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 '^ REPORT 
 
 TO 
 
 GOVERNOR EDWARD F. DUNNE 
 
 ON 
 
 INVESTIGATION OF FIRE INSURANCE 
 CONDITIONS AND RATES IN ILLINOIS. 
 
 
 t^ 
 
 By RUFUS M. POTTS 
 
 loiurancc Superintendent i 
 

1 
 
 State OF Illinois ^Bf^'' 
 
 Insurance Department :'.:•.*•..• 
 
 SpriinificlJ 
 To His Excellency, 
 
 Edward F. Dunne, Governor, State of Illinois. 
 Sir: In my annual Fire Report, dated April 18, 1914, I 
 slated (p. VI) : 
 
 "From the fact that I am now in the midst of an 
 investijration into fire insurance conditions prevailing 
 in this State, I am unable at this time to add my recom- 
 mendations to this fire report, but, as soon as this in- 
 vestigation is completed, I will file with you a separate 
 report, with proper recommendations." 
 
 I have continued this investigation and find that the fire 
 insurance business is illegally and oppressively conducted in 
 Illinois and its methods demand radical legislative reform. 
 
 The most objectionable feature disclosed is the usurpation 
 by the stock fire insurance companies of powers, rights, and 
 privileges not incident to their business and detrimental to 
 the best interests of the people of this State. Such usurpation 
 is accomplished by means of a nation-wide system of inter- 
 locking organizations, comprising all company officials from 
 the president to the local agent, with controlling boards domi- 
 nated by Eastern influence. 
 
 This immense system has established certain local "com- 
 bines" in Illinois, for the purpose of fixing and maintaining 
 exorbitant premium rates. Also about fifty of these "combine" 
 companies operate "Annexes," some as many as eight, through 
 which they issue so-called "underwriters" policies. These 
 "Annexes" are illegal and fictitious entities, and are an 
 effective aid in creating and continuing the fi-e insurance 
 monopoly now existing in Illinois. Through the , '^ration of 
 these "Annexes," the great Eastern companies hav^. absorbed 
 practically all of the Illinois stock fire insurance companies. 
 Under no circumstances should they be permitted. 
 
 An unfair, arbitrary and indefensible business policy is 
 followed by the stock fire insurance companies in dealing with 
 both the State and the public. 
 
 After a careful investigation of fire insurance conditions 
 and wide research into the legal, technical and economic phases 
 of this question, I have formed certain conclusions, and make 
 herein constructive recommendations which will remedy the 
 existing evils. I. therefore, bog leave to first call your atten- 
 
 921220 
 
 M 
 
tion to some underlying general principles upon which the 
 fire insur^cuce biisiness: feL<ts; and then make a full presenta- 
 tion of the fire msurcmee* business as it is carried on in Illinois. 
 
 MAONIl'UDS' AND 3S:E0ESSITY OF FIRE INSURANCE. 
 
 Very few citizens of Illinois have any realization of the 
 financial importance of the fire insurance business, nor of the 
 amount of waste which annually occurs by fire. According to 
 the official reports made to this Department, the total amount 
 of premiums received by stock fire companies in Illinois for 
 1913 was $26,037,910. According to the Spectator's "Insurance 
 Year Book" for 1914, a standard insurance publication, the 
 total income of all fire insurance companies doing business in 
 the United States for the year 1913 amounted to $416,975;367. 
 
 To better realize the immensity of these sums and what 
 this fire loss means, compare it with the governmental expense 
 of the State of Illinois and of the United States. The total 
 expense of the Illinois State Government for the period of 
 two years, October 1, 1910, to September 30, 1912, was $25,- 
 882,578, or $12,941,293 annually, so that the fire tax in Illinois 
 was over twice as heavy as the State tax. The total expense 
 of the United States Government for the year 1912 was $654,- 
 553,963. Consequently we see that the people paid the fire 
 insurance companies two-thirds as much as it cost to maintain 
 the government of the United States. But in reality the total 
 fire loss, direct and indirect, to the people of this country, ex- 
 ceeded the expenses of the United States Government. For, 
 the total fire loss to the nation included this total income of the 
 companies of $416,975,367, because if no fires occurred this sum 
 would not have been spent, and there was also a great loss 
 of uninsured property and property on which the insurance 
 collected did not equal the total loss. Furthermore, in Illinois, 
 in 1913, 387 lives were lost. The figures for the United States 
 are not available for 1913, but, in 1907, 1,449 persons lost their 
 lives and 5,654 were injured in fires. The mere monetary value 
 of the lives lost and injuries sustained cannot be estimated. 
 But this is not all. The expense of equipping and maintaining 
 fire departments in cities and providing fire protection in in- 
 dividual buildings must also be added. The grand total I will 
 not try to estimate, but it is a staggering amount. The report 
 of the New York Insurance Commission (1910), says: / 
 
 ' ' The fire loss of this country averages nearly two 
 hundred fifty millions a year, and is increasing; this 
 is about $30,000 an hour, or $500 a minute, year in and 
 
1 
 
 year out. To this must be added at least the same addi- 
 ditional aiuoiint for the maintenance of fire depart- 
 ments, and nearly as miieh more for the experience of 
 conduetinfr tlie insurance business; altogetlier in the 
 neighborhood of $T;")0,U0O,000 a year of expenditures, 
 because of destructive fires ; that is, fires cost us di- 
 rectly and indirectly, each year, more than the value 
 of the cotton crop, and not only that, but along with 
 this economic loss goes a frightful and horrible loss 
 of life." 
 
 Surely a matter of this importance is worthy our careful 
 attention and study. Wiien we give it this, some astonishing 
 results are disclosed, such as the fact that the expense of col- 
 lecting and disbursing the fire tax is about one-half; that the 
 fire insurance business, as at present conducted, increases 
 instead of diminishes the annual fire loss; and that, in reality, 
 the fire companies do not dread fires, but are content to have 
 them occur. 
 
 FIRE INSURANCE COMPULSORY. 
 
 Under moih-rn eommoreial conditions, tire insurance is 
 practically compulsory. This comes from the fact that most 
 mercantile, manufacturing and other business is done on credit. 
 Credit will not be extended to a merchant, manufacturer, or 
 business man, unless his stock of goods, merchandise in transit, 
 or articles in the process of manufacture are fully covered by 
 insurance. Neither can loans be secured on real estate unless 
 all buildings are fully insured. The insurance business is of 
 direct personal interest to every citizen of the State of Illinois. 
 The fire insurance tax falls, not only on property owners, but 
 also on everyone who sleeps in a house or purchases goods in 
 a store, for owners add the fire tax to the rental of their build- 
 ings and include it in the price of goods sold. These facts and 
 conditions are not generally understood. 
 
 HISTORY OF FIRE INSURANCE. 
 
 After a siioct investigation into the iiistory of fire insur- 
 ance in the civilized world. I made an interesting discovery. 
 Search in the historical portions of the numerous treatises 
 on insurance, and copious periodical insurance literature pub- 
 lished in the English language, failed to give any indication 
 either of the history or the existence at the present time of 
 State fire insurance in Europe. I find, however, that public 
 fire insurance, either by the State, province, canton, city or 
 commune, was the original and long the only form of fire 
 
insurance in most European countries, and that this State 
 insurance still flourishes vigorously in those countries, although 
 mutual and stock company insurance are now found in all. 
 This omission to mention State insurance, either historically 
 or otherwise, cannot be merely accidental. It is the most 
 striking and essential fact connected with fire insurance in 
 Europe, other phases of wiiich subject have received frequent 
 mention in books and periodicals in the English language. In 
 order to obtain any account of State fire insurance, I was 
 obliged to go to books written in foreign languages. When I 
 did this, I found a verj^ complete treatment of the subject in 
 the following books: 
 
 Assurance Contre L' Incendie, Service Public, En 
 
 Allemagne, Alglave, (1901). 
 Les Assurances Contre L' Incendie Par L' Etat Ou Les 
 Cantons, En Suisse & dans les Pays Scandinaves, 
 Alglave, (1902). 
 L 'Assurance Contre L' Incendie par la Province Ou 
 La Ville, en Autriche-Honerie & Russie, Alglave. 
 (1904). 
 Das Deutsche Feuerversicherungswesen, Biederman, 
 
 et al, (1913). 
 The only explanation that occurs to me of this extraordi- 
 nary omission, which amounts to a veritable "conspiracy of 
 silence", is that it might be embarrassing for the insurance 
 companies and their advocates to have the facts known in 
 relation to State fire insurance in Europe. It is already a 
 matter of common knowledge among persons familiar with fire 
 insurance matters, that the rates in European countries are 
 exceedingly low compared with those in the United States, 
 and it is probable they realized that it might be suspected that 
 there was some connection between State insurance and these 
 low rates of fire insurance. A brief study of the subject 
 renders this surmise very probable, and I am sure that State 
 insurance is the chief cause of the tremendous difference in 
 rates, OAving to several factors which I will detail later, after a 
 few words about the history of fire insurance in general. 
 
 ANCIENT TIMES. 
 
 There is no trace of fire insurance in any of the ancient 
 civilizations, either in Asia or Europe. It appears to be un- 
 known even to the Romans, although among the latter there 
 was an analogous form of maritime contract which, how^ever, 
 only amounted to a simple bet on the safe arrival of a ship. 
 
 Among the reasons given for the absence of insurance in 
 
ancient times are these: That there wore no reliable statistics 
 by which charges for insurance could be computed, and that 
 persons then engaged in commerce were usually very wealthy 
 or very poor. For the first class a disaster would not destroy 
 their entire resources, so that assurance was not indispensable 
 to tiiem. For the second class, the payment of a premium was 
 practically impossible. 
 
 For the germs of fire insurance we go back only to the 
 Middle Ages, where we find, in the ninth century in England, 
 and later in other countries, organizations or associations of 
 merchants and artisans. These had different names in different 
 countries, but are usually grouped under the term of "Guilds." 
 At first they were social and charitable in character, as well 
 as for the promotion of the material interests of their mem- 
 bers. Among the latter functions was the relieving of distress 
 of members, caused by accident and other casualties, among 
 which were losses by fire. Usually all the members paid an 
 entrance fee, as well as periodical dues, which were preserved 
 as a fund for these purposes. After the eleventh century the 
 Guilds became more industrial and professional in character, 
 and were succeeded in various Teutonic countries by Brand- 
 gilden, a sort of mutual fire insurance association, and these 
 also existed in England long before the great London fire, but 
 seem to have died out there. 
 
 GERMANY. 
 
 The Brandgilden were succeeded in Germany by public 
 institutions, generally termed Feuersocietaten. The first in- 
 stitution of this kind was that of Hamburg, founded in 1677, 
 followed by one in 1706, for Berlin. This was later divided, 
 one part being for insuring city property, and the other for 
 country property. During the eighteenth century, numerous 
 similar pul)lic fire institutions were organized in all tiie prov- 
 inces now comprised in the German Empire, and most are in 
 existence today, although some have been subject to modifica- 
 tion, usually by being united with other similar institutions. 
 
 There were in 1913, in operation, forty-nine public fire 
 insurance institutions in the various parts of the present 
 German Empire. A fiUl and authoritative account of the 
 organization and operation of these institutions is to be found 
 in "Das Deutsche Feuerversiohorungswesen." mentioned above. 
 Some of these are restricted in their field of action to one city; 
 some to a single province, and, excepting Prussia, there are 
 institutions which extend over whole kingdoms. For a long 
 
time fire insurance was a monopoly of the State institutions, at 
 least as regards real property, but since 1861 this monopoly 
 has been largely withdrawn and the State institutions have to 
 compete with private companies. In Germany, also, there has 
 been an extensive development of mutual insurance, so that 
 these three types are all in operation in Germany. 
 
 AUSTRIA-HUNGARY. 
 
 Fire insurance history in Austria-Hungary is similar to 
 that of Germany. We find State institutions, mutuals and 
 stock companies. In Austria, also, fire insurance originated 
 in small local associations, of which several have been in exist- 
 ence since 1710. Numerous other mutuals have since been 
 organized and still operate. There are now four State insti- 
 tutions in Austria, and eight stock companies. 
 
 SWITZERLAND. 
 
 In Switzerland, fire insurance is of more recent origin. It 
 began as a form of private insurance, but this was abandoned 
 for public insurance by the Canton. This change of policy 
 commenced in 1805 with the Canton of Argovie. In 1841 there 
 were seventeen Cantonal institutions for insuring buildings, 
 of which the larger part were compulsory. Many of the 
 Cantons took up fire insurance in order to fight the combi- 
 nation of private societies, and, above all, of the foreign socie- 
 ties which exacted excessive rates. Later there were Cantonal 
 institutions for insuring movable property. In 1897 there 
 were eighteen Cantonal institutions foy insuring buildings, and 
 two for insuring movable property. There were, also, at that 
 time, in Switzerland, five mutual societies and eighteen stock 
 companies. 
 
 DENMARK. 
 
 In Denmark, at the end of the seventeenth century, there 
 existed a law which obliged the commune to reconstruct, free 
 of charge, buildings destroyed by fire. In 1714 there was 
 founded in Seeland a free mutual society for insuring church 
 structures and schools. This example was rapidl}^ followed 
 and mutuals were formed for the purpose of insuring middle- 
 class houses and farms. The obligations of these mutuals, 
 however, became burdensome, and in 1735 the government 
 intervened and created an institution for compulsory insur- 
 ance in the cities of the province, and. in 1761. an institution 
 was founded which extended its action throughout the whole 
 territory, except Copenhagen. For Copenhagen a communal 
 
7 
 
 institution had been established in 1731, but with insurance 
 optional; a great tire in 1795, however, eaused insurance to 
 be made obligatory, and a fixed sum was collected for fire 
 prevention purposes. Prior to this time, fire insurance had 
 been carried on by local associations known as Braudgilden, 
 but a State institution for this purpose was organized in 1792. 
 Since that time, in addition to the continued existence of local 
 associations, we find mutuals for the insuring of movable 
 property. In addition to the above public and mutual insti- 
 tutions, .stock companies, also, at present conducted fire in- 
 surance in Denmark. In Iceland, in the thirteenth century, 
 we lind an institution under the name of "Repps" for insuring 
 against loss of cattle, and by fire. 
 
 SWEDEN. 
 In Sweden, at the end of the seventeenth century, several 
 small associations were in existence, which collected dues for 
 the j)urpose of relieving against disasters by fire, storm and 
 flood. These were s-ucceeded by the formation of a multitude 
 of small free societies, some extending only throughout one 
 commune, and the others further. Those owners affiliated with 
 one of these associations were exonerated from paying the 
 regular public fire tax collected in each "Harad." The fire 
 tax for insurance in "Ilarads" have ceased, being replaced by 
 a public institution in Stockholm for insurance of real property, 
 which exists today. Since 1829, there has been a special insti- 
 tution for insuring country buildings. Stock fire insurance 
 also exists in Sweden, there being 5 companies in 1897. 
 
 NORWAY. 
 
 The development of in.surance in Norway has been very 
 similar to that in Sweden. In 1767 a State insurance institu- 
 tion, managed by the government, was created, which insured 
 throughout the Kingdom. Insurance was at first obligatory for 
 all real property. Christiania, which had possessed since 1752 
 a municipal fire insurance institution, was soon relieved of obli- 
 gation to insure in the State institution. This lasted till 1827, 
 since which time Christiania has also been insured in the State 
 institution. Later the instituton was divided into two parts, 
 one for town risks and the other for rural risks. Since 1883 
 several stock companies have been formed for insuring movable 
 property, for maritime insurance, also forestry insurance. 
 
RUSSIA. 
 
 In Russia the beginning of insurance is stated to have 
 been in 1786, when an Imperial bank for making insurance was 
 organized. Various other insurance plans have since been in 
 operation. In June, 1864, an imperial manifesto established 
 provincial institutions for fire insurance which were compul- 
 sory upon dwelling houses not already insured in private com- 
 panies, but insurance was optional for other real property. 
 These institutions were under the supervision of the govern- 
 mental head of each province. These institutions now exist in 
 most of the provinces. There are in operation also many mu- 
 tual associations and several joint stock companies. 
 
 NEW ZEALAND. 
 
 The latest instance of the inauguration of a system of 
 State fire insurance is in New Zealand, where a government 
 institution for fire insurance was opened for business January 4, 
 1905. Although it began and has continued in operation against 
 strong competition from mutuals and stock insurance com- 
 panies, both domestic and foreign, it has been very successful, 
 and, although this is a very small country, at the end of 1912 
 carried insurance to the amount of £13,519,742 sterling. Its 
 annual premium income has been as follows : 
 
 "1905, £13,132; 1906, £20,962; 1907, £23,195; 
 1908, £26,657; 1909, £33,281; 1910, £40,552; 1911, 
 £47,745; 1912, £54,380." 
 
 (New Zealand Year Book, 1913, p. 706.) 
 
 Out of these it has accumulated a reserve fund of £37,000 
 in government securities and other funds amounting to £48,000. 
 
 The interesting point is that, by reason of its establishment, 
 the premium rates on mercantile risks have been reduced 10%, 
 and on dwellings, offices, etc., 33 1-3%, and this reduction oc- 
 curred not only in the premium rates of the State institution, 
 but in the stock company rates, in order to meet State compe- 
 tition, so that there has been an immense saving to the people 
 of New Zealand. It is said : 
 
 "The fire insurance department has saved to the 
 people in the first year of its operation more than half 
 a million dollars in premiums." — (Government Insur- 
 ance in New Zealand, Independent, Vol. 61, p. 86.) 
 
 The saving to the people has increased correspondingly 
 in succeeding years and now doubtless aggregates millions of 
 dollars. All this has been accomplished without a dollar of 
 
fxpeuse to the taxpayer, all expenses haviug been paid out of 
 the insurance business. 
 
 STATE INSURANCE OLD AND WELL TRIED. 
 This brief outline of the history and present condition of 
 insurance in these important European countries shows that 
 State tire insurance, instead of being a new and untried experi- 
 ment, is the oldest form of insurance, and still benefits the peo- 
 ple of these countries, or it would have been long ago discarded. 
 This beneht comes not only from the low rates at which State 
 insurance is effected, but also from the fact that it compels the 
 stock companies to do their business at similar low rates in 
 order to get business, instead of leaving them free to exact such 
 rates as they please, as in the United States. Another benefit 
 is that the fact that the State is engaged in the fire insurance 
 business has caused the enactment of strict laws for the pre- 
 vention of fires, the prohibition of overinsurance, and the pun- 
 ishment of criminal incendiaries, as well as those who cause 
 fires by gross carelessness. It is to these factors mainly that 
 the very much smaller fire waste in European countries is to 
 be attributed, rather than the excuse alleged by the insurance 
 companies, — the smaller use of wood in buildings. The increased 
 risk from larger use of wood in construction is probably offset 
 by the superior fire fighting facilities in American cities. The 
 most important cause of the immensely lower fire insurance 
 rates in Europe is the existence there of State fire insurance 
 institutions. 
 
 ENGLAND. 
 
 In England the early l(»<al fire insurance associations seem 
 to have disappeared without causing the inauguration of any 
 form of State fire insurance, such as occurred in most Euro- 
 pean countries. In 1609, a project was brought out for insur- 
 ing houses against fires in return for a fixed premium. It was 
 vigorously discussed, but religious scruples prevented its adop- 
 tion. Fire, .said the opponents, is the work of God, like other 
 scourges which afflict humanity; therefore, you cannot, without 
 sin, put obstacles in the way of the Divine "Will by suppres.sing, 
 through the payment of an indemnity, the chastisement w^hich 
 is intended to be inflicted on certain persons. The project 
 failed, whether for these reasons or others is not recorded. 
 
 In 1666 occurred the great fire of London which was 
 relatively the most destructive in the world, over three-fourths 
 of the buildings in the city being de.stroj'cd. This caused the 
 
10 
 
 subject of fire insurance to be again taken up, and, in the ab- 
 sence of any form of local or mutual insurance, the form of 
 insurance by stock companies was adopted, the first being or- 
 ganized in 1680. In 1681 an attempt was made to have fire 
 insurance carried on by the municipality of London, but owing 
 to different causes, among which was the vigorous hostility 
 of the previous private company, the city abandoned the enter- 
 prise, and, thereafer, fire insurance in England, followed by the 
 United States, has since been carried on solely by joint stock 
 companies, and later by mutuals, without anj^ state institutions 
 whatever being created for this purpose. The course of insur- 
 ance development in France was similar to that in England, 
 and it is with the historj^ of fire insurance in these countries 
 alone that the historical sketches printed in English have 
 solely busied themselves, as I have above noted. 
 
 UNITED STATES. 
 
 In the absence of State competition or regulation, the fire 
 insurance business proved very profitable for corporations and 
 a number were later organized for this purpose in England, 
 and the United States. Here the first company was the Phila- 
 delphia Contributionship, organized in 1752, followed by a sec- 
 ond in the same city, the Mutual Assurance, in 1786. The 
 third was the Knickerbocker Fire of New York. By the close 
 of the century, 22 had been formed, among which were 8 mu- 
 tuals. The first American companies to establish what is known 
 as the "agency system" were the Hartford and the Aeti\a, 
 incorporated in Connecticut. 
 
 In no state was there at first any legal control or super- 
 vision over the business of fire insurance and it was conducted 
 in such a manner that the companies frequently failed, particu- 
 larly whenever a great fire occurred, resulting in great loss to 
 insurers. Consequently, after the New York conflagration 
 in 1835, various states began to enact laws designed to compel 
 the companies to so conduct their business and maintain such 
 assets as would afford reasonable security to insurers. 
 
 COMBINATION BEGINS. 
 
 Up to 1866, in the United States, free competition had 
 been the universal rule, but in that year the companies formed 
 the "National Board of Fire Underwriters," organized for the 
 purpose of fixing and maintaining fire insurance rates. Later 
 on, for various causes, this particular function of this organi- 
 zation was abandoned, although its existence is still continued 
 
11 
 
 for utiier purposes. Tliis, liowever, does not mean that com- 
 panies abandoned their monopolistic practices and entered into 
 free competition. The monopolistic features were simply rele- 
 gated for more effective exercise to other orj^'anizations of 
 smaller territorial jurisdiction. Those which alYect Illinois at 
 the present time are the Union, the Western Insurance Bureau, 
 ,111(1 the Chicago Board of Underwriters. 
 
 ILLINOIS. 
 
 Doubtless, fire insurance was elVected in Illinois from an 
 early date by the ct^mpanies from other states or foreign nations, 
 but originally there was no State supervision of any kind, and 
 there is no record remaining of their activities. Prior to the 
 year 1869, Illinois insurance companies each received charters 
 by special acts of the legislature. The first company char- 
 tered was the Alton ^larine and PMre, February 7, 1835, the 
 office of which was at Lower Alton. This Avas followed by the 
 Chicago Marine and Fire, January 13, 1836, the office of which 
 was at Chicago. After this there were usually a number of 
 companies which received charters at each legislature and, up 
 to 1869, 197 stock companies and 47 mutual companies had re- 
 ceived special charters. None of these stock fire insurance 
 companies are in existence today, but of the mutuals 12 are 
 still doing business, which shows that the mutual principle in 
 this State has been more enduring than the stock plan. 
 
 The Chicago conflagration of 1871 is, of course, a landmark 
 in insurance history in Illinois. It is stated that 335 American 
 companies and six foreign companies suffered loss in this fire 
 to an aggregate amount estimated at $88,634,122. (Chicago 
 and The Great Conflagration, Colber & Chamberlain, 1871, p. 
 313.) But 57 of these companies failed, so that, according to 
 the above authority, it Avas estimated that the insured would 
 not receive more than thirty-five millions of insurance; this, 
 however, was probably an overestimate. The report of the 
 State Auditor for 1872 states that at that time $25,763,723.40 
 had been paid. 
 
 SUPERVISION BEGINS. 
 By acts of the legislature, approved March 11th and 26th. 
 1869, supervision of insurance companies doing business in the 
 State was conferred upon the State Auditor. The first report 
 of this office was issued December 15, 1869, which gives a list 
 of all the insurance companies then doing business in the State, 
 as well as a list of those domestic companies which had ceased 
 
12 
 
 to do business prior to that time and of the foreign companies 
 which had withdrawn from the State. Following this were 
 successive acts of the legislature regulating fire insurance, 
 which it is unnecessary to outline here. The legislature, June 
 20, 1893, established a separate Insurance Department to be 
 under the control of an Insurance Superintendent, and it is 
 under this act that the Department is now operated. 
 
 FIRE PREMIUM A TAX. 
 
 In the case of fire insurance as in all other political, social 
 and industrial institutions which have had a long period of 
 historical development, subsequent study has discovered and 
 formulated certain underlying principles or truths according 
 to which its development and evolution has occurred, although 
 its historical development was not made by any formal or 
 conscious application of such principles. Perhaps the most 
 important of these general principles is that fire insurance is 
 essentially a tax for the purpose of spreading the loss caused 
 by fire to certain unfortunate individuals among the members 
 of the whole community and so lessening the burden of each. 
 This conclusion as to the fundamental nature of fire insurance 
 rates is admitted by practically all authors who have gone into 
 the theory of the business, including those writing from the 
 standpoint of the companies and their interests, as well as 
 authorities not directly connected with the business. For in- 
 stance, Mr. A. F. Dean, Manager of the "Western Department 
 of the Springfield Fire and Marine Insurance Company, says: 
 
 "Fire insurance rates are by their nature a tax." 
 (State Regulation Fire Insurance in the Light of Ex- 
 perience, A. F. Dean, Chicago, 1909, p. 7.) 
 Another author: 
 
 "Fire premiums are often described as in the 
 nature of a tax, a fire insurance tax, which the various 
 fire insurance companies are authorized to levy by 
 virtue of the charters' and licenses issued to them by 
 the several States. This tax is paid by all property 
 owners who carry fire insurance, and is simply a 
 method of distributing the loss. of one among a great 
 many." (Business of Insurance, Dunham, Vol. 1, 
 p. 60.) 
 And: 
 
 "The insurance on a burned building does not 
 bring back the property that was destroyed ; it simply 
 equalizes the loss between all others whose property is 
 insured." (Bulletin 418, U. S. Geological Survey, p. 12.) 
 Fire insurance, then, being a tax, the next question which 
 
13 
 
 demauds oiu* eousideratiou is the agency througli which this 
 tax is collected and disbursed. Most other taxes are collected 
 and disbursed by governmental authority, either national, state 
 or municipal, but the insurance tax in the United States is not. 
 Here the collection and disbursement of the immense sums of 
 money which equals to two-thirds the entire income of the 
 United States Government, is carried on mostly by private cor- 
 porations, but to some extent by Mutuals, Inter-Insurers and 
 Lloyds. These corporations and other organizations are 
 simply institutions for the purpose of collecting and adminis- 
 tering fimds paid by the policy holders for indemnity against 
 loss by fire. Dean says : 
 
 "There can be no intelligent understanding of the 
 questions involved which overlooks the fact that the 
 aggregate premiums collected by all the companies 
 each year in the United States constitute a general 
 fund, from wiiich all losses and expenses are disbursed, 
 the remainder, if any, being the average profit of all 
 the companies. This fund, in its collection and dis- 
 bursement as a whole, constitutes the activity known 
 as fire insurance." (State Regulation Fire Insurance 
 in tiie Light of Experience, A. F. Dean. Chicago, 
 1909, p. 7.) 
 
