The longest-running, price-fixing cartel in our history was the fire insurance cartel.
When the fire insurance cartel was first organized is now shrouded in the distant past. But when I started working with the then Insular Life FGU Insurance Group in 1951, the cartel was already a well-oiled machine.
The price list was embodied in a manual, referred to as The Tariff. Everything – from residential houses to apartment buildings, from embroidery firms to shoe factories, from warehouses to power plants – had a fixed price, called the “rate,” expressed in percent of the sum to be insured. Deviating from the fixed rate was called a “breach of tariff,” a mortal sin.
The tariff was a British invention, first applicable to the colonies, but later to any country that had a fire insurance industry, with London as its main reinsurance outlet. The Manila Fire Insurance Association (MFIA) was tied to an obscure office in London called The Fire Offices Committee (FOC), which prescribed new rules and had the final say on any local controversy on pricing.
Then, in the early 1950’s, riding on the new wave of nationalism after the Philippines gained independence, the MFIA cut its umbilical chord with FOC. Freed from its shackles, the MFIA was worse than any colonizer.
To keep members in line, steep fines were imposed on breaches of tariff.
When the Insurance Code was extensively rewritten in 1974, the fire insurance cartel became the only cartel in our history that had a government license.
Fines for breaches of tariff were raised to as much as a few hundred thousand pesos per violation. The cartel was so emboldened that, during martial law years, there was even talk of asking the Armed Forces to enforce the tariff.
In 1990, the Insurance Brokers Association questioned the constitutionality of the cartel in Court. The brokers won the case. But before the case could become final and executory, the cartel was shaken to its very foundations.
In 1994, in line with the ASEAN free trade agreements, Insurance Commissioner Eduardo Malinis, with the approval of the Secretary of Finance, cancelled the cartel’s license and threw the tariff manual out of the window. The companies, especially the small ones, predicted catastrophe in the land.
Today, because of free market forces, the price of fire insurance is about one-fifth what it used to be. Yet, the disaster predicted has never happened. On the contrary, the fire insurance business today is as vigorous – and profitable – as ever before.
With prices so low, more people have been buying fire insurance than ever before. The insurance brokers and agents, suffering from a drop in commission income at the start, have recovered. They now have more clients who bought, not only fire insurance, but other lines, such as accident and health.
What happened to the fire insurance industry should serve as a good lesson for government planners during the current economic downturn.
When consumers are holding on to their money amid uncertain times, the sellers – from restaurants to supermarkets, from grocery stores to department stores – should cut down their prices to attract the consumers back.
If cement were freed from the cartel, the price should settle down in a free and open market. Then construction should boom, and more cement will be bought, at a lower price per bag, it is true, but at a volume the cement factories may be hard put to fill.
The government’s stimulus plan should include an aggressive program to cut down prices of the most basic consumer goods.
As you can see, a price-fixing cartel is bad, not only to the consumer, but also to the members of the cartel themselves. When will we ever learn?