proof was presented was that between individuals. Large corporations were said to have privileges and rights which were inaccessible to the small property owner. A third evil complained of was the arbitrary regulation of agents and brokers, who were strictly supervised by underwriters' associations and not always in an impartial manner. The complaints briefly classified were (1) lack of statistical justification for rates, (2) discrimination, and (3) arbitrary regulation of brokers and agents. As a result of these conditions fire underwriters' associations came to be generally considered as evil combinations or pools detrimental to public interests, although they performed many legitimate economic functions. The earliest actions against them were at common law on the ground that they were against public welfare. Since the common law doctrine is that contracts in unreasonable restraint of trade are simply void, and unenforceable, no adequate redress could be obtained. Furthermore, it was required to show that the restraint experienced was unreasonable and affected an article of necessity. Insurance, however, was generally held to be not a necessity of life, although we have seen that, under modern economic conditions, it most assuredly is. Later, a general antipathy to trusts arose, followed by the passage of a number of State anti-trust laws. These laws prohibited contracts and agreements in restraint of "trade, "commerce," "business," "dealings in commodities," "products," etc., and the question had to be decided as to whether such expressions could be considered as including insurance. The natural result of this inquiry was the decision, in many cases, that the wording of the acts was too general to reach the business of insurance. The anti-trust laws in some cases were then made more specific, and amended so as to include "mechanisms," "conveniences," and also the "price or premium to be paid for insuring property against loss or damage by fire." These may be termed anti-compact laws, to distinguish them from the preceding class of statutes. The only defense against such laws was to claim that they violated State and Federal constitutional guarantees of the right of contract, equal protec*For a discussion of the complaints against fire insurance rating and underwriters' associations, see Robert Riegel, "Fire Underwriters' Associations in the United States," Chronicle Company, Ltd., New York, 1916, and Robert Riegel, "Fire Insurance Rates," in the Quarterly Journal of Economics, August, 1916. tion of the laws and due process of law. In most of the cases, however, the insurance companies were unsuccessful. The cooperative making of rates was therefore legally impossible in some States except by subterfuge. The next type of legislation showed an entire reversal in attitude. Whereas the previous laws had all claimed that concerted action and common rates were detrimental to the public, the new State rating laws required an identical charge for the same risk by all companies, but designated the State as the judge of what the rates should be. These laws are of three varieties, some requiring the filing of rates, others providing for the revision of rates found to be unfair, and still others making the establishment of rates a State function. We find at the present time, therefore, the following methods of regulation employed in various parts of the United States, exclusive of the general, vague and inadequate provision that there shall be no discrimination in rates. 1. The Anti-Trust Act, generally considered inapplicable to fire insurance combinations. 2. Anti-trust acts designed to apply specifically to fire insurance and generally successful in this respect. 3. Acts requiring the filing of rates for public inspection, some slight power of regulation being given to the insurance commissioner. 4. Acts permitting insurance companies to make and file rates, but giving the department of insurance power to revise rates when found to be inadequate, unreasonable or discriminatory, and to examine and regulate rate-making associations. 5. Acts placing the rate-making power in the hands of the State. CHAPTER XVII FIRE INSURANCE RESERVE Definition of the reserve.-The reserve at any given time is that portion of the premium income which is held in trust by fire or casualty insurance companies and is not yet earned, owing to the fact that the policy-holders have not yet received the full term of protection for which the premium was collected. It is the natural result of collecting the price in advance and delivering the product in the future. The policyholders pay for their insurance in advance for one year, often for three or five years, or even for longer periods; in fact, it is possible to secure a perpetual policy by the payment of one premium of sufficient size. In all these cases the company is holding prepaid premiums on policies for various terms, and from the time of the payment of the premium and the inception of the policy to its expiration, the insured has a decreasing and the insurer an increasing equity in the premium. While the entire premium is in the possession of the insurance company, only that proportion which is equivalent to the expired portion of the policy really belongs to the company. The remainder is held by the company as an "unearned premium reserve" or "unearned premium liability," as it is sometimes called. It is this sum which is sometimes called the "reinsurance reserve," although this term is open to misinterpretation. "Reinsurance" implies that this sum is necessary for reinsuring the risks and is held for that purpose. But this is purely incidental, as we shall see later, and is not the primary reason for holding a reserve. Object of the reserve. The reserve from the standpoint of the State may be regarded as a necessity for solvency, which cannot be determined without a comparison of all assets and liabilities, among which latter the paid-for protection must be included. As shown later, however, this is a very arbitrary method of evaluating the company's contingent liabilities. From the standpoint of the insured the reserve may be regarded as a fund which enables the company to return the unearned portion of the premium in case of cancellation, and provides for the reinsurance of the risks with other companies. 