■ '' ■' i' ■-''■\' ■^:" .;''•/• f->iB\f\^iS'iP ■v ■-■'.■'.•■■> Ik V v'.y,v'4 Report of the Special Fire Insurance Committee of the Louisville Board of Trade { uo L-ii— .„. Full Text of an Act Creating a State Insurance Board Approved and Signed March, 1912 With Graphic Charts ^th ^^'S Graphic Charts copyrighted BY George H. Holt S. ZoRN, Chairman Mahion E. Taylor Owen Gathright W. G. MUNN Alfred Bbandeis C. B. Castner J. A. Mathews SPECIAL FIRE INSURANCE COMMITTEE SlnmstJtll^ Month of ^Svaht Louisville, Ky., March 26, 1912. The Directors of The Louisville Board of Trade. Gentlemen: — Your Special Fire Insurance Committee submits herewith a report of the work undertaken in pursuance of the order given by the Louisville Board of Trade at the annual meeting of Jan. 6, 1911. The report consists of a comaected statement of the several acts of the Special Fire Insurance Committee together with excerpts giving the more important parts of the publications which were issued from time to time. To this is added extracts from reports received from Mr. Geo. H. Holt, who was retained by the Committee to advise with reference to Fire Insurance technicalities. The entire report is commended to the careful consideration of every member of the Louisville Board of Trade with the recom- mendation that such further action may be taken from time to time, as the Board of Trade may deem necessary. Respectfully submitted/' Chairman. Marion E. Taylor, Owen Gathright, W. G. Munn, Alfred Brandeis, Charles E. Castner, J. A. Mathews. Committee. THE WORK OF THE Special Fire Insurance Committee OF THE LOUISVILLE BOARD OF TRADE Toward the close of the year 1908, improvements in the water equipment facilities of the City of Louisville costing about six hun- dred thousand dollars were nearing completion. The hazard of the City had been greatly reduced by these improvements and the time was thought opportune to urge the removal of burdensome increases in fire insurance rates which had been in force since the Baltimore conflagration. A conference took place between representatives of the Louisville Board of Trade, the Louisville Water Company and the Louisville Board of Fire Underwriters at which assurance was given by the Underwriters that the increases complained of would be removed as speedily as possible through the approaching applica- tion of the Dean Schedule. The improvements under discussion were completed in due time and much additional work was performed to comply with requests made by the National Board of Fire Under- writers, but the year 1911 began with the high fire insurance rates still in full force and with no indications that the long deferred re- ductions in rates would be granted in the near future. The injustice of this situation was presented at the annual meet- ing of the Board of Trade on Jan. 9, 1911. Mr. James F. Buckner, Jr., Superintendent, in his report called attention both to the im- portant reduction in hazard due to the increased water facilities and to the continued failure of the Underwriters to put into effect , the promised removal of the 25 per cent advance in rates imposed upon Louisville shortly after the Baltimore Fire. The meeting acted upon the report and after a motion by Mr. E. H. Bowen ordered the appointment of a Special Fire Insurance Committee to investigate the subject of fire insurance rates. The Board of Directors on Jan. 25th, 1911, acting upon the recommendation of the President of the Board of Trade, and the Executive Committee, named the following to serve on the Special Fire Insurance Committee: S. Zorn, Chairman Marion E. Taylor . Alfred Brandeis Owen Gathright Charles B. Castner W. G. Munn J. A. Mathews -3 — ol-l-^^ ^^ s- The Special Fire Insurance Committee conferred with a Com- mittee appointed by the Louisville Board of Fire Underwriters and endeavored to secure a prompt and adequate readjustment of fire insurance rates, j A^controversy developed which continued for sev- eral months terminating in the assertion by the Underwriters that the principles and practices of underwriting upon which rates are based cannot be reviewed by those in other lines of business. <{^The Underwriters compared their business to the grocery or hardwar e__ trade in which there is open competition and claimed equaflmmunity from public criticism of the prices charged. The Special Fire Insur- ance Committee could not concede the analogy claimed by the Under- writers. The Underwriters are admittedly in combination to fix and maintain a common selling price. , > Moreover, the courts have fre- quently decided that Underwriting is a semi-public business and __ subject to regulation in the public interest^ An attempt was made to secure information by which the Special Fire Insurance Committee could be fully and correctly informed about the rating situation in Louisville. The Underwriters resisted the effort to obtain this in- formation, although called for by the Hon. Charles W. Bell, Insurance Commissioner of the State of Kentucky. The Underwriters main- tained that investigation of fire insurance rates is not among the duties assigned to the Insurance Commissioner by the Act which established his office. The Special Fire Insurance Committee felt that there should be an authoritative decision on this point. If the laws of Kentucky are deficient in protecting the interest of the buyer of fire insurance, the fact should be made known and an effective legislative remedy sought without delay. Attorneys Carroll and Middleton were retained and instructed to present an agreed case to the Court of Appeals for a decision defining the scope of the authority of the Insurance Commissioner in matters of this nature. The lower court decided that the Insurance Commissioner had no power to make the desired investigation. Some weeks later the Court of Appeals handed down a decision which reversed the opinion of the lower court and sustained the position taken by the Attorneys for the Special Fire Insurance Committee in every particular. C ^ Pending a decision of the Court of Appeals upon the power to investigate rates, the Special Fire Insurance Committee acted upon a suggestion of its attorney that the Legislature of Kentucky had ample power to impose a requirement that fire insurance rates shall be reasonable. \ It was resolved that a determined effort should be made to place the control of fire insurance rates with a State Board as the only final, fair and just solution of the problems. The Attorney of the Committee, Mr. A. J. Carroll, was instructed to prepare a model bill for the control of fire insurance rates by the State of Kentucky and a state-wide campaign for public support was determined upon. In the meantime,^lr. Geo. H. Holt of Chicago_> and corps of experts had been retained to uncover the discriminations against Kentucky which are evidenced by comparison of Kentucky fire insurance rates with those charged in neighboring states. Proof —4— of amazing discrimination was found in the dwelling rates imposed upon Kentucky as compared with those in force in Ohio, Indiana, Illinois and particularly in Missouri where the law compels the in- surance companies to quote reasonable rates. A tabulation of com- parative charges for dwellings was prepared based on the schedule filed with the Insurance Department of Missouri and the schedules in use by the Kentucky Inspection Bureau and the Louisville Board of Fire Underwriters. This tabulation with pertinent comments was sent to every newspaper, every Commercial Club and to every mem- ber of the Kentucky Legislature soon to convene. Indignant protests arose on every hand and a strong sentiment for redress became manifest. Then followed the publication of the provisions of the proposed Rating law together with letters from public officials charged with the administration of similar laws in other states. Ad- ditional facts were given out showing that the Dean schedule was being applied in Kentucky outside of Louisville, on a basis that makes every rate exactly one-third higher than that charged for a precisely similar risk in Ohio, Indiana, Illinois, Missouri and Kansas. This information was mailed to thousands of business men with a request that the sentiment of their locality with reference to the proposed Rating law be made clear to the members of the Legislature without delay. The response to this appeal was remarkable. Editorial after editorial appeared in the press of Louisville and the State at large commending the general purpose and features of the Rating Law submitted to the people of Kentucky by the Special Fire Insurance Committee "of the Louisville Board of Trade. Commercial Club after Commercial Club passed resolutions urging active support of the Bill by legislators. These resolutions were reinforced by personal letters and appeals from thousands of business men. A tidal wave of interest rolled up to the Capitol City which bore the Bill onward to final passage and enactment. Identical Bills were introduced in the two Houses of the Legis- lature on Jan. 11, 1912, and referred to the appropriate Insurance Committees upon which leading Legislators had been appointed to serve. A joint hearing was set for Jan. 24, at which all interested were invited to appear and present their views. The hearing took place and for six hours the two Committees gave interested attention to the arguments put forth for and against the Bill. At the close of the hearing the charges made in the opening business talk of Chair- man S. Zorn of the Special Fire Insurance Committee still stood out practically unchallenged by the speakers for the Insurance side. Gross discrimination against the people of Kentucky was conclusively proved. The sixteen members of the two Committees voted unanimously to report the Bill favorably with some minor amendments which were satisfactory to the Special Fire Insurance Committee. On Jan. 29th the Senate passed the Bill, thirty members voting aye and none voting no. Owing to less favorable position on the calendar the House was v/ slower in taking action, but not less emphatic in its verdict, 78 for the Bill, 7 against, the Bill reaching a vote on Feb. 16th. With the signing of the Bill by the Governor on March 4, 1912 (after further hearing, in which the insurance companies made a last stand), the finishing touch was given to one of the most remarkable manifestations of public sentiment that has found embodiment in state legislation. From the day that the first notification of dis- crimination was published to the people of Kentucky to the date that the Bill was signed by the Governor, about 100 days elapsed. Unusual unanimity of view by the people and press of the State found expression with equal unanimity among the representatives of the people and contributed to the rapid progress of the Bill to final enactment. /The work of the Special Fire Insurance Committee was made possible' by the guarantee fund furnished by public spirited citizens of Louisville.