How regulatory changes are driven by a need for control in reputational scandals: a case study in the German insurance industry

Abstract

Purpose This paper aims to contribute to the understanding of the mechanisms that evolve during reputational scandals and lead to changes in industry regulation. It explores the processes by which a demand for external industry regulation evolves, also addressing the consequences of firms’ competitive behaviors which lead to substantial misbehavior and the destruction of reputational capital. The authors are interested in whether and how regulatory activities – in the case analyzed here, changes in insurance regulation regarding sales commissions for insurance brokers – are used as a costly, external behavioral control mechanism (third-loop learning) to terminate a reputational scandal that cannot be stopped by internal controls at a firm level (first-loop and second-loop learning) anymore. Design/methodology/approach The paper explores a real-life case in the German insurance industry that peaked in 2012 and has been well documented by broad media coverage, complemented by interviews with leading industry representatives. Using causal process tracing as a methodology, the authors study the factors in the case that led to an industry scandal. The authors further analyze why the insurance firms involved were not able to limit the scandal’s impact by internally controlling their behaviors, but had to call for external regulation, thus imposing costly restrictions on sales and contract processes. To identify the mechanisms underlying this result, theories from the fields of economics (game theory) and sociology (vicious cycle of bureaucracies), as well as organizational learning theory, are used. Findings The authors find that individual rationality does not suffice to prevent insurance firms from scandalous business practices, e.g. via implementing appropriate internal behavioral control measures within their organizations. If, as a result, misbehavior leads to reputational scandals, and the destruction of reputational capital spills over to the whole industry, a vicious cycle is set in motion which can be terminated by regulation as an externally enforced control mechanism. Research limitations/implications This study is limited to the analysis of a single case study, combining published materials, e.g. broad media coverage, with interviews from representatives of the insurance industry. Nevertheless, the underlying mechanisms that have been identified can be used in other case studies as well. Practical implications The paper shows that if firms want to avoid increasing regulation, they must implement strong reputational risk management (RRM) to counteract short-term profit pressure and to avoid restrictive regulation imposed on the industry as a whole. Furthermore, it sheds light on the relevance of spillover effects for RRM, as not only employee behavior within an organization might lead to the destruction of reputational capital but also that from other firms, e.g. from elsewhere within an industry. Originality/value The paper contributes by emphasizing a direct causal link between corporate scandals, loss of reputation and regulatory change within the insurance industry. Furthermore, the paper contributes by combining economic theories with organizational theories to understand real-life phenomena.

Guest editorial

“…In particular, Tica and Weißenberger (2022) illustrate that an organization's questionable business practices may ignite regulatory change across a national industrythe German private health insurance industry in this case. Tica and Weißenberger (2022) present the story of the so-called MEG scandal and conclude that not only risk-related regulation may be imposed on firms. Their case study highlights that the competitors of a scandalized firm urged regulators to impose new regulation on the entire industry to prevent it from suffering further reputational damage.…”

“…The seven articles in this issue cover a wide range of notions about how risk governance and risk management can evolve over time and how such developments interact with organizational change. Methodologically, the seven papers are based on several data generation approaches such as in-depth case studies (Murr and Carrera, 2022;Tica and Weißenberger, 2022), archival data (Nagel et al, 2022), survey data (Hassan et al, 2022;Schäfer et al, 2022), a combination of survey and interview data (Tan and Lee, 2022) and agent-based modeling (Harten et al, 2022). At the same time, the articles rely on data from across the world such as Germany (Tica and Weißenberger, 2022;Schäfer et al, 2022), Malaysia (Tan and Lee, 2022), Saudi Arabia (Murr and Carrera, 2022), the USA (Nagel et al, 2022) and Qatar (Hassan et al, 2022).…”

“…Methodologically, the seven papers are based on several data generation approaches such as in-depth case studies (Murr and Carrera, 2022;Tica and Weißenberger, 2022), archival data (Nagel et al, 2022), survey data (Hassan et al, 2022;Schäfer et al, 2022), a combination of survey and interview data (Tan and Lee, 2022) and agent-based modeling (Harten et al, 2022). At the same time, the articles rely on data from across the world such as Germany (Tica and Weißenberger, 2022;Schäfer et al, 2022), Malaysia (Tan and Lee, 2022), Saudi Arabia (Murr and Carrera, 2022), the USA (Nagel et al, 2022) and Qatar (Hassan et al, 2022). The geographical spread of the data used in the articles signals that new and changing approaches to risk governance and risk management are relevant in many countries, but are, at the same time, influenced by national regulations and idiosyncratic pressures (Alsharari, 2021;Haustein and Lorson, 2021;Maffei and Span o, 2021;Murr and Carrera, 2022;Rana et al, 2019a;Schäfer et al, 2022;Tica and Weißenberger, 2022).…”

“…At the same time, the articles rely on data from across the world such as Germany (Tica and Weißenberger, 2022;Schäfer et al, 2022), Malaysia (Tan and Lee, 2022), Saudi Arabia (Murr and Carrera, 2022), the USA (Nagel et al, 2022) and Qatar (Hassan et al, 2022). The geographical spread of the data used in the articles signals that new and changing approaches to risk governance and risk management are relevant in many countries, but are, at the same time, influenced by national regulations and idiosyncratic pressures (Alsharari, 2021;Haustein and Lorson, 2021;Maffei and Span o, 2021;Murr and Carrera, 2022;Rana et al, 2019a;Schäfer et al, 2022;Tica and Weißenberger, 2022).…”

“…The third paper, authored by Tica and Weißenberger (2022), sheds light on how riskrelated regulatory change may arise in developed countries. In particular, Tica and Weißenberger (2022) illustrate that an organization's questionable business practices may ignite regulatory change across a national industrythe German private health insurance industry in this case. Tica and Weißenberger (2022) present the story of the so-called MEG scandal and conclude that not only risk-related regulation may be imposed on firms.…”