 This being so, the important question at once arises as to 
 whether or not the present agencies are the best and most 
 economical for this purpose, so that the burden of taxation 
 will be equitably distributed and will be as light as possible. 
 
 PREMIUM RATES. 
 
 The most important thing about any tax is, first, the 
 amount of it; and, second, how it is apportioned among those 
 who must pay the same. 
 
 As noted above, I began early in 1914 to investigate this 
 subject of the amount and apportionment of the fire insurance 
 rates or tax in Illinois, and have already submitted to you a 
 preliminary report, under date of May 6, 1914, on this subject. 
 This report was preliminary in nature and not widely circu- 
 lated, and I believe that a brief re-statement of some of the 
 information therein contained is desirable, and will follow this 
 with new tables showing that, according to her individual ex- 
 perience, Illinois is enitled to a substantial reduction. 
 
 The facts and figures given are entirely trustworthy, be- 
 ing taken from the schedules of rates published for and used 
 by the companies themselves, fixing the premiums charged on 
 properties in these states. 
 
1.4 
 
 COMPARISON OF RATES IN CHICAGO AND OTHER 
 LARGE WESTERN CITIES. 
 
 Annual Dwelling Rates. 
 
 Frame, Frame, 
 
 Brick. Brick, Metal Roof, Shingle Roof, 
 
 CITY. CLASS. Metal Roof. Shingle Roof. Detached, Detached, 
 
 less than 25 ft. less than 25 ft. 
 
 CHICAGO 11/2 -27 .30 .675 .75 
 
 Detached, Detached, 
 
 less than 10 ft. less than 10ft, 
 
 Detroit 2 .20 .25 .30 .35 
 
 Cincinnati 1 .20 .25 .25 .30 
 
 Cleveland 11/2 .20 .25 .25 .30 
 
 Milwaukee 1 .25 .25 .35 .40 
 
 St. Louis 1% .15 .15 .35 .40 
 
 State. Protected Cities Outside Principal Cities. 
 
 Illinois 30 .35 .35 .40 
 
 Ohio 25 .30 .30 .35 
 
 Missouri 20 .25 .30 .35 
 
 Comparison With New York. 
 
 An even more striking showing is made by a comparison 
 with rates in force in New York City, as follows: 
 
 Dwellings. 
 
 Brick' 
 Metal Roof Contents Frame Contents 
 
 Chicago, 1 year..,.. 27 27 50-70 50-70 
 
 Chicago, 3 years... 54 54 100-150 100-150 
 
 New York, 1 year... 10 16 16 20 
 
 NewYork, 3years.. 25 40 40 50 
 
 Flats. 
 
 Brick 
 Metal Roof Contents Frame Contents 
 
 Chicago, 1 year 36 40 50-70 50-70 
 
 Chicago, 3 years... 72 80 100-150 100-150 
 
 NewYork, 1 year.. 15 20 20 24 
 
 NewYork, 3 years. 871/2 50 50 60 
 
 Private Stables and Outbuildings, 
 
 Brick, Stone, Contents Frame, Etc. Contents 
 
 Concrete, Etc. 
 
 Chicago, 1 year 30 30 50-60 50-60 
 
 NewYork, 1 year.. 20 26 32 32 
 
 Practically every other building and property is separately 
 rated by the Chicago Board of Underwriters so that direct 
 comparisons are not easily made, but the above are typical 
 examples of the exorbitant rates demanded from Chicago 
 property owners. 
 
 Omitting Chicago, the average charge in the large Western 
 
15 
 
 cities for the brick dwelling with standard roof is 20 cents an- 
 nual. Placing Chicago on this basis would cause a reduction 
 of about 25 per cent in the premiums on this class. Similarly, 
 the average charge for the frame dwelling with shingle roof is 
 35 cents annual. Placing Chicago on this basis would cause 
 a reduction of about 50 per cent in the premiums on this 
 class. 
 
 The rates for Chicago flats are obtained by adding to the 
 brick dwelling basis 10 cents for a three story flat, and 20 
 cents for a four story flat. If these differentials were retained 
 in connection with the reduced 20 cents basis, there would be 
 a reduction in tlif premiums on Ibis class of n])out 22' -j per 
 cent. 
 
 THE DEAN SCHEDULE. 
 The Dean Schedule, named after its author, Mr. A. F. 
 Dean, is a detailed classification purporting to make rates 
 proportionate to the fire hazard involved, on mercantile estab- 
 lishments, factories, etc. The rates at present exacted from 
 the owners of all buildings and contents of these classes in 
 Illinois are fixed by this schedule, as applied by the "Illinois 
 Inspection Bureau," which is described later. Dean Schedule 
 rates vary according to the basis tables which are used. The 
 schedule is constructed so that the rates produced with the 
 100 table are twice those produced with a 50 table. 
 
 Dean Schedule Basis Tables. 
 
 BRICK. FRAME. 
 
 M — u S 
 
 e c c a 
 
 2 i 2 2 
 
 'a OS 8 
 
 ce u cc O 
 
 Illinois, North 60 70 95 100 
 
 Illinois, South 70 70 05 100 
 
 Ohio, prior to 1014 50 70 00 05 
 
 Ohio, 1014 50 (iO 80 80 
 
 Wisconsin 50 70 00 90 
 
 Kansas 60 70 05 95 
 
 Indiana, Missouri ;iiid Michigan. .. . 60 70 05 95 
 
 I recently received reliable information concerning rates 
 in eastern states from a well-informed insurance man. who 
 formerly lived in Penn.sylvania, and who recently made a 
 trip east, during which he visited at his old home in Pennsyl- 
 vania, and also New York and New Jersey. During this visit 
 he said he compared notes frequently with local insurance 
 agents in the smaller towns and country di.stricts of these 
 states, and found that the rates on dwellings were usually 
 
16 
 
 about one-half of those in Illinois, and on other risks, while 
 the difference was not so marked, still the rates were much 
 below those on similar properties in Illinois. 
 
 It appears from this tabulation that Ohio and Wisconsin 
 have the lowest rates, and Illinois, the highest. The selection 
 of the general basis tables for a State is governed b}^ two 
 considerations, the existing level of rates when the schedule 
 is first applied, and the level of the loss ratio for a long term 
 of years. There is no reason for imposing the highest level 
 of rates on Illinois, except the fact that there has been no 
 legislation in this State- to interfere with extortionate practices. 
 The loss ratios for 33 years, to-wit. : 1880 to 1913, inclusive, are : 
 
 STATE. Loss Rario. 
 
 Illinois 50.5% 
 
 Indiana 52.2% 
 
 Michigan 52.3% 
 
 Missouri 59 .0% 
 
 Ohio 52.1% 
 
 Wisconsin 50 .4% 
 
 It thus appears that Illinois has been the most profitable 
 State of the group for a period of 33 years, except Wisconsin. 
 The volume of premiums in Illinois is equal to that of Michi- 
 gan, Missouri, and Indiana, combined, and exceeds that of 
 Wisconsin and Ohio, combined. Moreover, taxation is least 
 in Illinois and there are no anti-compact, anti-co-insurance and 
 valued policy laws such as prevail in the other states. Accord- 
 ing to insurance logic, by reason of this exemption from inter- 
 ference, the cost of operation should be the least in Illinois, 
 and rates the lowest. 
 
 The following tabular comparison of rates was obtained 
 by appljdng the basis tables, co-insurance credits and term 
 conditions to an example given on page 97a, of the Dean 
 Schedule. 
 
 Rates for Building and Contents. 
 
 Five Story and Basement, Brick, Wholesale Dry Goods. 
 
 BUILDING. CONTENTS 
 
 1 Year. 5 Years. 1 Year. 
 
 Chicago, Central Dis., Class 11/2.. .66 2.64 1.305 
 
 Chicago, Outside Cent. Dis., Class 2 . . .70 2 . 80 1 . 25 
 
 Chicago, average 68 2 . 72 1 . 28 
 
 Cleveland, Class 1 47 1 . 41 .91 
 
 Ohio, Class 2 525 1.57 .96 
 
 Wisconsin, Class 2 .525 1.57 1.01 
 
 St. Louis, Class 11/2 59 1.77 1 . 10 
 
 Danville, 111., Class 2 63 1 . 89 1 . 13 
 
17 
 
 Showing- Percentag-e Reductions of Dean Schedule Rates Neces- 
 sary to Phice Chicago on the Same Basis as the 
 Cities Listed : 
 
 5 >r. Builtlint;. I yr. Contents. 
 
 Rale Reduces. Rale Reduces. 
 
 Chicago equal to Cleveland, Class 1 50% 30% 
 
 '• "Ohio, Class 2 44% 25% 
 
 • " Wisconsin, Class 2 44% 217© 
 
 • " St. Louis, Class IV- 35% 14% 
 
 " " Danville, 111., Class 2.... 30% 11% 
 
 These percentages apply to all rates made in Chicago by 
 the Dean Schedule. At this date, the Dean Schedule has not 
 been applied in Chicago to the outlying small risks, but the 
 rates in force upon these risks are apparently on a line with 
 those that would be fixed by the Dean Schedule. 
 
 The National Druggists' Fire Insurance Company reports 
 that about two-thirds of its Illinois business is placed in Chi- 
 cago, with very little in the down-town district. This company 
 uniformly takes 25 per cent off the Board rate to fix its o^v^l 
 rate. The experience in Illinois on the premiums thus reduced 
 .shows a loss ratio of only 40 per cent, which, assuming that 
 60 per cent is a profitable loss ratio, the original rates could 
 be reduced 45 per cent and still leave a fair margin of profit. 
 
 The two Illinois companies which write small retailers 
 and grocers throughout Illinois show loss ratios upon their total 
 business since beginning of only 35 per cent. This indicates 
 that there is a general practice of overcharging small dealers. 
 While these specialized companies are supposed to select busi- 
 ness and therefore to show a better loss ratio than the Board 
 companies can obtain, it is still a fact that the rates upon this 
 class can be reduced 25 per cent and show a profit for the 
 average quality of business handled by the Board companies. 
 
 The Chicago rates established by the Dean Schedule were 
 the climax of a series of increases, beginning with February, 
 1894. The admitted purpose of the Dean Schedule i.s to collect 
 enough insurance premiums to pay the losses, expenses ;ind a 
 profit. To do so, this schedule makes varying rates on differ- 
 t-nt properties, according to material, exposure, occupancy, 
 construction and other factors, the aim being to make favor- 
 able allowance for conditions which tend to reduec fire lo.sses 
 and impose higher rates where conditions are unfavorable. 
 This purpose is a good one, but injustices ari.se because these 
 allowances and charges are not founded upon the only just and 
 proper basis for making such differences; namely, the actual 
 
18 
 
 experience as to fire losses in the various classes into which 
 property is subdivided in this schedule. 
 
 "Practically the only light that is thrown upon - 
 the hazards in fire insurance is that of experience, and 
 furthermore the experience to be worth anything must 
 not include one, but many similar cases." (Rep. N. Y. 
 Com. 1910, p. 69.) 
 
 ' ' Fortunately there is one guide in this matter, the 
 past; otherwise the problem would be quite hopleless." 
 (lb. p. 39.) 
 The allowances and penalties are merely the estimates or 
 guesses of Mr. Dean as to the importance of these various 
 factors. The fact that Mr. Dean is an experienced insurance 
 man does not render his schedule perfect or even approxi- 
 mately so. His skill gives it some degree of excellence and 
 makes his a schedule which accomplishes its main purpose, — 
 the securing of a satisfactory income for the companies. But 
 Mr. Dean does not know, nor does any one else, whether or 
 not the rates imposed upon different properties correctly 
 represent the relative fire hazards. 
 
 In addition to these inherent defects in the present 
 schedule rating used in Illinois, there are possibilities of great 
 injustices in its application to individual risks. A concrete 
 example of this is furnished by the rating of a commercial 
 building in a small Illinois city. The insurance on this was 
 carried for many years by a prominent "Combine" company 
 agency, but finally the owner gave the insurance to another 
 agency. The first agency then in some way procured a repre- 
 sentative of the Illinois Inspection Bureau to make a re- 
 survey of the building. He did this and purported to dis- 
 cover some previously undetected defect and nearly doubled the 
 rate ; conditions in the meantime being absolutely unchanged. 
 This was favoritism in its most pernicious form and is possible 
 at all times under the present system of schedule rating. An- 
 other remarkable example of the inequitable result of the 
 schedule occurred at Rock Island. A large wooden shed 
 building was occupied as a lumber yeard, and, while so used, the 
 rate was $1.00. The use of this shed was changed from a 
 lumber yard to a storage room for iron car wheels, which, of 
 course, are absolutely unburnable and cannot be injured by 
 fire, but the Dean Schedule raised the rate on the building, as 
 thus used, to $1.40. 
 
19 
 ILLINOIS EXPERIENCE. 
 
 From the records ol' Uiis Di'purtiucut, (^luade up from tlie 
 sworn statements of the stock companies), I have compiled 
 tables, covering the fire business in Illinois. These records are 
 full and complete since the year 18G*). 
 
 Experience for Twenty Years. 
 
 Per Ceni 
 Years -Period Premiums Rec'il Losses Paid ,q Premiums 
 
 I Loss Rario > 
 
 1909-1913, 5 years... $115,436,149 $58,424,018 50.6% 
 
 1904-1913, 10 years... 220,729,045 106,105,147 48.% 
 
 1899-1913, 15 years. .. 296,632,964 146,348,954 49.3% 
 
 1894-1913, 20 years... 356,749,351 179,374,010 50.3% 
 
 Taking the entire experience of stock companies on 
 Illinois business from 1869 to 1913, inclusive (45 years), and 
 including the Chicago couHagration (1871), the loss ratio is 
 only 2% above that of the last twenty years, or the last five 
 years. These figures reveal the fact that Illinois citizens have 
 paid the companies approximatel}' $2 in premiums for every 
 $1 returned for fire losses, uniformly for over twenty years. 
 
 In making up the above table, it was necessary, on account 
 of the arrangement of the reports, to compute the experience 
 separately of the Illinois companies, companies of other states. 
 and United States branches of foreign companies, and one 
 result obtained which it is interesting to note is that Illinois 
 companies, with less than ten per cent of the business of com- 
 panies of other states, show as level a loss ratio. This is also 
 true of the companies of foreign nations, doing business in Illi- 
 nois, which transact about forty per cent of the business. 
 
 The loss ratios of all companies combined, for the respec- 
 tive five year periods of the past twenty years, are as follows: 
 
 Period Loss Ratio 
 1894-1898 54.9% 
 
 1899-1903 53. % 
 
 1904-1908 45.2% 
 
 1909-1913 50.6% 
 
 The companies contend that a reasonable loss ratio on busi- 
 ness in cities subject to conflagration hazard, is 55%, and on 
 property not subject to this hazard, 60%. Therefore, even 
 figuring on a basis that the companies regard as "satisfactory", 
 Illinois is entitled to a substantial reduction in rates. 
 
 The companies, however, claim that because there has 
 been a .slight raise in the lo.ss ratio when calculated on all the 
 
20 
 
 insurance written in the State during the past five years, and 
 a slight decrease in the average rate for the same period 
 they should not, therefore, now be asked to reduce rates. This 
 position might be well founded if the rates at the beginning of 
 this period had been equitable or approximately so, but this 
 is not true. 
 
 Furthermore, an examination of the details of fire insur- 
 ance statistics during this period, 1909 to 1913 inclusive, shows 
 that in the class containing dwelling houses, flats, etc., with 
 their contents, which is the class comprising the largest num- 
 ber of risks, and is also the class in which there is practically 
 no competition, the trend has been just the ' opposite ; rates 
 have remained practically stationary, while the loss ratio has 
 declined, as shown in the following table taken from the com- 
 panies' annual report to my Department. 
 
 Dwellings and Contents. 
 
 Year 
 
 1909 
 1910 
 1911 
 1912 
 1913 
 
 The cause of the small increase of the loss ratio on the 
 totals for all the property in the State, and the slight decline in 
 the average rate on the same, is found in the risks in which 
 there is competition from mutuals and inter-insurers, which 
 has caused a lowering of rates in certain classes, and, of course, 
 a corresponding raise in the loss ratio. This can only be im- 
 perfectly shown from existing statistics because these have not 
 been subdivided into enough classes. A clear indication of 
 this trend, however, is given by the statistics of the classes 
 "Special Hazards" and "All Other Hazards," covering the 
 same five years experience. "Special Hazards" and "All 
 Other Hazards," are classes of business in which there is much 
 competition between the stock companies, mutuals and inter- 
 insurers, and it is noticeable that the average rates have de- 
 clined, while the loss ratios have rapidly increased. The fol- 
 lowing tables show the statistics of " Special Hazards" and 
 "All Other Hazards": 
 
 Premiums Rec'd. 
 
 Rates per $100 
 
 Per 
 
 Cent of Loss 
 
 
 Risks Written 
 
 (Loss Ratio) 
 
 $5,641,292 
 
 .95 
 
 
 46% 
 
 6,059,113 
 
 1.01 
 
 
 43% 
 
 6,265,195 
 
 .94 
 
 
 48% 
 
 6,516,806 
 
 .95 
 
 
 48% 
 
 6,604,524 
 
 .95 
 
 
 43% 
 
 Hki. 
 
21 
 Special Hazards. 
 
 Premiums RecM. 
 
 Ilatcs per 1100 
 
 Per Cent of Loss 
 
 
 Ui-sks Written 
 
 (Loss Ratio) 
 
 $5,628,115 
 
 1.33 
 
 41% 
 
 5.685.941 
 
 1.27 
 
 58% 
 
 6.246.482 
 
 1.19 
 
 57% 
 
 5,689,066 
 
 1.25 
 
 60% 
 
 5,544.627 
 
 1.23 
 
 69% 
 
 All Other Hazards. 
 
 
 $2,182,299 
 
 1.05 
 
 39% 
 
 2.927.523 
 
 1.04 
 
 40% 
 
 3.167.251 
 
 .99 
 
 44% 
 
 3.617,707 
 
 .98 
 
 45% 
 
 4,150,089 
 
 .83 
 
 57% 
 
 Year 
 
 1909 
 1910 
 1911 
 1912 
 1913 
 
 1909 
 1910 
 1911 
 1912 
 1913 
 
 The class, "Specal Hazards," is composed of risks rated 
 individually. The class, "All Other Hazards," comprises 
 everythiug not included in dwellings, mercantile risks and 
 special hazards. The trend of rates and loss ratios in each 
 class shows clearly wherein the cause for the decrease in rate 
 and raise in loss ratio lies, namely, competition. 
 
 A few months ago, when the present investigation was 
 beginning, we find open admissions that Illinois rates are not 
 entirely e(iuitable. The Market World and Chronicle, an in- 
 surance journal of New York, in its June 13, 1914, issue, made 
 the following statement: 
 
 "At present the companies are compiling statis- 
 tics to show the n-asonableuess of Illinois rates in gen- 
 eral, aside from dwelling rates. They hope to satisfy 
 the Admini-stration that most of the rates are fair and 
 that they are going to do the fair thing regarding 
 dwelling rates, by applying the dwelling house schedule 
 as soon as it is prepared. A committee from several 
 of the big organizations has been working on this 
 schedule for a nuinl)r'r of months. It is said it ought to 
 be completed by now, but it is not. ' ' 
 
 Ih is noticeable that no defense is offered as a justification 
 for present dwelling rates, and, since the promised reduction is 
 not yet in force, it is evident that the companies had no 
 intention of granting relief even on this class. 
 
 The same publication, in its May 16, 1914, i.ssue, expressed 
 this opinion: 
 
 "Certain it is that the companies are in an unten- 
 able position as regards preferred rates." 
 Rough Notes, an insurance journal published at Indi- 
 anapolis, on May 31. 1914. expressed the same opinion: 
 
 "There is more or less uneasiness in local circles 
 in Chicago as to whether the State Insurance Depart- 
 
22 
 
 ment will not take some action that may lead to reduc- 
 tion in rates in the city. It is known that a large 
 number of underwriters feel that preferred rates in 
 Chicago can well be reduced, and that there is no de- 
 fense for keeping the rates on this class higher in 
 Chicago than anywhere else in the State." 
 
 Similar overcharges oppress the Insuring Public in other 
 states and have received the attention of various insurance 
 departments. As the result of an investigation which he has 
 recently made, Commissioner of Insurance Herman L. Ekern, 
 of Wisconsin, has arrived at conclusions which are well sum- 
 marized in a recently issued abstract of his forthcoming report 
 on this subject. Commissioner Ekern was chairman of the 
 Committee on Rates of the National Convention of Insurance 
 Commissioners and his profound study of the subject renders 
 what he says of such importance that I attach the abstract 
 hereto as an appendix and desire to call your special attention 
 to the same, and particularly to his final recommendation, — 
 
 "Laws for inquiry into and the regulation of fire 
 insurance rates are absolutely necessary. This is one 
 of the big problems in Wisconsin." 
 
 I could extend these comparisons of rates and discussion 
 almost indefinitely, but do not believe this necessary or desir- 
 able, for I have given enough examples to show clearly that 
 great inequalities and injustices are being inflicted on Illinois 
 policyholders by exorbitant and discriminatory rates, fixed and 
 maintained by the "Combines." In order to understand how 
 these wrongs may be removed, we must consider briefly the 
 correct principles of fire insurance rate-making. 
 
 RATE-MAKING. 
 
 The only just basis for rate-making is : 
 
 (1) To have a scientific and detailed classification made 
 of all risks in the State, putting in the same class all those hav- 
 ing approximately the same fire hazard. 
 
 (2) To collect all the experience possible as to fire losses 
 on each of the different classes and on the basis of this fix a 
 fair rate. 
 
 The classification and especially the rate should be sub- 
 ject to modification from time to time as the further accumu- 
 lation of experience might indicate. This can only be done 
 by the authority of the State. The individual insurance com- 
 panies are absolutely helpless to carry out such an undertak- 
 ing, even if they honestly desired so to do. Neither can it be 
 
23 
 
 done by a "Combine" of the companies or through co-opera- 
 tive action of the companies because they have no authority to 
 obtain information of the experience of all the companies upon 
 which the rates must be based. 
 
 The State of Illinois is large enough to give trustworthy 
 averages for the purpose of fixing insurance rates for practi- 
 cally all classes of property in the State. It might, however, 
 be found desirable in the case of a few classes containing only 
 a small number of risks to supplement Illinois experience by 
 that of similar risks under similar conditions in other states. 
 As a preliminary attempt in securing fire loss experience, I 
 have prepared a set of questions to elicit such information on 
 certain classes of Illinois property, each of which contain large 
 numbers of risks. These, if correctly and honestly answered 
 by the companies, will furnsh sufficient data for a preliminary 
 schedule of rates and upon this a complete system can be 
 worked out as further experience accumulates for applica- 
 tion in a reformed method of fire insurance which I will de- 
 scribe later. 
 
 Illinois is so situated that we do not suffer from many 
 extra hazards that increase fire losses in other states. We are 
 outside of the earthquake zone, free from prevailing high 
 winds, and forest fires, hence, by including other states with 
 Illinois in arriving at insurance rates, the Illinois rates are 
 influenced unfavorably. The People of Illinois can themselves 
 work out a trustworthy system of insurance, which will not 
 only protect them against monopolies, but procure fire insur- 
 ance at much more reasonable rates. 
 
 In the annual reports filed by the companies all losses of 
 every kind and character are lumped together and compared 
 with the premium income from all classes of property to show 
 the result of the year's experience. By this method the com- 
 panies are able to conceal the classes on which rates are ex- 
 orbitant ; and the classes in which over-insurance is permitted, 
 with its consequent result of enormous arson and careless fire 
 losses. It also permits thorn to conceal the losses on classes on 
 which temporary lower rates are made to drive out inde- 
 pendent companies, which losses must be offset by excessive 
 profits on other classes. If every class of business was rated 
 according to its own past experience and had to be self- 
 supporting in order to make the aggregate business profitable, 
 the companies would of necessity immediately eliminate the 
 bad risk. 
 
24 
 
 FORMER POSITION OF COMPANIES AS TO 
 "EXPERIENCE." 
 
 The proper basis for rate-making has long been the sub- 
 ject of discussion and agitation. In the past the companies 
 have contended that rate-making was an occult thing, Avhich 
 <^;ouId not be understood by anyone who had not been engaged 
 in the business for a lifetime; "experience," — that is, the 
 records of losses, was no guide whatever in estimating future 
 losses. This position was maintained because the companies 
 desired to avoid the compilation of fire insurance statistics, 
 and thus conceal the facts from the public. The selfishness 
 and fallacy of this position has, however, been so clearly 
 demonstrated in late years that the "Combine" has been forced 
 to abandon it, and in the fall of 1912, as a result of pressure 
 brought to bear by the National Convention of Insurance Com- 
 missioners, an "actuarial committee" of the "Combine" was 
 appointed. At the April, 1914, meeting of the Insurance Com- 
 missioners in Chicago, the committee made a report in which it 
 declared that past experience was no guide to future rate-mak- 
 ing. This report was severely scored by certain Insurance Com- 
 missioners and the committee promised to pursue the subject 
 further and make another report. Under date of September 9, 
 1914, this committee issued a report styled "A Standard Classi- 
 fication" of occupancy hazards and loss report forms for use in 
 ascertaining fire cost. 
 
 COMPANIES AND CLASSIFICATION. 
 
 A very clear expression of the companies' position is con- 
 tained in the following quotation from the October 15, 1914, 
 issue of the Western Underwriter, an insurance journal, in 
 discussing this "Standard Classification." 
 
 "Doubtless much opposition will arise to an 
 acknowledgment of the value of classification. Those 
 who are contending against the move feel that Under- 
 writers will be stultifying themselves and turning 
 back the pendulum in yielding to the pressure that 
 may be exercised by some States and Commissioners 
 for classification. 
 
 "These men argue that the companies should 
 undertake to point out the fallacy of trying to use 
 classified experience as a basis or guide in rate-making 
 and converting the authorities to a true under- 
 standing." 
 