^ """^ The Fire Insurance Committee received aid from many sources in developing the facts which convinced the people of Kentucky that Legislative action was necessary to remedy the injustices with which they are burdened. Public officials in other states wrote frankly about their experience in administering Rating Laws and gave valu- able advice. Other Commercial Bodies furnished reports giving the results of investigations of insurance practices and rates which they have undertaken many facts were found in these reports which threw light upon the situation in Louisville and Kentucky. In . order to illustrate the extent of the work done and the conditions disclosed, the Special Fire Insurance Committee publishes herewith in detail the facts pertaining to the more interesting phases of the research which it has conducted. SCHEDULES Insurance men speak of the Dean schedule as if it were practically the only one in use. In fact, it is but one of many such devices used in the formation of rates for individual buildings and contents. Its application is limited to the mercantile class in the nineteen states controlled by the association of companies known as the Union or Western Union. The Union, however, has announced that in the future the schedules for all classes will be made over to conform to the Dean structure, which departs materially from former prac- tice. The former practice used a fixed basis rate to which various charges and credits were attached, all expressed in cents on the hundred dollars. The Dean schedule gives a series of tables of basis rates from which the rater makes the desired choice. The subsequent charges and credits are not expressed in cents on the one hundred dollars, but in percentages of the basis rate. ILLUSTRATION The effect of this change can be explained best by an illustra- tion. If the rater selects the "Sixty" table, the basis rate of a given building may be 48 cents and the charge for an opening at 20 per cent is 9.6 cents. If, however, the "Eighty" table is selected, the basis rate of the same building will be one third more or 64 cents and the charge for the opening will be increased in like proportion from 9.6 cents to 12.8 cents. All rates found under the Eighty table are one-third more than those found under the Sixty table, the risks being precisely the same in both cases. This peculiarity of the Dean schedule is not explained to the public when the table in use is high and the Special Committee experienced some difficulty in ascertaining that the Eighty table is still in use in Kentucky, although in Mis- souri and Kansas, where the Eighty table was used at the start, the Sixty has been substituted in recent years. No explanation has been given for this discrimination against Kentucky, which is the more marked from the fact that the table used in Ohio, Illinois and Indiana is the Sixty. DWELLING RATES The following tabulation was prepared to show the discrimina- tion against Kentucky in dwelling rates. TABULATION Dwelling rates fixed by companies in Missouri under require- ment of law that only reasonable rates shall be lawful, compared with dwelling rates exacted in Louisville by a combination of local agents of the same companies, and in Kentucky outside of Louisville by a combination of companies: ^^^^^ ^^.^^^ ^^^^^^ ^^^^^ Metal Roof. Shingle Roof. Metal Roof. Shingle Roof. St. Louis '. 20 25 30 35 Louisville 35 50 50 75 (Note that the existing rates in St. Louis are 15 cents for both classes of brick instead of 20 cents and 25 cents, and also, that the higher rates have not been accepted as complying with the law.) Towns of second rank in fire protection: Brick, Brick,""""" Frame,""'^" Frame, Metal Roof. Shingle Roof. Metal Roof. Shingle Roof. Missouri maximum 20 25 30 35 Kentucky basis 30 40 40 60 Kentucky maximum 50 65 65 90 Third Class : Missouri maximum 20 25 30 35 Kentucky basis 35 45 45 65 Kentucky maximum 55 70 70 95 Fourth Class: Missouri maximum 25 30 35 40 Kentucky basis 40 50 50 70 Kentucky maximum 60 75 75 100 Fourth and one-half Class: Missouri maximum 25 30 35 40 Kentucky basis 45 55 55 75 Kentucky maximum 65 80 80 105 — 7 — Brick, Brick, Frame, Frame, Metal Roof. Shingle Roof. Metal Roof. Shingle Roof. Fifth Class: Missouri maximum 30 35 40 45 Kentucky basis 50 60 60 80 Kentucky maximum 75 90 90 115 Sixth Class: Missouri maximum 30 35 40 45 Kentucky basis 60 75 75 100 Kentucky maximum 95 115 115 150 In Missouri, five rooms may be rented for boarders without extra charge. In Kentucky a charge of 25 cents is added for three boarders. In Missouri the law takes the hurden off; in Kentucky the rate- makers pile it on. RATES IN THE CITY OF LOUISVILLE Louisville is known among Underwriters as an "excepted" city or one in which rates and commissions are fixed by a Board of local agents instead of by the companies. The extent of the overcharge collected by the Louisville Board during a long term of years was shown by tabulations of premiums and losses. EXCEPTED CITY TABULATION In 1903 Mr. Wiley S. Littlejohn, of the Excepted Cities Com- • ^ mittee of the Union, prepared the following tabulation: ^^^ ^^^m^^f*^ Per Cent. Per Cent of Prems. 4/J _/ Premiums. Losses. of Prems. Over Losses. v^'^ f Chicago $58,419,458 $37,351,429 or 64 36 Jk \ Cleveland 11,347,794 8,056,233 " 79 21 ' \ Milwaukee 12,225,699 7,333,701 "63 37 r . LOUISVILLE 9,572,844 4,621,392 "49 51 ^ "" Cincinnati 14,012,117 6,693,093 " 48 52 i^ St. Louis 22,138,343 15,306,962 " 69 31 $127,716,255 $79,722,810 62 38 It appears from the tabulation made by Mr. Littlejohn that Louisville had been very profitable as compared with other cities for ten years — nevertheless the local Board, according to its own statement, made a 25 per cent advance in Louisville rates after the Baltimore fire, M^hich was in 1904, and is still in effect. (See Graphic Chart No. XI, page 29.) SPECIAL FIRE INSURANCE COMMITTEE TABULATION Statement of fire insurance premiums paid and losses paid in the city of Louisville during the twelve years ending December 31st, 1910: premiums. Losses. Ten years, 1899 to 1909 $10,772,630 $5,064,706 For year 1909 1,339,750 531,871 For year 1910 1,290,738 381,676 Total for twelve years $13,403,116 $5,978,253 5,978,253 Excess of premiums over losses $7,424,865 Average premiums paid per annum $1,111,926 Av. excess of premiums over losses per annum 618,739 Average per cent of annual excess of premiums over losses 55% This tabulation shows that the result of the advance in rates, during a period of six years, was sufficient to make the premiums collected during twelve years average $2.22 for each dollar of loss distributed by the Underwriters. t^ee also Graphic Chart No. XII and No. XIV, pages 30-31.) C ay THE EFFECTS OF RATING LAWS *.^ -.jii tf/Ci Before endorsing the proposition of a rating law for Kentucky, K oV^^ine Special Fire Insurance Committee made a thorough inquiry into ^V^ the effects of similar laws in other states. The reports received were ys) ^ favorable to the laws. Rates have been reduced without curtailing ^/^|^y»^the supply of sound insurance. -'No company has left a state or ^^ hesitated to enter because of the operation of a rating law and thus far no decision by an official administering such a law has been chal- \jJ^ lenged in court. The companies are not attempting to collect as high \jmN rates for dwellings in the states mentioned as in Kentucky, and the 'j^^ Sixty table is specified in connection with the Dean schedule instead ^/^ of the much higher Eighty table imposed in Kentucky. Such ex- actions cannot be imposed under the laws of these other states and must be abandoned under similar regulation in Kentucky. The comparison of the statistics of recent experience in states under rate regulation with those in others where combination is permitted with- out rate regulation, forces the conclusion that the rating law is / solving successfully a very serious problem, the reduction of tlie ^excessive expense of handling the fire insurance business. / WASTEFUL EXPENSE. %^ji^ The Special Fire Insurance Committee received several reports ' •^i^pm'similar committees and from State commissions in which there 'P^s general agreement that the expense of handling the fire insurance *^^^ business is extremely wasteful, and unwarranted by the services ren- yJ^ dered to the public. Many Underwriters admit this fact and deplore the inability of the companies to establish more reasonable relations or —9 — even to stop the constant annual increase in the expense ratio. While there is general agreement among all investigators as to the nature and extent of this abuse, there is disagreement as to the remedy which will be effectual. Considerable importance, therefore, attaches to the indications that the rating law is solving this problem successfully. The apportionment for the items of Company and Agency Interests and for losses which results from the levels of premiums maintained under regulated combination and under rate regulation, exhibits a remarkable contrast. Company and Agency Interests Received. Losses Paid. Under unregulated combination 55 per cent 45 per cent Under rate regulation 40 per cent 60 per cent The reason for this difference is obvious. So long as it is possible through combination to avoid the effects of uneconomic methods by keeping rates at high levels, expenses will grow until the public revolts, "When the rating law removes this resource by per- mitting only reasonable rates to be charged, unreasonable expenses must cease. The payment of excessive commissions comes to an end and ultimately the salary will supplant the commission wherever the good of the service demands. A large profit will be reaped from a 40 per cent allowance whenever the companies combine as assidu- ously for this purpose as they have combined in the past to overtop unreasonable expenses with top-heavy rates. REPORT SHOWING THAT NO INSURANCE COMPANY HAS LEFT A STATE BECAUSE OF REGULATION OF RATES Extract from letter signed by Hon. Ike S. Lewis, Superintendent of Insurance, State of Kansas: ' ' In answer to your inquiry concerning the workings of the anti- discrimination laws in this State I desire to say it has given very satisfactory results. I know of no companies that have withdrawn from the State on account of this law and at this time there are more fire companies transacting business in Kansas than at the time the law was passed. I will say, further, that the rates of insurance charged in this State are lower now than any time in the history of the State." From letter signed by Hon. B. P. Sullivan, Fire Marshall and member of State Rating Board, State of Louisiana: ''No insurance companies have withdrawn, but several new companies have entered the State during the year. Have ample insurance companies to meet the requirements of the people." From letter signed by Hon. Frank Blake, Superintendent In- surance Department, State of Missouri: "An act providing for the regulation of fire insurance rates was passed by the last Legislature. No insurance company quit the State —10 — on account of the passage of said act. I consider that there are suffi- cient fire insurance companies now operating here to meet the require- ments of the people. ' ' From letter signed by Robert L. Pollard, Secretary State Insur- ance Board of Texas: "So far as this Board knows, the companies are in the main working in harmony with the Board and no insurance companies have withdrawn from the State because of the law, nor have any local Texas companies retired on this account." STATE INSURANCE BOARD The provisions adopted in the Kentucky Law are the results of a careful study by the Attorney for the Special Committee, of the administration of similar laws in other states. Good features in these laws were selected and those found weak in actual trial were strengthened or rejected. The construction of a rating law involves decisions upon two questions with reference to which opinions differ. Shall the State merely supervise rates made by the insurance com- panies when complaint arises or shall the State assume the entire responsibility for the rates and issue the schedules under its own imprint? Shall the State Insurance Superintendent alone administer the law or shall there be a State Insurance Board? Of the states dealing with the subject two had pronounced for the State Board and State schedules while two had favored company schedules and the State Insurance Superintendent as the sole rating authority. The Special Fire Insurance Committee preferred State made sched- ules for the reason that while there is no practical difference in the final result, the responsibility is more clearly defined when the State takes the initiative and the burden of proof lies with the companies to show that the State is in error. Moreover, the pretense that schedules are the product of irresponsible individuals engaged in the private business of making rates, is effectually buried. The State Board was given the preference because it offers the better safeguard of all interests. The duties and training of the office of State Insurance Superintendent are such that these officers are in great demand for positions of trust connected with the insurance business. There is less chance of some impropriety resulting from this very natural situation if rate regulation is handled by a Board of which the State Superintendent is a member. —11— KENTUCKY STATE INSURANCE RATING LAW An act relating to Fire, Lightning, Hail, Windstorm and Sprinkler Leakage Insurance, and to regulate and control the rates of premium thereon, and creating a State Insurance Board and de- fining the powers and duties of said Board. Be