The Redacted Sherlock Holmes - Volume 4 Page 4

  I think Holmes was expecting Marshall to continue to set out his problem, while Marshall was expecting Holmes to interject something. In any event, there was a long pause which Holmes finally broke.

  “So what you are saying, Professor Marshall, if I may summarise, is that these three insurance companies are making significant profits which you cannot explain with your model of price and cost behaviour. The insurance companies would accordingly appear to be in the happy situation which may be presented thus.”

  Holmes abruptly stood up and seized a quill from one of the bottles of ink. He proceeded to draw, in a startling shade of violet, a curve starting at the top of the price axis, sloping gently downwards and only crossing the marginal cost curve at the extreme right hand edge of the page.

  Marshall stared at the new line Holmes had drawn. “In all the other industries that I have studied,” the professor eventually said, though his voice was shorn of the strident self-confidence displayed to date, “the economic laws that have been the subject of the exposition that I have given today, have proved as immutable as if they had been set in concrete. Casually setting them to one side is not something I would entertain.”

  “Does your deposition, Professor Marshall,” replied Holmes, drawing heavily on the cherry-wood pipe he was wont to smoke when in a disputatious mood, “not amount to asking me to investigate something that works in practice but gives no sign of working according to your economic theory?”

  Marshall was plainly not used to this sceptical line of questioning and flushed with anger at Holmes’s comments. Finally, he replied, “It is possible that in the longer run the insurance companies may register the declining levels of profitability which my theory suggests they should be showing but...” His voice trailed away and Holmes broke in.

  “In the long run, dear Professor, we will all be dead. And in fact the length of time that The Price Comparer has been in operation for should be quite sufficient for the insurance companies to show at least some sign of complying with your model.”

  I noticed Keynes gave Holmes a hard stare at the last remark, but no one seemed inclined to break the silence that followed Holmes’s acerbic observation. In the end, it was Keynes who piped up and said, “The situation we have described certainly works for the insurers, but does not work for the consumers. They are paying substantially more for their insurance than the costs that are arising from the risks that are being insured.”

  “So what is it you want me to do?” asked Holmes, turning to Mr Lawler. “Professor Marshall has evidently based his career on his economic model, which is foundering in the face of the irrational exuberance of the household insurance market. Would you not be better seeking a new model or new economists? They are, I understand, a breed of individuals where the supply is as infinite as their inability to reach a definitive conclusion is boundless.”

  “Professor Marshall and Mr Keynes are among the great minds in the country and key advisers to the Treasury,” replied Lawler. “The government’s entire economic strategy is based on following the tenets of what they espouse. We need you to make plain to them what they cannot at present comprehend. While I have no desire to launch a formal investigation against a major industry, as Chancellor of the Exchequer in a responsible government, I am eager to make sure that there is a proper understanding of how such a major business is operating. You, Mr Holmes, seem to me to be the perfect person to obtain such an understanding, as you are blessed with great far-sightedness and yet have no official status.”

  “Very well, Mr Lawler. If you leave this matter with me, I shall look into it, although I would warn you that so complex an investigation may take a considerable amount of time.”

  “The government is coming to the end of a five-year term of office,” replied Lawler. “There will be a general election in the next six months. It would be most valuable to have the results of your enquiry before we go to the country. Here is my visiting card as Chancellor. You may refer to me at any time you need.”

  After our three petitioners had left, I turned to Holmes and asked him how he proposed to conduct an investigation into the reasons why business practice failed to coincide with economic theory when it had proved beyond the wit of Professor Marshall and Mr Keynes. “What can you see that they do not?” I concluded.

  “The matter, Watson,” Holmes explained loftily, “is actually one of the utmost simplicity although I forbore to say so in front of such elevated intellects.”

  I gasped at my friend’s ability to cast light on problems which had defeated not only my mind but that of some of the greatest experts in the country.

  “The insurance companies,” continued my friend serenely, “have obviously mastered the art of being consistently lucky, which is a skill which falls outside the ambit of the dismal science of economics. The companies have discovered how to keep the premia they charge to the consumer consistently above the combined level of their overhead costs and the amounts they pay out to meet claims. All that remains for me to do is to find out how they have managed to achieve this. If you would return in a week, I will advise you of my success in investigating the skill of being consistently lucky.”

  My reader will understand my extreme curiosity in Holmes’s investigation. How was he going to examine the workings of fortune itself in a way that conformed to his normal intellectual rigour? I have already disclosed to my reader that I spend half my army pension in pursuit of winnings on the turf, so I could see no limit to the utility of such a discovery. I attempted to persuade Holmes to divulge a little more on his insight into the topic, but he would not be drawn. “Return in a week, dear boy,” he said. “I will give you an update on my progress then.”

  The seven days that followed seemed long and I found it hard to keep my mind off my friend’s investigation. If he could but identify the elixir of consistent luck, I would be forever in his debt. I returned agog early on the morning of the seventh day to find Holmes in confident mood.