 From an examination of this report it does not appear to 
 be made in good faith, but is a continuation of the "Combine's" 
 
25 
 
 policy of concealment. For instance, under "non-hazardous," 
 there are thirteen classes of buildings and contents, and among 
 the largest classes included are : 
 
 1- 2 — Barns, and stables, private (other than farms), 
 3- 4 — Churches and chapels. 
 
 9-10 — Dwellings, witliout barns (excluding classes 
 ll-K), inclusive; these classes are "palatial 
 dwellings," "summer or winter only, dwell- 
 ings" and "farm dwellings"). 
 15-16 — Dwellings occupied for farming purposes. 
 17-18 — Farm barns and other outbuildings occupied 
 for farming purposes. 
 
 All kinds of buildings of these various classes are lumped 
 together without regard to material or location, except that 
 in a prefactory note "For complete designation of classes, there 
 is to be added to the class number — 
 
 X for Fireproof. U for Unprotected. 
 
 Y for Brick. P for Protected. 
 
 Z for Frame. S for Sprinklered." 
 
 A schedule based on such a classification and experience 
 accumulated thereon would be unjust and inequitable. There 
 is a great ditYerence in the fire hazard of buildings having 
 shingle roofs and buildings having slate, tile, metal or similar 
 roofs. A.ssuming tiiat, by "unprotected" and "protected," the 
 distinction is made between buildings located in cities with 
 fire departments and those where there are no fire departments, 
 this distinction is wholly inadequate. The "Combine's" own 
 Illinois Inspection Bureau, for rating purposes, classifies cities 
 with respect to the fire protection into eight classes, and there 
 certainly should be a distinction between the risk on a building 
 in the city having such a fire department as tliat of Chicago, 
 and that of a village with a hand fire hose cart. 
 
 The loss experience is accumulated for rate-making pur- 
 poses, consequently, it should be accumulated for each class 
 for which separate rates are made. A large part of the popu- 
 lation of the State lives in cities and heavy taxes are paid for 
 the maintenance of fire departments. These are effective and 
 furnish groat protection, particularly the cities of the first, 
 second and third classes, and property owners therein are en- 
 titled to have the experience in these cities compiled separately 
 and if, as is certainly the case, there is a difference in the 
 fire loss, they are entitled to a corresponding reduction in 
 rates as compensation for the taxation which they bear to 
 support the fire departments. 
 
 Furthermore, this classification lumps together all dwellings, 
 
26 
 
 from the dilapidated tenement shack to a mansion. It is un- 
 just to compel the careful home-owners of the middle class to 
 pay rates justified by the tenement fire hazard. The committee 
 was very careful to provide that only "amounts written" and 
 ^'losses" should be reported, and that nothing should be said 
 about premiums collected. What reason could there be but a 
 desire to conceal the loss ratio, which shows whether rates are 
 ■excessive or not? 
 
 PROOF THAT REDUCTION IN RATES IS POSSIBLE. 
 
 Some indication of the reductions which are possible in 
 insurance cost is afforded by the well conducted mutuals and 
 inter-insurers. In these co-operative organizations every care 
 is taken to effect insurance only on the property of careful and 
 honest owners. Provision is also made by frequent inspection, 
 and otherwise, to see that the insured property is kept in 
 such condition as to reduce the fire hazard to the minimum. 
 Usually a sprinkler system is required. By such means the 
 cost of insurance has been reduced to one-fourth to one-eighth, 
 and even one-tenth of the stock company rates. 
 
 Another proof of the reduction possible in insurance rates 
 is afforded by foreign countries. 
 
 FIRE INSURANCE PREMIUM RATES IN EUROPE. 
 
 Germany. 
 
 When we come to examine into the fire insurance premium 
 rates in European countries, we find them extraordinarily low. 
 According to the absolutely reliable authority mentioned 
 above, (Das Deutsche Feuerversicherungswesen, Biederman, 
 et al, 1913, Vol. 2, p. 559), the average premium rate for the 
 public, (state, provincial, city, etc.) insurance institutions 
 throughout the entire German Empire for 1911 was 13.4 cents 
 per $100.00, and for the period of five years (1907 to 1911, 
 inclusive), the average rate was 12.9 cents per $100.00. This 
 is approximately one-ninth of the average rate in the United 
 States, which for these periods were 106.1 cents per $100.00, 
 and 110.1 cents per $100.00, respectively, (Spectator Year 
 Book, 1914, p. 420). In 1911, these German State insurance 
 institutions returned, as losses paid to the premium payers, 
 84.3% of the amounts collected from them, and, at the same 
 time, added to their reserve 2,292,113 marks. Consequently, 
 the entire expense of administration was only 13%. For the 
 five year period, 1907 to 1911, calculated in the same way, the 
 
expense of adiuinistration uas 13.7%. In the State insurance^ 
 tlie surplus belon<?s to the j)olicyholders, but in the stock 
 company insurance, the surplus belongs to the stockholders, 
 and is entirely lost to tlie policyholders. 
 
 These are strikingly different figures from the average 
 of about 45% expense and profit in American stock company 
 insurance. 
 
 Switzerland. 
 
 In Switzerland, similarly low rates prevail. The latest 
 year for which figures are available is 1899 (Assurance Contre 
 L' Incendie. par L'Etat ou les Cantons, en Suisse & dans les 
 Pays Seandinaves. Alglave, 1902, p. 363), in which the sum 
 insured was 6,320,561,515 francs, and the premium receipts 
 were 6,858,998 francs, so that the premium rate in American 
 money would amount to 10.1 cents per $100.00. In the same 
 year, 4,061,088 francs were returned to the policyholders for 
 fire losses, so that the loss ratio was 59.2 per cent. The 
 amount of the surplus for this year is not given, so that it is 
 impossible to calculate what the expense percentage was in 
 Switzerland for this year. For the year 1897. the premium 
 rate calculated in American money was 11.5 cents per $100.00, 
 and the loss ratio was 56.4%. For the same reason as in the 
 previous year, it is impossible to get the actual expense per- 
 centage. For the United States, premium rates are not available 
 for these years separately, but for the period 1891 to 1900, the 
 average rate was 103.7 cents per $100.00. (Spectator Year 
 Book, 1914, p. 420.) 
 
 Norway, 
 
 In Norway the average State insurance premium in the 
 rural districts for the period of 1895 to 1897, inclusive, was 
 6.9 cents per $100.00. In the cities, 13.8 cents per $100.00. 
 Taking both the city and country districts together, the aver- 
 age premium for this period was 11.7 cents per .$100.00. 
 
 The rate average in the Unitod States for period including 
 these years was 103.7 cents per $100.00. 
 
 FIRE PREVENTION METHODS NOT IN GOOD FAITH 
 FAVORED BY COMPANIES. 
 The "Combine" fonipjmit's arc reluctant to inform a 
 property owner of the reduction in rates to which he might 
 be entitled by the installation of sprinkler systems or other 
 fire preventive devices, becau.se the installation of such im- 
 provements would bring the buildings within classes which 
 
28 
 
 are much sought after by high class mutuals and inter-insurers. 
 So long as a risk is in hazardous classes the "Combine" has 
 a monopoly, and, so long as the "Combine" can charge any 
 rate it sees fit, it is not seriously interested in reducing the 
 amount of losses. 
 
 A striking example of the result to be obtained by the 
 dissemination of such knowedge is afforded in Texas, where 
 the present State law requires that a detailed statement of all 
 the different items, penalties, credits, etc., which go to make 
 up the final insurance rate on any property, must be placed in 
 the policy. This has given every insurer information concern- 
 ing the unfavorable factors which cause his rate to be high, 
 and, in very many cases, he has improved his property, and 
 thus secured a rerating at lower figures. This has resulted in 
 a great improvement in a large part of the insured property 
 in the State, which not only benefits the property so improved, 
 but also lessens the hazards to adjoining properties. 
 
 COERCION BY THE "COMBINE." 
 
 It has been the practice of the "Combine" whenever the 
 question of State -rate-making has been up, to threaten to 
 withdraw from any state attempting such action. They 
 actually put their threats into effect in Missouri and Kentucky, 
 and so coerced, to some extent, the government of those States. 
 This was done by the concerted action of the companies and 
 shows the extent and power of the agreement existing between 
 the members of the "Combine." The action in these States, 
 however, had a two-fold purpose. The companies, fearing the 
 effects of the anticipated decision of the Supreme Court of the 
 United States in the Kansas rate case, decided to make ex- 
 amples of these states as a damper to agitation for relief in 
 other states. This plan has been carried out faithfully and 
 during the past year it has been almost impossible to find a 
 single insurance periodical without some reference to the 
 terrible examples of Kentucky and Missouri. These threats 
 have already been made in relation to the movement in Illinois 
 for an equalization and readjustment of insurance rates. In 
 order that the selfish and illegitimate motives of the companies 
 behind this agitation may be understood by the citizens of 
 Illinois, it will be necessary to give a short account of the 
 conduct of the companies in this connection. 
 
■29 
 
 TACTICS OF THE COMPANIES IN DEALING WITH 
 THIS DEPARTMENT. 
 
 The fire insurance companies have made repeated claims 
 that unfavorable commercial conditions, caused by the present 
 European war, entitled them to immunity from prosecution 
 for violating the anti-monopoly laws. Their position is 
 founded on the allegation that fire insurance is the basis of 
 commercial credit. If this is true, it is certainly time 
 that some action be taken to see that commercial 
 credit does not remain dependent upon the monopolistic 
 "Combine." An unsigned circular was distributed at a recent 
 meeting of the Illinois Association of Bankers in Chicago, 
 making such charges. The circular was a verbatim copy of an 
 article previously appearing in the Insurance Post of Chicago, 
 an insurance journal, edited by T. R. Weddell, official publicity 
 agent for the "Union" and "Western Insurance Bureau," the 
 two "Combines" now attacked by an anti-trust suit. It is 
 evident that the fire interests preferred to do their fighting in 
 this manner, rather than by any direct and open statements. 
 A brief resume of the proceedings taken is a complete answer 
 to all such charges. 
 
 The investigation of fire insurance conditions in Illinois 
 was begun in March of this year, and my preliminary report 
 was filed with you on May 6th. On June 16th, we gave the 
 companies a joint hearing, at which time they agreed to file 
 their answer and state their position in regard to the demands 
 made upon them in my report, within thirty days. This was 
 long before commercial conditions were disturbed by the war, 
 and the companies had ample time to dispose of the entire 
 matter weeks before the outbreak of hostilities. 
 
 No answer was filed but, on July 2nth, I gave written 
 notice to the companies to file their long overdue answer by 
 August 10th ; on this date the companies .sent a representative 
 to you and pleaded for another extension, and they were 
 granted this to August 20th. Plowever, no answer was then 
 filed or ever filed by the companios, nor did they assign any 
 reason for their failure to do so. Because of this failure, I filed 
 an anti-monopoly suit on August 27, 1914, against the "Com- 
 bine" companies in accordance with my report of May 6, 1914, 
 (p. 5), in which I said that, unless the organizations and 
 methods of the companies were reformed "in such a manner as 
 not to be in violation of our laws, proceedings should at once be 
 brought against them." The companies' claim is false that this 
 
30 
 
 anti-monopoly suit is an unfair prosecution, coming without, 
 warning when business conditions were disturbed by the war. 
 After the commencement of this suit, however, the "Combine" 
 companies continued their dilatory tactics, and on November 
 5th they sent their representative to Your Excellency with a 
 proposal that, if if I should agree, as complainant in said suits, 
 to a postponement of the argument on the pending demurrer 
 therein from November 7th to December 5th, the com- 
 panies would file with you an answer to my said report of May 
 6th, within one week from that date, and that representatives 
 of the companies would meet at your office on November 16th, 
 1914, for the purpose of conferring with us in reference to the 
 allegations in my said preliminary report, and also with regard 
 to proposed legislation in relation to the regulation of fire in- 
 surance rates and other fire insurance matters in Illinois. 
 
 After waiting until the representative of said companies 
 had received, as he claimed, explicit ratification of his proposal 
 from his principals, he returned to you and on November 6, 
 1914, said agreement was completed, and according to your 
 directions, the postponement of the argument of said de- 
 murrer entered by agreement in the records of the court. 
 Nevertheless, neither did the companies file their answer a& 
 promised, nor did they or their representatives appear on 
 November 16th at your office for said conference, nor was any 
 excuse or explanation given for not doing so. I next, on Novem- 
 ber 19, 1914, filed in court a motion, supported by an affidavit, 
 setting forth the facts outlined above, to set aside the post- 
 ponement of argument on demurrer. The course of the com- 
 panies in this connection is unpardonable and a plain effort to 
 avoid an issue upon the charge that they have been exacting 
 unreasonably high rates agreed upon in their "Combine." The 
 insurance companies complain of my investigation and say that 
 I should not present these matters to the courts and to the 
 Public. If I am not right in my version, I ask the judgment of 
 the courts and the Public against me, and, if I am right, I ask 
 that both sustain me. 
 
 UNDERWRITER ANNEX LITIGATION. 
 
 The entire lack of good faith, upon the part of the com- 
 panies in their resistance of the efforts of public officials to 
 enforce the laws, is also shown by their conduct in the present 
 "underwriters agency" litigation now pending in the United 
 States Court of the Southern Illinois District. 
 
31 
 
 In April, 1914, a written complaint was presented to me 
 in regard to companies maintaining "annexes" which issue 
 "underwriters" policies. This is a plan which had grown up 
 largely within the past ten years, by which risks were insured 
 by unincorporated concerns called "underwriters agencies," 
 but the policy was issued over the name of some regularly 
 licensed insurance company. After some examination of the 
 subject and appreciating the importance of the issue, I gave 
 notice of a public hearing, to be held on June 1st, and invited 
 all parties interested to be present. At this hearing the com- 
 panies participating in this practice were represented by 
 counsel, and some of the most prominent of the proprietors of 
 "underwriters agencies," and also representatives of the local 
 -agents of Illinois. Immediately after this hearing, representa- 
 tives of the "Underwriters" companies, after a conference in 
 •Chicago, at once sent 54 special agents throughout the State, 
 dividing the State into 17 districts. These special agents 
 called upon every local insurance agent and urgently solicited 
 him to write a letter to the Insurance Superintendent, pro- 
 testing against any ruling contrary to the "underwriter" 
 policy scheme. They furnished such agents as they could 
 induce to use them, letters already written to be copied upon 
 the agents* own stationery. In this way they attempted to 
 make it appear that the agents were strongly opposed to any 
 ruling against "underwriters agencies", when, in fact, the 
 local agents as a body were and are opposed to the "under- 
 writers" policy scheme. This is shown by the subsequent 
 action of the National Association of Local Insurance Agents at 
 Minneapolis, August 17, 1914, which passed a resolution com- 
 mending my ruling, as did also the State Association of Local 
 Insurance Agents at their annual meeting in Springfield, 
 September, 1914. 
 
 After the hearing I took the matter under consideration 
 and, on June IGtli, made a ruling which contained a full out- 
 line of the considerations which led me to decide against the 
 practice of issuing the so-called "underwriters" policies. 
 This ruling was printed and sent to all fire companies lieensed 
 in this State. In a letter, which accompanied the ruling, I 
 allowed the companies until July 10th to indicate whether or 
 not they were willing to comply therewith. The nature of the 
 action contemplated was clearly indicated in the ruling itself 
 in which I said: "I shall direct that proper proceedings be 
 instituted in the Courts of this State again.st all companies 
 
32 
 
 issuing such policies, to compel them to conform with the laws 
 of this State." This course was adopted by me with a sincere 
 desire to settle the "underwriter" question without any dis- 
 turbance to the business. 
 
 This considerate action should have been appreciated and 
 reciprocated by the companies. Instead, however, the "under- 
 writer" companies hastily combined, concocted a sworn bill 
 containing absolutely false allegations, and rushed with it into 
 the United States Courts before July 10th to prevent me from 
 enforcing my ruling. These companies, by thus forcing the con- 
 troversy into the United States Courts, said plainer than 
 words that they have no faith in the State Courts of Illinois, 
 Insurance companies of other States do business in Illinois by 
 permission only. They are business guests of our common- 
 wealth. No greater affront could be offered the State of Illi- 
 nois than this action for an injunction against a State official 
 to prevent the enforcement of a State law by a State court. 
 Their conduct is a contemptuous violation of the spirit of the 
 statutes which imperatively require the Insurance Superin- 
 tendent to immediately revoke the license of any foreign com- 
 pany which removes a suit brought against it from a State 
 Court to a Federal Court, and, also, an example of the tactics 
 of this monopoly when confronted with regulation in any form. 
 
 INSURANCE JOURNALS. 
 
 The numerous insurance journals well scattered over the 
 country valiantly uphold the companies in every fight against 
 reform. These trade papers secure their income almost en- 
 tirely from company advertising and derive their ideas from the 
 source of their income. They are widely distributed among 
 insurance agents, and their editors are past masters at manipu- 
 lating facts and figures in the interest of the companies. 
 
 A quotation or two from these publications will show the 
 very evident use that is made of them by the "Combine." 
 The Insurance Post, of Chicago, 111., an insurance journal edited 
 by T. R. Weddell, official publicity manager of the Western 
 Insurance Bureau, and the Union, in the August 1st, 1914, 
 issue, in discussing the investigation being made, makes this 
 threat : 
 
 "In connection with the activities of Insurance 
 Commissioner Potts, of Illinois, in the matters of rates, 
 annexes, etc., the fact is recalled that Mr. Potts has 
 not yet been confirmed in his position by the Senate. 
 He is an interim appointee, and in case of a political 
 
upheaval, such as is quite probaFjle in Illinois this 
 winter, it is possible tiiat he may fail of confirmation 
 when his name is submitted to the Senate under the 
 laws, when that body meets. In the meantime the dis- 
 position of the insurance men is to let Mr. Potts alone, 
 so lontf as he lets them alone, but to serve notice on 
 him that every move he undertakes which is not justi- 
 fied by law will be foucfht to a finish. This includes 
 his demand for a reduction in rates, which is held not 
 to be a matter within his authority." 
 
 Within a week (issue of August 6th), The United States 
 Review, another insurance journal, published in Philadelphia, 
 made the same threat of the political intentions of the fire 
 interests : 
 
 "It is said, notwithstanding that he (Potts), has 
 held his present office for some time, that he has not 
 yet been confirmed in his position by the Illinois 
 Senate ; also that he is an interim appointee, and that 
 in the event of a political upheaval in the State during 
 the coming winter, which is thought to be highly 
 probable, he may fail of confirmation when the Legis- 
 lature then meets. Presumably he is not much con- 
 cerned about such a possibility, and at the same time 
 imagines that he is strong enough to face all the music 
 that may come along regarding any or all of his official 
 acts, but, nevertheless, some of his good friends should 
 quietly admonish him that in assailing the fire insur- 
 ance interests of his State, as he has been doing, he is 
 making a mistake, and is not unlikely to find himself 
 in a- good deal of trouble ere long, politically, officially 
 and personally, in consequence." 
 
 The following quotation, approving a speech made by an 
 Insurance Commissioner of another State, shows that the fire 
 companies do not want Insurance Commissioners to favor 
 investigations: 
 
 "He did not attempt to stir up any new species 
 of investigation which might possibly embarrass some 
 branches of the insurance business." (Insurance Ad- 
 vocate, New York, September 26, 1914.) 
 
 This extract from the Insurance Post, of Chicago. June 2, 
 1914, shows clearl}' the desire of the companies that all knowl- 
 edge of evils should be kept secret : 
 
 "In April, 0. B. Ryon. general counsel for the 
 National Board of Fire Underwriters, addressing the 
 Fire Insurance Club of Chicago, said : 'Don't take your 
 grievances to the insurance department unless they are 
 of a genera! character. Remember, while you are get- 
 ting your little complaint fixed you may be 'fixing' the 
 
3-1 
 
 whole fraternity. Mr. Ryon usually knows what he is 
 talking about, but he possibly did not know how very 
 appropriate that advice was just at the moment. About 
 that very time certain Chicago agents were asking the 
 Illinois Department to correct grievances and they 
 seem to have started something which they connot 
 stop." 
 
 Little confidence can be placed in the articles of the in- 
 surance journals, their function being more to suppress facts 
 than to give publicity to anj^ evils in the business. 
 
 The attitude, however, of the general press, when free 
 from insurance influence, is just the contrary. This is well 
 shown by the following editorial from the Illinois State 
 Register of July 27, 1914, which, in the course of the discussion 
 of a particular incident, states clearly the improper control 
 over the insurance press by the companies: 
 
 NEWSPAPER AND TRADE JOURNALS. 
 
 The relative value of insurance trade journals and 
 the daily papers as a medium of conveying news to the 
 public is strikingly shown by a comparison of the edi- 
 torial comments of a foremost representative of each 
 class on the report of Insurance Superintendent Rufus 
 M. Potts, covering his investigation of the stock and 
 bond holdings of eastern fire insurance companies in 
 the New^ Haven railroad. The report showed that these 
 companies hold over $7,000,000 in this worthless paper. 
 
 The Chicago Herald commends Mr. Potts, and 
 points out that the public is vitally interested in such 
 matters and should be kept informed. The sentiment 
 of the editorial is expressed in the following: 
 
 "And now comes this statement from the state's 
 commissioner of insurance to show^ that this situation 
 which we have been regarding with calmness, as alien 
 to our interests, affects to a certain extent everybody 
 who takes out a fire insurance policy in Illinois. ' ' 
 
 On the other hand, the Insurance Field of Louis- 
 ville, Ky., a leading insurance journal, severely criti- 
 cises Judge Potts for making such a discovery public, 
 the editorial declaring that : 
 
 "The companies holding these securities are prob- 
 ably as a rule able to charge off their losses. * * * 
 There are insurance authorities much nearer than 
 Judge Potts to the insurance companies and their 
 railway investments who can be depended upon to 
 give the most conscientious 'attention to the financial 
 affairs of the companies as they may affect the public. 
 * * * If there is any particular company endangered 
 by too much New Haven diet, Judge Potts might take 
 quiet steps, but to attempt to 'bawl out' fortv-three 
 
 1 
 
35 
 
 biu: companies on a blanket criticism that probably 
 will not vitally affect any of them is a grave error." 
 
 This contrast simply reflects the fact that articles 
 in insurance journals are not news items, but are pub- 
 lished for the sole jnirpose of protect in «r the trade, and 
 the public dealinir with these interests cannot with 
 safety rely upon such orii:ans. The coveriujc: up of this 
 discovery would prol)ably have brou,u:ht fulsome praise 
 from this very journal for the insurance superintend- 
 ent, and the insurin*;: public of the State of Illinois 
 would have been none the wiser. However, durinjx his 
 administration in the insurance department. Superin- 
 tendent Potts has taken the stand that where a com- 
 pany or class of companies violate the law, refuse to 
 conduct their business leijitimately, or endangrer the 
 safety of their policyholders tiirough rpiestionable 
 speculations, the public is entitled to have all available 
 inforamtion as their protection against further victim- 
 izing. 
 
 Under all theories of insurance, the money in- 
 vested by the companies in New Haven stock does not 
 belong to the companies; it is the accumulation of the 
 premiums of the policyholders set aside and held in 
 trust to pay their future losses, and when it is wasted 
 and devastated the trade journals declare that the 
 facts should not be made public. It is difficult to see 
 what this insurance journal has in mind when it insists 
 that such discoveries as made public by the Illinois 
 Department, which everybody must admit is of vital 
 importance to every policyholder for whose protection 
 it exists, should be kept secret. 
 
 The Insurance Field charges that such actions 
 cannot help Judge Potts in his clean-up campaign, 
 "but only help to cast suspicion on the business." It 
 would seem far better for such a paper to lend its 
 suppoi-t and editorial energies to a movent. -nt which 
 will clean up the business and raise its plane to a 
 point wiicri" it need I'lar ncitlvr adverse puMii-ily lun' 
 investigation. 
 
 CHARGE OF POLITICS.' 
 
 It is iilwjiys maintained by the conii»;inies, willi liypo- 
 critieal assumption of martyrdom on their part, that they must 
 ever bear the brunt of attack from self-seeking public oflicials. 
 They express in pathetic terms a yearning to prot'ct the I'cople 
 from loss by fire, but claim that the foolisimess of some public 
 servants is liable to deprive the people of this great charit}'. 
 It may be true that politicians have in the past secured lucrative 
 livings for some men at the expense of the companies, but this 
 is because the companies fully realize that on account of their 
 
36 
 
 violations of law they are at all times open to successful attack. 
 Open, vigorous prosecutions in courts of law are not methods 
 adopted by the beneficiaries of monopolies' corrupt generosity. 
 
 I am not restraining insurance, but restraining monopoly; 
 I am not fighting stock fire insurance companies, but am pre- 
 serving the rights of the people of the State of Illinois ; I am 
 not stifling business, but am trying to preserve an open market 
 in the fire insurance business in this State, as President Wilson 
 is doing in other lines of industry in the nation. In bringing the 
 anti-trust suits, my aim is to make insurance an open and 
 competitive field, and to effectually prevent, for all time, the 
 creation and maintenance of such insurance trusts or combines 
 as exist today. These companies do not undertake to offer any 
 legal substitute for the evil practices that now exist ; they will 
 not willingly permit others to correct these evils. 
 
 The truth is that the all-powerfu]. fire insurance trust has 
 been in control so long, their fortifications are so well estab- 
 lished through the insurance press, that they feel they can 
 resist the demands for reform by all State governments, and 
 hence will make no concessions, but seek immunity on the 
 bluff that they will leave the State in case we seek to regulate 
 or control them. The subjoined are recent examples of such 
 threats repeatedly made following the efforts of this depart- 
 ment to secure relief. 
 
 "Several important fire insurance companies have 
 announced their disposition to stop writing insurance 
 in Chicago or in Illinois if the Insurance Department 
 should be able to enforce its demands for a reduction 
 in rates." (The Insurance Press, September 8, 
 1914, p. 7.) 
 
 "It is almost unbelievable that the courts of Illi- 
 nois will approve the attitude of Potts ; but, in the 
 event that they do, we should expect to see with- 
 drawals of self-respecting companies from the State." 
 (The Surveyor, September 11, 1914, p. 27.) 
 Even if the "Combine" companies should put these ar- 
 rogant threats into execution, and by concerted action quit 
 Illinois, while it might cause some temporary inconvenience, 
 it would, in my opinion, ultimately benefit Illinois property 
 owners. It would afford an opportunity to at once create and 
 put into operation a system of State fire insurance. This might 
 be a somewhat difficult task if the insurance companies were 
 fully occupying the field, but if the "Combine" companfes, by 
 concerted action, abandon the State for the purpose of coercing 
 the State government into permitting the anti-monopoly stat- 
 
37 
 
 utes and common law of the State to be contemptuously 
 violated, these obstacles will no longer exist and S>tate fire 
 insurance can be easily and advantageously put into successful 
 operation. In this connection, I believe a brief presentation 
 of the advantages of State fire insurance will be of interest. 
 
