State Fire Insurance

The circumstance that the present Government is bringing in a bill to establish Fire Insurance deserves more than passing notice, dealing as it does with a large and important commercial interest. I think I may safely say that such legislation is opposed to the weight of opinion of the members of this Chamber.

State Insurance is apparently advocated on the assumption that the business as at present conducted has been found wanting in essential particulars which can be obtained by Government control.

It is asserted that the profit to shareholders of these Companies is too great, and instances are put forward to support this view, shewing that at certain times and under certain circumstances insurance companies have made large profits. I am not prepared to dispute the figures in the least, but will affirm that they are unanswerable proof of the unsoundness of the deductions attempted to be made. To be of any value they ought to show a normal or average condition of business, whereas it is quite evident that they are exceptional, and that it requires the average fortunate and exceptionally unfortunate to fill the complement of the whole. If the instances given were a fair average there would be no occasion to go to Coolgardie or Transvaal to make a fortune. Here is an opportunity at hand quite neglected. No person moves. Why ? The answer is simple. The deductions are false and unreliable. With some trouble a small list of the abnormal successes has been obtained. The list of companies which have come to ruin is ten times as long, but no mention is made of these.

The publication of successful operations has from time to time prompted the formation of companies, but the majority of these undertakings have not survived for any lengthy period. This way to fortune is invitingly open, but there is little inducement to venture, especially if there is any previous experience of the difficulties. Dissatisfied people, however, still look round and round the subject with the impression that it ought to be exploited, but without the necessary confidence to go in themselves. The happy thought has occurred to use some other means. Who so proper as the Government ? Advocates of page 2 State Insurance start with the bait that the rates must be lower and thus offer an inducement to all assured to support it. If [unclear: he] does not succeed only the Government will pay and it will [unclear: now] much matter. The benefit will be reaped by the insured at the expense of the people as a whole.

The tendency of the times is to look to the Government [unclear: has] remedy every supposed grievance and to ask on the slendered pretence for protection and assistance. Although this insurance matter is not likely to be a commercial success, it is confidently held out as a proper thing for a Government venture.

It is argued that because the Government Life Office is successful that a Government Fire Office must succeed also.

In every essential respect fire insurance is different from [unclear: life]. There are no tabulated experiences, fixed rules, or known quantity in the former as in the latter. There is a material difference [unclear: all] as to the ownership and interest in the funds of the office. [unclear: In] life companies such as are operating here each policy holder has a direct interest in the fund, and in a proportion which can I determined. Any surplus comes to him periodically.

The success of the New Zealand Government Life Department is not owing to its having gone out of the ordinary trade but has been obtained only in so far as it has carefully studied and followed those sound rules which were recognised and established long before its formation. It is quite true there before it emerged into the cold world of business, its political sponsors made promises that it would do business in certain [unclear: new] and desirable lines, having principally in view the cheapening the cost of conducting the business to a large extent. It is need less to say that none of those exceptional proceedings well successfully carried out. It was early seen that it must necessity conform to the ordinary rules which guide other kindred institutions. It is successful because it is in capable hands, that of men who are acquainted with and follow the [unclear: be] precedents of the business. Yet it would be difficult to [unclear: process] that any one assured person as such in the Colony has receive greater benefit from its establishment than they would have received from other mutual companies. Even in the matter investments of funds, it is only on lines in common with other [unclear: level] offices doing business here.

The insured in a Government Fire Department will not [unclear: be] the necessity of making provision for the contingency of conflagration, the exact extent of which cannot be demonstration. It will be sufficient for him that the Government is good for face value of his policy. Following the lead of the propone of the scheme he will refuse to acknowledge the existence of danger which cannot be defined and will never consent to premiums being made sufficient to provide large surplus [unclear: a] page 3 normal requirements for the purpose of establishing (in course of time) a fund to meet the conflagration hazard. No ordinary premiums would suffice, and no extraordinary premium would do it within a generation.

The chief of the department (if he knows anything of the business and its history) will be in constant dread of a catastrophe for which no provision can be made. He will be completely on the horns of a dilemma. His common sense will induce him to ask a large premium to try and meet contingencies which he will know must arise sooner or later. The whole weight of influence outside will be strained to compel him to accept the immediate experience if favourable as a basis for rating, as witness the expression of opinion by the Public Trustee founded on a very limited experience. This I will refer to again. If the experience at the time happened to be unfavourable, the assured may be sufficiently alive to urge that it all be viewed in that light.

