Study: Corporate Investment in Ethics Linked to Financial Performance

August 8, 2006

Life insurance and annuity consumers are far more likely to be treated better and be more satisfied when dealing with companies that demonstrate a real, ongoing commitment to ethical business practices. The same companies show better financial performance including a higher return on equity and more efficient use of capital, concludes a study by Georgia State University’s Center for Risk Management and Insurance Research.

“Life insurance and annuity companies that invest in a strong ethical infrastructure with verifiable policies and procedures have better financial results shown by higher A.M. Best ratings, higher cost and revenue efficiencies. Shareholders (or policyholders for mutual companies) are rewarded with higher profits. They also have greater cost efficiencies including lower costs of regulatory compliance and lower expenses,” said one of the study authors, Dr. Martin F. Grace.

“These data show that companies with a tangible commitment to ethical business practices and compliance monitoring show strong financial results.”

Grace said this is also good news for consumers.

“For consumers, higher financial ratings are the sign of a solid company. Lower lapse rates mean that fewer people are dropping their policies after they purchase them, indicating companies may be better matching the product to the consumer. The startlingly lower complaint index ranking in this study suggests that consumers are more satisfied with companies that have measurable, documented ethics programs,” said Grace. “These practices lead to better results for the consumer.”

The study, “The Economic Consequences of Voluntary Quality Certification Programs,” was conducted by Dr. Robert W. Klein and Dr. Grace as an economic analysis of the value to companies and consumers of a company‚s qualification in the Insurance Marketplace Standards Association (IMSA). IMSA is an ethics standards-setting organization for the life insurance industry.

According to the study, members of IMSA are top performers. IMSA-qualified companies are associated with almost two levels higher A.M. Best ratings, 4%higher return on equity, 8% increase in cost efficiency, 3% increase in revenue efficiency, 27% lower legal fees and expenses (an average savings of $217,221) and 88% lower investigation and policy settlement expenses (an average savings of$632,602).

Conversely, the study claims, companies that are not IMSA qualified have 3.2- 4% higher lapse rates,10% higher rate of regulatory discipline, and 67% higher ranking on the study’s justified complaint index.

An Executive Summary of the study is available at> .

Source: IMSA

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