INSURANCE (see 14.656[1]).—Insurance, or assurance, divides itself into several main classes. Although the distinction is not always observed, the word assurance is usually applied to life business and insurance to the acceptance of risks other than that of life. In an ordinary life assurance or endowment assurance contract the policyholder has the knowledge that either he or his dependents are assured of the payment of a sum on the occurrence of an event that must happen. In the various forms of insurance, such as fire insurance, marine insurance, accident insurance or burglary insurance, the policyholder pays a premium in order to be insured against a contingency which, if he is an honest man, he hopes will never occur.
United Kingdom
During 1910-20 there was a pronounced tendency among British insurance companies to amalgamate. The development of the fusion idea began on a large scale when fire-insurance companies absorbed the marine-insurance companies. There were formerly a large number of offices registered in the United Kingdom transacting only marine insurance. In 1921 there were only one or two which had not been taken under the wing of a fire company; and the large insurance offices transacted all the principal forms of insurance. In normal years they derive the bulk of their profits from fire insurance, but during the war period marine insurance proved exceptionally profitable. The earnings from life insurance are comparatively small, owing to the competition of mutual offices which have no shareholders to consider. Underlying all the fusion schemes of past years seems to have been the idea of connexion. The managements considered that it was essential that they should be able to offer to the assured every form of policy, or otherwise the man who was insured against one risk with a particular office would, sooner or later, be induced to effect other assurances with it or to transfer existing policies to it.
The business of the British insurance offices is world-wide, mainly as far as fire, marine and workmen's compensation insurance are concerned. London is a great school for insurance, and credit for much of the development of the business belongs to the underwriters of Lloyd's. Underwriters acting for themselves, or for a few friends, represented in a syndicate, doubtless feel freer to act than the managers of companies who have to report to boards of directors. In any case Lloyd's underwriters have shown a great deal of enterprise in accepting risks of a novel kind and thus in creating new markets. No ordinary life assurance is transacted at Lloyd's.
Life Assurance.—Life assurance was fundamentally affected by the World War. It will always be to the credit of British life assurance that, in spite of tremendous blows, no office failed to fulfil any contract into which it had entered. All actual sums assured were paid in full. At the same time, the majority of the offices failed to distribute bonuses on participating policies or else allotted bonuses at a reduced rate. The ill-effects of the war fell upon the participating policyholders. Until the war broke out the progress of the offices had been so steady and their success so great that the likelihood of their being unable to distribute profits hardly entered into the minds of most people. Life-assurance agents, basing their calculations on pre-war experience, were quite able to reason that the participating policies, in many cases, represented much better value than the non-participating contracts. The faith of the public in participating policies was rudely shaken by the experience of the war. There was subsequently a reaction, and non-participating policies became the popular form of contract. This change of feeling was really as short-sighted as the previous blind faith in participating policies. The public was thinking of the passing of bonuses during the war, and forgot that the causes responsible for the passing of distributions, such as heavy depreciation of funds and heavy mortality, no longer obtained, and that, with a prospect of appreciation of security values, the outlook for profits was exceptionally favourable.
Much valuable information on the effects of the war on life assurance was contained in the paper read by Mr. H. Brown, Assistant Actuary of the Commercial Union Assurance Co., before the Insurance Institute of London on Dec. 20 1920. Mr. Brown stated that, excluding offices which transacted industrial life business as well as ordinary life business, and those which had started to undertake life assurance since 1914, there were 44 leading British ordinary life offices at the end of 1920. Thirteen of these maintained, or slightly increased, their pre-war bonuses at their first valuation after the outbreak of war; nine reduced their rates of distribution; and 22 (exactly half the total number) either postponed their bonus distributions or passed five years' bonuses altogether.
During the war the tendency to postpone bonuses steadily increased. Forty-two of the 44 offices mentioned were in the habit of making quinquennial valuations. Of those valuing at or about the end of 1914, 2 out of 10 postponed or passed their bonuses. In 1915 the corresponding figures were 3 offices out of 12; in 1916, 3 out of 5; in 1917, 8 out of 8; and in 1918, 6 out of seven. Almost all the offices made arrangements for the payment of interim bonuses on policies which might become claims before the next valuation, although such rates were usually below those of the pre-war period.
The offices which made their valuations for the five years ended 1914 again came to make quinquennial valuations as at the end of 1919. Of six offices which maintained their bonuses in 1914, only two again maintained them. One of these and also the only office valuing quinquennially which maintained its bonus in 1918 were composite companies not keeping separate investments for their life funds, but content to make good the bulk of the depreciation out of the general funds. Apart from these two special cases, only seven ordinary life offices succeeded in maintaining their bonuses, and four of these, which formerly kept exceptionally strong reserves, absorbed part of these reserves in paying bonuses.
A number of highly important offices made their quinquennial valuations as at the end of 1920. The majority of these made no distribution of profits. Depreciation of securities swallowed up sums which would otherwise have been available. One office paid what was regarded as a satisfactory rate of distribution, its power to do so being due to profits from exchange.
An estimate of the war losses during the five years 1914 to 1918 inclusive was made by Mr. Brown as follows:—
(1) Mortality in excess of the pre-war ratio resulted in a loss of about £3,000,000 a year.
(2) Depreciation in excess of the amount provided for just before the war was estimated at £4,000,000 a year.
(3) The reduction in the net rate of interest due to the high income tax resulted in a loss, as compared with the pre-war period, of about £500,000 a year.
The total loss, as compared with the period immediately preceding the war, could therefore be estimated at, roughly, about £7,500,000 a year during the five war years. In the years immediately preceding the war the total divisible profits of the British offices, in respect of ordinary life assurance, amounted to about £6,500,000 a year, of which about £6,000,000 was divided among the policy-holders, and about £500,000 was distributed among the shareholders of the proprietary companies. During the war the normal profits continued, for the most part, to be realized, subject to the deduction of the special war losses enumerated. The special war losses, it will be seen, exceeded the normal profits of the same period, and it may therefore be stated that, down to the end of 1918, the war probably cost the life offices, as a whole, about five years' bonuses. Naturally the experience of individual offices varied. Some offices had a larger proportion of lives of military age on their books, and they were therefore more heavily hit by war mortality than others. Then some companies had a larger proportion than others of their investments in Stock Exchange securities, and they were more severely hit by depreciation of Stock Exchange securities. Besides direct war claims, all life-assurance offices were severely affected by the influenza epidemic which swept over the world in 1918 and 1919 and took a very heavy toll of civilian lives.
A growing tendency on the part of insurance companies to issue policies free from all restrictions meant that in the case of the majority of the offices transacting ordinary business the direct war risk in respect of civilians who joined the fighting forces was automatically assumed by the companies. Some companies doing ordinary business and some transacting industrial life assurance had specifically excluded the war risk. Such offices agreed, however, to waive their rights to extra premiums and assumed the war risks. This for the Prudential Assurance Co., by far the largest British office, meant an enormous liability. In the case of professional soldiers assured before the war, policies were issued subject either to a small extra rate during the currency of the policy, or to extra rates of premium when the policyholders were sent on active service. At first an additional premium of £7 7s. % per annum was charged to cover the war risk, but the rate soon advanced to as much as 20% per annum. Such rates were, in the majority of cases, prohibitive, and probably comparatively little business was done on such terms. It is known that even at these rates the majority of the offices, at any rate, would rather have been without it. They could point to the fact that they had assumed vast liabilities in respect of those who had assured before the war as civilians and then had become fighting men. The fact that all men of military age were liable to service meant that, as regards new business, the life assurance offices could not hope to do more than mark time. Their own staffs were reduced to the absolute minimum. Distinguished actuaries found themselves doing routine clerical work, and, for the most part, the male staffs were replaced by women.
The period of the war was undoubtedly the most exacting through which British life assurance offices have ever passed. In addition to the depreciation of funds, heavy claims, and lack of new business, they were adversely affected by the rise in income-tax. The special position of life-assurance offices as regards interest from investments, which really represents their stock-in-trade, had led to some concession under the Finance Act of 1916. The concession was then made that they should be allowed a refund of taxation in respect of their expenses, so that the tax was paid on the difference between interest and expenses, which was naturally very considerable. This concession reduced the effective rate of tax by about one-sixth, or to about 5s. in the £ on the average on the total interest as at the end of 1920, as compared with the pre-war rate of 1s. 3d. In his paper before the Insurance Institute of London Mr. H. Brown pointed out that in 1914 the pre-war net rate of interest of just over 4% was maintained. In that year the rate of tax was practically unaltered. In the four remaining war years the average net rate realized was 3s. % per annum less than the pre-war rate and was a little below 4% net instead of being rather above that figure. The offices during the war period had the opportunity of investing new funds at comparatively high rates of interest, but this increased rate did not go far to compensate for the enormous depreciation which had to be written off the existing funds. In 1921 there was some recovery in the prices of high-class securities, and this fact gave encouragement to the view that the prospect of earning profits was then brighter than it had been for many years.
After the quiet period of the war the figures of new business in 1919 were the largest ever recorded. These, in turn, were exceeded by the results for 1920. The return of enormous numbers of men to civilian life and the greater appreciation of the value of life assurance were evidently responsible for this development. It was hardly to be expected that the figures for 1921 could be as good.
With life assurance under the heavy cloud of the war, little could be expected in the way of devising new schemes of assurance. One office, the Sun Life Assurance Society, continued to develop assurance without medical examination of the proposer. Until the beginning of 1921 such assurances were issued subject to certain restrictions, the terms in other respects, including the rate of premium, being identical with assurances effected in the ordinary way. These stipulations were that: (1) One-third only of the sum assured was secured if the death of the life assured occurred during the first three months from the commencement of the assurance; and two-thirds if the death occurred within the second three months. After that period the claim was payable in full. If death occurred from accident during the first six months the full sum assured was payable. (2) No assignment was permitted during the first two years from the date of the commencement of the assurance. Early in 1921 the Society announced the removal of these restrictions. It professed itself thoroughly satisfied with its experience in assurances effected without medical examination, and, in fact, strongly encouraged proposals made on such terms.
Two or three offices, notably some with their headquarters in Canada, have been developing assurances providing for the cessation of premiums during incapacity, and for disability weekly payments during such periods. Assurances of this kind would seem to be only in their early stages. The ordinary accident and sickness policy is an annual contract, and a life assurance combining disability benefits would seem to have a good deal in its favour.