 STATE INSURANCE. 
 
 In the first place, State lire insui-aiice will afford infinitely 
 better security to property owners than all of the "Combine" 
 companies and their assets, even if all Avere united in one 
 gigantic insurance corporation. Eciually important, the fire 
 premiums could be reduced to one-half of the present "Cora- 
 bine" rates or less. The claim is not extravagant. As shown 
 above, the rates under State insurance in European countries 
 are only one-ninth of the rates here. While we would not hope 
 to be able to make such low rates immediately, they would be 
 approximated in a reasonable time, and great immediate re- 
 ductions would be possible. In my judgment, one-half of the 
 present charge would be an adequate rate under State fire 
 insurance because, in round numbers, only one-half of the 
 premiums collected is claimed by the fire insurance companies 
 to be actually paid for losses; the remainder, they say, is all 
 used for profits and expenses. As we have seen, all authorities 
 who have written on the theory of fire insurance agree that 
 such insurance is, in essence, a tax by which the fire losses are 
 distributed throughout the whole of the community, instead 
 of falling wholly upon the unfortunate individual whose 
 property is burned. 
 
 Now, it is exorbitant to absorb 50 per cent of a tax in its 
 collection and disbursement. Under European State insurance 
 less than 15 per cent is required for expenses, and no profit 
 whatever is made. With the expense reduced to less than 
 15 per cent, instead of 50 per cent, the cost of insurance to the 
 property owner would be cut down nearly one-half. The re- 
 mainder can be rapidly reduced by preventing over-insurance, 
 by compelling the repair and improvement of "fire traps" and 
 "fire breeders," and by tlif stringent prosecution of the too 
 frequent crime of arson. 
 
 That such a reduction is not an idle dream, but can be 
 made an immediate reality if proper measures are taken, is 
 proven by the recent extraordinary reduction of fire loss as 
 shown by the ratio of loss to insurance in New York City. The 
 reduction from the year 1912 to 1913 is exhibited bv the follow- 
 
38 
 
 ing tabular statement taken from the Spectator's "Year Book," 
 1914, page 505, which shows the number of dollars loss for 
 each one hundred dollars of insurance in force on buildings 
 and contents in which fires started: 
 
 Insurance Loss * Loss 
 
 Year In Force Buildings Contents 
 
 1912 $100 $1.48 $17.77 
 
 1913 100 1.00 8.93 
 
 The amounts of insurance premiums are not given, so that 
 the decrease cannot be shown in the form of percentage loss 
 ratios as usually done elsewhere in this report, but this method 
 gives a comparison for the different years of the proportion of 
 losses to insurance similar to that afforded by. percentage loss 
 ratios. 
 
 This shows that in one year the fire loss on buildings was 
 reduced to two-thirds, and on contents to one-half of what 
 it had been the year before. This is an enormous difference, 
 which means a decrease of millions of dollars in fire loss in the 
 metropolis alone. No such sudden drop in the fire loss ratio 
 ever occurred before. It did not happen at this time without 
 cause. When the course of the fire insurance business in New 
 York City for these years is investigated, it is not difficult to 
 see what the main cause was which brought about this extra- 
 ordinary and desirable reduction. Doubtless, part of the im- 
 provement w^as on account of improved building construction, 
 better fire protection, installation of automatic sprinkler equip- 
 ments and the installation of a high pressure water system. 
 But these factors had been in operation for several years and 
 only account for a general decline, and not for the sudden 
 tremendous drop. 
 
 It wnll be remembered that, in 1912, there was a great up- 
 heaval in fire insurance circles in New York City and an ex- 
 posure of the so-called "Arson Trust." The operations of the 
 latter were made possible by collusion between corrupt local 
 insurance agents and incendiary property owners. This be- 
 came so notorious that insurance could be obtained for several 
 hundred dollars on furniture, etc., in the tenement district, the 
 actual value of which was only a few dollars. Of course 
 fires happened and the corrupt agents paid the losses, receiving 
 their "rake off." The same thing happened in relation to 
 stocks of merchandise of all sizes. This condition became so 
 bad that exposure followed, and these evils were largely cor- 
 rected. This, in my judgment, is the explanation of this sud- 
 
39 
 
 den drop. I wrote the "Combine" officials as to what interpre- 
 tation they placed upon it, but they professed ignorance and 
 proceeded to cast doubt upon the reliability of the figures 
 given in the Spectator "Year Book," but would not furnish 
 any others. In view of what I have heretofore stated, this is 
 what might be expected of the "Combine." Although con- 
 ditions in Illinois cities are not as bad as they were in New 
 York in 1912, still, if arson was entirely eliminated, a similar, 
 but smaller, drop would occur in the fire loss ratio of Chicago 
 and other cities. 
 
 A similar sudden reduction took place in Texas, co- 
 incident with a change in Texas laws, which went into opera- 
 tion in 1913, and provided that rates be made by a State Com- 
 mission and established other insurance reforms, such as proper 
 credit for fire prevention devices. The Texas fire loss ratio 
 in 1912 was .85.8' c, in 1913, 55.7%, a reduction in one year of 
 30.1%. (Insurance Age, Sept., 1914, p. 203). No other re- 
 duction of like magnitude has occurred since the amount of 
 insurance in that State became large enough to afford reliable 
 averages. 
 
 The companies are wholly dependent for business on their 
 numerous local agents. These receive a percentage commission 
 on the premiums, so it is to the local agent's advantage to 
 asquiesce in over-insurance, and see that every applicant is 
 allowed insurance, whether his property is a fire trap or not. 
 It is probable that many honest insurance agents do not allow 
 these interests to control, but they exert steady pressure 
 toward reckless insurance and high fire losses with consequent 
 high premium rates, and in the aggregate have tremendous 
 influence. The truth is, that instead of fires being diminished 
 by insurance, they have been greatly increased, and, so long 
 as the companies are able to collect rates which will pay all 
 losses and a good profit, they are content. In fact, occasionally 
 an insurance company officer has been found frank enough to 
 admit that it was desirable that the fire loss was large, instead 
 of small, provided they can fix the rates high enough to pay 
 the losses, because they and their agents will get their per- 
 centage of profit and commission on a large, instead of small, 
 premium. 
 
 For instance, the general manager of the Scottish Union 
 and National Insurance Company, of Edinburgh, says: 
 
 "Were there no fires there would be no insurance 
 business; and, on the other h.iiul, the greater tli<« fire 
 
40 
 
 damage, the greater the turnover out of which insur- 
 ance companies make profit . * * * Speaking to- 
 night as manager of a fire insurance company, I say 
 we cannot make profits for our shareholders without 
 fires, and, further, that Avithin certain well-defined 
 limits we welcome fires." (Quoted in Collier's, Feb- 
 ruary 22, 1913.) 
 
 Edwin Milligan, vice-president of the Phoenix, of Hartford, 
 in his testimony before the Illinois Insurance Commission, says : 
 "Speaking for the company, for the fire insurance 
 companies, I should say that the reduction of the fire 
 waste would not be a profitable thing. I think, Mr. 
 Chairman, that as a business fire insurance is conducted 
 by companies — like the one I represent — with most 
 satisfaction and with larger profits in the years when 
 fires are plenty ; a good number of fires means a good 
 premium account." 
 
 Henry Evans, president of the Continental of New York, 
 testifying before the New York Insurance Commission (1910, 
 p. 2890), says: 
 
 "I don't care anything about a $2,500,000 or a 
 $3,000,000 fire. Just as soon have it as not. It would 
 put so much business on my books, and put rates so 
 high I would make it up." 
 
 A striking example explaining how insurance companies 
 gain instead of lose by conflagrations, and why Mr. Henry 
 Evans and other insurance presidents do not dread them, is 
 given in a speech made by Colonel Edwin Romberg, of Chicago, 
 before the Chicago Real Estate Board on November 5, 1914. 
 He says: 
 
 "I had a peculiar experience last June here in 
 Chicago, myself. My secretary called my attention to 
 an insurance policy expiring on a factory building, 
 owned by me, situate on Root street, near Halsted. 
 As usual, I requested to know the amount of the insur- 
 ance that we have, and told him that we would have 
 to renew the policy and wanted to know the rate. He 
 told me the rate would be a certain figure, plus 10%. 
 When I asked what this 10% was for, he did not know, 
 , so I had him call up the Board of Underwriters to find 
 out ; and this is the information he received : That the 
 extra charge of 10% was added to all mercantile 
 risks in 1902, after the Baltimore fire ; that the Under- 
 writers of Cook county then decided upon a general 
 increase of rate on all ordinary or special risks of 10% 
 on buildings and 25% on contents, but that this rate 
 would be eliminated by the Dean Schedule as soon as 
 the district could be brought under that Schedule, 
 which will be in about a year's time. In other words. 
 
41 
 
 ^'entlonicn, you have been raised lOS' on building and 
 25' t on contents on an immense amount ui' insurance 
 on account of the Baltimore fire which took place 
 twelve years ago, and tliey have never taken off this 
 increase fnuu the rates, and I dare say tliat you, as 
 well as the rest of the People in this City, are not even 
 aware of it." 
 
 This same spirit appears to control in the insurance busi- 
 ness everywhere, although it is concealed as far as possible, 
 and only becomes visible by reason of some special investiga- 
 tion or agitation. There has been much agitation in Kentucky, 
 and the Chairman of the Kentucky State Insurance Board 
 (Statement, etc., April 29, 1914) says: 
 
 "A very prolific cau.se of losses incurred in this 
 State, as admitted by the companies, is due to over- 
 insurance. To correct this evil, so far as possible, the 
 State Insurance Board was -given the right to inquire 
 into the question of insurance upon property as to its 
 value, thus, insofar as possible preventing fraud 
 lo.sses. The companies, however, because of their antip- 
 athy to State regulation, seriously objected to this, 
 as well as all otlu^r provisions of the law. They seem- 
 ingly little care how great their losses may be so long 
 as State supervision is prevented and the making of 
 rates charged for insurance left entirely in their 
 hands." 
 In the series of articles in Collier's "Weekly, beginning 
 
 February 8, 1913, satisfactory proof was given to support the 
 
 following statement made therein : 
 
 "At the very lowest estimate incendiarism, either 
 active or passive, is responsible for one-half of our 
 fire loss • • • • When we calculate everything that 
 our fires cost us, we may set our arson loss at one- 
 quarter billion dollars a year. No lower estimate is 
 possible." 
 The New York In.surance Commission report (1910, p. 
 
 119) says: 
 
 "Against that we have a certainty that the fire 
 loss could be at least cut in two; that there could be 
 not only a saving of one hundred million dollars a 
 year in property now destroyed, but nearly as much 
 more insurance expense, certainly hundreds, perhaps 
 thousands of lives saved and a world of worry and 
 suffering." 
 
 Commissioner Lewis, of Kansas, at the National Conven- 
 tion of Insurance Commi.ssioners (proceedings, 1910, p. 68) 
 says : 
 
 "The question of over-insurance is a subject that 
 
42 
 
 should receive the attention of this convention as 
 much as any other thing that we have before us for 
 consideration, in my opinion. I believe that if we 
 could eliminate over-insurance that the rates in Kan- 
 sas could be reduced 50 per cent, in my honest judg- 
 ment. ' ' 
 
 This incendiarism can be eliminated almost entirely under 
 a system of State insurance. Much good is now being done 
 by the Illinois Fire Marshal, but present conditions prevent 
 the full accomplishment of the purpose of that department. 
 However, with State insurance, officials deal directly with, for 
 and in behalf of the State, rather than with an insurance trust 
 controlling the insurance business in Illinois. 
 
 The Hon. James R. Young, president of the National Con- 
 vention of Insurance Commissioners, in his address at the 
 annual meeting at Asheville, North Carolina, September 15, 
 1914, said: 
 
 ''Although the strenuous efforts to reduce the 
 immense fire waste in this country is being continually 
 and intelligently increased, the great loss of life and 
 property grows unabated. It is nothing less than a 
 crime and a reproach to us as a civilized nation." 
 
 "UNDERWRITERS LABORATORIES." 
 
 But some insurance advocate will say : ' ' Does not the 
 "Combine" maintain in Chicago an extensive underwriters 
 laboratory for the purpose of testing fire preventing devices, 
 etc.?" This may be true and still little benefit accrue to the 
 public. Different motives control the different sub-divisions 
 of the great fire insurance companies. Subordinate depart- 
 ments may be attempting to disseminate information to 
 diminish fire losses while the men "higher up" are either 
 wholly indifferent or, when their real sentiments can be ob- 
 tained, openly hostile. 
 
 An objectionable phase of the operation of the "Under- 
 writers Laboratories" has lately been called to my attention. 
 The insurance interests have procured the making of require- 
 ments in some Illinois cities that the material in electrical in- 
 stallations and certain other appliances must be approved by 
 the "Underwriters Laboratories." These laboratories charge 
 a fee of from a minimum of fifty dollars up to hundreds for 
 testing materials and devices which tends to prevent competi- 
 tion therein. By this means, some very clever monopolies have 
 been built up. 
 
43 
 DISTRIBUTION OF RISKS. 
 
 All importaut feature of safety in the lire insurance busi- 
 ness is what is technically called a distribution of risks, that is, 
 that insurance should cover a great number of risks so that 
 there will be some approximation to uniformity in the number 
 of fires that occur within a year. In the first place, the neces- 
 sity for distribution would be much less important to State 
 insurance than to corporation insurance, because the credit of 
 the State is more able to stand sudden demands made upon it 
 by irregular distribution of fire losses. The State of Illinois, 
 however, is so large, the number of separate properties insured 
 is so great, that State insurance covering all properties in Illi- 
 nois would give a much better distribution of risks than is at- 
 tained at the present time by the largest fire insurance com- 
 panies, so that there could be no valid objection in Illinois to 
 State fire insurance on account of lack of sufficient distribu- 
 tion. The companies have a distribution of territory rather 
 than of risks, and it is the distribution of risks that counts. 
 
 CONFLAGRATION HAZARD. 
 The opponents of State fire insurance reserve, for their 
 final argument, the "conflagration hazard." There is no ques- 
 tion that, in the past, several large conflagrations have occurred 
 in the United States, one being in the City of Chicago in 1871. 
 But the po.ssibility of conflagrations is no barrier to State fire 
 insurance in Illinois. Another Chicago conflagration, such as 
 that of 1871, is an impossibility, and the continuous parading 
 of this argument by the insurance "Combine" shows the weak- 
 ness of their position. At the time of that fire, a great ma- 
 jority of the buildings were of wooden con.struction in con- 
 gested areas: 17,430 such buildings being burned. The fire 
 department and its equipment were insignificant compared 
 with the .splendid equipment and efficient service of the 
 present fire department. Fires will occur, but they cannot 
 spread among brick and stone buildings of modern construc- 
 tion with modern fire protection. This is proven by the fact 
 that fires are in most cases being confined to the buildings in 
 which they originate, and always to a very small area. As fire- 
 proof buildings have multiplied and the efficiency of fire fight- 
 ing devices and equipment increases, the conflagration danger 
 has become negligible. A conflagration occurring 43 years ago 
 is heralded by the insuranee trust as a horror to be expected to- 
 morrow, although every day in the City of Chicago fires occur 
 
44 
 
 which might have proven disastrous years ago which are now 
 easily controlled and soon extinguished. This fact is cer- 
 tainly proof of the ability of modern cities to prevent serious 
 conflagrations. The conflagration hazards arise out of con- 
 ditions which no longer exist in modern cities. The New York 
 Insurance Report (1910, p. 121) says: 
 
 "The conflagration hazard in New York City is 
 mostly due to the thousands of old buildings built in 
 the days when neither steam or electricity or gas were 
 important features of the hazard. They are not 
 adapted to modern conditions." 
 
 The loss of property covered by insurance in the Chicago 
 fire was $91,000,000. The companies, however, only paid about 
 $25,000,000, so the argument of "business safety" in case of 
 conflagration is not well served by the example of the Chicago 
 fire. However, conservative business judgment may require 
 that provision be made to meet any possible conflagration 
 hazard. This can be done as well by the State with the 
 People's money as it can be done by the companies with the 
 People's money. A small percentage set aside out of the 
 premiums, the savings of a few years, will create a conflagra- 
 tion fund sufficient to meet any emergency. The San Francisco 
 "conflagration" is frequently dwelt upon by the insurance 
 press. This originated in an earthquake in which the upheaval 
 alone destroyed much of the property, and the loss by fire was 
 secondary. The defenders of the present "Combine" system 
 cannot claim that Illinois is located in an earthquake zone in 
 order to apply this disaster to Illinois conditions. 
 
 STANDARDIZATION. 
 
 The business of fire insurance must be standardized by 
 creating a system w^hich will reduce both expense of adminis- 
 tration of the fire tax to the lowest possible figure and also act 
 as a preventive instead of an encouragement to fires, and in 
 this way produce the greatest benefit to the greatest number 
 at the least expense. This cannot be accomplished with the 
 business in charge of private corporations, whose sole aim is 
 profit for the stock holders. The system by which they must 
 operate is cumbersome, immensely expensive and wasteful,^ 
 and, worst of all, increases instead of diminishes fire waste. 
 Insurance by the State, if properly organized, can and will 
 bring a thorough standardization of the business. Discrimina- 
 tions will cease because no lower rates could be obtained by 
 "pull" or "influence"; with a prevention of overinsurance 
 
45 
 
 autl an inquest following each fire, incendiarism for profit 
 would vanish. Building and other regulations for the pre- 
 vention of fire could be enacted and enforced and with other 
 reforms the full purpose of distributing the ell'ects of lessened 
 fire losses throughout the whole community could be accom- 
 plished at mininuink expense. 
 
 Fire insurance is of all businesses the one which can be 
 taken over and operated by the State without inflicting any 
 injustice on capital engaged therein or creating any financial 
 disturbance. The capital of the insurance companies remains 
 intact and can be taken by the stock holders and placed with- 
 out loss in other enterprises. Stock holders will also have, in 
 addition, immense surpluses which many times exceed their 
 stock investments to be divided among them. The insurance 
 companies have absolutely no fixed investment, the value of 
 which will be destroyed if the State takes over their business, 
 such as would happen in other lines of industry. Their only 
 property which would be rendered useless is stationery, the 
 value of which is insignificant. The only persons whose in- 
 terest would possibly be harmed would be those high officials 
 who draw salaries larger than the president of the United 
 States, It is improbable they could find such enormous salaries 
 in any other business; but they have accumulated such for- 
 tunes that they can doubtless continue to live lives of luxury 
 the remainder of their days, even if they do not see fit to en- 
 gage in other enterprises at moderate salaries. 
 
 It would be wrong to say that the People did not have the 
 right to protect themseles from extortion by carrying on 
 the insurance business themselves, even if it did destroy the 
 value of property emploj'ed by private corporations in this 
 business, but fortunately even this does not occur and all the 
 capital and immen.se surplus will be returned intact to the 
 insurance companies' stock holders. 
 
 CONSTITUTIONALITY. 
 
 The objection may ho made that State fire insurance 
 would be unconstitutional but an examination of the decisions 
 of the higher courts of the State of Illinois, and of the other 
 states in the United States, fails to disclose any decision in 
 which the question of the constitutionality of a system of State 
 fire insurance has ever been raised. 
 
 The general rules as to the powers of the State are 
 laid down as follows: (Harris vs. Board of Supervisors, 105 
 111.. 445, 450) 
 
46 
 
 "The question of legislative power and its extent 
 depends on the limitations contained in the Constitu- 
 tion. "When a state is created, it is invested with 
 complete sovereign power;, unless restricted by consti- 
 tutional limitation, and under our system of govern- 
 ment such restrictions are written and embodied in or- 
 ganic law. "Were it not for these limitations, the legisla- 
 tive power would be without restriction. When we 
 have to determine whether an Act is within the scope 
 of legislative power, we do not look for an express 
 delegation of the power in the fundamental law, but 
 we look to see whether the general power has been 
 limited. ' ' 
 
 The same principle is again stated in People vs. McCul- 
 lough, 254 111., 9 (16). 
 
 "The legislature may pass any law and do any 
 legislative act not prohibited by the Constitution of 
 the State or the United States." 
 
 There is no prohibition in the constitution of the, United 
 States against a State engaging in tire insurance ; therefore, in 
 determining the question of the constitutionality of State fire 
 insurance, it is only necessary to examine the constitution of 
 the State of Illinois, (1) To see whether there is any positive 
 provision in regard to the creation of State fire insurance, and 
 (2) "Whether there is any prohibition of State fire insurance. 
 
 An examination of our State constitution discloses that 
 there is no provision for the creation of a State fire insurance 
 system. Neither is there any provision prohibiting a system 
 of State fire insurance. Therefore, we are justified in the 
 conclusion that a system of State fire insurance, created by our 
 legislature, would be constitutional, because the general power 
 of the legislature in that respect has not been limited in any 
 way whatever. 
 
 This conclusion is supported by a number of facts. In the 
 first place, under the present constitution, the creation of a 
 State bank is expressly prohibited; also the rendering of aid 
 or granting of money to railroads, or similar enterprises. These 
 prohibitions were necessary because, if they had not been in- 
 serted, the State would have had power to engage in such 
 enterprises, Avhich the framers of the Constitution deemed 
 undesirable, and, consequently, found it necessary to insert in 
 the constitution these express prohibitions. 
 
 Further support, which would seem conclusive, is afforded 
 by the fact that, although there is no express provision made 
 in the Constitution for these things, J;he State has legally en- 
 
47 
 
 gan:ed in many enterprises, of a nature similar to fire insurance, 
 for the benefit of the People of tiie State. For instance, it eon- 
 structed the Illinois and Michigan Canal; the Illinois Central 
 Railroad, (partly) ; it appropriated money for the i)urchase 
 and maintenance of a State Park at Starved Rock, Illinois; it 
 appropriates money and provides an organization for the pur- 
 pose of conducting a State Agricultural Fair, and for the sup- 
 port of farmers' institutes; a State Geological Survey; a State 
 Natural History Museum; a State Historical Library; a State 
 Library ; for the improvement of the Illinois and Desplaines 
 River; for the maintenance of a Biological Laboratory for the 
 purpose of furnishing free hog cholera serum ; and maintains 
 many State charitable institutions. All these things and insti- 
 tutions are for the benefit of the People, and the con.stitution- 
 ality of their creation and appropriation of money for their 
 support has never been successfully questioned. In People vs. 
 Canal Trustees, 14 111. 402, the Supreme Court decides that the 
 State has power to legally appropriate money for the purpose 
 of building bridges. 
 
 A system of State fire insurance would be self-supporting. 
 But, even if it should require an appropriation of money out 
 of the State Treasury for its inauguration or for its mainten- 
 ance, this fact would not render it unconstitutional, and there 
 does not seem to be any reason or authority to believe that a 
 system of State fire insurance in Illinois would be unconstitu- 
 tional. There is no difference in principle between the State 
 engaging in fire insurance for the benefit of the People and their 
 protection against the fire insurance monopoly, and the State 
 engaging in the manufacture and furnishing of hog cholera 
 serum for the benefit of stock-raisers, or maintaining a state 
 fair for the benefit of agriculture, or bridges for the benefit of 
 travelers. 
 
 A system of State tire insuruiiee could he very conveniently 
 and economically conducted, together with a system of State 
 management of workmen's compensation. The same commis- 
 sion could have charge of both. The management of th(^ work- 
 men's compensation by the State is a reform which is already 
 in operation in several states and gives the injured workman 
 two or three times as much compensation as stock company 
 casualty ins\irance at no greater cost to the employer, because 
 the casualty companies absorb, in expenses and profit, one-half 
 to two-thirds of the premiums received by them. It is very 
 desirable that the management and control of workmen's 
 
48 
 
 compensation in Illinois be taken over by the State, and it would 
 add to the economy and success of operations to have them be- 
 gun at the same time and carried on by the same commission, 
 and each would benefit similarly the parties concerned with 
 each of these burdens. They are both burdens, from accident 
 and misfortune, and should be made as light as possible. 
 RAPID SPREAD OF WORKMEN'S COMPENSATION. 
 It will be remembered that until about five years ago the 
 working people of every State in the Union suffered from un- 
 just liability laws. When an investigation was made and the 
 operations of these laws, together with their abuse by stock 
 casualty insurance companies, was disclosed, it was declared to 
 be a national disgrace and workmen's compensation substituted. 
 When this reform was urged, the stock casualty companies 
 arose in holy horror, cried paternalism, and urged every pos- 
 sible objection to workmen's compensation. Within a period 
 of some five years, however, about two-thirds of the States 
 adopted workmen's compensation measures, some of which are 
 administered by the State. Now the People cannot understand 
 how the old employers' liability system was tolerated and look 
 upon its past operation as a blot upon the industrial history of 
 our country. We are approaching the same reform in fire in- 
 surance. The enactment of a system of State fire insurance 
 in one of our States would mean that this system would be 
 adopted throughout the United States as was workmen's com- 
 pensation. Illinois has led in other reforms, and there is no 
 reason why it should not lead in this progressive movement. 
 
 MERCENARY PERVERSION OF BENEFICENT IDEA. 
 
 Modern fire insurance is the evolution of a beneficent idea. 
 It was not discovered like a hidden mine, a virgin forest, or an 
 unclaimed prairie ; hence, the fire insurance industry belongs to 
 no person, set of persons or corporations, and none possess any 
 vested rights or territorial" claims upon this industry. Fires are 
 misfortunes, and it is in violation of all ethics and rules of pub- 
 lie policy that institutions should not only profit from, but 
 build up and control a business for profit only, based solely 
 \ipon the misfortunes of our People. The fire insurance busi- 
 ness evolved from this beneficent idea should be administered 
 through a system of State fire insurance without profit or 
 emolument of any kind to any person or corporation. 
 
 It is not paternalistic for a State to protect its citizens 
 against oppressive and excessive burdens, but it is evidence of 
 
49 
 
 woaUiu'ss if a State fails to relieve its citizens In miiovin^ the 
 underlyiiifj caust's from which oppression and excessive burdens 
 result. That our citizens are bearing an excessive burden and 
 are sorely oppressed by the present system of fire insurance 
 must be admitted by all. Innnediate and eompleU' relief is 
 imperatively demanded, and State fire insurance is the only 
 medium throuiyh which complete relief may be obtained. 
 
