As with all financial and other services, conflicts of interest can sometimes factor into the equation. At Matrix Insurance, our experienced, talented team understands the potential issues and legal ramifications of conflicts of interest. This article examines potential conflicts of interest in the insurance industry and how brokers and policy providers handle them.
Conflicts of Interest in the Insurance Industry
Insurance conflicts of interest occur when the personal or financial interests of an insurance broker, agent, or company are at odds with their moral, professional, and legal duty to act in their clients’ best interests. Some examples include:
- Commission-based remuneration
Insurance brokers who earn commissions for recommending and selling policies might guide their clients towards policies that bring them higher amounts rather than basing their advice on the best policy for each client.
- Agents tied to a single insurance company
Some agents work exclusively to represent one insurance provider. Their financial advice may be biased or limited to that company’s products, irrespective of their clients’ needs. They are less likely to mention or recommend better-priced, more suitable offers elsewhere.
- Demanding sales targets
Insurance brokers are in the business of sales. Some employers or affiliated insurance companies pressure them to meet aggressive sales targets. This inevitably leads to them recommending policies that aren’t necessarily in the client’s best interest.
- Ownership
Suppose an insurance agent or broker has partial stakes in a particular insurance company or its related offshoots. In that case, they may be incentivised to recommend products and services from those companies their clients don’t need or want.
- Up-selling
Less reputable insurance brokers might attempt to sell their clients additional products and services they don’t need. This may be a lucrative practice, but it undermines trust in the industry and is considered unethical by most professionals.
Although the majority of conflicts of interest arise from the insurance broker or provider, there are occasions when their partners are responsible, including:
- Elevated bills from service providers
When insurance companies partner with outside companies like hospitals or repair companies to attend to policyholders’ needs, less scrupulous ones may be tempted to over-inflate their prices, knowing the insurance company will foot the bill.
Although technically not a conflict of interest, this practice is illegal and insurance companies/regulatory bodies are committed to detecting and prosecuting activities deemed insurance fraud. The result of this vigilance protects consumers and maintains the function and integrity of the insurance industry.
Managing Conflicts of Interest
To retain confidence in their professional services and the wider insurance industry, astute, ethical brokers and agents attempt to manage these conflicts of interest as follows:
- Identifying conflicts
Before any business is undertaken, brokers must check for any previous or existing relationships with the involved parties to identify potential conflicts.
- Transparency/disclosure
Once issues are identified, brokers must disclose potential conflicts of interest to their clients and explain the compensation system. Clients can make more informed decisions when aware of conflicts and possible biases.
- Consent
If conflicts are identified and disclosed, brokers may seek explicit, voluntary client consent to proceed. This need not be given, and the client can walk away anytime.
- Third-party reviews
Independent papers, reviews, and comparisons are commissioned to show transparency and provide unbiased guidance. Some critical features of third-party reviews include:
- Objective, unbiased assessments
- Ensuring regulatory compliance
- Transparency of findings
- Sufficient industry expertise
- Post-review recommendations
- Duty segregation
If conflicts of interest arise, firm-based brokers may segregate duties, tasking unaffected individuals or teams or individuals to handle a client’s account or aspects thereof.
- Self-governance
Most insurance brokers have formal, stated procedures and policies to manage conflicts of interest effectively.
- Regular reviews and monitoring
To maintain professional best practices and foster client confidence, many brokers monitor their financial dealings continuously for conflicts of interest. Any suspected conflicted client engagement with clients is reviewed and updated to identify and manage issues promptly.
- Client-centred approach
Reputable insurance brokers prioritise their clients’ needs and act according to their best interests, even at the expense of personal/professional gain.
- Ethics and legal compliance
Brokers adhere to industry regulations, ethical guidelines, and standards to maintain fair practices. The following section examines those legal requirements in detail.
The Legalities of Conflicts of Interest in the Australian Insurance Industry
In Australia, conflicts of interest in the insurance industry are strictly regulated to maintain transparency and fair practices. Some key legal frameworks and governing bodies include:
- Regulatory framework
- The Australian Prudential Regulation Authority (APRA) oversees and regulates the insurance industry and uses specific guidelines when identifying and managing conflicts of interest.
- Australian Securities and Investments Commission (ASIC): ASIC regulates insurance brokers and agents, ensuring they adhere to ethical standards and disclose any conflicts of interest to clients.
- Prudential practice guides
The APRA provides PPGs designed to outline the responsibilities of insurance industry businesses and help them comply with the applicable legal requirements.
- Disclosure requirements
Insurance agents and brokers are legally bound to disclose potential conflicts of interest to potential and existing clients.
- Ethical standards
Ethical standards set by the Financial Planning Association (FPA) and the Insurance Brokers Association of Australia (IBAA), most of which pertain to acting in the client’s best interest, must be adhered to.
- Penalties for non-compliance
Failing to identify, disclose, and manage conflicts of interest promptly and appropriately can result in fines and disciplinary actions.
Although the regulations and standards applied to the insurance industry lean heavily towards protecting clients, insurance-based businesses and individuals maintain integrity and public trust in their products and services by adhering to them.
Contact us
Please do not hesitate to contact us to learn more about any aspects of what you have read in this article and how Matrix Insurance conducts its business practices in this regard. Our outstanding, knowledgeable team will gladly help however possible and provide all the information, guidance, and advice you need.
We take great pride in our insurance policies and services, working tirelessly to maintain and surpass our reputation as a trusted, communicative, and fair broker. When you partner with Matrix Insurance, you can expect nothing less than transparency, straightforward products and price structures, and effective financial services delivered efficiently with maximum professional integrity.
