When ethics and law don’t meet

One of the more commonly expressed sentiments regarding ethics seems to be that they differ between people and cultures. This leaves them somewhat down to the ‘eye of the beholder’. Generally, this is something much more likely to apply to morals and the community’s view of how people should treat each other and the world around them.

Ethics is the study of acceptable behaviours and practices within an industry sphere. It may apply to the ways in which people are expected to act in addition to the baseline provided by regulators. Instead of relitigating the nuance of this argument, consider for a moment why society needs courts.

Since we have politicians to create legislation and regulators to enforce the laws that have been created, why is there a need for courts and judges to pass judgment?

The reason is down to the inability of any law to cover every possible permutation of relationship and outcome that may occur. This creates the need for an arbiter to pass judgment based on their interpretation of the law.

I bring this up since I believe an effective way to position oneself in the role of ethics mentally is similar. The ethical decision-making process lives in that potentially grey area right before a court decrees a practice to be acceptable or unacceptable.

Legislation will say things like ‘a decision must be made in a reasonable time and communicated to the client in an efficient manner’, instead of saying ‘all decisions must be made within five working days and communicated within 24 hours from that time’.

This is because they recognise that different tasks take variable amounts of time to complete. The allowance for ‘reasonable’ behaviour accounts for variation. But it provides the entryway for unethical behaviour. It shields itself from scrutiny by mingling in the area designed to allow businesses to do their best by clients within the constraints of unknown issues and individual needs.

Consider, for a moment, the idea of an ‘ethical freerider’. In financial markets, there is quite a bit of room for ethically questionable behaviour that doesn’t directly harm anyone. An illustration of this was discussed in a recent article on the insurance industry. It referred to a company that had taken a large portfolio of corporate bonds it held and securitised them.

Nothing odd here until you discover that they purchased all of the securities. The reason for this was that securitised assets required roughly 1/3 of the regulatory capital compared to individually held bonds.

Clearly, this is ridiculous, but not illegal (at least at the time it occurred). Whether the regulators in question ever considered this possibility or simply assumed that no one would do so is unknown.

Historically, however, when issues are brought to light, especially after a crisis, regulations tend to be tightened dramatically to a level that businesses find unacceptable.

One of the considerations about behaviour that was shown ex-post to be unethical is whether perpetrators are actually aware enough of their actions and those of others to realise the problem. In real time, normalised behaviour reaches the point, by definition, where it is normal.

This raises a question: before any meltdown, do the people espousing the current structure actually believe in it? Do they know that there are problems but won’t address them? Or, worst of all, do they not understand the reality of the world in which they are operating?

If a person invests heavily (with their own money) into a given venture, it would be anticipated that they would espouse the benefits of it to others. It also means that they are no longer in a position of impartiality.

The perennial issue is that it isn’t for regulators (or anyone) to determine what an appropriate amount of risk an informed investor should be allowed to take. There is a sting in the tail here, which is what we need to consider first. In a later section of this article, we will look at what happens when the tail bites back.

Some words carry significant weight

The concept of an ‘informed’ investor varies depending on whether a person is a retail or wholesale investor, whether they are advised or self-directed, and the nature of the product under discussion.

When it comes to the wholesale arm, the reliance is largely on the investor to make their own decisions based on their own resources. It can readily be argued that this is an imperfect system because a given amount of wealth does not ensure a comparable understanding of specific financial principles. But a line needs to be drawn somewhere.

Of more interest may be to start with the provision of services since these carry a specific obligation, unlike something like an equity investment or the application of leverage.

The insurance industry provides a fascinating ecosystem to examine due to its inherent service and investment nature. This exists either as a result of being a policyholder or because the customer has a policy with an investment component.

In either case, when an insurer agrees to take on risk in exchange for the payment of a premium, it then reinvests this money into assets to cover its policies. Or it may choose to unload some of its risk onto reinsurance companies.

This doesn’t really change anything, but instead puts the customer-facing insurer in the same position as the reinsurer vis-à-vis the transfer of risk for a payment.

