Insurance—Its Progress and Problems
By SIR GEOFFREY KITCHEN* TFIE insurance industry speaks with one voice through the British Insurance Association, but it is by no means a homogeneous business. It divides in various ways. The main division is between life and non-life. Life sub-divides into ordinary and industrial; and ordinary life splits into individual life assurance and annuities and Pension schemes. Non-life splits into fire, motor, accident, marine, etc. Then there is a sharp division between home and overseas. And, finally, there is the important distinction between the channels through which business is obtained and serviced, through full-time field staffs as with the industrial-ordinary offices and the Dominion life offices, through part-time agents such as accountants, solicitors, bank managers, etc., and last but not least through the brokers, particu- larly for non-life and pension scheme business.
Little can, therefore, be said on the state of the business as a whole. The adverse conse- quences of the Finance Bill are, of course, of general concern, except perhaps to the tax-free friendly societies, including the large collecting societies doing industrial and ordinary life busi- ness. Their attitude to the Finance Bill may Perhaps be rather like that of the pedestrian Scotsman when bus fares are raised or the non- smoking teetotaller when the tobacco and drink taxes go up. But more about the Finance Bill later.
Let us start, then, with individual life assur- ance, taking industrial (home service) and ordinary together, as there is today little differ- ence between them except the frequency and mode of receipt of premiums and some rather archaic statutory restrictions in industrial busi- ness. Steady progress in individual assurances has been going on for years and still goes on. The Year 1964 as a whole was a good year, but in the last two months of 1964 and through 1965 to date there has been some slackening in the growth, due most probably to Mr. Callaghan's autumn budget. This not only added to the ordinary man and woman's indirect taxes, but also foreshadowed further direct taxes and in- creased National Insurance contributions from April 1965. A life policy involves a regular long- !Chairman, Pearl Assurance Company Limited.
term premium commitment, and some potential new policyholders and existing policyholders contemplating increasing their insurances must have been deterred by the prospect of, to them, indeterminate increased payments to the state. In some sectors of the business, there has indeed been some slight turn-down in new business, but before any financial writer makes this a factor in relation to share prices of the pro- prietary life offices, it needs to be said, first, that slight ripples on the steady growth of the busi- ness are of no real importance and, second, that a temporary slowing down of new business growth actually leads to some temporary growth in emerging surpluses due to the consequent reduction in the new business expenses. The flow of new life business is quite a sensitive indicator of the economic state of the general population, reflecting, on the one hand, the level of the margins in their incomes and their propensity to save, short term or long term, and, on the other hand, their inclination to spend on con sumption goods or on consumer durables.
Individual immediate annuity business has been booming in recent years. This is partly because of a combined scheme of annuity and life assurance, but the volume 9f business under this scheme has receded as a result of controls put on it by the life offices as a whole.' Ordinary immediate annuity rates have never been so• favourable as they are now, due, of course, to the current high level of investment yields that life offices can obtain on the purchase moneys.' This is helping, many elderly people with modest means to arrange their financial affairs to enable them to enjoy rather brighter lives in these days of ever-increasing prices.
Pension scheme business continues to grow of its own volition. Existing schemes generate new business as new employees are taken on, as earnings rise and as employers steadily im- prove their schemes for the benefit of their employees. New schemes are, however, more difficult to obtain. The remaining market is narrowing. Recently published figures show that something like 10,000,000 males and 2,000,000 females are already in occupational pension schemes of one sort or another, either in con-
nection with state or local government employ- ment or with nationalised industries or in privately administered or insured pension schemes. There remains, however, a large number of employees in small firms, each with a handful of workers, for whom pension provision still needs to be made. Efforts are being made to bring the benefits of the life offices' pension ser- vice to these people, but the tax authorities' requirements still militate against this group, and it is to be hoped that before very long some way of cutting through the tax-approval red- tape will be found so that this important gap in the pension coverage can be attacked in a big way and the full benefit of a tax-free roll-up of contributions and investment income can be provided for everybody.
Over the whole field of private pensions there is a big question-mark. How will private pen- sion provision be affected by the extension of the state pension scheme that the Government, and indeed the other parties, are actively investi- gating? Some way must be found in the national interest and in the individual interests of 12,000,000 or more workers by which their pri- vate pension provision and an augmented state scheme can live side by side.
Before leaving the life assurance business it is worth noting that in recent years there has been a strong growth towards life cover—by whole life assurance, by long-term temporary assurance attached to basic whole life and en- dowment policies such as family income benefits, and by policies of the mortgage protection type which are by no means confined to providing for the repayment of mortgages on the death of the house-owner. This movement is going on without in any way diminishing-the attractions of the ever-popular with-profits endowment assur- ance. These policies with the current high bonus rates, and even without counting the important income tax relief on the premiums, show a very satisfactory net investment return at maturity with, of course, the life assurance protection in the meantime.
Fire and accident (including motor) insurance business has, as is well known, been going through a bad patch so far as underwriting results are concerned. The year 1963 was particularly unfavourable because of the bad winter and 1964 made a better showing. Overseas, particu- larly in the US and Canada, things have been bad, although underwriting losses have overall been more than covered by investment earnings. A major underlying factor affecting the business is inflation. In fire insurance the premium is proportionate to the amount insured and, par- ticularly for domestic insurance, it is notorious that upward adjustments of the sums insured lag a long way behind the growing money value of the insured property. Thus the increases in premiums are inadequate. Motor insurance premiums are only slightly geared to the value of the cars and are really not geared to changing money values at all. Ad hoc upward adjustments are made from time to time, but they always lag behind grow- ing wage-levels, which largely determine the cost of repairs and the ever-growing levels of com- pensation for personal injuries. There is little space for comment on the McKinsey report on the administration and costing of motor insur- ance. Suffice it to say that there are deep con- siderations at the technical level that call for intensive study and that there is no room for gimmick solutions.
The effect of the Finance Bill on the interests of policyholders and the shareholders is uni- formly adverse. The non-life companies will be
particularly hit by the treatment of overseas earnings and the proprietary life companies will be hit by the combination of corporation tax on investment income, less expenses. and income tax on distributions compared with the present system of income tax on investment income, less expenses. and profits tax on distributions.
Finally, a word about the taxation of capital gains as applied to life offices. The full impact of the corporation tax on their capital gains, including the important incidental gains on in- vestment switches, is quite unfair, particularly for the large industrial branch funds comprising the combined savings of the bulk of the wage- earners of this country. Various suggestions for alleviation have been made and turned down by the Chancellor. It is to be hoped that light will in due course dawn on the powers that be, and perhaps the best provision would be to relieve a substantial proportion, say one-half, of the policyholders' share (commonly 90 per cent) of the capital gains.
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