W. N. JOHNSON 
 
 ERIE, PENNSYLVANIA 
 FEBRUARY 1 . . 1906 
 
 HE INSURANCE 
 
 I TRUST"IIZZ] 
 
 WHAT IT IS AND 
 ITS RELATIONS TO 
 T H E P U B L I C ‘ 
 
» 
 
 "The Insurance Trust 
 
 WHAT IT IS AND HOW THE PUBLIC ARE 
 AFFECTED. © FACTS YOU SHOULD KNOW 
 
 r 
 
 HE disclosures which have attended the 
 recent investigation in New York City by 
 a special committee of the New York legis- 
 lature of the methods of . the life insurance 
 companies, have naturally given rise to 
 inquiries as to the methods of the fire insurance comparics 
 as well. This is the more natural because, notwithstand- 
 ing the fact that practically every property owner in the 
 country is carrying fire insurance, he has but a faint idea 
 of the principles of the business and does not understand 
 why it is not conducted in the same manner as any ether 
 business. Unfortunately for insurer and insured alike, • 
 there is a wide-spread prejudice against fire insurance 
 A'"- companies which ought not to exist. On the contrary, • 
 the relations between the insuring pubKc and the compan- 
 ,^ies should be of a friendly and cordial character, which 
 can only exist when there is a more thorough understand- 
 ing of the fundamental principles of the business and a 
 more general realization of the fact that the methods 
 pursued by the fire insurance companies must be such as 
 will, at the same time, provide for their own stability and 
 secure to their patrons that ABSOLUTE INDEMxNITY 
 which is to be their only protection against financial ruin 
 in case of fire. 
 
 That such friendly relations do not exist is no doubt ® 
 largely due to the fire insurance companies themselves, for 
 they seem to have made no particular effort to enlighten 
 the public as to those matters concerning which it was 
 entitled to full information. The time has come when 
 tliis information should be no longer withheld and it is 
 
 [ Page I 3 
 
the purpose of this article to give tliis information frankly 
 and fairly, so that every policy holder may know whether 
 he has any just cause for complaint because of the manner 
 in which the fire insurance business is being conducted. 
 
 The policy holder should bear in mind : 
 
 1 . That insurance is a tax and that the insurance 
 companies may be regarded as the agents for the collec- 
 tion of that tax in small sums from the many in order to pay 
 it out to the comparatively few who sustain loss by fire. 
 
 2. That the capital which the stock companies 
 adventure in the business is the guaranty which they offer 
 to the public as an evidence of their ability to promptly 
 pay all losses for which they may be liable. 
 
 3. That the insurance companies must ©ollect an 
 amount sufficient to pay all losses, all expenses incurred 
 in transacting the business, together with a reasonable 
 profit upon their capital invested, or they will be com- 
 pelled to retire from the business. 
 
 4. That it is of the first importance to the policy 
 holder, therefore, that adequate rates upon all classes of 
 property should be collected by the companies, otherwise 
 he may find his policy worthless in event of his property 
 being destroyed by fire. It is almost of equal importance 
 that the rates of insurance shall be no higher than the 
 experience of the companies has shown to be fair, and 
 that there shall be no discrimination whereby he is made 
 to pay a higher rate than his neighbor upon exactly the 
 same character of risk. 
 
 It must be apparent that the cost of insurance to the 
 policy holder will necessarily be higher when the losses 
 are heavy and the expenses of transacting the business 
 large, than it will be when the losses are light and the 
 expenses moderate. In this connection it is proper to 
 consider the question whether the rates or cost of insur- 
 ance are unfairly and extortionately increased by a com- 
 bination, constituting what is popularly believed to be 
 
 I Page 2 ] 
 
“AN INSURANCE TRUST.” 
 
 A “ Trust,” in the popular sense, is a combination of 
 persons or corporations formed for the purpose of stifling 
 competition and establishing a monopoly of the article, 
 commodity or thing to be produced, manufactured or sold, 
 so that unreasonable and exorbitant prices may be 
 charged, to the detriment and injury of the public. 
 
 In order that a combination of fire insurance interests 
 may be formed, whereby rates of insurance can be fixed 
 and maintained without regard to whether they are just 
 and equitable, it is necessary that all, or nearly all, of the 
 companies engaged in doing a general business should 
 enter such combination. Unless a sufficient number of 
 companies can be induced to combine to pradtically 
 prevent competition, it is impossible to “corner the mar- 
 ket” so as to control the business and maintain an 
 exorbitant tariff of rates. The difficulty, if not the impos- 
 sibility of forming such a combination may be appreciated 
 when it is understood that there are three classes of com- 
 petitors for the business, and that the interests of each 
 absolutely conflicTc with those of the other two. These 
 competitors are the stock companies, the mutuals and the 
 Lloyds. The stock companies do not now and never 
 have agreed among themselves as to rates and many 
 other things, as will be hereafter shown. The mutuals 
 are organized and operated upon the fundamental idea 
 that they can furnish their members with insurance at less 
 cost than the stock companies charge. The Lloyds are 
 often — though not always^ — managed by designing men 
 for their own gain, who are guerillas in the business, com- 
 peting with both stock and mutual companies for business 
 at any rate which will secureit, without regard to whether 
 their losses are paid or not. 
 
