Private versus Government Fire Insurance.
s the Honourable the Premier still expresses his intention to prosecute his State Insurance scheme, and may possibly bring it forward again in the ensuing session, the present may be an opportune time for a few remarks thereon, and on Insurance in general, from one who has occupied a fairly prominent position in the field for over 30 years.
I find that as a rule the insuring public are averse to the scheme, and are so confident that it will never become law that they do not treat it seriously. It is welcomed, however, by that considerable circle who are always on the lookout for Government Agencies and Inspectorships, and by those who see iniquity in Tariffs, forgetting that a Government monopoly would be worse. It is hopeless, of course, to convert the former, so I shall address myself to the latter, in the hope of showing them that tariffs are not oppressive or productive of anything like the large profits imagined, and are indispensable in such a speciality as Insurance. I shall then endeavour to point out the folly and injustice of the Government proposals.
During my long experience I have hardly ever met an owner or occupant of property, be it dwelling-house, manufactory, store or forge, who did not believe, and try to make page 2 me believe as well, that his was the safest risk of its class-that it could not possibly burn except through some miracle or act of incendiarism, and that consequently his rate of premium should be lower than that of his neighbours. I always sympathise with such an applicant, because I have an impression myself, and a very strong one, too, that my own dwelling-house is the very best possible risk for the Company I entrust my protection to; but I cannot get them to see things just as I wish them. In short, owner and insurer never can exactly hit it as to the premium which ought to be paid; and it is the same, in a wider sense, when a deputation of citizens arrange for an interview with Insurance Associations, to discuss, in a not unfriendly spirit, a question of rates, in the hope of securing a reduction. I have taken part in such discussions repeatedly, but I have never known much, if any, good result from them. They have generally been as barren and unprofitable as would be that of a body of the general public interviewing merchants and manufacturers to emphasise the ever-prevailing impression that prices were too high. What reply would such a body receive? Simply, that as they were not experts they could not possibly know the values and cost of production; that only a very moderate profit was charged, and that, so long as a sound article was expected, it could not possibly be supplied at a lower price. True, they might try elsewhere, but if they did they would not be more successful, unless there were some temporary sacrifice going on, the articles defective in some way, the owner defrauding himself, or undue advantage had been taken of someone in the construction or preparation of the article for market.
So with Insurance Companies. A long series of years and decades, extending in some cases to centuries—during which there have been collected the most elaborate statistics, from which can be divined with almost mathematical certainty the average of fires in different classes of risks—have taught the principals of such Companies what the minimum rate of every page 3 variety and description of risk ought to be, and they fix their charges accordingly. New Companies, as they come into the field as communities grow and commerce increases, generally consider it necessary to follow upon the same lines. If they do not, their career is invariably a short and stormy one; and fortunate have their promoters been if they get rid of their underwriting without being saddled with serious obligations for years. In my own experience I have seen a number of such Companies launched with fanciful and tempting inducements to shareholders and constituents, but a very little headway taught them that if they mean to keep afloat, one after another of their special features had to be cast overboard, and they must revert to the old-established sailing principles as their only chance of saving them from destruction.
Why should not all Companies charge a uniform rate for the same class of risk? They are selling the same article in the shape of an insurance policy. They have all to plank down 20s. in the £ when there is a loss, and, therefore, I know of no conceivable circumstances under which one Company for any length of time can under-sell his neighbour. In general trade a dealer may by some bargain or other temporarily steal a march upon a brother merchant, but Insurance Companies have no such windfalls.
Moreover, it is only the Directors and principal officers of our Institutions who know, as has been stated, at what price they can sell their policies, and they have to instruct their representatives accordingly. Without such instructions—it may be restrictions—Insurance Companies would very soon find themselves in the position of a merchant who had placed the contents of his warehouse in the hands of one totally ignorant of values, but with simple instructions to sell. More than likely that merchant would soon find his goods vanishing, but his profits would be nil.
Again, every care is taken by the Chief Experts of Insurance Companies to discriminate as regards rates—the class of page 4 hazard, the construction of individual risks and blocks, water supply, and other fire-extinction appliances—all receive the most careful consideration, and rates fixed accordingly.
Tariffs, therefore, do not mean high rates—merely ordinary precautions for the conduct of a business which necessarily requires exceptional treatment; and there ought to be no more contention or friction between Insurance Companies and their constituents than between a manufacturer or trader and his customers.
It has also been said that under these Tariffs large profits are assured. That is not so—good years are too soon succeeded by bad ones, and, on the whole, even with the most successful, a fair, even small, average of profit only is maintained. Were it the fact that profits were abnormal, the community have always it in their power to float a new Company, with lower scales of premiums.