A rebate of income tax in respect of life-assurance premiums of half the standard rate, or 3s. in the pound, in 1921, was a very considerable encouragement to the effecting of life assurances in the United Kingdom. This meant that £100 of life assurance could be secured for £85. Rebate at this flat rate was obtainable in respect of all policies effected after June 22 1916. In the case of policies effected before that date the rebate was on a sliding scale, being at the rate of half the standard rate of tax where the total income did not exceed £1,000; three-quarters of the standard rate of tax where the total income exceeded £1,000 but not £2,000; and the whole of the standard rate of tax where the total income exceeded £2,000. The rebate was subject to the provision that the total amount of the premiums to be allowed to any individual taxpayer should not exceed one-sixth of the income, and the amount of the premium in respect of which any allowance was made should not exceed £7% of the capital sum payable at death, exclusive of any addition by way of bonus.
Industrial Assurance.—Criticism of the industrial life-assurance system in Great Britain led to the appointment in May 1919 of a departmental committee by the Board of Trade to inquire into the business carried on by industrial assurance companies and collecting societies. Over this committee Lord Parmoor presided. The report of the committee (Cmd. 614) was issued as a Parliamentary paper in July 1920.
The magnitude of the interests concerned was shown by the facts that the total amount of premiums received in respect of policies in the industrial branch of the companies and societies in 1918 exceeded £25,000,000, that the number of policies in existence at the end of that year was about £51,000,000 and that the total number of whole-time and spare-time agents and collectors employed was estimated to be about 70,000. The possible clientèle was estimated by the committee at about 35,000,000 persons. From the fact that there were 51,000,000 policies in existence at the end of 1918 and that some millions of these were on the lives of children under ten years of age, in whose cases it is unusual for more than one policy to exist, it was evident that a great number of adults were assured under two or more policies.
Criticism can undoubtedly be levelled against the industrial assurance system on the ground of the high level of working costs. On this matter the committee had much to say. They pointed out that the remuneration of the agents is based upon the amount collected, and is frequently a direct percentage of that sum, varying from 25% in the case of the collecting societies to from 15 to 20% in the case of the companies. In addition to this allowance for collecting his renewal premiums, the agent is directly remunerated for the new business he secures. There are various ways of calculating this allowance, but, the committee pointed out, it is always on a generous basis. In some cases the agent takes the whole of the premiums collected during an agreed period following the issue of the policies, i.e. the first 12, 14, or 16 weeks. In other instances lapses are set off against new business, and the new business emoluments of the agent are calculated, wholly or partly, on his increase. Thus the Prudential pays ten times the weekly premium on each new policy provided that it is kept in force for 13 weeks, and 18 times the net increase in the weekly debit. The terms of remuneration vary widely in details, but it would appear that, on the general average, the agents of the companies retain about 25% of all the premiums they collect, while those of the large collecting societies may receive as much as 31 per cent. The committee found that about 44% of the total premium income on industrial policies was absorbed by expenses and commission, and also, where companies were concerned, by dividends to shareholders. Thus on every shilling paid in premiums 5¼d. goes in expenses of one sort or another, and only 6¾d. comes back to the assured in benefits. Otherwise stated, of £25,000,000 a year paid in premiums by the insured population, only £14,000,000 come back to them, and £11,000,000 are absorbed in expenses and dividends. The committee stated that they were satisfied that these expenses were too heavy and could be reduced.
Evidence was given before the committee that convenience and economy in collection could be improved by the introduction of the block system, under which an agent is assigned an exclusive area for his operation. This system so far has only been in the experimental stage, but the committee suggested that it should be introduced and extended wherever practicable. It has been put into practice by the Prudential Assurance Co. and has already resulted in a saving of expenses, although the actual effect has been, to a large extent, obscured by the higher scale of wages and the generally increased costs of working brought about by the war.
Lapsing of policies was a matter which received attention from the committee. They pointed out that in the case of one company, the Refuge, whose experience in this matter was held to be in no way exceptional, there were issued in the ten years 1909 to 1918, 9,322,336 policies, while 6,426,313 policies lapsed. Further, it was found that in ten of the offices, including most of the largest, nearly 5,000,000 policies lapsed in 1913, and that nearly 4,000,000 of these had been effected as recently as 1912 or 1913. It was considered probable that the premiums paid on these latter policies amounted to fully £500,000, practically the whole of which would have been absorbed in new business charges, chiefly procuration fees and Commissions paid to the agents. Taking all the offices together, it was thought probable that lapses of policies in the year of issue, or in the year following, reached an annual total of 5,000,000. The committee reasoned that this vast figure could only mean that there was a section of the population which was repeatedly induced by the pressure of agents and canvassers to take out policies and discontinued payment immediately that pressure was removed, having lost nearly the whole of whatever premiums it had paid, since the benefit assured at the outset was a mere fraction of the full sum named in the policy. The committee came to the conclusion that, as long as heavy procuration fees were allowed, it would always pay the agents to devote themselves to the ceaseless pursuit of new business among this class of the community, regardless of the value of the policies to the assured or of their being kept up.
It should be noticed that the companies maintain that lapses occurred mostly in the first year or two of assurances before initial expenditure was made good, and that they are thus a source of loss rather than a profit to the companies. Their line of argument seems to be that they have to pay to the agent as fees all the premiums he collects for the first 10 to 20 weeks of the life of the policy, and that if the policy is then dropped the agent has had all the premiums, and there is nothing to help to pay the superintendency and head-office expenses in connexion with the issue of the policy. The offices further contended, in effect, that if the policy lasted a year, the agent had been paid his collecting commission as well as the procuration fee, and, in addition, that they had to pay head-office and branch-office expenses in respect of the issue of the policy, accounting, etc., while they had the risk of the policy becoming a claim, so that even at the end of the year there remained little or nothing out of the premiums paid on the policy. They thus arrived at the conclusion that, on the whole, they lost money by lapses. The committee pointed out, however, that this line of argument seemed to imply that all the expenses relative to new business arose out of the particular policies which the agent succeeded in getting. That is to say he was supposed to earn nothing, and the companies were supposed to incur no expense, in respect of the people whose interest he solicited in vain, the whole of his exertions being regarded as concentrated upon those with whom he succeeded. They doubted, whether such an argument was maintainable, and they added that, whoever got the benefit of the premiums paid, whether the companies or their agents, it was certain that the public lost heavily by lapses. The committee recommended that procuration fees should be abolished, and that minimum weekly wages should be substituted based on a fixed collection per week, with a commission on all sums collected above that amount.
The conduct of life assurance by the post-office was also examined. Under the British post-office system life assurance may be effected with Government security at any post-office transacting savings-bank business. Premiums may be paid weekly by means of stamps affixed to premium books handed in quarterly. The average charge for expenses is very low, and the committee held that the terms of assurance ought to be so much better as the result of this than those afforded by the companies that the post-office should be able to issue a large number of policies, in spite of the fact that it neither canvasses nor collects the premiums at the policyholder's door. The number of persons who effect assurances through the post-office is extremely small, and the system as administered by the post-office can, the committee pointed out, only be described as a failure. Apart from the fact that the post-office system was not competitive and provided for no canvass, the committee thought that the system was not operated with sufficient vigour or with due regard to what the public required. The committee found that, although the cost of administration was so small, the sums assured did not compare to marked advantage at any age with those offered by the companies. As one explanation, it was pointed out that the premiums under the post-office plan cease to be payable at 60 years of age, whereas, under the ordinary system, they continue for the whole duration of life or, in certain cases, to the age of 75. Possibly, the committee pointed out, the post-office system was the better one, as official witnesses suggested, but, the committee added, the question was whether the system should offer what the public required or what was thought to be more suitable to the public needs.
In the main, it would seem that the best hope for an improvement of the industrial assurance system lies in a reduction in working expenses. Of this leading managers of companies are doubtless fully aware. During the war period the factors were undoubtedly against them, owing to the rise in the cost of living. In 1910-20 there was a distinct development of industrial assurance on the basis of monthly premiums, and, no doubt, from the practice of this system a substantial reduction of working costs may be expected. The benefits of the system should be developed and the drawbacks overcome.
During the World War the industrial assurance companies in England felt the heavy strain of war mortality claims. They were also adversely affected by the Courts (Emergency Powers) Act, which provided, in effect, that the companies were required to keep in force all policies should the assured be unable, owing to the results of the war, to pay the premiums. There was good reason to believe that the Act was much abused. Practically all those who were not in the fighting forces secured the advantage of the high wages ruling at a time when unemployment practically did not exist. In 1921 the companies under the Act were still required to keep in force a large number of policies on which no premiums had been paid for several years. In addition to receiving no premiums on such policies, they had been called upon to pay claims in respect of many policies of which the holders had been able to benefit by the Act. It was assumed in the summer of 1921 that the Act would shortly be annulled. There seemed a prospect, consequently, that it would come to an end at a time when unemployment was common and there was general financial stringency, so that it would be almost impossible for many policyholders to pay the arrears due, with the result that many policies of long standing would lapse. It was held by some authorities that the Act had been detrimental to the interests not only of the companies but also of the policyholders. The committee recommended, as a way of meeting the difficulties when the Act came to an end, that the policies subject to it should be kept in force for six months after the Act ceased to operate, and that the companies should be required to notify every policyholder to whom the Act applied his right to secure the maintenance of the policy by paying up the arrears, the amount of which should be stated on the notice. Alternatively, that the companies should give the option to the policyholder of maintaining the policy in force for a reduced amount, or in the case of an endowment assurance for an extended period, subject to the cancellation of the arrears, on terms to be approved by the controlling authority.
Fire Insurance.—Fire insurance was much affected by the rise in value during the war period. The rise meant that sums previously insured were quite inadequate and additional insurances were effected. The rise was shown in the estimated cost of the principal fires in the United Kingdom. In 1916 these calculations, according to The Times, amounted to £3,300,000; in 1917 to rather over £4,000,000; in 1918 to £5,500,000; in 1919 to £9,462,000, and in 1920 to £9,374,000.
On the whole the British insurance companies emerged from the war period in a far stronger position than when they entered it. After the Armistice there was much activity in the formation of new companies, especially of offices to transact reinsurance. In the pre-war years a very large amount of reinsurance had been placed with German companies which had specialized in this form of business, transacting it at a low working cost. During the war naturally no further business was placed with such companies. The limitation of the reinsurance market led, therefore, to the formation of new offices and to the representation in England of companies registered abroad. So long as values remained on the highest pinnacle all the offices did well, but when trade began seriously to decline in the latter part of 1920 the new companies found that matters developed far less favourably for them. Towards the middle of 1921 absorption schemes were announced for a number of the new companies. Fire managers realized that to conduct a reinsurance business satisfactorily a large capital was needed and only a small rate of profit could be expected.