 During the past year there were 225 stock companies 
 operating in the United States, not all in any one state. 
 
 ( Page 3 1 
 
but all ready to do so if the conditions had been favor- 
 able to their doing so at a profit. 
 
 The actual number of mutuals cannot be stated with- 
 out a careful compilation of statistics, but at a conservative 
 estimate they must more than double the number of stock 
 companies. 
 
 The Lloyds and their kindred are constantly changing 
 in number, name and location, as circumstances may be 
 more or less favorable to their peculiar methods of opera- 
 tion. At the close of 1 902 there were 40 known con- 
 cerns, while at the close of 1904 they had inaeased 
 to 100. 
 
 Besides the competitors named above, there were 
 1 5 1 unlicensed stock companies in the field during the 
 past year, seeking such business as could be secured 
 through the inducement of large reductions from the rates 
 offered by the authorized stock companies. 
 
 With this array of competitors, aggregating over one 
 thousand in number and representing CONFLICTING 
 INTERESTS, it must be apparent that the people have 
 little occasion to fear the organization of an “Insurance 
 Trust.’* While this fact must be clear to every intelligent 
 man, there is, nevertheless, some occasion for the appre- 
 hension of the public that a combination does, in fact, 
 exist:, which establishes and maintains rates that are exces- 
 sive and inequitable. There are associations in the East 
 South, West, and on the Pacific Coast which do many 
 things not fully understood by the property owners and 
 others affected by their operations, but concerning which 
 it is for the interest of all, both the associated companies 
 and their patrons, that the actual facts should be known. 
 
 As prelimmary to a statement of the purposes of these 
 organizations or associations, it should be understood that 
 after the great Chicago and Boston fires, an association 
 of the surviving companies was formed and operated for 
 a number of years for the purpose of maintaining such 
 
 I Page 4 ] 
 
rates as would recoup them for the heavy losses they 
 had sustained, as well as to enable them to accumulate 
 a surplus which should be found a bulwark of strength 
 and protection to their policy holders whenever future 
 great conflagrations should again test their resources. The 
 methods of this association were not entirely satisfactory 
 and, after a few years, it ceased to exist. Thereafter 
 such utter demoralization prevailed that the stability of 
 the companies was most seriously threatened. In 1879 
 the situation had become so grave in the field commonly 
 known as the Western States that a meeting of the 
 managers of the companies operating therein was called 
 and an association was formed which has existed from 
 that time to the present, and as a statement of its purposes 
 will apply equally to other similar organizations in other 
 parts of the country, reference will here be made only 
 to the association so formed and known as 
 
 “THE union;’ 
 
 This association was formed to meet a crisis in the 
 insurance business, when the conditions brought about 
 by unreasoning competition had caused the failure or 
 retirement of many companies and imperilled the very 
 existence of many others. Rates had been reduced 
 below the paying point, while the expenses of the busi- 
 ness had been enormously increased. Realizing that if 
 the insurance companies were to survive and continue 
 to meet their loss obligations reforms must be promptly 
 instituted, these managers, representing less than one half 
 of all of the companies engaged in business in the West, 
 courageously resolved to devote their energies to restoring 
 the business to a sound financial basis and to regaining 
 the confidence and respect of the public, which had well 
 nigh been lost, 'i his association, thus organized, has 
 been in operation ever since and during the twenty-six 
 years of its existence has been and still is the exponent 
 
 [ Page 5 J 
 
of everything which conduces to sound and healthy under- 
 writing. It cannot claim to have made no mistakes, but 
 it has always had in view these fundamental ideas : 
 
 1. Absolute Indemnity to Policy Holders. 
 
 This object can only be secured through the observ- 
 ance of correct principles of underwriting and the 
 maintenance of rates upon a basis which will produce a 
 sufficient amount of premiums to enable the companies to 
 pay accruing losses, the necessary cost of operation, a fair 
 profit upon the capital invested and, above all, the gradual 
 accumulation of a surplus against that “Rainy Day” 
 which must surely come, when the companies will be 
 again called upon to meet excessive losses in some great 
 conflagration like that of Chicago or Boston, or more 
 recently that of Baltimore or Toronto. THE UNION 
 accordingly maintains a “ Classification Bureau,” by means 
 of which the individual experience of the associated com- 
 ^panies is assembled and tabulated for the common good. 
 In no other way could this important information be 
 obtained and utilized. For many years each company 
 has jealously guarded its own “ Experience or Classifica- 
 tion Tables” as a trade secret, and until this Classification 
 Bureau was established it was impossible to base the rates 
 upon the various classes of risks on the general and 
 average experience of a large number of companies. 
 Now the cost of carrying every class of risk can be ascer- 
 tained and rates fixed by careful and scientific methods 
 in accordance with the average results thus ascertained, 
 and a corps of experts is maintained for the purpose of 
 preparing rating schedules upon the various classes of 
 insurable property based upon such experience. 
 
