New Look For Insurance
By FRED DORRIEN
rr HERE must be few insurance shareholders
who are unaware of the difficult time the industry is facing, with national fire wastage at new high levels and a steady rise in the cost of motor insurance claims. Some large insurance companies managed to increase their dividends this year, but most of the composite offices main- tained their payments to shareholders at existing levels, one or two even having to dip into reserves to achieve this.
At first sight it might appear that the interests of insurance shareholders and policyholders are in some form of conflict, for the shareholder seeks the largest return on his investment, while the policyholder seeks the lowest-priced policies which will meet his needs. This, however, is a very superficial judgment. Both groups have a common and overriding interest in the security and stability of insurance companies, and although the British public takes these qualities for granted, such confidence can only be main- tained if insurance companies continue to make reasonable profits on their underwriting, and can allocate sufficient sums to reserves. Mr. Roger Barnett, then chairman of the British Insurance Association, pointed out in June that while in- surance reserves were still very substantial, they had been falling steadily for some years in rela- tion to premium income, and this process could not be allowed to continue in view of the ever- increasing size and number of multi-million- pound risks which were insured.
It is against this background of the need to maintain sound underwriting principles that the latest rise in fire and motor premiums should be viewed. But the new look they will give to insurance accounts is bound to take time to de- velop. The companies will not earn the full benefit of the extra income until the end of 1964 as most policies are renewed annually, while some of the biggest fire insurance policies for industry are negotiated on four- or five-year con- tracts. Shareholders therefore cannot expect any tangible gains much before the middle of 1965.
An essential feature of the 'new look' is that the insurance companies are offering much stronger financial inducements to their policy- holders to be more careful and avoid suffering the risks they are insured against. Incentives of this kind are not only practical business sense —they also demonstrate the interest of the in- surance companies in trying to make the world a safer place to live in, an interest which goes back nearly 300 years to the first fire brigades operated by early fire insurance offices.
For example, the motorist with a full no- claim discount will find his premium increase quite a modest one, for the discount offered by the tariff offices has risen from 30 to 40 per cent, and may now be earned more quickly. The householder whose pipes tend to freeze up every bad winter has been given a strong hint that now is the time to spend some money on insulat- ing his loft—for in future he will have to bear the first £15 of an insurance claim for frost damage to pipes, unless he chooses to pay an extra annual premium of £4. But undoubtedly the most important of the 'carrots' offered by insurance companies to their policyholders is the exemption from the fire premium increases for those who install sprinkler systems on their premises.
Insurance companies recognise, however, that there is no quick way to curb the rise in claims costs for fires and road accidents. The last four years have seen a number of exceptionally large fires, coupled with a sharp increase in the num- ber of all kinds of fires, largely due, the com- panies believe, to a lowering of standards of behaviour at all levels of industry and the com- munity at large. Persuasion by fire insurance surveyors and others interested in fire prevention has to be extremely powerful to surmount the 'I'm all right, Jack, it hasn't happened to me' attitude so prevalent today. At the same time the number of motor insurance claims is rising faster than the growth of traffic and the cost of individual claims is much more than it used to be.
Many people are surprised to hear that some of Britain's largest insurance companies do more business in the United States than they do at home. The United States is in fact the biggest overseas market for British insurers, which is why the results obtained there are of such in- terest to the shareholders. They also have a sig- nificance for the country at large.
The reason for British insurance prestige in the US lie in the history of the past one hundred years, for after such catastrophes as the Chicago and Boston fires of the 1870s, and the San Fran- cisco earthquake of 1906, British insurers paid up in full while many of their American com- petitors went bankrupt. The British ability to pay was due to the early spread of business throughout the world, which was to help estab- lish London as the leading international centre for insurance—a position which it still holds today despite competition from the insurance markets in other parts of the world.
One of the main features of the American in- surance market is- the exceptional size of the losses which are liable to occur there, such as the $50 million fire which destroyed the General Motors plant at Livonia in 1953, and the $90 million trail of destruction caused by Hurricane Donna in 1960. American underwriting requires all the traditional phlegm of the British insur- ance man, combined with real business flair, if he is to earn a profit in a market with such fierce competition from local companies. After a period of underwriting losses, last year saw a modest improvement in the American business of British insurers, and a number of companies succeeded in making underwriting profits, while other companies reduced their losses. The larger British groups have carried out an intensive re- organisation of their business, and are hopeful that future years will see still further improve- ments.
One way in which insurance companies can reduce costs is by improving their own financial efficiency, and strenuous efforts have been made by many companies in this direction. Since 1959 there have been a number of mergers between leading companies which will lead eventually to major economies. In the early 1950s premium income in the insurance market was rising at the rate of about 4 per cent per annum, while in the early 1960s it has been rising at the rate of about 8 per cent per annum. During the same period the number of people working in insur- ance has increased by only about 15 per cent. So the companies may fairly claim that their performance has been considerably better than the 4 per cent growth rate set for the country by the National Economic Development Council.
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