Gilbert caught me in Curacao. I was on my way back to Jamaica from Aruba on the very day that Gilbert struck. A friend rescued me from being stranded. On about the Wednesday my host was translating a story about the damage done when she read about the Chest Hospital being looted. She turned to me and asked, `What kind of people you Jamaicans are to loot a hospital during a hurricane?’ That question stuck with me like a hammer. It has caused me to reflect seriously on the kind of society we are living in. That reflection has led me to conclude that looting is taking place at all levels of the society: from top to bottom. The fact is that the looting at the top is partly responsible for the looting at the bottom. When the people at the bottom loot the response is swift and brutal. Several of the hurricane looters were shot dead. But what happens when the looters are people at the top? It seems to me that we respond with silent acquiescence. I am going to illustrate my observation by reference to the average clause recently applied to housing by the insurance companies and to Government’s actions and policies with respect to the importation of motor cars.
The Imposition of the Average Clause
Looting is taking advantage of an opportunity presented by some calamity without regard for the morality of the actions or their consequences for others. For 37 years the insurance companies in Jamaica collected premiums from homeowners without having to pay out large sums as a result of any disaster. During that time profits were made and distributed, elegant building were erected all over the island, investments were made which expanded their assets and the people working in the industry enjoyed one of the highest standards of living and affluent lifestyles affordable locally. Now that the companies have had to pay substantial sums, they have fundamentally changed the basis of home insurance to the disadvantage of the homeowners. There must be something morally wrong about such this. In my view this is looting. It is not different from what happened during and immediately after Gilbert. One set looted in the wind and rains, the other from air-conditioned offices. One set looted in rags the others in three-piece suits. But, notwithstanding location and dress, they are looters alike. Having stated my conclusion in unequivocal terms let me provide the basis on which this conclusion was reached.
Under-insurance and Re-insurance.
Let us at the outset acknowledge that prior to Gilbert there was under-insurance of houses and buildings generally. It is also true that after Gilbert the companies were faced with increased re-insurance premiums from their re-insurers. Note, however, that the companies have increased their rates to cover the increased costs of re-insurance. They have already passed on the increased costs to the consumers. Increased re-insurance costs therefore, have no direct bearing on the application of the average clause to houses damaged by Gilbert. While Gilbert made it plain to all of us that under-insurance was a matter that all of us in Jamaica had to deal with, under-insurance by itself cannot justify the changing of the very basis of insuring houses. The validity of this statement will become increasing clear as I develop the other points of my argument.
The Average Clause and Houses.
The average clause has been the basis of insuring motor vehicles in Jamaica. It is a very debatable matter as to whether houses and vehicles should be insured on the same basis. For example, the risk that a motor vehicle runs of suffering `total loss’ and that of a house including its foundations and external works including fences, are quite different. The frequency with vehicles will suffer `total loss’ and that of houses warrant different actuarial treatment and also different bases of insuring these two items of property. For over 30 years the companies have operated on this basis. Which is a sound method of insurance. The question that the industry has not answered is what did Gilbert teach us that we did not know before? Why should the homeowners not be able to continue to insure for the kind of damage houses they are most likely to sustain and carry the risk for such damage that are much less probably? The fact that many houses were under-insured must have meant that many people suffered losses that were above the limit of their insurance. That alone would be inducement for homeowners to increase their coverage. The application of the average clause to houses is really explained by other reasons than under-insurance.
Increased Revenue and Decreased Settlements.
The application of the average clause to houses and other buildings immediately means that in a single stroke that the insurances companies will have put themselves in a position to increase revenue as owners increase coverage and at the same time decrease their liability in terms of claims made on them. Now that the owner’s risk is spread across the entire range of the value of the building, the company’s liability in terms of settlement of claims is reduced. What could be better for the companies, they will be collecting more in premiums and paying out less in claims!
The Depreciation Clause.
The companies have been telling the public that owners should insure for the full replacement value of the building. Only where this obtains would owners be fully covered. But would they? What the companies have not been drawing attention to is the Depreciation Clause. While building continue to appreciate in value insurance companies have applied a depreciation clause in settlement of claims. The reasoning here is that the owner is getting new for old hence the repairs is adding value to the building therefore the company deducts a proportion of the settlement on this basis. Now that the average clause is being applied to buildings why are the companies still retaining the Depreciation Clause? If coverage is based on the market value of the building of what relevance is depreciation? The truth is that the companies are fleecing the consumers from every angle.