 2. Economy in Management. 
 
 When the operating expenses can be reduced, the 
 rates of insurance can be correspondingly lowered. Before 
 
 [ Page 6 ] 
 
the organization of THE UNION every company engaged 
 in a general business was obliged to maintain its own corps 
 of field men for the purpose of fixing its own rates, sur- 
 veying and inspecting its own risks, making its own maps 
 and diagrams and performing the other duties incident to 
 the business. The expenses in proportion to receipts were 
 excessive and the results obtained were never entirely 
 satisfactory. By association THE UNION has substituted 
 for the cumbersome, expensive and unsatisfactory methods 
 of former years many reforms which, while reducing 
 expenses, have greatly improved the efficiency of the 
 service rendered and have been of immense benefit to 
 the public as well. It has been able to and does do 
 many things v/hich were impossible of accomplishment 
 without such association and co-operation. In addition 
 to its Classification Bureau with its scientifically prepared 
 schedules, it recommends uniform practices in the manner 
 of conducting the business and concurrent forms of policies 
 upon important individual risks ; it maintains an “ Under- 
 writers’ Laboratory” wherein practical tests are made of 
 the fire resisting qualities of the various building materials 
 and their relative desirability as such, and there inspec- 
 tions are had and tests made of heating and lighting 
 devices with a view to establishing rules, regulations and 
 Kecom*mendations for their installation and use, .as well as 
 to determine the character and possible danger of the 
 materials employed in producing heat and light thereby ; 
 it maintains a corps of experts whose duty it is to prepare 
 plans and specifications for property owners who desire 
 to equip their buildings or plants with efficient sprinkler 
 systems, together with estimates of cost of the same and 
 the probable reduction of rates upon buildings and plants 
 thus equipped, and also to make periodical inspections of 
 all such buildings and plants for the purpose of seeing 
 that such equipments are maintained in efficient condition ; 
 it has its own “ Inspection Bureau ” whereby various risks 
 
 I Page 7 ) 
 
are inspected, their construction, occupancy, external and 
 internal hazards and fire protection ascertained, investiga- 
 tions made as to the extent and efficiency of fire depart- 
 ments and water supply, character of streets and other 
 important matters incident to the prevention or suppres- 
 sion of fires and the extent of the conflagration hazard, 
 if any, of the cities and towns thus inspected. It also 
 employs its own electrical engineers for the purpose of 
 inspecting and reporting upon defects in electrical equip- 
 ment in the various buildings in each city and town within 
 its jurisdiction, and WHENEVER NOT PROHIBITED BY 
 LAW, it employs skilled and experienced men to apply 
 the various rating schedules for the purpose of establishing 
 fair, just and equitable rates upon all classes of properly 
 within its jurisdiction. 
 
 In one direction the efforts of THE UNION to benefit 
 the public by economy in management have signally 
 failed. At the time of its organization and for many 
 years thereafter one of its cardinal rules was that no agent 
 should be allowed more than fifteen per cent commission 
 upon the premiums received by him upon any class of 
 property. Competing companies, outside of THE UNION, 
 speedily took advantage of this rule by agreeing to pay 
 to agents representing Union companies greater commis- 
 sion than fifteen per cent, and by that means secured a 
 large amount of desirable business which had hitherto 
 been written by Union companies, or which would have 
 been so written, if the agents had not been induced to 
 place the insurance where they could procure the great- 
 est compensation therefor. For over eighteen years the 
 Union companies endured this unequal competition, 
 endeavoring to maintain the principle that the public 
 should not be required to pay excessive commission 
 charges to agents, and believing that 15 per cent was 
 ample remuneration to the agent for the services rendered. 
 During this time several states passed laws which 
 
 [ Page 8 I 
 
prohibited insurance companies from agreeii>g upon the 
 amount of commissions to be paid to agents.^ Being 
 restrained by law in some states from agreeing to hold 
 agents’ commissions within reasonable bounds, and having 
 sustained serious losses in premium receipts in the entire 
 field because of this attitude, THE UNION has been 
 reluctantly obliged to recede from its position and admit 
 that unless it can have the co-operation of those most 
 intimately concerned — the insuring public — it cannot 
 keep this important item of expense within the limits 
 which it regards as reasonable. 
 
 3. Reduction in the Fire Waste. 
 
 The destruction of valuable property by fire is a 
 public calamity, whether the immediate loss falls upon 
 the individual owner or upon the insurance companies. 
 It is the absolute destruction of material wealth and value. 
 The annual fire waste in the United States is enormous 
 and whatever can be done to reduce or prevent this 
 destruction of property values operates for the benefit of 
 the public. Property owners could well afford to pay 
 double the present insurance tax if thereby they could 
 purchase ABSOLUTE IMMUNITY FROM FIRE, instead 
 of being INDEMNIFIED FOR LOSSES WHICH THEY 
 SUSTAIN BY FIRE. THE UNION has not confined its 
 energies to the narrow limits of ensuring the stability and 
 undoubted strength of its associated companies, but has 
 devoted much time and incurred much expense in efforts 
 to minimize the fire hazard in every city and town in its 
 jurisdiction, realizing that its peculiar relations to the public 
 enabled it to promote this object when the municipal 
 authorities were apathetic or absolutely insensible to the 
 necessity for efforts in this direction. 
 
