Ethics 311

Professional associations and societies have a professional code that

Addresses the ethical standards and ideals that the group requires of its members. A professional code should be broad enough to account for the diversity of the group's membership, yet specific to the job duties, functions, and activities of each individual member.

Specific laws and regulations

Affect the actions and decisions of those working in the insurance industry every day. These laws are intended to maintain viable insurance markets, to protect consumers, and to regulate insurer solvency so that insurers remain financially able to fulfill the promises made in their insurance policies.

Ethical Responsibility to Groups

All professionals owe ethical responsibilities to differing groups of stakeholders. The fundamental needs and expectations of each group must be considered when making ethical decisions. Insurance professionals have duties to specific stakeholders—insurers, policyholders, and the public. To understand the extent of the responsibility owed to each group, it is necessary to first understand each group's perspective and interests.

Unselfish concern for the welfare of others is referred to as

Altruism

Sense of Altruism

Altruism is an unselfish concern for the welfare of others. Insurance exists to meet the vital needs of the consumer. Although insurers strive to be profitable, an insurance practitioner must practice altruism when interacting with and serving insureds.

Practitioners who are professionally competent

Are aware of their abilities and acknowledge their limitations. Personal accountability sometimes requires us to admit that we "don't know what we don't know." Because the insurance transaction is based on trust, it would be unfair to all involved to imply knowledge that doesn't exist. A sense of professional competence serves to direct the actions of the insurance practitioner to the benefit of all stakeholders.

High Ethical Standards

Are essential to individuals in all professions. A professional's work should always reflect integrity in order to earn and deserve consumer trust. In the insurance industry, a standard of "utmost good faith" exists to ensure the ethical nature of the relationship between insureds and insurers. This standard extends beyond the insurer to agents, brokers, claims representatives, loss control representatives, and other practitioners who perform work on behalf of the insurer.

Moral values of government bodies

Are expressed in laws and regulations. The business of insurance is highly regulated. These regulations are meant to define what is right and wrong regarding the business of insurance, including products offered and rights afforded to insurance consumers.

Laws

Are legal tenets. Laws created by a governing body are designed to protect society. In essence, they codify acceptable or required behaviors. Laws impose a sense of societal decency and order. They exist to protect people and property and to establish a code of appropriate behavior.

Business ethics

Are, in reality, applied ethics, meaning the actual application of ethics to specific business scenarios. The insurance and risk management professional must embrace moral values; be aware of applicable laws, rules, and regulations; and then apply those values and rules to a given situation. Business ethics entail making optimal choices in the workplace and doing what's right in the context of products and services and relationships with stakeholders. Business ethics are critical when an organization is threatened or faces fundamental change such as during a merger or an acquisition or when it faces new and significant challenges.

Ethics involves

Consideration of duty and of what is the right response when a conflict arises. They are, in essence, codes of expected behavior that apply in the absence of laws. However, we face circumstances each day to which laws may apply, but the corresponding choices are not cut-and-dried. In these situations, there may be more than one "right" choice.

Morals are principles that

Dictate an individual's behavior. A sense of morality implies a process by which decisions are made and behavior is governed. Morality is the manner in which those definitions are put into action. Though some may associate morality with organized religion or religious beliefs, it is, in fact, universal and basic to human relationships.

Practicing altruism

Does not preclude the opportunity to find personal rewards for the actions taken and the work done. Few people would pursue a career in risk management or insurance solely for altruistic reasons. Insurance practitioners have the opportunity for personal (financial and other) gain while striving to serve the needs of others.

Insurance rating systems discourage social responsibility.

False

Occasionally, group actions are necessary

However, participation in a group action does not relieve practitioners of their duty to consider issues independently and exhibit individual judgment. They must still be prepared to exercise good judgment based on the skill and expertise they have developed.

Professional associations are membership driven

In order to attract and retain members, most will strive to make membership meaningful and to be a valuable resource for members. Conversely, the professionalism exhibited by members enhances the reputation of the association.