It is possible to ask whether an insurance company has the primary obligation to generate returns for its shareholders, or to prioritise the ability to make good on its policy agreements with its customers.

This isn’t really much of an ethical stretch at the headline. This is because the policyholders have provided premiums and have a contractual agreement with the insurer for their risks to be compensated if the insured event occurs. The shareholders rank last in line for profits behind creditors (and especially customers), so they don’t get a look in here. That isn’t the end of the story, though.

An insurer needs to take the premiums it receives and invest them in such a way that it is confident of being able to cover its agreed-upon policies while remaining a viable concern. Some years they may do amazingly and need to pay out much less than had been estimated.

But they also need to have enough for the years when policy payouts are much higher than expected. Insurers aren’t not-for-profit organisations either. Shareholders aren’t investing out of some form of benevolence and are expecting to generate a return commensurate with the risk they are taking. This is where things get interesting.

When an insurer has a very clear contractual and fiduciary obligation to policyholders, what is an acceptable level of risk to take with premium investment such that all parties are satisfied? The regulations globally appear, at first glance, to be iron-clad regarding the acceptable levels of risk in an investment portfolio. But as we will see, when there is room for interpretation, there is room for flexibility.

Side note: A maybe mea culpa?

It is important and interesting to pause for a moment to take a look at the word ‘fiduciary’ and the way in which it is used. Like many people, the first time I came across the word was in training for stockbroking.

A precursor for this is to learn the motto of the London Stock Exchange – dictum meum pactum – “my word is my bond”. The idea that one can take an order from a client and execute it without consideration of one’s own needs, and certainly not prioritising their own needs over those of their client, is central to this mantra.

Evidently, it wasn’t strong enough, since front-running laws ensured that if you couldn’t follow your word, then you would follow ASIC’s.

“A fiduciary relationship is the very antithesis of an adversarial relationship. The unique characteristic of a fiduciary duty is the fiduciary’s obligation to act with undivided loyalty to the interests of another, usually referred to as her principal or beneficiary.

Within the scope of the fiduciary relationship, the fiduciary must act solely to protect or advance the interests of the beneficiary, without regard to any conflicting interests of either himself or third parties.” (Barker, Glad, & Levy, 1989)

The analysis by Barker et al forms part of their assessment that insurers do not have a fiduciary relationship with their policyholders. In part, this is due to their view that the fiduciary must act solely in the interests of their beneficiary. They argue this is not the role (or even within the ability) of an insurance company.

“An insurer’s obligation to its insured are those imposed by the express terms of its policy, plus an implied obligation of good faith and fair dealing that includes certain elements of fiduciary duty. While, in some ways, the duty of good faith is akin to a fiduciary duty, it is different than the duty of a fiduciary in important respects.

In particular, a fiduciary owes his principal a duty of undivided loyalty, and must treat the principal’s interest as paramount when exercising powers or discretion arising from the relationship, but the duties of an insurer have traditionally been different in character.

Unlike a fiduciary, an insurer engaged in determining and performing its contractual obligations may give consideration to its own interests, so long as it gives ‘at least as much consideration to the welfare of its insured as it gives to its own interests’ and refrains ‘from doing anything to injure the right of the insured to receive the benefits of the agreement.” (Barker, Glad, & Levy, 1989)

This is the moment where it may seem like we are splitting hairs over definitions, but the detail leads to an interesting characterisation of the argument. The nature of insurance provision is that risk can be transferred at a cost that is affordable to the extent that the policyholder finds it preferable to carrying the risk themselves.

The insurer’s assessment of its risk pool must lead it to believe that it will, over time, pay out less in claims than it generates from premiums and investment returns. Otherwise, there would be no solvent insurance companies.

When a policyholder makes a claim, the insurer will scrutinise the claim to ensure that it is genuine and matches the policy terms. It will then pay or decline the claim depending on the outcome. The ability to scrutinise and prioritise the needs of the insurance company over those of the policyholder is the distinction that means the relationship isn’t a fiduciary one.

