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 Fire Underwriters' Associations 
 in tte United States 
 
 By ROBERT RIEGEL 
 
 THESIS 
 
 Presented to the Faculty of the Graduaj e School of 
 THE University of Pennsylvania in Partial Fulfil- 
 ment of THE Requirements for the Degree of 
 Doctor of Philosophy 
 
 The Chronicle Co., Ltd. 
 1916 
 
 ^ ; 
 
 IT.' 
 
EXCHANGE 
 
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Digitized by the Internet Archive 
 
 in 2007 with funding from 
 
 IVIicrosoft Corporation 
 
 http://www.archive.org/details/fireunderwritersOOriegrich 
 
Fire Underwriters' Associations 
 in the United States 
 
 By ROBERT RIEGEL 
 
 THESIS 
 
 Presented to the Faculty of the Graduate School of 
 THE University of Pennsylvania in Partial Fulfil- 
 ment OF the Requirements for the Degree of 
 Doctor of Philosophy 
 
 The Chronicle Co., Ltd. 
 1916 
 
"^^1 
 
A SURVEY AND CLASSIFICATION OF FIRE UNDERWRITERS' ASSO- 
 CIATIONS IN THE UNITED STATES 
 
 By Robert Riegel 
 Whartcn Schcol of Finance and Commerce, University of Pennsylvania 
 
 ALL text writers have emphasized the importance of fire insurance as a 
 business necessity and if a more decided proof be desired one need only 
 consider the many State investigations of this economic factor. (Oi 
 the entire insurance field the most important division is that of rate-making or 
 premium fixing, and yet one of tne principal agencies exercising this function 
 has received comparatively little attention by writers. The term "premium" in 
 fire insurance refers to tne amount paid by one having an interest in property 
 to an insurer, in return for a promise of reimbursement for damage to the 
 property by fire. Dwellings and mercantile buildings, with their contents, 
 form the bulk of the property insured, and the premium, or the amount paid for 
 insurance, is a matter of importance to the community as regards both home 
 and business relations. It is included in the expenditures of families, firms 
 and corporations. From fire premiums, in the last analysis, losses are paid. 
 Many policyholders yearly contribute small amounts which are paid out to the 
 unfortunate to settle losses, and if losses increase, premiums must increase, or 
 the claims ultim.ately fail to be paid. Fire insurance premiums, since fire insur- 
 ance is a necessity of business, and almost a necessity of life, are of vital 
 importance to all, and this is also true of the property loss by fire, because of 
 its effect upon premiums. That losses be as small as possible, and that insur- 
 ance premiums be adequate, fair and consistent, are both to the interest of the v > 
 American public. In spite of the fact that premiums and losses are of such ^ 
 vital importance the institutions most closely connected with them — under- 
 writers' associations — have received practically no notice except individually 
 by committees of investigation. 
 
 The amount of premJum paid depends upon the amount of insurance car- 
 ried and the rate. The rate is the premium per $100 of insurance, and criticism 
 of the rates of fire insurance companies is not new. It has probably existed 
 since the inception of the business, although in its early stages most people y^ 
 considered that rates were kept at a minimum because of the existence of com- 
 petition. Criticism has doubtless had its good effect in the improvement of the 
 methods of rating, from the time when insurance was on "common," "haz- 
 ardous" or "doubly hazardous" properties to the era of the modern schedule, — 
 when it has been based upon sound premises. At other times, however, it has 
 resulted in the passage of laws which have injured the insurance business, the 
 policyholders and the public. Valued policy laws were passed, requiring insur- 
 ance companies to pay, upon the destruction of a building, the amount named 
 in the policy regardless of depreciation since the underwriting of the risk. 
 
 3 
 
 361270 
 
Under such statutes it was to the insured's advantage to have his building 
 I destroyed and he made a profit thereby. Anti-compact laws came into exist- 
 • ence, forbidding combinations in the fixing or maintaining of rates. By the 
 \ passage of such laws States refused to permit combination, which was eliminat- 
 \ ing the discrimination in rates which had resulted from competition.* 
 
 Rate criticism has lately assumed a new phase, however, induced by the 
 iharacter of the means used to obtain rates, namely, underwriters' associa- 
 tions. No longer do we have all the companies, influenced by competition, 
 reducing their rates to the lowest point consistent with their loss statistics, or 
 even lower, or arriving by separate processes at the final rates which they 
 grant on properties. They instead co-operate to centralize the control of 
 rates — place the power with associations in which they, among others, are rep- 
 resented; and to the new methods the critics find new objections. It begins to 
 appear as if rates might be placed at any point the companies choose and 
 thereby become exorbitant. Competition eliminated, what check on confisca- 
 tion exists? Were the rates, promulgated by the associations with the help 
 of local schedules, optional, there would be no room for adverse criticism, but 
 they are of little value if not enforceable. The money spent in obtaining a 
 rating on a building would be wasted, if through competition a company were 
 forced to discard the rate for a lower one. The present question, therefore, is 
 not only whether rates shall be higher or lower, as may superficially appear, 
 but is also one of method. Shall they be determined by competition or 
 co-operation ? 
 
 The Instruments of Rate-Making. 
 
 Many important insurance rates in the United States to-day are arrived 
 at by the use of "schedules" such as the Dean or Analytic Schedule and the 
 Universal Mercantile Schedule. Such schedules set forth the various disad- 
 vantages and good features in building construction, location and occupancy, 
 with their respective additions to or deductions from a "basis rate." This 
 basis rate is the rate for a standard building in a standard city, according to 
 the Universal Schedule, and under the Dean Schedule for an "ordinary" build- 
 ing, which, however, is better than the majority of those in existence. Few or 
 many items may be considered in such schedules, and they vary from the short 
 schedule used in New England, containing 17 items, to the Universal Schedule 
 with 3,400 items, including occupancy charges. By the use of schedules the 
 following advantages are derived :t 
 
 1. Consistent and equitable rating. 
 
 2. Accurate rating, by taking into account each feature of construction. 
 
 *In 1912 anti-compact laws existed in the following States: Alabama, Arizona, 
 Arkansas, California, Georgia, Iowa, Kansas, Louisiana, Michigan, Mississippi, Mis- 
 souri, Nevada, New Hampshire, New Mexico, Ohio, Oklahoma, Oregon, South Dakota, 
 Tennessee, Texas. Washington, Wisconsin, (The Fire Insurance Pocket Index, 1913. 
 Spectator Company, New York, p. 75). For the de^velopment of such legislation see the 
 author's "Commonwealth versus Co-operation," THEi MARKET WORLD AND 
 CHRONICLE, June 12, 1915, or the same, "Rough Notes," April 22, 1915. 
 tStandard Universal Schedule for Rating Mercantile Risks, page 8. 
 
3 As a consequence of the above, the prevention of opposition on the 
 part of policyholders and legislators. 
 
 4. Encouragement of proper construction. ^ -, 
 
 5. Tendency to prevent anti-compact laws. 
 
 6. Discouragement of excessive brokerages and commissions. 
 
 7. More thorough inspection. ^ \, 
 
 8. Prevention of excessive deductions for fire departments. 
 
 9. Prevention of competition and rate-cutting. 
 
 The schedule having been prepared with as great scientific accuracy as is 
 possible under present conditions, it is unnecessary for a company to prepare 
 its own rating system, except for certain risks out of the ordinary on which l 
 it may grant insurance. The companies first co-operate, again as far as is) 
 possible under present conditions, in furnishing data for the compilation of I 
 such a schedule, and once worked out, collectively adopt it as a basis for their 
 business. Many schedules are used, but they usually follow the principles of 
 the Dean or the Universal Schedule, with adaptations for local conditions. 
 
 The Application of the "Schedule." 
 
 Having then a schedule, some human agency must be employed to apply 
 it to the various risks. Obviously each company might individually employ 
 raters to apply the schedule, but if there were two hundred companies doing 
 business it would be folly to employ two hundred agencies to apply the schedule 
 in a given locality when one might do it for all. The companies therefore 
 quite naturally co-operate. If each company was compelled to inspect each 
 building for itself, the expense of transacting business would be increased, ' 
 with the result that premiums would be higher, to the detriment of those who 
 must purchase insurance. The agencies which the companies establish in most 
 communities to apply the schedules for them and so make the rates, are associa- 
 tions variously known as "underwriters' associations," **fire insurance ex- 
 changes," "unions," and "tariff associations." 
 
 State laws, however, sometimes intervene to prevent the companies from 
 using the underwriters' associations to make the rates. In January, 1912, for 
 example, a bill was introduced in the Legislature of South Carolina to expel 
 from the State companies which were members of the Southeastern Under- 
 writers' Association, In some instances the laws impose such penalties as 
 prohibit companies from membership in such organizations. In 1897 the State 
 of Alabama passed a law stating that if property insured under a policy issued 
 by a company which was a member of any tariff or rating association was 
 destroyed, the owner thereof might recover the actual amount of loss or 
 damage, and in addition, twenty-five per cent of such loss or damage. The 
 latter amount was a penalty imposed for the company's membership and 
 participation in such an association. 
 
 After the passage of such laws the companies resorted to another device 
 to enjoy the co-operation thus denied but which is necessary in the making of 
 rates. Some party in a given territory made the rates and sold them to the com- 
 panies there operating. These parties were known — for obvious reasons — as "in- 
 dependent raters," although the term is a misnomer. It is quite plain that the 
 
independent rater is a device employed by the companies to do that which may 
 not legally be accomplished through underwriters' associations. It is useless 
 to co-operate in making or purchasing rates unless such rates are adhered to. 
 These purchased rates were given to a stamping, office, usually a department of 
 an association, and the stamping office had the sole power to permit a change 
 of rates. This was accomplished by the passage of a "relief rule." By such 
 supervision the rates published are maintained. The New York Fire Insur- 
 ance Exchange made rates for a certain portion of the State of New Jersey 
 up to December 16, 1909, at which time it was forced to relinquish this function 
 by a decision of the New Jersey Court of Errors and Appeals, declaring com- 
 binations to fix rates ultra vires, since this was an important duty of the 
 officers of insurance companies, and could not, under the charters of the 
 latter, be delegated to an association. The New York Exchange then sold its 
 maps and surveys to an employe, who resigned his position with the Exchange 
 and organized the "Hudson Inspection Bureau," which promulgated advisory 
 rates in what was formerly the territory of the Exchange. Differences between 
 Exchange members affecting this territory were still settled by the procedure 
 of the Exchange. 
 
 The foregoing briefly shows the connection of these associations with the 
 vital insurance function of rate-making. 
 
 Types of Associations.! 
 
 Underwriters' associations may be divided into types or classified, (1) on 
 the basis of the extent of territory in which they operate; (2) according to 
 their functions or objects; and (3) with reference to the character of mem- 
 bership. 
 
 CLASSIFICATION OF ASSOCIATIONS 
 
 According to — 
 
 r National 
 
 1. Jurisdiction J Sectional 
 
 Local 
 
 fUr 
 I Su 
 
 rban 
 burban 
 
 2. Functisns. 
 
 3. Membership, 
 
 Occupation 
 of members 
 
 Classification 
 of members 
 
 Requirements 
 
 Teclinicai and educational 
 
 Regulation of brokers and agents and rate-making 
 
 f Company representatives 
 Special agents 
 Agents and brokers 
 No distinction between members 
 
 r 1. Without qualification 
 I of voting power 
 
 Classified 
 membership 
 
 tSee J. B. Kremer, "The Agency, 
 Insurance Society of New York. 
 
 2. With qualification of 
 voting power. 
 
 ^ Adherence to agreed commissions to agents 
 Adherence to stated scale of brokers' 
 compensation 
 
 an address at the Ninety-first Meeting of the 
 
Types of Associations. 
 According to territory, the various organizations may be divided as follows : 
 
 1. Local. 
 
 (a) Urban. 
 
 (b) Suburban. 
 
 2. Sectional. 
 
 3. National. 
 
 While the last two terms are to an extent self-explanatory, "local" is 
 somewhat misleading, giving the impression of a small unimportant body in a 
 very restricted territory. It may, however, apply to organizations concerned 
 with the largest cities, to those with jurisdictions extending beyond city limits, 
 or to those within a city proper, with suburban territory excluded. The New 
 York Fire Insurance Exchange has no jurisdiction over suburbs, these being the 
 territory of the Suburban Fire Insurance Exchange, but its activities extend 
 beyond the city of New York proper. 
 
 Local associations might be subdivided into urban and suburban, therefore, 
 the city of New York furnishing an example of such division of territory. The 
 Suburban Fire Insurance Exchange there extends over Westchester, Putnam, 
 Rockland and Richmond counties, the Bronx east of the Bronx River, and all of 
 Long Island outside of the Borough of Brooklyn; while the New York Fire 
 Insurance Exchange supervises, roughly, Manhattan, the Bronx and Brooklyn. 
 Similar instances might be cited elsewhere. 
 
 Other local associations operate within a single State, but with jurisdic- 
 tions ranging from two or three counties to almost an entire State. The type 
 in mind is best described by illustrations. The Allegheny County Underwriters* 
 Association covers several counties in the western part of the State of Penn- 
 sylvania, and is one therefore with a comparatively limited area. The Under- 
 writers' Association of New York State has a broader field, covering all of the 
 counties north of Putnam and Westchester, with the large cities excepted. 
 These two kinds of associations are both included under the term local to avoid 
 a too elaborate classification, as they are somewhat similar in other respects. 
 The local associations, although operating in a smaller field than the sectional 
 and national, are extremely important by reason of the character of the work 
 they perform — supervising brokers, agents and rates. 
 
 The sectional organizations' territories are wider in extent, and cover from 
 two or three States to half of the United States. The Eastern Union covers 
 that part of the country east of the Mississippi; the Western Union, broadly 
 speaking, the Middle West; and the Middle Department operates in Pennsyl- 
 vania, Delaware, Maryland and West Virginia. Such organizations perform, in 
 a broader way, somewhat the same functions as the local associations, in terri- 
 tory not covered by the latter. The Eastern and Western Unions are what may 
 be termed "company" organizations, their principal object being the equalization 
 of commissions. The interests of the field force may be directly opposed, there- 
 fore, to the interests of these two unions, as, for example, when reduction of 
 commissions is desired. These co-operative bodies have considerable influence 
 with the local boards which make rates, since some of the latter owe their very 
 
existence to the endeavor of the sectional unions. The local associations, how- 
 ever, must not be considered as branches of these larger bodies, for a company 
 may be represented m a local underwriters' association or many of them, and 
 at the same time not be a member of the Unions. The connection between the 
 different classes is indirect, but nevertheless exists. The Middle Department, 
 however, is a special agents' organization, and is similar in nature to the local 
 bodies, having for its objects the making of rates, inspection of policies, estab- 
 lishment of a stamping department, and the regulation of commissions. Many 
 of the local boards in the territory of the Middle Department have been 
 organized through the activity and influence of this body. It makes agree- 
 ments with local bodies, for example, with regard to rates and commissions. 
 
 There are, in the main, two fields of activity in which underwriters' associa- 
 tions engage, namely, efforts to improve the practices of the business, and, 
 secondly, measures which may be termed educational. Insurance may be 
 viewed from one standpoint as the furnishing of indemnity for a proper con-» 
 sideration; or in a broader light, as having also a duty to teach the methods 
 of reducing fire waste, as a doctor points out means of avoiding illness. The 
 educational activities of the associations are directed toward the fulfilment of 
 the latter duty. 
 , The local and sectional associations are in the main concerned with the 
 
 i practical aspects of the business, and the national bodies with the educational 
 j aspects. The practical bodies are chiefly concerned with the subjects of rates 
 i and commissions, while the educational bodies, the National Board of Fire 
 : Underwriters and the National Fire Protection Association, direct their efforts 
 i toward preventing and reducing fire waste. This division of function must not 
 be too much emphasized, for the local and sectional bodies are also greatly 
 interested in the educational or conservation work. The Middle Department, 
 for example, makes inspections and furnishes the advice of engineers, and the 
 constitutions and by-laws of many of the local associations include in the list of 
 objects of association "the reduction of fire waste" and "the improvement of 
 construction." Likewise the proper measurement of fire hazard, an object of 
 local associations, is in itself one of the strongest influences in discouraging 
 poor construction and in encouraging proper building and the use of fire- 
 extinguishing facilities. The National Board, on the other hand, has recently 
 undertaken the preparation of a new schedule rating system. (See p. 20.) 
 
 The national association (National Board of Fire Underwriters) and some 
 
 sectional organizations (Eastern and Western Unions, Underwriters' Asso- 
 
 I elation of the Pacific, Rocky Mountain Fire Underwriters' Association and 
 
 I Southeastern Tariff or Southeastern Underwriters' Association) are company 
 
 I organizations, and comprise practically all the large stock companies in the 
 
 United States. Other sectional organizations (the New England Fire Insurance 
 
 Exchange and Underwriters' Association of New York State, for example) are 
 
 composed of special agents. The local associations' membership is personal, 
 
 consisting of managers, agents and brokers. 
 
 In some associations membership is divided into classes. Thus in the 
 Board of Underwriters of Allegheny County three classes of members are 
 included; agents who write more or less than $5,000 net premiums annually. 
 
and brokers. In this association, also, the voting privilege of the latter two 
 classes is qualified. 
 
 Some of the organizations require members to adhere to a stated commis- 
 sion rate. Notable examples are the Eastern and Western Unions. The fol- 
 lowing table gives an outline of the nature of some of the more important 
 boards and bureaus :§ 
 
 Cate of Extent 
 
 Organi- of Juris- 
 
 ;zation. Name of Association, diction. 
 1866 National Board of Fire 
 
 Underwriters National 
 
 1879 Western Union 
 
 Eastern Union 
 
 Sectional 
 
 Sectional 
 
 11897 Underwriters' Associa- Sectional 
 tion of the Pacific 
 
 ■1889 Rocky IVIountain Fire Sectional 
 Underwriters' Assoc- 
 iation 
 
 11882 Southeastern Tariff As- Sectional 
 
 sociation 
 
 11883 New England Insurance Sectional 
 
 Exchange 
 -d883 Underwriters' Associa- Sectional 
 
 tion of New York State 
 ■1883 Underwriters' Associa- Sectional 
 
 tion of the Middle 
 
 Department 
 11899 New York Fire insur- Local 
 
 ance Exchange 
 
 11883 Philadelphia Underwrit- Local 
 ers' Association 
 
 Functions.!! 
 Educational 
 work 
 Technical 
 studies 
 
 Formation of 
 local boards, 
 regulation of 
 agents and 
 supervision of 
 rates 
 
 Regulation of 
 agents, promo- 
 tion of good 
 practices 
 Regulation of 
 brokers and 
 agents, promul- 
 gation of rates 
 Ditto 
 
 Ditto-forma- 
 tion of local 
 boards 
 Ditto 
 
 Ditto 
 Ditto 
 
 Regulation of 
 brokers and 
 agents, pro- 
 mulgation of 
 rates 
 
 Ditto 
 
 TlOnly the most important and distinctive functions are 
 jplete description of purposes and services follows In Jater 
 
 Membership 
 Composed of 
 
 Companies 
 
 Companies 
 
 Companies 
 
 Companies 
 
 Companies 
 
 Companies 
 
 Special 
 Agents 
 Special 
 Agents 
 Special 
 Agents 
 
 Agents and 
 Brokers 
 
 Agents ano 
 Brokers 
 
 here given. A 
 sections. 
 
