Tuesday, 8 March 2011

It's Prince Andrew's job, not his fault

Few things grate my adenoids more than self-righteous priggery. For the last week or so stories have abounded about Prince Andrew chummying-up to corrupt foreigners in his capacity as an honorary trade envoy and there has been much snarling about our current and former governments being too polite to Libya's mad dictator. The reality is that we have to deal with whoever we have to deal with in any given country, and for much of the world that means some pretty nasty little shytes, the alternative is the loss of business to those who are not so uptight.

In this field there is a substantial overlap between government and business although government's position extends far beyond trade links. Everything is a matter of practicalities. Either we maintain diplomatic links and converse with the head of state or we don't; there are very few situations in which severing diplomatic relations because the incumbent egomaniacal kleptomaniac in Outer Bongobongoland is of greater benefit to the UK than biting our tongues and pretending to be nice to him while working to make sure we get as much as we can as a result. Everyone has known Gaddafi to be bonkers for decades. So what? He's bonkers but he's in charge so if we wish to deal with Libya we have to deal with him no matter how repulsive he is. The same applies to the tin-pot dictators of almost all the oil states and those of almost all countries in Africa. A thin veneer of democratic authority in parts of Africa does not mask the simple fact that whoever wins the election will be no less corrupt than the losing candidates and no less corrupt than the likes of Gaddafi in Libya and, until recently, Mubarrak in Egypt. If it comes to that, these people are not very much more corrupt than the leaders of many mainland European countries. It is unthinkable to break-off relations with Italy or France yet the levels of personal corruption among their senior politicians make a few million in fiddled Westminster expenses seem like feed for the chickens. The situation is a classic one of keeping your friends close and your enemies closer. The more we interact with them the more chance we have of being able to make a tiny little difference when it really matters and, more importantly of keeping the benefits of trading with those who have products we want and markets we need.

I sometimes wonder whether suggestions (and even laws) that British companies should not pay bribes are made seriously. If you are driving through France and are stopped for speeding when you have kept religiously to the limit you know the policeman who stops you has no more desire to issue a ticket than you have to receive one. He wants to open your passport and find a crisp 20 Euro note inside. Having inspected your paperwork and retained that of greatest importance to him he will wave you on your way. Oh how wickedly corrupt, the prigs will say, no doubt they would choose to delay their journeys and pay three times as much for the privilege of an endorsement on their licence; like buggery they will, they will pay the bribe and tut-tut over their tofu for weeks. There is no difference between that situation and a business greasing palms in order to secure a contract. It's a matter of practicalities. That's how business is done in some countries whether we like it or not and we either play the game or lose the deal. Of course commercial reality still triumphs and bribes are paid in more indirect and subtle ways than a wad of cash in a brown envelope.

Over the last two days the front page of the Times newspaper has featured criticism of Prince Andrew's cozying-up to dubious senior figures from a number of unsavoury regimes. One has to ask whether he would be doing his job if he didn't give these people the treat of meeting his mummy or the hint that she might proffer them a cup of tea and a cucumber sandwich at a convenient juncture. After all, there's not much point giving the role of trade envoy to a Royal with no business experience unless his royalty were used to seek advantages for British companies in highly competitive markets. There is nothing else he can offer to the job so it seems implicit in his appointment that this is exactly what he was meant to do - although no one would ever be so crass as to actually say he was expected to do it.

Equally misplaced is excessive criticism of the pathetic current leader of the Labour Party for heaping odious praise on Gaddafi's corrupt son prior to a lecture at the London School of Economics. It would be entirely fair to observe that socialist politicians will always heap praise on any overseas despot provided that despot calls himself a socialist. No matter how brutal and repressive he might be, these poor fools go dewy-eyed once the S word is spoken and see nothing but benevolence and a desire to fight the enemies of "the people". Exactly the same conduct by a political leader who denounces socialism is, of course, a crime against humanity and an affront to basic human rights. The magic S word is all it takes to define two identical things in opposite ways, but that's what happens when you are in thrall to an irrational religion.

The reality is that the UK has no practical option but to try to get on with all countries around the world if it can, and that means being far more friendly to vile political leaders than a purely human response would allow. If we are honest about it we can see exactly the same thing happening in every aspect of international relations including sport - who would think of pretending to be delighted to meet the puffed-up heads of the International Olympic Committee or FIFA unless they had to? There is no choice unless you are prepared to abandon your interests and see the largesse of the corrupt and powerful leaders being dispensed elsewhere. Unpalatable it might be, but sometimes real life is exactly that. We should not have a go at those who suck-up to scum on our behalf; we'd have to find a way to do it ourselves if they didn't do it for us.

Friday, 4 March 2011

Insurance premiums and Euro ideology - part two

My previous offering (here) did not cover one aspect of the debate about the effect of the decision of the European Court of (so-called) Justice in case number C236/09. As I said then, the court decided that the premiums charged and benefits paid under insurance policies must not discriminate between men and women. In other words, men should never pay more or less than women simply because they are male and women should never receive more or less than men simply because they are female. I offered some views on the premium issue but said nothing about benefits.

