WHAT SHOULD BE THE ATTITUDE OF 
 THE STATE TOWARD THE 
 BUSINESS OF FIRE 
 INSURANCE? 
 
 & 
 
 WILLIAM T. EMMET 
 
 Superintendent of Insurance of the State of New York 
 
 Delivered at Meeting of 
 
 National Association of Local Fire Insurance Agents 
 in Cincinnati, Ohio, on October 15, 1913 
 
WHAT SHOULD BE THE ATTITUDE OF THE 
 STATE TOWARD THE BUSINESS 
 OF FIRE INSURANCE ? 
 

1 know of no more interesting present-day problem than that 
 which has grown out of the efforts that are now being made, in 
 many parts of the United States, to fix and control fire Insurance 
 rates by governmental action. Of course, it is only a single 
 phase of a very large movement that is in progress throughout 
 the civilized world looking toward the strengthening of govern¬ 
 ments in their powers of control over private business. But, 
 from certain points of view, the business of fire insurance seems, 
 in a very particular sense, to be one which can be better con¬ 
 ducted by private individuals than by even the most perfect 
 governmental machinery. It seems to possess certain features 
 which make it a particularly dangerous field for the people in 
 their organized capacity to attempt to enter. A good many kinds 
 of business lend themselves quite easily to the. designs of those 
 who would like to see a socialistic State established here with the 
 least possible delay. The idea of governmental operation pre¬ 
 sents no insurmountable difficulties in a number of cases. But in 
 the case of fire insurance, our present-day reformers and radical 
 thinkers, bent on driving private capital out of the field and 
 leaving this in the exclusive control of government, are confronted 
 upon • the threshold by unusual obstacles which are inherent to 
 the business itself, and few suggestions' have yet been made, of 
 a practical nature, respecting the manner in which these obstacles 
 can be avoided. Notwithstanding all this, however, it is no over¬ 
 statement to say that, at the present time, a very formidable and 
 aggressive movement is on foot, having for its ultimate purpose 
 the virtual transaction of the business of fire insurance by 
 government. 
 
 What is the peculiar feature of the fire insurance business 
 which makes the problem of State participation in this business 
 a more difficult one than the corresponding problem in the case of 
 railroads, for instance, or of water companies, or of telegraph 
 
3 
 
 and telephone companies? Well, broadly speaking, what I refer 
 to is of course the fact that fire insurance has always been, and 
 must always he, to an extent not approached by any other legiti¬ 
 mate business I know of, a game of chance pure and simple — a 
 game of chance in which men who are qualified by temperament 
 and experience to play it, and who are willing to risk their money 
 in it, can survive, hut in which none hut experts can with any 
 safety engage. If it were not that the word has acquired a sort 
 of invidious meaning which makes it unsafe to use it in connec¬ 
 tion with any legitimate business, I should be inclined to use the 
 word “ gambling ” in trying to describe the exact feature of the 
 business of fire insurance that I am referring to. It would be 
 obviously improper, however, to attempt to completely charac¬ 
 terize by any such word a business so beneficial to the entire 
 world as the business of fire insurance is when it is properly con¬ 
 ducted. But that the uncertainties and extraordinary hazards 
 which attach to all games of chance enter into the transaction of 
 this business to a very remarkable degree, cannot be denied. It 
 is this element in fire insurance which seems to require that it 
 shall remain in competent private hands longer than most other 
 kinds of enterprise — for I am assuming that all of us will agree 
 that the State is no fit agency for the transaction of business into 
 which the element of chance and guess-work enters to any abnor¬ 
 mal extent. 
 