Insurance and risk management professionals who maintain high ethical standards may

More effectively meet the needs of all stakeholders and the high standards of the insurance industry. They are therefore better equipped to adapt to changes to the rapidly evolving global marketplace and in the industry.

An insurance professional is responsible for his or her thoughts, decisions, and actions. Knowledge, skill, and expertise guide decisions and ensure that the insurance professional uses his or her

Professional Judgement

The ability to apply knowledge to risk and insurance circumstances is acquired through

Professional training and job experience.

Aspiring to Be a Professional

Professionalism entails continuous pursuit of knowledge, utmost good faith in all dealings, and adherence to standards and regulations. It requires hard work and lifelong commitment, including participation in professional organizations, attendance at educational programs, and education about new products.

Ability to Think and Act Independently

Professionals are responsible for their thoughts, decisions, and actions. Their knowledge, skill, and expertise help guide their decisions and ensure that their professional judgment benefits their clients. However, ultimately, they must use these traits to make their own independent decisions every day in their work.

Organizations that demonstrate high ethical standards also

tend to enjoy more positive reputations and, based on their reputations, are more easily able to recruit and retain highly skilled employees. By hiring the best candidates, an organization can produce at a higher rate, be more innovative in its operations, and deliver its products and services more efficiently. And just as employees are attracted to ethical organizations, these organizations are sought after by consumers as well. People like to do business with successful organizations. Consumers appreciate authentic relationships with companies that have high ethical standards. They know that these companies will be fair and equitable in their dealings, will put the interests of the consumer first, and will stand behind their products and promises. These are the attributes that attract consumers and form the basis of a long-term business relationship.

An additional complication of the global economy is

that professionals must comply with the General Data Protection Regulation (GDPR), which protects the personally identifiable information (PII) of residents of the European Union (EU). Under the GDPR, an individual can request that an organization erase all of his or her PII the organization has on record. The GDPR applies to entities that operate within the EU or have employees who reside there, but even organizations that are not subject to the GDPR may benefit from adhering to it. Several countries and jurisdictions outside the EU are also adopting privacy regulations similar to those of the GDPR.

Background of Insurance

the notion of workers compensation insurance as a benefit provided and paid for by employers arose in response to the rise in the number of work-related injuries (and the cost to workers and employers, both in a financial and a social sense) that began during the Industrial Revolution and continued into the early part of the twentieth century. Before no-fault workers compensation was available, injured employees could only receive payment for work-related injury or illness if they successfully sued the employer, which was often difficult. Employers, meanwhile, had to pay defense costs for each claim filed by an injured worker. Many injured workers turned to charitable organizations for financial assistance, but these organizations were eventually overwhelmed.

Professional associations also provide an avenue for

Publication of articles that report on current issues and provide analysis from the insurance and risk management perspective. Most professional organizations publish their own newsletter or magazine. Many also provide space on their website where members can post personal observations, relay current events, contribute analyses, share sources of information, and further their professional goals through networking.

Individuals and organizations generally do not

Recognize and value production success as much as professional expertise. Society rewards professional accomplishments by seeking out professionals who have demonstrated a commitment to the highest ideals.

Ethics require

That the insurance and risk management professional think through each conflict situation, bearing in mind the codes of expected behavior, ethical guidelines, and moral values. Ethical decisions are considered to originate from reasoned consideration of all the issues surrounding a conflict. Being able to rely on one's personal ethics is essential to risk and insurance professionals.

In recognizing their social responsibility and taking actions to improve the world around them, insurance professionals serve

a vital need. By developing more diverse insurance products and then making these products available to customers at a reasonable price, insurers enable more consumers to purchase the products, enhancing economic confidence and setting the scene for continual innovation.

The financial services sector (including insurers) also faces

additional compliance burdens from the federal government. For example, U.S. insurers are required to comply with regulations established by the Office of Foreign Assets Control (OFAC), a division of the U.S. Treasury. OFAC maintains the Specially Designated Nationals and Blocked Persons (SDN) list. Insurers are prohibited from having business dealings with any person or business on the list, and an insurer that transacts business in any way with a blocked person will face significant penalties.