'See Appendix XXIX. It is very important to the insured, for example, to know that the insurance company has laid aside a sufficient sum to take care of all possible losses. If this were not done by maintaining a reserve of the unearned premium the company would be gambling on the probabilities of loss and endangering its future solvency. As was mentioned before, this reserve is a trust fund, and in that respect is very similar to the reserve held by life insurance companies. In Chapter XIV one of the provisions of the standard policy discussed was the cancellation clause, which provides that either the company or the insured may cancel, upon proper notice. It necessarily follows that the company must always be in a position, in such cases, to return the unearned portion of the premium. Also, if the company desires to retire from business and to transfer the risks to another company, the reinsurance reserve alone makes this possible. It is not to be inferred from this that another company will assume these risks under all circumstances for exactly the amount of the reinsurance reserve, for this depends on the character of the risks that are being carried. If the underwriting methods of the retiring company have been conservative it may be that another company will be glad to assume the business for an amount less than the unearned premium reserve. On the other hand, if a reckless or unfortunate company has accumulated undesirable risks on its books it may be that the reserve held would be considered insufficient. In fact, when a company goes out of business, it is most frequently due to unsuccessful methods of underwriting, and the accompaniment is usually an inadequate reserve. In these cases the transfer of the risks often requires a sum exceeding the reserve. Importance of the reserve in regard to premium payment. -It is the maintenance of this reserve that makes it possible to pay premiums in advance with safety. The insured knows that the portion of his premium which the company has not earned is kept in a separate fund and that he may secure his proper share of it if he surrenders his policy before maturity. Besides, the knowledge that this sum is subject to State supervision reassures him when prepaying the premium for one, three, or perhaps five years. Thus, if on July 1st the company insured property for one year and collected $365 premium, on August 1st only $31, or thirty-one days' premium could actually be considered earned by the company on that particular policy. The other $334 belongs to the insured. The company under this contract is supposed to furnish protection for the remainder of the year and can claim the premium as its own only in the proportion that protection has been given; at any time the balance in its possession is unearned and is held for the benefit of the policy-holder. A calculation as exact as the above, where the premium is reduced to a daily basis, is seldom made because of the unnecessary detail involved. Methods of satisfactory approximation will be described later. Financial importance of the reserve. From a financial standpoint the size and importance of the reinsurance reserve is to the fire insurance companies what the prospective or legal reserve is to the life insurance companies. If the probability of fire loss could be as accurately forecasted as the chances of death, a similar method of reserve calculation might be employed. Owing to the comparatively short period for which fire policies are written (usually for one year and seldom for more than five), the reserve per $1,000 of insurance is never nearly so large on the average as the reserve of life companies. The life insurance companies in building up their reserves are preparing to meet the face of their policies, knowing that death must occur, but in fire insurance only a comparatively small number of policies ever give rise to claims. If life insurance were written only on the term plan of from one to five years, then its reserve would also be far less per $1,000 of insurance. Nevertheless, the financial importance of the fire insurance companies lies in the reserve, which is the most important item in their business. A balance sheet of a large stock fire insurance company is shown below and a comparison of the unearned premiums (which is the reinsurance reserve) with the other items will serve to show the relative importance of the former. LEDGER ASSETS Book value of bonds.... $1,304,703 36 Cash in company's office.. 1,283 50 Deposits in trust companies and banks not on interest. 42,191 86 Deposits in trust companies and banks on interest.. 509,921 63 Agents' balances representing business written prior to October 1, 1918 Agents' balances representing business written subsequent to 183,115 78 1,829 57 Total $2,043,045 70 |