The technicality may appear absurd. But it may be smoothed a little by considering that the insurer is not only protecting itself by investigating claims, but also protecting all the other policyholders that rely on its solvency for their risks to be covered.

“The duty of utmost good faith applies to all aspects of the relationship between an insurance company and the insured person. It also applies to any third party beneficiary to the contract. The duty arises when negotiations for the insurance company policy commences and does not end until the settlement of any claim.” (Law Handbook SA, 2021)

This is not to say that no one believes that insurers have a fiduciary relationship with the insured. The reason the Barker et al paper was written was to refute this opinion. The correct assessment isn’t especially interesting, as I would suggest that the larger issue is obscured when we examine the requirements of insurers to act in utmost good faith.

All of the focus at the client dealing side relates to the insurer’s decision whether or not to pay out the policy claim. The part that is not considered here (though it is addressed elsewhere and we will return to that) is the insurer’s ability to pay.

If the behind-the-scenes practices of an insurer mean that even when acting in good faith, they are unable to pay on a policy (due most likely to insolvency), then all other considerations become irrelevant.

This is a point that may appear particularly obvious. But pause for a moment to consider the trust that a policyholder has not only in the insurer’s good faith, but also in its ability to manage its finances effectively.

There is an argument that holds water in many cases, suggesting that for many policies, if an insurer becomes insolvent, the policyholder can simply go elsewhere. There are two notable exceptions to this, though.

The first scenario occurs when, due to timing, the insurable event takes place, but the policyholder is effectively uninsured due to the insolvency of the insurance company. The second may occur in life and TPD matters. In this case, a long-held policy can no longer be replaced at all (due to increased age or health issues) or can’t be replaced at an affordable price.

A breach of contract is remedied by paying damages to make the wronged party whole again. The concern we are discussing is the cases where this can’t occur. As we will see, the pushing of regulatory boundaries presents an excellent illustration of how the probabilities of this occurring can readily increase.

A moment to be alarmist

Consider for a second how, in the right market conditions, an insurance company (or the industry in general) shares characteristics with a Ponzi scheme. To pay claims, the insurance company needs a steady stream of premium income from its wider pool to maintain solvency.

Unlike a Ponzi scheme, the insurer actually has a functional investment business and lacks the criminal intent. However, in the event of massive payouts due to an event like a natural disaster, the outcome remains similar due to the mismatch of withdrawals and income.

Raising this type of point is deliberately hyperbolic. But it also underlines how there is a limit to the amount of flexibility there is for insurers at large to deal with significant events and still be able to make good on their claims. It could readily be argued that reinsurance exists specifically to deal with these significant risks, but that only transfers the risk to another party along the chain.

The ability of the reinsurer to cope with significant events determines its ability to recoup the losses of the insurers it works with.

I am not sure that they are unique, but it is unusual that, following a claim, insurance companies take on a somewhat adversarial relationship with their customers. If a claim is deemed to be (and actually is) fraudulent, then, naturally, the insurer should not be expected to pay.

While this point is used as an argument to suggest that an insurer is not in a fiduciary position with its client, I would argue that a fraudulent claim is not a claim at all. However, the possibility that a claim is fraudulent (or inflated) raises the rationale that all claims should be investigated before payment is made.

Again, this is to be expected, so that the insurance company can appropriately protect its asset pool and the other policyholders. Where does one draw the line though?

Is the insurance company expected to minimise the amount that is paid to a policyholder? This question actually carries much more weight than you might anticipate. Most people reading will have come across the principle of indemnity before.

This concept means that a person making a claim should be restored to their former position, but should not profit as a result of their insurance claim. This sounds straightforward, but as practical evidence shows, the reality is much more ambiguous.

In the AFCA annual report, a case was provided where a successful storm damage claim on a home and contents policy took two years for repairs to begin. Due to a disagreement about mould treatment, the relationship between the tradespeople doing the work and the insured (later the complainant) broke down. This left the insurance company seeking to cash settle the outstanding work.

If we start from the context of ‘to whose advantage’ (cui bono) and ask the insurance company, ‘Why not cash settle from the outset?’

