Beveridge: Change 23 Industrial Assurance Board

Change 23.   Conversion of the business of industrial assurance into a public service under an Industrial Assurance Board.

181.   The business of industrial assurance is life assurance conducted with the use of collectors, that is to say, it is life assurance in which the premiums are received by means of collectors who make house to house visits for that purpose at weekly or other short intervals. Life assurance in which the premiums are not collected or are collected at intervals of two months or more is described as “ordinary” life assurance.  The offices undertaking industrial assurance are described as Industrial Life Offices. They are of two kinds known as industrial assurance companies and   collecting  societies  respectively;  the companies themselves are divided into proprietary companies paying dividends to shareholders and mutual companies.  Beginning as insurance for burial expenses, the business has developed to include insurance for a variety of expenses that may arise at death, and life and endowment assurance generally, among persons of limited means; it is now very large. In 1939 there were 103,000,000 policies of industrial assurance in force, more than two-and-a-quarter policies for every man, woman and child in Britain. There were about 65,000 full-time collectors in addition to several thousand part-time and spare-time collectors. The premiums received were over £74,000,000, and the expenses of management were nearly £24,000,000 in addition to dividends to shareholders amounting to over £1,750,000 after payment of £1,600,000 income-tax.  In addition to premiums, the Industrial Life Offices received in  1939 about £20,000,000 as interest,  representing the return on accumulations of earlier premiums.  The premium income was nearly two-and-a-half times the total contributions of employers and insured persons  to national health insurance; that is to say, it was equivalent to the amount that would be raised by a contribution in the case of national health contributors of 1/10 a week for a man and 1/9 a week for a woman.

182 Though the total number of Industrial Life Offices is 160, nearly 90 per cent, of the whole business is concentrated in eight large offices, the Prudential, Pearl, Liverpool Victoria, Refuge, Co-operative, Royal London Mutual, Royal Liver and Britannic, each with a premium income in 1939 of more than £4,000,000 a year. All the larger offices except (in England) the Co-operative, have associated with them Approved Societies engaged in administering health insurance through the collectors engaged on industrial assurance. Most of the large offices undertake also a growing volume of ordinary life assurance, The premium income of their ordinary branches in 1939 was about £30,000,000 a year; a considerable proportion of this business is done with people who hold industrial policies as well.

1. The main facts as to the business of industrial assurance, the criticisms which have been made on it in the past and the reasons leading to the proposal made here for converting it into a public service under an Industrial Assurance Board are set out fully in Appendix D, to which reference should be made. Here they are given briefly :

2. Two of the proposals made above as integral parts of a comprehensive scheme of social insurance, namely supersession of the approved society system in its present form of giving unequal benefits for equal compulsory contri­butions (Change 3) and provision of funeral grant for all deaths (Change 18) affect directly the work of the Industrial Life Offices.   Though much of the business undertaken by these offices, particularly their large and growing endowment assurance and the work of their ordinary branches, would not be directly affected by these proposals, the whole of their work probably depends for its economical and effective administration so much upon associa­tion with health insurance or on provision for funerals, that it is doubtful if any satisfactory or just scheme dividing the work of the offices could be devised.   Moreover, to divide the work would deprive the administration of health insurance, to some extent at least, of the service of the present skilled staff.

3. Industrial assurance as now conducted has an excessive cost of administration. Including expenses of management,  dividends to share­ holders and income-tax, all of which are costs from the point of view of the policy-holder, the cost ratio of all the Industrial Life Offices taken together in 1937-40 amounted to about 7/6 in the £, or 4 ½ d. in the 1/- of premiums. That is to say, of every 1/- paid by the policy-holders only 7 ½ d. goes to the assurance fund. While a relatively high administrative cost is inevitable, so long as collectors are used, the actual cost is higher than necessary even with collectors, as is shown by the success of some of the larger companies in reducing their expenses of management materially by rationalisation.   The business of industrial assurance could not have been built up without collectors, but it cannot be admitted that weekly collection of premiums is a permanent, indispensable requirement for securing regular voluntary contributions from persons of limited means. The centralised Friendly Societies have an adminis­trative cost of 10 per cent, or 2/- in the £ of contributions. (See Appendix E, para. 23.) The Hospital Contributory Associations and the War Savings Committee are able to obtain small regular savings in peace as in war at a very small fraction of the administrative cost involved in industrial assurance.

