Models of Cooperation can be used to allow us to think about the shenanigans in the insurance industry, but first let's talk about how to shoehorn this model, originally based on the Prisoner's Dilemma model, to describe the industry as se know it in Singapore.
When a Financial Advisor cooperates, he basically decides to put personal ethics above his bottomline. He will engage with his clients fairly and sell what the client needs. To me, a FA who cooperates operates by the spirit of the engagement. He does not adhere to rules simply to meet compliance requirements.
When a Financial Advisor defects, he basically decides to focus solely on the bottomline without getting caught. He sells primarily for his commissions first and his client's needs second. While he may not engage in illegal acts and will still maintain standards of compliance.
The difference between cooperation and defection is outwardly subtle, but there should be a higher payoff for defection than cooperation. As the gap between defection and cooperation widens, more FAs defect and consumers suffer.
Our models of cooperation can then provide ideas as to how to create a better industry that provides Financial Advice.
The first mechanism to promote cooperation is repetition. If FAs think that they are in it for the long haul, they would be less willing to screw their clients. One possibility is to stagger pay-outs to FAs across a longer period of time so that they will suffer the consequences when clients find out that the product was not suitable later. Another mechanism would be to clawback commissions if they quit the industry after making an immediate sale.
The second mechanism is reputation. If the history of defections can be made more transparent, then the public can choose not to engage with someone with a bad reputation. Some insurance companies track the churn rate of their agencies but this is only made transparent when litigation occurs, imagine what benefit this can bring if these rates can be made public. In my opinion, FIDREC should also allow proceedings to be accessible by members of the public. If a policy sold by an agent is disputed often, even if the outcome is in her favour, the existence of disputes should be made public domain as a warning to potential customers.
The third mechanism is clustering. If we want to engender more cooperation, a group of successful companies must emerge that would be able to profit from cooperative behaviour so that it may spread. The burden cannot be placed on companies like Providend forever. One way I try to contribute to this situation is to direct some of my students to MoneyOwl to see whether they can remedy their insurance woes (and my students have a litany of insurance woes that I can't advice on). I see cooperative synergies between financial education and unbiased financial advice and like to contribute to this moving forward as I get more traction within my own industry.
The final mechanism is group selection. One of the fundamental tensions in group dynamics is this truism : Individual selection favours defection but group selection favours cooperation. We are increasingly seeing commissioned FAs as a coalition. When an FA defects, he makes more money than a cooperative FA. But when a group of FAs all defect at the same time, FA collectively get seen in a more negative light compared to a group of FAs who cooperate. MAS is now starting to drop hints that this current arrangement is not sustainable over the long run.
I believe that changes are coming and maybe defection can be legislated out of existence one day.
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