The Ethics of Information Asymmetry on Insurance Claims

It is said that the way in which insurance claims are handled says a lot about the values of the insurer involved. References to integrity and fairness are weighed up and judged by insurance claimants according to how they feel their claim has been dealt with. It is after all where the truths of the promises in the insurance policy come to be tested. And that has not been lost on regulators, who besiege the insurance sector with reviews, and investigations where private investigators, regulators’ reviews into claims, Insurance Ombudsman Office and, in some cases, the Fair Competition Commission’s investigation into certain claims practices come to the fore.

The three – claims, information and ethics are issues of fundamental importance – insurers who conduct internal reviews into their claim’s operations will need to consider these issues, or likely, risk having the regulator challenge their underrating and professionalism.

As it relates to information asymmetry – we all know that insurance can be a complex product. Well, such a statement may be overrated, because in a business-to-business context, this complexity shouldn’t be an issue, for with the involvement of brokers, both sides have relatively equal levels of insurance knowledge. In personal insurance, yes — the complexity can create some difficulties. The key difficulty being an asymmetry of information between the insured and the policyholder, with the former knowing a lot about the insurance product and the latter knowing very little.

Again, in itself, there’s nothing unusual about asymmetries of information like this, for we engage with people with specialist knowledge on an almost daily basis. However, the nature of the insurance contract, as a promise of financial reimbursement conditional on the circumstances of a loss, makes information asymmetry an important ethical issue. And it is an ethical issue that the insurer can be particularly exposed to. Let’s put it in some context — short of every policyholder holding an insurance qualification, information asymmetry will always be there. So, the ethics of information asymmetry lie not in how you avoid it, but in appreciating where it’s important and how you then handle it.

One of the reasons for professions evolving and becoming part of today’s business landscape is in recognition of information asymmetry (think of lawyers, accountants, engineers, doctors, etc). It’s the duty of every professional, of whatever form, to manage information asymmetry with fairness and skill. How well they have done this over the years has gone a long way towards building the reputation of each profession. An insurer that sees itself as part of a profession, offering a professional service to its customers, needs to put information asymmetry, and all its influences and consequences, at the heart of its relationship with the policyholder.

If you’re a member of a certain profession, or work for a company that is regulated, then this is an issue that should be central to your professionalism. Policyholders sometimes accuse insurers of exploiting their lack of knowledge about insurance and in some cases, they may have a point. However, it is often the case that they feel exploited, rather than actually being exploited. Those feelings of exploitation are symptoms of that imbalance of knowledge and the sense of powerlessness.

So, dealing positively and proactively with circumstances in which the sense of powerlessness can arise will go a long way to earning the trust of the public. With claims often being a complex mix of money, emotion and uncertainty, claims departments within insurance firms are ideally placed to take this sort of initiative.

Let’s look at some cases of how information asymmetry can influence the insurer and claimant relationship. Firstly, the policyholder may have read the policy, but they are unlikely to have really understood it. There’s nothing unusual in this – we all have situations where we may cast an eye over the information slip inside a box of medicine, but rarely read all of it, let alone understand it.

So, when insurers complain about insureds not understanding what they’ve bought, those insurers are in fact voicing a lack of understanding of their customers and of what their own role as professionals really means. Secondly, policyholders usually have little to no understanding of how the claims process itself works. This is compounded when insurers have created complex claims processing.

So, even if a policyholder has spent time reading the policy and made an effort to understand how the policy might deal with the claim, she then finds herself in the middle of a process that deflates her confidence and puts her on the defensive. Thirdly, the claimant may know many things about the loss they’ve suffered, but they may not fully appreciate what those things mean within the context of their claim. They’re not motor technicians, nor builders, for example. The insurer needs to proactively engage with the claimant about the information they need to assemble, what next steps need to be taken and who will be providing them with what service. Those insurers who approach this in a positive and supportive manner are much more likely to win the trust of the public, than those who leave the claimant to work it out for themselves.

Alternatives for the Financing of Insurance Premiums

Managing finances and cash flows can get complicated. In most cases when obligations fall due, individuals and businesses alike may be experiencing cash flow issues. When cash flow availability is low, paying for expenses, such as insurance premiums, can be difficult; meanwhile, that does not mean one should go without insurance protection. That’s why tools such as Insurance premium financing (IPF) comes in handy aiding in covering the cost of insurance premiums. 

Insurance Premium Finance (IPF) is a financing strategy that allows insurance policy owners to borrow funds from a third-party lender (normally a bank) to pay insurance premiums. It is largely a helpful strategy for individuals and businesses who need insurance but don’t have the cash on hand to pay the premiums or would rather keep their money invested in other areas, relying on a cheaper borrowing rate instead.

The concept of IPF is not new, it has been available for decades. Traditionally, IPF involved the use of loans that were used to fund the policies and the policyholder did not need any collateral besides the policy itself. However, recently IPF has evolved into a segment of the industry that tries to capitalize on low borrowing rates to get insurance for little to no out-of-pocket cost.

What Is IPF?

IPF enables an insured party to spread their insurance premium payment over the term of a policy rather than paying the entire premium upfront. The insured then repays the bank based on the agreed-upon terms which usually consists of a down payment followed by a series of instalment payments. IPF provides insured parties with a wide range of benefits, one of which is that it enables improved cash flow and asset liquidity.

How Does IPF Work?

IPF is essentially a loan that a business takes out to purchase an insurance policy. The loan is secured against the cash surrender value of the acquired insurance policy. IPF is an effective strategy used by many types of insurance purchasers — individuals, entrepreneurs, and business owners. Financing the majority of the upfront cost of an insurance policy ensures that business owners do not need to sell their assets to pay for the entire cost of the insurance policy upfront. This means that the business can enjoy the protection of the insurance policy without having to negatively impact their cash flow or assets.

Why IPF?

There are several reasons why one may choose to engage in insurance premium financing. The most common reason this financing option is so popular is because it allows the insurance buyer to attain a whatever volume of insurance policy without having to significantly impact their cash flow or liquidate their investments to cover the expense. Individuals and business owners are able to maintain the use of their cash flow and use it for operations or to grow the business.

On Choosing an IPF Program

When choosing an insurance premium finance program, there are several factors to be carefully considered. First, the insured party must review the cost of the loan; in some cases, the cost of insurance premium financing may be too significant and not a good return on investment. One may also consider if the program has a suitable exit strategy. The cash values of the policy are often the source of paying off the loan, a good program should provide borrowers with the ability to pay off the loan directly from the policy itself, especially if the insurance policy relates to a business.

IPF is best suited for borrowers who have a long-term need for insurance coverage. Borrowers should have the ability to sustain the requirements of the program and provide the minimum amount of collateral needed to secure the loan. IPF generally has a specified term length, and the policyholder is ultimately responsible for the loan during the repayment period.

How does premium financing work?

A bank makes the premium payments on an insurance policy with the promise that the policy owner will repay that amount plus interest at some future point. Additionally, the policy owner is required to post collateral if the policy cash value isn’t high enough to cover the full repayment to the lender.

What are the benefits of IPF?

There are several benefits to financing insurance premiums. These include: (i) eliminating the requirement for a large up-front payment to an insurance company; (ii) multiple insurance policies can be attached to a single premium finance contract, allowing for a single payment plan to cover all insurance coverage; (iii) premium financing is often transparent to the individual or company insured. Insurers, brokers and agents transmit the completed premium finance agreement to the bank, and the policy holder is billed as they would be for any other typical insurance policy; (iv) it allows for clients to obtain needed coverage without liquidating other assets; (v) premium financing helps in avoiding the opportunity cost in paying out of pocket.