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							              THE KEY ETHICAL DILEMMAS IN MARKETING
             INSURANCE: A COMPARISON OF THE TWO MAIN
                  SEGMENTS OF THE INSURANCE INDUSTRY
                                        Robert W. Cooper, Drake University

                                          Garry L. Frank, Drake University

ABSTRACT

Whereas the life insurance business and the property-liability insurance business have traditionally been viewed as
being quite different from one another, research findings suggest they have become quite similar in terms of the key
ethical dilemmas faced by those marketing products in the two segments of the industry.

INTRODUCTION

Despite the passage of sweeping financial services reform legislation recently, insurance as a product and as a
business will continue to exist as critical components of the financial services industry in the future. Regardless of
who buys whom in the financial services industry, the recent legislation provides that insurance companies as
"manufacturers of insurance products" will continue to exist as separate corporate entities from the banks and
securities firms who either own them or are owned by them. As such, many of the ethical dilemmas currently
encountered in the insurance industry will continue to face the financial services industry in the future. This paper
reports the findings of several research studies, which identify the key ethical dilemmas facing those marketing
insurance products and indicate that the key ethical issues in the property- liability insurance industry have become
quite similar to those in the more troubled life insurance industry.

KEY ETHICAL ISSUES IN THE LIFE INSURANCE INDUSTRY

The past decade in the life insurance industry was characterized by increasingly serious market conduct problems, a
deteriorating public image and an industry wide effort to bring about improvement in the industry's ethical
environment. Drawing from several other sources, Cooper (1998) summarized the situation during the first half of
the decade as follows:

Complaints against insurers involving allegations of churning, misrepresentation, or investment performance that
failed to live up to projections have led to a wave of market conduct suits against a number of the industry's leading
companies (and smaller companies as well) which, in turn, have resulted in multi-million dollar settlements by
and/or fines against several major life insurers. In addition, while a mix of influences has undoubtedly affected life
insurance sales, growing sales trends for some companies turned downward when alleged sales abuses came to
light in 1993. Market share for the Big, Three rose steadily from 7.32% in 1985 to a peak at 16.46% in 1992, and
then fell back to 11.25 in 1995. Perhaps worst of all, the market conduct suits eroded the public trust on which the
industry depends. David Malkin. former president of the National Association of Life Underwriters (NALU), has
expressed his concern about the insurance industry's negative image, and the fact that most agents who are ethical
and hard working are "being tainted with the same brush" as the agents and companies who deliberately caused
harm. American Council of Life Insurance (ACLI) research shows the percentage of the population agreeing that
life insurance companies have high ethical standards dropped from 50 percent in 1968 to 24 percent in 1994.

Studies of professionals working in the life insurance industry in 1990 (Cooper and Frank, 1991) and 1995
(Cooper, et al., 1996) identified key ethical issues that reflected a number of the leading factors contributing to the
industry's serious market conduct problems, In September 1990, 1,173 CLUs (Chartered Life Underwriters) and
ChFCs (Chartered Financial Consultants) were surveyed by mail (with a 37 percent response rate) in an effort to
identify the key ethical issues facing professionals working in the industry at that time. The second survey
involving 1,500 MDRT members (most of whom are CLUs and/or ChFCs) was conducted in May 1995 (with a
22.6 percent response rate) in an effort to assess the key ethical issues at the middle of the decade. In both surveys,
participants were presented the list of 32 ethics- related statements shown in Table I and were asked to rate each of
the 32 statements on a five-point scale where 5 meant that it is a major problem today in the life insurance industry
and I meant that it is not a problem today in the industry. The first 28 statements reflect ethical issues and dilemmas
facing businesses and their employees in general. Issues 29 through 32 were included in the survey form to provide
an indication of how the participants view ethical issues of special relevance to professionals.

Table I shows the mean ratings for each of the ethical issues based on the individual ratings given to each issue by
the participants in each study. The table also shows the rank of each issue based on the size of the issue's mean
rating in the particular study. For example, Issue 7 (false or misleading representation of products or services in
marketing, advertising or sales efforts) was rated 3.530 on average by all respondents to the 1990 CLU/ChFC
survey and had the highest mean rating among the 32 issues listed in the survey form.