 How, of course, the attitude of fire-insurance underwriters 
 toward governmental activities in connection with their business 
 has, to a large degree, been influenced and controlled by the cir¬ 
 cumstances to which I have referred. Broadly speaking, it is a 
 very different attitude indeed from that which has been adopted 
 during recent years by the leaders in the life insurance field. 
 Recognizing, in the first place, that their responsibilities are 
 peculiarly fiduciary in character — recognizing also, the fact that 
 mortality tables have made their business practically an exact 
 science out of which, when properly conducted, the element of 
 chance can be kept entirely — life-insurance men have for some¬ 
 time past treated the whole question of State participation in 
 company affairs as something which is not only inevitable, but, 
 on the whole, desirable and proper. At least, they have not 
 
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4 
 
 bitterly contested the steady growth which has been going on in 
 the powers of supervisory departments. In the case of fire insur¬ 
 ance, on the other hand, nearly every step which has been taken 
 in the direction of an increased governmental control over the 
 business, has been sharply opposed. Particularly has this been 
 true with respect to legislation affecting that most occult and 
 difficult branch of the fire underwriters’ art — namely, the making 
 of rates. With the evident fear present in their minds that even 
 little steps by the iState in that general direction can mean nothing 
 but a dangerous departure toward actual governmental rate¬ 
 making fire underwriters have united, on more than one occasion, 
 in opposition to efforts which legislative committees and insur¬ 
 ance departments have made to ascertain the secrets of fire insur¬ 
 ance rate-making, in so far as these are ascertainable. They have 
 protested that, in the very nature of things, fire insurance rate¬ 
 making cannot be reduced to an exact science, or anything 
 approaching one, and that, therefore, the filing by fire insurance 
 companies of their “ experience ” in tabulated form, according 
 to some uniform system — or any of the other similar suggestions 
 which have been made from time to time — would do more harm 
 than good and would not supply the public with any real informa¬ 
 tion respecting the manner in which fire insurance rates are 
 arrived at. “ These statistics,” say the fire insurance under¬ 
 writers, 66 when kept by ourselves according to our own system — 
 each one of which systems differs materially from the systems 
 employed by others — are of a certain amount of value to us in 
 determining what kinds of business are profitable and what kinds 
 are not, and the information contained in them is used by us 
 more or less in making rates. But they would be absolutely 
 meaningless to the general public. Standing by themselves, they 
 would furnish no real explanation of how we arrive at our rates. 
 In fact, we don’t ourselves know exactly how we do it. What 
 it comes down to is this, that we have spent our lives in the busi¬ 
 ness of fire underwriting, and in consequence are experts in this 
 business — and after we take into account all the statistical ex¬ 
 perience at our disposal, we make up our minds what rates may 
 safely be charged in any line, by simply using the best judgment 
 that we possess. Precisely how we do it, or why we arrive at any 
 
given result, is not susceptible of exact explanation. Rate-mak¬ 
 ing is a fine art, in other words, not an exact science; and the 
 public would only be confused by the filing of the past experience 
 of companies. For that reason, we protest against any such 
 requirement.” 
 
 This, very roughly stated, is the position which the leading 
 men in the fire insurance world have been taking lately in refer¬ 
 ence to the proposal which the Yew York Department advanced 
 about a year ago to the effect that the “ experience ” of the 
 companies should hereafter be filed with the Department as a 
 guide in determining whether in any given case the rates charged 
 were fair. Let me say at once that, personally, I sympathize 
 with their attitude to a very considerable extent, because I have 
 every reason to believe that the distinction which they draw be¬ 
 tween their business, as a highly hazardous calling, and the busi¬ 
 ness of life insurance for instance — from which the element of 
 chance has largely been eliminated — is a very real distinction, and 
 not in the least an imaginary one. But admitting this to be true, 
 we are still confronted with the question, what the proper limits 
 of governmental activity are in connection with this business, 
 and this is the question I am going to try to discuss briefly here 
 to-day. But first let me point out why I think that increased 
 governmental activity in connection with fire insurance rate¬ 
 making is more or less inevitable. Llaving done that, we will 
 take up the further question what line of governmental activity 
 should be followed by self-respecting commonwealths, in reference 
 to this matter, during the coming years. 
 