The good Mr Pogo raised a matter in the comments (here). He observed that annuity rates are generally more generous for men than for women and wondered whether the court's ruling would require this to change. The answer, I think, is that it depends whether an annuity is an insurance policy.

As I understand matters personal pensions work as follows. An individual pays contributions to a third party in order to build a fund from which a pension will be payable if he lives long enough. He could just save the money himself, but by paying it to an approved pension fund holder he is allowed to claim tax relief for his contributions. The pension fund holder collects the payments, invests them as well as it can, take a chunky commission at every stage and accounts to the contributor every year with a statement explaining just how little is being held in the fund. Each pension policy has a defined end-date. Provided the contributor has reached the age of 55 he or she may receive something back (it used to be 50 but is now 55). If he or she is younger than 55 at the relevant date, the fund is closed and the accumulated lump-sum is invested until he or she hits the magic age. At that time the policy matures.

I don't pretend to know many ins-and-outs of insurance law, but believe it is correct that these pension arrangements are a form of insurance. All insurance involves two factors: (i) you pay premiums and (ii) you are entitled to receive a payment if the thing you have insured against occurs (be it a burglary, a disease or, as in the case of pensions, reaching a certain age despite modern science decreeing that to be impossible because you smoke and drink). Entitlement to receive anything under a pension plan is dependent on a contingency and for that reason I believe it correct to say that pension plans are a form of insurance.

Insurance can entitle you to a fixed sum (you might pay premiums that entitle you to £5,000 if you break a leg bone - no matter which bone or how seriously it is fractured, you get the same sum) or to recompense for loss (as with home contents insurance), or to protection against claims others take against you (as in the case of professional indemnity insurance), or it might entitle you to a variable sum depending on how well the insurance company has invested its receipts. This latter course is how pension policies work. The heirs of those who die before the maturity date of the policy might or might not be entitled to claim a lump sum by way of refund and they might or might not make a claim, in any event some money will be left in the fund by those who cannot or do not get a refund. Some investments will be good, others will be bad. The fund will be what it is at the date a policy matures and the policyholder will be entitled to a lump sum calculated according to the state of the fund at that date.

When the policy matures, the policyholder is entitled to a lump sum but, if he claimed tax relief on his contributions, he is not entitled to receive it as a single lump sum. I believe a certain percentage can be taken in cash but the rest has to be used to buy an annuity. Many think this requirement iniquitous, but that is not the point of today's missive. The point is that the insurance policy comes to an end when the lump sum is calculated and paid. It goes without saying that all insurers large enough to administer pension funds also offer annuities, but their customers cannot be required to buy one of their annuities. The customer is entitled to a lump sum but must take that lump sum in the form of AN annuity, not any particular annuity. The purchase of the annuity is a separate transaction from the allocation of a particular lump sum to a particular policyholder on the date the pension policy matures.

At that date the policyholder has the benefit of a sum of money. Provided that sum of money is not calculated differently according to whether the policyholder is male or female it will not, I think, fall foul of the ECJ's ruling.

When it comes to buying an annuity men tend to get better terms that women because we don't live as long. Whether being the recipient of nagging shortens life or delivering nagging lengthens life really doesn't matter, it might even be a combination of the two, but the fact is that blokes generally don't live as long as gals. Annuities reflect this reality by giving men slightly better returns. It seems to me that that will not fall foul of the ECJ's decision unless annuities are insurance contracts. I cannot see that they are.

An annuity is a contract under which you pay a company a lump sum in return for being entitled to an income (paid weekly, monthly, quarterly or annually) for life. An annuity is no different from the cash-for-equity deals that are available to homeowners of a certain age. You make your house over and in return are entitled to a defined sum each year for as long as you live, it might even be index-linked, and you are also entitled to remain in the house. There is nothing about this that seems to me to equate it to insurance any more than purchasing an annuity is insurance. It could, I suppose, be argued that the lump sum is a premium and the receipts are benefits that depends on the contingency of longevity but that involves a contingency that causes payments to cease rather than one that caues payments to commence - and an essential feature of insurance, as I understand it, is that the entitlement to receive a benefit rests on a contingency other than payment of the premiums.

If this is correct, annuity returns are not caught by the ECJ ruling.

It's only a matter of time, of course.

Wednesday, 2 March 2011

Insurance premiums and Euro ideology

It is not often that men come out on the right side of anti-discrimination laws, but the slavish adherence of the European Court of Justice to a flawed principle seems to have produced exactly that result. I am, of course, talking about the recent decision that insurance companies are not allowed to discriminate between men and women purely on the grounds of gender when setting premiums or paying benefits.

The judgment itself (here) is clear. Where the position of men and women is comparable they must be treated the same. Where their positions are not comparable they may be treated differently. Who decides when their positions are and are not comparable? Well, the institutions of the EU of course and they have decreed that the situations of men and women are comparable when it comes to setting insurance premiums and calculating benefits payable under a policy.