Who Decides Building Values?
The fundamental concept in the average clause is that insurance should be based on the full value of the item insured. The definition and determination of the value of the item then becomes a very crucial matter. The value of the buildings, according to the fine print of the contract, is determined by the company. The policy-holder is at the mercy of the company. The sum assured is notional because in the case of a claim it is the loss adjusters contracted by the companies who will make the final determination of value. The loss adjusters operate on the basis of criteria laid down by the companies which also pay them. To think that the loss adjusters operate in the interest of the owners is to live in a fool’s paradise. Owners could in good faith believe that they are fully insured only to find at the time of a claim that they are either over or under insured.
The Cartel Caper.
It could well be argued that the introduction of the average clause to the area of home and household insurance should create no big problem given the fact that there are so many companies competing in the market place. The mechanism of the market should correct any problems arising. Surely there would be companies continuing on the old basis and others adopting the new basis. Home owners can choose the sort of insurance they require in terms of the type of risk they wish to take and coverage they want. But what do we find, the companies are no longer competing to satisfy the market demands. They are acting as a cartel. They have all come together and imposed the average clause. The consumers have no choice. This cartel caper of the insurance companies is tantamount to price fixing. It violates the principle of self-regulation resulting from free competition in the market place. It would appear that the Market Mechanism is not a principle in which the Jamaican private sector believes and lives by, but rather it is an expedient posture it adopts when it serves its purpose.
Widespread Effect of Introduction of the Average Clause.
Note must be taken of the widespread effect of the introduction of the average clause. Rents will increase as owners pass on the increases to tenants. People living in their own houses will face increased costs. This will be particular hard on pensioners who bought their houses during times when houses prices were much less but whose income currently cannot service the increased value of their holdings. Schools and other organizations and institutions engaged in social services will have to divert scarce resources into insurance thus reducing their already diminished capacity to perform their social functions. While the insurance companies are improving their profitability and liquidity, tenants, pensioners and social services are going to suffer.
I must draw your attention to the advertising campaign that the companies have mounted in support of their application of the average clause to housing and household furnishing. You can’t miss the slick ads. Notice also the simplistic logic designed to convince the trusting and unsuspecting. Take careful note that no mention is made of the Depreciation Clause. The public have been mislead into believing that if the house is insured for the full market value and a claim is made the full sum assured will be paid. The crucial question of who decides on the full market value of a property is totally omitted. To cap it all the ads suggest that before Gilbert an injustice existed which the companies in an act of righteousness is now correcting. Nothing could be further from the truth.
If the truth be told the insurance companies have used the opportunities presented by the hurricane to fundamentally change the basis of home insurance in ways that are to the considerable advantage of the companies. The companies have simply looted the insuring public. I am personally disappointed to see that certain good companies and decent persons in such companies have been caught in the tide of opportunism and greed that has apparently swept the industry. While I note the impotence of the Office of the Superintendence of Insurance in this matter, note I am not calling for government intervention to remove this blot on the record of insurance in Jamaica. I believe that the insurance fraternity must correct this wrong. Only then will the good name of the companies and the industry be restored. The companies must in a tangible change what they have done and demonstrate again that they are good corporate citizens committed to more than their narrow interests.
The Government is also Looting Us
The government is as involved in looting as the insurance companies. The government is looting us with respect to the importation of cars. When I am speaking of the government I am not referring to any particular party. The policies and practices that currently exist are the product of the actions of both parties when they formed governments in the past. In this matter no party can hold up clean hands.
The question can be asked, what calamity is the government taking advantage of? The answer is, the public transportation system. There can be no doubt that the public transportation system is a calamity of the order of Gilbert. A car is a necessity to a large number of persons. Without private cars the traveling public would be faced with an even greater calamity. The demand for cars represents real needs and the government knows this.
Taking full advantage of the situation government has made itself the sole importers of cars for five or six designated dealers. Private individuals cannot import cars unless you leave the country for three years. The new Minister proposes to reduce it to eighteen months but the principle remains in tact. You and I who intend to stay here and work for the good of the country must be penalized for such loyalty. We are really fools, judging by this policy. The State Trading Corporation is the government’s middle-man, hence it takes its cut from the importation of each car. The government takes its direct cuts through several taxes and duties. The end result is that government indirectly and directly extracts an enormous amount of loot from every car imported.
