afford the yearly premiums. In that situation, placing a product that will lapse due to nonpayment is not sensible or ethical.
Only a foolish agent would fail to purchase Errors and Omissions insurance in today’s lawsuit prone society. Even the most careful agent can find themselves in the middle of a lawsuit. It may not even be initiated by the insured, but rather by their family after the insured has died.
Ethics is not a new topic in the insurance world. There can be conflicting loyalties and the battle to reconcile personal values with financial goals can increase the industry's ethical dilemma. Many people consider the phrase business ethics to be an oxymoron. Ethical insurance agents may never be able to convince some people that the words go together, but generally speaking there should be no problem being both ethical and business-minded. There have been some debates as to whether it is ethical for businesses to have any priority other than profits, as long as those profits are made legally. While every business does have a duty to shareholders and even to the company’s employees to keep the business profitable, there is no reason that ethical business conduct must be left out of the equation.
The insurance industry has suffered many image problems, some of them deserved and others not deserved. In public opinion polls, insurance agents routinely end up at the bottom of the list between attorneys and politicians. Consumers simply do not feel that insurance companies and their representatives consider ethics to be a high priority. In fact, many consumers feel that ethical behavior of any kind in the insurance industry exists only because the states mandate it.
Insurance professionals must deal with questions of ethics every day, many of which have few answers. For example, to whom does an agent owe his or her allegiance: the insurance company or the policyholder? In some cases agents represent both parties but in other cases the agent’s contract stipulates that only the insurer can be represented (captive agents) in legal issues. Many agents have found that their contracted insurance companies do not seem to reward their ethical behavior, but do reward high producers with prizes. This is not surprising; how would ethical behavior be specifically recognized since there is no measuring stick for honesty and fair dealings with consumers.
For many questions of ethical behavior, there must be consideration of all facts involved since the deciding factor can vary from situation to situation. An agent must ethically give the insurance company all facts considering the insured that are pertinent to the issuance of the policy since it affects the insurer’s risk, but on the other hand, the agent also owes it to his or her client to give them all the pertinent facts regarding the insurance company. In other words, the agent has an ethical duty to both the insurance company and the policyholder.
An insurance agent can find facts and figures to back up nearly any position that he or she wishes to take. Giving clients too much information (taking it to extremes) is not necessarily effective, since it is likely to leave the buyer confused rather than educated. It is important to cover all relevant facts of a policy that affects how benefits will be paid but going into details that may not apply is not effective either. Insurance tends to be confusing to those not in the industry so agents walk a narrow path. They must follow federal and state laws regarding disclosing information while also informing clients in a way that makes sense of the policy they are buying.
In the past, most agents felt that giving the financial rating assigned to a company by a qualified rating firm was sufficient, but in recent years that has not always proven effective. In one case it may be sufficient, but in another it may not be enough information. While agents are always wise to represent only top-rated insurers, the real dilemma is the amount of policy information that needs to be disclosed. Agents want their clients to be fully informed on relevant information, but not confused about how the benefits work due to information overload.
Commission Structures
It is often said that the commission structure that has been set up by the insurance companies have been a primary cause for ethical problems within the industry. There are those that say a commissioned basis in and of itself fosters an "anything goes" attitude. That does not completely explain the problems, however, since many other industries also function on a commission basis without the negative image that has plagued the insurance industry. Most experts feel that commissioned sales, of any type, is ethically neutral although it is possible to have unintended results if it is not structured properly. It is not the commission pay system itself that causes problems. Rather, it is how people prioritize their work and their lives that bring out negative results. When making sales becomes the priority, without any other aspects considered, integrity can certainly suffer.
Generally speaking, all businesses have profits as their goal. In fact, being successful is not unethical, but rather an ethical aim of any business. It would be unethical to the owners or stockholders of a business to avoid profits. It would even be unethical to the current employees to disregard the role profits have in succeeding. When a company closes, employees lose their jobs so clearly the employees have a stake in the company’s profitability. Being profitable, however, should not alter other ethical concepts within the business. Just as profits and ethics can work together, so can ethics and commissions when other ethical concerns are also considered.
It has been noted that property and casualty lines have little incentive to use one company or another on the basis of commissions, since they all tend to pay about the same. It is more likely to be an issue in the life and health field. Some advocacy groups are calling for the discontinuance of all commissioned sales people. Interestingly, few of the consumers themselves seem to view commissions as the root of the problem. Consumers are more likely to target the insurance company as the major source of dissatisfaction. Groups that are calling for the discontinuance of the commissioned agent force may not be taking into consideration the matter of customer service. While there are certainly a measure of agents and agencies who do not provide the level of service necessary, there are many who do. Without commissions, it is unlikely that service would get better. We have seen many industries that do not utilize commissions that have very poor customer service practices.
