23 JULY 1927, Page 29


A CLOCK that beats seconds does so about 314 million times in a year. If it were possible for an individual to have the whole earth constantly in view, he would see at every swing of the pendulum something taking place that involved financial loss to somebody or other, which loss is, or might be, made good by insurance.

A man dies, and the income he has been earning ceases, but it may be replaced in whole or in part by the proceeds of a life policy which becomes payable at his death.

A building and its contents may be destroyed by fire. They may constitute a man's entire wealth which would be lost in a few minutes, and his creditors would have to go unpaid were it not for the existence of _fire insurance, which has made possible the conduct of industry on a large scale. What happens much more frequently is that a small amount of damage is done by fire which is paid for by fire insurance if people are sensible, and by the owners of the property if they happen to be foolish.

A storm, such as London experienced recently, may do much damage by flooding, and claims may arise under policies instead of individuals having to stand the loss.

The variety of risks which can be insured against is perhaps limited if we are using words correctly, but I doubt if a man intimately acquainted with the subject of insurance, and writing hard for a week, could complete his list of insurable risks. Since it is impossible to deal with them in detail, we may consider some of the general principles which apply to insurance as a whole, and which a very large number of policy holders do not know, or, if they know, do not act upon.


The first thing to recognize is that insurance is a process of getting people to act together for their common good, so that they may experience the benefits of the law of average. No individual can tell whether or when he will have a fire which will cause financial loss, but a large group of people can tell within comparatively narrow limits what the aggregate amount of the loss by fire to the group, as a whole will be in the course of a year.. The individuals can pay their share of the total cost, and so escape the chance of a sudden and heavy loss. The first, and the most essential, work of an insurance company is to form the groups of people who will combine for their mutual advantage.

In one of his books on Economics, Professor Marshall referred to a cathedral as being something much more than the stones of which it was built.. A pile of stones waiting for the builder may have little interest or significance, but, when grouped into a cathedral by a great architect, the influence and the interest are much greater, and of a different, quality. It is very much the same with a group of policy, holders who collectively can achieve advantages which are beyond their reach as individuals. In a life, fire, or casualty insurance company this grouping of policy holders is the essential thing, and is usually carried out by shareholders who are paid a little for their services. The whole apparatus of an insurance company, its office buildings, directors, and officials, are gradually established, but these are merely the machinery for collecting premiums-from policy holders, and paying claims to policy holders. Incidentally, the companies do a great deal more than this, but without the group of policy holders they would not exist. The individuals who join this wonderful group do so for the purpose of paying to each other the cost of the damage done by fire. They could, if they wanted to, work on different lines from those at present adopted. They could, for example, arrange that besides replacing the damage done by fire, the contract should arrange that each man who had a fire should receive some payment in addition. That, however, would be a very foolish scheme for policy holders to work,. They would have to pay much higher rates of premium to provide the extra payment, which extra would be an inducement to many of the policy, holders •ta set. fire to their property_ in order to gain. Policies would tend to become lottery tickets, and it would be in the poWer of each policy holder tci; draw a prize for himself by having a fire - , Absurd as this sounds, it is very much like the idea that many people have of the nature of fire insurance. When join oin the group of policy holders, they fill up a proposal forth, and pay a premium that is based upon the facts stated in it, and if their property is undervalued or if the risks. are. not fully stated, they are not playing the game fairly with their fellow policy holders. - Then quite often when the fire occurs, and they put in a claim, they demand more than the damage done by fire. They think, or act as if they thought, that they belonged to a group which promised a prize for everyone having a fire. There could be a group of this kind if there were enough foolish people to form it, but the condition of a prize or a profit for everyone who has a fire, or meets with an accident, is not at all the condition of the group which we join when we become a policy holder in an insurance company.


Many people fail to see that under some kinds of policies it is in reality a fraud not to insure for the full value of the property. If one man- has goods worth £1,000, and another has goods worth £2,000, and the goods are of the same kind and subjected to a similar risk, the one ought to pay twice as much as the other for his fire insurance. It is not to the point for a man with goods worth £2,000, and who takes out a policy for only £1,000, to say that if his property is entirely destroyed he will only receive £1,000 and the balance of the loss will fall upon him, because if damage is done to the extent of £100 he will perhaps receive £100 from the insurance company, whereas, strictly speaking, he ought to have only £50.

Fairness is brought about when a policy contains an average clause which in effect provides that the company will pay the same proportion of the damage done by fire as the sum insured bears to the true value of the property. If there were a clause of this kind in all policies, a man would be insuring himself for the difference between the amount of the policy and the greater amount of the value of the goods. He would be foolish, but he would not be a .cheat. People who under-insure, or who do not take out w ut a life policy, are,- in one sense, not really uninsured. They are only insured in a weak andunsound way. If John Smith carries his own risk, he may be, said to be insured with the John Smith Insurance Company, which only has one risk on its books, and is consequently entirely unable to secure the advantage of the law of average. A sound insurance company, on the other hand, by taking many risks, incurs no risk, because it can rely upon experiencing average results.


Sound insurance principles are not always strictly adhered to by the insurance companies themselves, and occasionally they can be departed from without much harm. For example, a man may have paid £5,000 for a picture, but at the time when it is deitroyed by fire the artist may have gone out of fashion, and the picture may be worth only £1,000, so the damage done by fire is £1,000, and not the £5,000 which the picture cost. To meet such cases as these, a system of " valued " policies was intro- duced, under which a recognized firm of valuers make a schedule of the property and assign values to the differ- ent items. On proof being given that certain. articles have been destroyed by fire, the values assigned to them are paid by the insurance company. The schedules and values ought to be revised from tim. e to time, and of course the policy holder has to pay the valuer for his work. This system has some convenience and attraction for certain people; in spite of the`fact that if the valuations are made only for insurance purposes, the fire_ insurance is very -costly.. Moreover, when the clainis made on insurance companies are fair and not exaggerated, the companies are generous. in their settlements. So long as valuers and policy holders are people of high standing, this system of valued policies is permissible, though, as it seems to me, by no means worth the additional cost that the policy holder has to pay.