Several key points should be highlighted about the findings of the two surveys. First, the very high positive
correlation coefficient, .9763, found for the issue means in the two studies indicates that the order of the 32 issues
as perceived by marketing professionals working in the life insurance industry was very similar in 1990 and 1995.
Second, precisely the same ten issues were seen as presenting the key ethical problems for the life insurance
industry at the beginning and middle of the decade. Listed in descending rank order for the 1995 MDRT study, the
identical top-ten issues were:

   •   false or misleading representation of products or services in marketing, advertising or sales efforts
   •   failure to identify the customer's needs and recommend products and services that meet those needs
   •   conflicts between opportunities for personal financial gain (or other personal benefits) and proper
       performance of one's responsibilities
   •   making disparaging remarks about competitors, their products, or their employees or agents
   •   lack of knowledge or skills to competently perform one's duties
   •   misrepresenting or concealing limitations in one's abilities to provide services
   •   failure to be objective with others in one's business dealings
   •   failure to provide prompt, honest responses to customer inquiries and requests
   •   failure to provide products and services of the highest quality in the eyes of the customer
   •   conflicts of interest involving business or financial relationships with customers, suppliers or competitors
       that influence, or appear to influence, one's ability to carry out his or her responsibilities
Thus, it appears that despite the passage of time and efforts by a number of individual companies and professional
associations, the key ethical dilemmas facing marketing professionals working in the life insurance business
changed little from 1990 to 1995. In fact, the same issues were ranked first and second in the same order in the two
studies. Also, Table I indicates that with the exception of Issue I (failure to provide products and services of the
highest quality in the eyes of the customer) and Issue 3 (making disparaging remarks about competitors, their
products, or their employees or agents) which were seen as presenting significantly greater problems in 1995,
statistically significant differences (at the .05 level) do not exist between the means for the top-ten ranked issues in
the two studies. This further suggests that the extent to which the key issues were perceived as presenting problems
for the life insurance industry appears to have changed little over the first half of the decade. Moreover, as
mentioned earlier, the nature of the top ethical issues reflect a number of the leading factors contributing to the
industry's serious market conduct problems that manifested themselves early in the last decade.

HE LIFE INSURANCE INDUSTRY'S RESPONSE

Despite a period in which a wave of market conduct suits resulted in huge settlements by and/or fines against
several large life insurers, loss of market share by the industry's leaders, and serious erosion of the public trust, little
change for the good appeared to be occurring in the ethical environment of the life insurance industry from 1990 to
1995. Concerned with "the industry's ... shabby image, possible regulatory repercussions, and potential company
and officer liability" (Editorial Comment, 1995), the

* = significantly greater than the CLU/ChFC study value at the .05 level

** = significantly greater than the MDRT study value at the .05 level

ACLI (American Council of Life Insurance -- a major trade association) board of directors in November 1994
approved in principle a program formulated by its CEO Task Force on Market Conduct to recognize insurers
certified by a third party for meeting a set of six ethical principles and a code of conduct for the industry. Nearly
two years after the market conduct initiative was approved in principle, it was announced in September 1996 that
the Insurance Marketing Standards Association (IMSA) would officially begin operations on November 15, 1996.
According to Robert Googins, the newly hired IMSA executive director, the Association's mission is "to help life
insurance companies maintain high ethical standards in the marketplace" (Schmitt, 1996).

IMSA's Ethical Market Conduct Program is a voluntary program that initially focused on the sales and marketing
procedures of individually sold life insurance and annuity products. An insurance company choosing to participate
is expected to adopt the Principles and Code of Ethical Market Conduct (which treat, among other things, all of the
top-ten ethical issues identified in the 1990 and 1995 studies discussed earlier) and then go through a two-step
assessment process, involving a self-assessment followed by an independent assessment conducted by an IMSA-
approved assessor (Cooper, 1998). Upon satisfactory completion of the assessment process and the IMSA
application process, the company is conferred membership in IMSA for a period of three years. Once membership
expires, the company must repeat the certification process to renew its membership.

By April, 1998, 155 life insurers representing 64 percent of the individual life insurance market had completed the
assessment process and were permitted to announce their membership in IMSA. By the end of the year, over 200
life insurers had qualified for IMSA membership. A study conducted by Cooper and Frank (1999) indicated that as
IMSA membership was first announced to the public, the extent to which the top-ten ethical issues identified in the
1990 and 1995 studies were seen by insurance professionals as presenting problems for those working in the life
insurance industry had changed little. On a more positive note, the study indicated that the insurance professionals
responding to the May 1998 survey saw IMSA as having its greatest contribution in significantly influencing the
senior managers of the companies that they represent and the senior managers of life insurance companies in
general to more strongly encourage and support ethical market conduct. As the ethics literature suggests, the
philosophies of top managers represent a critical factor influencing the ethical behavior of those in the organization.
Sims (1992) states "it is increasingly clear that the ethical tone or climate of organizations is set at the top. What top
managers do, and the culture they establish and reinforce, makes a big difference in the way lower-level employees
act and in the way the organization as a whole acts when ethical dilemmas are faced." With regard to IMSA's
potential for improving the life insurance industry's ethical environment and thus, the challenges it presents to the
efforts of those working in the industry to act ethically, Cooper and Frank (1999) concluded, "[Slenior managers
must actually demonstrate through their actions and the culture they establish and reinforce in their organizations
their true commitment to encouraging and supporting ethical market conduct if the IMSA program is to have a real
chance of restoring the public trust."

