Out of the Ashes of the Great Fire of London: The insurance industry is born
Introduction
Masters, Wardens, Sheriff, Alderman, Distinguished Guests, Ladies and Gentlemen
It gives me great pleasure to join friends from The Worshipful Company of Firefighters as well as colleagues from across the fire sector this evening in the magnificent surroundings of the Great Hall of the Chartered Insurance Institute. It is a personal honour for me to be invited to present the 2016 Fire Lecture but it is also a great pleasure for the Association of British Insurers to support this evening’s reception as well as the other events scheduled for later this year to commemorate the 350th anniversary of the Great Fire of London.
The birth of the global insurance industry is most often associated with the Lloyd’s Coffee House. But the insurance industry has a somewhat older and richer heritage than this. In the wonderful performance you’ve just seen from Spectrum Drama, we saw that the history of the Great Fire and the insurance industry are intimately linked. With your indulgence of a brief recap of history, tonight I want to set out how the Great Fire in 1666 led to the development of the globally competitive and world leading insurance industry that exists in London today. I also want us to collectively reflect on whether the policy and regulatory settings as they relate to fire remain appropriate in 2016 and indeed whether, 350 years after the Great Fire, as a society we still have lessons to learn from the tragic events that started in Pudding Lane shortly after midnight on 2 September 1666 and which would ultimately engulf a city.
The History of the Great Fire of London
Much has been written about the causes of the Great Fire, its spread, the enormous loss of life and the destruction of the thousands of buildings across the capital, including the Royal Exchange, Guildhall and St Paul’s Cathedral. What is equally as interesting though, is how the Great Fire led to the development of the insurance industry we know today.
In 1666, an effective fire-fighting capacity across the City of London was almost non-existent. There was no organised fire brigade and fire-fighting skills were rudimentary at best. There was little knowledge or understanding of the spread of fire and little in the way of effective fire-fighting equipment other than some leather buckets and axes.
Although a doctor by training, a wealthy property investor, Nicholas Barbon, was instrumental in establishing the first actual insurance company, known as “The Insurance Office”, in 1667 with its office located behind London’s Royal Exchange. A copy of one of the first policies written by The Insurance Office forms part of the ABI’s collection of historical insurance artefacts and is on display in our suite of meeting rooms in our new offices at One America Square. I would have loved to have brought it with me this evening for you to see and enjoy. But, ironically, our insurance wouldn’t let that happen!
The Insurance Office was a mutual and the Foundation Deed of the society allowed it to enter into 10,000 policies. Policyholders would join and pay a premium into a common fund which was used to buy properties. These properties were held as a pool of investments to provide back up to the cash resources of the scheme. Both the cash and property assets could be used to pay the small claims that it was thought would be common. And to protect the property investments it had made, the Insurance Office formed actual fire-fighting teams who were issued with equipment and identity badges.
Other insurance companies followed and although there remains some historical debate about whether this in fact happened, the folklore of today is that, when responding to a fire in a building not insured by a company identified by one of their firemarks, the fire brigade would either leave the scene or watch the building burn. The more prosaic reality is that the first fire brigade on the scene would attempt to put out the fire and then charge the building’s insurer for their services. They probably didn’t call it subrogated claims handling but it seems the highly competitive nature of today’s UK general insurance markets does in fact have a long history! If the building did not have any firemark, however, it is probable that no fire crew would attempt to put out the blaze. This would teach property owners the importance of buying insurance to protect themselves from life’s uncertainties – a message the industry continues to press today.
The basic economics of fire protection quickly led to the conclusion that a city-wide fire brigade was in fact a public good. Eventually, all the insurance companies donated their equipment to the City of London, the City hired the firefighters and it was the role of the firefighters to fight fires whether buildings were insured or not. It was apparently customary for insurers to pay for ale at local pubs for those firefighters who attempted to save their insured property and to provide bonuses for those who were successful. For those firefighters in the room, unfortunately for you this is not a practice that has stood the test of time!
No-one seems to know the reasons why but ultimately The Insurance Office went out of business. The oldest documented insurance company today dates back to 1710. It was originally known as the Sun Fire Office, whose fire staff apparently wore a distinctive blue livery with silver badges on their elbows. They were supported by a similarly dressed group of porters whose role was to move salvageable property that might otherwise be engulfed by fire. The Sun Fire Office eventually became the Royal Sun Alliance, known today as RSA.
