charged a higher premium than the normal risk. In fire insurance very little selection is exercised but the same results are attained by making the rates proportionate to the hazard involved. The violation of this principle has been well illustrated by the experience of some fraternal societies whose members were admitted without medical examination and the same rate charged everyone without regard to age. Such fraternal but inequitable method cannot long continue because the society accumulates a large number of extremely poor risks.2

Differences between life and other forms of insurance.— We have seen that in a great many respects all forms of insurance are similar. It would be a mistake not to notice, however, some of the differences between life insurance and other forms of protectioon. The principal differences to be noted are the following:

1. The event which is contemplated in life insurance is a certain event, the only uncertainty being the time when the event will occur. A vessel insured under a marine policy may or may not be lost; a workman covered by a workman's compensation policy may or may not be injured; but death comes some time to all. The marine insurance company, the fire insurance company and the casualty company may or may not be called upon to pay a claim on a given risk, but every ordinary-life contract results in a claim. One writer has very properly described this by saying that the life insurance premium must provide two funds, one against the certainty of death at an advanced age and one against the possibility of premature death.

2. The classification of risks in life insurance is generally more simple than in other forms of insurance. All risks are first divided into two great classes-those which are insurable and those which are not. Those risks which are insurable are then sub-divided into age groups. In some companies, where persons of impaired health are accepted, each age group is again sub-divided into standard and sub-standard risks. In other forms of insurance, however, there is usually a multiplicity of classifications. Thus in fire insurance every building differs from others in some particular and, aside from dwelling and churches, these differences are so great that schedules are required to appraise risks. In marine insurance a hundred different factors contribute to make up the hazard on a given 'See Appendix XIV.

risk, such as the voyage, the season of the year, the type of vessel, etc. In accident and health insurance a classification based upon occupations is used and in compensation insurance risks are rated according to the type of industry.

3. In most forms of insurance the contract is for a term of one year and often is cancelable by either party before this term has expired. The life insurance contract, on the other hand, while it may be canceled by the insured, cannot be canceled by the company, and therefore is usually a long term con- ! Furthermore, a company cannot change the premium during the course of this long period.

tract.

4. The principle of indemnity is more strictly adhered to in property insurance than in life insurance. Ordinarily a property owner may not recover more than the actual cash value of the property destroyed, while a life may be insured for any sum within reason. This question will be further discussed later in connection with insurable interest, where it will be shown, however, that the principle of indemnity in property insurance, emphasized by many text writers, is only relatively recognized.

CHAPTER III

TYPES OF INSURANCE ORGANIZATIONS

Classification of insurance organizations.-In all forms of insurance the insured is offered his choice of a number of different organizations for the purpose of insuring his risk. These organizations may be broadly classified into six groups; (1) self-insurance; (2) stock companies; (3) mutual associations; (4) reciprocal underwriters or inter-insurers; (5) Lloyds; (6) government or state agencies. To consider the advantages and disadvantages of each type of organization separately for every form of insurance would be a tremendous as well as an uninteresting task, inasmuch as the same ground would have to be covered many times. Each of these types has certain characteristics, whether it be writing life, casualty or property insurance, and from these characteristics its advantages and disadvantages naturally follow. We shall therefore devote this chapter to a general discussion of these various organizations, irrespective of the type of insurance business in which they are engaged, merely pointing out important quali fications relating to particular businesses.

1. Self-insurance.-Self-insurance is the endeavor of one who is subject to a risk to lay aside periodically sums which in time will provide a fund for reimbursing him for any loss which may occur. In the absence of insurance proper this is the only method available. Its advantages and defects are almost self-evident. It is apparent that if the insured himself operates the insurance fund he has it entirely within his own control at all times, can regulate the amount spent for expenses and, finally, any reduction in the risk involved is a direct saving to him. Thus if a person attempts to provide a fund against his own death he is obliged to furnish only the net amount required. No commission is paid to an agent for writing the insurance; no fees are paid to the State for the privilege of doing business; no salaries are paid to officials for managing the fund. If the insured regulates his habits and thereby increases his lifetime by five years the benefit accrues directly

to him. These facts would be equally true of any type of risk. But to provide a fund to take care of losses takes time. Suppose that he lays aside $1,000 per year and has a loss of $10,000 the second year. It is apparent that this is not insurance in the real sense of the word.

Such a plan may be attempted, of course, under widely varying conditions. The illustration of life insurance furnishes an extreme case of a field in which self-insurance is entirely inapplicable. Here, as we have previously seen, the person whose life is at risk has no assurance that the fund he accumulates will be sufficient, by the time the loss occurs, to cover that loss. He has no distribution of risks and consequently no law of average to rely upon. This is not self-insurance; it is gambling with death. On the other hand, let us suppose that a shipping company possesses fifty vessels ranging from $40,000 to $80,000 in value, all engaged in different trades. Let us suppose that the corporation has figured that $50,000 is the correct amount to be annually set aside in the insurance fund. In this case the selfinsurance plan can be operated with a greater prospect of success. It is hardly likely that many of these vessels will be lost in any one year, and should the losses or repair bills of one year be extremely high, it is probable that the following years will be low enough to counter-balance this exceptionally poor luck. There are two elements here present which were not present in the life insurance illustration; (1) a number of risks are covered instead of one, and (2) the risks are distributed and not subject to identical hazards.'

Between these two extremes are varying degrees of safety in the self-insurance plan. Where the two elements described above are present the disadvantages of the self-insurance plan are considerably reduced. Where these elements are to a large degree lacking it would be much better for the business man to at least supplement his self-insurance plan for a time with 1Compare, for example, the variations in fire losses in these two cases: City of Philadelphia $ 2,469

Penna. R. R. Co.

1908.

.$10,583

some other form of protection; later, if the self-insurance plan is successful he may gradually reduce the other forms of insurance he carries. In attempting to carry his own liability or compensation insurance he must bear in mind also that the cost is likely to increase, inasmuch as claims continue to come in long after the accidents have occurred. States usually permit self-insurance of the compensation risk only where the employer can satisfy the authorities that he is financially able to carry the risk.

2. Mutuals. The self-insurance plan is plainly inadvisable, due to the risk involved, for the small owner who possesses only one or a few properties. Therefore a mutual plan has been devised whereby small owners are enabled to insure themselves by combining their risks. The various individuals proceed to do jointly, under this plan, what would be impossible individually. We might take the law of one State as an illustration of the manner in which a mutual fire insurance company may be organized. At the time of organization a guarantee capital of not less than $25,000 must be provided by issuing shares which shall receive dividends of not more than 7 per cent annually. This guarantee capital is intended only as security for the payment of losses until the mutual is fairly started in business and is applied to losses only after its other assets have been exhausted. When the surplus of the mutual amounts to 2 per cent. of the total insurance in force the guarantee capital shall be retired and such capital may be retired by vote of the policy-holders and the consent of the insurance commissioner when the net assets of the company over and above its liabilities and reserve are for two years last preceding its last annual statement equal to 25 per cent. of the guarantee capital.2

Under this plan every member of the mutual organization becomes an insurer and an insured. Every member makes himself liable for his share of the losses which may occur. It may

happen that the premiums collected are in excess of the amount needed to pay losses, in which case the excess is returned to the policy-holder as a "dividend"-this term being a misnomer, inasmuch as the return is really not profits but saving. States have sometimes mistakenly decided to tax such dividends as if they were similar to the profits made by a commercial under

'See Appendix CI., for balance sheet and statement of a marine insurance mutual. See also Appendix XXIX and page 96.