 Remarks. 
 
 Observance 
 of agreed 
 commission 
 required 
 
 Ditto 
 
 Ditto 
 
 Ditto 
 
 Ditto 
 
 more com- 
 
 §lt need hardly be stated that these were chosen for no purpose other than to 
 Iillustrate the nature of the classes they represent. 
 
Having briefly indicated the general nature of the various classes of 
 associations, later sections discuss in detail the character and function of — 
 
 (1) The National organizations, of which the National Board of Fire 
 Underwriters and the National Fire Protection Association are perhaps the most 
 influential. 
 
 (2) The Sectional organizations, namely, the Eastern Union, Western. 
 Union and Western Insurance Bureau, and, 
 
 (3) The local bodies. 
 
 LOCAL FIRE UNDERWRITERS' ASSOCIATIONS* 
 
 Jurisdiction, Membership and Government. 
 
 OF all the underwriters' associations the local type, because of the num- 
 ber of such bodies and the character of their activities, is the most 
 important. Some have jurisdictions which are limited to single cities, 
 often excluding even suburban territory. Included in this group are also the 
 suburban exchanges, which are not relatively so important as the urban, because 
 of the smaller number of risks within their control. Taking two large Eastern 
 cities as examples, there are the New York Fire Insurance Exchange and the 
 Philadelphia Underwriters' Association. The former operates in substantially 
 the present city of New York, exclusive of the suburbs; its territory includes,, 
 therefore, Manhattan, Bronx and Brooklyn boroughs, and in addition Long 
 Island City and the American Dock piers in Richmond. The Philadelphia. 
 Underwriters' Association has jurisdiction over the City of Philadelphia, exclud- 
 ing suburbs. Both of these are unincorporated and voluntary in the sense that 
 membership is not compulsory, but is very advisable from a business stand- 
 point. 
 
 The local exchanges are in many cases the outgrowth of sectional organiza- 
 tions. Thus the New York Fire Insurance Exchange was organized in 1899 ini 
 pursuance of a by-law of the New York Board of Fire Underwriters, a State- 
 association, to the effect that its members might organize rating associations. 
 Local exchanges' membership is usually personal and includes principally 
 
 *The facts upon which this section are based were derived chiefly from the fol- 
 lowing sources: 
 
 Report of Joint Committee to Investigate Insurance, State of New York, Februaryr 
 1, 1911. 
 
 W. O. Robb, "New York Fire Insurance Exchange," Popular Insurance Magazine,. 
 January, 1911. 
 
 Report on Examination of New York Fire Insurance Exchange, July 21, 1913. Newr 
 York State Insurance Department. 
 
 New York Fire Insurance Exchange, Annual Reports of the Manager. 
 
 Handbook of the New York Fire Insurance Pxchange, July, 1910, revised to Janu- 
 ary, 1914. 
 
 Philadelphia Underwriters' Association By-Laws, Agreements and Rules, June-,. 
 1908; revised to 1913. 
 
 Wiedenhold, Louis, Jr., "Underwriters' Associations," Bulletin of Fire Insurance* 
 Society of Philadelphia, Special Supplement, May, 1912. 
 
 10 
 
brokers and agents. In 1911 the New York Exchange included about 55 com- 
 panies represented by officers or managers and about the same number of head 
 agents representing one or more companies in the territory named. f Prac- 
 tically all of the companies admitted to the State of New York and doing busi- 
 ness in New York City are represented in the Association, either by officers, 
 managers or head agents. The Philadelphia Underwriters' Association is sub- 
 stantially of the same nature. 
 
 Membership in local associations is obtained by application in writing, 
 accepted by a committee appointed for this purpose and usually known as the 
 Committee on Brokerage. The applicant must be a person representing, as 
 officer, broker or agent, some insurance company doing business in the terri- 
 tory of the particular association. In addition he must comply with certain 
 requirements promulgated by the committee and must agree to be bound by 
 the constitution, by-laws, rates, commissions and forms. 
 
 Like most present-day associations, the government of the local exchanges 
 is a government of committees. The most important is usually an Executive 
 or Governing Committee, which is in general control of all activities and whose 
 orders are executed by a Secretary or Manager. This Committee, -which is 
 usually elective, appoints various standing committees to take charge of par- 
 ticular branches of association work. The Executive Committee of the Phila- 
 delphia Exchange consists of nine members, four being representatives of 
 Pennsylvania companies, three of companies from other States and two of 
 foreign companies. Its duties are the following :§ 
 
 (1) To maintain a department of surveys and inspection. 
 
 (2) To make rates, schedules, standards, etc., which shall be binding on 
 
 all members. 
 
 (3) To prescribe rules and forms to be used. 
 
 (4) To m.ake alterations in rates provided: 
 
 (a) A change takes place in hazard or a change in the rates 
 
 applicable to the risk. 
 
 (b) A minimum, schedule or standard is adopted which did not 
 
 before apply. 
 
 (c) An error has been made in the application of a schedule, mini- 
 
 mum, standard or rule. 
 
 (d) A standard, schedule or minimum does not apply to the risk. 
 
 (e) A cause is stated in writing and is one of these named above. 
 
 (5) To fix rates on risks of superior construction. 
 
 (6) To assess companies for funds to defray expenses. The assessment 
 is made upon the basis of premium income. 
 
 A large portion of the actual work of an association is performed by stand- 
 ing committees appointed by the Executive Committee. The most important 
 among these are: 
 
 (1) The Committee on Rates, which in the New York Fire Insurance Ex- 
 
 tw. o. Robb. 
 
 §By-laws, Agreements and Rules, June, 190S; revised to 1913. 
 
 11 
 
change consists of seven members including representatives of local, agency 
 and foreign companies. This Committee has charge of the rating work of the 
 Exchange, to be later described. To some extent changes in rating originate 
 with the working force, but the control and direction of the rating department 
 rest ultimately with this Committee. It is virtually a court of appeals, hearing 
 testimony on the application of schedules to particular risks, the introduction of 
 new schedules and the revision of old ones. 
 
 (2) The Committee on Brokerage, which practically determines who shall 
 be admitted to the association, investigating applications for membership and 
 hearing any complaints against the applicant. If the candidate is considered 
 a satisfactory person and has complied with the rules for admission promul- 
 gated by the Committee, the latter issues to him a certificate of membership. 
 Among the rules prescribed for admission are usually the following :$ 
 
 (a) The applicant must have placed at least two risks with exchange 
 companies, covering properties of two different parties, neither of whom 
 is related to the applicant. The premiums thereon must have been paid 
 in full. 
 
 (b) The applicant must be favorably endorsed by two independent 
 references, one of whom is a voting member of the Exchange. 
 
 j (c) He must be 21 years of age or over. 
 
 (d) He must agree that he will not give rebates or accept commissions 
 in excess of those prescribed by the Association. 
 
 (e) He must agree to place all risks with Exchange members unless 
 sufficient insurance cannot be so secured. 
 
 In addition to its administration of admission requirements the Brokerage 
 Committee acts as a lower court to investigate complaints against members. 
 The accused has an opportunity to appear and defend himself, but if convicted 
 the Brokerage Committee imposes the appropriate penalty. An appeal may be 
 taken from this decision, however. 
 
 (3) The Committee on Arbitration. A member receiving an adverse de- 
 cision from the Brokerage Committee, as above described, may take an appeal 
 to the Committee on Arbitration within ten days of the mailing of notice of 
 such decision. This right of appeal is so restricted, however, as to make 
 the Brokerage Committee in some cases a court of final judgment. Thus 
 in one association the latter has the power to cancel certificates upon ten days' 
 notice, and when it dismisses a member in this manner he has no redress. 
 Upon other appeals the Committee on Arbitration investigates the complaint, 
 having power to examine the books of any office, agency or branch office, and 
 any person connected with such agency or office, under oath. Refusal to testify 
 or submit books or papers is considered an admission of the truth of the accusa- 
 tion. Accountants may be employed to assist the Committee. Having arrived 
 at a conclusion, the decision is announced and a penalty imposed, which may 
 consist of a fine, enforced cancellation of any policies in question or of prevent- 
 ing the mfember from taking a particular risk or risks, either directly or by 
 
 ^Examination of New York Fire Insurance Exchange. 
 
 12 
 
reinsurance, for one year. The last penalty is a serious one, as it may involve 
 considerable loss of business, which possibly will never be recovered. 
 
 (4) The Committee on Losses and Adjustments. The purpose of this Com- 
 mittee is to promote good business practice and equity in the adjustment of fire 
 losses. To this end it prescribes rules for the payment of claims. Thus some 
 associations on the Pacific Coast have agreed that a rule known as the Kinne 
 Rule shall be used for the apportionment of losses where non-concurrent insur- 
 ance exists. 
 
 The Objects of Local Associations. 
 
 The statement of the objects of the New York Fire Insurance Exchange 
 may be taken as illustrative of the general expression of local associations' 
 purposes. They are as follows: 
 
 1. Mutual counsel. 
 
 2. Comparison of experience necessary for adequate and just rates. 
 
 3. Economical conduct of business. 
 
 4. Prompt and equitable adjustment of losses. 
 
 5. Ascertainment of proper and safe methods of building construction. 
 
 6. Prevention and extinction of fires. 
 
 7. Promotion of mutual interests of underwriter and property owner. 
 
 Of the purposes enumerated two are of most vital importance — the regula- 
 tion of brokers and agents and the control of rates. The Joint Committee of 
 the New York Legislature in its report states that "The object of the Ex- 
 change" (referring to the New York Fire Insurance Exchange) "is the control 
 of rates and commissions to agents and brokers"; which perhaps gives an 
 unfair impression, in view of the other activities of this body, but which cer- 
 tainly properly emphasizes two of the most important functions. 
 
 (1) Regulation of Brokers and Agents. One of the main objects of associa- 
 tions is to require the adherence by brokers and agents to a uniform scale of 
 commissions. Thus, taking New York as an example, companies may com- 
 pensate head agents or managers in any form or amount they choose. Branch 
 office managers, however, receive commissions only for their services, these 
 amounting to 25 per cent. These managers are authorized to write insurance 
 only on risks of a less hazardous nature. A good portion of the 25 per cent is 
 turned over to brokers, and the managers receive in addition what is termed 
 an "over-riding" or excess commission of 12 1/^ per cent. For this is substituted 
 sometimes a contingent commission, depending upon the profit to the com- 
 pany on the business written by the branch.* Most associations provide that as 
 regards risks located in the territory of other exchanges members shall abide 
 by the rules of the latter. 
 
 Brokers receive commissions which vary with the class of business written, 
 ranging from 5 to 25 per cent, as follows: 
 
 vl) On risks rated under the Restricted Sprinkler schedule, 5 per cent. 
 This schedule is applicable to but few risks. 
 
 *For various methods of compensation see G, T. Forbusli, "Local Agency Com- 
 pensation," a lecture before Insurance Library Association of Boston. 1912. 
 
 13 
 
(2) On risks other than may be written by branch offices, (i. e., preferred 
 
 risks of a less hazardous nature) 10 per cent (if in the congested 
 district of Manhattan). 
 
 (3) On risks outside the congested district of Manhattan, said risks not 
 
 being of the Branch Office class, 15 per cent. 
 
 (4) On risks of the Branch Office class, 25 per cent. 
 
 In order to do business with Exchange members, a broker must be placed 
 upon the Certified List of Brokers maintained by the Exchange, which entitles 
 a broker to whom a certificate is issued by the Brokerage Committee to receive 
 a commission for business placed with its members. To obtain a certificate the 
 broker must be engaged exclusively in the insurance business or allied occupa- 
 tions, such as real estate, and must make the following pledges: 
 
 Brokers' Pledge, Class I. — "In consideration of the commissions or broker- 
 ages at the current rate that may be fixed and established for the time being 
 by, and to be paid by members of, the New York Fire Insurance Exchange, I 
 hereby promise and agree that I will not, directly or indirectly, pay to or divide 
 with any person not holding a broker's certificate, any commission or broker- 
 age, nor will I receive from any company or agent, directly or indirectly, any 
 remuneration for business placed with them, in excess of that permitted by the 
 rules of the Exchange." 
 
 Brokers' Pledge, Class II. — "In consideration of the payment to be made 
 to me of an additional five per cent to the commissions or brokerages as pro- 
 vided for in brokers' pledge. Class I, signed by me, I hereby promise and agree 
 in addition to said pledge, that in placing insurance, I will give the preference 
 to the members of the New York Fire Insurance Exchange, and that I will not 
 place any risk with those not members unless I cannot secure sufficient insur- 
 ance on such risks from members of the Exchange, in which case I agree to file 
 with the Secretary of the Exchange, within one week of so placing, a list of 
 such outside company or companies in which same has been placed, with the 
 name of the assured, location of risk and the amount of insurance given them." 
 
 With reference to commissions it is also provided that no member may 
 purchase the business of any broker on terms other than the rate of brokerage 
 or commission fixed by the Exchange. 
 
 Since practically all the large and reliable companies belong to the associa- 
 tions having jurisdiction in the territory in which they operate, membership in 
 such associations is practically a business necessity. The rules usually pro- 
 vide that insurance shall not be placed with non-members unless the same can- 
 not be secured within the ranks. In order to do business with Exchange 
 members a broker must be on the certified list maintained by the Exchange, 
 and the members do not recognize a person as a broker who is not named in 
 said list. No Exchange member may represent a company outside the organiza- 
 tion. It can be seen from this that the local associations have practically de- 
 cided who shall engage in the fire insurance business in their territories exactly 
 as the New York Stock Exchange decides who shall do business on its floor. 
 The Brokerage Committees of some of the various associations have established 
 rules as they saw fit and applied them as they desired. In New York State, 
 however, the enactment of Section 143 of the Insurance Law requires the Super- 
 
 14 
 
intendent to issue certificates to truthworthy applicants, and since he has been 
 ^empowered by a recent law to examine the practices of all associations the lat- 
 ter have of late necessarily regulated the conduct of their brokerage depart- 
 anents so as to be in harmony with the policy of the State. § 
 
 The power of the Exchange is exercised over brokers and agents in various 
 :minor ways. Thus by one association premiums for insurance are required to be 
 paid within forty days after the end of the month in which written, or notice 
 tf)f cancellation of the policy is to be sent to the broker and the insured. All 
 jmembers of the Association are also required to adhere to the rates of premium 
 promulgated. 
 
 (2) Control of Rates and Forms. The extent of local associations' control 
 iover forms and rates will be best appreciated after a description of the pro- 
 ccedure of rating. Three departments are concerned, namely, the inspection 
 idepartment, the rating department, and, often, the stamping department. 
 
 The association first comes in contact with the risk through an inspector. 
 The insurance company, in accepting a risk, stands in the position of a buyer, 
 ;and the thing bought is the privilege of insuring the owner of the building or 
 (Contents, as the case may be. Being a buyer, it should have the opportunity of 
 examining the thing purchased, i. e., should be allowed to see that the privilege 
 is one which will result in a profit, not a loss. The inspector, therefore, really 
 ;3tands in the position of an expert buyer, representing one or more companies. 
 
 It is his business to note possibilities of fires beginning, entering or spread- 
 ing on the premises, and all facts which can be secured relative to occupancy. 
 'The latter requirement necessitates a knowledge of the processes used in the 
 ,business carried on in the building. The first step in inspection is the acquiring 
 (or making of a map of the premises, in which map arbitrary symbols are used 
 tto describe features of construction. The inspector must examine the surround- 
 :ing and nearby buildings to determine the risk from exposure. The type of 
 (building, whether frame, mill, brick or fire-proof construction, must be consid- 
 <ered. Next come wall, floor, ceiling, support material, unprotected metal or 
 light masonry liable to be warped or fall from heat, openings in the floors, 
 :such as elevator shafts and stairways, concealed and inaccessible places, con- 
 tdition of the building, etc. He must investigate the occupancy, finding out 
 tthe tenants, the parts of the building occupied, and the occupations carried on. 
 'The methods of heating and lighting and many other features, too numerous to 
 imention, must be considered.* 
 
 The summary of the investigation is contained in the "survey" which is 
 ■handed over to the rating department. This department is sometimes divided 
 iinto two sections: the "mercantile department," which rates mercantile risks, 
 ;and the "general hazard" department, which rates all other risks with a few 
 texceptions. The survey is referred to the proper department and a rate com- 
 puted according to the schedules and rules of the Exchange. A notice is pub- 
 lished in the daily bulletin of the association, if it issues one, and. the result 
 
 §Similar laws exist now in several other States. See p. . 
 
 ♦For description of the inspector's work see E. R. Hardy, "Fire Insurance," 
 IPP. 42-51. 
 
 15 
 
of the rating is supplied to all members in card form for filing in their rate 
 cabinets. It is estimated that each member who operates in all of the terri- 
 tory of one of the large urban exchanges receives, annually, approximately 
 50,000 cards. The expense of the association for this service approaches 
 $60,000 a year. 
 
 The policy having been issued at the rate promulgated, a copy or abstract 
 thereof must be sent to the "stamping department." According to the rules of 
 one association abstracts of all policies and endorsements must be submitted 
 within seven days from the time they are written and must contain the fol- 
 lowing: 
 
 Name of company. 
 
 Number of policy. 
 
 Location of risk. 
 
 Term of insurance. 
 
 Kind of property. 
 
 Rate charged. 
 
 Kind of co-insurance clause. 
 
 Rate of brokerage. 
 
 Statement that all the rules of the association have been complied with. 
 
 If, after an examination, this abstract is approved, it is stamped "Cor- 
 rect" and returned. If "Incorrect" any errors to which attention is called must 
 be corrected on the policy within two weeks. 
 
 Through the Committee on Rates the local association fixes either specific 
 or minimum rates for the writing of insurance. A specific rate is a rate on 
 an individual risk specified by location and description, A minimum rate is a. 
 rate for all risks of a same general description, such as dwellings. In the 
 territory of a large exchange there are at least 300,000 buildings, and five- 
 sixths of these are given minimum rates, such rates being based on the ex- 
 perience of the companies and the judgment of underwriters. Specific rates, 
 are arrived at by the use of schedules. 
 
 The rules of the association require that no policies shall be issued on; 
 risks until the latter have been rated by the Exchange. After a rate has been 
 made no insurance shall be written at other than the official rate. This rule is. 
 frequently enforced by the establishment of stamping departments. Various; 
 minor regulations are enforced regarding rates, such as that they are binding: 
 upon the day they are promulgated, that when a change in hazard takes place 
 the risk shall be re-surveyed and re-rated, that rates made upon contents apply 
 only to the occupancy existing when the building is rated and the rate cardi 
 must be re-published for each new tenant, that any error in rating is to be at 
 once corrected without reference to the previous rating. Even the rates for 
 terms of insurance of less than one year are controlled by some associations; 
 through the prescription of "short rate tables." Likewise "term rates," which 
 give reductions for insurance of more than one year, are regulated. 
 
 f One-sixth of all buildings, or about 50,000 in a large city, are rated by 
 means of schedules. Schedules used in the United States are based upon 
 
 16 
 
the principles of either the Dean (Analytic) or Universal Mercantile Schedules, 
 with variations to suit local conditions. The New York Fire Insurance Ex- 
 change prescribes and uses schedules based upon the Universal Mercantile. 
 The four following are the principal ones used: 
 
 (1) The Green Schedule. One which is used for rating non-fireproof 
 
 hospitals, clubs, schools, stores, dwellings, apartments and tenements which are 
 over the minimum height and area. A four-story building, for example, con- 
 taining a drygoods store on the first floor and with the three upper floors in 
 use as dwellings or apartments, would be rated under this schedule. 
 