The origins of the modern insurance industry to today
From around 1720, insurance companies had developed a common procedure for rating the property risks they encountered:
- "Common insurance" applied to brick and stone premises that met the relevant regulations and which were used purely for domestic purposes;
- "Hazardous insurance" applied to the many domestic buildings made from timber or plaster that had survived outside the areas affected by the Great Fire or brick or stone buildings used for hazardous trades; or
- "Doubly hazardous insurance" – an interesting name - but this applied to all premises used by people like bakers, distillers, potters and glassblowers.
These categorisations lasted well into the 19th Century. The Metropolitan Fire Brigade Act was passed in 1865 and, following further catastrophic fires, more legislation was passed. In 1921, a Royal Commission was established. This looked at the existing provisions for the avoidance of loss from fire and drew up model regulations to extend the scope of fire precautions and the adequate means of escape from fire in public places.
Meanwhile, many years of informal cooperation between insurers had resulted in the establishments of the Fire Offices Committee to which most of the leading Fire Offices belonged. Major companies shared underwriting experience and expertise which standardised fire insurance services to customers and culminated in the fire insurance tariff. In a way that would make the competition lawyers of today shudder in horror, the fire insurance tariff comprised a set of basic insurance prices and risk rating structures across the industry. In 1985, the Fire Offices Committee was wound up and its activities transferred to the Loss Prevention Council and what is now the Association of British Insurers (ABI).
The ABI of today looks very different to the organisation the Fire Offices Committee joined in 1985. Today, the ABI comprises over 250 firms across the long-term savings and general insurance markets and is the pre-eminent organisation for representing the views of insurers to policy and decision makers in Government, to regulators and in the media.
In contrast to the non-existent insurance industry of 1666, the modern insurance industry is one of the UK’s under-sung success stories. The Great Fire was, therefore, the catalyst for the development of the modern, world-leading insurance and long-term savings sector we have in London which today:
- is the largest in Europe, the third largest in the world and employs over 300,000 people;
- contributes £35 billion to UK GDP;
- manages investments of £1.8 trillion;
- pays £12 billion in taxes to the Government; and
- pays out £64 million in general insurance claims every day.
It is an insurance industry which doesn’t just provide fire insurance but insures everything from the legs of a celebrity, to a gold mine in Brazil, the travel you might undertake over the Summer to the car that gets you to the airport. And the underwriting of that insurance is not simply done by allocating a risk to “common insurance”, “hazardous insurance” or “doubly hazardous” insurance baskets. It is based on an understanding of the effectiveness of risk mitigation, the importance of mapping and modelling; and the use of sophisticated data analytical tools and algorithms.
So, although insurers like to think of the development of our industry as taking place in the genteel surroundings of a London coffee shop with gentlemen protecting their trading interests, fundamentally insurance as we know it today has its origins in responding to the crisis that was the Great Fire. And that response was to develop innovative product offerings and to be there to help customers in their time of need.
Over the weeks, months and years ahead, the challenge will be for us to maintain the success story that is the UK insurance industry. Following the momentous change delivered by the electorate in the Referendum on the UK’s membership of the EU, it’s fair to say that we live in uncertain times. There is no point in pretending that the result in the Referendum was what many across the wider insurance sector wanted to see.
But at the ABI, our job now is to focus our energies on helping our members to navigate the turbulent economic, political and policy landscape ahead as the UK prepares to leave the European Union. Insurers want the UK to remain a competitive place to do business if our country is to thrive in a post-Brexit world. Competitive in terms of taxation, market access, the broader regulatory environment and the ability to attract and retain skilled labour. There is no doubt that the process of delivering Brexit will be highly complicated, involve significant practical and legal uncertainties and difficult political judgments. But, as I’ve set out, Britain’s insurance and long-term savings industry has adapted to changing circumstances for centuries; is well capitalised; and will be here for the long-term to help and support our customers.
Building regulations
Away from the challenges associated with Brexit, the insurance industry continues to respond to some of the public policy challenges that society faces in terms of better managing the risks associated with fire.
In the aftermath of the Great Fire, and with the benefit of hindsight, it became apparent that the lack of thinking about the design and layout of London was one of the key issues that had facilitated the rapid and catastrophic spread of the fire across the city. The old city streets, lined with buildings constructed from wood and plaster, many with thatch or wood shingle roofs extending over the pavements of narrow lanes meant that the fire was able to spread from building to building, from street to street and from ward to ward until a conflagration existed.