But there is worse to come. Government has abused the very system it has established. You may recall that horrendous duties were imposed ostensibly to discourage the importation of cars with engines greater than 2000 c.c. This was part of the strategy of fuel conservation. Government is now importing cars with these size engines in order to gain the revenue. The fuel conservation measure now serves the revenue interests of government.
The dealers and their accomplices contrive to complete the exercise of looting commenced by the government. Notice how hard it is to get a new car from a dealer. But somebody always knows some one who has an almost new car for sale. However, the price is some ten to twenty thousand dollars higher than the price of the new car which is supposedly controlled by the government. Even more preposterous is the fact that a one year old car is more expensive than the new car. Somehow in dropping in all the potholes we encounter daily the car increases in value. You must salute the genius of the government and the car dealers who have conspired to create a system in which all cars have appreciated in value. The car I drive cost $8,000 new. Fifteen years later it is valued $25,000 and I can assure you it is not a vintage model or an antique. Countless similar stories can be told. Imagine rolling stock is appreciating in value while fixed assets are depreciating. Only in Jamaica can cars and houses defy standard accounting processes.
It would be comical if the situation were not so tragic. A Volvo that sells for $20,000 U.S. in the United States sells in Jamaica for $85,000 U.S. A Honda Accord that sells for $13,000U.S sells for over $40,000U.S in Jamaica. The U.S. prices includes taxes and profit. Instead of changing the system that has produced these great and grave distortions Government is importing match-boxes with motorcycle engines in order to make car prices more affordable. The fact is that these motorized match-boxes will not last very long on our roads taking into consideration our hills and mountains. We will pay a heavy price in the future for this folly.
The naked truth is that the effectiveness and efficiency with which the government has excluded private individuals from importing cars is only matched by the inequity (iniquity) of the system that has been created. Corruption and rackets abound. Nepotism, patronage and bribery are rife. Normally the purchaser with the money to buy calls the shots. Our government policy-makers, economists and financial wizards and our business men have managed to change the relationship so that it is the government and the car dealers who call the shots and the purchaser who is reduced to a supplicant. The end result is a totally dehumanizing situation in which politicians grant favours: car dealers and their cronies engage in shady dealings: and those who seek to beat the system become embedded in deception.
The remedy is very simple. Allow private individuals to import new and used car of no more than three years. I have heard it argued that if such a policy were adopted individuals would abuse the system. Such a cynical argument can be countered by an equally cynical counter argument. No system can be established that will not be abused by some sector. Government and the car dealers have abused the current system. They have made enough money and collected enough taxes and duties. It is now the turn of the private individuals to abuse the system. The real point I am making is that the current system cannot be allowed to continue and that private individuals need to be relieved of the burden they now bear. Government looting must stop.
The Association’s Response.
Ladies and gentlemen I have tried to show you how insurance companies through the application of the average clause to home and household insurance have served their own interests by manipulating the circumstances in the aftermath of Gilbert. I have drawn attention to the fact that government and car dealers have combined to exploit motorists. My conclusion has been that their actions are no different from those who looted supermarkets, stores and other enterprises during and after the hurricane. I am not asking you to either accept my analyses or conclusions. My hope is that you will be inspired and stimulated to do your own analyses and come to your own conclusions.
To me what has been most alarming has been the docile and weak-knee manner in which we as educated people have responded to abuses of our quality of life and standard of living by persons and institutions wielding economic and political power in our country. Probably we are so preoccupied with securing our own salvation that we are wary to offend the powerful even where they abuse their powers and privileges. But we need to take note of what is at stake.
Owning and maintaining a house and a car are common ambitions in modern Jamaica. If government and the private sector contrive to put these beyond the reach of the vast majority of the population then basic incentives are being removed. If hard work, thrift and service cannot generate the means of acquiring and maintaining a house and a car then corruption and drug dealing is given legitimacy. If those who believe in and practice wholesome values do not protect their interests nobody will.
I commend the Association for honoring outstanding past students of Excelsior. The ceremonial has its place. Your efforts to contribute to the upkeep of your alma mater are vital, especially in the circumstances in which education find itself today. These are worthy actions. But I must urge upon you the necessity to become engaged in the issues of our times in our country. The Association has persons of varied talents and competences. The pooling of such capabilities could produce considerable impact. Individual resistance to abuses in society is not enough. Collective action is crucial. Hopefully Excelsior Past Students’ Association will pioneer new paths in making its voice heard on critical questions.