 (2) The Merchandise Schedule, usually designated as the General Schedule. 
 This is used for stores and dwellings which are of such a description that they 
 would fall within the minimum rate class were it not for the fact that the first 
 or grade floor contains an occupancy or business which excludes the risk from 
 this class. Stables and garages are also rated by this schedule. 
 
 (3) Universal Mercantile Schedule. As its name indicates, this schedule 
 is adapted primarily to the rating of buildings used solely for business pur- 
 poses, other than heavy manufacturing. This schedule would be applied to 
 retail and wholesale selling establishments and manufacturers of dress goods 
 and clothing. A mercantile building with two or more floors occupied as dwell- 
 ings would be rated, not by this schedule but by the Green Schedule. 
 
 (4) The Manufacturing Schedule. Such manufacturing risks as are not 
 rated under the Mercantile Schedule would come under this schedule, and there 
 would be included some printing, wood-working and metal-working establish- 
 ments, and all serious manufacturing hazards. Certain other risks of a dif- 
 ferent nature are rated under this schedule, but it is unnecessary to enumerate 
 them here. 
 
 In addition to the above there are used in rating as many as fifteen special 
 schedules for special classes of risks, such as hotels, theatres, breweries, etc., 
 these being known as "special hazards." For example, for certain manufactur- 
 ing establishments protected by automatic sprinklers there is a Restricted 
 Sprinkler Schedule. 
 
 The schedules for rating are, of course, the most important "forms" pre- >/ 
 scribed by local associations. In addition, however, they fix standard forms of 
 co-insurance clauses, descriptive clauses, permissions, consequential damage 
 clauses and many other endorsements or "riders." In this way the danger is 
 avoided of having non-concurrent insurances upon the same risk, which situa- 
 tion may cause complications in the settlement of a loss which baffle experts. 
 
 The above description gives some idea of the nature, organization and 
 objects of local associations of underwriters. They are voluntary associations 
 of brokers and agents for the principal purposes of maintaining uniform rates 
 of commission and brokerage and establishing a scientific, recognized system of 
 fire insurance rating. The economic functions of sectional as well as local asso- 
 ciations and the services they both render to the community will be described 
 in a later section. 
 
 17 
 
NATIONAL FIRE UNDERWRITERS' ASSOCIATIONS. 
 
 THE National Board of Fire Underwriters, membership in which is open 
 to any stock fire insurance company doing business in the United 
 States by election at a meeting or by action of its Executive Com- 
 mittee, was organized in 1866. There are now about 160 companies which are 
 members. It was, until 1878, a rate-making organization; but since that time 
 has exercised no jurisdiction over and is not concerned with rates, and is con- 
 ducted along lines best designated as "educational and technical," having the 
 following purposes: 
 
 First. To promote harmony, correct practices, and the principles of sound 
 underwriting; to devise and give effect to measures for the protection of the 
 common interests, and the promotion of such laws and regulations as will secure 
 stability and solidity to capital employed in the business of fire insurance, and 
 protect it against oppressive, unjust, and discriminative legislation. 
 
 Second. To repress incendiarism and arson by combining in suitable meas- 
 ures for the apprehension, conviction, and punishment of criminals guilty of 
 that crime. 
 
 Third. To gather such statistics and establish such classification of haz- 
 ards as may be for the interest of members. 
 
 Fourth. To secure the adoption of uniform and correct policy forms and 
 clauses, and to endeavor to agree upon such rules and regulations in reference to 
 the adjustment of losses as may be desirable and in the interest of all concerned. 
 
 Fifth. To influence the introduction of improved and safe methods of 
 building construction, encourage the adoption of fire protective measures, secure 
 efficient organization and equipment of fire departments with adequate and 
 improved water systems, and establish rules designed to regulate all hazards 
 conGcituting a menace to the business. Every member shall be in honor bound 
 CO co-operate with every other member to accomplish the desired objects and 
 purposes of the Board. 
 
 The expenses of the Board are borne by assessments upon companies which 
 are members in proportion to their net fire premiums in the United Sta':23, :nJ 
 are apportioned upon the receipts of the preceding year. The officers are a 
 president, vice-president, secretary and treasurer, and the activities of the asso- 
 ciation, as of most underwriters' associations, are controlled by various com- 
 mittees, each of which*devotes its attention to a particular field. 
 
 The Executive Committee consists of eleven elected members, and this is 
 the governing body. It has power to fill vacancies occurring in its own ranks, 
 to elect honorary members and to "exercise all necessary powers to promote 
 the purposes of the Board." Its meetings are open to all companies members 
 of the Board but not represented in the membership of the Committee. It 
 appoints a general manager and such other salaried representatives and 
 clerical help as may from time to time appear necessary. 
 
 Standing Committees are appointed by the president annually, of which 
 the most important, for our purposes, are those described hereinafter. The 
 work of the National Board may be best indicated by considering the activities 
 of these committees. 
 
 The Finance Committee. It is the business of this committee to collect 
 
 18 
 
assessments from members of the association in proportion to the net premiums 
 received by such companies on business done in the United States. The per- 
 centage of such assessments for the year 1915 was 1 17 of 1 per cent. The 
 expenditures of the Finance Committee may be classified under three heads: 
 
 (1) General expenses, which include the support of the Underwriters' 
 Laboratories, cost of inspection, contributions to the National Fire Protection 
 Association, and the expense of maintaining the National Board; 
 
 (2) Building construction expenses, including the salaries of engineers, 
 printing and equipment; 
 
 (3) Fire prevention expenses, including the salaries of the field men, 
 office force and printing. 
 
 The Committee on Laws. It is the duty of this Committee to obtain 
 information of the various laws proposed affecting fire insurance interests; and 
 in the past it was the custom to present at the annual meeting laws enacted 
 during the current year, but arrangements have now been made whereby 
 information is given to the members from time to time during the year of the 
 laws proposed and the work of the Committee with a recapitulation annually 
 of all laws introduced affecting directly the business. 
 
 Committee on Statistics and Origin of Fires. The functions of this Com- 
 mittee are clearly indicated by its title. In 1910-1911 it prepared a record of 
 the fires and fire losses of cities in this and foreign countries which aroused 
 widespread interest and was extensively quoted in addresses and in the insur- 
 ance press. This work has been continued since that date. It annually pre- 
 pares also a tabulation of large conflagrations as well as other tables of fire 
 losses. 
 
 Committee on Incendiarism and Arson. This Committee has charge of the 
 work of the Board in the prevention of and punishment for arson. During the 
 year ending April 1, 1915, ninety rewards were offered, amounting to $28,550. 
 As far as possible this Committee co-operates with the committees of various 
 local underwriters' associations. There exists, in connection with this work, a 
 permanent arson fund which is added to as necessary by assessments* upon the 
 companies which are subscribers to the fund. The assessments amount to one- 
 half cent for each $100 of net premiums, such assessments not to exceed in one 
 year, however, one and one-half cents for each $100. Definite rules are laid 
 down governing the payment of rewards for the conviction of incendiarism; 
 but no rewards are to be paid to any officer or salaried employe of an insurance 
 company, or to any public official, including an officer of police. 
 
 Committee on Fire Prevention. The work of inspecting cities for the pur- 
 pose of ascertaining their facilities for protection against fire is in the hands 
 of this Committee. This work has been carried on in its present form since 
 1904, and during that time reports have been issued on about 270 cities, many 
 of which have been revisited after a lapse of five or six years to ascertain the 
 extent of the changes and improvements. These reports contain a description of 
 the water works systems, fire department organization and equipment, fire 
 alarm systems and structural conditions and hazards; conclusions are presented 
 
 'Xo assessment of this character has been levied since 1905. 
 
 19 
 
as to the adequacy and reliability of the various fire protection features, as well 
 as an opin'on as to the degree of the conflagration hazard, and recommendations 
 are made for improvements in the different departments. For the past three 
 or four years the tests of fire engines exhibited at the Conventions of the 
 International Association of Fire Engineers have been conducted by the engi- 
 neers of the National Board. Engineers have been assigned, on request, to 
 advise as to the necessary fire protection facilities in some of the government 
 buildings in Washington and for the Panama-Pacific Exposition in San Fran- 
 cisco; one of the National Board engineers was engaged, while on leave of 
 absence, to supervise the design and installation of the fire protect'on at the 
 Exposition, and another is similarly engaged on the installation of a high- 
 pressure fire system in Boston. Much time is employed by the engineers in 
 preparing public laws and ordinances relating to fire prevention, many munici- 
 palities calling upon the Board for assistance in framing such ordinances when 
 necessary. In various ways this Committee co-operates with local boards of 
 underwriters, associations of engineers, associations of credit men, and all who 
 are interested in the reduction of fire losses. 
 
 Committee on Lighting, Heating and Engineering Standards. The Na- 
 tional Board, through this Committee, prints standard specifications for the 
 installation of protective devices, such as signaling systems, municipal fire 
 alarm systems, fire pumps, and similar appliances. It likewise prints specifi- 
 cations for the installing of electrical systems and furnishes such rules and 
 specifications as have been named to various associations, bureaus and the 
 public, not as orders, but as suggestions representing the best thought of 
 technical experts of the insurance profession. It is by such acts as these 
 that the educational character of the National Board is most clearly recog- 
 nized, and it is unfortunate that the public does not more fully realize the 
 value of the service which is thus freely rendered; but most of the improve- 
 ments in property come rather by reason of the insured's self-interest in a 
 financial way than through enlightenment by education. In other words, the 
 increased premium charge on poor risks is a greater incentive to good con- 
 struction than a vast amount of education. 
 
 Committee on Construction of Buildings. The object of this Committee 
 is the improvement of building construction in the United States. One of the 
 greatest steps in this direction was the preparation of the National Building 
 Code. Thousands of copies of this work have been distributed, and many 
 municipalities in the country have prepared or revised their building ordi- 
 nances on the basis of that Code. The Code has recently been completely 
 revised so that in effect it is practically a new ordinance. Its engineering 
 and fire protection features have been brought into accord with best present- 
 day practice and it is now the recognized standard for safe building con- 
 struction. 
 
 The Committee maintains an expert service upon all matters relating to 
 the drafting of building ordinances and fire-resistive construction. It is 
 ready at all times to aid municipal or State authorities with advice in relation 
 to laws dealing with those subjects. Such work is constantly in progress and 
 ■very beneficial results have been obtained. 
 
 i^ 20 
 
The work is distinctly educational in character, and it is evident that the 
 work of this Committee is already producing a material, beneficial effect upon 
 the character of building construction throughout the country, yet it is recog- 
 nized by the Board that a full realization of the protection to be derived from 
 reduction of the conflagration hazard will not be attained for some years. 
 This is because new laws for the most part regulate new buildings, and can 
 do little in the way of removing the hazard of existing structures. 
 
 Ccmmittee on Adjustments. The endeavors of this Committee are in the 
 direction of facilitating the adjustment of losses. As an example of its work, 
 one might mention the preparation of an emergency equipment to be used 
 for the benefit of all companies in case of a large conflagration and con- 
 sisting of "a cabinet with suitable cards, folders, indices, etc., to aid in at 
 once organizing a bureau to tabulate property destroyed or damaged, to list 
 claims, companies interested, committees appointed, dispositions of claims, 
 and to keep watch on fraudulent or dual claims." This is based upon the 
 experience gained in the large conflagrations of the past, the idea being to 
 put such experience in a form available for future guidance, if necessary. 
 
 The Underwriters' Laboratories. The description of National Associa- 
 tions must also include some mention of the Underwriters' Laboratories, a 
 corporation formed by the National Board of Fire Underwriters in 1902, the 
 entire capital stock having been subscribed for by members of the latter body. 
 The excellent fireproof buildings of this concern in themselves are incentives 
 to better construction, combustible material having been entirely eliminated 
 from them, the very highest skill in fire protection having been employed in 
 their construction, and their internal fire defenses being the best that modern 
 science can afford. The purpose of the institution is best expressed in its own 
 language: 
 
 "The object of Underwriters' Laboratories is to bring to the user the best 
 obtainable opinion on the merits or demerits of appliances in respect to the 
 fire hazards. Such appliances include those designed to aid in extinguishing 
 fire, such as automatic sprinklers, pumps, hand fire appliances, hose, hydrants, 
 nozzles, valves, etc.; materials and devices designed to retard the spread of 
 fire, such as structural methods and materials, fire-doors and shutters, fire- 
 windows, etc.; and machines and fittings which may be instrumental in caus- 
 ing a fire, such as gas and oil appliances, electrical fittings, chemicals and the 
 various machines and appurtenances used in lighting and heating." 
 
 After a device or material has been tested the report of such test is sub- 
 mitted to the Council of Underwriters' Laboratories, which consists of twenty- 
 two members, all directly interested in fire protection work or underwriting 
 associations and representing all sections of the United States and Canada. 
 If the article is approved, it is then listed as an approved and satisfactory 
 article, either direct by the Laboratories* card system to subscribers or through 
 the National Board's periodical list of appliances. 
 
 Actuarial Bureau Committee.* What probably is the most important work 
 
 ♦For a description of the work thus far completed by the Committee see Robert 
 Riegel, "Co-operation and Classification in Fire Insurance." Quarterly Journal of 
 Economics, August, 1916. 
 
 21 
 
undertaken in recent years by the National Board was the inauguration of 
 what is known as the "Actuarial Bureau of the National Board of Fire Under- 
 writers." The purpose of this work is the compilation of statistics to the end 
 that a complete and carefully compiled record of all fire losses upon insured 
 property in the United States may be obtained, with full information regard- 
 ing occupancy, location and character of property, values, insurance, origin of 
 fire, etc., and for the investigation of the fire dangers to which each class of 
 property is subject, and the development of thorough and scientific informa- 
 tion concerning the causes of fire and their prevention. 
 
 The plan for this work was completed during the year 1914, and the 
 Bureau began active work January 1, 1915, and has since that date collected 
 and classified approximately 500,000 reports of losses which have been paid by 
 the various companies during the year 1915. 
 
 The entire affairs of the Bureau are under the charge of a standing com- 
 mit'e? known ai the Actuarial Bureau Committee, which, as other stand- 
 ing committees of the Board, is under the supervision of the Executive Com- 
 mittee, it being understood that the Actuarial Bureau Committee has full 
 power to make such incidental changes as are necessary to perfect the system 
 of classification, all changes subject to the final approval of the Executive 
 Committee. 
 
 The expenses of the Bureau are met by an assessment by the companies 
 subscribing to its support and are based upon the gross premiums less only 
 cancelation. This work is open to all fire insurance companies of every kind, 
 and includes in its membership not only the National Board companies, but 
 non-Board companies and mutuals. 
 
 It was evident that this, the first year, would be needed for bringing the 
 operation of the loss department into proper method and order, leaving little 
 or no opportunity for taking up the question of writings, and for that reason 
 the compilation of writings was deferred and will not be undertaken until the 
 first day of January, 1916. 
 
 The National Fire Protection Association.f About seventeen years ago 
 there was formed the National Fire Protection Association, the aims of which 
 are stated to be: 
 
 (1) To promote the science and improve the methods of fire protection 
 and prevention; 
 
 (2) To obtain and circulate information on these subjects, and, 
 
 (3) To secure the co-operation of its members in establishing proper safe- 
 guards against loss of life and property by fire. 
 
 The membership of this body is divided into three classes. National in- 
 stitutions, societies and organizations interested in the protection of life and 
 property against loss by fire. State associations whose principal object is the 
 reduction of fire waste, and insurance boards and associations having primary 
 
 tNational Fire Protection Association, "Tlie Work of the National Fire Protecti 
 Association." 
 
 22 
 
jurisdiction are eligible for active membership. Associate members are na- 
 tional, State and municipal departments, chambers of commerce, business 
 men's associations and individuals engaged in the fire insurance business^ 
 Subscribing members are those who receive the publications of the association. 
 When a person wants to know how to make a standard fire-door or the cor- 
 rect method of installing a gasoline engine he goes to the office of the nearest 
 underwriters' association, where he may obtain a pamphlet containing the 
 information desired. At least thirty-seven subjects are covered, these specifi- 
 cations having been drawn by the members of the National Fire Protection 
 Association. In acknowledging its indebtedness to the experts who con- 
 tributed, the Association states: "There is no public effort in the history of 
 the Nation to which there has been so freely given over so long a period so 
 much expert thought and painstaking technical investigation as to the Na- 
 tional Fire Protection Association." While the connection of the National 
 Board with the National Fire Protection Association is one of membership 
 cnly, they are concerned in its activities inasmuch as they are principally those 
 of fire protection and prevention. 
 
 Services of National Associations. 
 
 From the foregoing description we may summarize the services of national 
 associations of the type considered as follows: 
 
 1. They educate the public to an understanding of the value of insurance 
 in the reduction of risk. 
 
 2. They bring about harmonious co-operation of fire companies and under- 
 writers toward aims broader than mere indemnity for loss. 
 
 3. They have reduced various expenses which the insured ultimately, of 
 course, pays, such as: 
 
 (a) Expense of watching legislation. 
 
 (b) Expense of protesting against unjust laws. 
 
 (c) Expense of reducing arson. 
 
 The effectiveness of efforts along these lines has been correspondingly 
 increased. 
 
 4. They have compiled and published statistics of the insurance business 
 which are recognized as standard — the National Board Tables — and have made 
 instructive comparisons of data. 
 
 5. They have endeavored to reduce arson and incendiarism. 
 
 6. They have inspected, criticized and suggested improvements in the 
 protective facilities of cities and towns. 
 
 7. They have furnished consulting engineers to assist in all kinds of con- 
 struction, to give advice on apparatus and ordinances, 
 
 8. They have set up standards for the installation of lighting and heat- 
 ing devices. 
 
 9. They have formulated codes as guides to correct building. 
 
 10. They have improved methods of adjusting losses. 
 
 11. They have been largely instrumental in causing the adoption of a 
 standard fire policy and have formulated standard forms and clauses. 
 
 23 
 
12. They have tested and inspected fire preventive and protective devices 
 of all kinds and have established a standard of efficiency for such devices. 
 
 13. Last, but not least, they have been the greatest factor in educating the 
 public to the fact that reduction in fire losses means reduction in insurance 
 premiums, and that the latter is principally dependent on the former. 
 
 It must be admitted that the above is only a partial list of the services 
 rendered by these organizations, yet it is hoped that it is sufficient to show 
 the benefits derived from their existence by the public, supported though they 
 are principally by private capital. Their very existence is sufficient to show- 
 that insurance companies and underwriters are not concerned wholly with fur- 
 nishing indemnity and profits and losses, but perform other real and useful 
 services to society. While indemnity for loss is an indirect and negative service 
 of insurance, the above presents another aspect of the business, showing results 
 which, while indirect, are yet positive in character. 
 