Early attempts to learn the lessons of the Great Fire met with resistance. Freeholders and leaseholders were so reluctant to have wider streets that the City authorities were forced to introduce strict regulatory regimes. In 1666, Parliament passed the Rebuilding of London Act which required:
- Replacement buildings to be made of brick and / or stone and with roofs made from stone, slate or tile;
- Buildings were not allowed to overhang the street beyond the limits of the plot of land; and
- Fireplaces and chimneys were required to meet strict specifications.
From the middle of the 17th century, London became a city of bricks - the results of which we can so easily recognise today. The aftermath of the Blitz and the Second World War led to a new era of London architecture and construction based on steel and concrete.
It was only last year that the last of the local pieces of legislation were repealed by the Government, essentially this removed the last of the regulations that were put in place to prevent the Great Fire from ever happening again. Their removal from the Statute books was done against the advice of those dealing with the consequences of fire, including Chief Fire Officers, the Fire Brigades Union and the insurance industry.
Although flooding in the UK usually attracts the headlines and the TV crews, fire has a much more traumatic effect on those whose lives are touched by it. Devastating though a flood is for a household, it is most unlikely to completely destroy a family home in the same way as fire. And from a commercial insurance perspective, insured fire losses, dwarf those associated with flood.
Some numbers for you:
- In 2014/15, the Fire and Rescue Services attended just over 155,000 fires: 31,000 of those in peoples’ homes;
- In the same year there were a tragic 263 fire-related fatalities, albeit that this was lowest death toll for 50 years. There were just over 7500 casualties;
- In 2004, there were £812 million of fire-related losses from 125,000 claims – an average claim cost of just under £6500;
- Yet in 2015, there were £1.14 billion of fire-related losses from 58,000 claims – an average claim cost of just under £20,000.
So despite the number of claims falling over time, both for dwellings and commercial premises, the average cost of a fire claim has increased dramatically, even when adjusted for inflation. As unlikely as it is, the ABI has calculated that the cost of the Great Fire, were it to happen today, would amount to £37 billion – the equivalent cost of four Olympic Parks. The repair cost of St Paul’s Cathedral alone would amount to around £600 million.
And in that context, the questions for debate are whether, in not ensuring that the policy and regulatory settings are right, are we as a society doing enough to prevent the tragic loss of life that fire causes? And, are we doing enough to protect both houses and commercial buildings against the perils of fire given the significant, economic costs fire can have for individuals, communities and society as a whole?
My answer to both those questions is no. And there are things that we can all do to change things for the better.
Sprinklers
As you have probably already been able to tell from the accent, I grew up in New Zealand where, for over 100 years, it has been mandatory to report fires to the authorities and where statistics indicate fire sprinklers have been effective in 99.7% of cases.
The fire sprinkler was invented in 1874 by Henry Parmalee. He installed them in his piano factory following several fires which resulted in him having difficulty obtaining insurance at a reasonable cost. The high cost and limited availability of insurance in some sectors during the Industrial Revolution increased the uptake of sprinklers across the country.
Today, automatic sprinkler systems are used more than any other fixed fire protection system and tens of millions are fitted around the world each year. And the benefits of sprinkler installation are clear: losses from fires in buildings protected with sprinklers are estimated to be a tenth of those in buildings without sprinkler protection. Their use means consequential losses and inconvenience can drastically reduce which helps businesses affected by fire to be back up and running more quickly. Insurer risk management teams often advise customers on the installation of sprinkler systems in areas of high risk to make the customer’s property safer. This enables insurance cover to be secured at the right price, where otherwise that cover might be inaccessible or unaffordable.
Warehouses are a particular concern for insurers. Given the changes in consumer purchasing demands and the rise in online shopping in recent years, retailers operating sophisticated logistical operations require large, un-compartmentalised spaces to house densely packed goods, to the point where some warehouses now measure over 50,000 square metres. In any given year, warehouse fires account for a significant proportion of the ABI’s declared annual fire loss figures. Every year, there are around 620 warehouse fires in England and Wales around 95% of these warehouses do not have sprinkler fire suppression systems installed. The RISC Authority Large Loss database indicates that the average cost of a warehouse fire is over £1 million. Overall, the annual cost to UK plc of warehouse fires is estimated at almost £250 million.