  “We progress, Watson! We progress! I have spent the last week going through the newspaper advertisements placed by The Price Comparer displaying the prices of the three main insurance companies. The Price Comparer appears in the press daily. Prices for house insurance sometimes do not change for several days on end but when they do, the quote for one insurer falls below the level of the other two and that for the others goes up two days later.”

  “And how do they compare in total over the time since The Price Comparer started operations?”

  “The Price Comparer placed its first advertisement sixteen months ago. Over the approximately seventy weeks since then, Amalgamated British Co-insurance has been cheapest for twenty-five weeks and three days, Domestic Equitable Finance has been cheapest for twenty-two weeks and one day, and General Home Insurance for twenty-three weeks exactly.”

  Holmes showed me a piece of paper which tabulated which company had been the cheapest over what periods.

  “But the periods over which each offers the best price are constantly varying,” I pointed out when I studied it. “In a couple of instances - here and here - it is sometimes as short as a day and sometimes it stretches to three weeks or more. That hardly suggests a contrivance.”

  “But the average period that each insurer is the cheapest of the three is thirteen days. And as clinching proof, thirteen is also the modal number for the number of days that each insurer remains the cheapest and is the median.”

  “Do you regard such statistical analysis as significant?” I asked in surprise.

  “I do, in a world of consistent luck,” said Holmes, staring straight ahead. I paused, waiting him to expand on his opinion, but he did not do so and continued to stare into the distance.

  At length I asked him what he proposed to do next.

  “I shall infiltrate one of the insurance companies. Only by doing so will I be able to learn how they have mastered the art of
consistent luck. You may come back in two weeks when I will update you on progress.”

  I am bound to say that when I returned to Baker Street two weeks later I was as eager to hear developments as I had been on my previous visit. On my arrival, however, I found Holmes in one of his darkest moods. Without preamble or greeting, he started to explain what he had been doing.

  “The case, Watson, is a simple one.”

  “So what is the secret of consistent luck?” I asked, almost overwhelmed by curiosity.

  Holmes stared back at me in disbelief. “The art of consistent luck in business is the obvious one that the providers of goods and services fix their price to the consumer between themselves. This is the only way to explain the way they publish their prices so as to make comparison between them easy, charge lower premia for insurance bought by reference to The Price Comparer, and make record profits.”

  “Are such agreements between companies against the law?”

  “They make the company liable to an unlimited fine and the directors subject to a prison sentence.”

  “Could not their record profits be due to the fact that they have received lower claims this year?”

  “Such an argument might apply if we lived in a country subject to an extreme climate or geological instability where insurers had to build reserves of profit over several years to meet the costs of infrequent and unpredictable catastrophes. But climatic and geological conditions in this country mean that the costs that home insurers have to meet are much the same year to year when spread over a large number of domestic properties. Accordingly, they should not all be able to announce record profits. The cost of claims across the whole market will not vary much from year to year and the question for each company is how they can identify the lowest risks for the maximum premium. It should not be possible to be consistently right on this.”

  “So how have you spent the last two weeks?”

  “The problem with the investigation of a major price-fixing scandal is not the difficulty in identifying it but rather the difficulty in proving its existence. I had reasoned that such fixing would not be taking place without some form of communication between the three major companies. Accordingly, I befriended the man in charge of the post-room at Domestic Equitable Finance and prevailed upon him to choose me as his replacement when he received an urgent telegram saying that his mother was unwell and that he needed to spend a prolonged period with her. In my temporary position, I was able to review the addresses of all outgoing mail, the sources of all incoming mail and I was also able to monitor all incoming telephone calls as Domestic Equitable Finance is an organisation of a sufficient scale to justify having a telephone of its own. The destination of all calls is recorded in the telephonist’s office, and it was never a problem arriving before the telephonist to review where calls had been made the previous day. I was even able to go into the office of its chief executive, Mr Schlessinger, and to infiltrate his private correspondence.”

  “And what was the outcome of your investigation?”

  “I have drawn a complete blank. I found no evidence of collusion between the companies. Among a torrent of incoming and outgoing mail, there were letters to householders, letters to the government, and letters to The Price Comparer. But between the companies themselves, there was no communication whatsoever.”

  “So what are your next steps to be?”

  “I am not yet sure, but I would beg you to be in readiness to come as I may need you to act as a witness.”

  As my reader may imagine, Holmes’s statement that the secret of consistent luck lay in market collusion between its participants caused the quest for the elixir of good fortune to drop down my list of concerns. Accordingly, my excitement when Holmes came to my surgery a few days later was considerably more muted than when we had met the previous time.

  This feeling of lassitude on my part however was to last no more than an instant. Holmes had only to say, “A cab is waiting for us outside,” and I was transported back to the great days of the1880s and 1890s when such words were the prelude to so many adventures. In a few seconds I had, to the not-insignificant consternation of my patients, announced the closure of my surgery for the rest of the day. And in a few seconds more, we were hurtling pell-mell down Southampton Row and along High Holborn. Five minutes later, horses steaming, we screeched to a halt at the headquarters of General Home Insurance Ltd. With the effect that Holmes’s visiting card always produced, we were soon in front of Mr Peters, the company’s chief executive.