Professionals who search for correlations between certain activities and reductions in losses, and who then develop incentives for loss reduction, are

also acting in accordance with their social responsibility. For example, a producer may provide customers with safety checklists to encourage routine loss control measures, or an underwriting manager might review commercial accounts to make sure that clients are getting appropriate premium credits for approved loss reduction measures.

Meeting their social responsibility may

also serve other needs of insurance professionals. For example, an insurance professional may volunteer to lead classes or to serve as a guest lecturer in high school driver education classes or college economics courses to teach students about the purpose of insurance. While the goal—to teach students about insurance products—may have a pure and altruistic motivation, there is yet a greater reward to society and to commerce as those students will be educated future insurance consumers.

Conflicts may arise when practitioners encounter temptations

and barriers to acting independently. Professionals should be aware of such conflicts to avoid acting in ways that do not benefit the insured or the claimant. The ability to think and act independently is an important characteristic of professionalism, as it is the basis for trustworthy actions.

Maintaining high ethical standards is the basis for

authentic relationships with stakeholders, and it helps professionals develop reputations based on honesty and integrity. Adhering to high ethical standards makes a professional a valuable asset to a successful organization by helping it meet its financial goals.

Moral values come from

A number of sources and are defined or influenced by society, religion, governmental entities, and individuals. Societal expectations often ensure that individuals and groups uphold defined moral values—individuals who fail to uphold these moral values may be ostracized or otherwise excluded. As the morals of a society change, so too do its expectations of individual behavior.

Supporting Professionalism

Because insurance is, in essence, a promise to the public, people must have a high level of trust in the insurance and risk practitioners with whom they conduct insurance transactions. To earn this trust, practitioners must exhibit professionalism. To support the position that practitioners should possess and exhibit the characteristics of professionalism, one must understand the traits that characterize professionalism and how those traits relate to the insurance business.

The insurance transaction is based on trust

Clients must know that the insurance coverage they pay premiums for will protect them when a covered loss occurs. Insurance professionals must build and maintain strong relationships with the public by always acting in good faith. In fact, when a fiduciary duty exists (such as when a producer is handling funds that belong to consumers or the company), the law requires insurance professionals to act with utmost good faith and trust in executing their fiduciary duty. Maintaining high ethical standards is crucial to preserving the trust on which the insurance transaction is based.

Compliance with morals

Compliance with regulations is encouraged by imposing fines or sanctions, as necessary and appropriate. Insurance professionals who fail to act in accordance with applicable laws or regulations are subject to fines, lost business opportunities, and loss of licensure. They may even lose their livelihood. Over the long term, moral behavior supports continuous success.

Ethics

Entail knowing what to do when a situation presents more than one "right" answer. They provide guidance in situations where a law is not applicable or more than one course of action could be considered "right." A set of standards held by a profession or group may be considered a code of ethics.

Morals

Entail making the distinction between right and wrong. Implies behavior based on virtue, meaning integrity, honesty, and the desire to do the honorable thing. Moral principles and rules of conduct dictate the appropriate response when a decision must be made between right and wrong. Such decisions generally are based on what "feels" like the right thing to do or on what one was taught to do.

By defining and supporting the activities of their members, associations and societies help them uphold the highest standards of professional conduct

Groups with a distinct identity are able to fashion educational opportunities and networking events to specifically meet the needs of their members. Professional associations often provide formal continuing education resources that satisfy licensing requirements. They also provide education and information for all members, whether licensed or not, to ensure that members stay abreast of trends and issues facing the industry. Additionally, many individuals find opportunities to seek help from mentors, or to offer mentoring advice, within the organization's membership.

Traits of Professionalism

High ethical standards, professional competence, sense of altruism, commitment to continuing education, participation in an association or a society, ability to think and act indecently, and public recognition as a professional.