 It has, therefore, encouraged the application of its 
 carefully prepared schedules in the rating of insurable 
 property throughout the territory within its jurisdiction. 
 
 I Page 9 I 
 
either by its own experienced employes or by indepen- 
 dent experts and rating associations. In no other manner 
 can just and equitable rates be made and proper credits 
 given for improvement in risks or charges made for 
 increase of hazard. Every encouragement is given to 
 each individual property owner to improve his own risk 
 so that he can obtain lower rates ; he is shown how his 
 building is rated and advised as to what he- can do to 
 make it better and safer. Each change for the better 
 thus serves to minimize the fire hazard of surrounding 
 property and so the whole character of a town is gradu-- 
 ally improved. In this manner THE UNION, with its 
 carefully prepared schedules for rating all classes of risks, 
 has done more than all other agencies combined to 
 improve the character of cities and towns, to secure 
 better buildings, to improve old ones, to increase the 
 efficiency of fire departments, to provide better water 
 supply with larger mains, to improve streets and alleys, 
 to reduce the possibilities of fire, to increase the facilities 
 for fighting the same and to minimize the conflagration 
 hazard which is present in a greater or less degree in 
 every city and town. THE] UNION has accomplished 
 so much good in this direction, by making discriminating 
 charges for deficiencies and credits for improvements, as 
 to be entitled to the confidence, respect and encourage- 
 ment of property owners and the public everywhere. 
 
 The general conflagrations at Baltimore, Rochester, 
 Toronto and other places during the year 1904 have 
 directed the attention of THE UNION to the alarming 
 fact that conditions similar to those which contributed to 
 the widespread and destructive fires at those places 
 exist in other cities. These conditions generally consist 
 of poorly constructed buildings with dangerous occupancy, 
 unprotected openings in rear and side walls, inadequate 
 fire department and insufficient water supply and, while 
 confined to limited areas, they make it possible for a fire 
 
 [ Pase IQ ] 
 
to speedily get beyond control and sweep everything 
 before it. There never having been any adequate effort 
 made upon the part of municipal authorities in any city to 
 remedy these conditions which imperil the vast property 
 values therein, THE UNION has conceived it to be a 
 duty it owes to the public to ascertain where these con- 
 ditions exist, designate the particular localities where they 
 may be found, specify what they are and what must be 
 done to eliminate them entirely or to improve them as much 
 as possible, at the same time advising the proper officials 
 of such betterments as seem to be necessary in the way 
 of fire apparatus, water mains or water supply and show- 
 ing individual property owners how their own buildings 
 can be improved and made reasonably secure against 
 fire, either within or without. With this purpose in view, 
 it has, through its committees and trained experts, been 
 engaged during the past year and Is now engaged in this 
 important work. These localities presenting unusual faci- 
 lities for breeding uncontrollable fires, for which no provi- 
 sion has been made in existing rating schedules, it has 
 been found necessary to take account of the same by 
 proper “ conflagration charges,” but as it is the desire 
 rather to reduce this conflagration hazard, than to increase 
 the rates, a reasonable time is always given for the requisite 
 improvements to be made, before such charges go into 
 effect. As THE UNION has no other means of securing 
 this much needed improvement in the conflagration breed- 
 ing centres of the various cities, it increases the rates upon 
 individual risks within the designated limits, if the stipu- 
 lated requirements are not complied with within a specified 
 time. Among the many objects which have the attention 
 of THE UNION there is none which has been, or will 
 be so Important a factor in the gradual elimination of this 
 great menace to life and property in m.any cities, as its 
 efforts to regulate and control the conflagration hazard. 
 
 [ Page 11 1 
 
4. Equitable Rates. 
 
 Without equitable rates the burden of the msurance 
 tax will be unequally distributed ; some property owners 
 bearing more and others less than their fair share of 
 the burden. 
 
 For many years the practice was to have rates estab- 
 lished by local agents, a practice open to two very 
 serious objections — first, because the local agents could 
 not have the experience or the knowledge requisite to 
 determine whether rates were correctly assessed or not ; 
 second, because the rate makers often were influenced by 
 self-interest, partiality and prejudice, so that discriminations 
 in rates were the almost universal and inevitable result. 
 Recognizing the frequent injustice to property owners of 
 this method of rating, THE UNION has advocated the 
 making of rates by persons employed especially for that 
 purpose, having no personal interest and therefore, being 
 enabled to apply the schedules prepared by THE UNION 
 impartially and “without fear or favor” to all property 
 alike. In this manner THE UNION has been enabled to 
 more generally establish equitable rates than under any 
 other plan, and while it cannot be claimed that the results 
 are now always satisfactory, they certainly are much more 
 so than before the formation of THE UNION. Without 
 such organization each company would be governed by 
 its own experience only in the matter of fixing rates, each 
 one would be obliged to employ its own corps of experts, 
 largely in excess of the number now employed, for the 
 sole purpose of inspecting and rating every risk within the 
 territory in which it transacts business, thereby enormously 
 increasing the cost of doing the business, while the rates 
 of no two companies would be alike, and the difficulties 
 and perplexities of writing insurance would be incalculably 
 enhanced. 
 