  Mr Peters was a tall, burly man with a bluff manner. He looked entirely at ease when Holmes said he was conducting an investigation into the conduct of the insurance industry.

  “Three companies,” explained Holmes, “dominate the household sector and all are showing high levels of profitability. Yet they publish their prices to consumers with The Price Comparer. This should make comparison of prices by consumers so easy that they can select the insurer who offers them the best proposition and make their buying decisions accordingly. This should have an adverse effect on your margins.”

  “Well Mr Holmes, it is clear that you have been most assiduous in reading up economic theory. Pray continue,” said Peters, drawing a large cigar from the box in front of him, cutting the end, and then puffing nonchalantly so that the room soon filled with grey-blue smoke.

  “How is your level of profitability possible in a country where the cost of covering claims is much the same from year to year and so the only difference in the costs of the companies is how efficiently they run their administration? One would expect that the three companies that dominate the sector to compete for business so fiercely that the price of premia to the consumer would soon barely cover the claims tendered once prices are directly comparable.”

  “My dear Mr Holmes,” said Peters loftily, “your studies of economics have obviously left you with an incomplete understanding of how the insurance sector works. We compete fiercely with the other two main companies. Each company has a large sales force whose members knock on the doors of householders across the land in pursuit of new business. The coverage we offer and the service levels we provide are all differentiated, and the prices charged by the various companies are subject to constant change. Furthermore, we wage a constant war on our overheads as we carry out regular zero-based budgeting exercises to ensure that all costs that do not pay for themselves in higher revenue are ruthlessly stripped out.”

  “If the market is so competitive, how is it that all three of the major companies have recently announced record profits? Surely in a world of fierce competition where the only barrier to entry is generating the capital necessary, your revenue would be so whittled away as to render the operation of all three of you minimally profitable.”

  “It pains me to labour the point, Mr Holmes,” said Peters, a disconcerting note of pity creeping into his voice, “but your knowledge of the insurance industry is inadequate for your investigation. Insurance companies take in money to cover risks and pay out if the risks are realised. That is not, however, the main source of their profits. Premia are paid in advance of the year that they cover. Insurance companies invest the premia they charge in deposits, securities and property. The investment income they derive from this is their principal way of making money. The bull market over the last few months on stocks and shares is the reason for the insurance companies’ high levels of profitability. If the stock market were to fall, then this would adversely affect our profits. Pure insurance is a very unforgiving business and the excess of premia received over claims paid out, almost negligible.”

  Mr Peters sat back serenely in his chair.

  “I have here a sealed envelope,” said Holmes, “which has come into my possession although I confess its abstraction was somewhat irregular. It is your daily private submission to The Price Comparer at the office of International Publications and this is today’s version.”


  I think Holmes was expecting an alarmed reaction from Peters. Instead, with an expression of infinite calm, Peters nestled further back into his chair and blew a cloud of cigar smoke into the air.

  “Well Mr Holmes, I guess you can’t rattle a man when his conscience is easy. I shall not ask how you managed to get hold of my private correspondence, but I shall be delighted to open this envelope for you, although you may find the contents somewhat disappointing in your quest for anything scandalous involving the insurance industry.”

  With great deliberation, Mr Peters picked up a horn-handled letter opener from his desk and calmly slit open the envelope, which he then handed to Holmes. I leaned forward to see what it might contain. Holmes reached inside and extracted a piece of note paper. It was blank on both sides. Holmes looked into the envelope to see if anything else were in there, but there was nothing.

  Mr Peters laughed uproariously. “I would have given more than a mere cat toy to have seen your face when you realised the paper was blank, Mr Holmes,” he jeered. “And your expression when you looked into the envelope to see if anything else were inside was beyond price. Take some snuff, Mr Holmes, and concede that you have been bested.”

  “This blank piece of paper must constitute a signal of some sort,” said Holmes in riposte.

  “My dear Mr Holmes, our offices don’t run to an iron, but if you would like to hold the piece of paper to the fire, you are my guest to check whether there is a message on it in invisible ink.”

  “I shall do precisely that,” said Holmes and, seizing the piece of paper, he strode to the open fire and held the document in front of the flame.” We waited for some message to manifest itself on the page but none did.

  “So why do you send envelopes containing blank pieces of paper to International Publications?” asked Holmes, and it was disquieting to hear a note of imprecation in his voice.

  “In my spare time, Mr Holmes,” said Peters blandly, “I write books on self-help for young ladies and my publisher is one of the numerous operations of International Publications. I advise young ladies on how to increase their self-belief and assertiveness. This will enable them to rise from their humdrum existence to become models of modern domesticity. It is a most lucrative activity for me as the demand for such books is very high, the demands on the writer facile, and the cost of production low.”