It seems reasonable to assume that, through their contacts, the frequency of work on offer, and their understanding of material costs, insurance companies can provide the same outcome for a policyholder. They can do so by administering and managing the process, rather than settling for the agreed-upon amount.

This is where indemnity is particularly important, as it returns the policyholder to their position before the loss occurred. The cash expense should not be relevant in the discussion so long as the claimant is indemnified.

This is actually to the benefit of all parties. The more cheaply the insurance company is able to compensate policyholders, the more cheaply they can provide coverage, and the more secure the business will be. Ideally, it will provide a more streamlined experience for the insured. This is because they will not need to gather quotes from tradespeople and try to manage a budget to a specific target.

The question to ask yourself is whether, once the insurance company has decided to oversee repairs, they can change their mind and instead choose to cash settle. This isn’t a consideration from a legislative or regulatory perspective, but rather a thought process on why AFCA might have chosen to rule in the way that it did.

In an attempt to make something of a universal rule, the decision to prolong a decision, if it is to the benefit of the decision-maker, is likely to fall into the realms of unethical behaviour.

What is interesting is that the magnitude of the delay doesn’t really matter in terms of the ethical standards, merely the intent. The size of the insurance industry (and many other parts of the finance sector) means that small delays, done consistently, add up enormously when viewed from an aggregate perspective.

This isn’t talking about examples, as you may see in the book ‘Delay, Deny, Defend’. Those are disgraceful and knowingly untruthful acts to take advantage of people who are rightly entitled to payment. This refers to a small but consistent act that keeps the insurance float intact for just a little longer. This generates a significant amount for the company by the end of the year.

This may sound trivial. But once policy begins to act to the benefit of the insurer, a slight difference for one company may become larger and more widespread with a company that has a much more flexible ethical compass.

The ‘Delay, Deny, Defend’ ethos is rooted in a view of being in a zero-sum game with the client. The more that is paid out in policy claims, the less profitable the company is. The unusual thing about this is that it seems improbable that no one had noticed this before, but that they decided to act on it.

Careful assessment of a claim to ensure that it isn’t fraudulent is part of being a prudent insurance company. Claiming a policy is fraudulent based on manufactured evidence is unconscionable. As we discussed in a recent article, the introduction of AI to insurance may help refine underwriting based on more disparate factors.

But it is probably going to be more useful in flagging claims that are worthy of greater scrutiny. This is due to factors that, in isolation, are not interesting, but combine to show an issue. This is ideal, as it makes insurance potentially cheaper and more profitable.

The troubling outcome is one where AI identifies an unusual set of factors and automatically declines the claim. Cost-effective for the insurer, but if not carefully monitored, it can be potentially devastating for consumers.

Think about it in one final way. The standards body that most insurers adhere to in Australia states that special care must be provided to those experiencing financial distress. It seems reasonable to argue that this is likely to be applicable to anyone making a claim.

The reason that a person insures property (in this case, including their physical ability to generate income) is because they don’t have the means to indemnify themselves against loss. You insure your car because, for the most part, people can’t pay cash for a replacement and certainly can’t without it taking a huge bite out of their savings.

Insurance is a viable option because the premiums are such a small percentage of the value of the item they insure. Thus, when a person loses their home, the ability to arrange and pay for alternative accommodation is almost certainly limited.

This means that, beyond a certain point, delays in paying their insurance will cause financial distress. For some, this may occur immediately.

According to figures published by Westpac early this year, the median savings account balance for individuals aged between 35 and 44 is $811. (WBC, 2025) Not surprisingly, the average for this (and all) age groups is much higher, but the propensity of people living week to week should not be underestimated.

In many instances, people’s savings may be low due to the repayment of loans, such as a mortgage. This means they have assets in their name but very little flexibility. This is the gap that the relatively low cost of insurance fills, but it relies on a reasonable payment period for claims to be effective.

In locations where there has been a natural disaster causing widespread damage, the idea that getting a tradesperson is going to be easy is clearly not the case. Whether it is an individual or an insurance company, there are going to be limits to the number of people available to perform repairs and reconstruction.