 SECTIONAL ASSOCIATIONS OF FIRE UNDERWRITERS. 
 
 A SECTIONAL fire underwriters' association is a voluntary organization of 
 company representatives having jurisdiction over a number of States, 
 as distinguished from local bodies which control only single cities and 
 national associations which are of a technical and educational nature. The sec- 
 tional association partakes of the nature of both local and national associations 
 in that it performs work of a technical nature, endeavors to reduce fire waste, 
 regulates commissions and influences fire insurance rates. But while control 
 of rates is the primary function of local bodies and technical work of national 
 bodies, the sectional associations' principal object now is the reduction of the 
 expense of the business by control of commissions. 
 
 The Eastern Union. 
 
 The Eastern Union is an example of the sectional type of organization, and 
 "is composed of fifty or more of the larger and stronger fire insurance com- 
 panies — both American and foreign — doing a fire insurance business in the 
 United States."* Any company may apply or be proposed for membership, but 
 must be elected by a majority of the members present at a regular meeting. 
 All members are, of course, required to subscribe to the constitution and by- 
 laws of the association. It is stated that in this association no penalties or 
 fines exist to bind the members, a sense of honor to associates being the 
 only tie. 
 
 Its influence, exerted through the executive officers of constituent com- 
 panies, extends throughout the Atlantic and Gulf Coast States, except where 
 prohibited by law.f This influence may be described best by an outline of the 
 functions of the Union. It "is organized for the purpose of maintaining, by 
 all proper and legal methods, borrect practices in the business of fire insurance; 
 
 •The greater part of the information secured on the Eastern Union was obtained 
 from a letter by Mr. Henry E. Rees, former President of the Union. 
 tAnti-compact or "anti-trust" laws. 
 
 24 
 
the reduction of the expense of the business by controlling, where permitted to 
 do so by law, the compensation paid to agents and brokers, keeping always in 
 mind that the expense of doing business is necessarily a part of the rate of 
 premium and must, in the end, be borne by the insuring public." 
 
 Another object is "th^^ystematic inter-change of information by which 
 all members are benefited, and^ practical co^eration by inter-insurances, by 
 which agents of Union members are assisted in retaining in their offices large 
 line risks which would otherwise be sought for, and probably written, by the 
 broker in a distant city."| 
 
 "The Union encourages superior fire-resisting construction, the introduc- 
 tion of modern fire protection appliances in city and individual plants, thus 
 endeavoring to do its share toward the reduction of the per capita fire loss 
 of this country, which is large when compared with the older countries of 
 Europe."§ Thus it is apparent that educational and technical services are not 
 confined to national associations, although such services are the vital purpose 
 of the latter. ^ 
 
 The Union also has som.e influence over fire rates, but in many cases this 
 is only indirectly exerted. It may, for example, appeal to a local association 
 to raise its rates; arid its influence is usually sufficient to accomplish the 
 desired object. No direct connection between the Eastern Union and rates 
 has been discovered. 
 
 It must be recognized that the Union companies may also have representa- / 
 tives in local associations. The Union is an association^ of companies, and not f 
 of brokers and agents, and the interests o'f the two may be directly opposed, \ 
 as in fact they usually are, on the subject of commissions. It is the practice 
 of many of the non-Union companies to offer an increased commission to the 
 agent in order to compete with the Union companies, who have combined for 
 the purpose, as stated, of reducing expenses. Competition of this nature was 
 recently so intense as to force the Eastern Union to the verge of dissolution 
 and compel that body to raise their commissions to the graded scale granted 
 by the Western Union. Previously the commission had been restricted to a 
 flat 15 per cent. There are, however, in the Union territory, certain excepted 
 cities, where no limit is placed by the associations upon commissions, which 
 have reached at times as much as 45 per cent. This high rate is a tribute ta 
 entrenched monopoly which the companies would like to dispense with. It 
 would seem that some restriction should, if only in the interest of the policy- 
 holder, be placed upon the rate of commission, which is a large factor in the 
 expense account and consequently in the premium. 
 
 The rules of the local organizations regarding commissions are influenced to 
 a large extent by the Eastern Union. The Executive Committee of the Boston 
 Board of Fire Underwriters, for example, recently made changes in the rules 
 after conference with the Eastern Union representatives. As Mr. J. B. Kremer 
 expresses it, "while the several associations in charge of this territory"^ 
 
 $See "Western Union — Regulation of Agents," p. 28. 
 
 ILetter to the author by Mr. Henry E. Rees, former President of the Eastern 
 Union. 
 
 25 
 
<the South and East) "are independent of it, its influence is such that over 
 them it has what may be termed a paternal watchf ulness."1[ 
 
 The Western Union. 
 
 The report of the National Board of Fire Underwriters for the year 1879 
 contained the following paragraph: 
 
 "One effort this year has thus far proved a 
 
 success, i. e., the development of what is known as the Western Union, 
 
 an organization having for its object the formation of local 
 
 boards throughout the States governed by its rules. Their chief province 
 is the equalization of rates, to be made not excessive, but adequate to 
 the hazards carried." 
 
 This association has, therefore, been in existence more than thirty years, 
 ibeing a result of the National Board's relinquishment of rating power. At 
 the time of its organization, it comprised about one-half of the general agency 
 ccompanies, the number being made up mostly of the strong and conservative, 
 ;and this has remained the character of the membership until this date. Its 
 ^authority extends over about twenty States of the Middle West. 
 
 As the agency system gradually developed between 1850 and 1872, Chicago 
 most naturally became the location of the Middle Western general agencies. 
 In_1872 there had been established in Detroit "The Western Association of In- 
 dsurance Managers," but the failure of this association to suppress the demoral- 
 Szing practices of hazardous underwriting and reckless rate-cutting gave 
 •occasion for the formation in 1879 of the "Western Union." Membership then 
 was and now is confined to company officials, and its principal object has 
 .always been to regulate commissions, although it has established many local 
 iboards and has made rates. The most important issue of the Union soon 
 Ibecame the demand for a flat 15 per cent commission to agents. 
 
 The method of government is similar to that of nearly all associations, the 
 appointment of committees, among which are the Governing Committee, the 
 Technical Committee, and the Committee on Publicity. The Governing Com- 
 :mittee promotes agreement between members, and takes charge of the affairs 
 of the association between meetings. Recently, for example, an agreement 
 ifor co-operation was made, and having been found to work satisfactorily, the 
 Governing Committee decided to extend its scope. It has supervision over 
 Tates, is the ruling body in the association, and in many cases acts as the 
 representative of various constituent companies in adjusting m.atters with 
 -Insurance commissioners and other State officials. It maintains stamping 
 departments, grants relief from published rates and supervises some rates. It 
 Bnay make agreements on behalf of the Union with other organizations. 
 
 The Technical Committee need not be described here at length, since its 
 ■work is of an educational and fire-preventive character, and these functions 
 were mere fully discussed in the section dealing with the National Board. This 
 
 lij. B. Kremer, "The Agency," address before the ninety-first meeting of the 
 Insurance Society of New York. 
 
 26 
 
committee, for example, will investigate the fire protection facilities of various 
 cities, and make a report of conditions. Such a report may be the basis for a 
 recommendation of increase in the rates of the backward communities. 
 
 The object of the Committee on Publicity is to secure the co-operation of 
 insurance commissioners, fire marshals and commercial associations in educat- 
 ing the public regarding the general principles of fire insurance, and the 
 necessity for the reduction of the fire waste. Literature is sent out by a pub- 
 licity bureau with the intention of stimulating the interest of those whom 
 it is desired to reach. While results have been attained, the work has not 
 received the success it deserves, because the territory in which the Union 
 operates is one which is regarded as generally hostile to insurance associations 
 and their work. 
 
 The Territory of the Union. — The jurisdiction of the Western Union ex- 
 tends over the territory bounded on the east by Pennsylvania, West Virginia, 
 Virginia and North Carolina, on the south by Georgia, Alabama, Mississippi, 
 Arkansas and Texas, on the west by Arizona, Utah, Idaho and Montana, and 
 by Canada on the north. At the time of its organization, the plan was rejected 
 by some powerful agency interests in a few large cities, and these cities have 
 since remained independent, being known as "excepted cities." 
 
 The Functions of the Union. — The principal object of the association is to 
 reduce the expenses of companies by the restriction of commissions paid to 
 agents. When the association was organized the principle contended for was a 
 flat 15 per cent commission, and for some years this principle was maintained. 
 But gradually non-Union companies, by the payment of higher commissions, 
 secured the preferred business. The constant loss of good risks finally com- 
 pelled the Union to establish graded commissions, 25 per cent on preferred 
 risks, 20 per cent on brick mercantile buildings, and 15 per cent on other 
 classes. These commissions were allowed only to agents representing Union 
 companies, and in mixed agencies (representing both Union and non-Union) 
 only 15 per cent was allowed. In the excepted cities mentioned the commis- 
 sions are open and sometimes run very much higher. The necessity for some 
 organization or influence to restrict commissions is evident from the fact that 
 the non-Union companies "competed" with each other until conditions were 
 unbearable. They then formed another association, known as the Western 
 Insurance Bureau, with exactly the same purpose as the one they refused to 
 join or withdrew from, and established a scale of graded commissions somewhat 
 higher than the Western Union. 
 
 Rates. — The connection of the Western Union with rates is indirect in 
 character. Where independent raters work, the Union appears to act in an 
 advisory capacity. It tries to have its members maintain the rates published, \ 
 and has stamping departments for this purpose where legally permitted. This / 
 department advises the companies of the proper rates and of any changes in 
 the rates. Abstracts of the daily reports are sent to it, and the correct rate, 
 whether it has been obtained or not, is stamped upon the abstract. 
 
 The rules provide that "no insurance, either direct or by re-insurance, shall 
 be effected in any manner whatsoever at a rate below the tariff" unless as else- 
 where provided for by the rules. If the correct rate is violated the punishment 
 
 27 
 
is loss of good will among the members and expulsion from the Union. This 
 penalty involves, of course, an entire readjustment of the offending person's 
 business. If it is necessary to write the risks at a rate lower than the pub- 
 lished rate, a relief rule must be passed by the Governing Committee, allowing 
 a reduction. The Union prescribes the risks which may be given term rates. 
 Its rules were several years ago extended to brick mercantile buildings, and 
 at a recent meeting the subject of term rates was discussed. 
 
 The Union tries to form and maintain local boards in the various States it 
 covers, through traveling agents who get in contact with local agents. This 
 work is under the control of the Governing Committee, It has an agreement 
 with the Western Insurance Bureau, a rival organization, under which com- 
 panies require agents to settle for premiums received within forty-five days 
 from the end of the month in which the risk is written. Agents try to use the 
 non-Union companies to make the rule ineffective. There is also a co-operative 
 agreement between these two bodies, regarding the status of agencies. 
 
 Inasmuch as the territory of this association includes several States, the 
 rates which agents are required to maintain are arrived at and enforced in 
 various ways, the method varying with the laws of different States. In some 
 instances, the rates are made by the local associations established under the 
 influence of the Union. Other rates are made by State Inspection Bureaus, to 
 whom the work of rating has been delegated by the Governing Committee of 
 the Union, which retains supervision over the same. The inspection bureaus 
 employ their own men to perform the work. Whenever the State laws will per- 
 mit local boards are organized unless inspection bureaus already exist. No 
 reductions in rates are to be made by members of the Union until such reduction 
 has been promulgated by the recognized rating authority. 
 
 From the above it will be evident that the Western Union (1) acts in a 
 supervisory manner toward rates, and endeavors to insure the maintenance of 
 the rates and rules promulgated by the various recognized authorities; and (2) 
 attempts to establish recognized rating systems where none exist. Complaints 
 of violatio:^of the established rates are treated in the manner described under 
 "Regulation^f Brokers and Agents." 
 
 Establishment of Inspection Bureaus and Local Boards. — The rules state 
 that "wherever the State laws will permit, the Union zvill reqiiire\\ agents to 
 organize local associations, (except at places which are within the control of 
 inspection bureaus now existing or to be hereafter established) for the pur- 
 pose of establishing an equitable and discriminating tariff of rates for their 
 respective localities, under the supervision of State boards and the governing 
 committee * * * ." Where such local boards are formed, their expenses 
 must be borne by members on a pro rata basis of premium receipts. Mem- 
 bers of the Union are forbidden to pay assessments levied on any other basis. 
 
 Local boards and inspection bureaus may try members for violations of 
 their rules and punish as provided by such rules for the first or second offense, 
 but upon a third conviction, with the approval and order of the Governing 
 
 lltalics are the author's. 
 
 28 
 
Committee, all members of the Union represented by such agent shall with- 
 draw their agencies from him and he shall be thereafter ineligible for any 
 agency appointment until reinstated by the Governing Committee. An agent 
 not amenable to discipline is thereby "blacklisted." The Union lays upon its 
 members the duty of seeing that their agents obey the rules and regulations 
 of the local bodies unless the same contravene those of the Union, in which 
 case the Union rules shall govern. Any member may, however, appeal to the 
 Governing Committee from a penalty imposed on its agent by a Ipcal board 
 within thirty days of the imposition. This Committee holds a hearing and 
 renders a final decision. 
 
 Regulaticn of Agents. — It has already been stated that the rules require 
 the agents and brokers to observe the published rates and even the rates of 
 non-Union companies and provide penalties for failure to do so. Rebates of 
 commissions to the insured or any person in his interest are strictly pro- 
 hibited in every form, and no member is permitted to take a line of insur- 
 ance, or any part thereof, from one who indulges in such practices, even 
 thovgh the portion offered such member shall have been written in accord- 
 ance with the rules. Where a complaint of rebating is made to the Governing 
 Committee, the member writing the line in question must satisfy the Com- 
 mittee that the insurance written involved no rebate. It is the duty of the 
 Committee to investigate such complaints and rule in the matter. Appeal 
 from its decision to the Grievance Committee may be made within ten days, 
 but the decision of this latter Committee is final and may be enforced by sus- 
 pension or forfeiture of membership. 
 
 The rules provide that companies shall not reinsure others which are not 
 members of the Union, in any manner whatsoever, except a non-Union com- 
 pany retiring from business in Union territory. Companies are also required 
 to prevent their agents from inducing a local agent to represent their com- 
 pany in place of another Union member which such local agent previously 
 represented. Companies represented in the Union must not be represented 
 by the employes of any non-Union companies, except if such non-Union com- 
 panies be adhering strictly to Union rules or if local companies, to the rules 
 of the local boards having jurisdiction. 
 
 Commissions. — The Union, although originally desiring to enforce a 15 ' 
 per cent commission on all classes of risks, has been forced to recognize the 
 graded commission plan, and also the rival Western Insurance Bureau, the 
 organization of which has been described. Western Union companies, there- 
 fore, are permitted to pay certain graded commissions (i. e., commissions vary- 
 ing with the class of risk) as agreed upon in the Conference Agreement of 
 April 6, 1912, with the Western Insurance Bureau. Both associations agree 
 to avoid being represented by agents who also represent companies paying 
 excessive commissions, i. e., non-Union and non-Bureau companies. Pro- 
 visions are made for determining the status of any agency as either a Union, 
 Bureau or mixed agency. In addition to the work of organizing local boards 
 and inspection bureaus, supervising rate-making, and regulating agents, the 
 Union promulgates rules governing the practice of the business, which pre- 
 scribe forms to be used, designate term risks, enumerate conditions for writ- 
 
 29 
 
ing sprinklered risks, prohibit the waiver of certain policy clauses and pre- 
 scribe a short rate table. 
 
 The influence and power of these sectional organizations, and the extent 
 to which they foster concerted action by insurance companies, which is often 
 to the public benefit, is well illustrated by what was termed by the press dur- 
 ing 1913 as the "Missouri situation." The State of Missouri, after compelling 
 insurance companies to file their rates with the Insurance Commissioner of the 
 State for his approval, and ordering many risks to be re-rated, which the com- 
 panies were permitted to do through common agencies, passed an exceedingly 
 drastic anti-compact law. This law provided that no combinations of insur- 
 ance companies should be effected for the purpose of making rates, and that 
 the use by a company's representative of any rate or rate-book "prepared, 
 kept or furnished" by any person acting in behalf of any other insurance com- 
 pany was prima facie evidence of such combination. Heavy penalties were 
 imposed for violation of this provision. After fruitless attempts by various 
 insurance interests to adjust matters, the Western Union held a meeting in 
 April, 1913, at which the question was considered. Although the Union could 
 not act as such, fearing legal action against it, the companies composing the 
 same individually all agreed to cease writing insurance in the State of Mis- 
 souri after April 30, claiming that business could not be carried on under the 
 new act's provisions. This caused tremendous disturbance in all businesses 
 involving credit, to which insurance is necessary, and the State authorities 
 were finally compelled to agree that the law would not be enforced. It might 
 be added that the Western Insurance Bureau also pledged similar action by 
 its members. 
 
 Summarizing the above it may be said that sectional organizations attempt 
 to perform, in a broader and looser manner, the functions undertaken by local 
 associations. In the first place they exercise an influence over rates: (a) by 
 endeavoring to insure the maintenance of those promulgated by various recog- 
 nized authorities such as local associations, "independent" raters and inspec- 
 tion bureaus; (b) by efforts to establish recognized rating systems. Secondly, 
 they endeavor to reduce the large annual destruction of property by fire. 
 Thirdly, they regulate the actions of insurers as regards rebates, reinsurance, 
 short and long term rates, endorsements on policies and with respect to great 
 emergencies such as the Missouri situation. Fourthly, they regulate the ex- 
 penses of doing business as far as commissions are concerned. 
 
 ECONOMIC FUNCTIONS OF FIRE UNDERWRITERS' ASSOCIATIONS 
 
 NOTWITHSTANDING considerable criticism and many statutes directed 
 against them,* it must be plain from the description in preceding sec- 
 tions that underwriters' associations, far from being inimical to the 
 public welfare, really possess econom.ic functions and are a necessary part of 
 the insurance system as at present constituted. If the contentions of their 
 
 *See article by the author, "Commonwealth vs. Co-operation," in THE MARKET 
 WORLD AND CHRONICLE, June 12, 1915. 
 
 30 
 
critics be examined it wall be found that the faults of the exchanges are not 
 sins of commission, but, at the very worst, sins of omission. Combination and 
 association have not gone far enough and have failed to completely attain their 
 purposes. This is not said to "whitewash" any associations which may have 
 abused their power or to compromise with any acts which deserve to be con- 
 demned. But, while it has been a general practice to bring to light the delin- 
 quencies of this system of co-operation, no real effort has been made to present 
 its desirable features. It is intended to summarize here the more important 
 services of such organizations. 
 
 (1) Such organizations offer to insurance men a chance to become ac- 
 quainted with their competitors, and it will be generally admitted that such 
 acquaintance improves the moral tone of any business. Many who would un- 
 hesitatingly take undue advantage of a stranger — witness the attitude, for 
 instance, that it is perfectly proper to cheat a corporation — regard it as dis- 
 honorable to meet an acquaintance in any but an open manner. In other 
 words, through the medium of the association a bitter struggle with enemies 
 is converted into friendly rivalry. Many objectionable practices are thus 
 indirectly eliminated. 
 