it enacted hy the General Assembly of the Commonwealth of Kentucky: Sec. 1. There is hereby created a board, to be known as the State Insurance Board, which shall be composed of the Insurance Commis- sioner of the State of Kentucky, who, in addition to his duties now im- posed by law, shall act as Secretary thereof, and two other members who shall be citizens of the State and be at least twenty-five years of age, to be appointed by the Auditor of Public Accounts, one of whom shall be Chairman of the board. The Auditor of Public Accounts shall appoint two members immediately after this Act takes effect and the appointments so made shall be for a term of four years. The board so constituted shall exercise all of the powers and duties and be charged with all the responsibilities embraced in this Act and shall have the power to decide all questions required, authorized or per- mitted to be passed upon by this Act or incidental to the powers here- in conferred. The members of said board, other than the Insurance Commissioner of the State of Kentucky, shall each receive a salary of $3,000 per annum. The Insurance Commissioner of the State of Ken- tucky shall receive $600.00 per annum in addition to the compensation now received by him, for the duties imposed by this act. Said board in all legal matters shall be represented by the Attorney General, ex- cept when it is impracticable for the Attorney General to represent said board, in which event the Attorney General is hereby empowered to employ an attorney to represent said board, but the compensation of such attorney shall not exceed $3,000 in any one year to be paid as herein provided, and to employ such additional clerks or agents as may be necessary to carry out the provisions of this Act, subject, however, to the limitations contained in this Act as to the amount authorized to be expended by said Board. The salaries of all the members of said board and of the attorney for said board shall be paid monthly out of the treasury of the Commonwealth, out of the insurance fund, and the other expenses of the board shall also be paid out of said fund, and all payments shall be by the warrant of the Auditor upon vouchers signed by the chairman and countersigned by the secretary of said board. The office of said board is fixed in the same office as that of the Insurance Commissioner of the State of Kentucky, and all of the regular meetings of the board shall be held and all of the records kept in such office, provided, that the board may hold special meetings at other places in the State if it so determines. The office of said board and of the Insurance Com- missioner of the State of Kentucky shall always be kept together, and the clerical (force of said) board and said Insurance Commis- -12 — sioner shall be jointly employed and their services used for the work of both of said offices. Sec. 2. Every insurance company licensed to do business in this State, and doing, at the time that this act shall take effect, a business of insurance against loss or damage by fire, lightning, hail, windstorm or sprinkler leakage, shall within thirty days thereafter file with the Secretary of the said board : '*A. Two copies of every general basis schedule now being ap- plied in this State, showing all charges and credits, terms, privileges, riders and conditions, which in any wise affect rates, or the cost of insurance on property located in this State. "B. Two copies of every book of published specific estimates or rates with inserts showing revisions and additions to date; two copies of every printed rate card when the rate card system is in use ; and two copies of a statement showing every specific rate not given in a book of estimates or rates, or not given in a set of printed rate cards." ''The grade of each town or municipality shall be shown in con- nection with such information, together with two copies of the inspec- tion report (upon) which each town has been graded. The basis tables of the Analytic System that are in use in various localities shall be stated. In each case where the rate has not been formed by the ap- plication of a general basis schedule, the fact shall be noted. The in- formation shall show also the general type of construction and occu- pancy of each risk, and if it is protected by automatic sprinklers the fact shall be noted. Provided, that all companies that use the same general basis schedules and specific rates may authorize some agent to file the two sets of required information in common for all. Any company thus represented that deviates in any manner or particular from the information filed in common shall file in addition thereto a full statement of the plan of deviation which it follows. It shall be the duty of said board to consider the information thus filed, with reference to the reasonableness of the general basis schedules, charges and credits, terms and privileges, riders and conditions, which in any wise affects the rates or the cost of insurance, and with reference to the reasonableness of the specific rates and grading of towns and selections of basis tables. And said board shall make such alteration, change, rejection and substitution as will enable it to publish rea- sonable general basis schedules, showing all charges and credits, terms, privileges, riders and conditions which in any way affect rates or the cost of insurance, so that a reasonable rate may be formed for every (risk) in this State upon which insurance of every kind regulated by this Act is written. After the publication of a general basis schedule, in the manner hereinafter provided, it shall be used by each inusranee company regulated by this Act for the formation of specific rates on all risks of this class to which the schedule applies. The rate obtained by faithful application of the appropriate general basis schedule pub- lished by said board, shall be the lawful rate in this State. It shall — 13 — be unlawful to use any other rate, except that obtained by uniform deviation from published schedule rates in the manner hereinafter provided. It shall be the duty of the said board to act upon as full information as possible in the preparation of a general basis schedule, and the said board is hereby empowered to call for and obtain from the insurance companies regulated by this Act, any and all informa- tion that it deems useful. When the said board is ready to publish a general basis schedule, it shall notify all insurance companies and other interests concerned, by mail and such insurance companies and other interests shall examine the provisions of the said schedule. If objections are found, the objectors may file the objections in writing with the secretary of the said board within thirty days from the date of notification or may apply for a hearing upon the objections within the thirty days. If no objection is raised, the schedule shall be pub- lished at the end of thirty days from the date of notification and shall take effect immediately. If objections are raised or a hearing asked, the said board shall take action thereafter upon the objections and requests presented. Such action by the said board shall be duly reported to all parties interested, by mail, and the schedule as affected by such action by the board shall be published within fifteen days after such notification unless some interested party shall appeal to a court having jurisdiction, as hereinafter provided. Any interested party shall upon request be placed upon the mailing list of the said board and shall thereafter receive due notification of all actions taken by the said board that affect rates or the cost of insurance regulated by this Act. It shall be the duty of each insurance company governed by this Act, individually, or through some agency for the purpose, to apply each general basis schedule immediately after publication. The specific rates found by the schedule shall be filed with the sec- retary of said board as soon as found. The said board in publishing each general basis schedule, shall set a date at which the filing of all specific rates under the schedule shall be completed, but such date may be extended for cause by the said board. All insurance governed by a general basis schedule and written after the date of publication shall be entitled to the rates established by the schedule. During the interim prior to the publication of a general basis schedule for a given class of risks, the existing specific rates may be used and the existing general basis schedule may be applied to new risks and to new conditions in old risks, and the said board shall make such tem- porary orders modifying existing specific rates or existing general basis schedules as the situation may demand. Such modifying orders shall be subject to the same course of procedure as prescribed for the publication of general basis schedule. It shall be the duty of the said board to provide for a system of adequate reports, from insurance companies, their employees and agents or from property owners, and in such manner as the board may deem proper, for the purpose of showing the relation of losses to hazards in risks and rates of loss for normal and sub-normal risks. Such facts shall be given suitable publicity by the said board and shall be kept accessible to the representatives of any interest that may wish to know the — 14- facts in order to plant the removal of hazards or in order to justify a request for a modification in a general basis schedule or a specific rate filed with the said board. Sec. 3. Every insurance company which shall hereafter take out a license in this State to do business of the kind coming under the provisions of this Act, shall comply with all the requirements hereof, except that the information filed under Section 2 shall relate only to risks which are not governed by general basis schedules published by the said board and in force at the time the license is taken out. Sec. 4. The said board may at any time alter a published general schedule, but shall observe the procedure prescribed for the publica- tion of a general basis schedule. The said board also may at any time and in like manner recall a published general basis schedule and pub- lish an entirely different basis schedule in place of the one recalled. Any specific rate may be changed by any insurance company when a survey discloses conditions which necessitate an altered rate through the application of the appropriate published general schedule. Such altered rate shall be filed immediately with the secretary of the said board. The said board shall prescribe rules for the keeping of proper records by all companies, bureaus and boards dealing with the appli- cation of published schedules so that the accuracy of the application in any individual case can be ascertained at any time by the said board. For the purpose of this Act such bureaus and boards shall be considered to be agencies for their subscribers in the business handled. Any insurance company may pursue a plan of uniformly reducing all specific rates found for a class of risks by a general basis schedule. In such case the insurance company shall file notice of the intention to so reduce rates, showing the extent of the reduction. Sec. 5. No insurance company coming under the provisions of this Act shall engage or participate in the insurance of any property located in this State until it has complied with the provisions of Sec- tion 2 and Section 3 of this Act, and no company, officer, agent or representative of any company shall write insurance at a rate different from the rate fixed in accordance with the provisions of Section 2 hereof, or refund or remit in any manner or by any device any portion of the rates so established, or extend to any insured or other person any special credit, privileges, advantages, favor, inducement, or con- cession. Sec. 6. All general basis schedules which are in force in accord- ance with the provisions of this act shall be open to the inspection of the public and each local agent shall have and exhibit to the public a copy of the specific rates published for his locality. Whenever a risk is first rated, or re-rated, the local agent writing the insurance thereon shall furnish to the property owner a form showing all details in the formation of the rate. Sec. 7. Whenever