Authentic relationships

Honest and open communication fosters an authentic relationship between the parties to the insurance contract as well as with third parties who may be affected by the contract. This honesty is the basis of the trust the insured places in the insurer to keep its promises.

Sense of equity

In order to be fair with insureds and claimants, insurance practitioners must know what constitutes fairness. A sense of equity allows the practitioner to consider the needs of all stakeholders. An equitable solution for claim resolution can be found not only by adhering to the terms of the contract, but by fully considering how a potential settlement will indemnify the claimant, affect the insured's historical data (and thereby, potentially, the insured's future premiums), and affect the profitability of the insurer.

National Association of Insurance Commissioners

In the United States, every state has a department of insurance and an insurance commissioner or regulator who is charged with overseeing insurance operations in that state. Commissioners are either elected or appointed. Nearly all insurance commissioners participate in the National Association of Insurance Commissioners (NAIC), an organization with a primary goal of protecting the public interest. One way in which the NAIC strives to achieve that goal is by encouraging consistency among the states' insurance laws and regulations. It has done so by creating model acts to assist and guide state insurance authorities. While the primary purpose of the NAIC is to protect the interests of consumers, consistency among insurance products and regulations serves that goal by setting standards for insurance business activities. The NAIC's Model Acts and Model Regulations suggest language and content, but they are not binding on insurers unless a state's legislature enacts the act or regulation or the state insurance commissioners adopts it.

Altruism serves the needs of

Individuals as well as society. Claim payments made under an insurance contract provide a means for the policyholder or claimant to return to normal without being a burden on society. The availability of insurance enables individuals to finance purchases by protecting the lender in the event of loss or damage to the financed property; it permits municipalities and organizations to sponsor events by protecting against liability losses; and it permits investors to pursue building projects and business growth. Creation of new insurance products, such as insurance coverage for data breaches, ride-sharing, and other exposures that may not have existed years ago, can also facilitate changes in society. By providing such protection for investors and others, insurance plays a key role in moving society forward and stimulates economic growth. This larger good reflects the universality of the trait of altruism.

Many professional associations

Industry publications, and other organizations also publicly acknowledge the accomplishments and contributions made by individuals to the industry. If an award is based solely on monetary accomplishments, it does not recognize professionalism; rather it recognizes the ability to produce. On the other hand, awards that recognize professional accomplishments are more enduring because they are based on merit.

Insurance professionals' adherence to high ethical standards also

Influences the public image of the industry and the degree of trust consumers place in the industry's ability to honor insurance contracts and pay covered claims. The ethical standards that risk and insurance professionals must adhere to are rooted in three general areas.

The perception of professionalism is important for

Insurance and risk management practitioners in both the public view and in the view of peers and stakeholders. Whether for the purpose of personal advancement or competition, practitioners who are perceived as professionals will gain an advantage over other practitioners.

When faced with a difficult situation or choice

Insurance practitioners may consult with peers or mentors to reach an appropriate decision. This consultation with others does not remove the practitioner's responsibility to analyze and act independently. Rather, it serves as an important step in the decision-making process—as a tool for gathering information. A practitioner's need for a consultation acknowledges and addresses his or her inability to know everything required to make a judicious decision. True professional insurance practitioners strive to make informed, independent decisions based on careful review and consideration.

To demonstrate a commitment o high ethical standards

Insurance practitioners must act with integrity, be honest and trustworthy, have a sense of equity and fairness, and accept personal accountability. To act with integrity, professionals must be open and candid.

Professional Competence

Insurance practitioners must be knowledgeable about insurance products, know how different coverage applies in particular situations, and understand the implications of risk and its effect on individuals and society. Practitioners should also be able to efficiently and effectively apply that knowledge to a given situation for the benefit of all stakeholders.