In some respects this is patently absurd. Women are at greater risk of thefts in the street, (for example, handbags are easier to snatch than wallets in jackets) young men are at greater risk of crashing a car, men are at greater risk of dying younger, men are at greater risk of injury around the house (they climb on chairs to fiddle with electric fittings whereas women climb on chairs to scream "eek" at the sight of a mouse). These disparate levels of risk exist between the sexes but it is not their gender that causes the disparity it is their behaviour and different patterns of behaviour present different risks of an insurance policy being called upon. Because, generally speaking, men behave differently from women men present a greater risk for some types of insurance and a lower risk for others.

Throughout the world these self-evident facts have conventionally been reflected by higher premiums being payable by those most likely to present a claim. There are two aspects to this because insurance operates in two ways. On the one hand, some insurance exists primarily to pay the policyholder a defined sum in the event of certain things happening; for example you can take out insurance that pays you a lump sum in the event that you break a leg or suffer a heart attack, or you can insure the contents of your home so that you receive some money if you are burgled and your stuff is nicked. The only beneficiary of such a policy is the policyholder himself (leaving aside the right to nominate a different beneficiary but there are limits to when and how that can be done). On the other hand some insurance exists primarily to provide protection to third parties against damage done by the policyholder. Lawyers, architects, accountants and others have to carry insurance so that anyone suffering due to their negligence can be compensated; similarly car drivers take out insurance not just to compensate them in case a crash occurs but also to ensure that innocent third parties can be compensated. Strictly speaking third parties are not entitled to claim against these indemnity policies, instead the policyholder is liable to pay compenation and the insurance company provides the funds from which he pays it; although the reality is that the insurance is for the benefit of the third parties.

Whether insurance is primarily for the benefit of the policyholder or third parties, it involves shifting risk from one person (or group) to another. If you have no household contents insurance the removal of your goodies by little Johnny Toerag causes you a loss and you have to dip into your own pocket to replace the missing things, the risk is yours alone. By insuring against burglary that risk is spread among all policyholders. Equally, negligence by an architect might cause millions of pounds of loss which will fall initially on the owner of the building; the owner can sue the architect but will he have the money to pay? Perhaps not, so he has professional indemnity insurance to ensure there is a fund from which his "victim" can be compensated. In that case risk passes from the owner to the architect to all those who have paid premiums into the relevant fund.

There is no single principle by which the fairness of the spread of risk can be assessed but the conventional approach is to charge higher premiums to those who are more likely to make a claim and lower premiums to low risk customers; in addition the greater the size of any potential claim the greater the premium. Different people, and different insurers, can take widely divergent views about how premiums should be weighted. Some might think it fair for everyone to pay the same premium, or for premiums to be graded according to the income of each policyholder, or to vary according to the area in which the policyholder lives, or according to his age or his occupation. Arguments can be made for each of these factors to be given particular weight in certain situations. What is considered fair is a matter of opinion and opinions necessarily vary.

I have read a lot of comment in the last few days about the judgment of the ECJ being unfair to young women drivers who, apparently, are much less likely to make a claim on their motor insurance than young men of the same age. It certainly appears to be the case that insurers will not be able to charge young men higher motor premiums than young women because that would involve unlawful discrimination on the basis of gender. I find this a slightly confusing concept. There is a reason why young men's premiums are higher - it is because, as a class, they are more likely to make claims. Not every one of them is a menace, but sufficient are to make them a risky group - not by way of anecdote but by way of hard evidence about the number and type of incidents in which they are involved. That is fact, that is reality. For reality to be cast aside in favour of a political ideal strikes me as highly unappealing.

Having said that, all weighting of insurance premiums requires judgments to be made about what is and is not fair. When I last had a big car and its insurance was due for renewal I obtained quotes varying between about £350 and just under £2,000. Same car, same location, same driver with decades of experience and not as much as a speeding ticket, yet one insurer assessed the risk I posed as requiring a premium five times higher than another. No doubt each felt they were chrging what was fair in the circumstances.

We shouldn't get too uptight about car insurance. Maybe premiums will go up substantially for young women, maybe they will fall a bit for young men, maybe they will rise for older people to allow premiums for the young to find a level between the current male and female level. Whatever happens there will continue to be wide differences between insurance companies' charges.

More troubling is the illustration given by the recent ECJ case of the consequences of pushing ideology into areas that are none of its concern. I have no problem with the concept of men and women being treated equally by the law, but I find it ludicrous that the law requires anyone to pretend that differences that actually exist as a matter of fact between men and women do not exist. There might be a simple way to avoid this absurdity. It arises only because the EU has decreed that the position of men and women is comparable so far as insurance premiums are concerned. As a matter of fact that is simply not the case, at least it is not the case when it comes to motoring premiums. The EU could, were it so minded, allow insurers to charge men and women different premiums where there is clear evidence that men present a higher risk than women or vice versa. That, indeed, was the position until it was struck down by the ECJ because it was inconsistent with another provision of EU law.

If we have to have EU law (and the sooner we don't, the better) it should at least try to reflect reality. I doubt that it can ever do so to a sufficient degree to gain public support because it is systemically ideological rather than practical. It is not just Middle Eastern despots who can only bully their subjects for so long before they are ousted.