 It is only proper, in this connection, to consider the 
 I Page 12 ] 
 
advantages of such an organization to the assured as well. 
 It is manifest that whatever enhances the cost of doing 
 the business must necessarily enhance the cost of insur- 
 ance to the property owner and, conversely, if the cost 
 of doing the business is materially reduced by organized 
 effort, the property owner is benefited by a correspond- 
 ing reduction in rate. It is important to him — especially 
 if the value of his property is large — that the rates are 
 BOTH UNIFORM AND STABLE, which cannot be if 
 the companies are not permitted to base their rates upon 
 their united experience, employing a few competent men 
 to apply such schedules based upon such average experi- 
 ence, rather than an army of men who would otherwise 
 be employed to fix rates based upon limited individual 
 experience. It is also of the greatest Importance that his 
 policies be concurrent and the forms prepared by com- 
 petent men and thorough underwriters, fitted by txalning 
 and education to properly draw important.contracts, involv- 
 ing material Interests, Unless companies can co-operate 
 in this matter of drafting concurrent forms, the policy 
 holder is sure to have trouble in event of loss, because of 
 the impossibility of reconciling differences between the 
 companies, even if he does not find that considerable 
 property values have been omitted entirely from the 
 protection of his policies on account of imperfect descrip- 
 tion or otherwise. For these reasons the assured is 
 relatively as much benefited as are the companies, by an 
 association having for its object the fixing of fair and 
 equitable rates, the drafting of proper policy contracts 
 and the observance of correct underwriting principles. 
 
 
 [ Page 13 ] 
 
Competition of Companies 
 
 NOT MEMBERS OF THE UNION 
 
 HE number of companies which are not 
 members of THE UNION far exceed those 
 within that organization. Of this very large 
 number of what may be termed non-affili- 
 ating companies, a very considerable num- 
 ber are equally as strong and responsible as many of 
 the Union companies and offer to the property owner 
 the most undoubted indemnity against loss by fire. These 
 companies, while preserving their independence and differ- 
 ing in some essential particular from the principles and 
 methods adopted by THE UNION, nevertheless usually 
 cooperate with that organization in the observance of 
 correct underwriting practices and adhere to the tariff 
 rates at all important points, sharing also to some extent 
 in the cost of maintaining independent tariff associations 
 and rating bureaus, by subscribing to the rates established 
 by such agencies. Aside from these reliable companies, 
 there is a horde of others, stock, mutual and Lloyds, 
 competing for business upon any terms which will pro- 
 cure it. Bearmg no share of the expense incurred by 
 the Union companies for classification, surveys, inspec- 
 tions, ratings and other matters essential to the intelligent 
 and proper conduct of the business, they nevertheless 
 derive as much benefit therefrom as do the Union com- 
 panies. Sharing in none of this cost, they are in position 
 to and do sell their policies at less cost and thereby 
 induce many people to believe that if it was not for their 
 competition the great Insurance Trust” would m.ake the 
 rates of insurance still more extortionate. Instead of this 
 being true, if the costs of classification, surveys, inspec- 
 tions and ratings were shared equally by all of the com- 
 panies, the rates could and would be less than they now 
 I Pace 14 ] 
 
are. This element of cost must enter Into the considera- 
 tion of rates and whatever the average reduction in cost 
 would be on account of increased contribution, such reduc- 
 tion would appear as a saving in rate. 
 
 At present many property owners buy inferior indem- 
 nity because it is cheap and being induced to do so by 
 the belief that the rates established by the leading 
 companies are unfair and exorbitant. Such was the 
 general impression which prevailed at Baltimore a short 
 time before the great conflagration and the citizens had 
 called a meeting for the purpose of protesting against the 
 rates then in force. The date of the meeting found the 
 city fire-swept and the rate question had been settled by 
 the most convincing of all arguments. The companies 
 which had irisisted upon adequate rates paid to their 
 policy holders over Thirty-two Million Dollars, while 
 those who bought cheap insurance are still fruitlessly 
 endeavoring to collect over Four Hundred Thousand 
 Dollars from companies whose policies had been pur- 
 chased at less than the tariff rates. 
 
The Effect of Adverse Laws 
 
 VERY law which is enacted, having for 
 its purpose the restriction of fire insurance 
 companies in the conduct of their business, 
 or which increases the taxes they are 
 required to pay, the expenses of operation 
 or the losses they sustain, is a law which reacts on the 
 property owner in the way of increased cost of insurance, 
 for the very simple reason that INSURANCE IS MUTUAL 
 IN PRINCIPLE, even when conducted by stock com- 
 panies. 
 
 The following laws always add to the cost of the 
 business and consequently to the cost of insurance pur- 
 chased by the property owner. 
 
