In the City

The threat to insurance

Roy Assersohn

The thrifty have had to accustom themselves to watching their savings being eroded by inflation and taxation. They may soon have to suffer the further indignity of seeing their money used as a subsidy for the social and economic policies of ambitious politicians. And the twenty million or so families whose savings are so threatened are blissfully unaware of the implications contained in the Labour Party's policy on the financial institutions.

Although the Prime Minister has rejected the outright nationalisation of the largest High Street banks and the seven biggest insurance companies as 'an electoral albatross', Labour still very much wants to control and direct the investments made by insurance companies. It is a sinister proposal, not only because it is founded on cant and ignorance of the facts, but also because it strikes at an important basic freedom.

Four out of five households in Britain pay premiums to life assurance companies for a wide range of policies giving them protection or investment or a mixture of both. These premiums, together with the contributions paid into pension schemes operated by the insurance companies, provide an average of £8 million of new money which is available for investment every working day of the year. That makes the 220 life companies the most powerful group of investors on the Stock Exchange, and thus one of the most important sources of capital for industry. It also makes the biggest of them a target for those who believe that such power should not rest with private enterprise, but rather with the State.

The Labour lobby, misguidedly, believes that the government should be empowered to direct the insurance companies where they should invest for the common good. With British industry suffering from lack of investment as it is, they argue, insurance company funds should be directed to help rejuvenate those areas of the economy which North Sea oil money will not reach. That sort of investment, they believe, will not take place unless the government implements such a 'socially responsible' policy.

It is a dangerous argument and fraught with perils for the twenty million families, who, having paid their premiums, and collected the tax relief, care little about what happens to their money subsequently. For what the direction lobby chooses to forget or to ignore, is that the money it would like to direct belongs not to the government, nor to the insurance company but ultimately to the policy-holder. Sooner or later the policy holder has to fall back on the investment expertise of those whose job it is to ensure that the life companies' funds grow sufficiently to meet all future liabilities in the form of bonuses to be paid on endowment policies, annuities to the elderly, the proceeds of a life policy to the bereaved and pensions to the retired.

Prudence, experience and objectivity have ensured that the large and respectable companies have sufficient in their coffers to meet all contingencies. Within well defined financial parameters the life companies have had the freedom to invest their policyholders' premiums with maximum security and for adequate returns. The companies fear that the erosion of that freedom will introduce an element of political motivation into investment strategy and that they will be forced to invest in those areas of industry which they would otherwise avoid, namely the unprofitable sectors.

That would be a mis-use of policyholders' money at the behest of the politicians. And it is asked why the thrifty policyholder should be forced to subsidise the economy when this should fall on taxpayers as a whole. The answer, of course, is that it should not be allowed. Otherwise millions of men and women, who, having freely committed themselves to paying insurance premiums or pension contributions over a period of a quarter of a century, would have impotently to watch the state threaten their expectations for their savings.

Unlike the banks, the life assurance industry, deeply concerned though it is about the prospect of direction of its funds should Labour win the next election, has chosen until now to keep a low profile. A phoney truce has enveloped both sides since the appointment by the Prime Minister of the committee, headed by Sir Harold Wilson, to examine the sources of funds for industry. This has deferred the whole question of direction of investment until after the committee reports.

The insurance industry has pointed out in its written evidence to the committee how detrimental direction of investment would be to the interests of policyholders: 'What we are afraid of is that direction of investment will be taken as a compromise between the status quo and full nationalisation,' says Peter Sharman, chairman of the Life Offices Association, 'We see direction of investment as a very serious threat which has the support of a lot of Labour supporters.'

The insurance industry has another opportunity to put its case when it gives oral evidence to the Wilson Committee on 8 November. And this week our seven biggest insurance companies which were named as nationalisation candidates fired a salvo in their defence. The companies, Commercial Union, Prudential, General Accident, Royal, Legal and General, Sun Alliance and Guardian Royal Exchange published a twenty-three page booklet in answer to the Labour Party's policy. In it they point out how the insurance companies have kept industry supplied with investment funds and that it is the reluctance of companies to borrow, rather than an absence of available funds, which accounts for the low level of investment in Britain.

The life companies as a whole last year had just over £2,000 million of new money to invest of which £200 million went into equities (i.e. investing in industry) compared with £300 million the year before. The rest was spread over government securities, property, loans to companies, mortgages and in foreign and commonwealth stocks. Of the total £22,000 million of life assurance company investments in Britain around £5,000 million was in equities last year, £4,400 million in government securities, £4,400 million in property, £2,600 million in various forms of finance for companies and the remainder in stocks and mortgages.

Those who support the direction lobby and argue that a bigger proportion should go towards financing investment to create new jobs either directly or indirectly miss one important point. The basic function of a life assurance company is to match its, liabilities in the future and not, as many critics of the industry believe, to invest for short term gains in the stock market.

While the ordinary voter/policyholder is not aware of the direction of investment policy and its implications, the Prime Minister is conscious of the political ramifications of including anything on nationalisation in Labour's next election manifesto. He will undoubtedly be taking behind the scenes soundings on what the Wilson Committee is likely to propose to avoid any conflict with Labour's election policy. In the meantime the life assurance industry has opened its portals a little more in the cause of its continued independence.

Somewhat belatedly the life companies, one of the last bastions of City mystique, has woken up to the fact that only five per cent of its customers have any idea of what happens to their money once the premiums have been paid. So the industry is spending £600,000 on trying to re-educate the public. And in the privacy of the Life Offices' Association's dining room in the City, a process of persuasion and indoctrination has been started. Several times a week, Members of Parliament, trade unionists, including Len Murray (his private views, said one insurance man afterwards, are not so extreme as they appear in public) are wined and lunched. So too are leader writers on newspapers, and other opinion makers. That in itself is an indication of the depth of concern in the reactionary stronghold of the life assurance industry.