Before the war, fire-insurance companies had been disturbed, to some extent, by the activities of militant suffragists who set fire to many buildings, including churches. These dangerous activities were to be far exceeded by those of Sinn Feiners after the conclusion of the Armistice with Germany. Immense damage was done to property in Ireland during the course of the campaign of destruction. Insurance companies did not admit responsibility for such damage, special legislation in Ireland providing that the damage could be made good by the local authorities. In the United Kingdom the question of damage of this kind was brought to a head by the destruction of much dock property at Liverpool at the end of Nov. 1920 which was traceable to a Sinn Fein plot. The attitude of the insurance companies generally was that, acting on legal advice, they paid claims under the special riot and civil commotion policies where these had been effected. Where no such special policies existed, or the amount insured under such contracts was insufficient, the loss, or balance of loss, was met under the ordinary fire policies. The insurance companies did not admit liability under such contracts and said that it might be necessary, in order strictly to define the legal position, to take the matter before the Courts.
At the same time, while the insurance companies continued to incorporate in their ordinary fire policies a clause excluding liability for loss or damage caused by riot, civil commotion or military or usurped power, they were prepared, either by the issue of special policies or by the endorsement of existing contracts, to undertake such liabilities, except in the case of Ireland. It is now possible to obtain full protection in respect of the risk of loss or damage by riot, civil commotion, military or usurped power (other than that caused by a foreign enemy), strikers, locked-out workers, or persons taking part in labour disturbances, or malicious persons taking part or acting on behalf of or in connexion with any political organization. In some cases the additional cover is granted for the same rate of premium as that previously charged for riot and civil-commotion risks alone. The risk of fire in respect of private dwelling-houses is included in the ordinary fire policy without extra charge, but, as a rule, a small additional premium is quoted. The wording of the clause giving protection against exceptional risks was, it will be seen, devised with the Irish trouble in mind. It was intended to give complete cover to the assured against risks which were definitely excluded from the ordinary fire policy or might be held, by legal decision, to be so ruled out. A very large number of such special insurances were effected by business men.
Marine Insurance.—In marine insurance the dominant feature of the decade 1910-20 was the demand for war insurance, especially during the period of hostilities. The war cloud was affecting business and was a subject of discussion before the storm broke. In a speech at Copenhagen in 1913, Sir Edward Beauchamp, who was then chairman of Lloyd's, made a stir by indicating what would happen if war with Germany broke out. He then declared that, in any event, British underwriters would stand by their contracts. This statement was considered by some to have gone rather far. Yet British insurance companies transacting business in Germany caused statements of similar effect to be published in German newspapers. The subject had in previous years been discussed in German newspapers, an article, in particular, appearing in the Neue Hamburgische Börsenhalle in Aug. 1905, under the title of “English Insurances in the event of a German-English War.” Its intention appeared to be that of creating uneasiness in the minds of Germans who had effected insurances in England. Confirmation of the attitude adopted by British underwriters was provided by Section V., Annexe III., Paragraph 16, of the Treaty of Peace, which stated that “where the risk had attached effect shall be given to the contract, notwithstanding the party becoming an enemy, and sums due under the contract, either by way of premiums or in respect of losses, shall be recoverable after the coming into force of the present Treaty.”
The ordinary policy covering hulls against the risks of marine perils excluded the risks of war. There was, however, in the years immediately preceding the outbreak of hostilities, a tendency on the part of banks to insist that the risks of capture, seizure, detention, etc., should be included. There was a small number of underwriters in the London market who made a feature of war-risks insurance. They studied the political barometer closely and, as regards rates of premium, set the pace. Other underwriters who were by no means enamoured of war-risk business felt obliged to accept such insurances on similar terms for fear that, if they failed to do so, they would lose the ordinary marine-insurance business. On the whole, the acceptance of such insurances proved profitable.
Reference is made in the article on Shipping to the establishment of war-risk schemes by the British Government immediately on the outbreak of war. While these schemes continued in operation and were of immense value, a large amount of war-risk business was transacted in the open market.
Some of the difficulties facing underwriters were indicated in a case which was taken up to the House of Lords and became known as the “Restraint of Princes” case. The facts were, briefly, that a steamer, bound from South America to Hamburg, was stopped off the Lizard on Aug. 9 1914 by a French cruiser and was told to proceed to Falmouth. There her master received orders from the naval officer in authority to proceed to Liverpool to discharge. This he did. The owners of the cargo gave notice of abandonment, which the underwriters declined to accept. The old form of marine-insurance policy included among the risks covered “takings at sea, arrests, restraints and detainments of all Kings, Princes, and People.” Mr. Justice Bailhache in the first Court, the Court of Appeal, and the House of Lords decided that a declaration of war involving the abandonment of a voyage was a “restraint of Princes,” and entitled the assured to claim a constructive total loss. The underwriters had maintained that actual exertion of force was necessary to constitute “restraint of Princes,” and that they insured the safety of the goods and not the success of the venture. They urged that, until the action was brought, there had been no suggestion by merchants that “restraint” meant anything but forcible action, which they themselves understood it to mean. In the case which was heard before the Courts the cargo arrived safe and sound at Liverpool. It was the venture which was not carried out as was expected. After this decision underwriters adopted a practice of modifying what was known as the war-risk clause. This had read:—
“Warranted free of capture, seizure, and detention, and the consequences thereof or any attempt thereat, piracy excepted, and also from all consequences of hostilities or warlike operations, whether before or after declaration of war.”
For the words “and detention” in this clause there were substituted, after consultation with eminent counsel, the words: “arrest, restraint, or detainment.” The opinion was afterwards expressed that, had merchants realized what the law on this subject was, as it was afterwards defined, underwriters might easily have been ruined, for a vast number of cargoes might have been abandoned to them. Yet there was another point of view. As events occurred prices of all commodities rose enormously in the United Kingdom. Consequently, had cargoes been abandoned to underwriters, the latter should have been able to dispose of the commodities at a handsome profit. Further, to meet the new situation a clause was inserted in all policies covering war risks which ran as follows:—
“Warranted free from any claim arising from capture, seizure, arrests, restraints, or detainments by any British Government or their Allies.”
This clause was based on one which, soon after the outbreak of war, had been inserted in all insurances against war risks on neutral cargoes in neutral vessels and had read:—
“Warranted free from any claim arising from capture, seizure, and detention by the British Government or their Allies.”
The intention of this clause was that neutrals should not collect from British underwriters moneys for goods or vessels which the British or Allied Governments found it expedient to capture, seize, or detain. In one way and another underwriters were able to assist materially in the conduct of the blockade of Germany. In a striking paper read before the Institute of London Underwriters by Mr. E. L. Jacobs, underwriter of the Alliance Assurance Co., it was pointed out that on a hint that the insurance of certain articles was inexpedient, no insurance was provided. Mr. Jacobs declared that: “No proclamation was necessary. A verbal message sufficed: No insurance, no finance, no shipment. Very simple!” A similar system applied to the insurance of vessels. In the case of these there were black lists. No insurance was available in the United Kingdom in respect of any vessel on such lists.
While the work falling on underwriters and insurance companies was steadily increased, the staffs of the offices were also steadily reduced as more and more men were required for the fighting forces. The difficulties of carrying on business at Lloyd's became immense, and a scheme was introduced which provided for the establishment of a Signing Bureau. An ordinary marine-insurance policy may be underwritten by a large number of syndicates of names, and the signing by hand of the policies by the representatives of all the syndicates was a slow undertaking. A policy might be passing from syndicate to syndicate for many weeks. Objection was raised to any departure from this practice on the ground, inter alia, that it was important for the representative of each syndicate personally to see that the terms of the policy were in accordance with the conditions of the insurance as underwritten. In the critical times these difficulties were overcome, and a Signing Bureau was established, which had authority to stamp the policies on account of a large number of individual syndicates and names. As regards despatch, the system had very considerable merits. A policy deposited at the Bureau for stamping was available a very few hours later, completed. Later the system was extended to the settlement of claims, authority being deputed by individual underwriters to the Bureau for that purpose. The practice of stamping the Lloyd's policies on behalf of various syndicates was reflected in the adoption by the insurance companies of issuing a joint policy. Previously each company had issued its own policy and prided itself on doing so. The issue of the joint policy was adopted as an emergency measure, and was not liked by the insurance companies. Most of them agreed to adopt it, but were glad to revert to the individual system later. In order to save paper the size of the policies was reduced during the war, and a standard form of proposal was adopted.
Some underwriters refrained entirely from writing war risks. Nevertheless, it was impossible for them to escape the consequences of the war. Many ships, for instance, became missing. No direct evidence was available as to the loss of the ships, whether through marine or war perils. Vessels were being destroyed promiscuously by the enemy's submarines, and it was clear that, largely owing to this cause, many of the ships became missing. In ordinary times a certain number of vessels set out on voyages and never reach their destination. No trace remains as to the cause of loss. In such cases, after a long interval, the circumstances of the voyage are considered by the committee of Lloyd's. The names of the vessels are then posted in the rooms for inquiry. If nothing, in the meanwhile, is heard of them, the vessels are posted as missing, and settlements are then made by the underwriters in respect of ships and cargo. The position respecting the enormous increase in the number of missing vessels during the war period was considered by a committee representative of shipping ownerships, insurance clubs, Lloyd's, the Liverpool Underwriters' Association, the Association of Underwriters and Insurance Brokers in Glasgow, and the Institute of London Underwriters. As the result of the deliberations, an agreement was drafted providing for arbitration in the event of vessels becoming missing. The underlying idea was that an arbitrator, after hearing such evidence as was possible, could form an opinion as to the probable loss of the vessels, whereas if the question had been taken into court, the proceedings might have been very lengthy, and no better judgment could be expected. In some cases the loss was apportioned by the arbitrator in such proportions among the war-risk and marine-risk underwriters as seemed reasonable.
In the years immediately preceding the war a good deal was heard of over-insurance. Many ships had been built during periods of active trade, and owners found themselves possessed of ships which were worth more to them lost than if still afloat. There was an epidemic of mysterious losses of ships which were, admittedly, over-insured. While suspicions may be formed, the scuttling of ships may be very hard to prove. In order to deal with a difficult situation, which was discussed in a paper read before the Insurance Institute, at the end of 1912, by Mr. Edward F. Nicholls, underwriter to the London Assurance Corp., a clause known as the 15% disbursement clause was prepared, which reads as follows:—
“Warranted that the amount insured for account of assured and/or their managers on disbursements, commissions, or other p.p.i. or f.i.a. interests, other than those hereinafter mentioned, shall not exceed 15% of the insured value of hull and machinery; but this warranty shall not restrict the assured's right to cover premium reducing freight, chartered freight, or anticipated freight to a reasonable amount; provided always that a breach of this warranty shall not afford underwriters any defence to a claim by mortgagees or other third parties who may have accepted this policy without notice of such breach of warranty.”
Underwriters considered that by the use of this clause the risks of under-valuation and over-insurance were eliminated. The risk of total loss is naturally coverable at a lower rate of premium than that of all risks, and any owner who had nefarious designs on his ship would have been tempted to secure a large amount of total-loss insurance at as low a rate as possible. It was held that, by limiting the amount which could be covered for disbursements, etc., to 15%, the inducement to an owner to lose his ship was minimized. The disbursements clause has been maintained throughout since its institution.
