Whatever happened to insurance?

Life insurance salesmen used to be taught they had three jobs, to help the dependents of those who die too soon, to help people who cannot work through accident or sickness and to help people who live too long.

We were taught that life insurance worked through a system of pooling and that life insurance companies simply brought large numbers of “lives” together to create those pools and take a cut for managing premiums and reserves for large claims.

Nowadays, life companies rarely take risks directly, they lay them off as bookies lay bets off, through a system called reinsurance that is part of the efficient functioning of the market. Insurance companies are financial intermediaries.

It is now possible , I am told , to point a laser at someone and get a pretty good idea of when they will die. Barring accidents, we can be confident about life expectancy from person to person through “advances in medical science”. This confidence would increase still further if we could apply genetic testing to underwriting.

But ,properly, limits are put on these intrusive techniques which have profound consequences on individual behaviour.

This high degree of certainty has filtered through into the pricing of pensions, especially the individual annuities that most of us have to buy with our pension savings.

At the moment there is a flourishing market in “enhanced annuities” (enhanced sounds better than “impaired life” annuities. Before long everyone will it seem be individually assessed for life expectancy and all that will be left to chance is the possibility of being killed by accident.

This scientific approach has social advantages. Most importantly it improves the pensions of those who have least (who are also those with lowest life expectancy). An existing cross-subsidy with the pot-rich super saver actually disappears and so the well-off get less value from individual annuities.

But the pot-rich have a get out, they can afford advice and have the money to draw-down from their pots. They absent themselves from annuity pooling altogether.

So what we end up with is no pooling at all. It has been predicted that soon all annuities will be individually underwritten and that the pool will be a thing of the past.

So long as we understand the process and don’t get left behind in a “stagnant pool” made up of people who can’t be bothered with getting themselves underwritten, we should all be taking less risk when buying a pension- the rich preserving capital through drawdown, the rest of us getting what our health deserves.

But somewhere along the way, we’ve lost something. We’ve lost the solidarity across large numbers of people of the same age and we’ve lost the cross-subsidies from one age group to another that provided the belts and braces to the system of social support we had in place to look after our elderly folk.

For when you say “every man for himself” at retirement, you will be bound to continue the logic for long-term care and soon you get to a point where those who have not got the resource do not get looked after.

At a more fundamental level, the principal of every man for himself is a justification for all of us abnegating age-old responsibilities for our looking after the elderly and infirm, whether family or friends.

Ironically both the principles of self-reliance and of the Big Society are embraced by conservative dogma. They are uneasy bedfellows but they create a social dynamic which seems to work. We must not allow one to eat another and this is what we could do if we abandon the mutual pools of the insurance I grew up with.

The principal of mutuality is fundamental to insurance. Pooling of risk accepts cross subsidies some fair – some not fair. It accepts losers and winners. It works where information levels are low and where appetite for decision making is even lower.

Ironically, many of those in Government who espouse self-reliance will rely for their retirement benefits on pools. The Civil Service pension pool, the Local Government pension pools and the smaller pools for judges and politicians. These pools provide defined benefits for the lawmakers and the law enforcers within Government and are ultimately insured by the tax-payers for whom it’s “every man for himself”.

I won’t labour the point but it’s also worth remembering that 11 of the 100 largest DB pools  in Britain cater for the employees of insurance companies.

If this sounds like me heading into the chippy world of Michael Johnson and those who want to dismantle the remaining mutual infrastructure, then it shouldn’t. We can allow these to be replaced by the “every man for himself” mantra.

Rather than calling for the dismantling of the pooling arrangements in the public services, I wish to see a move back towards their mutuality for those in the private sector.

My friend Alan Higham has recently written a proposal to use the massive powers of the remaining workplace pension providers to reintroduce a minimum level of death benefit for those enrolled in pension saving and a minimum level of protection in retirement for those who participate in such saving. His idea is that pools be established alongside the retirement savings that pay for benefits for the unfortunates who need extra care.

Effectively this is a return to the values I was taught in 1983 when I entered the insurance industry. If the man on the Clapham Omnibus was able to feel secure that he was insured against living too long, dying too soon or losing an income through sickness, mightn’t we have a simpler and more stable platform on which to build?

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Whatever happened to insurance?

  1. Insurance has long been about a pooling of probabilities, with the result being people who died too soon – as you say – knowing that their families would be cared for properly. As insurance companies are able to collect and use more and more data about customers, finer divisions are setting in. Hopefully, a medium will be found and insurance will not become too different a beast from the one we remember.

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