Ethical behavior and practices are crucial no matter what business you’re in. This document by Dick Weber discusses the ethical issues you might face and offers guidelines for maintaining ethical conduct.
For as long as I can remember, the Society of Financial Service Professionals (formerly The American Society of CLU & ChFC) has celebrated March as Ethics Awareness Month. And although
ethics is an important part of the mission statement of the Society, ethics awareness is not the sole provence or responsibility of CLUs. Ethics awareness and action is something we all need to integrate into our lives.
IF YOU DON’T KNOW WHERE YOU’RE GOING, HOW WILL YOU KNOW WHEN YOU’VE ARRIVED?
By now, every agent in America who hasn’t been living in a bomb shelter for the past 20 years knows that the 1990s was known as the 'Sales Practice/Market Conduct' era of the Life insurance industry. Spawned by the inflation and interest spiral that marked the end of the 1970s and the beginning of the 1980s, products with guaranteed pricing effectively disappeared from the marketplace.And participating policies - on whose projections we used to
depend to increase (even if we didn’t know by how much) - in reality turned out not to be so dependable. Carriers failed; policies failed. Market conduct and sales ethics issues became the mainstay of industry angst. In many cases agents became 'fall guys' for clients. 'My agent said I would only have to pay seven premiums
and no more.' became a frequent rallying cry for policy owners and their attorneys. Those attorneys attempted to convince juries that agents’ actions (or inactions) weren’t merely negligent but were borne of an intention to defraud.
Now agents increasingly face explaining to their clients not only failed policy expectations but also the revised business structure of many Life insurance carriers.Those of us who were raised on the notion that '
mutual was how God intended Life insurance' - and frequently shared our enthusiasm with our clients - are now struggling to explain demutualization (at least the client gets something tangible) or mutual holding companies (can anyone explain MHCs in fewer than 1,000 words and 10,000 pictures?).
While we’re at it, have you noticed that attendance at local and national industry meetings is a little light these days? The number of full-time career agents appears to be decreasing.As carriers consolidate and achieve economies of scale through reengineering, agents are encountering more and more competition from non-traditional alternative distribution as well as seeing fewer permanent sales due to the trend for insurance consumers to buy more Term (often of the do-it-yourself variety) and less Whole Life/cash value-type products.
ETHICS IS WHAT YOU DO WHEN NO ONE’S LOOKING
In the face of all this potential adversity, it would be easy to project our problems outwards. 'I’m ethical; it’s everybody
else; I’m right and
you’re wrong?'
And given the propensity to believe 'I’m OK - you’re not so hot,' we don’t talk much about ethics or ethical issues. Even if we want to give it a try, there are relatively few safe places to do so. For most of us, ethical behavior is measured by 'what we do when no one’s looking.' I’m worried about those problems with replacement. 'I wish those guys would clean up their acts.' But one of the problems in ethical sales behavior is that we live in a very subjective world. Relatively speaking, how do I know.
'BUDDY, CAN YOU PARADIGM?’
Another turn on the ethical circle is the issue of our biases and prejudices as a filter to 'doing what’s right.' Our personal paradigms (experience-based belief systems) color our world view. Just as everything looks like a nail when you’re a hammer, our experience as Life insurance sales professionals helps us provide insurance solutions to financial problems. In the 'good old days,' that insurance solution was a whole Life policy. In reality, however, the amount of individual coverage in this country is at best staying level (after inflation) and more and more people are desperately under-insured. We don’t sell nearly enough Term insurance. 70% of the population isn’t being served by an agent. These are the difficult facts which we need to reconcile with our individual and collective sales behavior.
So if we’re going to engage in a dialogue about ethical selling, one of the things we need to resolve is our understandable tendency to see the world through only one set of filters. Just as cowboys of the wild, wild west were asked to check their pistols, can we 'leave our biases at the door?'