Following a period of severe competition and heavy underwriting losses, an agreement was reached among the underwriters of the insurance companies and at Lloyd's on the subject of the conditions on which steamers should be insured for time. This agreement laid down the terms on which vessels should be insured, the conditions being reconsidered from time to time. It was carried on successfully for many years, and then collapsed in June 1921. Agreement on certain important points, such as values, rates of premium and the underwriting lead, could not be reached, and it was decided, while maintaining certain terms which are set out in the Institute Hull Clauses, to give underwriters complete freedom on other important points. This was certainly one of the most important developments in the conduct of marine insurance for many years. It meant that the individual initiative and enterprise of underwriters, which had been curbed by the agreement, were once again given free play. Instead of all owners being treated alike, underwriters were at liberty to discriminate between the good and indifferent ownerships. It seemed to be in the interests of the good owners, while it might possibly be to the disadvantage of those whose record is not so good.
There then set in during the summer of 1921 a period of severe competition, although this was restrained, to some extent, by the withdrawal from the market of a number of offices which had been writing considerable accounts during the period of hectic activity traceable to the war and its effects. As long as there was an immense amount of war-risk insurance to be effected, and values of ships and commodities were inflated, there was sufficient business to feed a much-increased and hungry market. When trade became extremely quiet, some of the newcomers thought that they must continue to secure a large share of the business, and the only way they could do so, in competition with the older and more firmly established offices, was to reduce rates of premium. The cutting of rates went on for some time without apparent evil effects, while the more experienced underwriters refused to accept business on such terms. Early in 1921 claims poured in at a rate which had never been experienced even by the oldest underwriters. There was a cataclysm of claims, both in respect of ships and cargoes. The claims in respect of ships were due, especially, to the fact that while tonnage was in active request, repairs, necessitating the laying-up of ships, were postponed, and also to the fact that the repairing establishments were heavily preoccupied in making good damage done to ships through the submarine warfare and the general stress of working under war conditions. A very large number of ships were unfit to go to sea until the damage they had suffered had been made good, and work on such vessels naturally took priority over repairs which could, by any possibility, be postponed. Incidentally, the cost of repairs was steadily mounting for many years, owing to the rise in wages and in the cost of materials. The following figures show the settlements actually made by a leading insurance company on a large underwriting account of hulls. Taking the premium income written in 1916, the first year's settlements amounted to 13%. By the end of 1917 the settlements had risen to 51%; by the end of 1918 to 72%; by the end of 1919 to 84%; and by the end of 1920 to 93%. These figures were only for actual claim settlements. They show that at the end of the fifth year only 7% of the large premium income remained, from which the working costs had to be deducted.
An extraordinary feature of marine underwriting in recent years has been the extended period over which claims have been made. Before the war it was considered that an account might, for practical purposes, be considered as closed at the end of a third year. There might then be still a few claims unsettled, but not of sufficient magnitude to disturb the main results of the underwriting as then disclosed. After the war no such calculations could be made. The books of the same important insurance company showed that of the 1917 premium income 17% had been settled in claims alone during the first year. By the end of 1918 the total settlements had risen to 56%; by the end of 1918 the settlements represented 72%, and by the end of 1920 89%. The total showed that for the fifth-year settlements 11% of the premium income remained. The earlier figures showed that 9% of the premium income was absorbed in the fifth-year settlements on the 1916 figures, so that if the settlements in the fifth year on the 1917 account were on the same basis, only 2% of the premium income would remain for expenses. It thus appeared that a substantial loss was inevitable. The figures were extracted from the books of a first-class office, and it is only reasonable to assume that those of other offices which were not in the same favourable position would be still worse.
A further factor responsible for heavy claims in respect of hulls was the loss of a number of steamers under remarkable circumstances. Vessels flying certain foreign flags were especially prominent in this connexion. A large number of steamers foundered near land, with little, if any, loss of life. In some cases the vessels were alleged to have struck drifting mines, especially in the Mediterranean. Some of the vessels were lost shortly before the expiration of policies covering them for far larger values than could be insured again. The epidemic was so notorious that underwriters could not feel justified in paying the claims without full inquiry into the mysterious circumstances of the losses. In this matter Government aid was forthcoming. It was, perhaps, unfortunate that a large number of steamers should be at sea insured for very much larger sums than they could be worth under current market conditions.
If, in connexion with the values of shipping, there seemed to be some weakening of the standard of morality, there was an obvious lowering of the ideals in other forms of commerce. Claims in respect of cargo losses were on an enormous scale, and were attributed in large degree to pilferage of goods throughout the world. Legal decisions have been held that there is a distinction between robbery with force and sneak-thieving, or pilferage. The ordinary marine-insurance policy covers the risk of robbery by force, but the risk of theft and pilferage has usually been specifically excluded. Gradually underwriters were asked to accept it, and they did so in various trades, quoting nominal rates for the risk. Then the evil grew steadily to vast proportions—encouraged, no doubt, by the high value of commodities and a laxity induced by the experience of vast numbers of men in the armies, where it was often a question of every man looking after himself as best he could. All classes of business men became alarmed by the growth of the pilferage evil, and committees were formed in the various ports, led by London, to consider what action was required. The shipping companies, who were called upon to pay a vast number of claims, were naturally active in adopting measures, such as the formation of special police forces and the institution of special systems of tallying the cargo on loading and discharging. The marine underwriters, in order, partly, to bring pressure to bear on the shippers and shipowners, resolved to accept only 75% of the shipping value of the goods, thus leaving merchants with responsibility for one-fourth of the value. Early in 1921 there was a strong agitation in the London marine-insurance market in favour of refusing to accept the pilferage risk at all, but this did not seem compatible with the functions of marine underwriters in protecting the interest of their clients. Such action as they did take was undoubtedly successful. It had a good deal to do with a decision on the part of the owners of lighters and barges to accept some responsibility, although of limited character, for the safety of goods carried. Until the matter was brought to a head by publicity and the action of shipping managers, merchants and underwriters, the owners of lighters and barges had, under the London Lighterage Clause, refused to accept responsibility for loss of or damage to goods carried, whensoever, wheresoever or howsoever such loss or damage might be caused. The question had many complications. Thus goods might be resold in course of transit at a profit to the original owners. It was pointed out that a settlement by underwriters of not more than 75% of the shipping value would not be adequate compensation to buyers of the goods at enhanced prices. This matter, in particular, was receiving the careful consideration of underwriters and merchants in the summer of 1921.
Workmen's Compensation for Injuries.—Important recommendations respecting the system of compensation for injuries to workmen in the United Kingdom were made by a departmental committee appointed by the Home Secretary in May 1919, which reported in July 1920. The committee was presided over by Mr. Holman Gregory, K.C., M.P., and included representatives of the workers and of the insurance companies. In the introductory paragraphs to the report (Cmd. 816) the committee pointed out that the system then obtaining, which was based on the Workmen's Compensation Act of 1906, imposed on employers a burden of upwards of £8,000,000 a year, and its cost was an item which every business enterprise had to take into account. The total number of workers within the scope of the Act was calculated to be about 15,000,000, and the negotiation and settlement of the claims of those who belonged to organized labour were an important part of the work of trade-union officials. Sixty-five joint-stock insurance companies did workmen's compensation business with employers having a wage-roll exceeding £600,000,000 a year, and their annual premium income in respect of the workmen's compensation risk was well over £5,000,000. Further, there were about 50 mutual indemnity associations which insured their members against the workmen's compensation risk and paid about £2,000,000 a year in compensation. The majority of employers in several of the most important industries in the country covered their risks by this means.
The committee, after examining the subject thoroughly, found that there were certain defects in the system then obtaining, but were of opinion that these defects could be remedied largely without resort to a State system of insurance, although not without the introduction of a certain measure of State control. They proposed that in future at least 70% of the premium income should be expended in benefits to injured workmen or their dependents, and that the remaining 30% should be available for the management, expenses or profits of the companies and the payment of commission to agents, the latter not to exceed 5% of the premium income in any case. They calculated that there would thus be saved on the then cost to employers a sum of between £1,250,000 and £1,500,000 a year which, under the existing organization would be paid away in expenses of management, commission and profits.
In order to provide against the risk to the workman of uninsured employers proving unable to meet the obligations incurred under the Act, it was proposed that every employer other than the Crown, a local or public authority, a statutory company, or householder in respect of servants not employed by him for the purpose of his trade or business, should be required to insure against the workmen's compensation risk. Employers with an annual wage-roll exceeding £20,000 were to be entitled to claim exemption from compulsory insurance upon compliance with prescribed conditions. Householders were excluded from the provision of compulsory insurance because, as the risk of accidents to domestic servants is small, the premium charged by insurance companies is more or less nominal, and also because it was considered that the cost and difficulty of enforcement would be out of all proportion to the number of persons involved. The committee were informed that a large proportion of householders already insured, and they believed that when the proposed increased liabilities were effective “few would be so unwise as to fail to cover their risk by insurance.”
The maximum rates of premium were to be approved or fixed by a Government official who was, for convenience, referred to in the report as the proposed Commissioner. It was proposed to bring within the scope of the Act large new classes of persons. These were:—
(a) Persons employed otherwise than by way of manual labour whose remuneration is at a rate not exceeding £350 a year (instead of £250 as under the existing Act).
(b) Employment of a casual nature for the purposes of any game or recreation where the persons employed are engaged or paid through a club.
(c) Taxi-cab drivers who, on the ground that they are the bailees of their cabs rather than the servants of the cab-owner, were excluded from the original Act.
(d) Share fishermen employed in the trawler industry.
(e) Share fishermen employed in the herring or other fishery to be brought within the Act by order of the Commissioner, if he was satisfied, after public inquiry, that they ought to be included.
(f) All persons ordinarily resident in the United Kingdom who were emploved, or were travelling in the course of their employment, in a British ship.
Under the original Act the dependents of a workman killed were entitled, under the Workmen's Compensation Act, to a payment of not less than £150 and of not more than £300. Provision was made by the committee for a substantial increase in benefits. They proposed that, in fatal cases, the benefits for total dependents should be on the following scale:—
(1) Where a widow is left, £250.
(2) Where the person killed leaves a child or children, a weekly allowance of 10s. for the first, 7s. 6d. for the second, and 6s. for every other child. The allowances were to be provided by the payment by the employer into a Central Fund of £500 in every case of a workman dying and leaving a child or children under 15 years of age.
(3) Where other dependents are left, in addition to the benefits mentioned above, a further sum of £500, or where dependents are left, not including widow or children, £250.