KEY ETHICAL ISSUES IN THE PROPERTY LIABILITY INSURANCE INDUSTRY

While the life insurance business and the property- liability insurance business have traditionally been viewed as
being quite different from one another and still are in terms of products, operations and regulation, research
findings reported below suggest that they may no longer be very different in terms of the key ethical issues faced by
those working in the two segments of the industry. Given the serious problems the life insurance industry has faced
due to its troubled ethical environment and the need for cooperative effort among industry members in an attempt
to improve market conduct, the similarity of the propertyliability insurance industry's ethical environment to that of
the life insurance industry suggests that similar market conduct problems may be encountered and that a
cooperative effort may be needed by property-liability insurers if such problems are to be minimized.

During September 1999, 1,500 CPCUs (Chartered Property Casualty Underwriters) were surveyed using a
questionnaire identical to that described earlier for CLU/ChFC and MDRT issues studies. As in the other surveys,
participants were asked to rate each of the 32 ethics-related statements shown in Table 2 on a five-point scale where
5 meant that it is a major problem today in the propertyliability insurance industry and I meant that it is not a
problem today in the industry. The survey response rate was 30 percent. Since CPCUs work in a variety of
functional areas including underwriting claims and marketing, the findings reported in this paper are those based
only on the responses of the 232 survey participants who work in marketing related jobs.

Table 2 shows the mean ratings for each of the ethical issues based on the individual ratings given to each issue by
the participants in 1999 CPCU study who work in marketing related jobs. The table also shows the rank of each
issue based on the size of the issue's mean rating in that study.

Ten ethical issues received mean ratings greater than 2.5 and were rated 3, 4 or 5 by 50 percent or more of the
CPCUs responding to the survey, suggesting that they are perceived as presenting real problems for those working
in the property-liability insurance industry. In descending rank by mean rating, these key ethical issues are:
   •   lack of knowledge or skills to competently perform one's duties (Issue 29)
   •   failure to identify the customer's needs and recommend products and services that meet those needs (Issue
       30)
   •   misrepresenting or concealing limitations in one's abilities to provide services (Issue 32)
   •   failure to provide prompt, honest responses to customer inquiries and requests (Issue 2)
   •   office/agency closings and layoffs (Issue 25)
   •   conflicts between opportunities for personal financial gain (or other personal benefits) and proper
       performance of one's responsibilities (Issue 8)
   •   false or misleading representation of products or services in marketing, advertising or sales efforts (Issue 7)
   •   making disparaging remarks about competitors, their products, or their employees or agents (Issue 3)
   •   failure to be objective with others in one's business dealings (Issue 31)
   •   failure to provide products and services of the highest quality in the eyes of the customer (Issue 1)

A comparison of the 1999 CPCU study findings for the property-liability insurance industry today and the 1995
MDRT study findings for the life insurance industry at the heart of its period of severely troubled market conduct
that brought about an industry wide cooperative effort (IMSA) in an attempt to regain the public trust provides
grounds for concern. As shown in Table 2, nine of the top- ten issues found in 1995 MDRT life insurance study
(Issues 1, 2, 3, 7, 8, 29, 30, 31 and 32) were also in the top-ten issues identified for the property-liability insurance
industry in the 1999 CPCU study. The same was true for the top-ten issues in the 1999 CPCU study and those for
the 1990 CLU/ChFC life insurance study. Thus, despite the many differences that exist between the life insurance
industry and the property-liability insurance industry in terms of products, operations and regulation, some key
similarities appear to exist in their recent ethical environments, particularly the considerable similarity in the
general nature of the key ethical issues facing those working in both industries. Moreover, although statistically
significant differences were found between the extent to which 4 of the 9 common topten issues were seen as
presenting ethical problems for the life insurance industry in 1995 and for property-liability insurance industry in
1999, no significant differences were found for five of the 9 common issues.