Agitators against Insurance Companies—men with no practical knowledge of the business—support their theories with figures which are either fragmentary or altogether false and misleading, and have thus grossly exaggerated profits. Let me substantiate this by quoting from a competent and recognised authority (the Banking and Insurance Record of 1895-6-7) a resume of the business of the Australian and New Zealand Companies for 14 years, from 1883 to 1896 inclusive. The combined revenue of these Companies during that period was £19,226,956, while their losses and expenses were £18,110,505, leaving an underwriting profit of £1,116,451, equal to about 5¾ per cent, per annum.
The figures of 1897 have not yet been published, but the disasters of that year, still green in our recollection, will reduce considerably the above average profit of 5¾ per cent.
It may of course be pointed out that as the premium income is drawn from sources outside as well as within New Zealand, the ratio of losses might be higher than if the business had been confined within our home circle, but this is not so, as page 5 recent figures show that the two larger New Zealand Companies, who operate farther abroad, have had larger profits than the other two whose principal operations are more within our own borders.
Again, it may be objected that a great portion of the revenue is from marine business, which may not pay so well as fire. The complete reply to this is that there are many marine Companies, pure and simple, which show as favourable results as Companies which operate in both fire and marine, or fire alone.
Still it may be retorted that the big dividends, which are now and then said to be paid by some of the Companies, prove that rates are too high. But these allegations are invariably made by persons incapable of dissecting a balance-sheet, or who have taken exceptionally good years.
All dividends of Insurance Companies are largely made up from returns on paid-up capital invested in what is admittedly a very risky business; and not seldom indeed have dividends to be paid from these returns alone. Moreover-, even with carefully managed Companies, we have now and then disastrous years, yielding not only no profit on underwriting, but swallowing up returns on capital as well—nay, worse, necessitating the writing down of capital itself, as Shareholders in more Companies than one in New Zealand have still painful recollections of, and I could name at least six Companies, floated in New Zealand, who, after struggling against such disasters, have had to succumb altogether.
But admitting that Companies on an average of years must have a profit, if they are to exist, surely this is not confined to Insurance. If it were, and had always been the law that private firms and persons, like Insurance Companies, had to publish their balance-sheets yearly, is it not certain that in many instances there would be a howl from the public that profits were too large and too easily earned? Perhaps this is page 6 not as much the case in these days, but it is the same with Insurance Companies. Rates are nothing like what they were within my experience. At one time the profits of properly managed Insurance Companies were much larger than they are now, but they were not anything like all paid away to shareholders. They were husbanded in reserves, which are held for the security of the public, and against any great conflagration to which we are always exposed.
Again, if the Insurance field in Australasia were as profitable as outsiders and political agitators seek to make it, would not the number of Companies go on increasing? But what is the fact? In 1885 there were 31 purely created local Companies doing business in Australia and New Zealand. Now there are but 17, the other 14 having been wiped out altogether, either wound up voluntarily or absorbed by others.
Let us now come to the Government proposal, and, first of all, let me say that this dream of State Fire Insurance is not a new one. It was long ago tried in England, and was a failure. It has been in force in various small States on the Continent of Europe, and where it has not completely failed it is a source of the utmost dissatisfaction "and grevious burden upon the larger towns."
Wherever practical intelligent business men have sat down seriously to consider it they have all more or less condemned it. I could quote numerous deliverances in this direction. Let two suffice. The Chamber of Commerce of Havre say: "State Insurance would be an infringement of liberty of trade; it would be contrary to the interests of the insured, the insurers, and the persons employed in the business No proof exists that the State would manage the business more economically than private Companies. Obligatory Insurance would entail upon the State financial liabilities, the consequences of which could not be foreseen." Another official body says: "By some of the secondary-rate arbitrary Governments of Europe, page 7 Fire Insurance has been practised with great benefit to the revenue, but a high price to the insured. So far as it has been tried by Free Governments or Municipalities it has been to their serious cost, and has turned out a failure."
Waiving the question as to what are and what not the proper functions of a State, the crippling or the destruction of Insurance Institutions, which have contributed so much to the advancement and security of commerce and the mercantile enterprises of the world, should not be one of them.