Isolating a simple problem

Consider a name from the past: HIH Insurance. This is a company that, for many people, will be something they have seen in texts relating to corporate malfeasance.

Given its demise occurred well over two decades ago, it will be seen as a cautionary tale that triggered widespread reforms as a result of its death. Regulations were tightened as a result of the collapse.

However, it realistically should highlight that in any regulatory environment, poor management combined with a lack of understanding of the actual risk that the company is exposed to can evade regulatory responses until it’s too late.

“The ultimate responsibility for the prudent management of capital of a life company rests with the Board of directors. The Board must ensure that the life company maintains an adequate level of quality of capital commensurate with the scale, nature and complexity of its business and risk profile, such that it is able to meet its obligations under a wide range of circumstances.” (Life Insurance Act 1995, 2023)

This is no ‘gotcha’ moment for the legislation placing responsibility with the board, since, unless you live in an ultra collectivist society, there is no one else. The very nature of a Board is to manage a business on behalf of shareholders, and as was the case with HIH, they are the ones who will be jailed in the event of criminal behaviour.

What it does show is that human weakness is always contained within these businesses and provides a limit on the certainty that standards will be adhered to.

In the early part of this article, there was a mention of how poor management decisions can often be disguised as ‘aggressive’ or ‘forward-thinking’ when viewed through the lens of optimism.

When things don’t break your way, your perspective suddenly changes. Everyone has at least one friend who was planning to quit their job and become a day trader during the best stages of a bull market.

But they typically go quiet following a significant correction. Managing a company based solely on everything going right sounds obviously wrong in retrospect. But when confidence overwhelms prudence in the boardroom, especially when combined with a lack of facts, enormous problems can arise. Here are some of the highlights from Justice Owen following the HIH Royal Commission:

Under pricing and under reserving: HIH grossly underestimated its liabilities, overestimated its assets, charged premiums that were too low, and under-reserved (under-provisioned) for future claims, particularly ‘long-tail’ claims. Past claims on policies that had not been properly priced had to be met out of present income. This was a spiral that could not continue indefinitely.

Corporate governance failures: The board of HIH was unduly influenced by, and failed to monitor the performance of, senior HIH management. It also: failed to subject management proposals to sufficient scrutiny; paid too little attention to strategic matters; failed to implement mechanisms to identify and resolve conflicts; and failed in its stewardship of HIH’s assets by not reigning in excessive expenditures, including executive remuneration and termination payments.” (Treasury, 2015)

There are so many fascinating lessons that we can examine from the HIH failure. But for our purposes, a big chunk of the material goes firmly into the illegal rather than the unethical bucket. The prelude to the next section relates primarily to the balance struck by HIH that was found to result in premiums that were too low, combined with a lack of reserves to back future claims.

On the other side of the coin were expenses that were too high, with the perennial issue of executive remuneration being a notable concern. Why is it that competing on premiums is far from straightforward for insurance companies?

The special risk for insurers

There are only so many things that any business can compete on, such as price, service, features, and cachet. The issue for insurers is that if their service is called in, then they know what the downside is going to be. There is a substantial optionality where, for the vast majority of policies, they will never need to pay, but for those that they do, they pay a lot.

This can’t be negotiated after the event or substituted without very quickly breaking the agreement that they have made with their client. When insurers unreasonably balk at payment for extended periods or otherwise delay restitution, it quickly appears unfavourable in the court of public opinion as well as in brick-and-mortar courts.

From the outside, an insurance company appears to be just one of the massive, faceless financial institutions that people encounter every day. Money goes in, and thousands of people make a range of decisions about how the business should be run and where the funds should be invested. The aim is to generate the greatest profits while providing for their diverse array of clients.

While this is true, the decision-making choices for insurers are somewhat simplified. An agreed-upon amount of premium is paid, and the insured must pay the agreed-upon coverage in the event of a claim. In the general insurance sphere in particular, the consequences of being ‘creative’ can be swift and severe.