4. Industrial assurance as now conducted is pushed in the interests of the Industrial Life Offices and their agents as sellers of insurance to a point beyond the interests of the public as buyers of insurance. This is shown both by the high proportion of their total incomes that is devoted to industrial assurance by persons of insufficient means and by the high proportion of abortive insurance, that is to say, of policies failing to reach maturity. In each of the three years just before the war the number of policies in six of the largest offices which, after some premium had been paid on them, ended prematurely, by lapsing, surrender for cash, or being made free for a reduced sum, was about two-thirds of the total number of policies issued and taken up in the year; more than half of this two-thirds were forfeited completely. From these returns for six large offices, it may be estimated that, taking all offices together, there were issued in each of the last years before the present war about 10 million policies and that each year about 6| million policies ended prematurely.   Of these, ¾ million were policies not taken up; about 3 ¼ million were forfeited outright after the policy had been taken up and premiums had been paid on it; about 2 ¾ million were converted into free policies for reduced sums or surrendered for cash. All the premiums paid on these policies had borne their share of the high administrative cost of collection. A higher proportion of abortive policies is probably inevitable in industrial assurance than in ordinary life assurance in view of the limited means and economic insecurity of the policy-holders. This makes it all the more important to remove the pressure upon the public to insure which results from the financial interest of the offices and the terms of remuneration of their agents.

5. Every independent Committee which has investigated the business of industrial assurance in the past—the Select Committee of 1889, the Parmoor Committee of 1919-20 and the Cohen Committee of 1931-33—has made strong criticisms on the conduct and results of the business. The last of these Com­mittees attributed the “principal defects” of the business to “excessive competition with its almost feverish pressure for ‘ increase ‘ ” While ruling out nationalisation of industrial assurance “as it now exists” as not a practical proposition, they added as a final sentence to the main body of their Report the following words: “We are convinced that if the changes which the due protection of the assuring public demands cannot be effected by less drastic measures the difficulties in the transference of the business to a single organiza­tion to which we have referred at length will ultimately have to be faced.” No effect has been given to the proposals of the Cohen Committee for changes in the law of industrial assurance. The Industrial Life Offices have taken steps to meet some of the criticisms of this and earlier Committees, by grant of surrender values and free policies in place of lapsing and in other ways. But on the main subjects of the Cohen Committee’s criticism—high cost of administration and high proportion of abortive insurance—the position was not substantially different in 1937-39 than at the time of the Committee’s Report. Though many changes and improvements have been made in the business, there is no sign of a radical change, and no prospect of any general large reduction of administrative costs. Since the date of the Parmoor Report the largest of the life offices, the Prudential, with a premium income in 1937-40 of nearly £24,000,000, has by rationalisation of its staff decreased its expenses of management by one-third. The two next largest proprietary companies, the Pearl and the Refuge, with annual premium incomes in 1937-40 of about £9,000,000 and £6,000,000 respectively,  have decreased their expenses of management by about one-quarter. These are noteworthy achievements, but they leave the total cost ratio in 1937-40 of the proprietary companies as a whole at 36~3 per cent, of the premiums and they cover only a part of the whole field of industrial assurance. In the fifty years from 1887 to 1937-40 the four chief mutual offices  (societies of companies) operating throughout that period have reduced their expenses of management only from being 44 per cent, of the premiums to being 40 per cent, of the premiums. During that period of fifty years, the premium income on which these percentages are charged has risen from under £1,000,000 in 1887 to nearly £18,000,000 in 1937-40; the business of this group of offices has been growing more rapidly than that of the Prudential.  In this group of offices recognition of book interest, that is to say, of the right of each agent to nominate his successor and in effect to sell his book, practically excludes the prospect of any large change of terms of service or reduction of costs.