 In my judgment, increased governmental activity in connection 
 with the fire insurance business is inevitable, for some time to 
 come, in Yew York and elsewhere—if for no other reason 
 because in respect to fire insurance, as in respect to most other 
 kinds of business activity, the world in its progress has left the 
 age of competition behind, and has passed into an era when 
 co-operation, not competition, shall be the controlling watchword. 
 This, of course, is not literally and completely the situation — I 
 am endeavoring merely to describe the tendency and the drift of 
 things. The drift in the fire insurance world has been the same 
 as elsewhere. It has been in the direction of doing away with 
 
the sharp competition which once existed in the business. Now, 
 if there is one thing that can be taken as absolutely settled in 
 connection with the trend of popular thought in this country, it 
 is that the moment competition dies out or languishes in any 
 industry, at that same moment a demand arises that the govern¬ 
 ment shall become active, either in supervising or conducting the 
 business which has ceased to be affected by competition. 
 
 In fire insurance, the companies commenced some years ago to 
 co-operate in the matter of rate-making. They did this by means 
 of variously devised methods of organization suited to the pur¬ 
 pose. In some cases, they subscribed to cables of rates made up 
 by individual experts upon supposedly scientific principles, and 
 agreed to be bound by these rates. In other cases, they organized 
 rate-making bodies of their own. The effect in either case was 
 the same, in that the. throat-cutting competition which once 
 existed virtually came to an end. 
 
 It was inevitable, as I have said, that this tendency should 
 have been met by a stirring up, throughout the United States, of 
 popular interest in the question what effect the new order of 
 things was going to have on fire insurance rates. The different 
 positions which people in different parts of the country, acting- 
 through their legislatures and insurance departments, have been 
 taking on this matter shows — if it shows nothing else — how 
 crude and unsettled popular thought still is on the subject. Cer¬ 
 tainly no adjustment of the situation that can be regarded as in 
 any sense final has been reached anywhere. In some places, the 
 popular view seems to be that this tendency toward co-operative 
 effort upon the part of those engaged in the business of fire insur¬ 
 ance should be combated by every means possible. All combina¬ 
 tions having for their purpose the achievement of uniformity in 
 rates between the companies should, in the opinion of some, be 
 legislated against and broken up. Those who do not desire to 
 compete should be made to compete, whether they wish to or not. 
 If they refuse to compete and try to co-operate, they should be 
 sent to jail and their business should be taken away from them. 
 That, I say, has been the point of view of some. It is not mv 
 point of view. It is not the policy which has found favor in the 
 State of New York. 
 

7 
 
 In Hew York we have concluded, on the whole, that the 
 tendency toward co-operative effort between the companies in the 
 matter of rate-making is, besides being inevitable, a tendency 
 wholly in the right direction. The evils of the old unrestrained 
 competition were many, and the wastefulness of it was great. 
 The effect of it on the solvency of the companies which sold the 
 indispensable commodity of insurance to the public could not help 
 being, in many cases, disastrous. Rate wars led to company fail¬ 
 ures, and company failures led to unsafe insurance. Under the 
 old conditions this was inevitable, and I, for one, hope never to 
 see those so-called “ good old days ” return. 
 
 But, of course, with the passing of competition the people com¬ 
 menced to develop a curiosity, which has ever been growing 
 greater instead of less, as to how the more or less standard rates 
 which they have to pay under the new system, no matter what 
 company they insure in, are arrived at. If a man can go from 
 company to company getting the lowest rate possible for the 
 insurance he requires, he is not apt to care very much how the 
 rate is arrived at. Why ? Because he knows that by virtue of the 
 mere fact that competition exists, he will be able to get as low a 
 rate as can with safety be granted — maybe a lower one. But 
 when competition is eliminated, he has no such comfortable assur¬ 
 ance. In the absence of it, the dread spectre of a grinding and all- 
 powerful monopoly, dictating for purposes of private profit the 
 raising of rates to an exorbitant figure, inevitably takes possession 
 of the average man’s mind. To whom shall he turn for protection, 
 he asks himself. And the answer of course is — to the State. 
 
 Thus in Hew York and elsewhere we were compelled, very 
 shortly after the tendency to which I have referred manifested 
 itself, to consider very carefully the question of the position 
 which the State should take toward these rate-making combina¬ 
 tions. Should we try to break them up by law and restore the 
 old conditions ? Or should we recognize the fact that co-operation 
 as a substitute for competition is both inevitable and desirable, 
 and legalize it under proper restrictions and with proper safe¬ 
 guards ? 
 
