Page:The New International Encyclopædia 1st ed. v. 10.djvu/770

INSUBANCE. 682 INSURANCE. risk, the gain from insurance becomes very slight, when the cost of cunjiivting the business is added to the first cost of the insurance. It is evident, however, that many risks are still untouched by insurance companies which olTer a fair field for their activity. One other point in connection with the subject of risks deserves brief consideration. While it is the purpose of insurance to reduce the burden which cbance losses bring upon society, one of its consequences is an increase in the actual amount of loss. This is due to the effect of in- surance upon the mind of the insured. An hon- est man may become less careful in protecting his property, a dishonest man may even seek to destroy his for the sake of obtaining the insur- ance. The danger of the loss through the careless- ness or misconduct of the insured is commonly referred to as "the moral risk.' It constitutes one element in every risk that the insurance com- pany assume*, and one which in general it is verj' dillicult to estimate. It is for the interest of the company to reduce the danger as much as possible, and it is contrary to public policy to allow them to increase it unnecessarily. Vari- ous forfeiture provisions are inserted in policies for the purpose of compelling greater careful- ness and reducing misconduct. The chief re- liance, however, must be on the strict applica- tion of the principle of insurable interest. It may even be practically advantageous to limit the amount of insurance to a certain percentage of the insurable interest in order to create a positive incentive to carefulness and honesty. It would at least be expected that the insurance companies would use all diligence to detect ex- tra hazardous 'moral' risks and avoid them. That they did not always do so in the past the history of marine insurance abundantly proves. How far they come short of doing it today can be inferred from the following statistics com- piled from the annual reports of the Massachu- setts State Fire Marshal to the Insurance Com- missioner. In the report for 1S96 forty per cent, of the in- surance-defrauding fires are said to have been the work of parties with a record, that is, who had previously collected or attempted to collect insurance from one to eight times on fires of a suspicious character. Of 14.3 insurance-de- frauding fires mentioned in the report for 1S07, 10 were set by persons who had had one or more previous fires, one of whom had had Ifi. Of 111 such fires in the report for 1808, 18 were set by persons who had had one or more previous fires, one of whom had had 6. Of 1.54 such fires mentioned in the reports for 1001 and 1002. one of the insured had had six previous fires, one had had five, two had bad three, two had had two, and 2.T had had one. The apparent increase in the later years in the proportion of these fires set by [M-rsons with a record may be due to greater activity on the part of the fire marshal and his assistants, but there is certainly no indi- cation of any improvement in the practice of the insurance companies. Such a state of things speaks for itself. The chief source of the trouble is undoubtedly to be found in the agency system, which makes the income nf the agents depend upon the amount of business they write, regardless of its character. The Premium. — The amount paid to the insur- ance company by the insured is called the pre- mium. It consists of two parts, the 'natural pre- mium' and the "loading.' The amount of the nat- ural premium is determined by the risk, or, to sjx-ak more precisely, it equals the risk. The loading is the amount added to tiie natural pre- mium to cover the cost of insuring the risk. In other words, the natural premium pays the losses and the loading pays the expenses. The insured in any company nmsl ])ay all the losses and all the expenses of the company, interest on the capital invested in the business included. This cu.^t of administration is distributed among all the insured, each contributing a certain pro- portion of his natural premium. It is interesting to consider what part of the entire premium is natural premium and what part is loading. In life insurance natural pre- miums are actually calculated and loadings added to them. In many forms of insurance, however, no such division is nmde in ]>ractiee, but the whole premium is estimated together. In such eases the proportion of loading can be discovered only by an examination of the expense account, which will reveal what part of the receipts from prcmiiuus has been returned to the policy-holders and what part has gone for expenses. It will be found that the proportion of loading varies a great deal from one kind of insurance to another, and fniui one company to another. In some cases the loa<ling d<K'S not exceed 20 per cent, of the nat- ural premium, in others it is as liigh as 100 per cent. The high expense accoiuit of the insurance companies is a great social burden. It enhances the cost of insurance and thus retards its growth. By far the largest single item in the expense account is usually under the head of commissions to agents, the generosity of which is defended on the ground that larg<' commissions are necessary to promote the extension of the business. Thus for the purpose of persuading more or less unwilling persons to insure, the cost of insurance to the entire body of insured is in- creased. It would be an experiment worth try- ing whether among people familiar with the practice of insurance a com])any could not be operated" at a cost so much below that of the present system that it could offer insurance at rates with which existing companies could not compete, at least without radical changes in methods of management. While from the social point of view the load- ing represents the cost of insurance, for a per- son -seeking insurance the entire premium con- stitutes its price. He is consequently interested in the questiim whether the competition of insur- ance companies may be relied on to reduce the price to the lowest point consistent with abso- lute safety. It is evident that the competitive principle would operate in this field at a tre- mendous cost. Competition works through the elimination of the least edicicnt. The faibire of an insurance company, however, may entail a far greater loss on the insured than it docs on the insurers. The severity of the process of elimina- tion has been greatly mitigated by the action of legislatures, many of which have provided for the eompulsory winding-up of the affairs of a com- pany on the appearance of certain indications of danger, while the company is still able to take care of the insured by reinsuring its risks. Further- more, the very uncertainty which constitutes an essential element of the insurance business makes unrestricted competition particularly dan- gerous. During a series of good years, when