“Depending on the branch of activity, nonlife insurers may have much shorter liability structures, meaning mismanagement (or, 1 or 2 bad years) may be enough to sink the firm, given the ability of policyholders to lapse contracts more frequently. Nonlife insurers have no smoothing mechanism to remain profitable in bad years, leaving them vulnerable to profitability shocks, while life insurance contracts can often work like a savings instrument with less of a role for active or efficient claims management.” (de Bandt & Overton, 2022)

The report from deBandt and Overton illustrates how failures of insurance companies often result from bad decision-making, ranging from negligent to fraudulent, that preceded the actual failure by several years.

This is clearly shown in the Royal Commission on HIH, where the realities of tough decision-making were kept out of the boardroom. The fundamental issue, though, relates to premium income being insufficient to deal with expenses.

“The point is, if you manage to reduce the capital required on your insurance book, you can take that capital out of the business and pay yourself a massive bonus. Or you can use the newly magicked capital to write more business, boosting effective leverage and the scope for profitability. Or you can outcompete other insurers with cheaper products and grab market share. In other words, free money.” (Nangle, 2025)

This quote from Tony Nangle refers to the same trick of securitising a bond portfolio and then, through a quirk of regulation, being able to write three times the amount of insurance for the same amount of capital backing. According to the article, this was an issue exclusive to the US, but it would be assumed that for those willing to push the boundaries without qualms about appearances, similar practices could be developed in any market.

When we examine the Annual Report 2024/25 from AFCA, it is readily apparent that bodies such as this hold insurers to a higher standard than what may be expected from normal financial institutions. This reflects the role they play in providing certainty in the event of disaster.

AFCA acknowledges that in times of enormous disasters, there will be inevitable delays in the processing of claims within the general insurance sphere.

As they also pointed out, this is not a new issue for insurers, and so they should be better positioned to deal with it. Imagine a position in which a policyholder suffers a total loss of a possession for which they have coverage. In other words, unless there is some impropriety, the insurance company will be paying out the full value of the policy.

If an insurance company has been too cavalier with their risk profile, especially if its internal costs have been rising, it makes it more vulnerable to major events like natural disasters. This pressures its available capital.

As mentioned previously, any equity investor is last in the queue for funds in the event of insolvency. This is the nature of this type of investment and is the reason why its potential rewards are generally higher than those of creditors.

If a company uses a regulatory trick to reduce its capital requirements without making any changes to its underlying portfolios, it would seem an ethically dubious strategy for both the shareholders and the policyholders. The difference being that in the event of a claim and insolvency lining up, the policyholder may be exposed to the very risk that they engaged the insurance company to avoid.

The philosophical importance of management focusing on the maximisation of shareholder returns is a crucial one. It attempts to avoid the temptation of managers acting for their own benefit, regardless of whether that aligns with the outcomes of the shareholders. It is outside the scope of this article to examine companies specifically in relation to practices aimed at maximising profits.

However, in a competitive sphere, it is concerning ethically to see practices that lack any sort of creativity and instead seem a simplistic means of disadvantaging policyholders.

As the cited research points out, general insurance companies can be susceptible to poor decision-making. This raises the question as to whether unscrupulous actions are merely a dubious means of increasing profits or an attempt to plug holes in the balance sheet due to poor decision-making elsewhere.

The following are a pair of quotes highlighting practices elsewhere in the world to serve as an illustration of ways in which policyholders have been managed:

Example One

“When Chad Atkins’ home was hit by a March tornado that damaged his roof and smashed the fence around his house, the Missouri resident filed his first-ever home insurance claim and received an unpleasant surprise.

Twenty-eight days before the storm, his home insurer Progressive pushed through changes to his policy that he had never signed off on or even seen, Atkins told the Financial Times.

When Atkins inquired about the changes, he was told Progressive had sent an email. The email never came, he said, but the insurer told him that by continuing to make his premium payment – which he had set to auto-pay, he had implicitly agreed to the changes.” (Harris, 2025)

Example Two

“Thousands of British consumers are suffering a mixture of delays, distress and financial harm when making home and travel insurance claims that the regulator is failing to address, consumer group Which? has said.