 The theory of State fire insurance carries with it absolutely 
 no basic difficulties. There is no reason why the State of Dli- 
 nois cannot administer a system of State fire insurance with the 
 People's money as ablj', eflieiently and ert'ectually as any cor- 
 poration or number of corporations may likewise do with the 
 People's money. Thus the cry of paternalism so loudly pro- 
 claimed by insurance trade journals is but the echo of the wail 
 of the wounded corporations, established for private greed and 
 feeding solely upon the misfortunes of our People. It is not 
 considered paternalism for a city to maintain a fire department ; 
 yet the maintenance of such a department is simply a form of 
 municipal fire insurance, which reduces for its citizens the fire 
 hazard. There is no valid reason why this principle should not 
 be extended to a system of State fire insurance which could be 
 administered with the burdens equitably distributed among the 
 insuring public, and thereby the whole People reap the full 
 benofit of complete protection without profit or tribute to any 
 person or corporation. 
 
 That the stock fire insurance companies will voluntarily 
 reform is beyond the dream of the most optimistic, nor can they 
 be involuntarily reformed. These corporations, assembled like 
 a hostile fleet, are now exerting every possible effort to defend 
 and maintain the unrighteous privileges that they have long en- 
 joyed. They always have, and do now, oppose all progressive 
 and constructive methods suggested or inaugurated in behalf 
 of the insuring public, and they openly threaten to dislodge 
 any State or government official who seeks to bring about refor- 
 mation of their business, in order to protect the State and the 
 People from their oppressive practices. They are now gloating, 
 drunk with the pride of power, over the recent defeat of Com- 
 mi.ssioner Ekern's policy of fire insurance reform urged by him 
 for the State of Wisconsin. With such sordid institutions in- 
 trenched as they are, reformation is impossible. 
 
 State fire insurance would mean a saving to the People of 
 the State of Illinois of approximately fifteen million dollars a 
 year, to begin with ; this sum is about the present yearly State 
 
50 
 
 tax. In twenty years this would mean a saving to the People 
 of our State of more than three hundred million dollars. But 
 the actual dollars saved would not alone measure the benefits. 
 Many lives would also be saved that are now sacrificed by pre- 
 ventable fires. The reserve accumulated from insurance prem- 
 iums deposited in the hands of either the State Treasurer or a 
 Commission could be invested under the strictest statutory safe- 
 guards, and in such a manner as to establish a favorable market 
 for State and municipal securities and for real estate loans.* 
 
 *NOTE: On April 3, 1914, I delivered an address on State Insur- 
 ance before the "Conference on Life Insurance and Its Educational Re- 
 lations" at the University of Illinois. In that address, I did not include 
 fire insurance in the list of insurance branches which I considered should 
 be conducted by the State, yet I did lay down a general principle appli- 
 cable to all insurance in the following language: 
 
 "There are certain economic conditions associated with 
 
 classes of individuals or lines of industry, by reason of which the 
 
 State must recognize and assume a special responsibility and 
 
 grant relief through the administration of a system of insurance. 
 
 Under such conditions, the State is fully warranted in taking 
 
 over the business of insurance." 
 
 Prior to the making of that address, I had not specifically inquired 
 into fire insurance conditions in this State. My investigation, as cov- 
 ered by this report, has been made since that date, and I am now con- 
 vinced, beyond all doubt, that the business of fire insurance comes clear- 
 ly within the general principle I laid down in that address, and that it 
 should have been included in the list of insurance branches to be ad- 
 ministered by the State. I now confess that, prior to my investigation, 
 I did not realize and had but little idea of the enormous burdens im- 
 posed upon the People of my State through the operation of the stock 
 fire insurance "Combine." 
 
 ALTERNATIVE— RATES CONTROLLED OR MADE BY 
 
 STATE. 
 
 If, however, for any reason a system of State fire insurance 
 cannot be immediatel}^ put in operation in Illinois, then the 
 protection of our citizens demands that rates be controlled by 
 the State. 
 
 The recent decision of the United States Supreme Court 
 in what is known as the Kansas rate case holding that the 
 States have power to regulate fire insurance rates finally dis- 
 poses of any supposed legal difficulties. 
 
 This decision contains an exhaustive discussion of the 
 whole question of the power of the States to regulate insurance 
 rates. In it the Supreme Court replies conclusively to the ar- 
 guments of the insurance "Combine" against the right of the 
 State to regulate insurance rates. This decision settles the 
 question absolutely, and is well worth careful reading by every- 
 one interested in the subject of insurance, so I attach a copy 
 thereof to this report, as an appendix. 
 
51 
 
 In view of the facts and conditions which I liave already 
 described it appears to me that some method of effectively 
 regulating insurance rates by the State is imperatively neces- 
 sary in order to protect the citizens of Illinois. On account of 
 the existence of the "Combine" there is no such thing as se- 
 curing reasonable rates through competition. The United 
 States Supreme Court decision, which I mention above, is con- 
 clusive authority for the right of the State to regulate insur- 
 ance rates. All that is necessary to secure relief is legislative 
 action. It remains, then, to be considered what is the best 
 method and means of regulating insurance rates. I believe that 
 it should be done by an insurance commission composed of 
 three members. If such a commission only had power to pass 
 upon the rates made by the insurance companies, it would af- 
 ford considerable relief and be a distinct advance over the 
 present condition of absolu''^ eorlrol of rates by the "' Com- 
 bine ", which is mitigaied ov]\ iu small part by competition 
 from tiie mutuals and inter-in.- iTi--. I believe, however, that 
 it would be still better for this commission to have the power 
 to themselves, to make a classification of all the property in 
 the State with reference to fire hazard ; collect statistics of fire 
 losses under this classification, and, upon the information thus 
 collected, make reasonable maximum rates which the com- 
 panies would not be allowed to exceed. This commission should 
 have wide powers in relation to fire insurance rates, similar 
 to the powers which the Utilities Commission has over the 
 charges which public utilities are allowed to make. 
 
 Unless, however, such a commission could make a correct 
 and thorough classification of property and then accumulate 
 statistics of fire losses in these various classes, they would have 
 insufficient means for determining whether or not any rates 
 tendered by the companies were equitable or not. The com- 
 panies have no power to require these statistics, nor would 
 they be disinterested parties in collecting and applying the 
 same; therefore, the classification and collection of stati.stics of 
 fire experience can only be done by a State Commission ; but 
 if a commission, pnd only a commission, must do all this, then 
 they will be in bolter position to themselves make the rates 
 than any companies or 'Combine" of companies. 
 
 In further detail the plan which I recommend would be 
 something substantially as follows: 
 
 (1) There should first be made a scientific and thorough 
 classification of all firo risks in the State into a sufficient num- 
 
52 
 
 ber of divisions so tiat all risks will be placed in classes where 
 the hazards will be substantially equivalent. 
 
 (2) The maximum fire insurance rates on each class 
 should be fixed by a commission appointed by the Governor, of 
 which the Insurance Superintendent would be a member ; these 
 rates to be based upon all the experience available as to 
 losses in the different classes and modified from time to 
 time, as further accumulated experience might indicate just 
 and proper. Allow any insurance company to make whatever 
 minimum rate it may see fit, provided that all such rates on 
 the same classes of property in the same community are uni- 
 form, and that, when such rates are once made, they cannot 
 be raised for at least twelve months. The latter provision is 
 for the purpose of preventing discrimination by allowing every 
 insurer to have at least one year's benefit of any lower rate. 
 It would also prevent temporary rate-cutting to drive other 
 companies out of business. 
 
 (3) Any combination, agreement, pool or understanding 
 by and between fire insurance companies for the purpose of 
 making rates should be absolutely prohibited, but, during the 
 time which might elapse from the passage of such a law until a 
 classification was worked out and rates established by a com- 
 mission, the companies should be allowed, after filing schedules 
 thereof, to collect such rates as such insurance commission 
 might deem reasonable. All rates during the interim period 
 should be under the control of the commission and made reason- 
 able and free from discrimination. 
 
 The plan outlined in paragraphs 1 and 2 above is sub- 
 stantially that in force in Texas, from which very good benefits 
 have been derived, both to insurers and, strange as it may 
 seem, to the companies themselves. The companies are bene- 
 fited because, by reason of the law, they have been obliged 
 to select better agents, and these have rejected bad risks and 
 so have reduced the burning ratio immensely. This would 
 never have been done under the previous system. A similar 
 benefit will accrue in Illinois. 
 
 In the first annual report of the Texas Pire Insurance 
 Commission, just made to the governor of that state, the 
 absolute control by the State of fire insurance rates is de- 
 clared to be "highly successful" and "the results obtained 
 have shown that the State can control rate-making and fix 
 reasonable rates in a manner just to the people and equitable 
 to the insurance companies." 
 
53 
 
 The State rates are made iu Texas at the expense of the 
 insurance companies, which are assessed 1^/4% of their gross 
 Texas premiums for this purpose. The key rate system is 
 used, in which "cities and towns are classified scientifically 
 according to general construction, width of streets and alleys, 
 general fire hazard and municipal protection." This, the re- 
 port says, has encouraged cities to enact ordinances for public 
 safety, and to improve water-work systems and fire depart- 
 ments. Also fire hazards are penalized and thus the public is 
 encouraged to eliminate fire dangers, with the result of a 
 nuirked reduction in fire loss in Texas. Confidence in the law, 
 as well as approval of its economic benefits, is shown by the 
 fact that not a single request for a public hearing by the Com- 
 mission has been made, and that there has been no unified 
 complaint during the fourteen months of its existence. 
 
 There are 146 local fire marshals in Texas who work in 
 conjunction with the State fire marshal. It is said, however, 
 that the State fire marshal needs more power to be able to 
 effectually enforce the law and obtain more convictions for the 
 crime of arson. 
 
 "Whatever method is adopted for control of rates, the 
 companies should not be allowed to combine for the purpose 
 of fixing and maintaining rates, even under regulation. Such 
 a "Combine" is contrary to the statutes and the common law 
 of the State of Illinois, and it would be an evil example to 
 allow the insurance companies, whose business is the most 
 profitable of all, to continue the "Combine" under any form 
 or pretext whatever, even if there was absolute control by a 
 commission over rates, the "Combine" would still have im- 
 mense power of oppression through control of local agents 
 and numerous other methods possible to skilled manipulators. 
 Also the public would be deprived of the benefit of competi- 
 tion which might, and in some classes and localities could and 
 would lower rates below the figures allowed by a commission. 
 
 EXCESSIVE PROFITS OF INSURANCE COMPANIES. 
 A statement which the insurance companies and their ad- 
 vocates are very fond of making is that, in the insurance busi- 
 ness as conducted by private corporations, the rates collected 
 by them must be enough to pay all losses and expenses and a 
 profit. This is a general statement which appears, on the face 
 of it. to be fair and reasonable, but in reality is exceedingly 
 deceptive, because it is incomplete, lacking some very im- 
 
54 
 
 portant necessary qualifications, from the non-observance of 
 which a large part of the present day evils in fire insurance 
 arise. These qualifications are : 
 
 (1) That the losses must be unavoidable, bona fide 
 losses, and 
 
 (2) The expense and profits must be reasonable. 
 Now, the facts are, that the losses to meet which rates 
 
 are now fixed are not all unavoidable and bona fide, but a large 
 part thereof are the direct result of over-insurance, criminal 
 negligence and plain arson, for much of which the companies 
 and the system by which the business is carried on at the present 
 time are responsible. It is, perhaps, true, that over-insurance 
 and its resulting evils are not directly encouraged by the com- 
 panies themselves, but they are the direct results of the agency 
 system and the large number of dishonest and reckless insur- 
 ance agents. The results from the local agency system cannot 
 be expected to be otherwise, when you reflect that the com- 
 pensation of the local agent is a percentage- commission on the 
 gross amount of the premium, or tax, paid by the insurer. It 
 is, of course, true that there are many honest insurance agents 
 who do not allow this consideration to influence them wrongly, 
 but, unfortunately, there are also many not of this sterling 
 character, so that in the aggregate the influence of the per- 
 centage commission is tremendous, and a constant pressure in 
 favor of over-insurance. The ordinary insurance risk is not 
 seen by anyone connected with the insurance company except 
 the local agent, and not often even by him. Consequently, the 
 insurance is written at whatever value figure the local agent 
 may wish, and it is not only to his interest that the premium 
 rates be high, but it is further to his interest that there be quite 
 frequent fires, because this strikes fear to property owners, 
 causes them to seek insurance and makes them willing to pay 
 high rates for it. When a local agent presents a bad risk, the 
 insurance company will accept it in order to secure the good 
 business the agent controls. 
 
 As regards the second proviso, I find that the expenses 
 are not reasonable. In round numbers only 50 per cent of the 
 money collected as premiums is paid back to policy holders 
 for losses. Keeping in mind the principle that insurance is a 
 tax, it immediately becomes apparent to every thinking per- 
 son that an expense of 50 per cent for the collection and dis- 
 bursement of this tax is unreasonable and exorbitant. 
 
 Profits are as far from being reasonable as expenses. The 
 
55 
 
 insurance companies publish complicated tabulations from 
 which they argue that their ''underwritinj; profit" is very h)\v. 
 This claim is entirely deceptive and turns upon the peculiar 
 meaning given to the term "undeiwriting profit." In all other 
 businesses, the differenee between the total income and the 
 total expense is considered the profit and figured as a percent- 
 age of the capital stock of the company. The insurance com- 
 panies, however, take the total premium receipts, and deduct, 
 from this, fire losses, expenses of every kind and character, 
 actual and estimated, and increase in liability. This difference 
 is called the j^rofit, and figured as a per cent of the total 
 premium receipts for the year, the result being termed "under- 
 writing profit." There is no reason why insurance i)rofits 
 should not be calculated like that of banks and other corpor- 
 ations, except the desire of the companies to conceal their 
 enormous profits. Basing profits as they should be, ui)on the 
 capital stock, some astonishing results are obtained. For 
 instance, I find that, according to the official reports made to 
 me by all the stock fire insurance companies doing business in 
 Illinois, their total income for 1913 was $365,785,r)f)5. and 
 their total expenditure, including dividends to stock holders, 
 was $338,703,821, leaving a profit of $27,081,774. The combined 
 capital stock of all these companies was $117,242,333. Thus, 
 the average profit of all these companies was 23.1 per cent per 
 annum. In the ease of foreign companies admitted to do 
 business here in the United States, the amount taken as capital 
 is the amount deposited in this country in order to secure per- 
 mi.ssion to do business here. The computation given above 
 does not, however, include the annual dividends paid by the 
 companies, so, in order to get the real profit, dividends must 
 be added. I have not been able to obtain the dividend figures 
 for foreign companies, but have done so for the companies 
 domiciled in the United States. Tliese, according to their 
 official reports, for 1913, had a total income of $253,077,525. In 
 the same period their expenditures, including dividends, were 
 $240,138,912, giving a difTerence of $12,938,613. The paid up 
 capital stock of these companies amounts to $39,967,347, so 
 that the average percentage of profit, exclusive of dividends, 
 was 32.8 per cent. According to the figures given in the 
 American Exchansre and Review (issue of September, 1914), 
 the average dividend paid by the above American companies 
 was 12.3 per cent. Adding this to the above "profit" we have 
 45.1 per cent per annum average real profit. These results are 
 
56 
 
 obtained from the figures furnished from the companies them- 
 selves and cannot in good faith be disputed. The truth is that 
 there is no other business of similar magnitude in the United 
 States which enjoys such enormous profits as the fire insur- 
 ance business. Certain individual instances further emphasize 
 this fact. The profit in 1913 of the Hartford Fire Insurance 
 Company was the enormous figure of 119.3 per cent, of the 
 Continental 92.7 per cent, of the German American 86.7 per 
 cent, of the American 67.6 per cent, of the Boston 54.5 per 
 cent, of the Buffalo German 72.7 per cent. This fact is reflected 
 in the very high prices paid for the stocks of these companies. 
 To more specifically illustrate these profits, I will take for 
 an example the Continental Insurance Company. This com- 
 pany has a capital stock of $2,000,000, and in 1913 declared a 
 dividend of $1,000,000, or 50 per cent. During the past five 
 years, 1909 to 1913, incluusive, this companj^ has declared 
 dividends amounting to $5,200,252, or at the rate of over one 
 million per year. In addition to this, it has increased its assets, 
 the property of its stock holders, over $5,300,000; also at the 
 rate of over one million per year, or the equivalent of another 
 50 per cent dividend each year. The income upon this stock, 
 therefore, has been over 100 per cent per year for the past five 
 years. It might be mentioned, also, that a share of this stock 
 of a par value of $100 sells for $900. It might be added that 
 other companies show years w^hen even higher profits were 
 made. 
 
 BANKING PROFITS OF COMPANIES. 
 
 It is a very striking and significant fact, known to but 
 few, that fire companies make no reference whatever to their 
 enormous "banking profits" when presenting statistics to 
 the public, showing their profits. Their income from this 
 source is large, being composed of interest earnings on the 
 enormous amounts of premiums placed in their hands by policy 
 holders, and other ordinary investment profits incident to 
 their business. The following table (which does not include, 
 as income, deposit premiums on perpetual fire risks or cash 
 contributed by stock holders, but only pure income) shows 
 some astonishing results : 
 
Banking Profits. 
 
 Capital Stock Pnmimns Re- Income other 
 
 YEAR. of all ceivod. (Fire than 
 
 Companies. and Marine.) Premiums. 
 
 1918 $117,242,333 $334,906,028 $30,879,566 
 
 1912 107,854,789 323,747.258 31,186,886 
 
 1911 103,760.874 307,474.359 29,211,923 
 
 1910 98,178.324 300,251.163 26,568.040 
 
 1909 87,924,512 284,474,144 27,931,569 
 
 Totals... $514,960,833 $1,550,852,952 .$145,777,984 
 
 Percentage of Profit As Shown By Above Figures. 
 
 rercenta«c of "Other Capital Stock Dividend 
 
 YEAR. than Premiums Income" produced by "Other than 
 
 to Premium Income. Premiums Income." 
 
 1913 9.2% 26.3% 
 
 1912 9.6 28.9 
 
 1911 9.5 28.2 
 
 191(^ 8.8 27.1 
 
 1909 9.8 31.7 
 
 Average, 9.4% 28.3% Annually 
 
 Thus it is seen that if the fire companies had expended 
 every dollar received for premiums during the past five years 
 to pay fire losses and expenses, they could still have declared 
 a dividend averaging 28.3% on their capital stock eacii year. 
 
 AVhen the facts concerning these enormous profits of the 
 insurance companiis are first presented to the average business 
 man, it is frequently difiicult for him to understand how they 
 are possible, and he is inclined to be skeptical as to the ac- 
 curacy of the figures or the good faith of the statement. Conse- 
 quently I venture to give a few words further in explanation 
 of this matter. Insurance premiums are all paid in advance, 
 most for the term of one year; but a considerable number for 
 terms of three and some five years. Considering for the pur- 
 pose of illustration the one year policies only, such losses as 
 occur are distributed throughout the year with some approxi- 
 mation to regularity. Some losses occur at the beginning of 
 the year, some at the end of the year and the others at inter- 
 mediate times. Assuming that the distribution of losses is 
 regular throucrhout the year, the total efTect is the .same as if 
 the insurance company received interest on the total premium 
 collected for a period of six months. In addition to this, it 
 receives interest on its capital surplus accumulated from excess 
 of premiums over losses throughout tlio whole twelve months 
 of the year. The capital of an insurance company is not em- 
 ployed in the business of the company as in the ease of other 
 enterprises, but is only for the purpose of affording additional 
 
58 
 
 security to the policy holders that there will be money to meet 
 the losses. As a matter of fact, however, except for exceed- 
 ingly infrequent emergencies, as the Chicago fire or San Fran- 
 cisco disaster, the capital stock is never touched for any pur- 
 pose, but is invested in the best interest bearing securities and 
 the interest goes to augment the income of the company. The 
 company collects an ample amount from the policy holders to 
 pay all losses, expenses and a profit. Next take into account 
 the fact that the capital stock of the large insurance companies 
 is small in relation to the business done by them, for example, 
 suppose we have a company with a capital stock of $2,000,000, 
 a surplus of $15,000,000, and a premium collection of 
 $10,000,000, annually. Suppose now we have an interest in- 
 come of five per cent on the capital stock of $2,000,000, and a 
 surplus of $15,000,000, for the entire year, and on the premium 
 receipts of $10,000,000, for six months, the total amount of in- 
 terest received would be $1,100,000, which would be 55% on 
 the capital stock of $2,000,000. These are approximately the 
 actual figures of one of the largest insurance companies for 
 the year 1913, and many other similar cases can be given, and 
 shows clearly how the tremendous profits of this and other large 
 insurance companies are possible. It is probable, however, 
 that through shrewd banking and investment operations of the 
 companies, more than 5% interest is realized. 
 
 It should be observed that the profits, as explained above, 
 does not include "underwriting profits," *which are the only 
 kind of "profits" to which the companies make any reference 
 in their published statements. 
 
 PROFITS FROM ILLEGITIMATE STOCK TRANSACTIONS. 
 
 There is another element which enters into the question 
 of fire insurance profits. Investigation by the United States 
 government authorities into illegitimate stock manipulations, 
 such as the New Haven stock transactions, has shown that 
 officials of fire companies unload on their company worthless 
 or depreciated stocks and bonds. These securities are then 
 sold by the companies at a loss, and this loss is included in the 
 ordinary losses and expenses when the companies figure their 
 profits. In the case of the New Haven Railroad, forty-three 
 companies held $7,765,691 in stocks and bonds of this railroad. 
 Of this amount the sworn statements of the respective com- 
 
 "The reader should refer to page 55 for an explanation of what 
 "underwritint: profits" are, in the deceptive sense in which the com- 
 panies use this term. 
 
59 
 
 panies show that $1,331,061 worth was acquired in 1913, when 
 it was known that the New Haven was certain to fail. It is ap- 
 parent that, in this instance, ''unloading" was practiced on a 
 large scale. 
 
 SURPLUS AND PROFIT PERCENTAGE CALCULATION. 
 Some defenders of the insurance companies, however, say 
 that instead of profit being calculated as a percentage of the 
 capital stock invested in the business that it should be calcu- 
 lated upon this capital stock plus the value of the insurance 
 reserve. If calculated in this way the percentage profit aver- 
 ages perhaps ton to fifteen per cent per annum, which they 
 claim is only a fair rate of income. If the surplus had been 
 accumulated by the self-denial of the stock holders of the in- 
 surance companies in not taking out of the business a reason- 
 able profit, but allowing it to accumulate therein for the further 
 security of the policy holders, there might be some justifica- 
 tion of the position. Such, however, is not the case. These 
 surpluses have been accumulated out of excessive profits during 
 years in which enormous dividends have also been paid. In 
 other words, the rates were so excessive that the companies 
 were able to pay enormous dividends of the magnitudes shown 
 above, and in addition pass large sums of profits to the surplus. 
 If an equitable view of the matter is taken, the stockholders 
 have not furni.shed the money piled up in the surplus, but this 
 has been extorted from insurers as excessive rates. Therefore, 
 to claim that insurance profits should be considered a per- 
 centage upon the surplus is wholly unjustified. 
 
 This surplus is accumulated from premiums paid by policy 
 holders, being an amount in excess of that neeessary to pay 
 fire losses, exc^.ssive expenses, enormous salaries and large 
 dividends and belongs, as a matter of right, to the policy holder, 
 and cannot be justly considered as capital of the stock holders 
 on which they are entitled to dividends. A stock holder is 
 only equitably entitled to returns from his own money, which 
 he lias paid into the company's treasury. 
 
 EXCESSIVE SALARIES TO OFFICERS. 
 
 AiKitlicr item ul' uiijustKiahle cxpt'iiscs of tlic insurance 
 companies is the enormous salaries paid to its officials. It is 
 diffienlt tci obtain exact amounts as to these facts, but it is 
 said that tin- president of the Continental Insurance Company 
 receives a regidar salary of $50,000.00 per annum, with certain 
 percentage allowances which gives him a total recompense of 
 
60 
 
 considerably over $100,000.00 per annum. The officers of 
 
 other large companies are similarly compensated. 
 
 INSURANCE HAZARD. 
 
 It is sometimes claimed, also, on behalf of the companies 
 that they are justly entitled to these great profits by reason 
 of the risks they take. This assertion is entirely untenable. 
 The rates are so high that they more than cover the fire loss, 
 excessive expenses and enormous profits, as shown by a great 
 number of years of experience of each company. This being 
 true, there is, in reality, no risk whatever taken by the insur- 
 ance company, except the remote "conflagration hazard," for 
 which also the companies provide after each conflagration 
 by a strong raise in rates, which are kept in force continuously 
 and result in enormous additional profit to the companies, as 
 I have previously shown (p. 40). Insurance "hazards" are 
 much less than the financial perils which beset the ordinary 
 merchants. This is proven by the fact that a much larger 
 per cent, in proportion to capital invested in mercantile and 
 industrial ventures, fail. 
 
 It is true that quite a number of stock fire insurance com- 
 panies yearly cease to do business, but this results from the 
 operation of the "Combines", and neither indicates nor proves 
 that the business is unprofitable. In 1913, out of thirty-two 
 stock fire insurance companies which ceased to do business, 
 thirty continued their existence as "annexes" of larger com- 
 panies. This does not indicate they were doing a losing busi- 
 ness, but simply that they were sold at great profit to the 
 larger insurance corporations to further mouopol}^ by reducing 
 the number of competitors. 
 
 OTHER RECOMMENDATIONS. 
 
 I would also make the following additional recommenda- 
 tion for the reform of certain details of the insurance business 
 in case it is impossible to secure State insurance immediately. 
 
 DETAILED STATEMENT OF VALUE OF INSURED 
 PROPERTY. 
 
 It should be required by law that there be made a full 
 description, with an explicit statement of the value of build- 
 ings insured, and, in the case of personal property, an invoice 
 of it, signed by the owner, and approved by the local agent. 
 The same penalty should be provided for making false state- 
 ments as to value, condition, quantity, etc., of either real or 
 
 i«i^ 
 
61 
 
 personal property, as are by law now provided for obtaining 
 money by false pretenses, in addition to n'nderinjx the policy 
 voidable, in the same way that material misrei)resi'ntations in 
 an application for life insurance renders a life policy voidable. 
 It should be required that the insurance ap:ent, before ai)prov- 
 ing such statement, should make a personal inspection of all 
 property, real or personal, included in such statement, and 
 that this fact siiould be certified to in his approval of same. 
 Such description and valuation should be attached to and 
 made a part of each insurance policy. This i)lan would pre- 
 vent practically all over-insurance of property, which is what 
 leads to arson. 
 
 STANDARD POLICY. 
 