6. The proposal to transfer life assurance among persons of limited means from the sphere of commercial undertaking to that of public service rests upon two sets of facts which distinguish such life assurance both from ordinary life assurance and from most other forms of business. In the first place, life assurance is a contract for life or for a long period of years. It is not an article in regard to which the buyer can, without loss, change his purchase or his seller, if he is dissatisfied. He cannot, having bought insurance from one company one day, buy less insurance or different insurance another day, as he can change his grocer or buy less of an article which he can no longer afford. Life assurance is also an article of whose value in relation to other things it is difficult for the buyer to judge. It is important, therefore, that in buying life assurance persons of limited means should be guided by advice from the seller which is wholly disinterested. This does not apply to life assurance by people who have larger means and in general can have recourse to skilled, disinterested advice. In the second place, industrial assurance is now so closely associated with other forms of insurance that are either already the business of the State (health insurance) or should, as a means of reducing costs to the public, be undertaken by the State (such as funeral insurance), that it will probably be less difficult and more advantageous to make the association still closer than to break it up. The difficulties seen by the Cohen Committee in transferring the business to a single organisation are probably now less than the difficulties of dividing the business, which is the only alternative.

7. In addition to these two features, as to which there should be general agreement, industrial assurance has a third distinguishing feature, in judging of which there may be differences of opinion, namely, that it is a business requiring little or no investment of capital. The Parmoor Committee pointed out that “the share capital of industrial assurance companies exercises much less important functions than that of commercial or manufacturing under­ takings,” and added that ” in these circumstances the case for high dividends appears … to rest upon somewhat slender foundations.”  Since the date of the Parmoor Committee, the industrial assurance companies have increased the share of valuation surpluses going to policy-holders and in other ways have improved the terms offered by them.  But largely increased sums continue to be paid as dividends on capital which either has not been increased or does not need to be increased. All the money to speak of in industrial assurance has come from the policy-holders. The large dividends to shareholders are only to a very limited extent payment for necessary services by capital. Conversion of the business of industrial assurance into a public service would involve the creation of a statutory corporation, that is to say, the setting up of an Industrial Assurance Board which would naturally to a large extent be founded on the experience and abilities of those now engaged in the business. The Board would have a statutory monopoly of the use of collectors and would be authorised to undertake life assurance, whether through collectors or otherwise, up to a low maximum sum assured, say £300. It would take over all the existing policies and honour them, safeguarding the rights of every policy-holder. It would compensate the shareholders. It would employ or compensate the staff, including dealing fairly with book interest, that is to say, with the valuable right of agents in certain offices to nominate their successors and in effect to sell their books. There will naturally be many difficult problems to solve; in particular that of the line which should be drawn between the business taken over and that not taken over. There will be difficult problems of transition, involved in the introduction of the State funeral grant. But transition will be more easy if industrial assurance is made a public service than if the alternative plan is adopted of leaving it to continue as a competitive business in a restricted field.

8. Once established, the Industrial Assurance Board would set out to encourage more economical methods of insurance and saving than are repre­sented at present by industrial assurance; would reduce the staff required for collection as rapidly as this could be done without hardship, and would at he same time place the staff at the disposal of the Ministry of Social Security for other work in the field of social insurance, whether in connection with health insurance or with other forms of insurance. The collectors now visiting at short intervals most of the houses in Britain have become in thousands of cases the friends and advisers of the families with whom they deal. Many of them are in effect travelling Citizens’ Advice Bureaux; they regard themselves as servants of the public. They can find in a new relation a better opportunity and not a worse opportunity of living up to that ideal.

9. The proposal made here is bracketed; that is to say, it is not essential to the whole of the rest of the Plan for Social Security. The alternative (assuming the acceptance of the changes which are necessary, in relation to Approved Societies and in relation to a State funeral grant) is to leave to the Industrial Life Offices as business concerns the great and growing sphere which would still remain—of insurance for indirect expenses connected with funerals, of life and endowment assurance for purposes other than funeral expenses, and of insurance against minor needs. That is a possible alternative, but presents almost as many administrative difficulties as that of the proposal made here. It does not yield as good results to the public. It makes more difficult the problem of doing justice to the existing staff. It means a greater not a smaller breach of continuity for all concerned than does the proposal for conversion to a public service.