 The Valued Policy Law. A law has been 
 enacted in a number of states which requires an insurance 
 company to pay the full amount of insurance upon prop- 
 erty which has been totally destroyed by fire, even if the 
 value of the property so destroyed is much less than the 
 amount of the insurance thereon. Such a law is an 
 incentive to crime. It invites incendiarism and the grossest 
 kind of fraud and the insurance companies are powerless 
 to prevent it. In every state where this law has been 
 enacted it has been denounced by the state officials in 
 unmeasured terms. 
 
 The Insurance Commissioner of Wisconsm says : 
 
 “ The valued policy law in this state, as in all 
 “ other states in which it has been tried, has 
 ** been the means of increasing losses, and plac- 
 “ing a premium on incendiarism. The very 
 “foundation principles of fire insurance are 
 “opposed to such a law. ‘Fire insurance is 
 “indemnity; it should never be gain*; it is 
 “intended only to make good the actual loss 
 “ sustained, and to make a company liable, in 
 
 l Pas« 16 ] 
 
“ case of total loss, for the full face of the policy, 
 “irrespective of the value of the property, has 
 “ been the means of increasing the number of 
 , “ fires, and compelled the payment of thousands 
 
 “ of dollars, thus increasing the rates to honest 
 “men. Such laws, together with high taxes 
 “ have prevented many companies from entering 
 “ the state and giving our people the benefit of 
 “ competition.” 
 
 The Insurance Commissioner of Massachusetts char- 
 acterizes such a law as 
 
 “ hateful to good morals and offensive to public 
 “ policy, because a temptation to social crime.” 
 
 Governor Pattison of Pennsylvania, in vetoing a valued 
 policy law passed by that state, said, 
 
 “ Overinsurance and overvaluation are con- 
 “ducive to fraud, perjury and arson; they 
 “ breed crime — the most dangerous and 
 “ demoralizing. Commonwealths, which in 
 “obedience to a false public clamor, have 
 “ ingrafted a contrary principle upon their 
 “insurance laws, have reaped the whirlwind, 
 
 “ and in the end honest insurers will have to 
 “ pay the penalty of largely increased rates.” 
 
 Governor Altgeld of Illinois, in vetoing a similar law 
 said, 
 
 “ Insurance is an indemnity, not a speculation. 
 
 “It is intended to protect a man against loss, 
 
 “not to give him something for nothing. Its 
 “ object is to make a man whole, so that he shall 
 “ be no worse off after a fire than before. The 
 “ principle involved in this bill would enable a 
 “ man, in many cases, to be twice as well off 
 “ after a fire as he was before. In all cases 
 “ where a dishonest man could, by conniving 
 “ with an agent, or in any other way, secure 
 “ insurance for more than the real value of his 
 “ property, a fire would be a blessing to him. 
 
 “ There would be a standing bribe, a per- 
 “petual inducement to allow his property to 
 “ bum down — I will not say to have it burn 
 
 I Page 17 I 
 
“dov/n — and when it is remembered that a 
 “fire in one building always endangers 2 uid 
 “ frequently destroys property near by, which 
 “ often is not insured, it v/ould be bad policy 
 “ for the State to permit a condition of affairs 
 “to exist, which, to say the least, tended to 
 “ increase fires.” 
 
 The Insurance Commissioner of Ohio says: 
 
 “To say that fires have steadily increased since 
 “ the enactment of this obnoxious law is to put 
 “it mildly. * * fr is an open bid for 
 
 “arson. The Legislature of Ohio ought to 
 “ have repealed the law years ago. I do not 
 “regard it as a desirable lav/ to have upon 
 “ the statute books. The rates have steadily 
 “increased since the enactment of this law, 
 “clearly showing that honest people, in the 
 “ end, are compelled to pay for the dishonest 
 losses. 
 
 The baleful effects of this law in Ohio may be 
 appreciated by reading the following extract from the 
 official report of the Fire Marshal of that state for 1903. 
 He says: 
 
 “ The losses from incendiary fires for the last 
 “year are estimated at $800,000, a part of 
 “the fires reported as from unknov/n causes 
 “ being charged to arson. The motives behind 
 “these incendiary fires were: To defraud 
 
 “insurance companies, 468; malice, 110; 
 “mischievous boys, 36; pyromaniacs, 29; 
 “intoxication, 28; to avoid or secure work, 
 
 “18; total, 689.” 
 
 NOTE: The $800,000 of incendiary loss is for the year 1903, whfle 
 the 689 incendiary fires occurred during a period of three years. 
 