Which? has made the accusations – which it has supported with research, surveys and case studies of consumers, in a rare use of its statutory power to submit a super-complaint on behalf of consumers.

Some customers had been ‘left to endure ordeals at the hands of their insurers’, the group said as it made the complaint public on Tuesday.” (Arnold & Harris, 2025)

Not ethics but dollars and cents

“The insurance industry, more than any other financial industry, is based on trust. Insurers, in exchange of a premium, promise to pay an indemnity if an adverse event occurs in the future. Without trust in insurance, it is very unlikely that individuals would decide to buy insurance. Understanding trust in insurance is therefore crucial as, not only it shows how insurers are perceived, but most importantly it helps explain why people are willing or not to buy insurance.” (Courbage & Nicolas, 2021)

The quote above may seem largely self-evident. But I would suggest that there are points to consider regarding why there is no free ride when it comes to the boundaries between ethics and regulations. This is applicable to any industry, but is especially relevant for insurance because of the role of trust that underpins the insurer and insureds’ relationship.

Without being unnecessarily simplistic, insurance is one of the few businesses where customers give you money on a regular basis. If all goes well for them (and you), you will never have to give them anything in return.

In the period between a policy being taken out and a claim being made (or the policy being cancelled), all that is there is the assumption based on trust (and law) that if the insured event occurs, then money will change hands.

Let’s make this worse. In nearly any other business relationship, if you have paid money and don’t get what you want, you can either forgo what you have spent or possibly get a refund. You can then go to a competitor of that business and have your needs satisfied.

With an insurance company, the moment that you are not having your needs satisfied is precisely the point where you cannot take your business elsewhere. No insurance company will provide coverage for an insurable event that has already occurred.

While a policyholder may have the right on their side (and everything may go smoothly), they are also over a barrel, subject to their ability to fight back in the event of a problem. There is no ‘I’ll just take my business elsewhere’ option here, which will entitle you to what you believe your policy was meant to provide.

Why else would the infamous ‘deny, delay, defend’ practice be so effective? It only works because the claimant can’t walk away at this stage of negotiations without foregoing at least some of their policy coverage.

Side note: What’s the key theme here?

“Financial firms should be clear if they require an end date and communicate well around how that end date will work.”

“The financial firm should clearly communicate when a limit increases.”

“They communicated clearly, offered practical solutions, and ultimately suggested she give up the vehicle.”

“Poor communication by the insurer meant the complainant was unsure about what was happening.”

“Communicate regularly with affected customers to keep them updated about the progress of their claim.”

“Insurance firms should be prepared to handle increased volumes of claims and maintain clear communications with policyholders.”

“The complainant may not have felt he needed to come to AFCA if the trustee had given him clearer information and communication up front about the fund’s insurance claims process.”

Key complaint issues were delays, including delayed communication, resolution and lodgement, and whether fees were clearly explained or appropriately charged.”

“Communication: inadequate responses to correspondence and/or calls.”

“Communication: providing poor quality information or advice.”

“ASIC alleged that prolonged decision-making, poor communication, and disregard for expert advice, caused unnecessary harm to the complainant and breached the insurer’s duty of good faith.”

“These challenges are not new and we consider that more can be done by insurers to meet customers’ expectations, particularly through proactive, clear and timely communication.”

“This highlights the need for financial firms to provide more proactive, clearly communicated and empathetic support.” (AFCA, 2025)

It is unknown where the insurance industry ranks overall. However, it is the norm for people to have had their own horror stories, or known others who have, about payment issues that have dented their trust in the industry and in individual firms.

The General Insurance Code of Practice notes that its members will provide updates on the progress of claims every 20 days. (ICA, 2023) This follows the pledge to communicate if more information is needed within 10 days of a claim being lodged.

Claim decisions are made within 10 days of all information being provided. They will also respond to routine enquiries within 10 days of them being lodged. There are naturally carve-outs on all of these, which is to be expected.