 Hew York decided upon the latter plan and, on the whole, I 
 think the results thus far have amply justified us in our choice. 
 
8 
 
 No single State, of course, can deal unaided with the problem 
 of fire insurance rate-making and hope to solve it completely. 
 It depends, in the first place, upon many things which are entirely 
 beyond State control — upon the fundamental morality of people, 
 for instance, and upon special conditions which exist here and 
 there and which no legislation, however well intended, can affect. 
 But beyond all this, rates in any given State are necessarily 
 affected, in large measure, by the laws which are passed in the 
 other States. As the result of its entire underwriting each com¬ 
 pany tries to make money for its stockholders. If through re¬ 
 strictive legislation it loses money in Kansas, Kentucky or 
 Missouri, for instance, it naturally seeks to recoup itself some¬ 
 where else. Thus, as I say, the question is a national one and, 
 in the very nature of things, cannot be dealt with satisfactorily 
 by any single State. But that we in New York are meeting the 
 difficulties of the situation in as satisfactory a manner as they 
 can be met under the circumstances, I think I am perfectly safe 
 in stating. 
 
 What we have done in New York is simply this: We have 
 recognized the need for rate-making associations, and have ex¬ 
 plicitly legalized these organisms so that they may transact their 
 business in the open and not, in fear and trembling, behind closed 
 doors. We have placed them, together with all their ramifications 
 and feeders, under the supervisory jurisdiction of the Insurance 
 Department. We have, in addition, passed laws forbidding the 
 making of discriminatory rates between risks of the same class. 
 We have given authority to the head of the Insurance Depart¬ 
 ment to pass upon questions of alleged discrimination of this 
 character, and, if he finds such discrimination to exist, to forth¬ 
 with order it removed. That has been the New York way of 
 dealing with the situation which has resulted, in the fire insurance 
 world, from the dying-out of the old thorough-going competition 
 between the companies which once existed in the matter of rates. 
 And, as I have said, it has proved to he a very good way so far 
 as it goes. It has enabled us, on several occasions to bring 
 about — with the approval, virtually, of the companies them¬ 
 selves — large reductions in rates which were being charged in 
 sections of New York and other cities where conditions had 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9 
 
 entirely changed since these rates were first put into effect. But 
 for the power which any citizen has, under the New York law, 
 to lodge a complaint of discrimination in such cases with tlie 
 Superintendent of Insurance, these antiquated rating schedules 
 would so far as one can see, have remained in operation in¬ 
 definitely — largely because with the best will in the world it is 
 humanly impossible for the rate-making organism, unless prodded 
 along from the outside, to keep abreast of the changes which are 
 occurring constantly in the territories they are supposed to cover. 
 Thus it came about, in one case I have in mind, that the depart¬ 
 ment’s order removing an obvious discrimination in rates against 
 an extensive outlying section of one of our greatest cities, was 
 hailed by the companies themselves with almost as much enthusi¬ 
 asm as it was by the inhabitants of the region benefited by the 
 order — because the justice of the finding was beyond any ques¬ 
 tion and the insurance companies realized that in calling it to 
 their attention, and insisting upon prompt action, the department 
 was really doing a service to them as well as to the people. 
 
 Am I not justified, then, in contending that excellent progress 
 has been made in New York toward solving the difficult question 
 of what should he the proper relationship, in the future, between 
 government and the business of fire insurance? Infinitely better 
 progress, at all events, has been made, I am certain, than would 
 have been possible had we gone into the matter from a different 
 angle, and sought to annihilate the rate-making bodies, as has been 
 attempted in some of the States. Nevertheless, when all is said 
 and done, it must be admitted that in New York, as elsewhere, a 
 feeling of suspicion exists in the minds of people generally that 
 fire insurance rates are higher than they ought to be. Hand in 
 hand with this suspicion goes the demand that the people shall be 
 afforded an opportunity — by studying the figures showing past 
 experience upon which present rates are predicated — to sit in 
 judgment, as it were, from time to time, through their proper 
 representatives, upon the question whether the price they are 
 paying for fire insurance protection, now that competition has 
 been eliminated, is a fair price or not. And he would be a 
 venturesome prophet indeed who was willing to record himself 
 as thinking that this demand will speedily die out. 
 