Regulatory Requirements

Insurance professionals must weigh both ethical and legal considerations in their decisions. So understanding the law and abiding by legal and regulatory requirements are the first steps toward maintaining high ethical standards. Risk and insurance professionals must therefore understand applicable regulations and current regulatory issues, which they can achieve through a lifelong pursuit of continuing education. This will enable them to determine what is legal and not legal and avoid allegations of impropriety. As mentioned, complying with laws and administrative regulations is the basis (but only the basis) of maintaining high ethical standards—but compliance can be complicated, particularly when insurance operations involve multiple regulatory bodies.

Insurers

Insurers are in business to provide their customers with protection from financial loss. They do that by helping consumers manage their risk exposures. At the same time, insurers must earn a fair profit for shareholders or, in the case of mutual insurance companies, net assets for policyholders. Insurance professionals have a responsibility to support these (and other) goals of the insurers they represent. Insurance professionals must act responsibly within the context of the duty owed to insurers. They must weigh and fully consider competing interests to ensure that their decisions are ethical.

An insurer's investments also reflect an awareness of its social responsibility

Insurers often invest in municipal bonds, which provide funding those governments can use to, for example, build roads or complete other public projects. Insurers thus play a key role in improving the lives of others. Insurers can also foster innovation and new industry by investing in corporate equities and bonds. Such investments fuel the economic engines and enable growth of commerce. This is made possible by judicious investment of the premiums the insurer collects—investments made with an eye toward good long-term results.

Maintaining High Ethical Standards

Maintaining high ethical standards isn't simply the right thing to do. Unethical conduct can lead to a reduction or loss of business, bankruptcy and insolvency, or, in some cases, lawsuits and prosecution. Unethical conduct on the part of an individual professional can also tarnish the reputation of his or her entire profession.

In some jurisdictions, continuing education is

Mandated by law as a prerequisite for producer licensing and license renewals, and the same requirements often apply for claims representatives. The required proof of continuing education provides evidence that an insurance practitioner is keeping up with new issues, products, and legal concepts.

Social Responsibility

Many insurance products have evolved from the identification of a social need and the industry's societal responsibility and actions to meet that need. Providing assistance to individuals and organizations continues to be the primary role of the insurance industry. An insurance professional must therefore adhere to high ethical standards when considering what coverage might be appropriate for a given exposure, what premium would be fair to charge for the coverage, and whether the purchaser has confidence in the product.

Commitment to Continuing Education

Many insurance professionals hold at least one degree of higher education and/or certification from a recognized insurance education provider. They also are often trained in specific job functions that require judgment and thoughtful consideration.

Ethics are derived from

Morals and are applied when a purely moral response might not be wholly appropriate. Contradictory laws or societal norms set up conflicts that must be resolved in an ethical manner. Individual values significantly influence ethical behavior. Values are what one believes. Ethics are how one behaves. Values define what is important to an individual, a strong factor that influences which "right" answer one chooses.

A commitment to continuing education involves

More than simply the learning gained by performing job functions. It requires a more formal approach to learning. While experience provides valuable insight about the real world, it is not sufficient to rely on experience alone. Formal education expands knowledge beyond experience. Formal education that requires testing serves to certify the extent of knowledge gained from the course of study and qualifies the knowledge of the insurance practitioner.

Carmen is an adjuster and has evaluated a claim at a certain dollar amount. Upon calling the claimant, she begins discussing the special damages. She realizes that the claimant has not taken into account a rather large expense for which there is other insurance. Carmen must decide whether she will reveal the additional covered expense to the claimant or whether she should settle the case based on the claimant's demand, which is significantly lower than what Carmen had expected to pay to close the case. To complicate matters, Carmen has just left a meeting with her supervisor, who encouraged her to make the lowest settlements possible, regardless of the circumstances. What is the ethical decision for Carmen to make, and what are the potential consequences of making this decision?

Of course, the ethical decision for Carmen is to advise the claimant of the additional expense and negotiate an appropriate settlement. If instead Carmen had been influenced by her supervisor's admonishment and settled the claim for a lower amount, the claimant could have learned about the coverage being omitted. Then, Carmen's reputation and the reputation of the company she represented could have been damaged. While in the short term, she may have been praised by her supervisor, there likely would be both personal and professional costs. By applying her moral values of fairness, truth, and trust, Carmen's decision to reveal the additional coverage is an ethical decision, despite potential repercussions from her supervisor.