 (2) New problems arise in the insurance business every day. Under 
 circumstances where the interests of agents and brokers do not conflict, where 
 they are not enemies awaiting every opportunity to out-distance a competitor, 
 where they operate according to a well-established code of rules, these new 
 problems are more likely to be discussed in 'a fair and open way, and the 
 combination of two or more minds will more probable arrive at a correct and 
 equitable solution of any difficulty than will individuals thinking independ- 
 ently. For individual opinion there is substituted mutual counsel and con- 
 certed action by means of associations. For example, how could a rating 
 schedule be adapted to local conditions except by the concerted action of 
 experts? How could an adequate and just scale of commissions be otherwise 
 adopted? Hov/ could it be decided whether or not certain acts were detri- 
 mental to the business as a whole? 
 
 (3) From time to time legislation is enacted which is prejudicial alike 
 to the insurers and the public. As an instance may be cited valued policy laws 
 which sometimes compel insurance companies to pay the insured more for his; 
 property than its value at the time of the fire and thus encourage destruction: 
 of property. Also may be mentioned retaliatory laws, whereby one State taxes- 
 heavily the insurance companies of another. The second retaliates, and so ont 
 — the insurance companies and ultimately the insured paying the cost of this 
 war of statutes. Against such legislation protection is required; and it can- 
 not be obtained by individual action. Singly, insurance companies, because 
 of popular ignorance of the business, are at the mercy of any laws which. 
 may be enacted, without hope of public support. A protective alliance is the 
 only defense available. When, as in Missouri, the law one year permits com- 
 panies in common to employ an expert to make rates and the next year makes 
 a combination of this kind a penitentiary offense, single companies alone are- 
 powerless, but concerted group action may force a more just exercise of State 
 power. 
 
 31 
 
(4) Judicial procedure in the United States is notoriously slow. In many 
 businesses associations exist to prevent dealers who refuse to abide by business 
 ethics from transacting business with honest men. Thus the New York 
 Stock Exchange has the power to exclude from its floor any broker whose 
 acts aro ii.c-ns.Sccnt wim business principles without waiting for a court 
 decision which may not be delivered for several years. In the same way the 
 underwriters' associations afford a means of ridding the business of objection- 
 able persons. About a year ago, for example, a certain political "boss" was 
 lefised admission to one association because of his general reputation. That 
 an association's power in this respect is capable of abuse cannot be denied, 
 but ic3 proper exercise is apparantly serviceable to the community. 
 
 (5) It is probable that nothing has had so much influence upon the de- 
 velopment of a scientific method of rating as associations of underwriters. 
 Pr.or to the adoption of the Universal Mercantile Schedule no very generally 
 accepted system of rating existed. After the issuance of this schedule, which 
 itself was but an evolution of more or less crude schedules promulgated by the 
 older local associations, the schedule principle was further improved by such 
 associations and adapted to the requirements of practically all localities. Mr. 
 C A. Hexamer said in this connection, in an able article: "I will, therefore, con- 
 fine myself to the history of the development of * * * the Pniladelphia Fire 
 Underwriters' Association, believing that in the development of that organiza- 
 tion all of the various advancements in scientific rate-making can be clearly 
 traced. "$ This association began in 1852. It promulgated later "Classes of 
 Hazards and Rates of Premium in the City of Philadelphia," which list was 
 based upon principles still in use and was the beginning of the present system. 
 The Underwriters' Association of New York State was formed in 1883 and the 
 Irrational Board of Fire Underwriters in 1866. Practically all of the larger 
 associations in the East have been in existence prior to the adoption of the 
 schedules in use to-day, and it is natural to expect that schedules requiring 
 combined opinions of underwriters should develop from organizations foster- 
 ing acquaintance, mutual counsel and co-operation. 
 
 (6) Of the advantages of combined action in rating and inspection much 
 might be said, but a brief illustration must suffice. Let us suppose that in 
 a given territory there are 40,000 insurable mercantile and manufacturing 
 risks. Inspection^ entailing expense are necessary. There are, we will say, 
 fifty insurance companies in the field and each risk, on the average, is in- 
 sured in two companies. It is frequently the case that large risks are divided 
 between four or five companies. There are, therefore, 80,000 insurances and, 
 if no co-operation exists, 80,000 inspections and ratings. Arbitrarily assuming 
 the cost of each to be $5, the expenditure is $400,000, an expense which must, 
 of course, ultimately be borne by the policyholder. If the companies combine 
 to do this work the 40,000 buildings are rated once at a cost of $200,000 and 
 the results are available to all at one-half the alternative cost. Every member 
 of the association or rating bureau receives his card covering each risk. It 
 
 f'Rates and Schedule Rating," Annals of American Academy of Pol. and Soc. 
 Science; title, "Insurance," September, 1905. 
 
 32 
 
is apparent that the extent of the saving is dependent upon the number of in- 
 surances upon the same building and number of times inspections and re- 
 inspections are required. 
 
 (7) The above figuring does not adequately measure the savings, since 
 no account has been taken of that reduction of expense which naturally follows 
 combination, due to specialization and division of labor. 
 
 (8) When a number of companies pool their facilities to obtain a rate ]' 
 it must be admitted that the result is more probably just and adequate than j 
 where the charge is the result of or is influenced by competition; and adequate ! 
 rates which are not exorbitant are to the interest of both the public and the \ 
 insurer. It is impossible for ruinous competition in the insurance business 
 to prove of any lasting advantage to the policyholder. In most other busi- 
 nesses, the result of competition among producers or distributors is an ad- i^ 
 vantage, more or less permanent, to the consumer. In purchasing insurance, \ 
 however, it is impossible for him to receive the same article at the reduced j 
 price. The commodity he purchases is not delivered to him at once, but over a / 
 term of one year, three years or five years. If the price is reduced by 25 j 
 per cent the stability of the selling company is reduced, and this stability is 
 the only guarantee that the consumer will receive the protection he paid for. 
 The company, in other words, after the advance payment of the premium 
 stands in the position of debtor to the insured, and it is to the advantage of 
 the latter to have it in as good financial condition as possible. Adequate 
 rates are, therefore, to the common interest, and in bringing them about 
 the associations render a service to all. 
 
 (9) While authorities are divided on the question of the necessity of 
 classification of loss statistics in the fixing of rates, if such statistics are of 
 value the underwriters* association presents itself as a medium (and, indeed, 
 the only practical one) for obtaining such data. In fact, in the opinion of 
 one investigator of the subject,§ "effective measures should be adopted in 
 order to enable the exchange to obtain the experience of companies on the 
 various classes rated by it." Recently the idea of using classified loss data 
 as a basis for rates seems to have the ascendancy and the National Board 
 has a committee working on this problem at the present time. 
 
 (10) It is and has been for some time the practice of insurance companies 
 to consider one year as the standard policy term and to charge proportion- 
 ately for insurance of less than one year. Rates for terms shorter than one 
 year are known as "short rates." Originally companies charged what they 
 liked for short term insurances. Later, a little uniformity was attained 
 but was sacrificed when such a course seemed desirable. Now, however, all 
 the companies of the Middle West adhere to the short rate table of the West- 
 ern Union and many local organizations have established tables which coin- 
 cide. Likewise, it has been the practice very generally to make some reduc- 
 tion proportionately in the premium for insurance taken for short terms of 
 three and five years. These reduced rates apply only to certain classes of 
 
 §S. Deutschberger, "Report on Examination of New York Fire Insurance Ex- 
 change." .July 21, 1913. New York Insurance Department. 
 
 33 
 
risks and are called "term rates." No uniformity exists whatever regarding 
 the classes of property which may receive term rates except such as is im- 
 posed by the underwriters' associations. Thus it is evident that such associa- 
 tions have promoted uniformity as regards short and long term rates. 
 
 (11) A fire insurance premium is in the nature of a tax and all taxes are 
 based upon uniform assessments of the same percentage of value. Like- 
 wise, insurance rates are based upon the supposition that all will insure at 
 least a certain percentage of the value of their property. The majority of 
 losses by fire are small. Therefore, other things being equal, the property 
 owner who insures a proper percentage of his property's value is entitled to a 
 lower rate than one who insures a small percentage. There is a difference 
 between the cost of insuring different percentages of value even greater than 
 the difference between wholesale and retail prices in mercantile business. 
 Co-operation of companies is necessary to provide for this by percentage co- 
 insurance clauses in all policies, or general adjustments of the rate. 
 
 (12) It is probably necessary only to mention the work of the associa- 
 tion in raising the standards of building construction and rendering lives, 
 houses and factories less liable to destruction. The work of the national 
 organizations along this line has been described. The efforts of State, sec- 
 tional and local bodies must not be forgotten. The importance of these efforts 
 to reduce fire waste is apparent when we consider that the loss per capita by 
 fire in the United States is ten times that in many European countries. Mr. 
 Willis 0. Robb, manager of the New York Fire Insurance Exchange, says: 
 "The Exchange has done almost more than any other agency both to improve 
 the quality of so-called fire-proof construction, by charging for defects, and 
 to encourage by its very low fire-proof building rates, the multiplication of 
 standard fire-proof structures and the breaking up of great areas of conflagra- 
 tion breeders. The difference between properly and improperly protected 
 columns and beams is one that architects and owners have largely learned 
 from underwriters, whose knowledge has been put before them in the per- 
 suasive form of discriminating rates. It is now a common practice for archi- 
 tects to submit plans for new buildings and improvements to the Exchange 
 for comment and criticism, and in order to secure advance information as to 
 the probable rates. "^ The inspections of the Association of the Middle De- 
 partment, for example, of smaller towns and cities, have resulted in many 
 improvements. Engineers are supplied who give gratuitous service, and 
 other activities along this line have been described elsewhere. 
 
 (13) Along with the efforts to better building construction go the serv- 
 ices rendered in standardizing and improving protective and preventive devices. 
 This work has been described in the consideration of the functions of the 
 National Board and the National Fire Protection Association, and is only 
 mentioned here to make the list of services as complete as possible. 
 
 The report on the Examination of the New York Fire Insurance Exchange 
 
 1IW. O. Robb: "New York Fire Insurance Exchange," Popular Insurance Magazine 
 February, 1911. 
 
 34 
 
states: II "There can be no doubt that the practice maintained from the first by 
 the Exchange of including in its rates a charge for defective water supply 
 and fire protection and making prompt allowance for betterments in these 
 respects, has contributed largely to the improvement in fire protection, both 
 public and private, that has been so marked a feature of the recent history 
 of New York." 
 
 (14) In addition to the co-insurance clause previously mentioned, the 
 value of the standardization of other forms of clauses and endorsements should 
 be noted. If the value of a standard fire policy be acknowledged, it follows 
 that similar, though lesser, benefits must result from uniform clauses. The 
 legal meaning of various words and phrases becomes fixed, the underwriter 
 knows definitely what privilege he is giving and the policyholder what benefit 
 he is receiving. 
 
 (15) Underwriters' associations are a great influence toward economy. 
 We have already mentioned the saving in expense of rating by means of co- 
 operation, and there is also a saving in other items. In an era of competition, 
 an increase in commissions to agents and brokers is almost as effective as a 
 decrease in rates. By means of the regulations of associations excessive com- 
 missions are eliminated. The rules of the associations also provide against 
 the evils of the rebate, which entails a preference of one policyholder over 
 another. In other words, fire insurance companies, through associations, have 
 themselves abolished an evil which in the railroad business required the inter- 
 vention of the Federal Government. 
 
 A synopsis of these economic functions will serve to place them more 
 clearly in mind. The services of underwriters' associations may be grouped as: 
 
 I. Those regarding economy: 
 
 (A) In the making of rates: 
 
 (a) by the saving in labor and expense; 
 
 (b) by specialization and division of labor. 
 
 (B) In commissions. 
 
 (C) In surveillance over legislation. 
 II. Those regarding standardisation: 
 
 (A) Of rates and rating systems: 
 
 (a) by the improvement of schedules; 
 
 (b) by the establishment of organizations to apply the 
 
 schedules; 
 
 (c) by the elimination of rate-cutting; 
 
 (d) by the classification of loss statistics. 
 
 (B) Of long-term rates. 
 
 (C) Of short-term rates. 
 
 (D) Of clauses and endorsements. 
 III. General results: 
 
 (A) Elimination of objectionable practices: 
 (a) by acquaintance; 
 
 |Pp. 123-124, New York Insurance Department, July 21, 1913. 
 
 35 
 
(b) by prohibition of rebates; 
 
 (c) by expulsion of undesirable members. 
 
 (B) Mutual counsel and assistance. 
 
 (C) Surveillance over legislation. 
 
 (D) Prevention of and protection against fire. 
 
 Like many supposed evil combinations such associations prove upon exam- 
 ination to be really of assistance to the insurance consumer, if that term 
 can be applied to the holder of a fire policy. Their services in connection 
 with economy and standardization entitled them to be recognized generally 
 as institutions with certain very proper functions, with individual instances 
 of bad practices and abuse of power. In this light the proper object of any 
 legislation is very plain, namely, to retain the advantages of such associations 
 and to eliminate any undesirable features. This is to regulate. Regardless 
 of the seemingly plain necessity of such a course, however, for many years 
 our legislatures have pursued the course of hostility toward co-operation, of 
 prohibition of combination. The companies have been proceeded against 
 under general anti-trust laws applicable to all industries, under the common 
 /aw, under specific anti-trust statutes naming insurance and other businesses 
 in particular and under State-rating acts. With the exception of instances 
 where the mere filing of rates is required, only two or three of our States have 
 recognized the principle of regulation. In a few other States the advantages 
 of co-operation are admitted but quite unconsciously and only under State 
 administration of the rating facilities. Yet after so many years and so gen- 
 eral a trial no success can be claimed for the prohibitory variety of legislation. 
 
 CAUSES OF LEGISLATION AGAINST FIRE UNDERWRITERS' 
 ASSOCIATIONS 
 
 A STUDY of fire underwriters* associations makes two facts very appar- 
 ent — (1) that they have certain very definite economic functions and 
 a place in the present insurance system, and (2) that notwithstanding 
 this, the public has become opposed to them and legislation has endeavored to 
 suppress them. The services of these associations have been enumerated in a 
 previous section,^'' and the extent of the antipathy to this form of organiza- 
 tion may be judged by the number of investigations, prohibitory statutes and 
 prosecutions. Fire insurance investigations have been conducted by at least 
 nine States, during the past three or four years — New York, Illinois, Wisconsin, 
 Texas, Illinois, Kansas, Missouri, Louisiana and Pennsylvania. In 1912 an 
 investigation by the Bureau of Corporations involving an estimated expendi- 
 ture of from $30,000 to $300,000 was proposed. The Insurance Commissioner 
 of Illinois in May, 1914, employed a special investigator to determine the rea- 
 sonableness of rates in that State. The States of Missouri and Kentucky 
 were for a time partially deprived of insurance, as a result of laws aimed at 
 underwriters' associations. In view of the benefits claimed for such organiza- 
 tions it is surprising to find twenty-seven States having general anti-trust 
 
 <i> See p. 29. 
 
 36 
 
laws which may possibly be construed (but are not usually) as applying taj 
 underwriters' associations, seven States having laws which specifically prohibit 
 combinations to fix insurance rates, three statutes which provide for the re- 
 vision of rates by the State and three which permit State boards to fix rates. 
 Why does such hostility exist toward such apparently useful and economical 
 bodies ? Why, when railroad tariff associations, for instance, have been legally 
 recognized, have legislators so persistently attempted to abolish combinations 
 for the purpose of making fire insurance rates? 
 
 A prominent insurance man has said: "The two great questions con- 
 fronting the stock insurance companies at the present time are (a) a revolu- 
 tionizing and standardizing of its rate-making methods to place the same 
 upon a consistent basis, and (b) a revision of its cost.''^^* This is a mild 
 statement of the views which have actuated the sincere but mistaken repre- 
 sentatives of the people in their attacks upon underwriters* associations, 
 stamping departments and "independent" raters. The work of such organi- 
 zations as have confined themselves to forwarding the cause of fire protection 
 and prevention has not been interfered with; in insurance "all roads lead to 
 the rate question" and attention has been centered upon the rate-fixing and 
 commission-regulating organizations. What are the contentions of those who 
 oppose these organizations and which methods give rise to criticism ? In order 
 to properly understand the present attitude toward the associations we must 
 consider the circumstances which gave rise to this attitude. 
 
 At the outset of this discussion it is necessary to eliminate one repeatedly 
 disproven criticism, namely, that fire insurance companies on the whole have 
 earned exorbitant profits, i. e., that the general level of rates is too high. 
 This contention is based upon a comparison of profits with fire insurance 
 companies' capital alone. Stock companies carry, however, a large surplus 
 against possible conflagrations. This sum, which belongs to the stockholders, 
 might be withdrawn and otherwise invested; if left with the insurance com- 
 pany it is entitled to some return. When the earnings are. compared with the 
 capital, surplus and a portion of the reserve (say 30 per cent) no basis exists 
 for the complaint of exorbitant returns. In fact, considering the number of 
 companies forced to retire from business, fire insurance seems a rather haz- 
 ardous investment. The elimination of this possibility of generally excessive 
 rates leaves only to be considered the important question of discrimination. 
 There will be recognized discrimination between (a) classes of risks, (b) 
 kinds of policies, (c) localities, and (d) particular risks. The regulation of 
 brokers and agents also requires discussion. These varieties of discrimination 
 will be considered in the order given. 
 
 Discrimination Between Classes of Risks. 
 
 Among the risks of insurance companies are included buildings and con- 
 tents of many classes, such as hotels, dwellings, public halls and factories of 
 all kinds, the rate, of course, varying not only according to the class, but with 
 the character of the particular building and contents. All risks except those 
 
 "Some Methods of the Fire Insurance Business," New York Journal of Com- 
 merce, i'arch 26, 1914. 
 
 37- 
 
taking minimum rates are rated by schedules, which proceed from a certain 
 basis rate and give due additions or deductions for important components of 
 hazard. These additions and deductions are. often percentages of the basis 
 rate. The basis rate of the class is, therefore, a very important factor in the 
 final rate upon any particular building in that class. If it is fixed higher 
 than it should be, every building within the class suffers an injustice, and the 
 final rate on each is higher than it should be. A basis rate too low has an 
 opposite effect, and confers upon the class which obtains it an undeserved 
 benefit at the expense of other classes. Under such a state of affairs the 
 owners of some buildings are excessively taxed in order to eke out the in- 
 adequate premiums of those favored with an unjustly low rate. How is the 
 proper basis rate for a particular class to be determined? In general the 
 premiums on the various classes of risks should be proportionate to the losses 
 on these classes. If for every $1,000,000 of insurance written on hotels, losses 
 to the extent of $25,000 annually occur, and for every $1,000,000 of insurance 
 written on apartments $20,000 is paid in losses annually, (assuming these 
 figures for the sake of illustration), the rate on apartments should be four- 
 fifths of the rate on hotels. Any rate above this is an overcharge of the 
 apartment owners. It would seem that such a principle would be instantly 
 recognized and applied by the insurance companies; but it has been claimed 
 that such is not the case. 
 