Another charge made against the present system is that the expense of management entails too great a load upon the premium income, and that this is evidenced by the number and remuneration of the appointments made. Companies in obtaining the best talent available, and in adopting methods calculated to reduce the ratio of loss not only obtain an immediate benefit themselves, but tend to promote a higher standard of business and a reduction of waste by fire. By vying one with the other in obtaining the best results they ultimately bring the price of indemnity down to the lowest adequate rate.

As a Government Department, there would be none of this healthy rivalry. There would be no standard of excellence and no special interest in keeping the loss ratio down. It would simply be the means of collecting from the many to repair the disasters of the few—the needy and the unfortunate. These would readily adapt themselves to the altered conditions, and time and experience would develop the facilities in this direction to an extent which only those in the business can fully appreciate.

Public opinion always sides with the individual claimant against a corporation or government, and as a consequence it unwittingly tends to increase the cost of insurance. As the business is now conducted there are a hundred channels open for obtaining information which would be closed to a Government Department. The individual interest of each member of the community to promote strict equity in cases of difference as to settlement of loss would, under the proposed scheme, be as entirely lost as it is under the present system. It would simply be another Government Department, and we all know how leniently the public regard any excessive claim against a Government body.

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There is, too, the fault urged against the companies that they do not sufficiently discriminate in rating between the risks. [unclear: To] provide for every varying feature of risk is impossible, for no living man or body of men could judge with sufficient accuracy, as there are no two circumstances in the world exactly alike, and no mind could contain a full knowledge of the particulars of each and every business, varied by the influences of climate and all other differences of condition which tend to affect a change in the habits of people or construction of their buildings. The utmost which can be done by the most skilful underwriting is to classify risks and make allowance for the principal points of variance under the several heads. With the greatest care there an discernable differences which cannot be provided for which leave the rating open to seemingly just criticism by those who have simply a casual knowledge of the business.

The principal point urged in favour of State Fire Insurance is that it will be worked at a cheaper rate than the present system. If this be so, however, it is quite against all experiences as to results in such cases. But the putting together of a number of risks and the receipt of premiums at the greatest speed and smallest possible cost is not the acme of fire underwriting. This many offices have found out to their sorrow. Any expert is aware that the most important part of the business is discrimination as to individuals and circumstances, and that [unclear: is] neglect of these will much more than counterbalance any saving which may be made by getting risks on the books at a cheaper rate. How can a Government official possibly distinguish between this person and that? A Government Department must be run upon the lines that all men are equally reliable. But the success of the Department, from an economical point of view, will depend upon the exceptional treatment of certain individuals as against certain others—this person's risk must be rejected, that person's may be taken—all with equal rights all citizens and with equal voting power.

The introduction of this Bill into the New Zealand House of Representatives will, in any event, be one of the most remarkable incidents in the records of underwriting. I think I may venture to say that the framing of the Act exhibits considerable ability in the knowledge of what is necessary for the creation and administration of a State Department. The only part in which it fails conspicuously is in the knowledge of practical Underwriting. There are seventy-two clauses in the Act, of which two deal with the real conduct of the business. It is remarkable also that these two are devoted to the insistence of methods totally opposed to the ordinary practice. The aim in the Bill is evidently to save expense in administration. I am ready to admit that if this can be attained without sacrifice in other directions it is a worthy object, but only in that event.

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Under the compulsory clauses of the Act no person can obtain cover for more than three-fourths of the capital value of any building. Take the case of a person with a small capital desirous of making a home for himself. On application to a building company or society he can obtain an advance of a considerable proportion of the capital value or cost. It is the practice of insurance companies in such cases to insure for practically full value. It is perfectly safe for them to do so, because the fencing, planting, and other concomitant matters give the owner sufficient interest in the preservation of the place. Under the Government scheme the man's small capital will, in most cases, be entirely unprotected. There are thousands of cases of this kind in the Colony. Another instance. Take the case of a lessee with a lease of short term with a building which will meet his requirements until the end of the lease. A fire would interfere with his occupation and render him liable to expend the full capital value in re-building. In some cases brick has to be substituted for wood, the cost to restore the accommodation in such cases is, say, 50 per cent, in excess of the full capital value of the original wooden building. The instance is a very common one. Is it right in regard to any of the cases I have mentioned that the tyranny of the majority of ratepayers (or active minority, as the case may be) shall prevent the legitimate functions of underwriting being exercised?