Ethical behavior is based on moral conduct, which implies

One knows what is right and what is wrong

Professionals are recognized in many ways

One way is through awards and acknowledgement by professional organizations or peer groups. This form of recognition is a tangible acknowledgement of skills and expertise. Professionals can also be recognized through their designations and continuing education.

Penny is in the marketing department at Insurance Company. Which one of the following is an important truth for her to know?

Organizations that focus on short-term profits and fail to adhere to high ethical standards often do so at the expense of their long-term success.

Morals are learned

Over time, they develop moral values from learned experiences and discipline imposed by others. By applying what they have learned about acceptable behavior, individuals are able to exhibit moral behavior. So morality is ultimately owned by the individual.

Public recognition may also come from

Peers or other individuals. For example, Tyrone is a successful real estate broker. Whenever Tyrone sells a home, he recommends that the buyers obtain an insurance quote from agent Jim. He does this because, based on prior experience working with Jim, he knows that Jim does an excellent job explaining homeowners coverage options and will treat Tyrone's clients fairly. Tyrone's referrals are public recognition of Jim's professionalism.

Which one of the following could create an ethical issue?

Placing insurance with the insurer paying the highest commission

Personal accountability

Requires professionals to consider their conduct and its influence on outcomes. It was memorably encapsulated by the sign on President Harry Truman's desk that read, "The buck stops here," meaning professionals should assume full responsibility for their actions and the results of those actions. A commitment to high ethical standards requires hard work over an extended period of time. Only practitioners who consistently demonstrate high ethical standards can be considered insurance professionals.

Laws specify

Right and wrong behavior are important to the orderly behavior of individuals and groups. But laws alone are not enough to dictate moral behavior. Laws cannot cover the entire spectrum of moral behavior, define each situation, or describe the moral response to each conflict. They are, however, an essential part of ethical decision making.

Current Social Needs

Risk and insurance professionals should be aware of the physical environment in which they work. Their activities should not harm the environment, and they should cooperate with the public and with governing bodies in finding ways to protect and improve the environment. This can be done, for example, by developing new products and services that support green building, reduced energy consumption, and conservation methods. Insurers have responded to heightened awareness of the costs and implications of energy use by creating insurance products to address emerging environmental concerns and the industries that have arisen to address those concerns.

The study of business ethics

Sensitizes professionals to conflicts that may arise. It may result in more in-depth knowledge about the values held by the organizations to which they belong and provide them with guidelines for resolving conflicts. With respect to stakeholders, ethics require an awareness of the rights of all stakeholders. Conflicts frequently arise because of the inherent needs of different parties.

Participation in an Association or a Society

Such as claims associations and agents' groups, typically have established standards for ethical behavior specific to the specialty of their members. Such associations, societies, or organizations are an essential element of professionalism, whether they are locally organized or national in scope.

Professional competence includes

The ability to perform all tasks in a thoughtful, organized fashion. Professional competence entails the skill with which practitioners provide services to their clients. For example, an insurance producer may have extensive knowledge about the commercial general liability (CGL) policy. Without professional competence, however, he or she would not be able to apply that knowledge to assist a new business in protecting itself from risk exposures. The ability to apply knowledge to risk and insurance circumstances is acquired through both professional training and job experience.

In human conduct, altruism is

The opposite of selfishness and requires that practitioners look beyond their own and their employer's needs. An example of altruism is when an agent is called late at night by an insured who has just suffered a severe fire loss and the agent leaves his or her home to help the insured find temporary shelter. Also, the catastrophe adjuster who works long hours for a period of several months does so because of a desire to serve the needs of others who have found themselves in dire straits.

Each area of insurance demands specific, specialized knowledge that must be built on a broad educational foundation.