The provision for investing money for the children was new. The committee proposed that, in the case of partial dependents, a sum representing the value of the late workman's contributions to the support of the partial dependents should be payable, with a maximum of £250. By the term “support” was meant the provision of the ordinary necessaries of life suitable for persons in their position.
Originally the maximum benefit for total disablement was £1 a week. This sum was raised after Sept. 1917, by two increments, to 35s. a week. The committee proposed that the total payment should be 66⅔% of the average weekly earnings, with a maximum of £3. Since the cash value of an annuity of £3 a week for a man aged 30 might represent £1,500, the liability of employers would become very considerable, and it was this fact evidently which decided the committee to recommend compulsory insurance.
The arrangements for instituting benefits under the Act of 1906 provided that no compensation should be payable for incapacity lasting one week or less; for incapacity lasting more than one but less than two weeks compensation was payable, but only for the days after the first week; for incapacity lasting two weeks or more compensation was payable from the beginning of the incapacity. The committee proposed in future a waiting period of only three days, with no dating back.
Another provision was that any medical and surgical aid necessary, in addition to the medical treatment already available under the National Health Insurance Acts, should be secured for the injured workmen at the cost of the employer under a comprehensive scheme to be worked out by the proposed Commissioner in coöperation with the Ministry of Health.
It was proposed that county court registrars should be appointed to undertake the following duties under the supervision of the registrar:—
(a) To give information, free of expense, to injured workmen or their dependents about the benefits provided by the Act and the necessary procedure to protect their rights.
(b) To act as mediators between the employer and the injured workman or his dependents on the request of the parties.
(c) To be empowered, if both parties agreed, in the event of a dispute as to the workman's condition, to refer the matter to the medical referee, whose certificate should be final.
Power, it was recommended, should be given to the proposed Commissioner to institute inquiries into the practicability of a system of discounts from normal rates in consideration of approved safety devices or provisions, and by agreement with insurance companies and mutual associations to prescribe a practical scheme. The committee was in favour of a substantial increase in the amount of compensation to which priority may be given in the distribution of the assets of a bankrupt employer, and recommended that the amount should be fixed at the full amount of the claim.
The terms of the agreement concluded between the departmental committee on workmen's compensation and the Accident Offices' Association was the subject of some criticism in financial circles. The provision that commission, expenses and profit, if any, should not exceed 30% of the premiums was criticised especially, since it was known that during the previous eight years the average commission paid to agents by a large number of offices had been about 12%, the expenses of management had been about 19%, and the profit about 15%, making a total of about 46%. On the insurance side, however, it was recognized that, even if no committee had been appointed, the companies would have revised their rates of premium in consequence of the favourable effect on the business of the rise in wages during the war period. It was reasoned that the increased benefits recommended by the committee would certainly involve increased rates of premium. Evidently the insurance companies wished to make it quite clear that they had no desire to profit unduly from such developments, and they offered to conduct the business on terms which they hoped would not result in actual loss to them. There was a provision in the agreement that at the end of three yearly periods the rates should be reviewed, so that any deficiency there might be could be taken into account in fixing the premiums for the next triennial period. The insurance companies could well point out that any Government scheme to be inaugurated could not work the system on such favourable terms, and that insurance companies were in a position to do so only because of the efficient organizations which were already in existence.
Legislation was required to give effect to the proposals. This, the Government announced, it would introduce. The time of the Government throughout the first six months of 1921 was, however, much preoccupied with such matters as the coal stoppage, and the necessary legislation was still awaited.
New Extensions of Insurance.—In recent years there has been a great extension in practice of the insurance principle. In some directions this progress received a setback on the outbreak of war, while hostilities gave it an impetus in other directions. As an instance of the development of the principle there may be cited insurance against the risks of bombardment of persons and property in the United Kingdom by the enemy from the sea and air. Underwriters were asked very early in the war to cover such risks. Many insurance companies did not see their way to undertake the business, alleging that they had no data on which to work. But some underwriters and insurance companies did undertake the business and wrote a very large amount of it, to the comfort of the assured and, as events proved, to their own profit. Insurances were issued against the risks of damage to, or death of, individuals and against the risk of damage to property. The demand for insurance of this kind grew to very large proportions, and the market was hardly large enough to deal with the whole of it. Thereupon, with the assistance of leading underwriters, a Government scheme was instituted, use being made of the organizations of all the great insurance companies, which acted as agents for the Government in this matter.
The general insurance department of a composite company includes miscellaneous forms of insurance. Among the chief of these is motor-car insurance. During the war comparatively little was done in this form of business. Many private cars were garaged at specially reduced rates of insurance. In 1919 and 1920, when these cars came into use again, the insurance experience was very unsatisfactory. Costs of repairs were on a high scale, and there was an epidemic of thefts. Profits earned from the business in 1919 were small. For 1920 some of the leading insurance companies reported substantial losses. Early in 1921 rates of premium were advanced.
Unfavourable results also followed the transaction of burglary insurance during the two years immediately following the Armistice. This was due to a general epidemic of lawlessness which pervaded Great Britain, and was seen in the wholesale robberies of goods in course of transit. While the large insurance companies are always ready to transact the main forms of insurance, great credit should be given to the underwriters at Lloyd's, who are willing to consider the issue of policies covering every conceivable risk against which the public may legitimately expect to be insured. In this way insurances are effected against the risks of strikes and their effects, against the risks of changes in taxation imposed in budgets and of the special risks of aviation. Risks of the most diverse character are constantly offered, and those underwriters who have been prepared to accept them are known to have secured satisfactory financial results. Before the war efforts of underwriters were concentrated on forming an Aviation Insurance Association, the idea being that one office should be maintained where risks should be accepted on behalf of a large number of underwriting syndicates and also of two insurance companies. It was recognized that aviation insurance required close study and that one or two underwriters who could give the necessary attention to it could expect to be more successful than those who tried to transact it in addition to many other forms of insurance. The principle was also adopted by many of the leading insurance companies.
Weather insurance was being developed by underwriters at Lloyd's before the war. It was transacted in connexion with the business side of amusements and also in connexion with the spoiling of holidays by wet weather. Naturally little business of the kind was transacted during the war. Yet the importance of the weather upon world affairs was demonstrated again and again during the war. Operations on the western front were frequently affected by the weather, and there is no doubt that the Germans were successful in forecasting it. The battle of Jutland was also affected by “low visibility.”
With the resumption of peaceful activities great progress was made with weather insurance. In 1919 the ground was being prepared and a very large amount of data was collected, tabulated and employed respecting the experience in the United Kingdom for many years. In 1920 the volume of business of the kind transacted in the United Kingdom was on a large scale. Insurances were taken out to cover losses due to a falling-off in gate receipts, and to losses of caterers at open-air amusements such as race meetings, cricket matches and regattas. The summer of 1920 in the United Kingdom was wet, and the underwriting experience there was very unfavourable. The business was gradually being extended in foreign fields and the profits which were earned in other countries were believed to have just offset the losses suffered in the United Kingdom. The bulk of the business which had been transacted at Lloyd's was transferred to a leading insurance company, and it was known that the company was satisfied for losses to be on a substantial scale in 1920, because these demonstrated the utility of the business. At one time weather insurance was regarded as a somewhat frivolous form of business, but its importance came gradually to be recognized. It has been realized that there is an immense field open for insurance in connexion with the risk of damage to crops by bad weather. This is a form of business in which large sums of money could easily be lost, and prudent underwriters proceed somewhat carefully with it.
Credit insurance has long been transacted in the United Kingdom by a limited number of underwriters and insurance companies, and in 1920 and in 1921 it was hoped that the principle might be applied to overcome the difficulties caused by the collapse of the credit of some countries especially hard-hit financially by the war. A number of discussions took place between representatives of the Government, banks and insurance companies, but the problem was felt to be beyond the power of the insurance companies generally to solve, and, while the offices showed sympathetic interest in the different schemes discussed, they did not, as a whole, give practical support.
The Insurance Institute movement has developed notably in recent years. It dates back to 1873, when the Insurance Institute of Manchester was formed. The example was quickly followed in other leading centres in the United Kingdom. At the invitation of the council of the Insurance Institute of Manchester the various institutes were asked to send delegates to a meeting held on March 12 1897, at which the decision was taken to form an association to be called the Federation of Insurance Institutes of Great Britain and Ireland. The objects of this federation, as set out in its constitution, were to encourage the study of all subjects bearing on any branch of insurance, to promote the technical education of junior insurance officials, and to do such things as might be deemed desirable to advance the welfare and efficiency of the insurance profession. A scheme of examinations was inaugurated in 1899, which has steadily been developed. The Insurance Clerks' Orphanage was also the outcome of the Institute movement, and has done splendid work amongst the dependents of insurance officials throughout Great Britain. A journal has been published annually since 1898, and the 22 volumes now in print contain papers on all subjects cognate to insurance business. In 1912 the federation received a Charter of Incorporation. The objects of the new Chartered Insurance Institute were set out in 14 clauses, of which the first reads as follows:—
To provide and maintain a central organization for the promotion of efficiency, progress, and general development among persons employed in insurance business, whether members of the Institute or not, with a view not only to their own advantage, but to rendering the conduct of such business more effective, safe, and scientific, and securing and justifying the confidence of the public and employers by reliable tests and assurances of the competence and trustworthiness of persons engaged in such business.
In June 1921 the membership of the Chartered Insurance Institute approached nine thousand. The membership included that of 30 local institutes in the United Kingdom. In addition, seven institutes in British dominions overseas were affiliated to the Chartered Insurance Institute, namely, those of the Cape of Good Hope, New South Wales, South Australia, Western Australia, Victoria, Toronto and the Transvaal. Primarily, the Chartered Insurance Institute is an examining body, and its present curriculum includes all subjects under the headings of fire, life, accident and marine insurance. For the examinations held in 1921, applications were received from 2,530 candidates, who entered for upwards of 12,000 subjects. Simultaneous examinations were held in 43 different centres throughout the United Kingdom. The council decided in 1921 to extend their operations in this connexion throughout the world. The diplomas of the Institute are sought after, and a fellowship diploma, secured as the result of an examination, may well be regarded as a hall-mark of proficiency in insurance business.
United States
Insurance in the United States during the years 1910-21 developed along lines of increasing adaptability to the needs of policy-holders and solidified its standing as an essential and reliable financial instrument.
Extent.—In practically all lines of insurance the figures show a remarkable increase in extent and variety of risks carried under insurance contracts. This resulted from the need to provide for hazards not previously covered, from the general expansion of business, from the increasing recognition of the desirability of insurance of all kinds as a means of reducing personal and business risk, and from an increased activity on the part of insurance carriers in providing new forms of coverage. There was also considerable activity in the organization of new companies by interests which had formerly specialized in fire or casualty insurance and thus became enabled to offer coverage in all fields with the exception of life.