any insurance company, or other person, or city or town or their authorized representatives shall be dissatisfied with any regulation, order or rate adopted by said board, such in- surance company, person or municipality, or their authorized rep- — 15 — resentatives shall have the right to apply in writing to said Board for a modification or change of such regulation, order or rate, and such writing shall set forth the action desired and the reasons thereof. Upon refusal of said board to take the action desired the applicant shall have the right within fifteen days to bring action against said board in the Circuit Court of this State at the domicile of the com- plainant, or where the risk is located, to have such regulation, order or rate vacated or modified, and shall set forth in the petition therein the particular ground or grounds of objections to such regulation, order or rate, and the modification or change desired, provided the said fifteen days shall not begin to run until actual notice of the action on said application has been given to said applicant. In any such suit the issue shall be formed and the controversy tried and determined as in other equity cases and the court may set aside, vacate or annul one or more of any part of any of the regulations, orders or rates adopted or fixed by said board, which shall be found by the court to be unreasonable, unjust or excessive, or inadequate to compensate the company writing insurance thereon for the risk assumed by it. No injunction, order or decree suspending or re- straining directly or indirectly the enforcement of any order of said board shall be granted; provided, that the court may permit any company complaining of any order, regulation or rate made by the said board to write insurance at the rates which obtained prior to the making of such order, regulation or rate complained of, upon con- dition that the difference between the rate complained of and the rate at which it is permitted to write insurance shall be paid into court, and upon the final determination of the suit shall be paid to the insurance company if the court shall find it entitled to the same, or to the holders of policies written by said company after the rate complained of is ordered, as the court may deem just and equitable ; and provided further, where any person or municipality or other insured or their representatives is the complainant, the court may order the difference between the rate deemed reasonable by the peti- tioner, and the rate complained of, to be deposited in court pending the final determination of the suit, in the same manner as herein provided for where the insurance company is the complainant; pro- vided further, that if the court does not grant the order hereinabove referred to, the rate, regulation or order fixed by the said board shall remain in full force and effect. Yfhenever any action shall be brought by any insurance company under the provisions of this section, within said period of thirty days, no penalties or forfeitures shall attach or accrue on account of the failure of the plaintiff to comply with the order sought to be vacated or modified in such action until after the final determination of same. Either party to any such action, if dissatisfied with the judgment or decree of said court, may appeal therefrom as in other civil cases. No action shall be brought in any court of this State to set aside any order by said board under the provisions of this act (until) all the remedies before the said board provided for herein shall first have been exhausted by the party com- plaining. — 16 — Sec. 8. The governing authorities of municipalities of any class, board of trade, commercial bodies or other kindred organizations shall be authorized to apply to the said board to fix fire insurance rates, orders or regulations for their respective counties, municipalities, or particular localities, or special class of risks they may represent, and to test the reasonableness of such insurance rates, orders, or regula- tions, which may affect the interest they represent, before the court in the same manner as provided for in this Act where suits are brought by individual insured interests. Sec. 9. Any insurance company coming under the provisions of this Act, or any director or officer thereof, or any agent or person acting for or employed by any such company, who alone, or in con- junction with any corporation, company or person, shall wilfully do or cause to be done, or shall wilfully suffer or permit to be done, any act, matter or thing prohibited or declared to be unlawful by this act, or who shall wilfully omit or fail to do any Act, matter or thing re- quired to be done by this Act, or shall cause or wilfully suffer or per- mit any Act, matter or thing, described by this act, not to be done, or shall be guilty of any wilful infraction of this Act, shall be deemed guilty of a misdemeanor and shall, upon conviction thereof, in a court of competent jurisdiction, be punished by a fine of not less than one hundred dollars and not more than three hundred dollars for each offense; provided, that if the offense for which any person shall be convicted, as aforesaid, shall be an unlawful discrimination, such person shall be punished by a fine of not more than three hundred dollars and not less than one hundred dollars, or by imprisonment in the county jail for a term of not less than thirty days, and not more than ninety days, or by both such fine and imprisonment. It shall be the duty of the said board to inform the Attorney General and the Commonwealth's Attorney of the district wherein the offense ha^ been committed of any violation of this Act. It shall be the duty of the attorney of the said board to prepare all of the evidence for the prosecution of persons violating this act, and he shall appear in per- son at all trials to assist the Commonwealth's Attorney in conducting the prosecution. Sec. 10. "Whenever a company is finally convicted in a court of competent jurisdiction, of violating any of the provisions of this act as provided in Section 9, it shall be the duty of the Insurance Com- missioner to revoke, if it be for the first violation of this Act by such company, the authority of such convicted company and its agents to do business in this State for a period of three months, and, if it be a second conviction, the authority of such company and its agents shall be revoked for a period of twelve months. The Insurance Commis- sioner shall give notice of such revocation in the manner now re- quired by law, and until the expiration of that time such company and its agents shall be without authority to do business in this State, and shall forfeit to the State the amount of the unexpired portion of any license which has been paid. Sec. 11. No person shall be excused from giving testimony or — 17 — producing evidence when legally called upon so to do at the trial of any person charged with violating any of the provisions of this act on the ground that it may incriminate him under the laws of this State, but no person shall be prosecuted or subjected to any penalty or for- feiture for or on account of any transaction, matter or thing concern- ing which he may so testify or produce evidence under the authority of this act, except for perjury in so testifying. Sec. 12. Said board shall have the right, at any time it may be deemed necessary by said board so to do, to examine through agents appointed for that purpose, or otherwise, the books, records and pa- pers of any insurance company affected by this Act and which per- tain to the rates charged for insurance regulated by this Act, and to examine the surveys, books, records and papers of any Board of Un- derwriters, Rating Bureau or organization of any character composed of insurance companies or their agents or person or persons perform- ing duties connected with rates of insurance regulated by this Act. If any insurance company, rating bureau. Board of Underwriters or other organization or agent fails or refuses to submit to such exam- ination, the Insurance Commissioner shall revoke or suspend authority granted to such organization or agent to transact business in this State. Sec. 13. The total amount which said board shall be authorized to expend in one year, for all purposes, shall not exceed the sum of twenty-five thousand dollars. It shall be the duty of the Insurance Commissioner of the State of Kentucky to, in addition to the amounts now authorized to be collected by him and paid into the State Treas- ury, collect from each insurance company coming under the provisions of this Act and doing business in this State during the preceding cal- endar year, or any portion thereof, the proportion of said twenty -five thousand dollars which the gross premiums collected by said com- pany during such year from persons or upon property located in this State bears to the aggregate amount of gross premiums so collected during such year by all insurance companies affected by this Act transacting business in this State, provided that in computing such gross premium receipts there shall be deducted therefrom the amount paid out for reinsurance and for return premiums or cancelled poli- cies. All moneys so collected by the Insurance Commissioner shall be paid into the State Treasury to the credit of the Insurance Depart- ment, for the purpose of paying the expenditures authorized by this Act. If at the end of any year, it shall be found that the aggregate amount expended in carrying out the provisions of this Act during such year has been less than twenty-five thousand dollars, the amount remaining unexpended shall be applied in the reduction of the amount to be collected from said companies for the ensuing year. Sec. 14. The provisions of this act shall not apply to purely mutual or to purely profit-sharing fire insurance companies incor- porated or unincorporated under the laws of this State and carried on or by the members thereof solely for the protection of their prop- erty and not for profit ; nor to purely co-operative interinsurance and — 18- reciprocal exchange carried on by the members thereof solely for the protection of their property and not for (profit) ; nor to companies, societies or associations organized under the authority and patronage of any church or religious denomination for the exclusive purpose of insuring the property of churches or religious denominations and the personal property of the pastors and ministers thereof against loss or damage by fire, lightning or storm. Sec. 15. Inasmuch as it is of the greatest importance to all owners of property in this Commonwealth that the rates of premium charged for the character of insurance embraced in this act be properly regulated and readjusted at the earliest practicable time, an emergency exists and is hereby declared and this act shall take effect from and after its passage. Edward J. McDermott, President of the Senate. Claude R. Terrell, Speaker of House of Representatives. Approved March 4th, 1912. James B. McCreary, Governor of Kentucky. OPINIONS OF STATE OFFICIALS WITH REFERENCE TO THE KENTUCKY LAW Fred S. Jackson, 4th District, Kansas. House of Representatives U. S. Washington, D. C. Washington, Jan. 3, 1912. Mr. S. Zorn, Chairman, Special Fire Insurance Committee of the Louisville Board of Trade, Louisville, Ky. Dear Sir: I have yours of December 29th enclosing the proposed fire insur- ance law of Kentucky. I have gone over it carefully and find no objections to it. I like the Board idea better than controlled by the Superintendent alone, but this was the best we could do at the time the Kansas law was drawn. Very truly yours, F. S. Jackson. (Congressman Jackson was Attorney General of Kansas at the time the Rating Law was passed by that State and successfully de- fended the law in the suit brought by the companies to have it declared unconstitutional. ) — 19 — y state of Missouri Insurance Department City of Jefferson Frank Blake, Superintendent M. D. Aber, Deputy Superintendent A. L. Reeves, Actuary January 16, 1912. Mr. S. Zorn, Chairman, Louisville Board of Trade, Louisville, Ken- tucky. Dear Sir: Your letter of January 13th received. I wrote you on January 2nd that the bill prepared by your Committee was the best rating bill I had yet seen. I have no amendments