 A report of the Superintendent of Insurance of Missouri contained an 
 abstract of the testimony of Mr. F. J. Fetter, who promulgated fire rates for 
 all parts of Missouri except St. Louis County, and Mr. Fetter is reported as 
 follows :^'^ "I had no figures or experiences from any of the companies show- 
 ing their losses or profits on the various classifications to aid me in making 
 up the rates. During the time that I rated the State I collected no actual 
 data or experience of the companies showing their losses or profits. It may 
 be, however, that under this system a man who owns a building of one kind, 
 like a fireproof building or a sprinklered building, would be paying more 
 than was sufficient to carry his risk; while another man owning a building 
 specially liable to be burned would be paying less than he ought to pay, but 
 it has been the practice to lump together the experiences from all the dif- 
 ferent schedules and base rates on these aggregate results. The rates that I 
 made were called estimates. We had better call them estimates until they are 
 approved, and then they become rates. They were what I considered fair, but 
 might be termed guesses." Mr. H. M. Hess, chairman of the Missouri Actuarial 
 Bureau, testified as follows :^*^ "I have never seen any statistics covering fire- 
 proof buildings. I have no statistics to justify any of the basis schedules 
 other than what I have quoted as to the average experiences of the State of 
 Missouri, and they cover only the aggregate results. Many of the schedules 
 may be too high, and others too low, but in the aggregate they produce fair 
 and reasonable profits." Mr. J. V. Parker, whose business is the study of 
 fire hazard and the formulation of schedules and rates, said: "No tabulated 
 
 <3) Report for 1912, pp. 9-10. 
 <♦' Report for 1912, p. 11. 
 
 38 
 
or classified statistics are filed in my office. The general loss ratio of all 
 companies on all classes of business in each State and over all States, as 
 shown by 'Insurance by States' and the National Board of Fire Underwriters' 
 printed proceedings, are the available statistics showing the relation of 
 premiums to losses on all classes of business." Mr. Parker was asked the 
 following questions: "Did you ever see any statistics on sprinklered busi- 
 ness? Ever see any on fireproof buildings?" and his answer was, "I have 
 not." The fire insurance companies doing business in the State of Missouri 
 were written to and their answers confirmed the facts set forth, almost all 
 stating that no such statistics were kept.*^* If the lumping together of loss 
 statistics was followed to its logical conclusion premium calculations would 
 also be lumped together and all classes of risks would start with a common 
 basis rate, say $1 per $100. As a matter of fact, the path of progress leads 
 in another direction, — toward differentiation. 
 
 The question immediately arises, why is one risk rated twenty times as 
 much as another? Why is the basis rate on grain elevators $1.50 and on 
 iron foundries $1, machine shop schedule $1.25, tin can factory $1.59, flour mill 
 schedule $1.75? Equal basis rates are not demanded, for that would be even 
 more unjust than present arrangements; but the theory is that a fire rate 
 equitably measures the fire hazard, and if there is no record of experience to 
 show that there is a greater risk assumed under a sawmill schedule with a 
 basis rate of $2.50 than under a school schedule with a basis rate of 50 cents, 
 how can it be determined that these rates are fair and reasonable ? In other 
 words, has not the questioner as much proof of the inequity of the several 
 rates as the defender has of their correctness, that is to say, none at all? 
 How could those promulgating rates justify them to the public? In other 
 words, the critics claimed that the associations' rates were not based on classi- 
 fied statistics. 
 
 It was stated with reference to one association that "there are no figures 
 officially gathered which will accurately reflect the ratio of losses to premiums 
 in exchange territory. Practically all rating is done independently of other 
 rating organizations upon bases and schedules peculiar to the exchange, and it 
 should be considered as a matter of importance to ascertain the premium rate, 
 the premium volume and the loss ratio, in order to test the results of its rat- 
 ing methods. It, therefore, seems almost incredible that no systematic effort 
 was ever made by any one in authority to ascertain these figures." This was 
 claimed to be true both as regards classes of risks and aggregate business.'*' 
 The attempts to gather statistics for rate-making were alleged to be few and 
 far between, and on a number of occasions important rate changes were based 
 upon incomplete and unsatisfactory data. In a statement by the New York 
 Superintendent of Insurance the following appeared :'^^ "It is a noteworthy 
 fact that, with the exception of rates on very few classes, the rating associa- 
 
 '■'■•' Annual Report of the Superintendent of Insurance of Missouri, for 1912, p. 14. 
 
 <«' Report on Examination of New York Fire Insurance Exchange. July 21, 1913. New 
 
 York Insurance Department, pp. 10, 95, 125. (Hereafter referred to as "Report.") 
 (T) THE MARKET WORLD AND CHRONICLE, 1913, p. 91. See also Report, pp. 95. 
 
 99, 106 and 107. 
 
 39 
 
tions are obliged to grope their way without the aid of the statistical ex- 
 perience of the companies for whom the rates are made. It is in evidence that 
 the associations on various occasions requested their members to furnish fig- 
 ures on certain classes, and when the association succeeded in obtaining a 
 fair volume of figures it was considered worthy of comment. With the ex- 
 ception of competitive rates, changes in rates have been made in the past for 
 two reasons: First, because one or more companies discovered that a certain 
 class proved unprofitable, the result generally being an advance in that class; 
 second, because a distinct class of insurers would band themselves together, 
 collect from sources available to them statistics regarding the premiums and 
 losses in that class and then threaten to form or insure in mutuals unless the 
 rates in the class in question were lowered; and, generally, such action was 
 followed by a reduction in rates." *^' 
 
 To appreciate the situation which is here complained of one must know 
 the origin and purpose of the classification of figures kept by the various 
 companies. They were prepared for the purpose of competition, in order to 
 measure the profitableness of writing various classes of risks. Such lists 
 were maintained at heavy expense, for each policy written had to be carefully 
 examined to determine the class of risk. A. F. Dean cites an instance of a 
 risk of $5,000, wrongly classified, which affected the loss ratio of one class 
 25 per cent and of the other class nearly 100 per cent, which illustrates the 
 necessary degree of care.^"' They were and are guarded as secrets by each 
 company — regarded as a kind of stock in trade. In earlier days, when one 
 company not only could but was forced to make its own rates because of lack 
 of co-operation, these classifications served in a crude way as a scale by which 
 to measure rates. At the present time, when companies are compelled to 
 carry all classes of risks, desirable and undesirable; when companies co- 
 operate, to some extent at least, to make rates; when competition is keen and 
 the margin of profit small as compared with earlier periods; the usefulness of 
 these classifications in their present form has ended. The following table, ^'"' 
 covering a number of companies for a five-year period and showing the best 
 and poorest loss ratio (from the standpoint of the company), is sufficient to 
 give an idea of their unreliability: 
 
 Showing of Any One Company as Regards 
 Class No. Lowest Loss Ratio. Highest Loss Ratio. 
 
 1 .00 1.11 
 
 2 10 2.13 
 
 3 00 1.31 
 
 4 ' C6 1.88 
 
 5 18 1.69 
 
 6 03 .92 
 
 In discussing this phase of the public's criticism we may dismiss at the 
 
 <s> For an example of successful results of such a pracedure see the report of the 
 ' Fire Insurance Committee. National Convention of Building Managers, reported 
 in "Building Management," August, 1911, said Committee having prepared an 
 interesting comparison of about 160 office buildings. 
 <"> A. F. Dean, "Fire Rating as a Science." 
 <^<» A. F. Dean, "Fire Rating as a Science," p. 74. 
 
 40 
 
outset all question of the possibility or desirability of classified statistics as a 
 basis for rates; this is an open question among underwriters/"' 
 
 There can be no doubt, however, that such statistics would do much to 
 satisfy the public that the rating system rested on a tangible base. The lack 
 of them is nevertheless not traceable to underwriters' associations, but rather 
 exists in spite of the efforts of these bodies. Evidently the spirit of co- 
 operation among the companies is not strong enough to induce them to 
 surrender certain figures which, in their hands, are weapons of competition, 
 but in the possession of the associations would be a defense against dis- 
 crimination. It is of record that various associations have often used every 
 effort to secure statistics which would better enable them to make rates in 
 particular localities. Their failure is but an instance where co-operation has 
 failed to abolish privately-kept statistics which are relics of former com- 
 petition. 
 
 Furthermore, regardless of the extent cf accuracy of a schedule itself, 
 considerable opportunity for its imperfect application was claimed to exist. 
 In a former section"'' some of the more important schedules used by a large 
 association were described. A great variety of rules are applied in the work 
 of using these schedules, which are of extreme importance to the insured and 
 should be available for reference by all members of the association. In some 
 case.:, however, no properly codified sets of rules were possessed and since no 
 one rater was familiar with all the rules the natural consequence was that 
 uniformity in their application was impossible. No attempts have been made, 
 however, by the associations to keep these rules secret. On the contrary, 
 of late years they were, in many cases, published in the bulletins issued by 
 the exchanges. The early rules which still remained in force, nevertheless, 
 were unknown to brokers. Knowledge of a large number of the rules became 
 the possession of a few brokers, through long experience or otherwise, and 
 
 <"^ Some authors, including underwriters, admit the value of classified data, whereas 
 many others deny that its collection is possible and some its usefulness if it could 
 be collected. For the first view see 
 
 David Rumsey, "A Suggestion for a Method for the Control of Fire Insurance 
 Rates," THF MARKET WORLD AND CHRONICLE, December 6, 1913, p. 722. 
 
 Report of the New York Legislative Investigating Committee, 1911, p. 68. 
 
 Report of Special Committee on L'niform Classification of Fire Insurance Ex- 
 perience, National Association of Insurance Commissioners, 1913. 
 
 Report of the Insurance Commissioner of New York, 1913. See alsb THE MAR- 
 KET WORLD AND CHRONICLE, February 28, 1914, p. 292. ; 
 
 E. G. Richards, "Classification — Discrimination," address before Insurance Society 
 of New York, 1913. 
 
 E. G. Richards, "Why I Believe in Classified Experience," address before Insurance 
 Library Association of Boston, 1916. 
 
 E. G. Richards, "Experience Grading and Rating Schedule," 1916. 
 
 For the latter viewpoints see A. F. Dean, "Classification" and "Classified Ex- 
 perience." For an example of an attempt at classification see the Reports of the 
 Texas State Rating Board and E. G. Richards, "Experience Grading and Rating 
 Schedule," 1916. See also the author's "Co-operation and Classification in Fire 
 Insurance," Quarterly Journal of Economics. August. 1916. 
 <^> See "Local Underwriters' Associations." p. 15. 
 
 41 
 
this gave them an advantage over less fortunate competitors, and the clients 
 of the former benefits not possessed by those of the latter. Charges for ex- 
 posure were formerly assessed by a "judgment" system, but of late years 
 there has been considerable extension of the use of "exposure tables." Rules 
 are necessary to govern the application of the tables to the different classes 
 of risks and in addition to these numerous special rules and office practices 
 obtained in many associations which materially modified and even completely 
 waived the application of the exposure charge. In the case of one of the 
 most efficient of local associations it required several months to produce a 
 fairly complete enumeration of these rules and practices. 
 
 Often such rating rules are rather old. Some were obtained by existing 
 associations as an inheritance from their predecessors, others they have them- 
 selves adopted from time to time. In the formulation of such rules, and par- 
 ticularly the older ones, consistency has not always been the principal con- 
 sideration. As a result, when a risk on the border line between two schedules 
 was rated by one, a rate was produced wholly inconsistent with the rate which 
 would have been obtained by the application of the other. The transfer of a 
 mercantile risk with many occupants to the manufacturing schedule because 
 of a slight change in occupancy has been cited as an example. 
 
 Schedule rating, the advantages of which were enumerated in a previous 
 section,'"* while producing reasonable justice as between risks of the same 
 class, does not necessarily eliminate unfair discrimination between different 
 classes of risks. One large association may employ in its rating activities as 
 many as twenty schedules, and many of the schedules are not designed pri- 
 marily to harmonize with each other. There is also opportunity for class 
 favoritism in the preparation of schedules. Despite its title the Universal Mer- 
 cantile Schedule is not universally applied in its original form, and its use in 
 modified form is generally confined to the larger cities in New England and 
 the Middle States. Even in such places it applies only to certain classes of 
 risks, and numerous other schedules upon different plans are employed for 
 other classes. Furthermore, similar hazards may be differently charged for by 
 different schedules. This is referred to in a later section i;nd2r the headin'? 
 "Discriminations Between Localities" (p. 48). 
 
 The above two criticisms, namely, the failure to collect statistics to sup- 
 port rates and neglect of providing a codified set of rating rules which would 
 be harmonious, were fairly directed against the associations. As regards the 
 first of these, laws should have been enacted penalizing companies for failure 
 to furnish data upon which to base rates. The enactment of statutes would 
 have relieved the companies of the fear that they alone were furnishing data, 
 while others refrained from doing so and made unfair use of such of their 
 competitors' figures as they could obtain. Under such laws the associations 
 could have enforced compliance with their requests. At the present time the 
 alternative seems to be, furnish the data to the associations or furnish it to 
 the State under a State rating system. In the light of their past experience 
 
 <w) "^ Survey and Classification of Fire Underwriters' Associations in the United 
 States," p. 3, 
 
 42 
 
with State rating systems, there is little doubt as to the companies' choice. 
 These criticisms, however, and many that follow, are only indications of the 
 imperfections and abuses of the rate-making system. They do not in any way 
 affect the contention that underwriters' associations are the most economical 
 means of performing the work yet discovered, and that they perform certain 
 other economic functions which were described in preceding articles. 
 
 In the territory covered by a large urban exchange the risks rated by 
 schedule form but a part of the total. There still remains to be considered 
 that large class which takes minimum rates, i. e., dwellings, churches, schools, 
 etc., or "preferred risks." In large measure, what has been previously said 
 applies also to these risks, for it was claimed that they, too, were granted a 
 rate which lacked the support of loss statistics. This class was but one of 
 the many lumped together in the aggregate figures. Mr. Hess in his testi- 
 mony stated: "The Dean Schedule does not cover dwellings. On the aggre- 
 gate loss theory it is not possible to state how much the companies make or 
 lose on dwellings. It is possible under this theory for the rates on some 
 classifications to be too low and others too high. We have no way of telling 
 what the losses are on each classification."^"* Minimum rated risks and 
 schedule rated risks, therefore, subject themselves to criticism for the same 
 reason. How can it be shown that the minimum rates granted are just and 
 reasonable in the absence of classified loss statistics? Mr. Hess stated that 
 it is possible that the rates on some classes might have been too high. Since 
 nine-tenths of the dwellings are owned or rented by persons of moderate 
 means, without influence, is not this the class likely to be charged exorbitantly? 
 Because of the lesser hazard which must necessarily be present in this class 
 as compared with some others, and the consequent actual but not relative low- 
 ness of the rate it is easier to collect a little additional from this class than 
 from others more hazardous. It might be presumed that the property owner 
 would have protested if he thought the rate was high. The companies would 
 show him that every one who owned a dwelling was paying that rate, and the 
 difficulty he would have of forming a combination of dwelling owners can be 
 imagined. Secondly, a protest against factory rates is a business matter, but 
 the questioning of a dwelling rate means time and trouble outside of business 
 hours. Thirdly, as was stated by the Insurance Commissioner of New York, 
 the way to obtain a reduction is to band together and collect from available 
 sources statistics of premiums and losses; and this is plainly almost impossible 
 in this class. 
 
 However, it is unnecessary to point out the reasons why such discrimina- 
 tion was present since there is evidence that it has existed. The term "pre- 
 ferred" is rightly applied to these risks, because underwriters do prefer them; 
 unless they yielded a larger profit what reason for such preference would 
 exist? Mr. James A. Waterworth, a Missouri, rate expert, said, "Dwellings 
 and minor business houses, frequently stores below and dwellings above, and 
 generally the small stores throughout the city, are known as preferred risks 
 
 <"> Annual Report, Superintendent of Insurance of Missouri, 1912, p. 12. 
 <'5) Report of Superintendent of Insurance of Missouri, 1912, p. 13. 
 
 43 
 
because they are considered more profitable to the companies."^'" If the name 
 applied to these risks and the testimony of raters were not sufficient evidence, 
 the actions of the companies would be. Competition for this particular business 
 is very keen. All companies insist upon brokers giving them their due pro- 
 portion of this class of business and are always willing to accept more than 
 their share. Larger commissions are paid for securing these risks and many 
 companies will not accept more hazardous risks from agents and brokers unless 
 judiciously "mixed" with "preferred" business. It has, therefore, been the 
 practice of brokers to deliver "lines" of insurance in bulk, using the preferred 
 risks to offset the poorer risks, and their profit partly depends upon their 
 ability to skilfully mix risks. 
 
 This question of dwelling rates has been discussed in the more progressive 
 journals. The Chicago correspondent of The Economic World wrote:""* 
 "The rates on dwellings in Illinois outside of Cook County are much like those 
 in other Western States, and they are high enough so that most of the com- 
 panies appear anxious for the business at the rate. But inside the County, in 
 towns with paved streets, waterworks, paid fire departments, electric alarms 
 and telephones in nearly every house, rates are far and away higher than in 
 villages outside with almost primitive protection. * * * These rates can- 
 not be defended." The editor of this journal, in the same issue, states: "Now, 
 this state of things is not confined to Cook County, Illinois. It is to be found, 
 in a greater or less degree of unfairness, inequitableness and departure from 
 consistent uniformity, in all parts of the country where the pressure of com- 
 petition has taken the form of striving for the largest possible share of an 
 over-profitable business, rather than meeting the demands of able bargainers 
 among buyers of insurance." 
 
 It is not an answer to policyholders, it is contended, to allege that higher 
 rates exist because of higher commissions to agents. The matter of commis- 
 sions is to be settled between companies and agents; the policyholder has 
 no voice in fixing the amount to be paid agents and, therefore, cannot be com- 
 pelled to suffer because it is high. The owners of dwellings seem to be in 
 the peculiar position of paying more premiums, by reason of the high com- 
 missions, in order that the companies may extract from them more profit. 
 They offer a little more inducement to come and get their business, because it 
 is profitable, than the same agents could obtain for writing a more hazardous 
 factory, warehouse, or mercantile building.-''* In New Zealand, where State 
 fire insurance has been in force for eight years, the greatest reduction in rates 
 claimed has been on dwellings — 33% per cent. 
 
 The factors considered in the rating of a risk may be divided into three 
 
 (16) rpjjp, MARKET WORLD AND CHRONICLE, January 13, 1912, p. 35. 
 
 <"> See letter of one manager to New York Fire Insui'ance Exchange with reference 
 to an increase in rates on household furniture in brick dwellings, in which he 
 says: "Not only is its exceeding sweetness- drawing many 'flies' that are increas- 
 ing the competition both fair and unfair, but the companies have no right to 
 advance rates on property that they are willing to pay an agents' commission on 
 of 35% in addition to other expense direct or indirect of not less than 10 or 15%." 
 Report, p. 102. 
 