Effect of the War.—The World War affected in greater or less measure all forms of insurance. The seriousness of the resulting problems varied in proportion to the intimacy of the connexion between war hazards and particular kinds of insurance. The insurance business as a whole was affected by war inflation and subsequent deflation, leading to increased expenses, increased taxation, depreciation of securities, increase in interest rates, fluctuating property values, and marked changes in the moral hazard. During the period of inflation there was a general tendency to increase the volume of business, with an improvement in the moral hazard, as it was distinctly contrary to the interests of policy-holders to have losses. With the period of deflation, decreasing values and less intensive industrial activity, insurance companies were confronted with a large volume of insurance on depreciating property values. At the same time there was a decreased interest on the part of policy-holders in avoiding losses. In many cases it became profitable to collect insurance rather than to preserve the values insured.
In certain lines the increased volume of business and apparent prosperity of insurers led to the organization of many new companies and the introduction of inexperienced personnel. Subsequent events tested these new organizations and in many cases caused their disappearance.
The extreme depreciation of securities might have caused serious problems for companies which carried large amounts of invested funds over considerable periods of time had not insurance officials applied new standards which took into account the intrinsic worth rather than the market price of the securities.
At the beginning of the war considerable direct insurance and reinsurance was carried by the American branches of alien enemy companies. Even after the entry of the United States into the war these companies were permitted to write business. It soon became evident that their activities must be checked, largely because their operations enabled them to acquire and convey to the enemy vital commercial information. At the end of 1917 these companies ceased writing new business and were taken over by the Alien Property Custodian. This change necessitated a new distribution of insurance in the American market and resulted in an increase in business for American companies and for those of friendly nations.
Coöperation of Insurance Carriers.—The years 1910-21 showed a remarkable increase in the acceptance of the principle of coöperation among insurance carriers. Problems involved in the control of new lines of business, in the meeting of new conditions in old lines, and in general the recognition of common interests by insurance executives all have contributed to the growth of coöperative organizations. These organizations have as their chief purposes education of the public, control of legislation, making of premium rates, adoption of uniform contracts, discouragement of bad practices, provision of reinsurance facilities, suppression of fraud. All this is a part of the growing recognition that the business can no longer proceed along the old individualistic lines.
Governmental Regulation.—During 1910-21 there were also notable advances in the regulation of insurance in the interest of the public. Perhaps the most significant is the growth in importance of the National Convention of Insurance Commissioners, an organization of regulatory officials from the various states in the interest of promoting sound and uniform methods of regulation. Discussions at the meetings of the Convention, and the work of its several committees, each of which deals with some one aspect of the insurance problem, have served to improve the quality of state regulation and to increase the respect with which state departments are regarded by state Legislatures, as well as insurance executives and the public. Among specific accomplishments in the general field of regulation may be mentioned: coöperation in the examination of insurance companies, the uniform valuation of securities for insurance purposes, regulation of the appointment and practices of agents and brokers, prohibition of discriminatory acts, and the adoption of uniform standards of practice.
Insurance Education.—There has been a marked increase of interest in insurance education. Some universities have departments of insurance with classes for college students and for men engaged in the business, and many other colleges and universities have devoted some attention to this subject. The Insurance Institute of America and its constituent societies have developed education among employees of the companies. The Casualty Actuarial Society was organized in 1914 for the purpose of furthering scientific research and education in casualty subjects.
United States Chamber of Commerce.—Recognition of insurance as an independent business activity of major importance was evidenced in the creation of an Insurance Department in the organization of the United States Chamber of Commerce.
Expansion of Operations Abroad.—In 1918 the American Foreign Insurance Association was organized to transact fire, marine and allied branches of insurance in all parts of the world with the exception of North America. The association was in 1921 composed of 16 leading American companies and had an extensive system of branches and agencies.
Life Insurance
Extent.—In 1921 life insurance still held its place as financially the most important type of insurance with assets of 253 companies at the end of 1920, as given in the Insurance Year Book, of nearly $7,400,000,000, a total income during 1920 of nearly $1,800,000,000, and disbursements of over $1,200,000,000. These figures represent a growth of over 100% since 1909 when the same items for 189 companies were, respectively, about $3,500,000,000, $750,000,000, and $500,000,000. Consideration of the reports of companies subject to the jurisdiction of the New York Insurance Department shows that the increase of business during the 10 years was somewhat irregular. The total number of policies in force increased from slightly over 5,750,000 on Dec. 31 1909 to nearly 14,000,000 on Dec. 31 1920; insurance represented by these policies from over $11,000,000,000 to nearly $27,000,000,000. At the same time the size of the average policy increased from $1,930 to $2,055. There were substantial increases in the amount of new business written in each of the years 1910 to 1913 inclusive, a slight decrease in 1914, further increases in 1915 to 1918 inclusive, and an immense increase in 1919 which was exceeded in 1920. The amount of new business written in 1920 was more than five times the amount written in 1910. Practically all this new business represented an increase in the business of old companies. At the beginning of the period there were 35 companies operating in New York and at the end 37. In the whole United States the number of companies operating increased in the same period from 189 to 253, but nearly 85% of the business was carried by companies operating in the state of New York.
It is impossible accurately to assess the importance of each of various reasons for the immense increase in the life-insurance business. The following are probably the principal causes: (1) Inflation and high prices, making necessary a larger amount of insurance to achieve the same real protection. (2) Increased willingness to pay for insurance out of high wages and profits due to the war. (3) Education in the desirability of life insurance through widespread application of the governmental war-risk scheme. (4) Development of life insurance to cover business risks, inheritance taxes, and other contingencies.
One result of the Armstrong Investigation of 1906 was an attempt to limit the new business which individual companies might write in any one year. The impracticability of the limitations originally imposed soon became evident and modifications in the law caused their almost complete elimination.
The following table from the Insurance Year Book presents in detail the record for 1910-20 of new business written and insurance in force for companies reporting to the New York Insurance Department:—
| No. of Companies |
New Business Written |
No. of Policies in Force Dec. 31 |
Amount of Insurance in Force Dec. 31 |
Amount of Average Policy | |
| 1910 | 33 | $1,362,589,920 | 6,049,617 | $11,669,698,842 | $1,929 |
| 1911 | 34 | 1,577,846,251 | 6,621,386 | 12,802,989,205 | 1,934 |
| 1912 | 34 | 1,702,146,572 | 7,002,352 | 13,527,321,222 | 1,932 |
| 1913 | 34 | 1,840,577,945 | 7,452,154 | 14,324,485,296 | 1,922 |
| 1914 | 35 | 1,808,730,481 | 7,851,199 | 14,931,150,898 | 1,902 |
| 1915 | 35 | 1,928,288,981 | 8,284,281 | 15,609,722,445 | 1,884 |
| 1916 | 35 | 2,362,193,027 | 8,886,568 | 16,784,207,636 | 1,889 |
| 1917 | 35 | 2,879,338,785 | 9,502,382 | 18,422,349,562 | 1,938 |
| 1918 | 37 | 2,979,783,022 | 10,193,211 | 20,018,199,440 | 1,963 |
| 1919 | 37 | 5,213,897,389 | 11,602,715 | 23,849,488,761 | 2,050 |
| 1920 | 37 | 5,628,778,503 | 13,199,605 | 26,839,537,511 | 2,055 |
Mortality.—The registration area of the United States showed a decrease in general mortality from 14.7 per thousand to 12.8 per thousand for the years 1910 to 1919 inclusive. Investigations of mortality of insured lives showed a similar trend. This favourable mortality experience was interrupted by the influenza epidemic. It was at its height during the winter of 1918-9, resulting in such an increase of deaths that the mortality of insured lives reached approximately 100% of the American Experience Table, although normally it is expected to reach only about 55 to 75% of that table according to the age of the company. A well-known actuary has said that the net effect on the general body of policy-holders in participating companies was the loss of approximately one year's dividends. Fortunately the epidemic was brought under control and no insurance company was unable to meet its liabilities to policy-holders on account of it. A few small companies were seriously embarrassed and some were forced to reinsure; but the large old-line companies, although they found it necessary to reduce dividends in some cases, were at no time in danger of becoming unable to meet their obligations.
Mutualization.—In the years 1910-21 the Metropolitan Life Insurance Co. and the Home Life Insurance Co. passed from the stock form of organization to the mutual. The Equitable Life Assurance Society and the Prudential Life Insurance Co. practically did so although they were in 1921 still technically stock companies. With these changes the mutual form of organization became the ruling force in life insurance, nearly all of the large companies in 1921 being operated on the mutual plan. A large majority of the smaller companies were stock corporations.
Group Insurance.—Group insurance has as its purpose the insurance of the lives of a group of employees under a blanket contract issued to the employer who becomes responsible for the payment of premiums although he may arrange for contributions from his employees. The New York Insurance Department issued its first approval of a policy of this form in Feb. 1911. On Dec. 31 1920, according to the Insurance Year Book, there were nearly 19,000 policies and over $1,500,000,000 of insurance in force under this plan. Although 31 companies had group insurance on their books, 4 of these wrote about 90% of the total business. In its typical form this insurance is written under a yearly renewable term contract at a premium rate based on the age-characteristics of the group at the time of writing the contract and on the desirability of the group as an insurance risk. The individual amounts payable to the beneficiaries of the employees are small, varying from $500 each to a maximum of $5,000. This type of insurance is becoming an accepted form for large industrial corporations.
Disability Clause.—The disability clause commonly added to the insurance contract provides for the assumption by the life insurance company of the risk that the insured might become totally and permanently disabled. In its most complete form it provides for a waiver of premiums during the period of disability, maintaining the amount of insurance unimpaired, and for the payment of an annuity to the policy-holder. In its early form the clause provided for waiver of premiums alone, but it gradually has been liberalized as experience and the demand for protection have developed. A recent development is a provision to the effect that after a policy-holder has been totally disabled for three months it shall be presumed that he is likewise permanently disabled. Another development in liberality is the practice of granting benefits after death which might have been claimed under this clause by the insured during his lifetime.
Tuberculosis, insanity, and accidents account for the majority of cases of permanent and total disability. Mr. Arthur Hunter in a paper delivered before the Actuarial Society of America presented the following figures covering the experience of the New York Life Insurance Co. from 1910 to 1920:—
| Cause of Disability | Number of Cases |
Per cent of Total Claims | |||||||||||||||
| Tuberculosis |
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| |||||||||||||||
| Insanity | |||||||||||||||||
| Accident | |||||||||||||||||
| Paralysis of all forms including infantile | |||||||||||||||||
| Cancers and tumours | |||||||||||||||||
| Heart disease | |||||||||||||||||
| Other causes | |||||||||||||||||
| Total |
|
|
Double Indemnity.—The so-called double-indemnity clause which has come into general use in life policies takes two forms: one promising a payment of double the amount of insurance in the event of death from any accidental cause; the other promising double payment if accidental death occurs while the insured is a passenger on a common carrier. A small extra premium is usually charged for this feature. This coverage has developed largely as a selling point and it seems to many to have no logical place in a life-insurance contract.