to suggest at this time. Our Attorney-General has ruled that under the new law specific rates cannot be filed by piecemeal, but that all the specifics for the whole State must be filed at one and the same time. The companies keep no classified experiences tending to show that their basis sched- ules filed are reasonable, when tested by the loss experiences, and I rcently directed them to begin such a classification in the year 1912. I have examined the tabulation comparing dwelling-house rates in Missouri and Kentucky. The rates set down for Louisville and Kentucky are higher than those to be charged in ]\Iissouri under the new basis schedules. Whether this is justified on the loss showing in Kentucky, I do not know. Extra charges are made under Missouri schedules for lack of foundation or interior lath and plaster finish, or for stovepipe, etc., through roof or side of building, and additional percentage reduction given for use of co-insurance clause. The new schedules show a reduction of five cents in almost all towns, except in St. Louis, where the brick rate is increased five cents, but I have seen no statistics justifying this increase in St. Louis. Yours very truly, Frank Blake, Superintendent. . HISTORY OF FIRE INSURANCE RATE REGULATION Kansas in 1909 was the first State to pass a law of this nature. Boards and associations of companies had been dispersed and pro- hibited for many years, and rate-cutting and rebating were prevalent discriminations. Certain local companies and many local agents de- sired the protection of a law prohibiting these practices and the State officials were inclined to view the proposition favorably provided the control of rates were placed in the hands of a State oificer. A bill containing this provision was drawn up and passed. Subse- quently the companies sought to have the law declared unconstitu- tional in the United States Circuit Court of Kansas. Judge Pollock of the court upheld the constitutionality of the law in every particular and after some months of delay the companies took an appeal to the Supreme Court. The opinion of Judge Pollock leaves little ground to expect a reversal of his position. The next State to deal with the subject was Texas. In this State the companies had been enjoined from conducting a rating bureau. The leading insurance men of the State prepared a bill with the intention of restoring the rating system. A State Rating Board was created which by the language of the bill should be dominated by insurance men on the theory that insurance men alone are qualified to pass judgment on rates. The rates promulgated by this Board were multiples of the existing rates and a storm of protests arose which ended in the remodeling of the law at a special session of the Legislature convened for that purpose. The remodeled law does not provide that the Rating Board shall be composed of fire insurance men. Louisiana followed Texas with a similar law promoted by the Board of Trade of New Orleans. In 1911 the local agents of Missouri secured the passage of a Bill in that State in order to put an end to rate-cutting and rebating. Washington recently passed a law which proved to be defective when administered. Insurance men make much of the action of the New York Legislature which in- vestigated the subject and provided for publicity and regulation of discrimination without positively regulating rates, but the action of a State having many large insurance companies and a 10-cent dwelling rate is not necessarily convincing to the State that pays these large insurance companies 35 or 40 cents for the same thing. CLASSIFIED STATISTICS The Special Fire Insurance Committee is not alone in discovering a dearth of information bearing upon the reasonableness of rates. To most business men the statement in the letter of Insurance Superin- tendent Blake — that the insurance companies never have kept any statistics with tvhich to adjust rates ivith fairness — will come as a shock. Yet it is the truth and the problem of establishing reasonable rates in the light of positive knowledge is one that the public must solve for itself. — 21 — 'i^ POLICY FORMS The striking variation in the policy forms and riders for similar risks in different parts of the country and even in the same city has been brought to the attention of the Special Committee during its investigation. The amount of co-insurance is nothing in some cases and in others, 75 per cent, 80 per cent or 90 per cent. The elimination of discrimination and production of uniformity in these particulars will evidently form an important part of the work of the State Rating Board. NECESSITY FOR STATE CONTROL "We believe that the following are conclusive reasons for the creation of a State Insurance Board : Because the underwriters have banded themselves together in secret organizations, under heavy penalties, not only of fines, but of business ostracism or boycott as a means of maintaining their unfair grasp upon the people. Because fire insurance premiums are a tax levied by monopoly, without the knowledge or consent of property owners. Because the underwriters in the State of Kentucky claim that the laws of Kentucky give the property owner no power to question or review a rate, however unjust, and affords no tribunal or official before whom the property owner may apply for remedy. Because other states and municipalities and organizations within other states have rights of review and redress, which were not granted by the laws of Kentucky to her citizens. Because the citizens of Kentucky ought to be entitled to every right and remedy to which the citizens of any other state are entitled at law or in equity. Because commerce and industry are now handicapped in Ken- tucky as compared with adjoining and sister states, and this handicap can be removed by legislation similar to that adopted in other states, and which has been found beneficial wherever adopted. NATURE AND EXTENT OF PROBLEM In order to exhibit in the clearest possible light the contrast between conditions as they existed in Louisville at the time of the appointment of this Committee and as they exist today under the new State Insurance Board law and the decision of the Court of Appeals, we quote here extracts from the report of Mr. Geo. H. Holt, made from time to time from October 25, 1911, to date. 1—22 — EXTRACTS FROM THE REPORT OF GEO. H. HOLT PRELIMINARY STATEMENT OF PROBLEM You have submitted to me for consideration the following problem : Is Louisville being well treated by the Underwriters: (a) Tested by recognized standards; (b) Tested by comparison with other cities; (c) If not, what can be done to improve conditions in the public interest ? The information which you are able to submit for consideration is meager and inadequate for a final determination, but is sufficient to justify the preliminary statement that Louisville is not being well treated by the Underwriters, judged by any standard whatever. Consider first the claims made by the Louisville Board of Under- writers, as follows: That Louisville is now and always has been treated fairly and generously by the Board of Underwriters. That rates have not been higher in Louisville than in other cities of similar class of hazard. That the Board of Underwriters have had absolute control of rates, rules, etc., in Louisville for a great number of years, free from interference by the companies. That about 1909 the companies represented in the Board de- manded that the Board apply the Dean Schedule to risks covered by that schedule for the purpose of securing a "uniform system of rating throughout western and southern territory." That the Board made tests of the proposed new schedule and considered it unsatisfactory, and protested against the demands of the companies, and after a long continued effort succeeded in getting a modification of the application more favorable to Louisville than the one proposed by the companies. That this delay has been, therefore, in the interest of Louisville rather than of the companies. That the re-rating of the business section under the Dean Sched- ule will produce an average reduction in fire insurance premiums at least equal to the 25% tax or after-charge which was imposed by the Board of Underwriters as Louisville's proportion of the gen- eral tax to recoup losses in the Baltimore Conflagration. That the Dean Schedule is now effective in Ohio, Indiana, Mich- igan, Minnesota, and Wisconsin, including the cities ; in the cities of Chicago and St. Louis; and in the states of West Virginia and Tennessee, not including cities. That they have submitted to your Committee certain summaries of the re-rating schedules covering a certain portion of the business district, but decline to furnish any additional information or to ex- plain the system further. That they have no knowledge of rates in other cities or states and cannot state how rates elsewhere compare with rates in Louis- ville upon the same classes of hazard. That they have furnished sufficient information to prove that the application of the Dean Schedule in the business district will greatly reduce rates. The Underwriters have furnished certain general statistics which are set out herein under the heading "Louisville Fire Insurance Kecords." (See page 26.) COMMENT Your Committee contends that the information furnished is not adequate to form the basis of any general conclusion, and it does not establish the claim of the Underwriters that the application of the Dean Schedule throughout the business district will greatly reduce rates. The property and insurance values located in the areas reported upon are not of an average character and are not of sufficient variety or volume to form the basis of any adequate test. The Underwriters have failed to give you any satisfactory answer to your inquiries concerning the effect of the application of the Dean Schedule in other cities. This makes it impossible for you to make comparisons with other cities. Your Committee, therefore, is not in position to judge either by comparison of the former rates with the present rates; or by comparison of results produced in Louisville with results produced in other cities; whether the application of the Dean Schedule will or will not effect a reduction in rates in accordance with the claim of the Underwriters. The Underwriters also refuse to give out to property owners the "Schedule of Rate" on separate properties, to which they are entitled under the Dean Schedule, excepting in a few instances. We have carefully examined the cases which have been placed in our hands, including the Board of Trade Building, and in every case find that the schedule has not been correctly or fairly applied upon the basis of the schedule, but the number of cases is too small to generalize from. BALTIMORE AFTER CHARGE No more flagrant example of discrimination against any city could be found than the 25% arbitrary charge which the Board of Underwriters imposed upon Louisville as its part of the general tax to recoup losses in the Baltimore Conflagration. No such charge was imposed upon Baltimore itself, nor was it im- posed upon property owners generally throughout the country. — 24 — ^r i> Even if some excess charge were justifiable, the amount of the charge and the long period through which it has been collected are entirely indefensible and inexcusable. Upon the basis of the figures given by the Underwriters to your Committee, we estimate that this after-charge which has been imposed upon Louisville property owners has produced a sum equal to 8% of the total insurance loss in the Baltimore Conflagration. As Louisville is insuring only about $180,000,000 of property while the total amount of insurance outstanding in the United States approximates $50,000,000,000, the injustice of collecting 8% of the Baltimore loss from Louisville alone needs no elaboration. COMPARISON WITH RECOGNIZED STANDARDS The Underwriters and the companies have in their possession all of the statistics, from whatever source, which show the result of their stewardship. Through their daily reports and the multi- plicity of records and reports and audits, which make up their system of accounting, they have acquainted the insurance companies with every detail of the business. Nothing has been hidden either in the way of