To perform at an optimum level, an insurance professional must continually update his or her knowledge in response to changes in the legal environment, new regulations, emerging loss exposures, and new statutes.

In general, organizations and individuals who demonstrate high ethical values are more successful over the long term.

True

When developing new products and services

Underwriters must consider the exposures faced by consumers and provide the broadest coverage possible. Conversely, they must ensure that the product can be sold in a manner and for a price that will create a profit for the insurer. They must make decisions about aspects of coverage that will not be profitable, no matter how badly they may be needed by the consumer. They must remain true to their own values and the values of the business, and yet understand the duty owed to the consuming public and society as a whole.

Examples of commitment to continuing education

Underwriters must learn how to interpret data, evaluate submissions, develop solutions, and comply with underwriting requirements, and they must also understand insurance as a risk management tool. Agents must learn the risk exposures faced by a wide variety of individuals and businesses in order to select and recommend appropriate coverage. Claims representatives must learn skills such as property valuation, negotiation, and investigation techniques and be able to apply the law to a given set of facts.

Public Recognition as a Professional

When an insurance practitioner aspires to develop the traits of a professional, his or her clients and associates are likely to recognize those efforts, value his or her expertise, and accept his or her status as a professional.

Insurers have direct contact with the public at two primary contact points:

When the insurance coverage is purchased When a loss event occurs and results in a claim

Laws govern

Which products insurers may offer, who may represent the insurer, where and to whom products may be offered, prices charged, contract provisions, and settlement practices. Insurance transactions must be legal before they can be considered ethical. Difficulties can arise in circumstances where compliance with the law may not seem to be in the best interest of the consumer.

Professionalism

While some occupations emphasize a physical manifestation of knowledge and skill, the term "profession" implies using the powers of discipline, intellect, and ethics to solve problems. Insurance and risk practitioners demonstrate professionalism through their conduct. Professionalism should be reflected in an insurance practitioner's actions. In fact, through professionalism, the insurance practitioner maintains the industry's reputation of integrity and helps to earn the trust of the public.

From an economic standpoint, the net result of maintaining high ethical standards is

a reduction in operating expenses as well as costs related to fines or legal defense. And when high ethical standards improve customer satisfaction, revenue increases through customer retention and referrals. The increase in profitability is a direct result of maintaining high ethical standards.

Fire insurance similarly arose in response to

a social need. Through the seventeenth century, many homes were built entirely of wood. And because there was no public fire protection, a fire often completely destroyed the building. Groups of homeowners responded by pooling their resources to maintain a fire brigade that would fight fires at members' residences. Members' homes were identified with nonflammable (usually metal) fire marks. Without a fire mark, homeowners had no guarantee that anyone would help them extinguish a blaze. The sharing of loss serves the needs of the individual and the community as a whole.

Professionals are also expected to

comply with the requirements of the companies they represent. Just as a high level of trust is required for transactions, relationships must also be built on trust. Those working in the insurance business are often placed in the role of acting as an agent of (that is, on behalf of) the insurer. Whether the individual is an employee, a producer, or an independent contractor, the individual represents the insurer within the scope of his or her employment or contract. (This is in contrast to brokers, who directly represent insureds.) Some agency relationships create a fiduciary duty on the part of the insurance professional, particularly when the individual handles money that rightfully belongs to the company, the insured, or a claimant. A fiduciary duty implies an enhanced level of trust, and it can arise from statutory rules and regulations or be imposed by rulings and interpretations of the courts. Such rules, regulations, and court decisions require that insurance professionals act with the utmost good faith in all dealings.

Organizations that focus on short-term profits and that fail to adhere to high ethical standards often

do so at the expense of their long-term success. Such a short-term focus can result in allegations of errors and omissions or negligence committed by the organization's directors and officers. These allegations can result in legal expenses to defend the actions of the individuals involved and an increase in costs for professional liability, errors and omissions, and directors and officers liability insurance coverage.

