Public Liability Crisis: Insurance for profit is a fraud on society

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Rural doctors afraid to practise, private midwives barred from delivering babies, tourist operators forced out of business, houses standing half built, sport and not-for-profit activities suspended as insurance premiums increase by up to 1500%. For many working people, small businesses and communities, the withdrawal of insurance cover is having dire consequences.

There is certainly a crisis for the victims of the insurance debacle. Yet the “crisis” is not what it seems. The turmoil in this specialised part of the finance sector does not arise from increases in litigation or huge court payouts. It is not a result of the collapse of the criminally mismanaged HIH insurance group. And it has little to do with the so-called war on terrorism. For while it is true that both events hit financial markets hard, there should be no reason for the catastrophic disruption to economic activity. The real issue is that insurance and the profit motive are mutually exclusive. Historically, insurance was about the worthy idea of sharing risk — either of personal injury or financial loss, among all of the members of a particular community or group. Some form of insurance is essential to any healthy society. The profit system, on the other hand, is about private gain at the expense of society as a whole. The notion of social solidarity embodied in shared risk is distorted beyond recognition when that risk is bought and sold for profit. Over the last 250 years, the withering away of the old system of “mutual aid societies” in favour of large “for profit” corporations has moved the insurance sector ever closer to the brink of collapse. The vast reserve funds needed to cover liabilities have been gambled on ever more risky speculative investments, currency manipulation and the now-burst “new technology” bubble. The global insurance industry is about to hit the wall — and we’re supposed to pay for it

Managing risks.  Chinese merchants first used a non-cash form of insurance around 3000 BC, and a form of legal insurance, known as “bottoming,” was included in the Babylonian Code of Hammurabi in 1750 BC. In a “bottoming” transaction, a merchant paid a fee on top of the amount borrowed to purchase goods. If the goods were stolen, or the ship sank, the loan was not repayable. The craft and merchant guilds of the Middle Ages provided support for members. However, the modern insurance industry can be traced to a single event: the Great Fire of London, which gutted much of the old City in September 1666. The following year, one Nicholas Barbon set up The Insurance Office behind the rebuilt Stock Exchange. From fire insurance, it quickly became possible to purchase indemnity against all kinds of risk, and in 1688, Edward Lloyd turned his coffee house into the first mercantile insurance broking establishment, where wealthy risk takers would, for an agreed premium, sign their name under the terms of a contract. These were the original “underwriters.”

In 1771 Lloyd’s became an unincorporated association where members could join the list of “Names” through the payment of 100 pounds sterling. In exchange, they shared any profits from the enterprise. Similar arrangements were made by other London companies and by companies in all European capitals, based in part upon the philosophies of the by-then obsolete guilds.

To market, to market! The American Revolution cut the merchants of the United States off from Lloyd’s, and so they formed insurance companies of their own. However there was one crucial difference — most of the new American companies were not mutual societies, but, in keeping with the “free market” zeal of the emerging U.S. capitalists, were listed on the stock exchange and administered by professional managers.

This development contained the seeds of the present global insurance industry crisis. The Names of Lloyd’s, and members of similar syndicates, benefitted from mutual obligation and shared risk. In contrast, the stockholders were not necessarily part of the industry at all, risking only the value of their holdings, and profiting only when the price of their portfolio increased. As with all other listed industries, the main game grew to become the exchange of the stocks themselves, rather than the “core business” of the listed entities. This is not too much of a problem in, say, the manufacturing industry, where the ratio between the price of stocks and the value of goods produced can vary only so far before the market “self corrects.” Nothing brings an industrial or retail company’s share prices down to earth like warehouses full of unsold goods!

But insurance is different. Insurance companies base their businesses upon the assessment of risk — that is, a more or less scientific estimate of whether a particular hazard will befall a business, individual or industry. This is not that far removed from gambling. In fact the English word “hazard” comes from the Arabic al zahr, meaning “the dice”!

It is therefore essential that insurance companies maintain a healthy, protected cash reserve to guard against unforeseen events. After all, by the mid nineteenth century, these companies controlled the lion’s share of the reserve fund for the entire capitalist class of a given country. The cash flow of an insurance business revolves around the prudent management of its reserve against both current and future claims by matching average premiums to average payouts. Profits arise from the investment of the reserve. It is imperative that such investments preserve its integrity. So, even in the heyday of laissez-faire capitalism, the stock market kept a very sharp eye on the activities of the insurance sector, and when the inevitable disasters happened, there was not much complaint when the government stepped in to regulate minimum cash reserves.

Gambling in the global casino. At some point in the last 20 years, regulation of the insurance industry evaporated. Perhaps a future historian will be able, after careful analysis, to fix the date. In any case, the absence of supervision meant that the boards of insurance companies across the planet felt free to dip into their reserves in order to “maximise shareholder value.” This  translates as “I’ll see your bet and raise you a billion.” Welcome to the high stakes game called “derivatives.”

