January 2014        

Insurance: the white man’s burden
(with apologies to the Goon Show)

The first recorded methods of transferring or distributing risk were practised by Chinese and Babylonian traders. In China as early as 5,000 BC farmers used boats to ship their crops to purchasers or to markets. It was a time when ships were commonly lost at sea, accidents occurred, and harvests were lost, resulting in the farmers facing financial devastation.
      These farmers, using common sense, conceived the idea of not “putting all their eggs in one basket” (or, in this case, boat). Instead farming families relieved their anxieties about their shipments by using multiple boats to ship their merchandise. This primitive form of insurance was employed for situations where one or more shippers could avoid being financially ruined by the catastrophic consequences of a boat or boats sinking. The loss was minimised because of the distribution of the merchandise.
      It is generally accepted that Lombard merchants introduced maritime insurance to London in the sixteenth century. This is considered the beginning of insurance as we know it, in the modern sense of the word. At the time it was a form of mutual protection for merchants who were sending goods by sea.
      Insurance was therefore a form of mutual support and protection. Like building societies and co-ops, when they were started, insurance was not conceived as a profit-making venture: these organisations were formed with the purpose of raising funds from their membership or customers, which could then be used to provide common services to all members.
      A mutual is owned by, and run for the benefit of, its members: it has no external shareholders to pay in the form of dividends, and therefore does not usually seek to maximise and make large profits or capital gains.
      At one time most major American life insurers were mutual companies. The success of these organisations, many with very healthy balance sheets, attracted the attention of the financial vultures. In the 1980s, with the deregulation in the American financial markets and Thatcherite policies in Britain, most mutual companies were demutualised, with shares being distributed to their policy-holders in recognition of the ownership interest they formerly had in the form of their interest as mutual policy-holders.
      As most of these policy-holders stood to make substantial gains from the changeover, it was not surprising that they cashed in their holdings.
      One of the mantras of the neo-liberals has been the need for competition in all markets; but what has in fact happened in the insurance field is that a small number of monopolies control the markets globally. One of the results of this is that they have tried, and usually succeeded, to lessen their exposure to risk-taking at the expense of the customer.
      Instances of this include customers whose houses have been, or are in danger of being, flooded not being able to get household insurance. Similarly in the health insurance field there is a reluctance or even refusal to cover people who have health problems. Many insurers will not cover people over seventy years of age for travel insurance, and young or learner drivers are often quoted prohibitive rates for car insurance.
      Private health insurance is another area worth looking at. Until recently in Ireland private health insurers’ only real service was to help their policy-holders to jump the queues in public hospitals. This is immoral, particularly where children are concerned and time is of the essence. Patients are not dealt with according to need but to their ability to pay.
      We now have a situation where organisations that were set up to cater for certain needs or demands do not meet these. We have insurance companies that don’t insure, building societies that don’t give out house loans. The policies being pursued by the present Government may even result in credit unions that don’t give their members the usual small loans that are their hallmark.
      Yet the insurance giants, with tens of billions in reserves, are some of the most powerful elements of the capitalist credit and finance system, second only to the banking monopolies in their scale of operations.
      In his book Monopolies: The Limits of Competition in the European Efficient Property Insurance Market (2004) Thomas von Ungern-Sternberg of the Department of Economics, University of Lausanne, compared the premium rate of the state property insurance companies in large parts of Switzerland with those of the private insurance companies active in the rest of the country. The state companies had a 40 per cent lower premium rate, operated with substantially lower administrative costs, spent considerably more on prevention, and had lower claims rates.
      The premiums of private insurance companies are much higher because they typically spend more than a third of premium income on commissions and administrative costs. State insurers are considerably more efficient in this respect.
      In 1984 the state of Florida reacted to the unwillingness of the private sector to insure hurricane risks at reasonable premium levels with the creation of the Citizens’ Property Insurance Corporation (an insurer of last resort) and the Florida Hurricane Catastrophe Fund. Their existence has also resulted in substantial premium reductions for Florida property-owners.
      Over time, the raison d’être of insurance and other mutual organisations has changed from providing services to maximising profits. This is done to the detriment of the customer or policy-holder and is diametrically opposed to the reason for the creation of these organisations. There has always been a very strong case for the nationalisation of all branches of insurance, or at least returning them to some kind of mutual, non-profit status. Unfortunately they have proved to be such profitable ventures that there is no likelihood of this happening soon.
      There’s a type of insurance called political risk insurance, whereby companies can minimise the uncertainty and potential disruption caused by the nationalisation of their business. One wonders whether this cover can be extended to the insurance companies themselves.
[RCN]

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