In response to new state laws, the insurance industry

fulfilled its social responsibility by developing a new product that was not based on negligence and provided assistance to injured workers and reduced the exposure of employers. Workers compensation insurance remains a key resource for both employers and employees by protecting employers and providing workers with prompt rehabilitation and compensation for work-related injuries or illness. In addition to these obvious benefits to individuals and employers, workers compensation also benefits society at large by, for example, reducing lawsuits and promoting commerce.

As insurers become increasingly intertwined with the global economy

governmental and regulatory bodies such as the NAIC are seeking ways to encourage sensible risk management strategies without stifling insurers' growth or profitability. For example, the NAIC Risk Management and Own Risk and Solvency Assessment (ORSA) promotes enterprise risk management (ERM) principles, advocates financial soundness, and challenges insurers to effectively manage their risks and prospectively determine capital adequacy.

Insurance regulations and laws provide

guidance and parameters for acceptable behavior in order to protect the public interest and maintain fair competition. These regulations also specify punishment for violating them. Punishment ranges from fines or sanctions levied against an individual or insurer to revocation of professional licensing. These punishments can threaten an insurance professional's livelihood or, at the very least, lead to allegations of errors and omissions or even bad faith—and because the insurance transaction requires a relationship built on trust and good faith, reputational damage can ultimately be even more harmful than direct monetary punishments.

While consideration for social responsibility gave rise to the insurance industry

in the modern world, attention to social responsibility has become an indicator of business success. Social-responsibility expectations compel organizations to focus their goals and objectives on long-term survival and sustained growth. In addition, understanding their social responsibility remains vital to insurers. Insurance and risk management organizations must serve the public trust and maintain careful stewardship of money designated for the benefit of policyholders and claimants—all to ensure that the organizations will have adequate funds available to pay covered claims. All insurance professionals share this responsibility because if an insurer fails, then its insureds, employees, investors, and business partners, as well as claimants, regulators, and other stakeholders, would suffer dire consequences.

Economic Outcomes

individuals and organizations that demonstrate high ethical standards are more successful in the long term. They avoid legal issues and additional costs because their activities comply with applicable laws and regulations. They avoid allegations of negligence that could lead to an action in tort. They honor their contracts and perform as agreed. This leaves the organizations free to focus their attention on their core business goals. For risk and insurance professionals, this means that they are able to develop more and improved products and services for their customers.

Aspiring to be a professional often requires

insurance practitioners to make personal sacrifices, including spending time in training and time away from family or recreational pursuits. There is often a financial cost as well, as education programs and exams often have fees associated with them. Aspiring to be a professional may require sacrificing short-term desires to accomplish long-term goals. Having the support of family, friends, and colleagues is vital to achieving the status of a professional in the insurance industry. The gifts of encouragement and time are of real value to insurance practitioners in their pursuit of professionalism.

Insurance rating systems also encourage social responsibility

insurers often offer reduced auto insurance rates to responsible drivers who have good safety records or who have completed driver safety training. Insurers also offer preferred commercial building property insurance rates to businesses that practice good housekeeping, undertake safe practices, and support loss control efforts. The opportunity for preferred rates motivates individuals and organizations to become more responsible in their actions.

Because insurance coverage is an intangible product, these two contact points are

of great significance to the insurer. The purchase of insurance coverage initiates the insurer's responsibility to the policyholder, and the policy language creates contractual obligations that are fulfilled when a loss event occurs and results in a claim.

Because insurance products are financial instruments, the industry is considered

part of the financial services sector. However, while insurance is regulated at the state level in the U.S., banks and other financial institutions are also regulated at the federal level. This circumstance can lead to regulatory complexities, particularly when a bank acquires an insurance agency and the two entities attempt to codify standards and guidelines for the new combined organization. Insurance professionals working for the merged organization may be required to meet both the state insurance regulations and the federal banking regulations that are imposed on the organization. This dual regulatory environment may create additional challenges in maintaining compliance. Regardless of the source of regulations, organizations in the financial services sector have a fiduciary duty because they handle funds on behalf of consumers.