 , i^Anti-Compact LuJP. A law which prohibits 
 companies from co-operating in the collection of statistics 
 with reference to losses and the cost of insuring various 
 classes of property, or in the preparation of rating sched- 
 ules based upon such experience, or which prevents the 
 companies from agreeing upon the rates which may be 
 determined under and by such schedules, or which 
 
 [ Page 18 ] 
 
prohibits the companies from agreeing upon the amount of 
 commissions or compensation to be paid to local agents, 
 is a law which might well be entitled “An Act to 
 Increase the Cost of Insurance and to Prevent the 
 Reduction of the Fire Hazard.”^ Such a law, in its final 
 results, will prove as prejudicial to the citizen as has the 
 valued policy law. If the insuring public are to obtain 
 equitable rates of insurance, the insurance companies must 
 be permitted to combine their experience in order to 
 arrive at the average cost of carrying every kind of risk. 
 Insurance is unlike any other business and there is no 
 criterion for determining the proper rate upon any risk 
 except by comparing it with similar risks which have been 
 insured in the past, and the larger the number of such 
 risks which can be aggregated for comparison, the more 
 nearly an equitable rate can be ascertained. The experi- 
 ence of one company will not do, for it will have written 
 comparatively few of the class, and it may have a very 
 sKght loss ratio or it may have an extremely heavy 
 one. [ Obviously, insurance must be based on the law of 
 average, and if the companies are not permitted to 
 assemble their experience tables in order to ascertain the 
 general average upon each class, the business becomes 
 one of guesswork instead of science. Besides this, the 
 natural and practical result of combmation and collab- 
 oration of insurance companies is to encourage the 
 improvement of buildings, to secure the adequacy of 
 water supply, the efficiency of fire departments and the 
 improvement of streets, giving credit in the way of 
 reduced rates for every improvement made. If com- 
 panies are not permitted to agree upon such credits there 
 will be no inducement to make these improvements and 
 cities and towns will continue to be subject to the 
 ravages of fires. The valuable assistance which fire insur- 
 ance companies have rendered in the gradual improvement 
 of various cities and towns has been repeatedly demon- 
 strated during the past few years. 
 
 [ Page 19 J 
 
Anti-Co-insurance Law. A law which pro- 
 hibits a fire insurance company from agreeing with a 
 pdicy holder that he will, in consideration of a reduction 
 in the rate of insurance, maintain a certain amount of 
 insurance upon his property in proportion to its value, 
 infringes upon his liberty as a citizen by depriving him 
 of the right to make any contract he desires, so long 
 as he does not infringe upon the rights of others. A 
 co-insurance clause is not operative in case of a total 
 loss. The large majority of fires cause but partial loss 
 to the property imperiled. If full insurance is carried on 
 all property which sustains loss by fire, the average loss 
 per $1,000 involved will be much less than if a small 
 amount of insurance is carried. As the possibility of a 
 total loss to the insurer increases, so must his rate of pre- 
 mium increase to provide for such increased possibility of 
 loss. If the total value of a certain class of risk amounts 
 to $2,000,000, upon which there is an average loss of 
 $20,000, this entire property should produce sufficient 
 premiums to pay this annual loss charge. If full insurance 
 of $2,000,000 is carried, the rate would be 1 per cent 
 
 and the premium would be $20,000. 
 
 If 60 per cent of insurance or $1 ,600,000 is carried, 
 the rate would be 1 % per cent and the premium would 
 be $20,000. 
 
 If 60 per cent of insurance or $ 1 ,200,000 is carried, 
 the rate would be 1 ^ per cent and the premium would 
 be $20,000. 
 
 It will readily appear from the foregoing that it is 
 
 impossible to determine what rate of premium should be 
 charged, unless the approximate amount of insurance to 
 value is also known and it is also apparent why it is pos- 
 sible to give to the assured a reduction in rate, providing 
 he will agree to maintain a certain amount of insurance 
 upon his property. Having his option whether he will 
 accept the condition in consideration of the reduced rate. 
 
 F Page 20 1 
 
or pay a higher rate without Si, diere is no just reason 
 why he should be deprived of that right by law. 
 
 Taxation. A law which imposes a tax upon the 
 gross premium receipts of fire insurance companies is a law 
 which, indirectly, imposes a tax for an equal or greater 
 amount upon the property, owners of the state. This sub- 
 ject was fully treated in a recent letter from the President 
 of THE UNION to Hon. Hemy R. Prewitt, Insurance 
 Commissioner of Kentucky, and as what was there said 
 applies with equal force to fire insurance taxation every- 
 where, the following extract is made from said letter : 
 “Your present fees and taxes — state and muni- 
 “cipal — aggregate 3.71 per cent upon the 
 “ gross premium receipts, a discrimination against 
 “ the insurance companies which is prac- 
 “ ticed against no other taxpayers, corporate 
 “ or individual. What would be thought of a 
 “ proposition to tax a merchant upon his gross 
 “ sales without allowing any deduction for cost 
 “ of merchandise sold or expenses of his 
 “business? Yet your state taxes the com- 
 “panies 3.71 per cent UPON EVERY 
 “DOLLAR WHICH THEY HAVE PAID 
 “OUT TO YOUR CITIZENS FOR LOSSES 
 “AND EXPENSES. 
 
