Sunday 4th September, 2005


Insurance: Bearing each other’s burdens

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Last 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 victim’s family.

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 practices.

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 didn’t 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 Pompeii’s 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.

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