10 
 
 This brings me to the point where, if I have any further solu¬ 
 tion of the problem than the one now on trial in New York, it is 
 proper that I should divulge it. I have already said that I think 
 that the New York method of handling the situation has been a 
 good one, so far as it goes. I am not yet prepared to say that it 
 does not go as far as need ever be gone in the direction of govern¬ 
 mental supervision over the question of fire insurance rates. The 
 results accomplished so far have been satisfactory enough to en¬ 
 courage the hope at least that, with further trial, the present 
 New York method will show that it is capable of meeting all the 
 requirements of the case. But, if this should turn out not to be 
 so — if there should be a necessity for further State activity in 
 this field — a suggestion has recently been made to me as to the 
 direction which this activity should take, and without in any 
 sense adopting it as my own I am going to tell you what it is, for 
 whatever it may be worth. I hope my action in mentioning it at 
 this time wifi be accepted by those in the fire insurance business 
 in the spirit in which it is intended — that is, as an honest and 
 sincere attempt to contribute something helpful to the public dis¬ 
 cussion of an exceedingly intricate and troublesome question. 
 
 Insurance departments exist primarily in order to insure the 
 solvency of insurance companies operating within the jurisdiction 
 of these departments. Anything which it may be necessary to do 
 in the direction of State activity in the rate-making field, beyond 
 what has already been done in New York, should, in my judg¬ 
 ment, be done in connection with the performance of this admitted 
 and well-recognized duty of insurance departments — namely, the 
 maintenance of solvency among the insurance companies. The 
 question of solvency can best be dealt with by requiring the 
 maintenance of adequate reserves by the companies. In order to 
 know whether a reserve is adequate or not, it is necessary to know 
 what the hazard is, or in other words, the anticipated loss. The 
 net premium rate is the measure of the hazard, and reserves 
 should be based upon true net premiums. Theoretically, there¬ 
 fore, insurance departments, in order to carry out their primary 
 purpose of safeguarding the solvency of companies, should not 
 only know what the true net premiums are upon which the com¬ 
 panies base their reserves, but should have the equipment for 
 
11 
 
 determining wliat rates may be justly charged by the companies 
 in order to maintain solvency and insure a fair return upon the 
 capital invested. 
 
 I believe that the scope of State authority in the matter of 
 making rates should, under any and all circumstances that I can 
 conceive of, be limited to' the field outlined above, namely, the 
 safeguarding of solvency. I do not believe that under any con¬ 
 ceivable circumstances the State should undertake to do anything 
 in the direction of making rates which it shall be obligatory upon 
 insurance companies to charge their customers. But I know that 
 a good many thoughtful people see a certain virtue in the 
 idea that it may prove desirable some day for States to have 
 something to say about the making of the rates upon which the 
 companies’ reserves are calculated — leaving the companies then 
 to actually charge such rates as they see fit, so long as they reserve 
 upon the rates which have received departmental approval. If 
 State rate-making confines itself to the single purpose above out¬ 
 lined, it would be stripped, they say, of all the terrors which it 
 now has for the men who are leaders in the fire insurance busi¬ 
 ness of the country. Ho strong fire insurance concern has any 
 objection whatever, so far as I know, to the maintenance of any 
 reserves which in the interest of safety they may reasonably be 
 called upon to maintain. To maintain strong reserves — even to 
 err in this respect upon the side of safety — takes no money out 
 of the companies’ pockets. It simply makes the insurance which 
 they sell safer. The companies might under certain conditions, 
 therefore, have no serious objection to State rate-making, if the 
 rates so made were made for no other purpose than to calculate safe 
 reserves upon — if, in other words, the rates so made were not 
 made as compulsory rates to be charged by the companies. 
 
