month, I walked the old streets of Pompeii. That city of
some 20,000 people was destroyed in a matter of hours, by
Vesuvius in 79AD. Two months before, I wrote this column
from prosperous New Orleans. That city is now under water!
The hotels, the Convention Centre, the restaurants, the
people who worked there have all lost.
The only business enterprise that will come forward to indemnify
the loss of those people, businesses and homes is the insurance
industry. Yes, there will be humanitarian relief, and relief
from the Federal government, but only insurance will seek
to replace real property, with a value in terms of money.
That is indemnity. It is the insurance principle.
To indemnify a loss is to seek to return the victims of
the loss, to a financial position close to where they were,
prior to the loss, subject to the quantum they would have
contributed to the pool of funds set aside prior to the
loss, to cover the pure risk of loss..
For centuries, individuals have been willing to come together,
to contribute to a pool of funds, from which money will
be paid out, should a contributing member suffer a loss.
Long ago, in certain cultures, homicide not amounting to
murder, was deemed to be an accident, and was settled by
what was called blood money. The burden of the
financial implication was transferred to the larger family
group, and money would have to be paid out to the victims
In principle, there is nothing irreligious, or evil, about
such a social custom being organised into an enterprise
that pays people to advise, to assess the risks, to manage
the funds, or to disburse the funds. What is wrong is the
amassing of huge profits by the business enterprise, based
on unfair premium calculations and unfair claim settlement
The economic importance of mitigating the effect of loss
is very clear from the ravages left by hurricane Katrina.
If a business owner had to factor into the cost of his product,
the costs associated with a loss from fire, theft, flood,
the final price to the customer is likely to be prohibitive.
If the customers of the business had to pay for the destruction
caused by flood, the customer would not buy, and the business
will go bust. The entire economy would collapse.
It is the insurance industry that provides relief from this
level of distress, when the business can mitigate risk through
a periodic premium, shared by a large group of people with
similar risk. The large group makes it affordable, as compared
to an individual operating by himself.
If insurance as an organised system was removed from the
equation in the New Orleans floods, there would be an immediate
lowering in the standard of living, and in the level of
civilisation, for more than a generation.
The majority of us who didnt suffer the loss would
not be willing to make more than token donations to the
victims. We would remain focused on wealth creation for
ourselves and our successor generations, and remain judgemental.
And may I ask: who made us judges?
In Pompeii, you can see the House of the Dancing Faun, named
for the whimsical statue in the indoor fountain. The house
is believed to have belonged to Pompeiis military
ruler and wealthiest family. Its ruins occupy an entire
city block. It had four dining rooms, one for each season,
a winter garden and a summer garden. But for insurance,
some day, someone may have written about New Orleans in
much the same way.