Mortality Investigations.—In 1916 the Bureau of the Census published an interesting set of mortality tables known as the United States Life Tables, 1910. These were based on the general mortality statistics for the original registration states and showed mortality for males and females, whites and negroes, natives and foreign born, and dwellers in city and country. There were also special tables for the states of Indiana, Massachusetts, Michigan, New Jersey, and New York. The Medico-Actuarial Mortality Investigation was completed and published in 5 volumes. This investigation was undertaken jointly by the Association of Life Insurance Medical Directors and the Actuarial Society of America. To quote Mr. Wendell M. Strong (American Year Book, 1913, p. 369): . . . “The present investigation is of even greater scope than the Specialized Investigation and is participated in by 43 companies of the United States and Canada, including practically all of the important companies of both countries . . . the scope of the investigation will be seen from an enumeration of a few of the subjects and classes investigated, such as weight with reference to height and age, causes of death, over-weights, under-weights, large men, small men, married women, unmarried women, family history of tuberculosis, different classes of miners, different classes of employees in the iron business, and different races.”
It has long been recognized that the American Experience Table of Mortality is not an accurate statement of insurance experience, particularly as to the younger ages. In 1915 the Actuarial Society of America, at the suggestion of the National Convention of Insurance Commissioners, undertook to prepare a new American table. The result of the work, which was participated in by these two organizations and by the American Institute of Actuaries, was issued in the form of two principal tables: the American Men Table, and the Canadian Men Table, of which the former is the more important. These tables are based on the combined experience of 60 leading insurance companies of the United States and Canada. The results show, for ages below 50, a considerably lower mortality than that indicated by the American Experience Table, while mortality rates above 50 are approximately the same.
Governmental Insurance.—Two states have experimented with state-managed life insurance, each contemplating principally the elimination of the agent's commission. The Massachusetts Savings Bank Insurance scheme, which was started in 1907, showed Oct. 31 1919 total insurance in force of $12,374,000. The Wisconsin State Life Fund, which was started in 1912, showed insurance in force Dec. 31 1919 of $404,000. The most important governmental attempt to furnish life insurance during the period was of course the War Risk Insurance Bureau, described under Pension.
Industrial Insurance.—Industrial insurance showed a steady growth during the period, as indicated by the following table from the Insurance Year Book:—
| No. of Companies |
Insurance Written |
Insurance in Force (as of Dec. 31) | ||
| No. of Policies | Amount | |||
| 1910 | 22 | $ 749,717,264 | 23,044,162 | $3,179,489,541 |
| 1915 | 25 | 999,079,322 | 33,370,638 | 4,431,754,866 |
| 1920 | 20 | 1,545,989,192 | 49,178,887 | 7,121,380,255 |
Fraternal Insurance.—The development of fraternal insurance, so far as figures are available, is shown in the next table from the Insurance Year Book:—
| No. of Orders |
Insurance Written |
Insurance in Force (as of Dec. 31) | ||
| No. of Certificates |
Amount | |||
| 1910 | 497 | $1,331,552,713 | 8,558,093 | $9,562,511,910 |
| 1911 | 396 | 1,200,633,063 | 10,122,169 | 9,839,909,282 |
| 1912 | 397 | 1,023,726,087 | 9,963,019 | 9,472,232,473 |
| 1913 | 509 | 1,065,071,108 | 8,058,317 | 9,622,276,590 |
| 1914 | 498 | 1,079,569,596 | 7,868,554 | 9,171,284,227 |
| 1915 | 472 | 922,890,799 | 7,695,944 | 8,694,449,483 |
| 1916 | 523 | 1,155,784,564 | 8,674,996 | 9,162,111,616 |
| 1917 | 533 | 822,041,734 | 7,456,551 | 9,129,974,447 |
| 1918 | 506 | 834,170,063 | 8,021,387 | 8,838,578,765 |
| 1919 | 463 | 1,327,957,612 | 10,380,132 | 9,531,216,614 |
| 1920 | [2]238 | 1,177,970,840 | 8,439,097 | 8,879,451,774 |
An improvement in the conditions of fraternal insurance, most important from the point of view of the insured, was brought about by the Mobile Bill and the New York Conference Bill. The former was the result of a meeting of the National Convention of Insurance Commissioners and representatives of the fraternal organizations held in Mobile, Ala., in Sept. 1910. It was enacted into law or adopted by departmental rulings in many states without material amendments and required the societies gradually to improve their condition under state supervision until they should reach a defined standard of solvency. The latter bill which has since been generally adopted is in the nature of an amendment to the Mobile Bill and is an improvement on it in some respects. Through legislative permission the fraternal societies have also acquired the power to write juvenile insurance.
Fire and Marine Insurance
The development of fire and marine insurance during the years 1910-20 is indicated by the appended table from the Insurance Year Book.
It must be remembered in considering these figures that the 1920 statements do not reflect completely the process of deflation of business, as the figures for 1921 were not available when this article was written.
It is unfortunate that aggregates are not available separately for fire, marine and allied lines of insurance. The figures here given represent all lines written by companies doing primarily fire and marine business.
Fire and Marine Insurance, 1910-20.
| No. of Insuring Organizations |
Net Premiums | Total Income | Paid for Losses | Paid for Expenses | Total Disbursements | |
| 1910 | 624 | $ 267,134,029 | $ 295,644,715 | $125,335,702 | $ 95,466,763 | $256,681,453 |
| 1915 | 659 | 433,995,437 | 474,626,373 | 226,867,125 | 159,568,682 | 416,275,196 |
| 1920 | 926 | 1,020,241,864 | 1,102,788,799 | 461,872,894 | 378,257,920 | 907,245,187 |
Fire Losses and their Prevention.—The annual fire losses in the United States during 1910-20 as compiled from various sources by the Spectator Co. show a fluctuating tendency due probably to their relation to the changing business situation. It will be noted that for the year 1920 there is an unusually high figure.
Fire Losses in the United States, 1910-20.
(From the Insurance Year Book.)
| Aggregate Property Losses |
No. Fires Causing Loss of $1,000,000 or More | ||||||||||||||||||||||||||||||||||||||
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|
|
During 1910-20 there were 10 fires involving losses of $5,000,000 or more each, 5 of which caused losses of over $10,000,000 each. Certain of these fires were caused in part at least by explosion.
The insurance experience of the 10 years was very favourable as there was only one year, 1914, during which the ratio of insurance losses to premiums exceeded the average ratio of the past 61 years. This ratio touched its high point in 1914 at approximately 60% and its low point in 1919 at approximately 40%. The ratio was rising during 1920 and 1921.
In 1915 the Actuarial Bureau of the National Board of Fire Underwriters was founded in response to a demand for complete classified statistics of fire insurance experience. To 1921 this work had been devoted almost entirely to the classification of losses by states and by causes and a report had been issued on this subject covering the years 1915-19 inclusive. The following table is a condensation of this report:—
| Amount of Losses |
Per cent of total | |
| Strictly Preventable Causes | $287,759,960 | 25 |
| Partly Preventable Causes | 484,753,172 | 43 |
| Unknown Causes | 360,587,544 | 32 |
| Total | $1,133,100,676 | 100 |
Little was done in the development of entirely new fire-prevention devices. There was considerable improvement in the efficiency of operation of devices which were already in use in 1910, and there was a widespread development of education and stimulation of fire prevention. In 1920 the President of the United States issued a proclamation setting aside Oct. 9 as fire-prevention day. Education in fire prevention was extended to the schools and a large amount of literature was distributed. Results from this work had not yet become perceptible during 1921, though future years were confidently expected to show a reduction of losses. During the war important industrial and governmental property was put under the care of fire-prevention engineers. The results furnished abundant evidence of the effectiveness of preventive measures when directed by experts.
Fire Insurance Rating.—Little fundamental progress was made in the development of fire-insurance rating. Modifications of the Universal Mercantile Schedule and the Dean Schedule still were used throughout the country in 1921. The latter had been adopted in new localities, notably in New England and the Middle, West, and was used in 29 states. Interesting proposals for improvement of the rating situation were offered in the Experience Grading and Rating Schedule and the L. and L. Schedule, both of which failed to be adopted. The former contemplates a revolutionary change of methods of rating. It is a plan for collecting statistics on fire-insurance experience in such a way that relative hazards may be calculated and premium rates based upon them. The L. and L. Schedule does not differ in principle from the older type.
Several states have passed laws dealing with fire insurance rates, varying all the way from the prohibition of discrimination to the creation of a special rating board for the purpose of making rates. Better opinion seems to favour a type of law which permits the making of rates by insurance carriers acting in concert and subjects the rate-making organization to supervision. Several important reports on investigations dealing primarily with fire insurance were made during the period, resulting in advances in state regulation and in curbing undesirable practices. The most significant of these was the Merritt Report transmitted to the Legislature of New York in 1911. Others were the Illinois Report of 1914, the Pennsylvania Report of 1915, the Missouri Report of 1914, and the North Carolina Report of 1914.
Anti-Compact Laws.—Attempts have been made in certain states to prevent all forms of coöperation between insurance companies in fixing premium rates. In the states of Missouri, South Carolina, and Mississippi such attempts resulted in the virtual withdrawal of the companies. Compromises were effected in the first two states and the objectionable legislation withdrawn; the situation in Mississippi was still unsettled in 1921. Such destructive methods are evidence of a poverty of constructive ability to deal with insurance problems. They cause confusion in business and retard the adoption of more adequate measures.
Underwriting Profit.—The conflict of opinions concerning what constitutes a reasonable underwriting profit for fire insurance companies was resolved in some measure by the agreement between the National Convention of Insurance Commissioners and the National Board of Fire Underwriters. The following points of agreement were reported by the latter body in the Proceedings of its 55th Annual Meeting:
“1. The minimum ‘reasonable’ underwriting profit is 5% plus 3% additional for conflagrations.
“2. Five years is a minimum term upon which to base a calculation as to underwriting profits.
“3. The difference between earned premiums and incurred losses, plus incurred expenses, represents underwriting profit or loss.
“4. A conflagration is defined as property loss exceeding $1,000,000.
“5. In determining the underwriting experience in any given state the first $1,000,000 of loss shall be charged to the particular state and the balance distributed among all the states (including the one in which it occurred) in proportion to the premium income of each.
“6. That no part of the so-called ‘banking’ profit shall be included in the underwriting profit.”