 44 
 
groups, construction, occupancy and exposure. Complaints have been made 
 of the rules and methods adopted by exchanges for the measurement of ex- 
 posure. It has been stated that "the rules and their application have moreover 
 resulted in injustice and absurd inconsistencies, which discredit the judgment 
 of the underwriters responsible for such conditions." Failure to modify ex- 
 posure tables to conform to improvements in protection and the existence of 
 little known exposure rules are claimed to have resulted in great variation in 
 the exposure charge as applied to risks rated by different schedules, and, in 
 fact, as applied to risks rated on the same schedules, but belonging to different 
 classes, as well as in the relationship of the exposure charge as applied to 
 stock or contents when compared with the exposure charge applied to build- 
 ings. With regard to one city it has been stated that "The exposure table 
 has remained practically unchanged during the thirteen years of the existence 
 of the exchange. The use of the table during that period has been steadily ex- 
 tended, until it now covers almost all classes of risks, and its application, 
 where used, has in recent years become more rigid. As a result, the exposure 
 charge now constitutes a more important element of the rates fixed by the 
 exchange than at any other period of its existence. And this, notwithstanding 
 that the exposure hazard has been materially lessened by the installation of 
 the high pressure system, and an increased efficiency of the fire-fighting force. 
 * * * The high-grade public protection against fire has a tendency to 
 equalize the exposure hazard from risks of varying character, although under- 
 wi'iters fail to recognize it in the rating." 
 
 Injustice also results, it is alleged, from unfair discriminations between 
 classes in the exposure charge, resulting from difference in the basis rates or 
 the application of different schedules. For example, a sculptor's studio fur- 
 nished a basis for a greater exposure charge than a newspaper printing plant. 
 Risks exhibiting dangerous conditions suffer an increase in. rates therefrom, 
 which results in increased rates on neighboring risks through the exposure 
 charge. Nevertheless, associations have refused to divulge the reasons for the 
 advanced rates to interested and affected neighbors and have not assumed it 
 to be part of their duties to co-operate with the fire prevention authorities 
 to have the improper conditions remedied. 
 
 One of the objects for which insurance associations exist is the improve- 
 ment of construction and the reduction of fire waste. Fire rates are the 
 greatest factor in effecting good construction and improving poor, because of 
 the direct pecuniary interest involved. Fire insurance companies have prom- 
 ised property owners for some time that if proper precautions were taken 
 and losses reduced, premiums would be lowered. Of the devices for reducing 
 fire damage the automatic sprinkler is one of the most important. When the 
 fire becomes hot enough to melt solder on a sprinkler head the place is flooded 
 with water. This is a device which has proved very effective and many owners 
 of mercantile and factory buildings have installed it. Under the present 
 method of aggregate loss statistics, how do these owners know they have been 
 granted the proper reductions? Some of the rates, upon risks equipped with 
 automatic sprinklers, it is certain, have been made without the assistance of 
 any guiding statistics or any knowledge of what aggregate profit is made on 
 
 45 
 
this class of business. In one large city the rates upon sprinkler risks were 
 not reduced until competition by factory mutuals forced this action, and then 
 those risks already insured with mutual companies and those threatened with 
 competition were first considered. The restricted sprinkler schedule here was 
 concededly devised to meet competition, and apparently the changes in it and 
 the rules applying to it have generally been made owing to mutual com- 
 petition. 
 
 The preceding attempts to give some idea of the conditions which were 
 believed by the public and the legislators to exist in fire insurance, as regards 
 discrimination between classes of risks. *'^' In addition different kinds of 
 policies, localities and particular risks suffered it was believed because of 
 abuses of the system of rate-making. Because of the suspicion with which 
 business combinations of all kinds were regarded, every instance of this kind 
 was exaggerated and every particular instance considered a general condition. 
 No effort was made to ascertain whether the associations possessed advantages 
 which offset the disadvantages,^"^ and an antipathy was consequently engen- 
 dered which demanded the abolition of all forms of co-operation. 
 
 Thus far ^^* a cause of the public enmity toward underwriters' associa- 
 tions was sought in the discrimination which was believed to exist be- 
 tween classes of risks. Other causes of anti-compact. State rating and 
 regulative laws were discriminations between kinds of policies, between dif- 
 ferent localities and particular risks. While some contended that rates in gen- 
 eral were too high, it was generally admitted that any real cause for criticism 
 must be found in the pernicious practice of favoring some risks as compared 
 with others. 
 
 Discriminations Between Kinds of Policies. 
 
 Pire insurance policies may be divided into three classes, according to their 
 duration. Annual policies are customary. There also exist, however, "term" 
 policies having durations of three and five years and "short term" policies or 
 insurance for less than one year. The object of insuring for three or five 
 years in preference to one year is to obtain a so-called "term" rate, which is 
 lower, proportionately, than the annual rate on the same property. The rate 
 for a term of three years is usually only double the annual rate and for a term 
 of five years only triple the annual rate. The justification for these rates has 
 long been a mystery to the public, largely because they could not be reconciled 
 with certain contentions of the underwriters. If the annual rate is proper, 
 fair and only adequate to cover losses, expenses, contingencies and a five per 
 cent profit, as has been claimed, how can insurance for five years be granted 
 at a lower rate ? On the other hand, if the five and three year or "term" rates 
 are sufficient to cover these various items, why should a higher rate be charged 
 for one-year policies? 
 
 t'^> All of the criticisms contained in this section, it is to be understood, are not 
 
 endorsed by the author. 
 (19) rjy^iQ very important economic function of the associations have been described. 
 <') Page 36. 
 
 46 
 
There are, of course, some elements which are not currently taken into 
 account, two of these being: 
 
 (1) The interest which is earned on the larger amount paid in as a pre- 
 mium at the beginning of the term, on the term basis, and 
 
 (2) The saving in expense due to writing five years' insurance, say, at 
 one time. 
 
 Suppose we have a risk bearing an annual rate of $1.15 which is granted 
 a term rate of $3.45 for five years' insurance. The apparent difference be- 
 tween the two rates is $2.30, which, however, is partly accounted for by the 
 two elements just named. Let us assume that the term premium is received at 
 the beginning of the term and the annual premium on the first of each of the 
 five years. We may assume that the company will earn interest on the 
 amounts held, considering the nature of the funds; that losses, on the average 
 are paid in the middle of the year and consume 55 per cent of premiums; that 
 expenses amount to 35 per cent; conflagration fund, 5 per cent; and profit, 
 5 per cent.*'' If figures were available showing the interest which might be 
 earned by the company on funds on hand it would be possible to compute the 
 saving in the form of interest which results from the collection of a term 
 premium. For example, out of an annual premium of $1.15 paid in at the 
 beginning of the first year of the term must be taken 35 per cent for expenses, 
 leaving 74.75 cents. For half a year this sum earns interest and in the middle 
 of the year losses of 63.25 cents (55 per cent of $1.15) must be paid, leaving 
 a small remainder to accumulate at interest for the remaining half year. At 
 the beginning of the second year a second premium of $1.15 is paid and the 
 process repeated. If, however, a term premium of $3.45 is collected at the 
 beginning of the first year and expenses of 40 cents are deducted, the sum of 
 $3.05 remains to earn interest for one-half year. At the end of this time 63" 
 cents is paid out for losses, leaving $2.41 to accumulate at interest for one-half 
 year. It can be seen that there is a considerable gain in interest and saving in 
 expense on the term plan from the standpoint of the company. 
 
 There are, however, two other elements which have not been considered: 
 
 (1) The advantage of keeping the business, and 
 
 (2) Of having on hand the premium, whether earned or not, in case of loss. 
 
 These are advantages to the insurer difficult to estimate, and it is a mat- 
 ter of opinion whether they would be of sufficient advantage to compensate 
 for the 44 cents difference in premium receipts. It must be acknowledged, 
 however, that a high estimate has been made of the saving in expense. On 
 the other hand, the risks which are granted term rates are usually of a less 
 hazardous nature and losses on them would probably be less than the average 
 of 55 per cent of premiums, while losses on others would probably be greater 
 than the average. In general, the conclusion may be drawn that the difference 
 complained of between annual and term rates has usually been exaggerated. 
 
 Term rates are not granted to all classes of risks, and with respect to the 
 favored ones practices vary with different sections of the country. Some risks 
 
 <*> Report on Insurance to Senate and Assembly of New York, February 1, 1911. 
 
 47 
 
cannot be insured for more than one year; others may be, but must pay the 
 full annual premium without reduction for the longer term; others may be in- 
 sured for long- terms by increasing the premium by one-half for each year 
 over one, and still others by increasing the premium by three-fourths for each 
 year after the first. Furthermore, the risks are not placed in these groups 
 because of peculiar characteristics or established classifications, but are shifted 
 from time to time "without any definite guiding principle or standard.'" ' The 
 reasons which are said to justify term rates are (1) that they tie up the busi- 
 ness longer, (2) that a larger amount of interest is earned, (3) that the ex- 
 pense is reduced, and (4) that they provide a premium, whether earned or not. 
 available if loss occurs. As far as buildings are concerned, why should there 
 be a distinction in the ratio of term rates to annual rates, considering these 
 factors? Which of these reasons applies to one class of buildings and not to 
 another ? So far as can be seen, none of them affords any basis for discrimina- 
 tion between classes. The most important objection, therefore, to term rates 
 is the arbitrary manner of allowing them on some risks and not on others. A. 
 F. Dean says, "If this (a standard scale for long term rates) were adopted as a 
 standard, and as universally observed as our present short rate standard, it 
 would have two excellent results. First, it would stop the growing confusion 
 in our tabulated annual statistics, caused by the ominous growth of term risks. 
 Second, it would prevent discrimination in favor of the man with ready cash 
 who cannot put it to more profitable use than to save a year's premium on his 
 three-year policies. * * * "<*> 
 
 As regards short term risks, the situation is considerably better. Several 
 such tables have been promulgated, including that of the Western Union, and 
 these tables are usually applied to risks regardless of class. 
 
 What has been said above regarding long and short term risks serves to 
 illustrate the conditions which exist in business where co-operation is absent or 
 restricted. If, even with the assistance of associations and boards, non- 
 uniformity exists, the situation under unrestricted and unprincipled competi- 
 tion may well be imagined. It is probable, for instance, that instead of the 
 Western Union table for short rates being generally applicable throughout the 
 Middle West, every company would establish any standard of measurement it 
 thought proper or advisable, and the extent of discrimination would be only 
 limited by the ability of the powerful to force concessions from the companies. 
 
 Discrimination Between Localities. 
 
 A third type of discrimination is that which differentiates between locali- 
 ties; and an evil which was apparent even to underwriters was the failure to 
 harmonize and relate the rates of different parts of the country. Co-operation 
 has to a large extent established a relation between the rates on all the risks 
 within the territory of individual exchanges, but co-operation had not then and 
 has not yet reached the stage where any definite relation can be shown to 
 
 <•'> A. F. Dean, "Standardization," Proceedings, 42d Annual Meeting, Fire Underwrit- 
 ers' Association of the Northwest. 
 <*> A. F. Dean, "Standardization," Proceedings, 42d Annual Meeting, Fire Underwrit- 
 ers' Association of the Northwest. 
 
 48 
 
exist between the rates on particular classes of risks in New York and in San 
 Francisco, for example. Commenting upon the system of rating in 1901, A. F. 
 Dean said, "We construct a basis schedule of each State, but cannot show that 
 it bears any logical relation to the schedules of other States. We say that each 
 individual rate is the sum of a basis rate combined with certain charges and 
 credits, but cannot show whether this basis rate is relatively correct when 
 compared with others, nor can we show that the charges and credits which 
 permeate many classes are consistently imposed upon each class. This naive 
 disregard of relations crops out not only in the comparison of every existing 
 basis tariff with other tariffs, but in the comparison of parts of the same tariff 
 with other parts. "^"* Selecting ten tariffs Mr. Dean compared their charges 
 for specific defects, and rearranging his table, it shows the following:^*' 
 
 Number of Times Am'ts of Different 
 
 Some Charge Appears Charges Made 
 
 in all Tariffs. for Same Defect. 
 
 [4 5 cents 
 
 Awnings, wood, on one-story building J 4 10 
 
 [ 1 20 
 
 r 2 5 
 
 Lighting by other than gas or \ 27 10 
 
 electricity ] 5 ' 15 
 
 [26 25 
 
 r 3 5 
 
 Metal stack through roof (metal | 1 15 
 
 roof) ] 9 25 
 
 [ 3 50 
 
 These are three examples picked from a list of thirty-two at random, 
 which serve to show the inconsistencies in charges. It is doubtful if the same 
 extent of inconsistency can be found to-day, for rating methods steadily im^ 
 prove, but similar differences can be found, even if not of the same extent. 
 Quoting again from the same authority :^^^ "It would be a truism to say that 
 in the face of inconsistencies so glaring, explanation or defense is impossible. 
 The public contention that rates are made *by guess and begad' is susceptible 
 of proof from the documentary evidence contained in our own tariffs. It mat- 
 ters not that * * receipts and disbursements come out exactly even, if 
 taken for decade periods; in other words, that indemnity as a whole is prac- 
 tically sold at average cost. Our failure to make a profit does not concern the 
 public, but our failure to maintain reasonably true rate relations offends the 
 sense of relation which is instinctively the basis of every reasoning process. 
 Even low rates that are inequitable are an offense to common intelligence." 
 
 Within the last year or so the relation of the rates on urban dwellings 
 to those on suburban risks has been the subject of contention. There is quite 
 a difference between a farm building, subject to burning for an hour, perhaps, 
 through the failure of untrained volunteer firemen to respond or by their lack 
 of knowledge and efficient apparatus, and a city dwelling, surrounded by hun- 
 
 <^' A. F. Dean: "Fire Rating as a Science," p. 53 et seq. 
 
 <6> Ibid., p. 53. 
 
 <T' A. F. Dean: "Fire Rating as a Science," p. 54. 
 
 49 
 
dreds of volunteer firemen and within ten minutes' journey of an improved 
 chemical engine. Yet in some States practically no allowance was made for 
 the difference in hazard due to municipal water supply and fire departments. 
 Thus at one time, for example, the rate on frame dwellings in the State of 
 Illinois was 40 cents, with no charge added for exposure, while dwellings in 
 Chicago, with water supply and fire department, paid 50 cents and a charge 
 for exposure in addition.*" Even the Illinois Commission, assisted in its in- 
 vestigation by a prominent underwriter, which rendered the most favorable 
 State report on conditions in the fire insurance business prior to the New York 
 report, was compelled to say, "It is very hard to escape the conclusion that 
 owners of dwellings in Chicago are grossly overcharged."* ' 
 Discrimination Between Particular Risks. 
 More unfair, however, than discrimination between classes of risks, kinds 
 of policies and localities, are discriminations between individual risks. This 
 type of favoritism has been considerably diminished of recent years, but still 
 exists to some extent. An agent represents sometimes as many as twenty 
 different companies. In order to place large risks without dividing his com- 
 missions with other agents this is a necessity, for the companies restrict the 
 amount they will write on any one risk in order to obtain good distribution. 
 The agent has a lot of smaller risks which all the companies desire and urge 
 him to supply them with, even maintaining special agents to see that they 
 receive their share of such "preferred" risks. He also has some risks which 
 no company wants at the price offered. The agent, under the compulsion of the 
 owners of the large but poor risks, takes advantage of this situation and 
 shrewdly mixes the good with the poor, offering the lot in bulk to the various 
 companies. All or none must be taken, and by careful mixing and the com- 
 petition of the companies, the agent usually succeeds in placing his risks. The 
 existence of the preferred risks, which he wants, thus compels the manager of 
 a company to accept other risks at inadequate premiums. The large risks are 
 able to command such advantages solely because of their size, the large com- 
 missions obtained by the writing and the competition of the companies. 
 
 The manner in which companies may compete in rates is shown by an 
 illustration by L. W. Zartman.*'*" "Let us assume that a risk, say a factory, 
 is offered to the company; the company wants the business, but competition is 
 keen and a competitive rate must be named. To find out this competitive rate 
 it is only necessary to analyze the expenditure of the company. The total 
 premium income, in general, is paid out as follows: 
 
 Losses 55 per cent 
 
 f Commissions 15 per cent 
 
 Salaries of special agents 5 per cent 
 
 Home office expenses 15 per cent 
 
 Taxes 3 per cent 
 
 Profit 7 per cent 
 
 <s> Report of the Illinois Fire Insurance Commission, to the 47th General Assembly, 
 
 p. 57. 
 <»> Ibid,, p. 57. 
 <'"> L. W. Zartman: "Yale Readings in Insurance," New Haven. 
 
 50 
 
"If the burning ratio on the class to which the factory in question belongs' 
 is $0,825 per hundred, in order to get the current rate of profit, to charge the 
 factory its proportion of the fixed expenses and to pay the agent the regular 
 commission, the company would have to name a rate of $1.50 per hundred on 
 the factory. It will not charge that rate if a lower rate is necessary to secure 
 the business from a rival, and it need not in order to make acceptance of the 
 business profitable, as the expenses for special and home office force will con- 
 tinue whether that risk is accepted or not, and both of these can be ignored in 
 making the rate. The tax will have to be paid, and some commission to the 
 local agent, though at times the agent is willing to take a smaller commission 
 in order to induce the company to accept the risk. Therefore, a company can 
 fix a rate of $1.00 on the risk and still make a profit as follows: 
 
 Expected loss $0,825 
 
 Taxes .03 
 
 Commission .10 
 
 which make a total expense of $0,955, leaving a profit of nearly 5 per cent to 
 the company upon the transaction, even with the heavy reduction in rate." It 
 is unnecessary to point out that some other risks bear this factory's propor- 
 tion of the expense, which it did not pay. 
 
 The above illustrates exactly the situation which would prevail universally, 
 and has prevailed universally, without the existence of some means of re- 
 stricting competition, such as underwriters* associations. When such associa- 
 tions were mentioned by the writer to an officer of a very large corporation 
 the latter said: "Oh, they aren't of great account. When we talk to a broker 
 about placing our business we always tell him that if he has in mind an under- 
 writers' association rating he is just wasting his time. We won't have any- 
 thing to do with them." This is the most potent argument that could be ad- 
 vanced in justification of such co-operation. This large corporation, through 
 the value of its large insurance business, induces companies to compete, obtains 
 a lower rate than its competitors can hope for, and thus compels underwriters 
 to disregard the agency which they have established to promulgate uniform 
 rates. 
 
 A study of these associations shows that from them result in fire insur- 
 ance the many direct and indirect advantages which follow co-operation in any 
 business pursuit, and in addition the technical character of this particular busi- 
 ness renders their existence especially valuable, both to the companies and the 
 public. As with every other economic agency, however, the same power which 
 in general renders public service may be utilized in some instances and to some 
 extent for private gain and to the general detriment. Thus the Interstate 
 Commerce Commission unofficially recognizes now that railroad traffic asso- 
 ciations are absolutely necessary in present-day land transportation; Con- 
 gressional committees realize that agreements between steamship lines are the 
 only solution of certain water transportation difficulties; and yet it is also 
 seen that certain abuses of the existing system are liable to become prevalent. 
 So in fire insurance co-operation was a certain misuse of power introduced, 
 insignificant in comparison with the general improvement of present methods 
 over old, but which legislators desired to eliminate. 
 