Many insurance products can now be purchased over the internet, without any direct involvement from commissioned salespeople. Most of the online services seem to be working as expected by the insurers. It will take time to see if the loss of personal service from a local agent affects clients and their service expectations, but so far there have not been excessive complaints.
A basic question asked not only by the consumer, but also by the agents themselves, is whether or not the insurance companies and management staffs actually value ethical behavior in their field force. While most people say that practicing good ethics is also practicing good business, many agents feel that there is little, if any, recognition for ethical behavior and practices. Insurance agencies seem uncertain how to reward or even recognize ethical sales practices in their field agents. Certainly, underwriters value ethical behavior because it is necessary in order for them to underwrite the policies effectively. When an agent has a reputation for giving solid information, the underwriters are likely to do a better job in terms of timely policy issuance and risk judgments. On the other hand, when underwriters know an agent consistently omits needed information or is vague in the routine information given, then underwriters are much more likely to question every aspect of that agent's submitted applications. Certainly, in this area, ethical behavior is rewarded.
Clearly the issuance of insurance policies is based upon ethical behavior. There is the general agreement that the insurance industry is founded on ethics. It would be impossible for the industry to operate without it. The risk-sharing mechanism is closely dependent upon trust. The insurance industry depends upon the consumer to act ethically when disclosing personal information; it depends upon the agent to relay that information correctly and adequately to the underwriters; and it depends upon the insurer to keep their promises that appear in the contracts. Even the claims that are submitted to the insurance companies depend to a certain degree on ethical behavior. Of course, we all know that many fraudulent claims are submitted each year, which drives up the costs for insurance protection for all policyholders. Such fraudulent claims are certainly unethical. Ironically, many consumers feel insurance companies have lots of money, which makes filing false claims, in their minds, acceptable.
There is general agreement that encouraging ethical behavior within any company must begin with top management and ownership. A strong, understandable code of ethics must not only be a written doctrine, but also practiced by owners and management. The more massive a company is, the more a written code of ethics is needed since many of the employees may never have access to top management. When ethical codes are clearly stated and demonstrated by a company, the lower management and staff are more likely to behave ethically themselves because they know it is expected.
Of course, a written code of ethics that is buried in a company manual, but seldom discussed, is not likely to be taken seriously by the employees of the company. This is especially true when management does not appear ethical themselves. Employees certainly want to be recognized, so it simply makes sense for management to recognize ethical behavior. Such recognition will promote ethical behavior among employees, which will benefit the company as well. On the other hand, if top management seems only to recognize quantity of sales without any concern as to how they are achieved, the message will be clear to the sales staff.
Some companies conduct ethics training sessions. Ethical questions that arise in the sales field are considered for possible solutions that are both ethical and sensible. Ethical competency often is simply a matter of education. It may also a matter of peer pressure. When coworkers expect ethical competency, others are more likely to be ethically competent as well. Ethics must be made a part of the decision making process both by the company management and individually by the personnel. If employees are to act ethically, however, they must feel confident that their superiors will stand behind them.
In business, many ethical qualities cannot be put in economic terms. When a company pulls product off the store shelves, the first concern must be for the citizens of our country with economic concerns placed second. We have seen this occur with food products primarily but it can affect many other types of product as well.
We live in a society where rules and regulations seem to grow daily. With the abundance of rules and regulations growing, sometimes the simplest method is asking "is it legal?" However, the legality of any given circumstance may not address the ethical issues. Many salespeople do not realize that simply following the laws is the minimum acceptable level of ethical conduct. It is up to management or the business organization to set the actual ethical code of conduct required. Ideally that will be higher than is actually mandated by law. Of course, each individual must also set their own personal standards of conduct. Some individuals simply use what is legal as their standard for ethical behavior, assuming legality is enough. For these individuals, as long as they are not breaking the law, any behavior is deemed acceptable, even when others are taken advantage of.
Doing the proper thing ethically is simple when choices are clearly between an action that is right or wrong. Stealing or not stealing is basically a clear-cut choice, for example. Making ethical choices is not so easy when the decision is between two sets of action that may both be right or may both be wrong, depending on the details of the situation. This generally has to do with two "sets" of ethics, either one of which may be valid. For example, we have all probably lied to someone in order to spare feelings. This may not necessarily make the selected action right, but the choice was made for the right reasons: truthfulness and another person's feelings. Both choices may have ethical dimensions since it is not right to lie nor is it right to hurt another person. The correct path to take is often a matter of personal opinion.
