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20 September 2021

From the NS archive: The future of National Insurance

27 September 1913: National Insurance will not be complete until it covers the whole ground of physical disaster.

By A G

When a third of the recruits for the Second Boer War in 1898 were found unfit for military service, it became startlingly evident that poor physical conditions and a lack of access to medical care were preventing young, working-class men from working effectively. In 1911, then-chancellor David Lloyd George introduced the National Insurance Act as the first contributory system of insurance against illness, laying the foundations for the modern welfare state. In this article for the New Statesman, a “Friendly Society Official”, who writes under the initials AG, discusses the benefits and the limitations of the Act, following an amendment in 1913. He dissects its problems, too: it only covered employed workers and did not extend to their families, nor provide any provisions in the event of their death. The author concludes: “We have made a start – a comparatively limited, but yet an encouraging start – with sickness insurance. This must be developed to cover not only the wage-earner, but his dependants, so that no man or woman or child shall be uncared for in illness.”

The Insurance Act Amendment Act, which became law a few weeks ago, forms the second chapter of a code of Insurance legislation whose beginning is still too new and too big to be perfectly comprehended, and whose end is hidden in the far political distance. Neither the main Act nor the amending Act has been more than an elaborate framework to be filled in later by the Insurance Commissioners, and some of the most important sections of the new Act, notably those dealing with casual labour (the very raison d’être of the measure), arrears, and the extension of medical benefit to exempted persons, do no more than give special powers to the Commission to legislate on special subjects. One of the most important of these special powers is that concerning medical benefit. The Commissioners are given power to introduce alternatives to the panel system, and in view of the chaos that persists unabated in the administration of the medical service of the Act, it is quite possible that this power may be taken advantage of. In this event it is to be hoped that the Government will be strong-minded enough to resist the agitation which is still being kept up by the “old gang” of the National Conference of Friendly Societies to place the administration of medical benefit in the hands of the societies.

A very significant thing, however, in the new Act is the large increase it imposes on the State contribution to the Insurance Funds. The increase in the benefits means, of course, a proportionate increase in the State’s payments; but, in addition to its regular share of the cost of benefits, the State now pays:

1. All the central expenses of management of the scheme (from 1 million to 1 and a half million pounds per annum).
2. All expenses of audit and valuation.
3. 2s 6d per head per annum for Medical Benefit.
4. 1d per head per annum for Sanatorium Benefit (research).
5. 1d per head per week to low-wage earners.
6. An unfixed sum in respect of arrears.
7. £80,000 a year for members of Insurance Committees.

These special charges will, no doubt, be very heavily augmented when the results of the first valuation are made known; for it is by now a matter of certainty that a very large number of the Approved Societies will show considerable deficiencies in 1915, and it is equally certain that no government could weather the storm that would arise were two or three million insured persons to find themselves faced with a substantial reduction in benefits. Much has been heard of the extraordinarily high rates of sickness prevalent among Approved Societies and the large amount of malingering that has been going on. Many of these statements must be discounted to a great extent, but it is undoubtedly true that the all-round rates of sickness are considerably higher than those estimated by Messrs Hardy and Wyatt, and that there are serious financial difficulties ahead.

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What, then, is to happen in 1915? Even if the government decided to allow matters to take their course and to see benefits reduced, the scheme would be hard hit by the fact that all healthy lives in the Societies with a deficit would at once leave such Societies and transfer to those with a surplus, even if such a transfer involved a small cash payment. In this way the insolvent Societies would be forced still farther into the mire, and unless the process were checked it would end by plunging half the Societies into utter bankruptcy. The only course open would be for the State to make good the deficiencies; but as it would be highly invidious to subsidise some Societies and not others, an equivalent contribution would have to be made to all Societies at a huge cost to the State. Doubtless if Mr Lloyd George can find any other way of dealing with the situation, he will adopt it. But it is difficult to see what other plan is available short of the taking over of the Approved Societies by the State, and if the pre­­sent high rate of expenditure continues (and the summer has brought no diminution in Societies’ sickness rates), this suggestion will have to be considered very seriously. It is a course that has very much to commend it: the saving thus brought about would amount to some millions of pounds per annum, as the present duplication and even triplication of work between the Societies, the Commission, and the Treasury would be done away with. It would solve the problem – that will presently become acute – of the industrial company Approved Societies and would improve an administration that is at present in a state of unparalleled confusion. Further, it would provide the best means of dealing with the Deposit Contributors.

