Insurance Risk

³¹ The chance of loss is frequently under-valued and rarely valued more than it is worth.

• This is proven by the very moderate profit of insurers.

To be successful in insurance, the common premium must:

• be sufficient to compensate the common losses
• pay the expence of management
• afford a profit equal or bigger than other businesses using the same capital.

Paying this premium pays the real value of the risk or the lowest price of insurance. Although many people make a little money by insurance, very few have made a great fortune.

Profits are not more advantageous in the insurance trade, than in other common trades. Many people despise risk so much that they pay for insurance.

In Great Britain on the average, 99 homes in 100, are not insured from fire. Sea risk is more alarming to people so more ships are insured compared to homes.

Although many sail even in wartime prudently without any insurance. When a great company or merchant, has 20-30 ships at sea, they may insure one another.

The premium saved on them all, may more than compensate potential losses. The neglect of shipping and home insurance in most cases is due to thoughtless rashness and contempt of the risk.

³² The contempt of risk and the presumptuous hope of success, are most active at the age when young people choose their professions.

The little fear of misfortune is then capable of balancing the hope of good luck. This is more evident in those enlisting as soldiers or those going to sea, than in those entering the liberal professions.

³³ Young volunteers enlist most readily at the start of a new war.

They fancy acquiring honour and distinction which never occur. “These romantic hopes make the whole price of their blood.” Their pay is less than that of common labourers though their actual service and fatigues are much greater.

³⁴ The lottery of the sea is not so disadvantageous as that of the army.

A son of a creditable labourer or artificier might join the navy with his father’s consent. But his father will never allow him to enlist as a soldier. Only the son sees anything to be made by being a soldier.

The public has less admiration for a great admiral than a great general.

The greatest naval success promises lesser fortune and reputation than equal success in the land. The same difference runs through all the inferior ranks in both. A naval captain has the same rank as an army colonel.

But the captain does not rank with the colonel in the common estimation. As the great prizes in the lottery are less, the smaller ones must be more numerous. Common sailors, therefore, more frequently get fortune and promotion than common soldiers. The hope of those prizes principally recommends the trade.

The skill, dexterity, hardship, of sailors are much superior to that of artificers. However, their only additional recompence is the pleasure of exercising their skill and surmounting their hardships. Their wages are not greater than those of common labourers at their home port.

Their monthly pay is more the same with other workers in those ports their ships sails. London is the port from where the most ships sail. It regulates the wages of all other ports.

At London, the wages of workmen are double those at Edinburgh.

But sailors sailing from London seldom earn 3 or 4 shillings a month more than those sailing from Leith, a small difference. In peacetime, the London price is from a guinea to about 27 shillings monthly.

A common labourer in London, at 9 or 10 shillings a week, may earn 40-45 shillings in a month. The sailor is supplied with goods over and above his pay.

Their value, however, may not always exceed the difference between his pay and that of the common labourer; Any excess will not be clear gain to the sailor, because he cannot share it with his family, whom he must maintain with his wages at home.

³⁵ The dangers of adventures seem to encourage instead of discourage people.

A poor tender mother is often afraid to send her son to school at a sea-port town.

The sight of the ships and the adventures of the sailors might entice him to go to sea. The prospect of hazards is not disagreeable to us. It does not raise wages in any employment.

It is otherwise in employments where courage is useless. In very unwholesome trades, wages are always high. Unwholesomeness is a kind of disagreeableness. It affects wages.

³⁶ In all employments, the ordinary profit rate varies with the certainty or uncertainty of the returns.

Generally, the inland trade is more certain than foreign trade. Some foreign trade is more certain than other foreign trade. The trade to North America is more certain than the trade to Jamaica. The ordinary profit rate always rises with the risk.

It does not seem to rise with it to be able to compensate it completely. Bankruptcies are most frequent in the most hazardous trades. Smuggling is the most hazardous trade. It infallibly leads to bankruptcy.

The presumptuous hope of success entices so many adventurers into those hazardous trades. Their competition reduces the profit below what is sufficient to compensate the risk.

To compensate it completely, the common returns should:

• make up for all occasional losses
• afford a surplus profit, the same as the profit of insurers.

If the common returns were sufficient for all this, bankruptcies in smuggling would just be as frequent as in other trades.

³⁷ Only 2 of the 5 circumstances affect profits:

• The agreeableness or disagreeableness of the business
• Its risk or security

There is little difference in most employments of stock in terms of agreeableness or disagreeableness. There is much difference in the employment of labour. Ordinary profits rises with risk but not proportionally.

Ordinary profit rates in different businesses should be and are more on a level than the wages of different occupations.

The difference between the earnings of a common labourer and a lawyer or physician is much greater than between the ordinary profits of two different businesses.

The difference in the profits of different businesses is generally a deception. It arises from not always distinguishing wages from profits.