 A standard form of liie iu^uiaiire i)oliey should be adopted 
 by the State, and it should be required that this contain a full 
 and complete itemization of all of the hazards, credits, penalties, 
 etc., which go to make up the complete rate charged on such 
 policy so that the property owner could see how his rate was 
 made up, and so be able to know how to obtain a lower rate 
 by removing unfavorable conditions. There should be a pro- 
 vision that, if an owner improves his property so as to remove 
 unfavorable conditions, the property be given a re-inspection, 
 and a lower insurance rate immediately granted. 
 
 CANCELLATION OF POLICIES, ETC. 
 
 Insurance companies should- not be allowed to cancel 
 policies at will. Cancellation should only be allowed if there 
 had been material misrepresentations, or when there has 
 occurred a material change in the condition of the risk, and 
 these things should be required to be proven in court. If a 
 company should bring suit to cancel a policy and a fire occurred 
 before the case was decided, then, upon a final decision in 
 favor of the company, it should be relieved from liability. 
 
 Insurance companies should also be reriuired to grant 
 insurance at regular rates for the class to which the ri.sk be- 
 longs to any applicant in the same way that a ecuninon carrier 
 must transport, or a hotel keeper must give lodgings to any 
 decent person. The companies, however, should be allowed to 
 refuse insurance for substantial objections either to the risk 
 or the owner proven in court. 
 
62 
 
 AGENTS' QUALIFICATION REQUIREMENTS. 
 
 Outside of exorbitant rates, a considerable part of the evils 
 which affect the fire insurance business arise from the fact that, 
 under the Illinois law, any person whatever can act as a fire in- 
 surance agent. It is true that the law now requires that each 
 agent secure license from my Department, but there are no 
 qualifications prescribed as pre-requisites. The natural result 
 is that a certain proportion of insurance agents are incompetent 
 and their work perilous to the insuring public. This could be 
 very effectually remedied by a requirement that, before agents 
 are issued licenses, they must show reasonable qualifications 
 which will enable them to understand and carry on the busi- 
 ness of writing fire insurance in a careful and business like 
 manner, in accordance with the insurance laws of the State. 
 The provisions suggested by the Illinois State Association of 
 Local Fire Insurance Agents appear to me to be well adapted 
 for this purpose, and I would recommend that the salient fea- 
 tures of the same be incorporated into our insurance laws. 
 
 FOREIGN RE-INSURANCE AND NET LINES. 
 
 The following insurance practice tends to increase -the cost 
 of fire insurance, and is also an efficient aid to monopoly: — a 
 fire insurance company will issue a policy for an amount greater 
 than it can carry individually, and then re-insures the excess 
 in a foreign "treaty" company. There are no American re- 
 insurance companies, with the exception of one, which is owned 
 by foreign capital. During the year 1913, $38,000,000 were 
 sent across the ocean for re-insurance premiums. Thus cost of 
 insurance is increased_because of the increase of the number 
 of middlemen who each make a profit from the original prem- 
 ium paid by the polic.y holder. Its tendency toward centrali- 
 zation is due to the fact that the large companies, by reason of 
 their great agenc}' forces, are able to write a far greater amount 
 of insurance than they themselves desire to carry, but re-insure 
 the excess. Consequently, small companies are unable to 
 secure business which they would otherwise get if no companies 
 were permitted to write more insurance than it was itself able 
 and willing to carry. Furthermore, the extent to which they 
 have indulged in this practice has embarrassed several com- 
 panies considerably, at the present time, because of the fact 
 that they are legally responsible to their policy holders for the 
 full amount of all policies written. In case of loss, the Ameri- 
 can companies look to the foreign companies for reimburse- 
 
G3 
 
 ment, but, on account of the present European war, these com- 
 panies are temporarily unable to meet their oblij;ations. 
 
 I recommend that a "Net Line" law be enacted, prohibit- 
 ing companies from writing insurance upon any property in an 
 amount greater than they are tht'uiselves able and willing to 
 carry. 
 
 COINSURANCE. 
 
 The subject of eo-in.surani:c is our wliieii lias been liberally 
 discussed, but no legislative action taken in relation thereto in 
 Illinois. The actual practice of the companies doing business 
 in Illinois varies with respect to co-insurance, but I believe that 
 a majority of existing policies are without co-insurance provis- 
 ions. The companes, however, strongly desire to put co-insur- 
 ance clauses in all policies for reasons mentioned below, so that 
 this subject should be carefully considered, particularly as co- 
 insurance is prohibited by statute in many States. 
 
 The term co-insurance has the following meaning: Sup- 
 pose an owner instead of insuring his property for the full value 
 decides that he will only insure for a part, say one-half its value, 
 trusting that in case of a fire it will be extinguished before the 
 property is damaged more than one-half. In cities where there 
 is good fire protection the great majority of fires are extin- 
 guished before the total loss occurs. Under the ordinary 
 insurance policy where tiu^ property is only insured for. say, one- 
 half its value, tlif company is bound to pay for all of the dam- 
 age which occurs up to the face of the policy. Thus the insured 
 for a small premium is nearly always able to collect enough 
 money to pay all the fire loss which actually occurs. Naturally 
 the insurance companies are reluctant to see the property owner 
 get off so easy and obtain practically complete protection by 
 paying premiums on only a part of its value, because thereby 
 their revenue is reduced. Consequently to i)revent i>roperty 
 owners from getting any benefit out of this plan of insuring for 
 only a part of the value of the property where there is good fire 
 protection, the companies have devised what they term a co- 
 insurance clause to be inserted in policies to the effect that, in 
 case a property is only insured for partial value, say one-half, 
 in case partial loss occurs, only such proportion of that loss 
 will be paid as tlie insurance on the property bears to the total 
 value of the property. If the insurance on the property was 
 $4,000.00 and the actual value of the property was $8,000.00, 
 then in case of loss only one-half of the actual damage would 
 be paid to the insured. Thus, in order to obtain the total insur- 
 
64 
 
 ance of $4,000.00 under such a provision, there would have to 
 be a total destruction of the property amounting to a loss of 
 $8,000.00. On any smaller loss the owner would receive less 
 than the face of the policy; if the damage was $6,000.00, he 
 would receive $3,000.00 ; if $2,000.00 only $1,000.00, and in pro- 
 portion for all other damages. 
 
 Co-insurance is a subject as to which opinions vary widely. 
 Some states permit the companies to use co-insurance clauses in 
 their policies, but in a large part of the states this is prohibited. 
 The fact that property is insured for less than its value is an 
 absolute protection against arson by the owner. If the owner 
 who pays taxes to maintain an efficient fire department wishes 
 to get some advantage out of this expenditure by insuring his 
 property for less than its full value, trusting the fire protection 
 to prevent full loss, I believe he should be permitted to do so 
 without being penalized by a co-insurance clause. Otherwise, 
 the insurance companies reap the benefit of the good fire pro- 
 tection the owner has paid for, and, if permitted to compel co- 
 insurance, are able to collect as high rates from the insured as 
 if there were no fire protection whatever. The companies claim 
 that permitting an owner to insure for less than the full value 
 of the property is a species of discrimination because it per- 
 mits the more wide awake and venturesome business man to 
 get protection for that proportion of the property which is 
 liable to be damaged in the ordinary fire at less rates than the 
 more timid man who is only satisfied by having the value of his 
 property totally covered by insurance. This may be true, but 
 my view is that the enterprising and venturesome owner is en- 
 titled to all the benefit he gets out of the additional risk which 
 he takes and the fire department tax he pays. By doing this 
 he is simply carrying a part of his own insurance. There is no 
 discrimination whatever in permitting owners to insure for less 
 than full value because any man can do this if he desires. Dis- 
 crimination only arises where the effect is to give one man a 
 privilege which others do not have. The fact that one man 
 may not feel able to, or may not dare to carry a part of his own 
 insurance, does not render it a discrimination to permit other 
 more venturesome men to do so. In fact, co-insurance which 
 compels all men to insure for the full value of their property is 
 a clear discrimination against the venturesome man, and 
 amounts to forcing property owners to allow insurance compan- 
 ies to take all of the risk, which, when the insurance companies 
 have the fixing of the rates, compels the property owner to pay 
 
65 
 
 the full tax or do without insurance. But, insuranot' under 
 modern conditions being a necessity, the real effect of insurance 
 is to compel all property owners to pay full taxation to the in- 
 surance companies. 
 
 Consequently, after careful consideration, I recommend 
 that, while there should be stringent provisions to prevent over- 
 insurance, co-insurance clauses should not be permitted, 
 but that the insurance companies should be compelled to pay 
 the total damage suff^Ttnl on a risk up to the face of the policy. 
 
 • VALUED POLICIES." 
 In connection with co-insurance comes the subject of a 
 Valued Policy Act. This is a provision compelling an insurance 
 company to pay the face amount of the policy in case of a 
 total loss, the value of the property destroyed by fire being ac- 
 cepted without proof. The companies oppose such a pro- 
 vision of law as tending to fo.ster arson, yet their position in 
 this regard is inconsistent. One purpose of a Valued Policy 
 Act is to prevent overinsurance, it being presumed that, if a 
 company knows it is to be held liable for the full amount of a 
 policy, more care will be exercised in writing the insur- 
 ance. However, the companies have found overin.surance very 
 profitable to themselves and without a valued policy provision 
 are permitted to receive a premium on an overinsured value of 
 property and than scale the amount on payment of a loss. With 
 the elimination of overin.surance, a Valued Policy Act will not 
 be necessary. 
 
 FIRE PREVENTION. 
 
 In addition to the elimination of overinsurance and con- 
 sequent arson, which I have mentioned above as tending to 
 prevent fires, there are certain other measures which would as- 
 sist in reducing this tremendous annual lo.ss to rea.sonable 
 figures, such as those in European countries. Among these is 
 the installation of automatic sprinklers for the protection not 
 only of goods within buildings, ])ut in the case of certain build- 
 ings in congested districts of great cities the installation of 
 similar devices on the exterior of buildings, called "water cur- 
 tains." which are pipts arranged so that when heated to a cer- 
 tain point they open the same as the automatic sprinkler heads 
 on the interior of buildings. This permits a sheet of water to 
 nm down the outside of the l)uilding and is very effective, par- 
 ticularly when used in combination with window glass rein- 
 
 —3 
 
66 
 
 forced by wire netting to prevent buildings catching fire from 
 adjacent fires. 
 
 A striking example of the benefits of this was exhibited 
 at the very recent fire in Salem, Massachusetts, where a build-, 
 ing protected in this way, both within and without, in the midst 
 of a large fire, stored with inflammable material, remained 
 standing. The water curtains on the outside operated and 
 kept down the heat so that not only did the building not catch 
 fire, but not a single sprinkler head on the inside opened. 
 
 EDUCATION IN FIRE PREVENTION. 
 
 Another important means of fire prevention is the educa- 
 tion of the Public and particularly of school children on this 
 subject. Among the topics on which information could be 
 profitably given are : danger from defective chimneys and 
 stove pipes ; from defective electric wiring ; from use of kero- 
 sene to start fires ; from accumulations of leaves, rubbish, etc., 
 and from bonfires of the same; from the use of gasoline and 
 illuminating gas ; from cigar and cigarette stubs ; from fire 
 crackers, fire works, matches, etc. I believe that, since safety 
 matches have become as cheap as any other kind, the sale 
 of parlor matches, and, in fact of all other kind of matches, 
 excepting safety matches, should be prohibited. 
 
 Information should also be given of the usefulness of 
 proper lightning rods for preventing fires from this cause, 
 particularly on farm buildings. This is not said for the pur- 
 pose of aiding professional lightning rod agents, who have so 
 often swindled the People in the past by selling them rods, 
 usually worthless, at exorbitant prices. Better lightning pro- 
 tection than furnished by lightning rod agents can be provided 
 at very small expense, and erected by anyone, in the form of a 
 good galvanized iron or copper wire cable nailed directly to the 
 building extending two or three feet above the highest point 
 and sunk at the bottom down to permanently moist earth. 
 Scientists say that not only are glass or other insulators useless, 
 but they are positively disadvantageous. If the conductor is un- 
 broken and extends into moist earth, there is no danger what- 
 ever that the electricity will leave it and strike into the build- 
 ing when fastened directly against the wall. If the conductor 
 is broken, insulators will not save the building.* 
 
 *This subject is fully treated in Farmers' Bulletin No. 367, Light- 
 ning and Lightning Conductors, by Alfred J. Henry, issued by the 
 United States Department of Agriculture, from which it can be ob- 
 tained free. I recommend every property owner to send for this and 
 protect his buildings according to its directions. 
 
67 
 Information should be given as to the advantages of fire- 
 proof construction, or, where this is impossible from cost, of the 
 best fire resist in-r iiiati'rial. paints, etc., and particularly of the 
 best material and nu'tliod ot" ruof construction for resisting 
 fires. A considerable number of fires originate in roofs, and, in 
 ccwiflagrations, a fire is nearly always carried by roofs being 
 set on fire. 
 
 CLAIM THAT INSURANCE MONOPOLY IS NECESSARY. 
 The fire insurance companies strenuously claim that their 
 business can only be conducted by means of an agreement or 
 combination for the purpose of making rates. They admit that 
 the method is monopolistic, but justify this and claim that it 
 is absolutely necessary in fire insurance. The}' endeavor to 
 disarm suspicion by using the harmless term of "co-operation" 
 instead of "trust," "agreement" or "Combine." The facts in 
 the case ar^ that the insurance business in Illinois as at present 
 conducted by the companies through "Combines," which I have 
 already described, is a monopoly of the most oppressive type. 
 Under the terms of the existing understanding, inspections 
 are made and rates fixed for all the companies through the de- 
 vice called the "Illinois Inspection Bureau." If the community 
 of action stopped at this point there might be some truth in the 
 claim that it was legitimate co-operation to save expense. But 
 this is only a preliminary. The essential thing is the further 
 agreement to maintain rates and the Stamping Bureaus, and 
 other effective machinery for enforcing the rate agreement, 
 wliich enables the "Combine" to compel every member to ob- 
 serve these rates. The courts of Illinois have explicitly 
 decided that an agreement or combination for the purpose of 
 maintaining fire insurance rates is contrary to the laws of the 
 State of Illinois. The insurance companies recognized the cor- 
 rectness of these decisions when they dropped their previous 
 combination methods and attempted to evade these decisions 
 by putting into operation the Illinois Inspection Bureau device 
 and the secret understanding to enforce its rates instead of 
 the previous open agreement to that effect. All other business 
 in the State mu.st be done subject to the anti-monopoly laws 
 of the State. Since courts have decided, and their decision 
 still .stands as the law of the State, that the anti-monopoly pro- 
 visions apply to the insurance business al.so, the insurance com- 
 panies' demand, that they be allowed to continue their so-called 
 co-operation, amounts to this: — that they be permitted to con- 
 tinue to violate the anti-monopoly laws of the State. 
 
68 
 
 Of course, no reasonable person will claim that the insur- 
 ance companies should have the privilege of violating the anti- 
 monopoly law, by any subterfuge, device or trick, whatever, 
 and the companies do not dare to openly take this position 
 themselves, and, therefore, falsely term their scheme "co- 
 operation," because co-operation, in the correct use of the term, 
 is not only a lawful, but a highly commendable thing. 
 
 Leaving aside, for a moment, the entire illegality of what 
 the companies are doing under the euphemistic name of co-oper- 
 ation, I desire to examine briefly the claims they make in favor 
 of this alleged co-operation. These in brief are : that this is a 
 greater economy to the companies in making schedules, inspect- 
 ing and supervising risks and repressing incendiarism; that 
 otherwise it would be impossible to regulate rates and they 
 would be unstable and discriminatory. 
 
 I will frankly admit that there would probably be some 
 economy in having the inspections and schedules (which are 
 estimates of relative fire hazards) made for all companies at 
 one time, but it does not follow that it is best for the People 
 that this should be done by a "Combine" of the companies. 
 In the first place far worse discrimination and favoritism are 
 not only possible but are actually practiced at present by the 
 "Combine's" rate-making institution than would be possible 
 under open competition, and the public is absolutely helpless 
 against these things. There is no one to whom appeal can be 
 made against them. Their inspection bureau possesses arbitrary 
 and absolute power. In the second place, there is no protection 
 whatever from exorbitant rates. The Bureau's rates will in- 
 evitably reflect the desires of the companies for larger and 
 larger profits, and while provisions for State regulation of these 
 rates, similar to that imposed upon public utilities, would help 
 somewhat, still this process is slow and cumbersome. 
 
 If insurance by private companies is to be continued, the 
 best method of rate-making is to have this done by a State com- 
 mission, which will be more economical than their present ar- 
 rangement, will be free from the discrimination and favoritism 
 practiced at present, and, most important of all, will enable a 
 thorough and scientific study of the whole subject to be made 
 and reasonable maximum rates made in the fixing of which the 
 People, through their commission, will have something to say. 
 
 The claim of the companies that under free competition 
 rates are unstable and therefore discriminatory is w^hoUy falla- 
 cious, and not made in good faith, but is a false appeal to the 
 
69 
 
 People's just resentment against discrimination in order that 
 the companies may be allowed to continue their "Combine" by 
 which they are able to extort excessive premiums. Discrimi- 
 nation is entirely unjust and should not be permitted in any 
 form. It cannot, however, be prevented even partially hy per- 
 mitting the companies to combine, except, perhaps, through 
 substitution by the companies of a still worse thing, — equal ex- 
 tortion levied on all instead of some being able to partially 
 escape. Only direct State intervention can effectually prevent 
 discrimination. 
 
 The particular discrimination which they allege is liable to 
 occur under free competition is that large insurers and keen 
 business men can, by playing one company against the other, 
 secure lower rates than smaller or less active competitors. 
 This, if true, would bo an evil, but will be absolutely done away 
 with by either State-made rates or a system of State insurance, 
 and cannot be thoroughly eliminated by any other method. If 
 the "Combine" methods are permitted or legalized it is pos- 
 sible that some discrimination would be abolished, but it will 
 not be by lowering the rates of the smaller insurers. It will 
 be by raising the rates of the big insurers. This has already 
 occurred to a considerable extent during the past few years in 
 Illinois under the power usurped by the existing "Combine" 
 and with a further access of power through express recogni- 
 tion of "Combine" methods the process will be completed and 
 the rates of everyone forced up to the highest point now 
 exacted from any insurers, and the excessive and enormous 
 profits of the "Combine" companies still further enhanced. 
 
 The reality of this process of forcing up rates is attested by 
 numerous complaints on file in my office, from all parts of the 
 State, of enormous raises of rates made since the Illinois In- 
 spection Bureau went into operation in 1908. If this institu- 
 tion or something similar was legalized, the "Combine" would 
 find some means of neutralizing the only protection which now 
 remains to any of our citizens; that, is competition from the 
 mutuals. Mutual insurance is impossible at the present time 
 for a large part of property owners in this State. If it should, 
 by some means, be rendered unavailable to all of them, then our 
 citizens would be entirely at the mercy of the companies, and 
 would either have to pay such rates as the insurance "Com- 
 bine" saw fit to dictate or do ^v^thout insuraoce. But many 
 cannot do without, because they cannot otherwise obtain credit 
 to carry on their business. 
 
70 
 
 All the trusts and monopolies make practically similar 
 defenses of economy and similar claims of disaster unless 
 monopolies are permitted, etc., and they are as false and detri- 
 mental to public welfare in the insurance business as in any 
 other business. In fact, since, as I have shown, the effect of the 
 insurance monopoly is to increase instead of decrease fires, I be- 
 lieve that the insurance monopoly has a more damaging and 
 dangerous influence on public welfare than other monopolies. 
 
 MONOPOLY. 
 
 Monopoly is the greatest evil of the modern industrial era. 
 The general effect of monopoly on the welfare of the People 
 cannot be better summarized than in the words of President 
 Woodrow Wilson: 
 
 "Private monopolies are indefensible and intolerable." 
 It only remains to be considered whether the effect of the in- 
 surance "Combine" is different and whether it should be 
 legalized, while other monopolies are outlawed. The facts and 
 considerations I have outlined above refute such claims con- 
 clusively. The fire insurance monopoly not only taxes the 
 People more than twice as much as would be necessary to dis- 
 tribute the legitimate fire loss among the whole People instead 
 of allowing it to crush a few unfortunates, but actuallj^ in- 
 creases the annual fire waste and loss of human life. Some 
 monopolies in return for their exactions have given improved 
 service to the Public, but the effect of the fire insurance 
 monopoly is to make natural conditions worse. 
 
 There is a curious inconsistency in the companies' position 
 that they cannot survive free competition because the fact is 
 that, except in the matter of premium rates, the companies are 
 and will continue to be in intense competition as to other things, 
 particularly the commission paid to agents. There are two 
 ways of increasing the business of a company. One is by re- 
 ducing the rates to the Public, the other is by increasing the 
 commission to the agents. Just as soon as by combination the 
 companies have gotten rid of competition in premium rates, 
 then they begin competition for business by raising the commis- 
 sion to their agents. This has gone to an almost unbelievable 
 extent. In Chicago the companies according to sworn state- 
 ments made in examination by my Department admitted they 
 pay commission as high as 40 per cent on some lines. 
 
 The insurance companies can continue to do business 
 while competing in premium rates just as well as they can con- 
 
71 
 
 tinue to do business while competiug for local agents and other 
 factors in their business. It is absurd and illogical for the 
 companies to claim that in order to remain solvent tliey must 
 be permitted to eliminate- competition as to premium rates 
 while they continue in the most strenuous competition as to 
 everything else in their business. This competition as to 
 everything excepting rates means much useless, costly duplica- 
 tion of officers, agencies, etc., which necessarily causes con- 
 tinually increasing expense to be added to the heavy burdens 
 of the policy holders. They do not seek to avoid this, but only 
 to escape competition in rates which would tend to lighten the 
 burdens of the policy holders. If any business can be suc- 
 cessfully operated only as a monopoly, then it is time for the 
 People, through their governmental institutions, either to 
 effectively control or to take over and themselves operate such 
 business. Only by so doing, can they escape extortion and 
 robbery and be able to enjoy the pleasures and benefits of 
 modern civilization. The argument for monopoly in the fire 
 insurance business is only the selfish plea of those who, having 
 wrung enormous profits out of the necessities of the People, are 
 fighting for permission to continue to do so. Their attitude is 
 the same everywhere. Alglave .says: (Assurance Contre L' 
 Incendie, Service Public, En Allemagne, p. LIV.) 
 
 "Let us not forget that they (the insurance com- 
 panies) are not philanthropists, but dealers who seek 
 to sell their merchandise at the highest prices that are 
 possible." 
 
 BENEFITS OF INSURANCE. 
 
 In conclusion, I <io not think it necessary to enter upon 
 any extended exposition or eulogy of the benefits of insurance 
 if it is conducted on correct principles, and with the aim of 
 benefiting the People as a Avhole instead of affording monopo- 
 lists a means of collecting tribute. Insurance is essentially an 
 institution for expressing effectively under modern conditions 
 the sympathy and aid of human fraternity. It is the visible 
 and mercif\il embodiment of the spirit of brotherhood of all 
 men. Adopting the words of a recent writer, we may consider 
 this great institution says to mankind : 
 
 "Fire and flood, lightning and tornado, will, un- 
 less my shield is over you, inevitably l)rino misfortune 
 and disaster to many, but dismiss your fears and 
 anxiety and pursue your vocations with courage and 
 perseverance, for, if these things should perchance be 
 allotted to you by the inscrutable decrees of fate, never- 
 
72 
 
 theless I will surely protect you. Your riches and your 
 happiness shall not be diminished, for I will replace 
 your losses. Rely on me and the dangers of the air, 
 the sea and the land shall cease to exist for you. Under 
 my protection you shall live your allotted days in 
 peace of mind, and when the final summons comes, as 
 come it must to each, you shall depart consoled by the 
 thought that your loved ones are not exposed to sudden 
 disaster nor liable to the miseries of poverty and the 
 pangs of hunger." 
 
 Selfish and greedy men have seized and' made a monopoly 
 of this beneficent institution so that, to realize its benefits, 
 the People are obliged to pay heavy tribute to them. This is a 
 great wrong. It should not be possible for such a heavy price 
 to be exacted by the mere middlemen who collect and dispense 
 insurance. It should be conducted at cost, but this can only 
 be done by the People themselves through their governmental 
 institution, the State. 
 
 SUMMARY. 
 
 The important facts which stand out in bold relief as a 
 general result of my investigation of the fire conditions in 
 Illinois are: premium rates, especially on dwellings, are ex- 
 cessive and discriminatory; Chicago being particularly sub- 
 jected to insurance extortion ; this is so because there exist three 
 insurance ''Combines" in Illinois, which fix rates and prevent 
 competition. An insurance "Combine" is illegal and the 
 courts in Illinois have so decided. The People of the State of 
 Illinois, as shown by complaints continually received by this 
 Department, are becoming aroused, and demand, and should 
 have, immediate relief. Complete relief can only be secured by 
 establishing a system of State fire insurance which will afford 
 great, immediate reduction in rates and ultimately reduce rates 
 to near to the European State Insurance rates, which are only 
 one-ninth of those in force here. The People of the State of 
 Illinois are as much entitled to fire insurance at cost as the 
 citizens of Switzerland, Germany, Norway, or New Zealand, 
 and are as capable of carrying on a system of fire insurance as 
 are the citizens of those nations. There is no constitutional or 
 other reason, whatever, why Illinois should not enjoy the. bene- 
 fits of State fire insurance, except the clamor of the already 
 enormously rich companies against giving up the "Good 
 Thing" they have enjoyed in the past. When they entered 
 into a monopolistic "Combine" they forfeited any claim to 
 consideration, and the People of the State of Illinois should 
 
take steps to provide themselves with fire insurance protection 
 at cost, without any thought of the effect on the fire insurance 
 companies. 
 
 CONTINUATION OF OUR EFFORTS FOR REFORM 
 NECESSARY. 
 
 It was at your direction that I began this investigation. 
 You have carefully followed its progress, and continuously as- 
 sisted with your advice and co-operation. You have mani- 
 fested a deep interest in fire insurance conditions existing in 
 our State and their effect upon the public welfare, and the re- 
 form which is certain to be brought about in this business will 
 only be the legitimate fruit of your courage and initiative. The 
 results obtained and disclosures made by this investigation 
 show that your original apprehension was well founded that the 
 citizens of Illinois were being charged excessive premium rates 
 by the stock fire insurance corporations upon practically every 
 class of property, and especially in the case of dwelling houses 
 and flats. 
 