It seems to me also that the ordinary sickness and accident policy is a departure from sound insurance principles. It provides that in the event of disablement from sickness or accident the insured shall receive a specified weekly payment while incapacity lasts, but subject to a time limit. Some people. may have a long illness which may involve no loss of income and little expense, and they gain. Others may have a short illness, costing much perhaps for an operation and nursing home,. and the payments under the policy fall far short of meeting the expenses. It may be argued that fixed payments- of this character, regardless of the amount of loss caused by the illness, can safely be. made because few people are likely deliberately to injure themselves for the sake of the compensation, although many cases of self-injury, and pretended deaths for the sake of fatal accident compensation, have been recorded. A far more satisfactory plan is the sickness and accident indemnity policy which was introduced several years ago, but has not, so far as I am aware, been taken to any great extent. The plan under this form of insurance is to pay the loss actually incurred, up to, but not exceeding, the sum insured.. The company settles the accounts of the surgeon, the doctor, the nursing home, and so on, and in certain circumstances will pay com- pensation for loss of income, or the cost-of a locum tenens or other substitute who carries on the, work of the insured person. Total disability to work does not have to be insisted upon, so that, for example,' a writer, 'though suffering from an accident, might be able to continue his work, and thereby lessen the loss incurred. - In recent years there have been great improvements in the practice of life assurance, about which I am saying very little on the present occasion, and there have been some notable improvements in connexion with fire insurance. It is, however, in connexion with what the Americans conveniently _call ` casualty 7 insurance that the greatest change and extension have taken place, and in which most progress is likely to be experienced.


The types of payment under casualty policies may conveniently be claSsified as those which are made to the policy holder himself for damage to his person or his property, and those which are paid to -other people for injury to them -or their belongings through accidents for which the policy holder is responsible. In the former class the& are the siekness and accident policies to which reference has already been made. The issue of accident policies by insurance companies was brought about when railways were introduced, for it was a general opinion that this form of travelling would prove very dangerous. The basis of compensation was at first, and, 'to a con- siderable extent, is still, that which Governments used to pay to soldiers for specified injuries, or the still older customs which settled how much should be paid by aggressors to those whom they injured. In these days, there is much talk of compensation for accidents due to travelling which is carried on by or through newspapers. It is to be regretted that some insurance companies aided and abetted the use of insurance for enabling newspapers to increase their circulation. At least in some cases the companies who did so have had substantial financial reasons for regretting their action, and the losses they have incurred have not brought them much sympathy from the insurance community generally. . Another cause of loss to individuals is that which results from burglary and theft, with which the sound insurance principle of indemnity against loss is adhered to. Since the war, the loss from .these causes has been exceptionallY heavy, and a very large number of policy holders limit be-thankful that they had policies in force which prevented any financial loss from burglary being incurred.

There are many..other occurrences from which losses to householders may arise, and these are conveniently provided against by the comprehensive or all-in policies which most insurance companies now issue. The risks could of Course be covered by separate policies, knit it is a convenient arrangement to have one contract, which, it a remarkably low rate of premium,' covers all the houieholder's risks of loss to himself, or of damage to the personal property of others for which he is liable. It is instructive to reflect that when motor-cars. were coming into general use the majority of the insurance companies did not think that 'insurance was necessary, or did not see how a satisfactory system could be devised, or thought that the amount of insurance required 'would be too small to bother about. The result was that a company was formed for the main purpose of providing motor insurance which has now become of great Magni- tude, and is for practical purposes essential if motoring is to continue and to expand.


This form of insurance is a good example of the, two classes of casualty insurance referred to above. A motor policy compensates the insured for injury to himself or his car, and also covers the risk of damage to the persons or property of others.

I am old-fashioned enough to think that we are suffering from over-legislation, and that Governments in these days do many things they had better leave alone. I suppose, however, that it is, agreed by everybody that the main- tenance of justice is a proper function of the State, and that it is injustice when a man has his person or his property injured, and is unable to obtain compensation from- the impecunious motorist who caused the damage. Hence there is much to be said for making it a condition of granting a licence for a car that the owner should be compelled to effect a policy which would insure his victim against loss.

It has been well pointed out that one of the greatest advantages of the last half-century or so has been the widespread recognition of the value and dignity of human life. It is now recognized that industry imposes risks for workers just as motoring involves the change of injury by a stranger. This recognition finds expression in the Workmen's CompensatiOn Acts, the working of which is made possible by the system of insurance. This perception of the greater value of life, and the justice that those responsible for the accident should compensate the injured person, makes, and will continue to make, casualty insurance, with all the risks which it covers, a social service of the very greatest value.

From the introduction of railways onwards, there sprang up and developed a number of accident companies who -did not transact fire insurance. For the most part -these were absorbed by the fire offices, or they commenced fire insurance when -the -fire offices invaded the casualty field. It will probably be in this sphere that, apart from life assurance, the greatest and most beneficial developments of insurance will take place in the future.

• It is, as I have said, largely concerned with the recog- nition of the value of human life, and the justice of the man who is responsible for injury to another compen- sating the victim, consequently in. some sense we may regard casualty insurance as achieving a higher purpose -than that which fire• insurance accomplishes. We are witnessing a somewhat strange reversal of the conditions which prevailed thirty years ago, when the casualty business was small, whereas it is likely to become the largest, most varied, branch of insurance business.