The principle of limiting the cover is not unknown to insurance men. It is very much in the nature of what is called a co-insurance clause; that is, a clause which stipulates that under any circumstance the assured must bear a certain proportion of the loss. It is rather common in America, and is usually applied to risks of doubtful moral or physical aspect. There is this difference, that the co-insurance clause is operative with regard to partial loss as well as total. The Government scheme would, under usual policy conditions, only affect the settlement in case of total loss. That is, it would restrict his indemnity when the assured is in greatest straits and when he requires the greatest amount of assistance. He would, however, have the satisfaction of knowing that he had been sacrificed in the endeavour to demonstrate a great principle—viz., that insurance business can be done cheaper by Government than at present by the companies.

It is a strange circumstance that the majority or persons think they can do fire insurance better than those who devote their whole life to it. As an instance, the Public Trustee has made a suggestion in his annual report that his Department could with advantage undertake the insurance of risk held in his name. This gentleman has shown his ability in so many directions that I hope he will not feel hurt if I say I cannot accept his opinion in the matter as a guide. His experience is page 6 that for a payment of £2500 over a period of two years he had returned to him in losses the amount of £850, or, say, 33 per cent, of the premium. From this data it seems to him that a largo profit is being made out of the business furnished by his Office. If the experience had been otherwise, the argument, of course, would have had no point. I may mention that he does not say anything about working expenses, or unexpired risk.

Let us state a principle, and then test the value of the experience furnished by the Public Trustee.

The risk of one building for a hundred years is equal to that of one hundred buildings for one year, and is also the equal of twelve hundred buildings for one month. The volume of risk in each instance, and the premium, will be the same. We shall consequently be able to affirm that the risk covered for the Public Trustee for £2500 for two years is equal to twelve times the volume covered for two months. In each of these cases the dimensions of risk and premium respectively are equal. Now, I am prepared to demonstrate in an equally reliable manner, but supported by New Zealand experience of much greater magnitude during the same period as that under review by the Public Trustee, any of the following propositions which may be desired—viz., that the covering of fire risk entails no liability whatever; that the present rates charged by companies ought to be doubled to enable them to meet losses; that the premiums at present charged by the companies are fair and proper.

It is manifest that from such limited experience as that furnished by the Public Trustee no deduction worthy of a moment's consideration can be arrived at.

The proposal to give bonus to the assured as a portion of a realised profit calculated on the experience of any one year's operations can only be a catch to attract business. No such experience can possibly determine the profit. Companies with a much larger base of operations have found that twenty years is too little to judge by. It is quite clear that any such Government Department would require all the revenue and more to provide for the contingent liability.

Perhaps the most extraordinary part of the proposed Act is that which provides that the Council of any district (whether the Act is adopted or not) may equip and maintain fire brigades at the joint expense of the county or borough and the insurance companies operating in the Colony. It does not matter, apparently, whether the companies, individually or collectively, have any risk in that special district or not. As it is possible that the companies would withdraw from any district or borough which shall adopt the Act, we may have the anomaly of a Council being able to levy upon corporations which have no more interest in the district than the Mikado has. In any case it is clearly wrong that in defiance of their objection insurance comp- page 7 anies shall be levied upon to support measures in restriction of their business. The field of a company's operations is the amount of value at risk multiplied by the degree of danger. Value only yields revenue to them in proportion to the hazard, and yet they are mulct on the ground ostensibly that they benefit, The companies are surely sufficiently alive to provide any such thing if it were to their advantage. There is, moreover no limitation to these establishments for fire prevention. With a free hand (one hand being in the coffers of the insurance companies) we would, no doubt, see some very lavish expenditure in the way of fire brigade establishments. If any Council had conscientious scruples against committing such robbery the Government has the power to compel them to proceed. The scope which will be given under the Act for political and other jobbery has, perhaps, rarely been surpassed by any legislation.