 I also desire to express my sincere personal thanks for the 
 cordial and efficient support which you have at all times given 
 me in bringing to the surface the inner workings of the gigantic 
 fire insurance "Combine" or "Trust", which today either di- 
 rectly or indirectly lays an unnecessary burden upon every citi- 
 zen of this State. I trust you may continue your interest and 
 lend your influence for fire insurance reform, which can only 
 be secured by a thorough revision of the fire insurance laws of 
 Illinois. The methods and practices of the present "Combine" 
 must be replaced by some fair and equitable system of fire in- 
 surance, and, when established, its successful operation in the 
 face of the bitter fight the "Combine" is certain to make will 
 require a continuation of your strong support and favorable 
 influence. 
 
 I wish to say further, that I am greatly indebted to the 
 Illinois Press Association, and particularly their Insurance 
 Committee, for the cordial support and assistance they have 
 given mo in this investigation, and confidently rely upon their 
 further efforts in disseminating information and educating the 
 People for the achievement of this reform, through safe and 
 proper legislation. 
 
 The agitation for reform in the insurance business has just 
 started. The immense majority of the citizens of the State of 
 Illinois are ignorant of the true facts in the case. They feel 
 
74 
 
 that they are suffering from a great burden, but they do not 
 know that this is mostly for the benefit of monopolists. The 
 People must investigate the facts in the case : they must educate 
 themselves and take an intelligent and intense interest in the 
 matter. Under our Democratic system of government, relief 
 from oppressive conditions must come from the People them- 
 selves, and it is to contribute to their education and enlighten- 
 ment as to fire insurance and promote their welfare and happi- 
 ness by showing them how their present indefensible insurance 
 burdens may be lightened that I submit the facts and sugges- 
 tions of this report. 
 
 Respectfully, 
 
 RUFUS M. POTTS,, 
 Insurance Superintendent. 
 November 19, 1914. 
 
 Note: — Since the filing of this Report, the companies have at last, 
 on November 23, 1914, presented an answer to my Preliminary Report 
 made to Your Excellency on May 6, 1914. In this answer, the com- 
 panies deny the existence of any combination for the purpose of con- 
 trolling fire insurance rates; they disclaim responsibility for the opera- 
 tions of the Chicago Board of Underwriters, alleging that this is an 
 organization of Chicago local agents; and also claim that they are not 
 able to grant a reduction in the premium rates. Their allegations all 
 relate to matters of fact which are fully covered with ample evidence 
 to substantiate my statement thereof in this Report. Nothing con- 
 tained in their answer warrants me in modifying in the least the con- 
 clusions and recommendations made herein. 
 
to 
 
 APPENDIX A. 
 
 ABSTRACT OF REPORT OF HERMAN L. EKERN, INSUR- 
 ANCE COMMISSIONER OF WISCONSIN. 
 
 That the tax to Wisconsiu policy holclei's froni lire insur- 
 ance premiums paid by them to the stock fire insurance cor- 
 porations in the last ten years was nearly three times the direct 
 State tax for the same period, is the important statement in 
 the forthcoming report of State Insurance Commissioner, Her- 
 man L. Ekern, in discussing fire insurance rates in "Wisconsin. 
 
 Mr. Ekern also states that: "The stock companies' fire 
 losses were 1 1-5 times the State tax. The stock companies' 
 expense and profits were 1 2-3 times the State tax. This fire 
 premium tax is largely unnecessary. The losses are too large, 
 the expenses are excessive, and, as compared with other states 
 and with the entire United States, the stock insurance corpora- 
 tions are overcharging the people of Wisconsin." 
 
 In his report, Mr. Ekern states that the people of Wis- 
 consin have paid to the stock fire insurance corporations from 
 1904 to 1913, in net premiums, $68,065,042, and have received 
 in return for losses $29,152,025, or $42.80 per $100 in premiums. 
 Four stock companies, located in Wisconsin, collected in net 
 premiums $5,344,399, and paid in losses $1,599,964, or $29.90 
 for each $100 in premiums. 
 
 "The stock corporations have thus collected from the 
 people of Wisconsin $38,913,017 more than they have returned. 
 Deducting the increase in reserve liabilities, the amount taken 
 in ten years from the people of Wisconsin for expenses and 
 profits is $37,600,000," continues the report. 
 
 "During the same period the mutual companies doing a 
 general business in Wisconsin collected in net premiums 
 $6,138,062, or $55.50 out of each $100 of premiums collected. 
 The farmers' town mutual companies collected $7,129,954, and 
 paid back in losses $5,829,694, or $81.80 for each $100 collected 
 in premiums. 
 
 The report further states that the .same companies, during 
 the same period, returned in los.ses throughout the United 
 States $56.30 per $100 of premiums, and for the nine years, 
 omitting the San Francisco conflagration in the year 1906, they 
 
76 
 
 returned $52.10 per $100 of premiums throughout the United 
 States. 
 
 Discussing conflagrations he says "That, notwithstanding 
 the $150,000,000 paid on account of the San Francisco earth- 
 quake and conflagration, "the state of California has in 34 
 years, from 1880 to 1913, paid to the stock fire insurance cor- 
 porations more money than it has received in return for losses. 
 The total premiums for the period are $274,654,276, and the 
 losses $246,195,714, or 90% of the premiums. The State has 
 thus not alone paid all its own losses, but has paid enough to 
 cover the expense of a business conducted with an economy a 
 little more than equal to that of the Wisconsin farmers' mu- 
 tuals. 
 
 Discussing the excessive Wisconsin cost to policy holders, 
 the report states that during the ten year period it has cost 
 $234 in net premiums paid to the stock corporations by Wis- 
 consin policy holders to pay $100 in losses, against the $177.60 
 collected by the same companies from policy holders through- 
 out the United States. It has cost $180 in mutual companies, 
 and $122 in the farmers' town mutuals for each $100 paid in 
 losses, against $334 in premiums paid Wisconsin stock com- 
 panies for each $100 of Wisconsin losses paid. The stock com- 
 panies collected 83% of the net Wisconsin premiums and paid 
 75% of the total Wisconsin losses. Attention is called to Ver- 
 mont, where, during 1913, the home mutual companies col- 
 lected 42% of the premiums and paid 52% of the losses. 
 
 Tables are given showing the rate of loss per $100 for each 
 of the ten years for each class of companies. 
 
 After stating that the overcharge for the ten years to Wis- 
 consin policy holders, as compared with the rest of the country, 
 has been 24% and 16% for the last five years, 28% for 1912, 
 and 36% for 1913; Mr. Ekern concludes: "Whether the over- 
 charge may be reckoned at the $1,500,000 per year for the ten 
 year average, or $1,100,000 per year for the five year average, 
 or $2,000,000 for 1912, or $2,600,000 for 1913, it is apparent 
 that Wisconsin is a very profitable State to the stock fire in- 
 surance corporations." 
 
 The report further states that losses in Wisconsin have 
 been, and will be, very considerably reduced by the advanced 
 fire prevention work, now being done under the laws resulting 
 from the recommendations of the legislative fire insurance in- 
 vestigating committee of 1912. He states that the reductions 
 
77 
 
 iu premiums have not kept pace with the reductions in losses, 
 and that to maintain public interest in this work there must 
 be corresponding reductions in rates. Commenting on the 
 recommendations of this committee for regulation of fire rates, 
 he says : 
 
 '"These recommendations of the investigating committee 
 were defeated, antl there is now no authority under the law 
 for the regulation of the rates of fire insurance companies, or 
 for an inquiry into such rates, except such as may be made by 
 the commissioner of insurance, under the authority given to 
 him to make recommendations for legislation. Such laws for 
 inciuiry into and the regulation of fire insurance rates are 
 absolutely necessary. This is one of tlie big problems in Wis- 
 consin." 
 
APPENDIX B. 
 
 NOTE: — The following decision of the United States Su- 
 preme Court is of as fundamental importance in relation to fire 
 insurance as the Dartmouth case was in relation to corpora- 
 tions, the Dred Scott case in relation to slavery or the case of 
 IMunn vs. Illinois in relation to power of the State to control 
 railroad rates. First is given, in smaller type, the statement of 
 the facts of the case made by the court, followed in larger type 
 by the decision of the court giving the law as applied to the 
 facts. In this decision certain parts, containing the most im- 
 portant principles, are printed in black-face type. Any one 
 who does not have time to read the whole decision can get a 
 good idea of the law as laid down by the Supreme Court in the 
 decision from reading these black-face passages. 
 
 SUPREME COURT OF THE UNITED STATES. 
 No. 120.— October Term, 1913. 
 German Alliance Insurance Company, \ 
 
 Appellant, / Appeal from the Circuit 
 vs. Court of the United 
 
 r, T- c ■ ^- A 4. f -r { States for the District 
 
 Ike Lewis, as Superintendent of Insur- \ „ ^, 
 
 of Kansas, 
 ance of the State of Kansas. ' 
 
 (April 20, 1914.) 
 
 Bill in equity to restrain the enforcement of the provisions of an act 
 of the State of Kansas entitled "An Act relating to Fire Insurance and 
 to provide for the Regulation and Control of rates of Premium Thereon 
 and to Prevent Discriminations Therein." Chap. 152 of the Sessions 
 Laws of 1909. 
 
 The grounds of the bill are that the act offends the Constitution of 
 the State and of the United States. 
 
 A summary of the requirements of the act is as follows: 
 
 Sec. 1. Every fire insurance company shall file with the superin- 
 tendent of insurance general basis schedules showing the rates on all 
 risks insurable by such company in the State and all the conditions which 
 affect the rates or the value of the insurance to the assured. 
 
 Sec. 2. No change shall be made in the schedules except after ten 
 days' notice to the superintendent, which notice shall state the changes 
 proposed and the time when they shall go into effect. The superintend- 
 ent may allow changes upon less notice. 
 
 Sec. 3. When the superintendent shall determine any rate is ex- 
 cessive or unreasonably high or not adequate to the safety or soundness 
 of the company, he is authorized to direct the company to publish and 
 file a higher or a lower rate, which shall be commensurate with the char- 
 acter of the risk; but in every case the rate shall be reasonable. 
 
 Sec. 4. No company shall engage or participate in insurance on 
 property located in the State until the schedules of rates be filed nor 
 write insurance at a different rate than the rate named in the schedules, 
 or refund or remit in any manner or by any device any portion of the 
 
\ 
 
 79 
 
 rates; or extend to any insured or other person nny privileges, induce- 
 ments or concessions except as specified in the schedules. 
 
 Sec. 5. Any company making insurance where no rate has been 
 filed shall, within thirty days after entering into such contract, tile with 
 the superintendent a schedule of such property showing the rate and 
 such information as he may require. The schedule shall conform to the 
 general basis of schedules and shall constitute the permanent rate of the 
 company. 
 
 Sec. 6. The schedules shall be open to the inspection of the public, 
 and each local agent shall have and exhibit to the public copies thereftf 
 relative to all risks upon which he is authorized to write insurance. 
 
 Sec. 7. No company shall directly or indirectly, by any special rate 
 or by any device, charge or receive from any person a different rate of 
 compensation for Insurance than it charges or receives from any other 
 person for like insurance or risks of a like kind and hazard under similar 
 circumstances and conditions in the State. Any company violating this 
 provision shall be deemed guilty of unjust discrimination, which is de- 
 clared unlawful. 
 
 Sec. S. The superintendent may, if he finds that any company, or 
 any officer, agent or representative thereof, has violated any of the pro- 
 visions of the act, revoke the license of such offending company, officer, 
 or agent, but such revocation shall not affect liability for the violation of 
 any other section of the act; and provided that any action, decision or 
 determination of the superintendent under the provisions of the act shall 
 be subject to review by the courts of the State as provided in the act. 
 
 Sec. 9. The superintendent shall give notice of any order or regu- 
 lation made by him under the act, and any company, or any person, city 
 or municipality which shall be Interested, shall have the right within 
 thirty days to bring an action against the superintendent in any district 
 court of the State to have the order or regulation vacated. Issues shall 
 be formed and the controversy tried and determined as in other cases of 
 a civil nature, and the court may set aside one or more or any part pf 
 any of the regulations or orders which the court shall find to be unrea- 
 sonable, unjust, excessive or Inadequate to compensate the company 
 writing Insurance thereon for the risk assumed by it, without disturbing 
 others. The order of the superintendent shall not be suspended or en- 
 Joined, but the court may permit the complaining company to write In- 
 surance at the rates which obtained prior to such order upon the 
 condition that the difference In the rates shall be deposited with the 
 superintendent to be paid to the company or to the holders of policies 
 as, on final determination of the suit, the court may deem just and 
 reasonable. During the pendency of the suit no penalties or forfeitures 
 shall attach or accrue on account of the failure of the complainant to 
 comply with the order sought to be vacated or modified until the final 
 determination of the suit. Proceedings In error may be Instituted in the 
 Supreme Court of the State as in other civil cases, and that court shall 
 examine the record. Including the evidence, and render such judgment as 
 shall be just and equitable. N'o action shall be brought In the United 
 States courts until the remedies provided by the act shall have been ex- 
 hausted. If any company organized under the laws of the State or 
 authorized to transact business in the State shall violate the section, the 
 superintendent may cancel the authority of the company to transact 
 business In the State. 
 
 Sec. 10. Infractions of the act are declared to be misdemeanors and 
 punishable by a fine not exceeding $100 for each offense, provided that If 
 the conviction be for an unlawful discrimination the punishment may be 
 by a fine or by Imprisonment In the county Jail not exceeding ninety 
 days, or by both fine and Imprisonment. 
 
 Sec. 11. No person shall be excused from testifying at the trial of 
 any other person on the ground that the testimony may Incriminate him, 
 but he shall not be prosecuted on account of any transaction about 
 which he may testify, except for perjury committed In so testifying; 
 
80 
 
 "provided, that nothing in this act shall affect farmers' mutual insurance 
 companies, organized and doing business under the laws of this State 
 and insuring only farm property." 
 
 The bill alleged that it was brought by the German Alliance Insur- 
 ance Company in behalf of itself and all other companies and corpor- 
 ations conducting a similar business and similarly situated, and that 
 Charles W. Barnes was the duly elected superintendent of fire insurance 
 of the State of Kansas. It alleged .the jurisdictional amount, and that 
 the controversy was one arising under the Constitution of the United 
 States and of the State of Kansas. It alleged, further, the following 
 facts, which we state in narrative form, omitting those which relate to 
 the constitution of the State, no assignment of error being based upon 
 them: The appellant, to which we shall refer as complainant, w'as in- 
 corporated under the laws of New York as a fire insurance company in 
 1879 and immediately entered upon such business, and it has for long 
 periods of time conducted the business of fire insurance in Kansas and 
 other States of the United States. 
 
 The business of fire insurance as conducted by it consists of making 
 indemnity contracts against direct loss or damage by fire for a consider- 
 ation paid, known as a premium; that the rate or premium is the amount 
 charged for each $100 of indemnity. The property which is the subject 
 of insurance is ordinarily known and designated as the risk. Complain- 
 ant issues indemnity contracts or fire insurance policies covering all 
 kinds and descriptions of improvements upon real estate and the con- 
 tents thereof and all kinds and descriptions of personal property and 
 also farm houses, barns and granaries and their contents. The rate of 
 premium varies with the kind of property covered, its physical character- 
 istics and situation, its exposure, the presence or absence of fire protec- 
 tion, and many other causes. 
 
 The establishment of the basis rate for the premium to be charged 
 is a matter of technical and mathematical deduction from the experience 
 of all fire insurance companies covering a long period of years and, 
 territorially, the whole civilized world. To make such deduction it is 
 necessary not only to be in possession of the compiled statistics of fire 
 insurance business, but also to be skilled in the mathematical "theory 
 of probabilities" and in the "law of large num.bers" so as to be able to 
 apply with technical accuracy such laws and such data, and that no one 
 not specially trained as an insurance statistician is competent to make 
 such deductions. 
 
 A theoretically correct basis rate having thus been arrived at is sub- 
 ject to variation according to the risk, whether in town or country, and, 
 if in the former, according to the class of town or city in which it is 
 situated. The classification of towns and cities depends upon water 
 supply, fire protection and general physical conditions. In addition to 
 ascertaining the individual risk, if a building, the size, material of which 
 and the manner in which it is constructed, the character of the occu- 
 pancy, and the character of the occupancy and construction of adjacent 
 buildings, also the character of the contents of the buildings and the 
 manner in which they are stored and the precautions used to detect and 
 prevent fires, are necessary to be ascertained. 
 
 Complainant and others engaged in the insurance business employ 
 a large number of men skilled as inspectors to report upon individual 
 risks, and it is impossible to fix and adjust a reasonable rate of premium 
 for each and every individual risk without the information so obtained 
 and having the same applied by experts. And such training and infor- 
 mation are necessary to determine whether a basic rate or actual rate 
 as applied to any particular risk is or is not reasonable, and the re- 
 spondent is not possessed of the requisite information or special train- 
 ing necessary to qualify for such determination and any conclusion to 
 which he might come would be a mere guess or arbitrary determination; 
 and the provisions of the act can only be properly administered in any 
 event by the employment by the State of a corps of inspectors and ex- 
 perts specially trained in the business of fixing rates of fire insurance. 
 
81 
 
 The loniplainant has complied with all of the laws of the State and 
 has received the regular license or authorization of the State, to trans- 
 act the business of fire insurance therein. 
 
 It conducts its business by means of resident agents, of which it has 
 seventy-two directly employed; it has a large and valuable established 
 business to secure which it has expended a large sum of money, and to 
 be compelled to give up its business would result in irreparable damage 
 and injury to it. A large number of the tire insurance policies issued 
 by complainant are written upon farm buildings and their contents and 
 in writing such business it comes into direct competition with various 
 farmers' mutual insurance companies organized and doing business under 
 the laws of the State and insuring only farm property. 
 
 The business of fire insurance is purely and exclusively a private 
 business and may be transacted by private persons in their individual 
 capacity or by unincorporated or incorporated companies, that the 
 amount of Indemnity and the premium is a matter of private negotiation 
 and agreement, and the act of the legislature of the State of Kansas at- 
 tempts to regulate the business in so far as the fixing of the rate of 
 premium Is concerned and in the attempted regulation distinguishes be- 
 tween fire insurance companies and individuals and partnerships, and 
 thereby denies to complainant and other companies the equal protection 
 of the law, contrary to the Fourteenth Amendment to the Constitution 
 of the United States, and Is therefore unconstitutional and void. 
 
 I'nder the laws of Kansas, mutual fire insurance companies may be 
 organized, that such companies having a guaranteed fund of $25,000 
 may do business on a cash basis and accept premiums in cash and that 
 such premium measures the total liability of the insured under the policy 
 either to the company or to Its creditors; that, by the 11th section of the 
 act under review, it Is provided "that nothing In this act shall affect 
 farmers' mutual Insurance companies, organized and doing business 
 under the laws of this State, and insuring only farm property." The 
 complainant and many other companies insure farm property and come 
 into direct competition with farmers' mutual companies of the character 
 specified and the act of the legislature In excepting the latter companies 
 deprives complainant of the equal protection of the laws and is there- 
 fore repugnant to the Fourteenth Amendment of the Constitution of the 
 United States and is unconstitutional and void. 
 
 The business of fire Insurance is private, with which the State has 
 no right to Interfere, and the right to fix by private contract the rate of 
 premium Is a property right of value; the business Is not a monopoly 
 either legally or actually. It may not be legally conducted by the National 
 Government or by the State of Kansas or other States under their re- 
 spective constitutions, and Is not a business Included within the func- 
 tions of government. Neither complainant nor others engaged in fire 
 insurance receive or enjoy from the State of Kansas or any government. 
 State or National, any privilege or Immunity not in like manner and to 
 like extent received and enjoyed by all other persons, partnerships and 
 companies. Incorporated or unincorporated, respectively, engaged In the 
 conduct of other lines of private business and enterprises. Complainant, 
 therefore, is deprived of one of the Incidents of liberty and of its prop- 
 erty without due process of law, in violation of the Fourteenth Amend- 
 ment to the Constitution of the United States. 
 
 The act distinguishes between fire Insurance companies and other 
 Insurance companies. Individuals and persons and dl.stlngulshes between 
 Insurance and other lines of business and thereby offends the equality 
 clause of the Constitution of the United States. 
 
 Complainant, under protest, filed the general basis schedules of Its 
 rates as required by the act, which were arrived at by the process here- 
 inbefore set out. On the 19th of August. 1909, respondent made a re- 
 duction of 12 <^ from the rates as filed and from the rates filed by other 
 companies, with the proviso that It should not apply to residence prop- 
 erty, churches, school houses, farm property or special hazards. The 
 
82 
 
 order was to become .effective September 1, 1909. And it was further 
 odered that on and after that date the exceptions of churches and dwell- 
 ing houses should be eliminated. Complainant notified the superintend- 
 ent by letter that it would, under protest, and reserving the rights which 
 it had under the law, comply with the provisions -of the order. 
 
 The risks included in the order, and not excepted therefrom, com- 
 prise all ordinary mercantile risks in the State and that the reduction of 
 12% will result in a rate which is much less than the cost of carrying the 
 risks. 
 
 Respondent is threatening to make further reductions and it is pro- 
 xjosed to revoke the license of any fire insurance company which may 
 violate the provisions of the act, even though the rates fixed by him may 
 be so low as to be confiscatory and to inflict upon the officers of the com- 
 pany, including complainant, the penalties prescribed for such violation, 
 and such com'panies and complainant, unless defendant be restrained by 
 injunction, will be obliged to comply with the requirements of the act to 
 their irreparable damage and injury. 
 
 Complainant finally alleges that it is not its purpose to attack the 
 orders of respondent on the ground that they were not made in strict 
 compliance with the provisions of the act, but to have the act in its en- 
 tirety declared to be unconstitutional and void for the reasons alleged, 
 and to have respondent restrained and orders made by him under the 
 provisions of the act enjoined. And such an injunction is prayed. 
 
 Respondent filed a demurrer stating that he demurred to so much of 
 the bill as charges the act of the State of Kansas to be repugnant to the 
 constitution of Kansas and the Constitution of the United States. The 
 demurrer w^as sustained. Subsequently, upon the bill being amended, a 
 general demurrer was filed, which was also sustained by the court, and 
 the bill dismissed. Prior, however, to this action, it having been sug- 
 gested that the term of office of Charles W. Barnes as superintendent of 
 insurance had expired and that Ike Lewis had succeeded to that office 
 and to all of its duties and powers, he was made defendant in the place 
 and stead of Charles W. Barnes. 
 
 After stating the case as above, Mr. Justice McKenna de- 
 livered the opinion of the Court. 
 
 The specific error complained of is the refusal of the dis- 
 trict court to hold that the act of the State of Kansas is un- 
 constitutional and void as offending the due process clause of 
 the Fourteenth Amendment of the Constitution of the United 
 States. To support this charge of error, complainant asserts 
 that the business of fire insurance is a private business and, 
 therefore, there is no constitutional power in a State to fix the 
 rates and charges for services rendered by it. An exercise of 
 such right, it is contended, is a taking of private property for 
 a public use. The contention is made in various ways and, 
 excluding possible countervailing contentions, it is urged that 
 the act under review cannot be justified as an exercise of the 
 police power or of the power of the State to admit foreign cor- 
 porations within its borders upon such terms as it may pre- 
 scribe, or of any other power possessed by the State ; that no 
 State has the power to impose unconstitutional burdens either 
 upon private citizens or private corporations engaged in a 
 private business. 
 
83 
 
 The basic contention is that the business of insurance is a 
 natural right, receiving no privilege from the State, is volun- 
 tarily entered into, cannot be compelled nor can any of its 
 exercises be compelled ; that it concerns personal contracts of 
 indemnity against certain contingencies merely. Whether such 
 contracts shall bo made at all, it is contended, is a matter of 
 private negotiation and agreement, and necessarily there must 
 be freedom in fixing their terms. And "where the right to de- 
 mand and receive service docs not exist in the public, the cor- 
 relative right of regulation as to rates and charges does not 
 exist." Many elements, it is urged, determine the extending 
 or rejection of insurance ; the hazards are relative and depend 
 upon many circumstances upon which there may be different 
 judgments, and there are personal considerations as well — 
 "moral hazards," as they are called. 
 
 It is not clear to what extent some of these circumstances 
 are urged as affecting the power of regulation in the State. It 
 would seem to be urged that each risk is individual and no rule 
 of rates can be formed or applied. The bill asserts the con- 
 trary. It in effect admits that there can be standards and 
 classifications of risks, determined by the law of averages. In- 
 deed, it is a matter of common knowledge that rates are fixed 
 and accommodated to those standards and classification in pre- 
 aranged schedules, and, granted the rates may be varied in 
 particular instances, they are sufficiently definite and applicable 
 as a general and practically con.stant rule. They are the 
 product, it is true, of skill and experience, but such skill and 
 experience a regulating body may have as well as the creating 
 body. Indeed, an allegation in the original bill that the super- 
 inttndent of insurance could not have the requisite technical 
 and mathematical training to determine whether a basic rate 
 or an actual rate as applied to any particular risk was or was 
 not reasonable and that his conclusion, therefore, "would be a 
 mere guess or arbitrary dntorminntion" was omitted by an 
 amendment. It would indeed be a strained contention that 
 the Government could not avail itself, in the exercise of power 
 it might deem wise to exert, of the skill and knowledge pos- 
 sessed by the world. Wc may [)ut asi<lc^ therefore, all irn-rcly 
 adventitious considerations and come to the bare and essential 
 one. whether a contract of fire instirance is private and as .such 
 has constitutional immunity from regulation. Or, to state it 
 differently and to express an antithetical proposition, is the 
 business of insurance so far affected with a public interest as to 
 
84 
 
 justify legislative regulation of its rates? And we mean a broad 
 and definite public interest. In some degree the public interest 
 is concerned in every transaction between men, the sum of the 
 transactions constituting the activities of life. But there is 
 something more special than this, something of more definite 
 consequence, which makes the public interest that justifies 
 regulatory legislation. We can best explain by examples. 
 The transportation of property — business of common carriers — 
 is obviously of public concern and its regulation is an accepted 
 governmental power. The transmission of intelligence is of 
 cognate character. There are other utilities which are de- 
 nominated public, such as the furnishing of water and light, 
 including in the latter gas and electricity. We do not hesitate 
 at their regulation nor at the fixing of the prices which may be 
 charged for their service. The basis of the ready concession 
 of the power of regulation is the public interest. This is not 
 denied, but its application to insurance is so far denied as not 
 to extend to the fixing of rates. It is said, the State has no 
 power to fix the rates charged to the public by either corpora- 
 tions or individuals engaged in a private business, and the 
 "test of whether the use is public or not is whether a public 
 trust is imposed upon the property and whether the public has 
 a legal right to the use which cannot be denied;" or, as we 
 have said, quoting counsel, "Where the right to demand and 
 receive service does not exist in the public, the correlative right 
 of regulation as to rates and charges does not exist." Cases 
 are cited which, it must be admitted, support the contention. 
 The distinction is artificial. It is, indeed, but the assertion 
 that the cited examples embrace all cases of public interest. 
 The complainant explicitly so contends, urging that the test 
 it applies excludes the idea that there can be a public interest 
 which gives the power of regulation as distinct from a public 
 use which, necessarily, it is contended, can only apply to 
 property, not to personal contracts. The distinction, we 
 think, has no basis in principle. (Noble State Bank v. Haskell, 
 219 U. S. 104), nor has the other contention that the service 
 which cannot be demanded cannot be regulated. 
 