Derivatives are financial instruments that have no value of their own, but derive their value from some other asset. An agricultural company might protect its exports against a rising Australian dollar by taking out an option on the value of the shipment in U.S. dollars at some agreed time in the future. And then prays that the value of the $AUD doesn’t fall in the ensuing interval, thus resulting in a loss as the foreign currency debt becomes due. Just about anything can be used as a hedge, but the risk is high — much higher than ordinary share trading.

Derivatives only “work” in a volatile market. If share and commodity prices do not fluctuate widely, then there is little percentage in gambling. Insurance executives and pension (superannuation) fund managers, among others, have deliberately fuelled the volatility of the markets through currency speculation and by promoting the trade in derivatives. This is shrugged off by financial analysts as simply an extension of the “core business” of the fund managers, the insurance companies buying risk to share it around, and the pension funds “growing” the assets of their investors.  Some of them made a killing on their bets — they took the gains, and the funds took the losses. The oceans of “other people’s money” are now effectively the private stash of the planet’s most reckless gamblers.

HIH: where greed met stupidity. The HIH group is in liquidation, and it’s easily the largest corporate collapse in Australia’s history. This huge insurer, run by a couple of corporate gambling addicts, has debts — actual and potential — of some 8 billion dollars. Yet it had tens of thousands of corporate customers, lucrative government accounts in areas like Traffic Accident and Workers’ Compensation Schemes and hundreds of thousands of ordinary policies supposedly “owned” by ordinary workers and small businesses. All down the drain. All covered up by shonky executives, corrupt auditors and weak regulators — until, by April 2001, it was no longer possible to hide the truth.

HIH executives, Larry Adler and Ray Williams, were so distracted by greed and egotism that they forgot the first principle of investment theory: you cannot expect to make large profits without risking large losses. HIH collapsed through reckless manipulation of share prices, speculative takeovers and suicidal ventures into property management and the British film industry. It grew too fast, some of its directors were manifestly corrupt, and most of its activities had little to do with covering the losses of policyholders. It suited politicians that HIH premiums were artificially low, because it was popular with the electorate. Other insurance companies, and mutual societies, most notably United Medical Protection — which covered about 60% of Australia’s doctors — were forced to cut premiums to survive. When, too late, the regulators cracked down on cash reserves, UMP was caught out, unable to raise sufficient cash to cover its projected claims. Which is why we may have no viable private health system from January 2003.

Nor is UMP alone. On June 15, it was revealed that the government was to bail out one hundred and eighty one superannuation funds whose managers, Commercial Nominees of Australia (CNA), had gambled away the life savings of hundreds of retirees. Investors in nearly 300 other schemes stand to get nothing. There are strong rumours that CNA is not the only superannuation “manager” with major cash flow problems. Thousands of retired workers are about to find that their life savings have been stolen — while the government looked on.

September 11 — the cupboard is bare. Westfield Holdings bears little resemblance to Old Mother Hubbard, of nursery-rhyme fame. Except for one thing — the giant property developer, which had a 99-year lease on the twin towers of the World Trade Centre, is about to be bitterly disappointed. Soon, it will finalise its insurance claim — as will thousands of other claimants, from individuals to airline companies. And it will likely be told — “Sorry, we can’t pay.”

Reinsurance is meant to be the insurance companies’ “insurance policy.” In really big insurance contracts, a consortium of insurers will accept the risk, passing on a proportion to reinsurers. If a claim is made, they pay in proportion to the percentage they have agreed to cover. The World Trade Centre was insured like this at the base level. But then it gets complicated. One group of insurers has responsibility for the first $200 million or so. Then another group will come in and so on until an arrangement called the “sleep easy” policy kicks in. This covered the building in an absolute worst-case scenario. It is extremely rare for these policies to pay out. Taking into account all the possible claims arising from September 11, it is estimated by some experts at $US57 billion, provided that the event is treated as one incident. But there were impacts by two planes — which could very well be treated as two separate claims.

Here’s where the “sleep easy” turns into a nightmare. The global insurance industry is, in the view of ratings agency Standard and Poors, “under grave pressure.” There’s not nearly enough money in the global insurance kitty to cover the WTC bill. Lloyd’s of London faces nearly $US700 million in liabilities, and some of its 108 backing syndicates face certain collapse. Swiss Re[insurance] faces a similar burden, while Allianz, ACE, Chubb and 19 other insurers are in only slightly less trouble. Worse, George Bush’s war rhetoric has given Swiss Re and other insurers of last resort the excuse to consult lawyers about invoking “war exclusion clauses.”

Insurance “experts” are claiming that they could not have foreseen the WTC/Pentagon attacks, nor their devastating consequences. The insurance industry only keeps $US20 billion in ready reserve. In terms of the WTC, there was little consideration of what would happen should a plane hit one or both of the towers (even accidentally), because the risk was considered low. But after the 1993 bombing, it was clear that the precinct was vulnerable to a terrorist attack. And that should have set alarm bells ringing, because it was already known how structurally vulnerable the towers were in case of a hot fire. The terrorists certainly knew this, after all — that’s why some of them had studied structural engineering.