SOME CONCLUDING COMMENTS

Faced with an ethical environment that tolerated, if not encouraged, serious market misconduct in the early part of
the last decade, the life insurance industry found it necessary to use a cooperative effort among insurers--the IMSA
Life Insurance Ethical Market Conduct Program--in an attempt to regain the public trust. Faced by ethical issues
quite similar to those of the life insurance industry and some serious consequences that have occurred already (not
the least of which has been the loss of substantial amounts of business to alternative risk-financing mechanisms in
recent years), the property-liability insurance industry might be prudent to consider also undertaking a cooperative
effort of some sort. The CPCU Society, as a professional association, has called for a coordinated effort by all
insurers and insurance professionals to improve the property-liability industry's ethical environment. More
specifically, they have undertaken an effort aimed at fostering a universal standard for corporate codes of ethics in
the property-liability insurance industry. As indicated by the findings of another recent study of CPCUs conducted
in January 2000, 44 percent of the responding CPCUs rated the lack of a uniform code of ethics as 3, 4 or 5,
indicating that they see that factor as presenting a challenge to professionals seeking to respond ethically to
dilemmas encountered in the course of their work (Cooper and Frank, 2000).
In pursuing a cooperative effort to improve the property-liability industry's ethical environment, the CPCU Society
and others involved in a coordinated effort have much to learn from the experience of the life insurance industry in
first essentially ignoring and then attempting to deal with a troubled ethical environment on a broad industry wide
basis. First, consideration should be given to the components and operation of IMSA's Ethical Market Conduct
Program (Cooper, 1998). Designed to encourage and assist participating insurers to improve their market conduct
practices and those of the industry and thus, strengthen consumer confidence in the life insurance business, the
program is based on six broad Principles of Ethical Market Conduct and a Code composed of a series of more
detailed statements that specify the means for achieving the broader Principles. An analysis of the Principles and
Code indicated that all of the top-ten ethical issues identified in the 1990 CLU/ChFC and 1995 MDRT life
insurance studies are treated by one or more of the Principles and Code provisions in IMSA's Ethical Market
Conduct Program. Similarly, the key ethical issues identified in the 1999 CPCU study might be used by the CPCU
Society along with other information gathered from companies in its effort to establish a uniform standard for
corporate codes of ethics that all property-liability insurers and professionals can adopt and live by.

The life insurance industry's efforts, however, go beyond simply providing principles and a code to adopt. IMSA's
Ethical Market Conduct Program also has an assessment process involving both self- and independent assessment
aimed at certifying that an insurer is meeting the ethical principles and code of conduct. As mentioned earlier,
insurers that successfully complete the assessment process can qualify for membership in IMSA which can be
advertised to the public. Once the Society of CPCU has established a standard for corporate codes of ethics in the
property-liability insurance industry, the Society should (as it has indicated to the authors it plans to) provide
leadership in encouraging the industry's CEOs to implement such a program to demonstrate their companies'
compliance with the code. Even with support from leading company CEOs, the life insurance industry's experience
suggests such an effort is likely to take years to implement and that it will encounter considerable controversy along
the way and skepticism once a program is launched (Cooper, 1998 and Cooper and Frank, 1999).

However, although efforts to change an industry's ethical environment will never be easy, not only is ethical
behavior fundamental to the notion of true professionalism, but also as learned in recent years by professionals in
both the life and propertyliability segments of the insurance industry, failure to behave ethically and provide
leadership in encouraging others to do so can have a severe impact on the public's perception of the industry and
thus, its willingness to do business with it. Thus, for both philosophical and practical reasons, CPCUs and their
professional Society must take a leadership role in helping to bring about change in the industry's ethical
environment.

REFERENCES

Cooper, Robert W. and Garry L. Frank (199 1),"Ethics in the Life Insurance Industry: The Issues, Helps and

Hindrances," Journal of the American Society of CLU and ChFC 45, 54-66.

John P. Bell and ---- (1996), "The Ethical Environment Facing Life Insurance Professionals: Views of MDRT

Members," Journal of the American Society of CLU and ChFC 50, 64-71.
---- (1998), "IMSA: An Industry Effort to Restore Ethical Market Conduct," Journal of the American Society of
CLU and ChFC 52, 88-96.
---- and ---- (1999), "The Potential Effects of IMSA on the Industry's Ethical Environment, 11 Journal of Financial
Services Professionals 53,49-55.
---- and ---- (2000), "The Ethical Environment Facing Professionals in the Property-Liability Insurance Industry:
Entering the Millennium," unpublished report prepared for AICPCU/IIA and the CPCU Society, Malvern, PA.

Editorial Comment (1995), "ACLI's Market Conduct Response," National Underwriter: Life & Health/Financial
Services, (December 4, 1995), 42.

Schmidt, F. (1996), "Market Conduct Association Ready to Begin Operations," National Underwriter: Life &
Health/Financial Services, (September 23, 1996), 1.

Sims, R. R. (1992), "The Challenge of Ethical Behavior in Organizations," Journal of Business Ethics 11, 505-513.