The Deposit Contributors’ Fund has only another 15 months to run, and within that time the Government must devise a scheme for providing them with insurance. This problem has been considerably simplified by the fact, surmised earlier, but now clearly proved, that the Deposit Contributors are not bad lives at all, but are a very fair-nay, very good-specimen of the insured population. Out of 898 Deposit Contributors interrogated for the Insurance Commission, 137 were deposit members owing to ignorance of the working of the Act, 118 owing to indifference or negligence, and only 20 owing to ill-health. This result is confirmed by the surprisingly small number of claims made by the 82,599 Deposit Contributors in London. It will not be on grounds of ill-health, therefore, that the government will have difficulty in handling the Deposit Contributors. The difficulty will be that of dragooning a quarter of a million persons into Approved Societies, and this would be entirely obviated by the merging of Approved Societies into a central insurance fund, State managed.

But the great argument in favour of creating a National Insurance department is that it prepares the way for the proper treatment of one of the gravest scandals of our time – the existing system of industrial life assurance. There are several signs and portents in the political sky which indicate that the government are contemplating taking steps towards entering the field of life insurance in a serious manner, and it is devoutly to be hoped that National Insurance may be extended in this direction. No reform could be more needed or more profitable to the nation, for it is difficult to speak in moderate language of the present state of affairs. This may be described briefly as follows: there are 18 companies now transacting industrial assurance business, of which nine have a premium income of over £100,000 a year. Taking the figures of the Return of the Board of Trade for 1912 for these 18 companies, only 43 per cent of the premium income was paid out in benefits, while no less than 43.5 per cent of premium income was absorbed in commissions to canvassers and in expenses of management.

The staggering nature of these figures will be realised when it is pointed out that in the same period the companies engaged in ordinary life insurance business paid out 90 per cent of their premium income in benefits, while the expenses of management, including commissions, absorbed a sum equal to only 13.35 per cent of premium income. It may readily be conceded that it is more costly to handle ten policies of £10 each than one of £100, but even after making ample allowance for this the vast gulf between the insurance of the middle and upper classes and that of the lower classes is glaringly apparent. The relative proportion of commission and expenses of management varies considerably among the industrial companies. In one of the best-known companies the expenses of management are only 13.5 per cent of the premium income; in the case of a second the expenses amount to 28.3 per cent of premium income. The former, however, spends no less than 26.2 per cent of its premium income on its army of canvassers, while the latter spends 20 per cent, the combined figure for expenses plus commission, working out at 39.7 per cent and over 48 per cent respectively!

It will be evident from the foregoing that the policyholders pay very much more than its true value for their insurance, and it is a well-known fact that the insurance policies of industrial companies cost from 25 to 50 per cent more than those issued by the Post Office or on large friendly societies. A further light is thrown upon the business of industrial assurance by the fact that the profits earned for shareholders in 1912 amounted on the average to 28 per cent on the capital subscribed, one of the most notorious companies earning no less than 57 per cent on its capital! One of the circumstances facilitating the earning of such profits is the extremely onerous nature of the policies, surrender values being practically unknown in industrial assurance. Should payments be in default for periods varying from two to four weeks, the policy lapses, and these lapsed policies are a valuable source of profit to the shareholders.

The method by which the working classes are induced to sink their money in these insurance quagmires is the employment of canvassers, of whom over 80,000 are now employed by the companies. It is no exaggeration to say that the existence of this body of men is a veritable social menace. Merging at their worst into the lowest form of “area sneak”, the photograph, sewing machine, and musical album cadgers who figure not infrequently in the criminal courts; at their best when most skilful and over-persuading unwilling and often ignorant men and women, these men are forced by the very nature and conditions of their employment into methods that the majority of them would otherwise deplore. The operation of the Insurance Act has greatly widened the scope of their action, and every friendly society and trade unions secretary had his quota of members gulled into transferring, of cards illegally appropriated, of malicious rumours assiduously spread by the agents of the industrial companies. Unfortunately, too, as Mr Fischer Williams points out, “they constitute a vested interest in the business of industrial life assurance most formidable from the political point of view”, and this body of men lies right athwart the path of the reform of this parasitic branch of insurance.

But reform there must be, since the working classes are being defrauded out of millions of pounds annually by this business of industrial assurance. Happily there is a precedent for government action in the existence, feeble though it may be, of the Post Office Life Insurance Department, and it is to be hoped that Mr Lloyd George will go on with the courage with which he began and will cleanse the Augean stable of industrial assurance. National Insurance will not be complete until it covers the whole ground of physical disaster. We have made a start – a comparatively limited, but yet an encouraging start – with sickness insurance. This must be developed to cover not only the wage-earner, but his dependants, so that no man or woman or child shall be uncared for in illness. Then the widow and orphan must be safe-guarded, and for this they must not be left to the tender mercies of the canvasser and the industrial company. Mr George must redeem his promise to them by extending National Insurance to meet the losses caused by death; for if it is necessary to provide for the temporary cessation of income on a man’s illness, how much more necessary it is to provide for the permanent cessation on death.

Read more from the NS archive here, and sign up to the weekly “From the archive” newsletter here. A selection of pieces spanning the New Statesman’s history has recently been published as “Statesmanship” (Weidenfeld & Nicolson).

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