In the infancy of a Colony, when capital is scare and private co-operation difficult if not impossible, public necessities may compel the State to embark to a greater extend upon certain well-known undertakings which in older countries of the world are left to the citizens themselves, and having done so it may afterwards be impossible or inexpedient to relinquish them to others. But it has never been shown that any of such operations can be performed cheaper or so cheap as in the open market. All experience contradicts this. Government work is expensive work. Every book they print, every ton of goods they carry, every carriage they build, and every chain of road they make or acre they plough could all be done, without under-paying labour, much cheaper by private enterprise; and, coming to the subject more immediately in hand, the same remark is applicable to their Life Insurance Department. Though fostered for years by free postages, free telegrams, railway passes and office accommodation, it has not been the success anticipated, and the cost of it is now from 6 to 9 per cent, per annum higher than the Mutual Provident, falsifying the anticipation of its promoters (vide Hansard of 1869-70) that it could be worked much cheaper than any private company.
Cheaper Fire Insurance may therefore be accepted as a fallacy. But admitting for a moment that by dragooning the public into payment of premiums with the same free hand that is at work in the Tax Departments, Fire Insurance might be a page 8 little cheaper, it is to come to us in the most repugnant and oppressive form of compulsion. Now you can insure or not, and for just such an amount as you please. Then you will have no voice in the matter, but will have to insure for what a Government Inspector dictates; and, what is worse, in the event of a fire you will be at his mercy as to what you are to be paid. A passport to favour will be his settlement of claims at a minimum, and in his adjustments he will be free of a healthy consideration for the good name of his Company or the fear of losing business in the future. I do not mean for a moment to say that he will have instructions to be harsh or unfair with the public, but we have not far to seek for evidence that in certain sections of the Civil Service, "professional instincts and loyalty to departments "are apt to develope into something like oppression." True, the Courts will still be open, but the State is an ugly defendant to fight. Fires will also increase; as a writer has said, "There are great numbers of people who would not rob a private firm or company who would rejoice in spoiling the State."
Then, again, why should the State monopolise or even compete in Fire Insurance—a purely mercantile enterprise, which requires heavy paid up and subscribed capital, in which the risks are great, and in which, as has been shown, there have been so many failures?
Not only is there no inducement in the shape of profit for entering upon such a business, but there is no demand for it from those most interested, nor is there any reasonable plea whatever for forcing it upon the public. When the Government first broached Life Insurance, particular stress was laid upon the fact that as an incentive to thrift and an encouragement for making provision for the future, the movement came well within the duty of the State; and when it was introduced, its author, Mr. Vogel (Hansard, 1869) emphasised the fact that up to that date no purely New Zealand Company was operating in the same field, and therefore they were not trenching upon any vested page 9 Rights or Competing with Local Enterprise. But how no such plea is available. At the present day there are still four New Zealand Companies with the necessary capital, all contributed amongst ourselves. These Companies have stood the test of time, have the confidence of the community at home and abroad, are monuments to the enterprise and sagacity of their promoters and Directorates, bring money into the Colony from foreign fields, contribute largely to the Colonial revenue, and, moreover, afford suitable investment for Colonial capital and employment and positions to a considerable number of the present and rising generations at their various centres, not only here, but abroad.
These Companies, by their widespread and honourable dealings in almost every quarter of the globe, have brought New Zealand into prominent and favourable notice where otherwise she might hardly ever have been heard of. It is therefore inconceivable, and nothing short of national folly, to dream by adverse legislation of attempting to strangle or cripple such Institutions in the land of their birth, and destroy one of the best advertisements the Colony can possibly have.
There is another ugly aspect of the case, which looks very like a serious breach of faith. We are all aware that very large sums have been borrowed from time to time for the works and improvements absolutely necessary for rendering our cities habitable. These moneys were lent on the faith that the millions of British, Continental, and Colonial Insurance Companies were, in the event of a fire catastrophe, pledged to the reinstatement of our buildings and the replenishing of our warehouses. But now it is proposed to drive all such capital from the country, and to restrict the lenders' security to the guarantee of a State whose obligations are already enormous and apparently ever increasing, and whose Fire Insurance Reserves will be a myth.page 10
I hope that I have to some extent made it manifest that State Insurance is not wanted by those really interested—is unnecessary, cannot be cheaper, will be an oppression and an unwarrantable interference with the management of our own property, will be accompanied by fresh hordes of Civil Servants in the shape of Commissioners and Inspectors, a prohibition of an important branch of mercantile enterprise, a danger to the State, and a wanton injury to vested interests and long established local institutions.
The Government may just as well, and with less injury to Colonists, step in, close the doors, and usurp any other private business, and they might easily make a selection from which the profits would be more assured and much larger than from Fire Insurance.
23rd June, 1898.
Wilsons and Horton, Printers, Auckland.