THE TOP FIVE ETHICAL CONCERNS OF LIFE INSURANCE AGENTS
Not necessarily in order of importance, I believe the ethical issues confronting agents include:
- Sales illustrations - Sales illustrations are a pro-forma of current experience projected so far into the future as to defy 'reasonableness of expectation.'
Illustrations have been used to create a competitive edge, and the misuse of illustrations has cost agents and their carriers billions of dollars in regulatory fines and class action settlements. Those of us who grew up in the industry during the time of ever-increasing dividend scales have had a hard time accepting the new reality. And if traditional policy projections are now more problematic, variable illustrations are likely to become our next litigious nemesis. Since the underlying sub-accounts on which variable products are funded never increase on even a weekly basis at the steady rate implied by a variable policy illustration, 40-50 year projections are simply asking for trouble.
Here’s why: the investment return rates allowed in a variable Life insurance illustration (not to exceed 12% gross of expenses) are implicitly expressed as an average. In a simple calculation of average investment return for something like a mutual fund, for example, the five-year accumulation of value will be the same whether a 10% average rate is earned in the order of +10 / 0 / +25 / -5 / +20, or in reverse order, or in any order. Tables 1 and 2) This will always be true as long as there are no withdrawals from the 'fund.' In variable Life insurance, however, there are monthly withdrawals in the form of COIs and policy fees. 
These withdrawals can make a substantial difference to the outcome based on an 'average' return. Use of an 'average' rate of return can thus be misleading regardless of the level of the average. (Tables 3 and 4) Because of the likelihood of consumer misunderstanding - and viewed from an ethical perspective - continued agent usage of policy illustrations (and especially variable illustrations) will be hazardous to our professional health.
- Replacement - Replacement of an old policy with a new one is a classic area in which we tend to view our own behavior as reasonable and ethical, while at the same time calling other agent’s behavior into question.
Replacement is a highly subjective topic. It can be justified as the only reasonable way for an agent to be paid to work with a new prospect who no longer wants to deal with the original agent. As new policy types come along - certainly with the popularity of variable policies - there can be an attraction to the 'new and improved!' syndrome.
Regulators are increasingly applying pressure on agents to discourage replacement. The most serious regulations to date came into effect in 1998 with New York’s 'Regulation 60.' In time, I predict that more and more insurance companies will begin to adopt commission rules that prohibit paying first-year commissions on any replacement business.
Is this ethical? Ask yourself a question: 'Would I feel as passionately about the benefit of a new policy over the existing policy if I were not going to be paid a first-year commission?'
- Regulation - There’s an old maxim that you can’t regulate ethics; apparently no one has informed the NAIC of this.
Model Illustration Regulations were enacted in 1997 and 1998 in most states after the NAIC’s five-year effort to reign in illustration abuses. It’s estimated that the industry spent at least $100 million in illustration programming costs alone.
The problem with regulations is that they tend to make it harder for ethical agents to conduct business, and will generally have little or no impact on those whom the regulations were intended - the agents who operate on the fringe of responsible selling. Although we must adhere to regulations whether we like them or not, ethical selling calls for constantly going beyond regulations and seeking what’s in the best interest of the client.
- Consolidation -
Did you hear that the newly formed entity comprised of Provident Life & Accident, Paul Revere, and UNUM is striving for an ultimate merger with the U.S. government?
The proposed name is E. Pluribus UNUM!' It’ll be some time before we can appreciate the practical impact of consolidating an estimated 80% or more of all U.S. disability insurance coverage into one company. 
Many believe that the banks will acquire and the insurance companies will be acquired.
Ethical issues abound. How do we make sure that the client’s interests are protected as their supposedly privileged insurance and banking data becomes available to mass-marketers? How will traditional agents compete against such enormous resources and clout and still hold on to their dignity, their professionalism, and their businesses?
- Product suitability - A number of Departments of Insurance have passed product suitability requirements; more are considering such a move.