 “During the past 13 years the premium receipts in 
 “Kentucky of stock fire insurance companies have 
 “ amounted to . . . $4 1 ,2 1 6, 1 02 
 
 “ Losses have amounted to $23,692,739 
 “ Expenses (not including 
 
 taxes) 13,609,557 37,302,296 
 
 “ Leaving, after deducting 
 losses and expenses, 
 
 the sum of . . . 3,913,806 
 
 ** Upon which the state 
 and municipal taxes 
 
 and fees have been 1 ,529, 1 1 7 
 
 “or 39 PER CENT UPON THE NET INCOME. 
 “The companies have remaining the munifi- 
 “ cent sum of $2,384,689 as the results of the 
 “ operations of 1 3 years, which divided among 
 “ the 115 companies now doing business in 
 “ your state, would afford an annual profit of 
 “$1,595 to each company.” 
 
 [ Page 21 J 
 
“This method of taxation upon the basis 
 of gross premiums, when analyzed, comes 
 pretty near to confiscation, as you will see. 
 All that is needed to make the transactbn 
 complete is to so amend your laws that the 
 companies shall pay the balance to the state 
 of Kentucky and its various municipal corpor- 
 ations. If a tax of 39 per cent upon net 
 income is justified, then there is no reason 
 why your state should not take it all. I do 
 not overlook the fact that other states have 
 adopted the same manner of taxation as has 
 Kentucky, but that only serves to emphasize 
 the unreasoning prejudice which has marked 
 the legislation of many of the states when 
 dealing with a class of corporations which has 
 become absolutely essential to the success and 
 prosperity of any state. But if your legida- 
 tors and statesmen are seeking for meaRS 
 whereby the rates of insurance may be 
 resduced and its cost to your property owners 
 lessened, they might ^vell ask themselves this 
 serious question: ‘ Why should a business, 
 
 which is of absolute necessity to every 
 merchant, busmess man, manufacturer or 
 owner of property, real or personal, within 
 our state ; which daily and hourly stands 
 between some of our citizens and absolute 
 ruin; which preserves the merchant’s credit 
 and without which our modern business 
 methods would stagnate ; which now is 
 the very keystone of their prosperity; why 
 should this business be singled out for 
 this unjust discriminative taxation’ ? No other 
 business could or would submit to an income 
 tax for any amount, much less one amounting 
 to over one-third of the same. If the injustice 
 of the discrimination does not appeal to your 
 legislators, they should bear in mind that this 
 imposition must eventually fall upon the citi- 
 zens of the state in the way of an increase 
 in rates.” 
 
SOME MISTAKEN IDEAS 
 
 1 . The idea that the difference between the pre- 
 miums received and the losses paid is all clear profit. 
 The average loss ratio for the past ten years has been 
 56.7 per cent, and the expense ratio 37.3 per cent, so 
 that after paying losses and expenses the companies have 
 6 per cent remaining, out of which to pay losses on out- 
 standing policies ranging in term from one day to five 
 years ; dividends upon capital invested, and contribution 
 to the surplus which they should accumulate against the 
 “Rainy Day” which MUST BE RECKONED UPON. 
 In the ten years ending December 31,1 904, the actual 
 underwriting profits of 144 leading fire insurance com- 
 panies amounted to 56-100 of one per cent, or in actual 
 figures to $8,682,598, divided among 144 companies 
 as the net result of ten years’ business, or an average of 
 $6,030 per annum for each company. 
 
 2. The idea that dividends declared by the leading 
 companies are excessive. If a company is reported to 
 have declared a dividend of 20 or 30 per cent, it must 
 not be assumed that such dividend is excessive, for the 
 reason that the stockholders have invested, not only the 
 capital, but every dollar of assets as well. One of the 
 leading companies has a capital of $ 1 ,000,000, while its 
 total assets amount to the sum of $ 1 6,000,000, so that 
 the stockholders have invested sixteen times the amount 
 of the capital, and ai^ entitled to the earnings on the 
 entire assets, just as much as they are upon the earnings 
 of the capital first invested. A dividend of 30 per cent 
 upon the capital stock, therefore, amounts to but 1 Yl per 
 cent upon the assets. Stock of this company has just sold 
 in open market for $1,371 per share, so that a dividend 
 of $30 per share would mean a dividend of a little over 
 2 per cent upon the amount paid per share. 
 
 i Page 23 ] 
 
REMEMBER 
 
 That Insurance is Mutual in Principle and being so 
 ?OUR interests and those of the companies with which 
 
 insure are mutual. 
 
 That an insurance contract is one demanding absolute 
 good faith on both sides. 
 
 That if YOU are unfortunate enough to have a lo^ 
 by fire, the BEST insurance is NONE TOO GOOD. 
 
 ^ That if fire insurance companies do not secure fair 
 rates, they cannot survive great conflagrations.1 Thirty 
 companies failed or retired in 1904, the year of the 
 Baltimore conflagration. 
 
 ^ That rates are highest in those states where the laws 
 are the most oppressive and burdensome and the lowest 
 in those states where the laws are the mildest and most 
 reasonable. 
 
 That the leading fire insurance companies are officered 
 and managed by honest men, who are honestly striving 
 to give YOU the lowest possible rates, consistent with 
 ability to pay every legitimate claim. 
 
 That YOU should read your policy before a fire, so 
 that you may have no cause to complain after a fire that 
 . it does not cover as you intended it should. 
 
 Erie, Pa., February 1, 1906 
 
 [ Pa«a 24 %