 Does the question of State rate-making, viewed from this angle, 
 clear itself a little? Does this suggestion point to a wav out of 
 existing difficulties and uncertainties ? I am far from thinking 
 that immediate steps must necessarily be taken along this line. 
 I only say that, if the agitation in favor of State rate-making 
 continues, this is perhaps the channel into which it should be 
 directed — the channel into which, if it is directed, will result 
 in the maximum of good and the minimum of harm coming to 
 
12 
 
 the business of fire insurance in private hands. The procedure 
 would be, I suppose, that the rates would be made, in the first 
 instance, by rate-making bodies or bureaus, as at present, and 
 submitted to the Insurance Department together with the classified 
 experience of the companies. These rates and schedules would 
 be approved by the department upon the basis of a study of col¬ 
 lected experience, by qualified experts in the employ of the State. 
 The rates so approved would be the minimum basis for reserves, 
 but in no other sense would be mandatory or binding upon the 
 companies. 
 
 Does this sound revolutionary or dangerous ? It is not so in¬ 
 tended. At all events, it is the only suggestion I am able to make 
 now as to what the future attitude of government might con¬ 
 ceivably be, under certain circumstances, toward the problem of 
 fire insurance rate-making. I shall be interested to see what 
 criticisms it calls forth. That it would, if adopted, inevitably 
 lead to a larger measure of supervision and control by government 
 over fire insurance companies than now exists, is undoubtedly 
 true. I should be the first to regret this, because I am so incor¬ 
 rigibly an individualist, in matters of this kind, that I continue 
 to believe, with Thomas Jefferson, that the least governmental 
 machinery we can get along with, the better off we will all of us 
 be. I approach the whole question of Insurance Supervision 
 from that standpoint. I agree that we should have just as little 
 Insurance Supervision as possible. Where I differ from some of 
 the men who are now active in the business of fire insurance is 
 merely over the question what, under existing conditions, the least 
 possible measure of State activity in insurance matters is. I am 
 afraid that what sufficed, in this respect during the days when 
 conditions of life were simple, and before the great commercial 
 and social developments and changes of the present time had 
 occurred, no longer meets the needs of the situation. 
 
 To recapitulate. I entirely understand, and to a considerable 
 extent sympathize with, the reluctant attitude of the older fire 
 insurance men toward anything which savors of governmental 
 aggression in their chosen field. They are engaged in a very 
 peculiar and essentially hazardous business — one in which expert 
 knowledge is absolutely necessary in order to succeed — and I 
 
13 
 
 do not in the least blame the men who have grown gray in this 
 business for viewing with alarm the increased activities of the 
 government in respect to their affairs. It is the last business m 
 the world that the people ought to be eager in their organized 
 capacity, to engage in. It differs altogether from life insurance 
 in this respect — although I do not want to be understood as 
 favoring State insurance in the life field either, for I certainly do 
 not favor it. But the time has come, I think, when broad-minded 
 fire insurance men must recognize the inevitable drift of things. 
 They must view their problem in the light of actual conditions, 
 not in the light of conditions as they would like them to exist. 
 They must recognize the universality of the demand for good 
 cheap insurance, and the utter dependence of the people upon it. 
 They must appreciate the truth of the proposition that, after 
 competition has died out in any branch of business, and monopoly 
 reigns in its stead, the only direction in which men can look for 
 protection against the possible abuses attendant upon monopolistic 
 conditions, is the State. Monopoly having to a greater or less 
 degree taken the place of the old competition in the fire insurance 
 field, the leaders in the fire insurance business should realize that 
 henceforth they must adopt a different attitude toward govern¬ 
 mental activities in connection with fire insurance. I am very 
 sure that the strong men who have performed such wonders in 
 this useful field of work will readjust themselves very quickly 
 to the new conditions. In so doing, they will be establishing 
 additional grounds, besides the many which now exist, for the 
 praise which no right-thinking man will withhold from them 
 for all the splendid results they have achieved. And they will 
 be taking the final step necessary to place their great business — 
 without which the affairs of the world could not be carried on 
 at all — upon a sounder foundation than it has ever yet occupied.