rules, rates, permits, favoritism, discrimination, relief rates, competitive rates, rate wars, errors and corrections of classifi- cation, record of loss adjustments in great detail, (a most illuminating source of information) commissions, rebates, concessions, profitable and unprofitable classes, the increase or abatement of hazards, the improvement in water supply or fire protection, and numberless other details which go to make up the knowledge upon which the justice or injustice, the adequacy or inadequacy of a rate or of a rule may be determined. This information the Board of Underwriters refuses to make public, and also refuses to have any disinterested authority examine into it in the interest of your Committee. In the absence of more complete information, we are able to make \ the following demonstrations: INSURANCE STANDARD For a long term of years, rate-making has been based upon the theory that 50% of the values subject to fire loss would be covered by insurance. Upon that theory the Underwriters have for many years approved a standard distribution of premiums into the following items : Fire losses, conflagration and ordinary 60% All expenses, and 5% for profit 40% Total 100% A computation of 5% upon all premiums charged throughout the United States for any term of ten years or more will produce — 25 — a result in excess of the conflagration losses for that period. This proves that such a charge, which has been included in the rate, is adequate to meet the hazard of sweeping conflagrations; in other words, the experience of the United States is that the conflagration risk is adequately covered by the 5% charge heretofore collected, without any necessity for collecting an arbitrary after-charge like the Baltimore after-Charge imposed upon Louisville. The schedule is based upon the expectation of a loss not exceeding $5.00 for every $1,000 of insurance during the previous five year period. LOUISVILLE FIRE INSURANCE RECORDS Total amount of insurance at risk, as reported to the Board of Trade Committee by the Board of Underwriters, approximately $180,000,000. Normal loss of $5.00 per $1,000 of insurance at risk amounts to $900,000. That is to say, the normal fire loss of Louisville is $900,000 per annum. Tabulations of returns made by the Underwriters to the State give the following results: (See Graphic Chart No. 10.) Premiums. Losses. 10 years from 1899 to 1909 $10,772,620 $5,064,706 15 years from 1893 to 1907 15,390,379 7,293,836 1909 1,339,750 531,871 1910 1,290,738 381,676 The following computation gives the loss ratio that would be normal for the premiums paid by Louisville, compared with the loss ratio actually experienced : Year. Premiums. 60% for Losses. Actual Losses. Unbumed. 1909 $1,339,750 $803,850 $531,871 $271,979 1910 1,290,738 834,442 381,676 452,766 Amount unburned to the credit of Louisville $724,745 This tabulation shows the enormous discrepancy between the normal premiums which ought to have been collected from Louisville, and the premiums which have actually been collected. It shows the large sum which has been taken from the capital or surplus of the citizens of Louisville and diverted to the use and profits of (mainly) non-resident insurance companies. If other cities have not been overcharged in the same proportion that Louisville has been overcharged, then the Underwriters have placed a handicap upon the property and commerce of Louisville which puts it at a disadvantage in the competition with other cities. UNDERWRITERS' TEST OF RATES The tests which were made by the Underwriters to determine the basis of classification to be applied to Louisville under the Dean Schedule were doubtless designed to ascertain whether the application of the Dean Schedule would produce the same premium income (that is to say gross income) that was being collected under the then exist- ing system. That is not what the citizens of Louisville desire or what they are entitled to. If the seller has fixed a price which is unjust and excessive, the buyer is entitled to a correction of the excess. The Underwriter who ignores his responsibility to the property owner and shares with the insurance companies such unjust gain is not only guilty of extortion but of a violation of his trust. V "-^ The Underwriters in Louisville have for two generations exer- ' cised a trust toward the citizens of Louisville. The citizens of Louis- ville had the right to expect that the Underwriters would act as their agents and represent their interests adequately and justly in their relation to the insurance companies furnishing the indemnity. If from motives of greed or selfishness, or by reason of carelessness or indifference, they have exercised their trust to the injury and loss of their principals and neighbors, an explanation and much more than an explanation is due from them. ,^ *-""' PROOF OF OVERCHARGE I have prepared and hand you herewith certain graphic charts which give in a condensed form the proof of overcharge and dis- crimination. No. 10. Louisville Fire Insurance Records. No. 11. Louisville Ten Years' Experience— 1892-1902. No. 12. Louisville Premiums and Losses — 1899-1910. No. 13. Louisville Dwelling Rates. No. 14. Louisville Cost and Return to Policy Holder. We have also tabulated and analyzed fire losses in Louisville for the past five years and have classified the hazards which have caused or suffered the losses. These calculations show not only discriminations in rates, based either upon premiums or upon loss to value, but they also serve to disclose the nature and extent of the remedies which should be applied. These tabulations further show that with proper treatment of the hazard as a community problem instead of an individual problem and with the proper adjustment of rate to fire loss, the fire waste of Louisville should drop to $400,000 or less per annum and remain below that level for many years to come, and the cost of insurance should decrease in proportion to the savings in fire waste. -27 — Proof of Overcharge Graphic Chart No. X Geo. H. Holt LOUISVILLE FIRE INSURANCE STATISTICS Loss to Amount at Risk Amount of Insurance at Risk $180,000,000 Normal Loss Ratio at $5 per $1,000 900,000 Normal Loss 1909-1910 $ 1,800,000 Actual Loss 1909-1910 913,547 Savings to companies 1909-1910 $ 886,453 Normal Loss for Two Years $1,800,000 Actual Loss $913,547 Savings $886,453 Loss to Premiums Premiums 1909-1910 $2,630,488 Normal Loss 60% of Premiums $1,638,292 Actual Loss 913,547 Savings to companies 1909-1910 $ 724,745 Normal Loss $1,638,292 Actual Loss $913,547 Savings $724,745 Reduction of Premiums proportional to Savings = Nothing. — 28 — Proof of Profit Graphic Chart No. XI Geo. H. Holt LOUISVILLE Per Cent of Losses to Premiums Compiled from Littlejohn's Table of Excepted Cities Ten Year Experience 1892 - 1902 CLEVELAND 79% ST. LOUIS 69% CHICAGO 64% LOUISVILLE 49% In spite of this low loss record, the Louisville Board of Under- writers added to Louisville rates an arbitrary charge of 25% after the Baltimore Fire, which was not imposed by the Boards upon the other cities. This chart shows that Louisville deserved a reduction of rates instead of an advance at the time of the Baltimore Fire. ■29 — Proof of Profit Graphic Chart No. XII Geo. H. Holt LOUISVILLE Premiums and Losses Special Fire Insurance Committee Tabulation Twelve Years 1899 - 1910 Premiums Paid $13,403,116 Losses Paid $5,978,253 ■^■■^^■■H 44.6% Normal Premium $9;963,000 Overcharge $3,440,000 Louisville Overcharge 34.6% of Normal Premium. Continental Experience — 26 Years Spectator Tables United States and Canada Premiums $281,440,712 Losses $167,440,712—59.6% Rate of Premium 1910 : Kentucky $1.36 per $100 at risk United States and Canada $1.11 per $100 at risk — 30— Proof of Overcharge Graphic Chart No. XIII Geo. H. Holt LOUISVILLE Brick Dwellings Shingle Roof ST. LOUIS 15c LOUISVILLE 50c OVERCHARGE 35c Overcharge Louisville over St. Louis, 233 per cent. MISSOURI MAXIMUM RATE 25c KENTUCKY MAXIMUM RATE 65c Overcharge Kentucky over Missouri 260 per cent. —31 — Proof of Overcharge Graphic Chart No. XIV Geo. H. Holt LOUISVILLE Cost and Return to Policy Holder Every $1.00 received for Losses. Cost Policy Holder in Premium Paid — ten years' experience. U. S. Continental $1.66 Louisville $2.20 Overcharge $ . 54 Louisville Overcharge compared with all United States 33% , — 32 — GAIN AND LOSS EXHIBIT I hand you herewith certain tabulated summaries of the Gain and Loss Exhibits as shown on the Convention form of report made ") annually by the companies to the States of Connecticut, New York r\ and Massachusetts. These cover the years 1909 and 1910, and J7> combined. (Page 34.) ^ ^^ /^t is a common thing for the Underwriters to make the claim^ that there is "no profit in the business" and to show various tabula- tions and summaries Which seem to indicate that fact. The tabula- tions from the Gain and Loss Exhibit, however, completely disprove that claim. They show that the tabulations prepared by and for the companies cannot be accepted as a basis of rate-making without - close scrutiny and further analysis. ^^ The reports show the total number of companies reporting to these states. The smallest number of companies reporting is 154 in Connecticut in 1909 and the largest number is 232 in Massachusetts in 1910. Every company reporting gives practically the same figures for its individual company for each of the states. No two states have the same list of companies and allowance must be made for that fact in handling these statistics. NOTE— The Graphic Charts are copyrighted, but permission is hereby given for their use and publication with the report of your Committee. —33 — CO O D OQ 1^ s mm X o Q < o o (—1 H o o u a OS o O ■— 1 .-H05 CO'* c<) CO CO-* Total Gains in Surplus 2S o6~o 05o UO '*•* 00 t^(N O) C^ .-H CO «© «© 00 CO "* . t^OO lO CO^ 1—1 (Nr-l T}< e© m Olt-- CO 00 CO (N »CCO (N 00 Oi 00 oco ^ 00 CO (NOO I— 1 CO(M CO €# e© Oi05 00 OiCO CO 00 CO (M Oi CO CO 00 iM U5«:) IM (M 00 1— ( t^ Oi y-i 1— 1 t^CO -* 00 05 00 t^'-H 05 00 CO r-^ coco t^ y^ e© t>- 00 i> 00 oio 05 ■* lO ■* OCO CO t^t^ T}< 1>,-H 05 0-* '^ lO t^ (N -* 00 CO r^o 00 co»o 00 1— I 1— I (M «© «© CO kO ^ coo -* C0 05 (M coco «o lO Ci lO . 05 00 05 r>- (MIM lO ^ «© IXM i-HCO (M(M OiO O I-H 05 05 1— 1 t-H — 34- COMBINED EXPERIENCE: 1909 AND 1910 (Expressed in Millions) Conn. N. Y. Mass. Risks in force (average) 39,334 42,616 (not given) Premiums earned 479 554 580 Underwriting gain 34 31 72 Investment gain 35 42 40 Combined gain 69 73 112 Carried to surplus 34 40 39 Margin paid out in dividends and otherwise (except expense items) 35 33 73 Dividends to Stockholders and Mutual Policy Holders included. BURNING RATIO Losses incurred upon $100 at risk: 1909 1910 Combined Connecticut 316 .321 .318 New York 341 .346 .344 Massachusetts (not reported), A ratio of 50e per $100 is normal, as per Insurance Companies' published standards. The above difference ought to be looked into in the public interest. Rate of premium earned upon amount at risk: Massachusetts 60 New York 65 This differs amazingly from the National Board figures. Losses incurred to premiums: Connecticut 52.17 New York 55.05 Massachusetts 49.88 This reflects the higher loss ratio in New York than in the other two states. But even that ratio is below the 60% standard of Loss to Premium. The whole country experience is therefore below — not above — the expected by a large margin. The Companies had the money. What did they do with it? Proof of Profit Graphic Chart No. V Geo. H. Holt GAIN AND LOSS EXHIBIT Banking Department The companies claim that they make no money out of Underwrit- ing, but make their large earnings out of the "Banking Department." Compare the combined earnings as below: Conn. N. Y. Mass. Underwriting (millions) 34 31 72 Investment income earned, " 53 61 62 That shows a large gain from underwriting, but still larger gain from investments. Compare, however, the amounts shown in surplus: Conn. N. Y. Mass. Underwriting gain in surplus 34 31 72 Invested gain in surplus 35 42 40 From Underwriting (Conn.) $34,000,000 From Investments (Conn.) . . $35,000,000 Combined gain in surplus, three states : From Underwriting $46,000,000 From Investments $39,000,000 36 — Proof of Profit Graphic Chart No. V-a Geo. H. Holt GAIN AND LOSS EXHIBIT Banking