The Insurance Marketplace Standards Association (IMSA) virtually requires member companies to develop, promulgate, and monitor policies and procedures that speak to product suitability standards. In the not-too-distant future, agents will be required to demonstrate the objective basis on which they make product recommendations.
For those of you who sell Universal Life and have fallen out of the habit of selling Whole Life: how do you defend U.L. against Term-blended Whole Life? And for those staunch 'whole Lifers' who wouldn’t dream of selling Universal Life ('because it has no guarantees'), how do you defend your product recommendations against U.L? I don’t seek to make a case about the superiority of one over the other, but more and more agents will be called upon to do precisely that - in front of a panel 12 of their peers.
The ethical issue: what are you doing today to demonstrate an objective process of assessing a client’s circumstances and matching these circumstances to an appropriate product recommendation? And what if the appropriate product is a variable product - and you’re not licensed to sell such products? Do you ignore the need and sell what you can? Do you refer it to someone who is licensed, knowing that it’s illegal under any circumstances to accept a commission back from that licensed individual?
CONCLUSION
Contrary to what some consumerists would suggest, selling Life insurance is
not the world’s oldest profession. '
Ethical insurance salesperson' doesn’t have to be the ultimate oxymoron. With those one-liners out of the way, our responsibilities are clear: regulators and insurers are constantly making rules - which must be obeyed - but just following rules does
not make us ethical. possible to sell Life insurance ethically.
Being ethical means having a strong sense of holding the client’s interest paramount in our consideration of financial solutions. Being ethical is doing the right thing for the right reason. Being ethical is measured by what we do when no one’s looking over our shoulders; we do what we do because it’s the right thing for our clients. We should make this intention clear.
As a partial response to IMSA’s 'Six Standards of Ethical Market Conduct,' agents might want to consider adopting their own standards, which I offer for your consideration:
Agents’ and Brokers’ Principles of Ethical Market Conduct*
Each insurance agent and broker subscribing to these principles commits her and himself in all matters affecting the sale of individually-sold Life and annuity products:
- I will conduct business according to high standards of honesty and fairness and render that service to my clients which, in the same circumstances, I would apply to or demand for myself.
- I will provide competent and customer-focused sales and service, and will maintain a level of professional competence through a lifetime commitment to professional growth and continuing education.
- I acknowledge the different constituents whom I serve: insurance companies and the wider insurance industry, my clients, my client’s advisors, my community, and my family - and I will ethically resolve any conflicts that might arise between those relationships.
- I will communicate fully and effectively so that clients receive appropriate recommendations that balance the natural inclination to maximize benefits, tempered by their unique tolerance - or lack of tolerance - for risk.
- I will deliver to my client a statement of business processes, methods of compensation, and other disclosures appropriate to an open and professional business relationship.
* IMSA doesn’t sponsor these principles. I offer them as an extension of my personal principles. Although I’ve copyrighted
Agents’ and Brokers’ Principles of Ethical Market Conduct, permission is granted to any licensed Life insurance agent who wishes to use them intact and as shown above.
Table 1 - Results of a compounded 10% return
Period Rate of Return Accumulation
0 1000
1 10% 1100
2 0% 1100
3 25% 1375
4 -5% 1306
5 20% 1567
Table 2 - Results of a compounded 10% return - reversed pattern of return
Period Rate of Return Accumulation
0 1000
1 20% 1200
2 -5% 1104
3 25% 1425
4 0% 1425
5 10% 1567
Table 3 - Results of a compounded 10% return - with withdrawals
Period Rate of Return COI Accumulation
0 1000
1 10% 100 990
2 0% 125 865
3 25% 150 894
4 -5% 175 683
5 20% 200 579
Table 4 - Results of a compounded 10% return - with withdrawals and a reversed pattern of return
Period Rate of Return COI Accumulation
0 1000
1 20% 100 1080
2 -5% 125 907
3 25% 150 947
4 0% 175 772
5 10% 200 629