Now in a panic, insurance brokers around the world are withdrawing from “high risk” cover. There would be no international or domestic airline industry today but for the fact that governments have agreed to indemnify the airline companies. The owners of large buildings are finding it impossible to get insurance — which is why the Australian government, for example, is quietly moving to back the potential losses of property managers in Sydney and Melbourne. And it’s why Australian state governments have been forced to back the building industry after the main local insurer withdrew from the market, following the cancellation of its reinsurance contract by international broking companies.

Protection money — the Public Liability scam. None of this should have had any effect on the general insurance market — and in some sectors it hasn’t, yet. Transport Accident, Workers’ Compensation and, to a lesser extent, household and vehicle theft insurance, are highly regulated, with mandated capital pools and government audits. They generally operate on a strict cost recovery basis as a minimum, which is why governments had no trouble arranging for other insurers to take on these policies from HIH.

But then there is public liability insurance, which indemnifies businesses, community groups, sporting clubs and the like against the cost of accidents arising from their activities. All over the country, from rural doctors, to suburban netball teams, newsagents, lifesaving clubs and even the Returned and Services League (RSL), people are being slugged with exhorbitant increases in premiums and excesses — if they can get cover at all. Currently, for example, private midwives in South Australia can’t work, because their activity is allegedly too risky to insure.

Yet is anybody prepared to argue that childbirth is getting more risky as medical technology improves? Is horse riding today any more hazardous than yesterday? In the history of ANZAC Day marches since 1919, have there been more than a handful of minor claims for trips and falls?  Of course not! And while the market dominance of HIH did lower premiums too far, the current price rises are highway robbery. Nor is it a question of more litigation and bigger payouts. Leaving aside the series of natural disasters that have hit Sydney in the past five years, there has been no increase in the annual amount of court-awarded payouts, and only a moderate increase in the number of claims. Sure, there have been a few very large settlements, but these are rare. The increase in claims is easily explained — as the social security system is dismantled, people attempt to look after themselves by seeking relief in the courts. In countries where there is still a decent welfare safety net, there is no so-called epidemic of court cases.

In the 1980s, insurance companies engineered a similar crisis in the United States. A number of states then enacted restrictions on access to the courts. But in 1987, the U.S. industry’s own report admitted that restrictions had little, if any, effect on premiums. The local insurance industry is using the excuse of the HIH collapse and the September 11 attacks to try and privatise insurance for the general community — by forcing people to rely on their own resources. Meanwhile it enjoys relief to the tune of at least a billion taxpayer dollars in the form of government guarantees. The so-called crisis in public liability insurance is old-fashioned extortion.

Insure the poor — tax the rich. Insurance for profit is a recipe for chaos. The way out of the mess is not to throw wads of banknotes at private companies. It is simply obscene that, while the government seeks to make the poor pay more for medicines and to dump disabled workers off their pensions, it is prepared to write blank cheques for large sectors of industry. The airline industry wants taxpayers to cover its future losses without any control over how these losses may be incurred. No way! If Qantas can’t fly because it’s uninsured, it must hand back its terminals and its taxpayer-funded fleet. If private doctors can’t work because of the insurance extortion scam then they must surrender their practices in return for award wage positions in the public health system. Abolish inefficient health for profit and expand the public sector!

The point is that if these private companies and élite professionals want government money, then they have to pay a price — open the books and hand over control. Any future claims for damages would be more than covered by the removal of the profit component and corporate rorts like the private health insurance system.

Once upon a time, the community had an arrangement for mutual support. It was called a universal social welfare system. Never perfect, it was still vastly superior to the “work or starve” operation run by the current government. A perfectly affordable solution to the problem of insurance for personal injury is a welfare system where one is treated, rehabilitated, cared for and paid a living wage for as long as it takes to recover from an injury or illness. There might even be extra compensation for pain and suffering according to an agreed scale.

All this would be funded by making the wealthy and big corporations actually pay the taxes they’re supposed to  pay. And by abolishing all the tax dodges accessible to them, but not to working people. The whole scheme would be controlled by local, regional and national elected boards. People would still be free to sue if they wanted — or they could assign this right to the government, which has much more likelihood of legal success.

In a socialist society, this is exactly what would occur. Socialism is based on mutual responsibility and solidarity. A universal welfare system is completely affordable in this country, now — the capitalist class has the funds to cover all of us against any adversity, and for life if necessary.  It’s not that capitalists can’t pay, it’s that they won’t pay. The dismantling of the welfare system has one aim — to redistribute wealth from the poor to the rich. Demand a reversal!

Insurance is vital to society, but insurance companies are not. Let the standover merchants go broke! Social welfare, not corporate handouts. Don’t subsidise — nationalise!

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