Department — Continued Note the losses in investments which have come out of invest- ment earnings: Conn. N. Y. Mass. Investment income earned 53 61 62 Investment gain in surplus 35 42 40 Loss in investments 18 19 22 Earned (Conn.) 153,000,000 Carried to Surplus $35,000,000 Shrinkage $18,000,000 In other words, the loss on sales, or upon shrinkage of value, in investments approximates $20,000,000, which is now shown as taken out of Investment Earnings. This is for two years experience. What item was it taken out of during all the years in which the companies were not required to report the Investment Department gains and losses? Where did the Investment Department expenses appear in those older reports which are now utilized to show that in a long term of years there has been no profit in underwriting? — 37 — We have a right to be shown that the tabulations of a long term of years which are presented as an argument against State Rating, contain facts and figures which are germane to the subject and which are so correlated to existing conditions and prospective con- ditions as to be in any measure controlling. These are problems which should be left to the deliberate and authoritative determination of a State Rating Board, subject to review by judicial authority. This is the meaning of the State Rating Bills now proposed, and under their provisions no injustice will fall upon any individual or class. Can this be said of exist- ing conditions? DISCREDITED STATISTICS The statistics submitted by the underwriters ought not to be ac- cepted without full investigation. They have been discredited over and over again, and will be discredited by your Committee upon investigation. They deal with facts and conditions in the distant past, and with companies and methods long since defunct. They have not been tabulated upon any approved system designed to disclose the facts in the public interest. Within the past two years the companies have been required to report to certain of the states a new tabulation, called the Gain and Loss Exhibit, or sometimes called the Underwriting and In- vestment Exhibit. We have now in printed form two years of re- ports of this kind for more than two hundred companies, and these exhibits totally discredit and disprove the previous tabulations and summaries of published results. The difference disclosed between the tabulations of the Gain and Loss Exhibits and the previous standard tabulations, designed by the companies for their private ends, is a matter of enormous sums of money. It is no trifling percentage, but an appalling sum. These facts are known to the insurance men themselves, and still they publish and offer you the discredited statistics. Your Committee has not the time, nor is it desirable from any standpoint, that it should undertake to investigate and pass upon the credibility or accuracy of this mass of statistics. That work should be left to the State Rating Board and its organization, de- N. signed and equipped for the purpose and bound to do the work ^impartially. — 38 — SPECTATOR TABLES (See Graphic Chart No. Ill, page 46.) Take another set of figures, compiled from THE SPECTATOR Year-Book, for ten years' experience from 1901 to 1910, inclusive, as follows : Capital (average) $ 80,000,000 Net surplus (average) 197,000,000 Total income 3,055,000,000 Paid for losses 1,523,000,000 Paid for dividends 240,000,000 Expenses other than losses and dividends 968,000,000 Average number of Stock Companies. . 323 Average number of Mutual Companies 234 Total 557 Consider that item of "Expenses other than losses and dividends," $968,000,000, If a man is at liberty to take out of the bag all that he wants to spend, how much will he leave in it for the item of *' Excessive profits," to be returned to the premium payer in the form of reduced rates? How long will the premium payer probably wait for his share? The figures of Mutual companies are properly included, because they are included in any determination of the inadequacy or equity of rates. They are included by THE SPECTATOR, and must be included when quoting THE SPECTATOR. These are the figures in THE SPECTATOR Year-Book, and un- til you juggle with them, they show this condition of things. They include all of the recent conflagrations, San Francisco, Baltimore, Toronto, Rochester, Paterson, Chelsea, and many others. Think of that a moment ! These profits are over and above all losses, conflagration and ordinary. The Company method is to make up a different tabulation, and to shift items here and there, and then to draw off percentages and partial figures of one kind and another, so that when they present these emasculated statistics, they may indeed express accurately the results of such calculations, but those calculations are not designed to show and do not show the whole state of the case. — 39 — NO SHRINKAGE IN CAPITAL OR SURPLUS To state the facts in another way, utilizing the same SPECTA- TOR table : Capital, 1910 $ 94,734,035 Capital, 1901 69,930,423 Gain in Capital $ 24,763,612 Net Surplus, 1910 $257,529,237 Net Surplus, 1901 162,083,426 Gain in Surplus $ 95,445,811 This shows : 1910 Gain in Capital $ 24,763,612 1901 Gain in Net Surplus 95,445,811 Total $120,209,423 There has certainly been no shrinkage in capital and no shrink- age in surplus in the ten-year period, although that period includes all of the great conflagrations mentioned — San Francisco, Baltimore, Toronto, Rochester, Paterson, Chelsea, etc. How can it be true that a business which has retained its capital and satisfied its stockholders so that the value of the stocks of these companies is today approximately 3 to 1 in the market, is an unprof- itable business? How can it be true that the companies make no money in under- writing but make ''great profits" out of the "banking business," when these particular companies make their reports under oath as above indicated? RATIO OF PREMIUMS TO INVESTMENT EARNINGS The tabulation shows : Total income for the ten years $3,055,370,182 Total net premiums for the ten years 2,788,020,735 Margin $ 267,349,447 That margin is all that the compilation shows could possibly have been received from the "Banking Department" or "Investment De- partment," an average of $26,700,000 per annum. The net premium income was an average of $278,800,000. This shows the relative importance of "Investment Income" and * ' Premium Income, ' ' according to this table. We do not accept any responsibility for THE SPECTATOR table excepting to quote it correctly. We do not try to reconcile it with the Gain and Loss Exhibit, because we are unable to do so. — 40 — \ RECORD SINCE ORGANIZATION Page 7 of the Convention form of Annual Report discloses the following items: No. 3. Gross premiums received from the organization of company. No. 4. Total losses paid from organization of company. No. 5. Total dividends declared since commencing business: (a) cash; (b) stock. The tabulated result of these inquiries has not been published, but an examination of the separate reports of a large number of companies shows that almost the entire amount of surplus is earned surplus, accumulated out of profits in the business. Surplus earn- ings over and above losses and expenses and dividends. The percent- age of contributed surplus remaining in the tabulation is so small as to be negligible for purposes of comparison. It is far less than the amount of stock dividends which have been declared out of savings. It is impossible to maintain that a business which has accumu- lated such a vast surplus over and above all losses and expenses and dividends is an unprofitable business. Why should the State of Illinois accept the insurance companies* statistics without investigation and without analysis? The conflict between the statistics and statements published by the insurance companies for public consumption, and the tabula- tions from the Gain and Loss Exhibit, ought to be investigated in the interest of the public and the property owners and of the com- panies themselves. If one set of figures is right, the other set is not right. CAPITAL AND SURPLUS Refer now to the State Reports, Table No. 1, showing capital, surplus and percentage of capital and surplus to amount at risk. (Table page 42, also Graphic Charts I and II, pages 44, 45.) When a railroad company reports its earnings as a certain per- centage, that percentage is figured upon capital. When the insurance companies figure their earnings, and reponV^ that they have made no money, the percentage is figured upon the amount at risk, not upon the capital. The seventy-two millions of capital in this country (1910) carried an amount of insurance at risk in 1909 and 1910 averaging in Con- necticut over thirty-nine thousand millions, and in New York over forty-two thousand millions. A very small percentage upon forty thousand millions is a very fair percentage upon seventy-two millions. After paying every expense and extravagance and all the losses of conflagrations and normal fire waste, this seventy-two millions of capital or less has put by in surplus, after paying dividends, an aver- age of over eighteen million dollars per year, in round figures. — 41 — FROM TABLE I. STATE REPORTS CONNECTICUT Stock Companies — Domestic and Foreign (Excluding Mutuals) Capital Surplus Capital and Surplus % Capital and Surplus to Amt. Risk 1909 Conn. Co's Other States Foreign Co's Conn. Co's Other States Foreign Co's $ 11,000,000 49,807,067 5,000,000 $ 22,052,569 96,375,132 25,736,272 $ 33,052,569 146,182,198 30,736,272 .57 .65 .34 1910 $ 65,807,067 $ 12,700,000 53,600,000 6,000,000 $144,163,973 $ 24,876,069 102,062,322 26,313,390 $209,971,039 $ 37,576,069 155,662,322 32,313,390 .52 .57 .65 .34 $ 72,300,000 $153,851,780 $226,151,781 .52 NEW YORK 1909 1910 N. Y. Co's.. Other States Foreign Co's N. Y. Co's.., Other States Foreign Co's $ 21,050,004 47,962,067 (Not rept'd) $ 23,100,004 52,520,000 (Not rept'd) $ 63,351,265 62 475,907 38,394,690 $164,221,862 $ 65,883,997 69,176,492 42,090,992 $177,151,481 $ 84,401,269 110,437,974 (Not rept'd) $ 88,984,001 121,696,492 (Not rept'd) MASSACHUSETTS 1909 Mass. Co's Other States Foreign Co's Mass. Co's Other States Foreign Co's $ 3,600,000 62,357,067 8,400,000 $ 6,059,204 119,214,881 26,082,407 $ 9,659,204 181,571,948 34,482,407 1910 $ 74,357,067 $ 4,100,000 67,499,999 9,700,000 $151,356,492 $ 6,410,832 126,760,343 27,944,273 $225,713,559 $ 10,510,832 194,260 342 37,644,273 $ 81,299,999 $161,115,448 $242,415,447 These two examples, one of them taken from the summary of the Gain and Loss Exhibit, and giving the total results of the busi- ness since the organization of the companies, the other giving the underwriters' own figures as reported by THE SPECTATOR Year- Book of ten years' results, showing what money they started with, what they took in, what they paid out, and what they have left, are a complete disproof of the methods and statements of the under- writers which purport to show that the business has not been profit- able. NOT BANKING BUSINESS . ^^ The Gain and Loss Exhibit has demolished the fiction that the companies make money in their "Banking Business." There is no such thing. They could not divert a dollar from their insurance business to the Banking Business without acccounting for it to the Insurance Department of the State. Their own charters and the laws of the States make it unlawful for them to engage in the Banking Business. tjU^ /it was a false pretense always, but in any event it, has now toA ^^^.^ tanjj; disappeared. y There is not a column, nor a figure, nor a dollar, available to wear the mask of "Banking Profit." All of the funds of the company are shown as part and parcel of the Insurance Business. If diverted from that business to the "Banking Business," they could not appear upon any State Report as a resource of an Insur- ance Company. They are funds which the company must hold to meet outstanding oljligations, and as a function of the Insurance Business. ^ ^v ' v w Befuddl^^hinkii^i^-OT intentional deception must not be per- mitted to cause ,>Qr-6xcuse overcharge in the rate of premium, or,.'