 Munn V. Illinois, 94 U. S. 113, is an instructive example of 
 legislative power exerted in the public interest. The constitu- 
 tion of Illinois declared all elevators or storehouses, where 
 grain or other property was stored for a compensation, to be 
 public warehouses, and a law was subsequently enacted, fixing 
 rates of storage. In other words, that which had been private 
 
85 
 
 property had from its uses become, it was declared, of public 
 couceru and the compensation to be charged for its use pre- 
 scribed. The law was sustained against the contention that it 
 deprived the owners of the warehouses of their property with- 
 out due process of law. We can only cite the ease and state its 
 principle, not review it at any length. The principle was ex- 
 pressed to be, quoting Lord Chief Justice Hale, 'that when 
 private property is "affected with public interest it ceases to 
 be juris privati only" and it becomes "clothed with a public 
 interest when used in a manner to make it of public conse- 
 quence, and affect the community at large"; and, so using it, 
 the owner "grants to the public an interest in that use, and 
 must submit to be controlled by the public for the common 
 good.' Anil it was said that the application of the principle 
 could not be denied because no precedent could be found for a 
 statute precisely like the one reviewed. It presented a case, 
 the court further said, "for the application of a long-'known 
 and well-established principle in social science, and tliis statute 
 simply extends the law so as to meet this new development of 
 commercial progress." The principle was expressed as to 
 property, and the instance of its application was to property, 
 but it is manifestly broader than that instance. It is the busi- 
 ness that is the fundamental thing; property is but its instru- 
 ment, the means of rendering the service which has become of 
 public interest. 
 
 That the case had broader application than the use of 
 property is manifest from the grounds expressed in the dis- 
 senting opinion. The basis of the opinion was that the busi- 
 ness regulated was private and had "no special privilege con- 
 nected with it, nor did the law ever extend to it any greater 
 protection than it extended to all other private business." The 
 argument encountered opposing examples, among others, the 
 regulation of the rate of interest on money. The regulation 
 was accounted for on the ground that the act of Parliament 
 permitting the charging of some interest was a relaxation of a 
 prohibition of the comon law against charging any interest, but 
 this explanation overlooked the fact that both the common law 
 and the act of Parliament were exercises of government regula- 
 tion of a strictly private business in the interest of public policy, 
 a policy which still endures and still dictates regulating laws. 
 Against this conservation of the mind, which puts to question 
 every new act of regulating legislation and regards the legisla- 
 tion invalid or dangerous until it has become familiar, govern- 
 
86 
 
 ment — State and National — has pressed on in the general 
 welfare; and our reports are full of eases where in instance 
 after instance the exercise of regulation was resisted and yet 
 sustained against attacks asserted to be justified by the Con- 
 stitution of the United States. The dread of the moment 
 having passed, no one is now heard to say that rights were re- 
 strained or their constitutional guaranties impaired. 
 
 Munn V. Illinois was approved in many state decisions, but 
 it was brought to the review of this court in Budd v. New York, 
 143 U. S. 517, and its doctrine, after elaborate consideration, 
 re-affirmed, and against the same arguments which are now 
 urged against the Kansas Statute. Nowhere have these argu- 
 ments been, or could be, advanced with greater strength and 
 felicity of expression than in the dissenting opinion of Mr. 
 Justice Brewer. Every consideration w^as adduced, based on 
 the private character of the business regulated, and, for that 
 reason, its constitutional immunity from regulation, with all 
 the power of argument and illustration of which that great 
 judge was a master. The considerations urged did not prevail. 
 Against them the court opposed the ever-existing police power 
 in government and its necessary exercise for the public good 
 and declared its entire accommodation to the limitations of the 
 Constitution. The court w^as not deterred by the charge (re- 
 peated in the case at bar) -that its decision had the sweeping 
 and dangerous comprehension of subjecting to legislative regu- 
 lation all of the business and affairs of life and the prices of all 
 commodities. Whether we may apprehend such result by ex- 
 tending the principle of the cases to fire insurance we shall 
 presently consider. 
 
 In Brass v. Stoesser, 153 U. S. 391, Munn v. Illinois and 
 Budd V. New York were affirmed. A law of the state of North 
 Dakota was sustained which made all buildings, elevators and 
 warehouses used for the handling of grain for a profit public 
 warehouses, and fixed a storage rate. The case is important. 
 It extended the principle of the other two cases and denuded 
 it of the limiting element which was supposed to beset it — 
 that to justify regulation of a business the business must have 
 a monopolistic character. That distinction was pressed and 
 answered. It was argued, the court said, "that the statutes 
 of Illinois and Ncav York (passed on in the Munn and Budd 
 cases) are intended to operate in great trade centers, where, 
 on account of the business being localized in the hands of a 
 few persons in close proximity to each other, great opportu- 
 
87 
 
 nities to raisi' and eoutiul elevating storage charges are af- 
 forded, Avhile the ^vide extent of the State of North Dakota 
 and the small population of its country towns and villages are 
 said to present no such opportunities. ' ' And it was also urged 
 that the method of carrying on business in North Dakota and 
 the Eastern cities was ditlerent, that the elevators in the latter 
 were essentially means of transporting grain from the lakes 
 to the railroads and those who owned them could, if uncon- 
 trolled by law, extort such charges as they pleased, and stress 
 was laid upon the expression in the other cases which repre- 
 sented the business as a practical monopoly. A contrast was 
 made between those conditions and those which existed in an 
 agricultural State where land was cheap and limitless in quan- 
 tity. It was replied that this difference in conditions was "for 
 those who make, not for those who interpret, the laws." And 
 considering the expressions in the other cases which, it was 
 said, went rather to the expediency of the lawys than to their 
 validity, yet, it was further said, the expressions had their 
 value because the "obvious aim of the reasoning that pre- 
 vailed was to show that the subject-matter of these enactments 
 fell within the legitimate sphere of legislative power, and that, 
 so far as the laws and Constitution of the United States was 
 concerned, the legislation in question deprived no person of 
 his property without due process of law." 
 
 The cases need no explanatory or fortifying comment. 
 They demonstrate that a business, by circumstances and its 
 nature, may rise from private to be of public concern and be 
 subject, in consequence, to governmental regulation. And they 
 driiionstratr, to apply the laiiiruagr of Judire Andrews in the 
 Budd case (117 N. Y. 1, 27), that the attempts made to place 
 the right of public regulation in the cases in which it has been 
 exerted, and of which we have given examples, upon the ground 
 of special privilege conferred by the public on those affected, 
 cannot be supported. "The underlying principle is that busi- 
 ness of certain kinds holds such a peculiar relation to the public 
 interest that there is superinduced upon it the right of public 
 rocrulation." Is thf business of insurance within the principle? 
 It would be a bold thing to say that the principle is fixed, in- 
 elastic, in the precedents of the past and cannot be applied 
 though modern economic conditions may make necessary or 
 beneficial its application. In other words, to .say that govern- 
 ment possessed at one time a greater power to recognise the 
 public interest in a business and its regulation to promote the 
 
general welfare than the government possesses to-day. We pro- 
 ceed then to consider whether the business of insurance is 
 within the principle. 
 
 A contract for fire insurance is one for indemnity against 
 loss and is personal. The admission, however, does not take 
 us far in the solution of the question presented. Its personal 
 character certainly does not itself preclude regulation, for 
 there are many examples of governmental regulation of per- 
 sonal contracts, and in the statutes of every State in the Union 
 superintendence and control over the business of insurance 
 are exercised, varying in details and extent. We need not 
 particularize in detail. We need only say that there was quite 
 early (in Massachusetts 1837, New York 1853) state provision 
 for what is kno-\vn as the unearned premium fund or reserve; 
 then came the limitation of dividends, the publishing of ac- 
 counts, valued policies, standards of policies, prescribing in- 
 vestment, requiring deposits in money or bonds, confining the 
 business to corporations, preventing discrimination in rates, 
 limitation of risks and other regulatons equally restrictive. 
 In other words, the State has stepped iu and imposed condi- 
 tions upon the companies, restraining the absolute liberty 
 which businesses strictly private are permitted to exercise. 
 
 Those regulations exhibit it to be the conception of the law- 
 making bodies of the country without exception that the busi- 
 ness of insurance so far affects the public welfare as to invoke 
 and require governmental regulation. A conception so general 
 cannot be without cause. The universal sense of a people can- 
 not be accidental; its persistence saves it from the charge of 
 unconsidered impulse, and its estimate of insurance certainly 
 has substantial basis. Accidental fires are inevitable and the 
 extent of loss very great. The effect of insurance — indeed, 
 it has been said to be its fundamental object — is to distribute 
 the loss over as wide an area as possible. In other words, the 
 loss is spread over the country, the disaster to an individual 
 is shared by many, the disaster to a community shared by 
 other communities; great catastrophes are thereby lessened, 
 and, it may be, repaired. In assimilation of insurance to a 
 tax, the companies have been said to be the mere machinery 
 by which the inevitable losses by fire are distributed so as to 
 fall as lightly as possible on the public at large, the body of 
 the insured, not the companies, paying the tax. Their effi- 
 ciency, therefore, and solvency are of great concern. The other 
 objects, direct and indirect, of insurance we need not mention. 
 
89 
 
 Iiukt.ll. il may be enough to say, ^vithollt stating other effects 
 of insurance, that a hirge part of tlie country's wealth, sub- 
 ject to uncertainty of loss through fire, is protected by insur- 
 ance. This chinonstrati'S the interest of the public in it and we 
 need nut dispute with the economists that this is the result of 
 the "substitution of certain for uncertain loss" or the diffusion 
 of positive loss over a large group of persons, as we have al- 
 ready said to be certainly one of its effects. "We can see, 
 therefore, how it has come to be considered as a matter of pub- 
 lic concern to regulate it, and trovcniiiiciilal iiisuraiicf lias its 
 advocates and even examples. Contracts of insurance, therefore, 
 have greater public consequence than contracts between indi- 
 viduals to do or not to do a particular thing whose effect stops 
 with the individuals. We may say in passing that, when the 
 effect goes beyond that, there are many examples of regula- 
 tion. Holden v. Hardy, 1G!1 U. S. 8GG ; ririflfitii v. Connecticut, 
 218 U. S. 563 ; :Muller v. Oregon, 208 U. S. 412 ; Mutual Loan 
 Co. V. IMartel, 222 IT. S. 225; Schmidinger v. Chicago, 226 U. S. 
 578; Chicago, Burlington & Quincy R. R. Co. v. Maguire, 219 
 U. S. 549 ; Noble State Bank v. Haskell et al., 219 U. S. 104. 
 
 Complainant feels the necessity of accounting for the 
 regulatory state legislation and refers it to the exertion of 
 the police power, but. while expressing the power in the broad 
 language of the eases, seeks to restrict its application. Coun- 
 sel states that this power may be exerted to "pass laws whose 
 purpose is the health, safety, morals and the general welfare 
 of the people." The admission is very comprehensive. What 
 makes for the general welfare is necessarily in the first in- 
 stance a matter of legislative judgment and a judicial review 
 of such judgment is limited. "The scope of judicial inquiry 
 in deciding the question of power is not to be confused with 
 the scope of legislative consideration in dealing with the mat- 
 ter of policy. "Whether the enactment is wise or unwise, 
 whether it is based on sound economic theory, whether it is the 
 best means to achieve the desired result, whether, in short, the 
 legislative discretion within its prescribed limits should be ex- 
 ercised in a particular manner, are matters for the judgment of 
 the leffislature. and the earnest conflict of serious opinion does 
 not suffice to bring them within the range of judicial cogniz- 
 ance." Chicago. Burlington & Quiney Railroad Co. v. Ma- 
 guire. 219 U. S. 540, 569. 
 
 The restrictions upon the legislative power which com- 
 plainant urges we have discussed, or rather the considera- 
 
90 
 
 tions which take, it is contended, the business of insurance out- 
 side of the sphere of the power. To the contention that the 
 business is private we have opposed the conception of the public 
 interest. We have shown that the business of insurance has 
 very definite characteristics, with a reach of influence and 
 consequence beyond and different from that of the ordinary 
 businesses of the commercial world, to pursue which a greater 
 liberty niay be asserted. The transactions of the latter are 
 independent and individual, terminating in their effect with the 
 instances. The contracts of insurance may be said to be inter- 
 dependent. They cannot be regarded singly, or isolatedly. 
 and the effect of their relation is to create a fund of assurance 
 and credit, the companies becoming the depositories of the 
 money of the insured, possessing great power thereby and 
 charged with great responsibility. How necessary their 
 solvency is, is manifest. On the other hand, to the insured, in- 
 surance is an asset, a basis of credit. It is practically a neces- 
 sity to business activity and enterprise. It is, therefore, es- 
 sentially different from ordinary commercial transactions, and, 
 as we have seen, according to the sense of the world from the 
 earliest times — certainly the sense of the modern world — is of 
 the greatest public concern. It is, therefore, within the prin- 
 ciple we have announced. 
 
 But it is said that the reasoning of the opinion has the 
 broad reach of subjecting to regulation every act of human 
 endeavor and the price of every article of human use. We 
 might, without much concern, leave our discussion to take care 
 of itself against such misunderstanding or deductions. The 
 principle we apply is definite and old and has, as we have 
 pointed out, illustrating examples. And both by the expres- 
 sion of the principle and the citation of the examples we have 
 tried to confine our decision to the regulation of the business 
 of insurance, it having become "clothed with a public in- 
 terest," and, therefore, subject "to be controlled by the public 
 for the common good." 
 
 If there may be controversy as to the business having such 
 character, there can be no controversy as to what follows from 
 such character if it be established. It is idle, therefore, to de- 
 bate whether the liberty of contract guaranteed by the Consti- 
 tution of the United States is more intimately involved in price 
 regulation than in the other forms of regulation as to the valid- 
 ity of which there is no dispute. The order of their enactment 
 certainly cannot be considered an element in their legality. It 
 
91 
 
 would be very rudimentary to say that measures of goverumeut 
 are determined by circumstances, by the presence or imminence 
 of conditions, and of the legislative judgment of the means or 
 the policy of removing or preventing them. The power to regu- 
 late interstate commerce existed for a century before the Inter- 
 state Commerce Act was passed, and the Commission consti- 
 tuted by it was not given authority to fix rates until some years 
 afterwards. Of the agencies which those measures were en- 
 acted to regulate at the time of the creation of the power, there 
 was no prophecy or conception. Nor was regulation immediate 
 upon their existence. It was exerted only when the size, num- 
 ber and influence of those agencies had so increased and de- 
 veloped as to seem to make it imperative. Other illustrations 
 readily occur which repel the intimation tiiat the inactivity of 
 a power, however prolonged, militates against its legality when 
 it is exercised. United States v. Delaware & Hudson Co., 213 
 U. S. 366. It is oftener the existence of necessity rather than 
 the prescience of it which dictates legislation. And so with the 
 regulations of the business of insurance. They have proceeded 
 step by step, differing in different jurisdictions. If we are 
 brought to a comparison of them in relation to the power of 
 government, how can it be said that fixing the price of insur^ 
 ance is beyond that [)ower and the other instances of regulation 
 are not? How can it be said that the right to engage in the 
 business is a natural one when it can be denied to individuals 
 and permitted to corporations? How can it be said to have the 
 privilege of a private business when its dividends are restricted, 
 its investments controlled, the form and extent of its contracts 
 prescribed, discriminations in its rates denied and a limitation 
 on its risks imposed? Are not such regulations restraints upon 
 the exercise of the personal right — asserted to be fundamental 
 — of dealing with property freely or engaging in what con- 
 tracts one may choose and with whom and upon what terms one 
 may choose? 
 
 We may venture to observe that the price of insurance is 
 not fixed over the counters of the companies by what Adam 
 Smith calls the higgling of the market, but formed in the coun- 
 cils of the underwriters, promulgated in schedules of practical- 
 ly controlling constancy which the applicant for insurance is 
 powerless to oppose and which, therefore, has led to the asser- 
 tion that the business of insurance is of monopolistic character 
 and that "it is illusory to speak of a liberty of contract." It is 
 in the alternative presented, of accepting the rates of the com- 
 
92 
 
 panies or refraining- from insurance, business necessity impell- 
 ing if not compelling it, that we may discover the inducement 
 of the Kansas statute, and the problem presented is whether the 
 legislature could regard it of as much moment to the public that 
 they who seek insurance should no more be constrained by arbi- 
 trary terms than they who seek transportation by railroads, 
 steam or street, or by coaches whose itinerary may be only a 
 few city blocks, or who seek the use of grain elevators, or be se- 
 cured in a night's accommodation at a wayside inn, or in the 
 weight of a five-cent loaf of bread. We do not say this to be- 
 little such rights or to exaggerate the effect of insurance, but to 
 exhibit the principle which exists in all and brings all under the 
 same governmental power. 
 
 We have summarized the provisions of the Kansas statute, 
 and it will be observed from them that they attempt to syste- 
 matize the control of insurance. The statute seeks to secure 
 rates which shall be reasonable both to the insurer and the in- 
 sured, and as a means to this end it prescribes equality of 
 charges, forbids initial discrimination or subsequently by the 
 refund of a portion of the rates, or the extension to the insured 
 of any privilege; to this end it requires publicity in the basic 
 schedules and of all of the conditions which affect the rates or 
 the value of the insurance to the insured, and also adherence 
 to the rates as published. Whether the requirements are neces- 
 sary to the purpose, or — ^to confine ourselves to that which is 
 under review — whether rate regulation is necessary to the pur- 
 pose, is a matter for legislative judgment, not judicial. Our 
 function is only to determine the existence of power. 
 
 The bill attacks the statute of Kansas as discriminating 
 against complainant because the statute excludes from its pro- 
 visions farmers' mutual insurance companies, organized and 
 doing business under the laws of the State and insuring only 
 farm property. The charge is not discussed in the elaborate 
 brief of counsel, nor does it seem to have been pressed in the 
 lower court. It is, however, covered by the assignments of 
 error. 
 
 The provision of the statute is, ''That nothing in this act 
 shall affect farmers' mutual insurance companies, organized and 
 doing business under the laws of this State and insuring only 
 farm property." The distinction is, therefore, between co- 
 operative insurance companies insuring a special kind of prop- 
 erty and all other insurance companies. It is only with that 
 distinction that we are now concerned. There are special pro- 
 
93 
 
 visions in the statutes of Kansas for the organization of co- 
 operative companies and if the statute under review discrimi- 
 nates between them the German Alliance Company cannot avail 
 itself of the discrimination. A citation of cases is not neces- 
 sary, nor for the jjeneral principle that a discrimination is valid 
 if not arbitrary, and arbitrary in the legislative sense, that is, 
 outside of that wide discretion which a legislature may exer- 
 cise. A legislative classification may rest on narrow distinc- 
 tions. Legislation is addressed to evils as they may appear, 
 and even degrees of evil may determine its exercise. Ozan 
 Lumber Co. v. Union County National Bank, 207 U. S. 251. 
 There are certainly differences between stock companies, such 
 as complainant is, and the mutual companies described in the 
 bill, and a recognition of the differences we cannot say is out- 
 side of the constitutional power of the legislature. Orient In- 
 surance Co, V. Daggs, 172 U. S. 557. 
 Decree affirmed. 
 
94 
 
 INDEX. 
 
 PAGE 
 
 Agents' Qualification Requirements 62 
 
 Appendix "A" — Abstract of Report of Herman L. Ekern, Insurance 
 
 Commissioner of Wisconsin 75 
 
 Appendix "B" — Decision of U. S. Supreme Court, Upholding State's 
 
 Right to Control Rates 7S 
 
 Banking Profits of Companies 56 
 
 Benefits of Insurance 71 
 
 Calculation of Profit Percentage, Etc 57 
 
 Cancellation of Policies, Etc 61 
 
 Charge of "Politics" 35 
 
 Classification 24 
 
 Coercion Threatened by the "Combine" 28 
 
 Co-Insurance '. 63 
 
 Companies and Experience 24 
 
 Companies' Tactics Toward Insurance Department 29 
 
 Comparison of Rates in Chicago and other Cities 14 
 
 Annual Dwelling Rates 14 
 
 Comparison with New York 14 
 
 Conflagration Hazard 43 
 
 Constitutionality 45 
 
 Continuation of Efforts for Reform Necessary 73 
 
 Dean Schedule '. . . . 15 
 
 Basis Tables 15 
 
 Rates for Building and Contents 16 
 
 Reductions NecessaiT to Eciualize Chicago 17 
 
 Climax of Increases 17 
 
 Detailed Statement of Value 60 
 
 Distribution of Risks 43 
 
 Education in Fire Prevention 66 
 
 European Premium Rates 26 
 
 Excessive Profits of Insurance Companies 53 
 
 Excessive Salaries ' 59 
 
 Fallacious Claim That T'ire Insurance Monopoly is Necessary 67 
 
 Fire Insurance a Tax 12 
 
 Fire Insurance Compulsory 3 
 
 Fire Investigations Continued 1 
 
 Fire Prevention Not in Good Faith Favored by Companies 27 
 
 Fire Prevention 65 
 
 Fires Not Dreaded by Companies, Proof 40 
 
 Foreign Re-Insurance and Net Lines 62 
 
 History of Fire Insurance ■. . . . 3 
 
 Ancient Times 4 
 
 Germany 5 
 
 Austria-Hungary 6 
 
 Switzerland 6 
 
 Denmark 6 
 
95 
 
 I'AtJB 
 
 Sweden 7 
 
 Norway 7 
 
 Russia 
 
 New Zealand 
 
 State Insurance Well Tried y 
 
 England 9 
 
 United States 10 
 
 Combination Begins 10 
 
 Illinois 11 
 
 Super\'ision Begins 11 
 
 Illinois Fire Loss Experience 19 
 
 Illinois Press Association 73 
 
 Insurance Hazard 60 
 
 Insurance Journals' Policy 32 
 
 Magnitude and necessity of Fire Insuranoc 2 
 
 Mercenary Perversion of Beneficent Idea 48 
 
 Monopoly and EvUs 70 
 
 Newspapers and Trade Journals 34 
 
 New York and Arson 38 
 
 Other Recommendations 60 
 
 Premium Rates 13 
 
 Profits from Illegitimate Stock Transactions 5S 
 
 Proof that Reduction in Rates is Possible 26 
 
 Rate-Making 22 
 
 Rates Controlled or Made by State 50 
 
 Standardization 44 
 
 Standard Policy 61 
 
 State Insurance 37 
 
 Summary and Conclusions 72 
 
 Surplus and Profit Percentage Calculation 59 
 
 Texas Experience 39 
 
 Underwriter Annex Litigation 30 
 
 •Underwriters Laboratories" 42 
 
 "Valued Policies" 65 
 
I 
 
That the rep 
 Rates in lUiiiois 
 manded by the f 
 tield newspaper 
 papers were tak 
 
 The Canton E 
 
 The most imp 
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 the union ninety-s 
 M. Polts, state insi 
 insurance business 
 ports of the compi 
 tion, he finds the 
 million dollars m< 
 great sum is take 
 most comprehensi' 
 pie ha^ J felt for y 
 see no relief and \ 
 their money. Jud 
 relief for the peoj 
 
 And then wil 
 Illinois. Already ' 
 one argument and 
 
 There will he 
 shall not have a 
 be a thunderous <! 
 
 Every constit 
 matter. Every m 
 
 lUinois State : 
 
 The Insurant 
 adoption of the 
 surance Superi 
 ments are ineff; 
 trol or adminls 
 Is clearly expre: 
 ber 24th issue > 
 journal publisli 
 organ of the fii 
 ness in Illinois. 
 mended, it mak. 
 
 Stat 
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 Inefficiently ; 
 be much of 
 with collectln; 
 Until the gov 
 in a much mc 
 the people wi 
 akin to it. 
 
 This Journal alt 
 lieve that think 
 our inefficient 
 the vast insura 
 
 This defense 
 ever been urged 
 only false, but 
 our republican i 
 
 The operatic 
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 our people; and 
 that has caused 
 state governmei 
 the trusts, and 
 quickly vanish. 
 
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Register, Springfield, 111. (Democratic.) 
 
 ;e "combine" is urging as its defense to the 
 remedial legislation recommended by In- 
 ntendent Potts, that all "state govern- 
 cient," and inherently incompetent to cen- 
 ter systems of insurance. This sentiment 
 3sed in an article appearing in the Decem- 
 3f the Western Underwriter, an insurance 
 ed in Chicago, and the recognized official 
 e insurance interests controlling the busi- 
 In discussing the reform measures recom- 
 ?s the following statement: 
 
 e Governments Are Inefficient. 
 
 hat most of the state governments are 
 md extravagantly managed would not 
 i recommendation for entrusting them 
 J and distributing vast insurance funds, 
 srnments of the states are administered 
 re satisfatcory way, it is not likely that 
 11 listen to state insurance or anything 
 
 ;o editorially states that "We do not be- 
 ing people would be willing to entrust to 
 state governments the administration of 
 nee fund." 
 
 is in keeping with the defenses that have 
 by all trusts, and these charges are not 
 un-American, and a vicious attack upon 
 orm of government. 
 
 n of "trusts" have always been a bar- 
 srnmental progress; combinations in re- 
 constitute the agencies cf oppression of 
 it is the corrupt use of corporate money 
 any inefficiency that may exist in any 
 it. Eliminate the pernicious influence of 
 inefficiency in a state government will 
 
 f Illinois are big enough, and our state 
 imply competent to control or adminis- 
 f insurance that can be furnished by any 
 )ns on earth.. From the class of people 
 ar government come our public officials, 
 fficiency should be expected, whether the 
 the people or is employed in piling up 
 rations. 
 
 endations tendered by Superintendent 
 ;ed by all to be sound and of scientific 
 
Stockton, Calif. 
 PM. m. 21. 19C8 
 
 vn»«;:7oi 
 
 921220 
 
 
 / 774 
 
 THE UNIVERSITY OF CALIFORNIA LIBRARY