If you consider each of the quotes listed above from the AFCA annual report, it is easy to see that one of the most oft-repeated points of contention was a lack of communication. Two more have been added below to show the relationship between trust and communication:

Quote One:

“To maintain trust, insurers must address reasons for delays, review product offerings, and effectively communicate challenges transparently and proactively, so that customers are clear about why, and for how long, they must wait.”

Quote Two:

“We focused on non-financial harms, including delays, poor communication and process breakdowns, that undermine consumer trust and often reflect deeper governance or accountability failures.”

Even if a person was inclined to put ethics aside in the pursuit of profit, it is apparent just how quickly customer faith is eroded if there is any uncertainty about the level of trust in this relationship.

When it comes to insurance, there is an obvious correlation between the feeling of trust being dependent on a reasonable level of communication. Looking through the quotes from AFCA, it seems likely that clients are happy to hear that their claim, at least, hasn’t been forgotten. Clearly, they would prefer to hear that it has been accepted and their cheque is in the mail.

But being assured that the claim is still in motion and is awaiting something that can be described to them goes a long way.

I can only imagine that not every call made to clients waiting on funds is pleasant, especially when the answer they receive may sound highly bureaucratic. However, in a world where NPS scores remain a focal point for management decision-making, it would seem like time very well spent.

As the research quoted earlier pointed out, insurance from the policyholder’s perspective is based more heavily on trust than any other part of the finance industry. The average Australian probably doesn’t have a lot of positive things to say about their bank and the interest that they pay on deposits.

Yet you would probably have to survey thousands of people before you find one that loses any sleep over the funds not being available the next time they visit the ATM. That said, with the number of people queueing to buy gold bullion with its remarkably large bid-ask spread, it may be more common than it once was.

The difference is that a person withdraws money from their bank in one form or another on most days, whether to get cash or to pay for lunch with a card. We are conditioned to have ready and instantaneous access to our funds that are held with a bank. An insurance policy is something that may only be claimed on once in our lives, so we are entirely reliant on trust that it will be there.

Conclusion

The core theme examined in this article was the amount of ethical variability that can occur before the regulator’s attention is drawn.

The choice to use the insurance industry as the framework arose from the extreme reliance on trust that exists among policyholders, as well as the inherent flexibility in how claims are handled. It is easy to point to the worst behaviours and use them to illustrate what being unethical looks like.

But this would disguise the gradient that lies between perfect client management and client relations destined to be case studies. It is difficult to point to a line that should not be crossed.

However, the acceptance of policies that still provide the eventual settlement to the client but are delayed or otherwise tipped consistently to the benefit of the insurer is where problems begin.

The special relationship that exists between insurers and policyholders makes the management of premium investment and the stability of the company incredibly important. The mantra of maximising shareholder wealth is as important for insurance companies as it is for any other firm.

Without that, the flow of capital will be greatly stymied. However, research indicates that poor decision-making by insurance companies, particularly when combined with unfavourable investment conditions, can lead to failures within a relatively short period.

The ability to wiggle within regulations may be viewed by different people as somewhere between commendable and criminal. However, in the context of insurance, the choice to risk premium investment in a way that remains opaque for policyholders jeopardises the viability of the policy to the benefit of short-term but unsustainable gain for management and shareholders.

It is for this reason that we raised the idea of the ‘ethical freerider’. The insurance industry, more than others, relies on trust. Companies that artificially reduce premiums by unreasonably toying with capital ratios risk being unable to pay their policyholders due to failure.

According to research, they also reduce the propensity of people to insure at all. As the HIH illustration showed, the combination of unrealistically low premiums, combined with high expenses (which benefited management rather than shareholders), was a major reason for the company’s failure.

The broadest takeaway for all parts of the industry is the powerful link between trust and communication. The stress of loss that leads to an insurance claim is only exacerbated by slow communication.

Delays of claims do not automatically imply poor behaviour on the part of the insurer. But as the AFCA report highlights, when people are left in the dark, they will assume the worst.

This isn’t surprising, given the large-scale losses due to natural disasters that have contributed to the difficulty of making timely assessments and payments. It seems quite apparent that while people don’t like receiving bad news, it is preferable to hearing nothing and assuming the worst.