It is to be noted that the term “underwriting profit” is defined by this agreement as signifying a profit drawn entirely from the operation of the insurance business as such and that there is eliminated from consideration any profits which a fire-insurance carrier may make from invested funds. Dividends to stockholders are in many cases paid from the latter source, insurance profits going entirely to increase surplus.
Revision of Standard Policy.—The old New York Standard Policy which was in use in many parts of the United States was supplanted in New York on Jan. 1 1918 by a new policy form. The new form differed in detail and in arrangement from the old and gave effect to the changes which some 30 years' experiences had shown to be desirable. Substantially the same policy had been enacted in Pennsylvania in 1915. The new policy had been approved by the National Convention of Insurance Commissioners and was in effect in 1921 practically throughout the United States.
Marine Insurance.—The only figures indicating the extent of the marine insurance business in the United States are those which were compiled by Dr. S. S. Huebner of Philadelphia in connexion with an investigation of marine insurance described below. These show that the total net premiums received during the year 1918 by American companies amounted to over $70,000,000 and by foreign companies to over $39,000,000, a total of $109,000,000. Estimated losses paid were respectively $40,000,000 and $24,000,000, a total of $64,000,000. These figures take no account of the large amount of marine insurance which is placed directly with the home offices of foreign companies, of which no record appears in the American reports. It is variously estimated that premiums for this business aggregate 20% to 30% of the total for the United States.
The War and Marine Insurance.—Marine insurance was more intimately connected with the conduct of the World War than was any other line, since it dealt with hazards involved in shipping supplies to Europe. As evidence of the increase of interest in the business during the war, the N. Y. Insurance Department reports that, while there were but 58 organizations authorized to write marine insurance in New York on Jan. 1 1914, there were 109 so authorized on Jan. 1 1918. This total includes new companies organized during the period as well as old companies extending their facilities. So great, however, were the risks incident to war that it was impossible for private initiative to cope with them. Accordingly the Government established the Bureau of War Risk Insurance, which accepted insurance against war hazards. This Bureau was a necessity during the continuance of hostilities; without it American commerce must have almost ceased. Its operations had by 1921 been discontinued so far as they related to marine insurance. New private organizations were attracted into the field by the seemingly large profits, but lack of experience and reckless underwriting caused the disappearance later of some of these organizations and the withdrawal from the marine business of many of the companies primarily interested in fire insurance. Losses which were apparently small during the war period in their final settlement turned out to be alarmingly large. In addition there was an increase in the moral hazard after the war, due to depreciation of values and to the tendency on the part of foreign merchants to refuse to accept shipments of goods whenever a pretext could be found. Congestion of ports in the artificially prosperous times succeeding the Armistice was another cause contributing to increased losses.
During this period, owing largely to the competition of new underwriters, the marine insurance contract was quite generally extended to cover the risk of theft and pilferage. Experience under this coverage has been most unfavourable, as the existence of insurance tended to relieve shippers and carriers of concern for the safety of the cargo. This, with the moral irresponsibility engendered by the war, demonstrated the need of restricting or eliminating the coverage. When accepted it is now frequently provided by indorsement that only 75% of theft or pilferage losses will be paid.
Congressional Investigation.—In 1919 the Committee on the Merchant Marine and Fisheries of the House of Representatives and the U.S. Shipping Board entered upon an investigation of marine insurance in the United States. It early appeared that what the committee regarded as an unduly large share of American marine insurance business was placed directly or indirectly with foreign companies. On the ground that American marine insurance facilities should be developed to a point which would enable American companies to care for the commercial needs of the United States, the committee recommended that combinations of companies be legally authorized, and that the legislative obstructions, including taxation, which hamper companies in their competition with alien interests, should be removed. To provide increased facilities for hull insurance and the survey of losses, three marine insurance syndicates were organized with the approval and encouragement of the Congressional Committee. Syndicate “A,” which is a service syndicate for the settlement of losses, operates through the United States Salvage Association, Incorporated. There was likewise introduced a marine-insurance bill for the District of Columbia, designed to serve as a model for enactment in the states.
Marine-Insurance Contract.—In 1917-8-9 the American Hull Underwriters Association adopted certain new forms of marine-insurance contracts which have come into general use, not differing widely from the old forms but adapting them to American conditions.
American Bureau of Shipping.—Increased activity in extending the operations of the American Bureau of Shipping has placed at the disposal of American marine underwriters improved facilities for the classification of risks.
Casualty and Miscellaneous
Workmen's Compensation.—The substitution of the principle of workmen's compensation for that of employer's liability in the United States (see Labour Legislation) gave rise to an entirely new form of insurance by which insurance carriers assume the obligation of employers to pay compensation to their workmen. Workmen's compensation insurance occupies a peculiar place. The insurance carrier is placed in the position of an administrative unit in a scheme of social welfare. Its duties involve relieving employers of undue risk, insuring the payment of compensation to employees, and assisting in the prevention of industrial accidents. In this form of insurance also there are found the only examples in the United States of the extensive application of state-managed insurance. In 6 states the so-called state funds are given a monopoly of workmen's compensation insurance, in one state there is practically a monopoly, and in 9 states the state fund competes with private carriers. The growth of this type of insurance followed the increasing acceptance of the compensation principle, until in 1920 the carriers collected some $200,000,000 in premiums, more than twice the amount of the entire premiums paid for all kinds of casualty insurance in 1910. It was by far the most important of the lines of insurance written by casualty companies.
Workmen's compensation insurance is written largely by stock-insurance companies, but the organization of state funds, mutuals, and reciprocals has intensified competition for the business. Fortunately competition is in large measure regulated by coöperative action and state regulation, so that it had not the disastrous effects which might otherwise have developed. It undoubtedly improved the service offered to policy-holders.
Regulation of premium rates by the state was from the first an important factor in the compensation business, which is held to be affected with a greater public interest than are most other types of insurance. At first this regulation took the form of approval of rates as to adequacy, with the purpose of requiring carriers to collect sufficient premiums so that there might be no question of their ability to pay claims to injured workmen. Largely through the operation of competition, approval as to adequacy has involved approval as to reasonableness since rates charged in individual cases tend to be the lowest permissible. The measurement of the hazard of workmen's compensation insurance as expressed in terms of rates is peculiarly difficult. In the first instance the carriers had no experience of immediate value. Even after experience was acquired it was difficult to make use of it, because of the great variation in laws and conditions among the states and because of the frequent changes in the laws of each state. Further, each industry and each plant should be rated on its peculiar hazards.
The first rates, which were largely a matter of judgment, were too high. Successive reduction and changes in conditions brought about a rate-level which in 1916 was seen to be too low. The state departments of insurance and the carriers realized the necessity of revising rates and of securing the widest possible basis of experience for the revision. Compensation rates for the entire country were revised in 1917 by the Augmented Standing Committee, a group representing all interests: companies, mutual companies, state funds, and state departments of insurance. The success of this conference led to the formation in 1918 of a continuing coöperative organization, representative of the same general interests. This organization, the National Council on Workmen's Compensation Insurance, conducted another general revision of rates in 1920. These rates, with certain detailed changes, were in effect in 1921. In addition to the national organizations, there were many state rating bureaus which have control over the making and application of rates in their respective states. All but one of these organizations coöperated with the National Council. Where exclusive state funds are in operation each state is, of course, a unit.
The rates of premium developed in the first instance were average rates for each industry. Further account must be taken of the variation from the average of individual plants within the industry. This is accomplished through the application of a system of merit rating, consideration being given in most cases to the loss experience of the individual plant and to the hazards of the plant as determined by inspection of its physical features. Provision is made in compensation acts for the payment of compensation in periodical installments. An insurance loss under a compensation policy may involve payments extending over a considerable length of time. To guarantee the ability of the carrier to make such payments it is necessary that a reserve be set up which shall be equivalent to their probable amount. Such reserves are required by state law, and the rules for their calculation have gradually been improved so that there was in 1921 little question of their adequacy.
Automobile Insurance established itself during the years 1910-21 as a major department of the business. Net premiums received during 1920 were estimated by The Insurance Field at $185,000,000. Full coverage under automobile policies involves several hazards, contracts being written to cover the risk of fire, theft, damage to the insured's automobile through collision, liability for damage to the property of others, and liability for personal injury. Fire and theft insurance are written by fire and marine companies, personal liability by casualty companies, while collision and property-damage insurance are written by both. In the West and South there are many specialized automobile insurance companies writing all forms of coverage. Combination contracts are frequently issued by a fire and marine company and a casualty company under a coöperative arrangement. The contract of each company is, however, independent.
The rapid development of this sort of insurance has carried with it serious problems, particularly in the fields of theft and collision where the moral hazard is peculiarly difficult to handle. Rates for these coverages are high, and losses so serious that in 1921 it was apparent that some means must be found to control the hazard. Both casualty companies and fire and marine companies had their separate organizations for discussion and for taking coöperative action on automobile problems. The two organizations coöperate closely in matters of common concern. In this way the contract and rating methods have gradually been developed. It seems probable that the loss problem will receive increasingly effective attention from these same organizations.
Accident and Health Insurance.—Premiums of approximately $92,000,000 were received for accident and health insurance in 1920. This was about three times the premiums of 1910, representing largely an increase in the business of casualty companies, although certain life-insurance companies have developed this field recently. Two new forms of contract appeared which are of particular interest. Accident and health insurance contracts may now be secured without provision for cancellation by the insurance company. Formerly contracts were written only on a one-year basis with provision for cancellation at any time by the insurer, and the bulk of the business was in 1921 still so written. It was the practice of the companies to cancel as soon as there was any evidence of a risk becoming undesirable; consequently, many individuals needing this type of insurance were unable to secure it. The new form insures the continuance of the coverage. Another recent development is group accident and health insurance, similar in its purposes and methods to group life insurance, described in a preceding paragraph. It is being used in many cases as supplemental to the limited coverage provided by workmen's compensation laws which apply only to occupational accidents. Many of the states have enacted standard provisions to be incorporated in policies, some of them compulsory and some optional. These laws have introduced an element of standardization into the contract but the schedules of benefits still remain bewilderingly diverse.
Other Lines.—During the years 1910-20 there were tremendous increases in the business of bonding and of plate glass, burglary and theft, and flywheel insurance. There were considerable increases in steam boiler, title, credit, and live stock, and a decrease in workmen's collective and employer's liability insurance.
Several new types of insurance appeared and attained positions of more or less importance. Among these are strike insurance, covering loss of profit and expenses due to strikes of employees; aviation insurance, covering hazards connected with the use of aeroplanes; weather insurance, covering loss due to interference by rain with public ceremonies, amusements, sales and other events; explosion insurance; crop insurance, covering the failure of crops to reach the marketable stage; riot and civil commotion insurance; and parcel post insurance, covering losses of parcels sent by mail. (R. H. B.)