A case study demonstrates the point. In August 2011, the Sony warehouse in Enfield was set on fire during the rioting in London. The warehouse was 25,000 square metres. The fire resulted in the loss of the building’s structural integrity, as well as 3.2 million units of stock. The cost of damage to the building alone was over £10 million, with over £80 million paid out in insurance claims overall. A replacement building was opened 13 months later by the Prime Minister and yet it remains without sprinklers! Why?
The answer lies in Approved Document B of the Building Regulations 1991. Here the Department for Communities and Local Government only recommend that warehouses in England and Wales should have a fire sprinkler system installed if it is larger than 20,000 square metres. The current UK regulations for fire sprinkler installation in warehouses are overdue a review, especially in light of the demands of modern building owners. And that is what we at the ABI continue to lobby for. Until there is any Government action, it will be incumbent on all of us to continue to promote a better understanding of the economic benefits of the use of sprinklers across the business community and to encourage their installation more widely, especially in new-build warehouses.
But leave to one side for a moment the economic benefits of the use of fire sprinklers. Let’s consider the impact on the loss of life in a fire. Personally, I find it absolutely scandalous that there is no regulatory requirement for the mandatory use of sprinklers in newly built buildings that house the most vulnerable in society: those in care homes and schools.
The Building Regulations and British Standards offer guidance and encourage the use of fire protection measures. But that is simply not good enough.
In Scotland and Wales, the occupants of new and refurbished care homes must be protected by automatic fire suppression systems. Why not in England as well? Why don’t responsible care home operators install sprinklers on a voluntary basis to protect their residents? And why don’t families think more about the safety of their loved ones in an emergency rather than simply about the activities a care home offers or the quality of the food they provide?
Two recent examples demonstrate the value sprinklers provide to those care homes that have installed them.
On 21st November last year, an elderly man had a lucky escape from a fire caused by a cigarette in his flat. Fire-fighters from Sutton and New Maldon were called to a fire at the residential care home in Mickleham Gardens in Cheam at 11:12pm. The fire was out at 11:47pm. The man had already escaped the flat and the sprinkler system had extinguished most of the fire.
And on 25th March this year at around 5:00pm, a fire involving cooking fat occurred in a staff kitchenette at a 3 story, 23 bed supported living scheme in Hillingdon. The flash fire activated the sprinkler system which extinguished the fire. The damage was limited to 5 square metres and the fire service was able to leave the scene less than 90 minutes after the fire had started.
But it is not just in care homes where our current regulatory framework lets down the most vulnerable in society. The same concerns arise when thinking about schools. Although many schools do have systems in place to protect against property damage, the sprinkler systems in use in many schools are not necessarily designed to protect the lives of children. How can that be right when there are over 1500 fires every year in schools or other educational establishments? And even if all the kids escape a fire, the educational disruption that can result from having to take lessons in a port-a-cabin at the end of the sports field is not want anyone wants.
The sad reality in the cases of both care homes and schools, is that it will take a tragic loss of life and a public outcry before something changes to require the mandatory installation of fire sprinkler systems. But the real tragedy is that this loss of life is as inevitable as it is predictable.
Conclusion
So I suppose the question for us all to reflect on is whether, in 2016, we have really learnt all the lessons we should have taken from the tragic events of the Great Fire of London. Fire deaths are thankfully much rarer than they were 350 years ago. But we cannot, and should not, be complacent as a result. The ABI’s work on fire policy is not just about the insurance industry looking to reduce the cost of fire related losses. Naturally, if there are fewer fires, there will be fewer claims for insurers to pay. That’s a given. But our work is about more than that. It is an opportunity for us as an industry to take a thought leadership role on important regulatory and public policy issues. Those issues may not be on the front pages of the daily papers but they are nevertheless important. So we will continue to make the case to decision makers in Westminster and society at large about the importance of making both people and buildings more fire resistant and resilient. We do need to talk about the issues but fundamentally we need action, delivery and change.
None of us will ever be able to prevent all fires from occurring. But we should all strive to minimise the impact fire has on our families, communities and the wider economy. That is one of the founding principles of the Worshipful Company of Firefighters and something that more of us should be focused on achieving, now and in the years ahead.
Thank you.