- Xwanton w^ste'OH the business methods of the companies. v^ ENERAL FINANCIAL RESULTS rraphic Charts I, II, III, IV, VI are designed to present "Proof of Profit" for comparison with the "Proof of Loss" showing made by the underwriters. — 43- Proof of Profit Graphic Chart No. I Geo. H. Holt LATEST FINANCIAL SHOWING All United States Stock Fire Insurance Companies Reporting to Connecticut, 1911 Capital (including Stock Dividends) $68,200,000 Book value $191,600,000 Market value $214,400,000 Profit $144,200,000 Compiled from the Spectator Tables and current market reports. All losses of every kind are taken into the account in these figures. Proof of Profit Graphic Chart No. II Geo. H. Holt RECORD SINCE ORGANIZATION Of All United States Stock Fire Insurance Companies Reporting to Connecticut, 1911 Contributed Capital $56,000,000 Stock Dividends $12,200,000 Accumulated Surplus $127,500,000 Cash Dividends paid $269,600,000 Stockholders' showing since organization $465,300,000 All losses and expenses of every kind accounted for. See Graphic Chart No. 1. Capital (as above) $68,200,000 Market value $214,400,000 Profit on Stock alone $144,200,000 -45- Proof of Profit Graphic Chart No. Ill Geo. H. Holt SPECTATOR TABLES 1901 • 1910 Includes all Conflagrations and all Companies This is the amount that the Stockholders put up in Cash and Stock Dividends $80,000,000 This is the amount that the Policyholders got for Losses in 10 years $1,523,000,000 This is the amount that the Policyholders did not get. .$1,485,000,000 EXPENSES OTHER THAN DIVIDENDS CASH DIVIDENDS SURPLUS Capital and Surplus now on hand $277,000,000 Capital 80,000,000 Gain in Surplus $197,000,000 — 46 — Proof of Profit Graphic Chart No. IV Geo. H. Holt SPECTATOR TABLES All Foreign Companies (28) Licensed in Connecticut Prior to 1910 Sent to U. S. from Home Offices, 1909-1910 $4,176,447 Remitted to Home Offices from U. S., 1909-1910 $15,332,232 Net amount sent abroad, 28 companies, 1909-1910 $11,155,785 Note the net gain for two years only. — 47 — Proof of Profit Graphic Chart No. VI Geo. H. Holt GAIN AND LOSS EXHIBIT All United States Stock Fire Insurance Companies Reporting to Connecticut, 1911 Except Spring Garden Premiums Received since Organization $3,400,000,000 Losses Paid since Organization. $1,900,000,000 Balance unaccounted for. What became of it? $1 ,500,000,000 Capital of these same Companies $68,200,000 This Chart shows all fire losses — conflagration and ordinary — and a balance of premiums received of FIFTEEN HUNDRED MILLION DOLLARS, on a Capital of $68,200,000. No account is taken here af any income from Investments or Banking. That would be ad- ditional. — 48- BASIS RATE JUGGLERY While it is certainly difficult to make an untrained man under- stand in a short time the intricacies of the Dean Schedule, and while even experts are mystified by it, as the testimony in the Mis- souri case plainly shows, it is very important to get clearly in mind that the practical application of this basis rate to cities and towns and risks, utterly ignores loss experience in those cases. It is in fact a "joker" by means of which any jugglery of rates desired may be effected. Mr. Fetter, the expert independent rater in Missouri, states in his testimony under oath, that while the printed books contain only tables from 60 to 120, he could work out any table which he wished to use either above or below those tables from 20c to $4.00, or any other figure, and still be using "the principles of the Dean Schedule." He distinctly states that he could so manipulate the Dean Schedule as to produce any result that he desired to produce, and that it would still be the Dean Schedule. He not only could do so, but he actually had done so in every case, excepting in those cases in which he had been directed by the Governing Committee to raise certain particular classes an arbitrary percentage. Practically the same state of things was testified to by Mr. Persch, the Illinois rater; Mr. Sellers, the Indiana rater; Mr. Waterworth, the St. Louis rater. The printed definition of the Dean Basis Rate is that it is "the residuum of unanalyzed hazard." Mr. Persch says it is determined "by water supply and fire pro- tection in a town, and by nothing else." Mr. Fetter says: "A basis rate under the Dean Schedule is a starting point at which we start, according to the height of the building, the kind of a building, and the location according to fire protection. "When we first started out a number of years ago, we started out with an 80 table, but that made rates too high. We later dropped to the 70 table, got along with that, and found it still to be too high; and we started to use the 60 table. (Brick buildings. ) ' ' Q. You changed tables as you found the conditions justi- fied it? A. To such risks as the Dean Schedule applied. Q. Upon what theory did you operate to determine that these rates were too high? A. By tests ; applications of the ratings themselves. Q. How would you know that you had the rates high enough ? A. By comparison with our previous rates from time to time. Q. Well, the theory of making a rate is to produce a reason- able revenue, isn't it? — 49 — A. That is my understanding; yes, sir, Q. How did you find out that a reasonable revenue had been produced by a certain table of rates? A. By comparison with our previous rates that we thought were right; by comparison with rates in my own of&ce. Q. How could you tell by comparing them with the rates what experience the companies had had on different classifi- cations ? A. I didn't know the details of that only by comparison with the general level of rates. Q. Were you supplied with any figures from any companies or from any agencies to help you in arriving at this result? A. No; not any specific figures. Q. Then it is more a matter of guesswork ? A. No, sir; it was a comparison with the previous rates. Q. But you did not collect any actual data upon which you predicated the loss and profits of the insurance companies of the State? A. I did not; no, sir, Q, Then you simply arrived at that result by a general conclusion in your own mind? A, By the application of those schedules; yes, sir. Please note the utter disregard of Fire Protection, water supply, loss experience, insurance to value, classification of profitable and unprofitable rates, the effect of term insurance, cut rates, or any at- tempt to learn what other raters were charging upon similar prop- ties in other States, It totally abandons the theoretical basis and justification of schedule, or any other rating system. It simply fits a new ass's sMn upon the same old lion. Note how the further testimony confirms this: Q. If you were going to Tennessee and were authorized to put in force and effect the Dean Schedule, what table would you select for Tennessee? A. Oh, I would start out with any table and see what results I would get; the general level of rates. I would keep on testing until I was satisfied. If the conditions today were too high, I would work until I got them lower. If they were too low, I would test the tables until I got them where I wanted them. Note: Where is there a suggestion in all this that Fetter had any conception of anything like "science" in rating, or any intention whatever of adjusting the rate to loss experience? He rated Kansas City, but he compiled no statistics before doing so, and made no attempt to do so afterward. — 60 — Mr. Dudley, of the Union (on June 26, 1906), directed him to raise Flouring Mills 20% ; Boot and Shoe houses 40% ; Saw Mills 15%, and Summer Hotels 25% ; and he thereupon issued a circular to that effect. He was a professional "Independent Rater;" but without any change in any condition of Water Supply or Fire Protection or of any particular hazard in a risk or in a class, he promulgated that great advance over his published rates. HOW FETTER CLASSIFIES TOWNS Q. How are towns classified? A. Oh, by their fire protection and ordinances. Q. That is fully your theory, is it? A, Well, some other details may enter into a town that I can't recollect now. Q. Do you classify at all in regard to fire loss ratio ? A. No; not the classification of a town. Q. You pay no attention to fire loss? A. No, sir. Q. Pay no attention to that in classifying a town? A. No, sir. Q. In fixing a rate, do you study fire losses? A. Well, I can't say that I give it a general study, more than a question of whether rates are getting too low or getting too high. Q. Well, do you study fire losses in fixing a rate. That is the specific question. A. Well, I cannot say that I do. Q. You do not allow the fire losses to enter into fixing the rate at all? A. No, sir; not as to one locality. Q. In making a basis rate, or fixing a rate of any kind, you have no fire experience to which you refer? A. No ; only the fact that the companies in general are mak- ing a profit in a State or not. Q. Could you justify and defend any of the rates that you made? A. No ; only taking as a foundation the general level and the fact that they were considered in that proportion in that schedule. This certainly shows that the "Dean Basis Rate" is not what it purports to be, and it may be and is manipulated and juggled with everywhere by everybody to produce the same result that had been obtained by existing schedules, if that level would hold the business, and was as high as "Underwriting Judgment" (not of the rater but of the Union Governing Committee) decided the property owner would pay. — 51 — Words could not make it clearer that the public is deliberately and purposely and systematically deceived by fair sounding words, and a pretense of mathematical and scientific measurement of hazard applied to every State, town and risk, while in fact the ' ' Independent Rater" is a tool of the companies who has little or no underwriting knowledge or experience, who keeps no statistics of loss experience, and would not know what they meant if he did keep them. He wouldn't use them if he had them, not because they would not be useful and valuable if kept and used in the interest of the public, but precisely because the companies do not want them to be used in the public interest. That is all there is to it. The Rater is no "expert," except in making the new schedule produce the same, or a greater, premium than the old. In many places that rate had been loaded up with the ''pink slip" charge. When that charge had become so offensive to the public and dangerous to the companies that the companies feared to continue it as such, they interred it privately and decently in the Dean Schedule appli- cation, and hid it from sight without experiencing any pang of lost income. — 52 — NEW HORIZON To show how far and how rapidly your Committee has progressed, permit me to call attention to the following contrast: In October, 1911, the Committee of the Board of Underwriters declined to deal further with your Committee, Since that time, you have passed through experiences with The Rating Committee of the Board of Underwriters; The Board of Underwriters, as a whole; The appeal to the State Commissioner; The hearing before the Court of Appeals; The transfer of attention to legislation; The preparation and passage of the Insurance Bill; The transfer of responsibility and authority from the Under- writers to the State Fire Insurance Board; The favorable decision of the Court upon the authority of the Commissioner ; The campaign for and enactment of the Insurance Board Law; The appointment of the Commission; The loss of control of rate making and inspection by the Board of Underwriters; The loss of their power to continue arbitrary rules and rates, etc. ; The merging of responsibility for Louisville with the Kentucky Inspection Bureau; The control of records of experience, of rating, of rules, etc., has also passed out of the hands of the Kentucky Inspection Bureau and the cooperating insurance companies and now rests with the State Insurance Board. The individual and the public now have the same standing and the same right to the information that the insurance companies have. UNIVERSITY OF CALITOENIA LIBEAEY, BERKELEY THIS BOOK IS DUE ON THE LAST DATE STAMPED BELOW Books not returned on time are subject to a fine of 50c per volume after the third day overdue, increasing to $100 per volume after the sixth day. . Books not m demand may be renewed if application is made before expiration of loan period. _^^^-^-^-==^=== JG 27 1921 OCT 4 m^ Jiff ' 20m-ll,'20 mrr-m'^y' ■.V 'v.' rfw-< '■J^t'i.a.V 4- ■■;'.■'.■■:■•.■■ ■ ii)v>83' 305192 : -■ii-v.