Ethical behavior tends to have long-range (versus short-range) benefits. In the short term it is often advantageous financially to make the sale no matter what tactics are used. In the long term it is more advantageous to behave ethically even if that means forgoing the sale. When an individual is financially stressed, it is more likely that he or she will ignore the ethical requirements making the financial gain the top priority. This applies to both individuals and businesses. When an agency or other type of business is struggling, their first concern may be profits rather than ethics. That is why salespeople must use some thought regarding whom they choose to work for.
Ethical conduct can be thought of in a trickle-down effect. When those above us are ethical, we also tend to become ethical. When those above us stress financial goals rather than ethics, we are likely to value financial goals above all else, too.
Ethical rewards also follow the trickle-down effect. Our rewards for ethical behavior are often not realized at the moment of the action. Rewards may come years later. Religious persons base many of their actions on the rewards they feel will be theirs after death.
Society as a whole has become much more demanding when it comes to ethical behavior. At the same time, we are living in an age when financial success is more likely to be admired. Even when we feel we are not receiving ethical treatment it is important to treat others from an ethical base. Nearly everyone has, at one time or another, gone out of their way to do something for another only to be treated badly in return. Such a situation does not change what is ethical.
Sometimes ethical behavior is aided by our advancing technology. People may act more ethically simply because they realize that their chances of being caught in unethical actions are greater today than in the past. Today computers, cameras, and other technology is available to a greater number of people. For example, many social issues have been highlighted because questionable actions were caught on video, cell phones, and other devices. Police officers are beginning to wear cameras to film the actions of both citizens and officers. This brings up another question: when an individual acts ethically, not out of desire, but because they know they must, is that person actually ethical? As previously noted, sometimes society is only able to dictate a person's behavior, not their ethical standards.
Each person has a public image, which is not always deserved. For example, if a law enforcement official or a politician is caught behaving unethically should the public then announce that all law enforcement officials or politicians are the same? If a plumber cheats an elderly person, should we announce that all plumbers cheat the elderly? If one insurance agent lies about a product, does that mean all agents lie?
We sometimes make the mistake of believing only large companies must be concerned with public relations. It is doubtful that any other area is more important than how the public sees us. The “public” are the individuals that buy insurance. Having a good public image means that more referrals will be generated, more business will stay on the books and people will be more trusting of their agent’s advice. In fact, when businesses sell, it is often the public image of the company's name that raises the selling price. When a business has a reputation for excellent service or products, the business is simply worth more money.
We sometimes think of public images as having to do with advertising budgets, glitzy images or being in the spotlight. Actually, a person’s public image is simply how others perceive him or her. The defining image of each person is seldom created by their personal description, but rather by others they come in contact with. Others make those judgments based on the actions and words that were seen and heard. This is true of both individuals and businesses.
Individual ethics and business ethics are sometimes thought to be different things, but that is not necessarily true. Every business has a responsibility to develop a business ethic. Certainly an insurance entity must worry about becoming the concern of a government regulator if legal ethics are not followed, but it really goes beyond that. Without clear principles within the business outlining what is acceptable and what is not, problems may easily develop, with both their public image and their legal continuance.
Accounting firms and attorneys point out the need for a clearly written, legally sound employee manual for every business. With the number of employee-related lawsuits being filed, employers simply cannot afford to ignore the need for a well thought out employee manual. It is the company’s proof that ethical guidelines were established and known by their employees.
Experts note that a significant percentage of employee-based lawsuits would never have stood up in court if the situation had been properly addressed in a manual and emphasized at company meetings. Businesses that have not put together such a manual are definitely at legal risk. Besides lessening the likelihood of being sued, a well-written (and followed) company manual can also improve employee morale since it establishes what is expected of the employees and provides channels of communication when an employee feels he or she has been treated unsuitably or unethically. When an employee feels he or she has options when their treatment seems unfair (maybe even illegal) instead of going to an attorney the individual may go to management instead. Of course, management must take appropriate steps as well or the printed manual will do little good in preventing a lawsuit.
Such things as churning policies (mentioned earlier in this text), misrepresentations of products or services, and outright fraud taint the public's image of the insurance industry. Of course, that ends up hurting every licensee in the insurance industry. All of these issues need to be addressed in the company manual even though a salesperson should not need to be told that such activity is illegal. Including it simply makes it easier to handle the situation when it occurs. Often, salespeople are hired as independent contractors. In other words, each salesperson is self-employed. The contracted agency is still wise to formalize and issue a manual on ethics in selling. Doing so may protect the agency from future lawsuits since it can be demonstrated that it tried to keep the contracted licensees on the correct path.
End of Chapter 12
United Insurance Educators, Inc.