 51 
 
These evils in the midst of good may be briefly outlined as follows: 
 
 1. Discrimination between classes of risks: 
 
 A. Inability to justify basis rates by classified statistics; 
 
 (1) Failure of associations in collecting statistics; 
 
 (2) Incompleteness of the figures in existence. 
 
 B. Diversity and imperfect compilation of rules for rating. 
 
 C. Lack of harmony between class schedules. 
 
 D. Overcharge on "preferred" risks. 
 
 ■ E. Absence of relation between exposure charges. 
 
 2. Discrimination between kinds of policies: 
 
 A. Term rates. 
 
 3. Discrimination between localities: 
 
 A. Lack of harmony between schedules of various localities. 
 
 B. Inconsistencies of urban and suburban rates. 
 
 4. Discrimination between particular risks: 
 
 A. "Mixing" risks. 
 
 B. Making reductions for large lines. 
 
 Many difficulties in the treatment by legislators of this common phe- 
 nomenon were created by the mistake of applying old legal principles indis- 
 criminately to new conditions. Thus the mere fact that fire insurance com- 
 panies combined in rate-making and that such combination did not immediately 
 perfect conditions caused them to be placed in the category of evil trusts, 
 and their interconnection to be abolished at all costs. This section was in- 
 tended to show the origin of such an attitude; the development of resulting 
 legal restriction from the prohibitory basis to the regulatory principle remains 
 to be discussed. 
 
 THE LEGAL STATUS OF FIRE UNDERWRITERS ASSOCIATION 
 
 T[T is almost unnecessary to point out that the power of the several States 
 ^ to regulate the business of insurance within their respective borders is 
 derived from the decisions of the United States Supreme Court in Paul vs. 
 Virginia (1868)^'^ and New York Life Insurance Company vs. Deer Lodge 
 County, Montana (1914). ^^^ In the first of these the court enumerated the 
 principle that contracts of insurance "do not constitute a part of the com- 
 merce between the States" but are "local transactions" and "governed by the 
 local law"; in the second case the court reaffirmed this principle. Improper 
 conditions are, therefore, not remediable by the application of any of the Fed- 
 eral statutes relating to interstate commerce, but the regulation of this busi- 
 ness consists entirely of the diverse and ever-changing laws of the various 
 
 <'> 8 Wall, 168. 
 
 <^' United States Supreme Court, Spring Term, 1914. 
 
 The Supreme Court of the District of Columbia dismissed a bill for injunction to 
 restrain the Home Life Ins. Co. of New York from continuing as a member of 
 the Underwriters' Association of the district. It held that the Sherman Act did 
 not apply to insurance. 
 
 52 
 
states. The activities of fire insurance associations iftay be restricted in any 
 of four ways: 
 
 (1) By virtue of the common law, in the absence of statutes specifically 
 
 limiting the manner of doing business. 
 
 (2) Under "anti-trust" laws, either in the form of 
 
 (A) General anti-trust laws, of the nature of the well-known 
 
 Federal "Sherman Act," governing all kinds of business, or 
 
 (B) Statutes governing insurance companies only or specially 
 
 mentioning these as included within their scope. 
 
 (3) By means of State rating laws which are either 
 
 (A) Laws providing that the State shall prescribe maximum or 
 
 actual rates, or 
 
 (B) Laws which require that all rates must be approved by some 
 
 State authority. 
 
 (4) By acts providing for the supervision of rate-making in certain par- 
 
 ticulars by State officials having power to prevent abuses. 
 The Common Law. 
 
 It is probable that insurance companies might have escaped molestation 
 for many years had it not been for the inauguration of the once-popular an- 
 tipathy to combinations of all kinds. In this insurance associations could not 
 fail to be included and a multiplication of suits under the common law was 
 the result. 
 
 The common law doctrine with respect to restrain of trade has been 
 briefly stated as follows: "Contracts that were in unreasonable restraint of 
 trade at common law were not unlawful in the sense of being criminal, or giv- 
 ing rise to a civil action for damages in favor of one prejudicially affected 
 thereby, but were simply void, and were not enforced by the courts."^^^ "Where 
 the sole object of both parties in making the contract as expressed therein is 
 merely to restrain competition, and enhance or maintain prices, it would seem 
 that there was nothing to justify or excuse the restraint, that it would have a 
 tendency to monopoly, and therefore would be void."**' 
 
 The courts have uniformly refused to consider associations of fire under- 
 writers, having for their purpose the fixing and maintenance of rates, as 
 illegal or void per se.*^' Even where the term "unlawful" has been applied by 
 the courts to associations of this nature, as in Beechley vs. Mulville, it has 
 probably been used in the sense of extra-legal, rather than as meaning that it 
 furnished a ground for criminal or civil action. In several cases this attitude 
 has been maintained even though the court seemingly admitted that it consid- 
 ered the particular defendant's actions as a restraint of trade. Thus it was 
 
 <='> United States vs. Addystone Pipe & Steel Co., 85 Fed. 271. 
 
 <*' Roller Co. vs. Cushman, 143 Mass. 353: Gloucester Isinglass & Glue Co. vs. Russia 
 
 Cement Co., 154 Mass. 92: Continental Ins. Co. vs. Board of Fire Underwriters 
 
 of Pacific, 67 Fed. 310. 
 <3> Harris vs. Commonwealth, 73 S. E. 561 (1912): Beechley vs. Mulville, 102 Iowa 602; 
 
 Metzger vs. Cleveland, 13 Ins. L. J. 855: Queen Ins. Co. vs. Texas, 86 Tex. 250; 
 
 Continental Ins. Co. vs. Fire Underwriters of Pacific, 67 Fed. 310; Aetna Ins. 
 
 Co. vs. Commonwealth. 106 Kj*. 864. 
 
 53 
 
said: "The most that can be said as to the combination to fix, regulate and 
 control the business of fire insurance in the city of Newport News is that it 
 was an agreement in restraint of trade. But agreements merely in restraint 
 of trade are not illegal in the sense that they are either indictable or action- 
 able."^®* Contracts to maintain rates are, however, extra-legal and unen- 
 forceable/^* In Harris vs. Commonwealth, the court quoted Mogul S. S. Co. 
 vs. McGregor, as follows: "Contracts as they are called, in restraint of trade, 
 are not, in my opinion, illegal in any sense, except that the law will not 
 enforce them. It does not prohibit the making of such contracts. It merely 
 declines, after they have been made, to recognize their validity. The law 
 considers the disadvantage so imposed upon the contract a sufficient shelter to 
 the public" (p. 563). Parties thereto cannot resort to the courts for enforce- 
 ment or for redress against an associate. In Beechley vs. Mulville it was said: 
 "Of this combination plaintiff was a member. The penalties imposed, among 
 which is that of 'removal of all companies from the offending member,' are 
 specified in the compact, and his name is signed thereto. He is himself one of 
 the conspirators who devised and put in operation that which caused his in- 
 jury. * * * j^ (,an be said, undoubtedly, that plaintiff has caused the injury 
 of which he complains by his unlawful acts."^"' 
 
 Such associations may be, and have been, attacked, however, on grounds of 
 public policy. Under such circumstances it must be shown that the restraint 
 exercised is unreasonable and affects the public interest, or is employed with 
 respect to an article of necessity.*"* "In cases like this the decisive question 
 then is: Is the rule a reasonable trade regulation, or an unlawful restriction 
 upon the right of the individual to employ in the conduct of his business such 
 legitimate means as are needed to successfully carry it on? If it is not a 
 reasonable business regulation, it should not be upheld. * * * "d") -pj^^ 
 view is well supported that insurance is affected with a public interest and is 
 at least of a quasi-public nature.*"' "The conclusion that we reach from these 
 considerations is that the business of the defendants is in point of fact one that 
 directly affects the interests of the public * * * and * * * in point 
 of law * * * is affected with a public interest."*'" The New Jersey 
 Chancery Court stated that insurance companies are not public or quasi-public 
 bodies,*^" in an opinion which was overruled. Insurance is, furthermore, not a 
 necessity of life and not indispensable.*"* 
 
 Successful actions at common law against underwriters' associations have 
 
 <6> Harris vs. Commonwealth, 73 S, E., p. 563. 
 
 <T> Harris vs. Commonwealth, 73 S. E. 561; Beechley vs. Mulville, 102 Iowa 602; Metz- 
 
 ger vs. Cleveland, 13 Ins. L. J. 855. 
 <8> 102 Iowa, 610. 
 
 <»> Louisville Board of Fire Underwriters vs. Johnson, 119 S. W. 153 (1909). 
 *!«> Louisville Board of Fire Underwriters vs. Johnson, 119 S. W. 157 (1909). 
 <"> McCarter vs. Firemen's Fund Ins. Co., 16 Atl. 80 (1909); Citizens Ins. Co. vs. Clay, 
 et al., 197 Fed. 435 (1912); Queens Ins. Co. vs. State, 102 S. W. 1048 (reversed on 
 appeal). 
 <i2> McCarter vs. Firemen's Fund Ins. Co., 73 Atl. 85 (1909). 
 ^") McCarter vs. Firemen's Fund Ins. Co., et al., 61 Atl. 705 (1905). 
 <"' Harris vs. Commonwealth, 73 S. E. 561 (1912). 
 
 54 
 
been few in number, but several of the associations' acts have been declared 
 to be illegal. Thus, where efforts were made to regulate rates, commissions 
 and the intercourse of members and, it was alleged, to boycott certain com- 
 panies, if such efforts could have been plainly shown to have been the actions 
 of the association, the decision would have had to be against it.*'^' Provisions 
 prohibiting members from writing insurance for non-members; from having 
 more than two agents with offices in the congested portion of a city; from 
 disclosing the manner of making rates to anyone except a member of the board 
 expressly designated by the owner of the risk; provisions requiring the can- 
 celation of risks written at other than the board rates; and the practices of 
 adding charges for faults of management, etc., without giving notice that such 
 charges were removable if the faults were remedied; and of notifying members 
 of the final rate without giving details, are contrary to public policy, illegal 
 and void."" Other decisions have held the delegation of rate-making powers 
 to an association to be ultra vires an insurance company'"" ar.d a by-law 
 stating that "no member of this board shall take the agency of a company 
 which has already an existing agency in a city" to be reasonable and not 
 illegal. 
 
 Statutes Prohibiting Combinations in General. 
 
 Several attempts were made to bring fire insurance exchanges within the 
 scope of a common type of statute which prohibits combinations, contracts, 
 agreements, etc., in restraint of "trade," "commerce," "business," "dealings in 
 commodities," "products," etc. The following law of Iowa"'* furnishes an 
 illustration of this general type of law, which exists in many other States^"* 
 and is hereafter referred to as "anti-trust" legislation. 
 
 Pools and Trusts. 
 
 "Any corporation organized under the laws of this or any other State or 
 country for transacting or conducting any kind of business in this State, or 
 any partnership, association or individual, creating, entering into or becoming 
 a member of or a party to any pool, trust, agreement, contract, combination, 
 confederation or understanding with any other corporation, partnership, asso- 
 ciation or individual, to regulate or fix the price of any article of merchandise 
 or commodity or to fix or limit the amount or quantity of any article, com- 
 modity or merchandise to be manufactured, mined, produced or sold in this 
 State, shall be guilty of a conspiracy." 
 
 Cases involving such statutes have principally raised the question of 
 whether their general terms included insurance, and decisions have usually 
 been to the effect that they do not. Thus in several cases it has been declared 
 that insurance is not "trade" nor a "commodity" within the meaning of these 
 words as used in the acts."^' "We conclude that the word must be construed 
 in a mo:e restricted sense, and as synonymous with 'traffic' * * * j^^^ 
 
 "^> Continental Ins. Co. vs. Board of Fire Underwriters of Pacific, 67 Fed. 310 (1895). 
 "«> State vs. Board of Underwriters of Allegheny County, Court of Common Pleas. 
 
 Pittsburgh, Pa., May 7, 1913. 
 06I) McCarter vs. Firemen's F\ind Ins. Co., et al., 73 Atl. 85. 
 <'•' Code of Iowa, 1897, Sect. 5060. 
 
 55 
 
it does not embrace the business of insurance, which is trade only in the sense 
 that it is an occupation or employment. * * * It is only by a strained 
 construction that the word commerce can be made to embrace the business of 
 insurance. * * * Insurance is neither produced, consumed, manufactured, 
 transported, nor sold in the ordinary signification of any of these words, and 
 therefore it is not within 'the plain import' of the language employed in the 
 act."^""^ The above objections were successfully overcome in Texas by the 
 insertion in the statute of the word "business."^-'^ It is evident that general 
 statutes of the nature we have been discussing, in order to include insurance 
 within their scope, must be specific and accurate in wording/"^ 
 
 <iS) Tj^g following is a list of State anti-trust statutes, not specifically mentioning in- 
 surance, with their citations, existing January 1, 1914: 
 
 Alabama, Code 1907, Chap. 69, Sect. 7579 et seq. 
 
 Arizona, Laws 1912, Chap. 73. 
 — ^.California, Laws 1909, Chap. 362. 
 
 Colorado, Laws 1913, Chap. 161. 
 
 District of Columbia, U. S. Statutes at Large 209, Sup. 2d d., 762. 
 
 Hawaii, Revised Laws, Sect. 31O0. 
 
 Idaho, Laws 1909, p. 297. 
 
 Idaho, Laws 1911, Chap. 215, p. 688. 
 
 Illinois, Laws 1891, p. 78, amended to 1901. 
 
 Indiana, Bums Annotated Statutes, 19'08, Sect. 3878, et seq.. Sect. 3884 et seq., 
 and Sect. 3889 et seq. 
 
 Iowa, Code 1897, Sect. 5060, and Laws 1909, Chap. 255. 
 
 Kentucky, Russell's Statutes, 1909, Sect, 3717 et seq. 
 
 Louisiana, Laws 1890, Act 86, and Laws 1892, Act 90. 
 
 Maine, Revised Statutes 1903, Chap. 47, Sect. 53 et seq.. Laws 1913, Chap. 106. 
 
 Massachusetts, Laws 1908, Chap. 454, Sect. 1 et seq.. Laws 1911, Chap. 503, and 
 Laws 1912, Chap. 651. 
 
 Michigan, Laws 1899, No. 255, and Laws 19C5, Act 329. 
 
 Minnesota, General Statutes 1913, Sect. 8973 et seq. 
 
 Montana, Laws 1909, Chap. 97, Sect. 1 et seq. 
 
 New Jersey, Laws 1913, Chap. 13. 
 
 New Mexico, C. L. 1897, Sect, 1292. 
 
 New York, Consolidated Laws, Chap. 20, Sect. 340 et seq. 
 
 North Carolina, Laws 1913, Chap. 41. 
 
 North Dakota, Laws 1907, Chap. 259. 
 
 Ohio, General Code 1910, Sect. 6391 et seq. 
 
 Oklahoma, Revised Laws, Sect. 8220, and Laws 1908, p. 750. 
 
 Porto Rico, Revised Statutes, Sect. 2373. 
 
 South Dakota, Laws 1909, Chap. 224. 
 
 Tennessee, Laws 1903, Chap. 140. 
 
 Utah, Hammond and Smith's Compiled Laws 1907, Sect. 1753 et seq. 
 
 Wisconsin, Sanborn and Berryman's Wisconsin Statutes, Sect. 1791, and Laws 
 1905, p. 944. 
 
 Florida and one or two other States have laws applicable to certain industries, 
 which have not been included in the above list, inasmuch as they are not ap- 
 plicable to insurance. See, for example, Florida General Statutes 1906, Sect, 
 3160, referring to meats and other edibles, 
 <!»> Queen Ins. Co. vs. Texas, 86 Tex. 250, interpreting Act of March 30, 1889; Aetna 
 Insurance Co. vs. Commonwealth, 106 Ky. 864 (1899); State vs. American Surety 
 Co., 133 N. W. 235 (1911), interpreting Art. 2, Chap. 91a, Comp. Stat. Nebraska, 
 1911. Reversed in 135 N. W. 365 (1912). 
 
 56 
 
Specific Anti-Compact Laws. 
 
 Owing to this necessity for definiteness it became the practice to spe- j 
 cifically enumerate insurance as included within the scope of the various ' 
 acts/^' The following law of Arkansas^^*^ is an illustration of the type. j 
 
 Anti-Trust Regulations. — Defining Conspiracy to Regulate Prices. 
 
 Sec. 142. Any corporation organized under the laws of this or any other 
 State, or country, and transacting or conducting any kind of business in this 
 State, or any partnership or individual, or other association or persons what- 
 soever, who are now, or shall hereafter create, enter into, become a member 
 of, or a party to, any pool, trust, agreement, combination, confe4eration or 
 understanding, whether the same is made in this State or elsewhere, with any 
 other corporation, partnership, individual, or any other person or association 
 of persons to regulate or fix either in this State or elsewhere the price of any 
 article of manufacture, mechanism, merchandise, commodity, convenience, re- 
 pair, any product of mining, or article or thing whatsoever, or the price or 
 premium to be paid for insuring property against loss or damage by fire, 
 lightning or tornado, or to maintain said price when so regulated or fixed, or 
 who are now, or shall hereafter enter into, become a member of, or a party to 
 any pool, agreement, contract, combination, association, or confederation, 
 whether made in this State or elsewhere, to fix or limit in this State or else- 
 where, the amount or quantity of any article of manufacture, mechanism, mer- 
 chandise, commodity, convenience, repair, any product of mining, or any article 
 or thing whatsoever, or the price or premium to be paid for insuring property 
 against loss or damage by fire, lightning, storm, cyclone, tornado, or any 
 other kind of policy issued by any corporation, partnership, individual or asso- 
 ciation of persons aforesaid, shall be deemed and adjudged guilty of a con- 
 spiracy to defraud and be subject to the penalties as provided by this Act. 
 (Sec. 1, Act 1, 1905.) 
 
 Propriety and Scope of Anti-Compact Laws. 
 
 Inasmuch as the power to regulate insurance rests entirely with the States, 
 combinations to prevent competition in rates have been held proper subjects 
 
 <-•"' Queen Ins. Co. vs. Texas, 86 Tex. 264, 265. 
 
 <=^* Amer. Fire Ins. Co. vs. State, 7-5 Miss. 24 (1S97). Xoyes. "Intercorporate Rela- 
 tions," Sect. 435, footnote. 
 <2=> Queen Insurance Co. vs. Texas, 86 Tex. 250. 
 
 (23) The following laws enumerating insurance as covered by their provisions existed 
 January 1, 1914: 
 Arkansas, Laws 1905, Act. 1, Sect. 1 et seq., as amended by Laws 1913, Act. 161. 
 ^ Kansas, Laws 1889, Chap. 257, Sect. 1; General Statutes, Sect. 5185; Laws 1897, 
 Chap. 265, Sect. 1; and General Statutes, Sect. 5142. 
 Mississippi, Code 19C6, Sect. 5002. as amended by Laws 1908, Chap. 119, Sect. 1. 
 Missouri, Revised Statutes 1909, Chap. 98, as amended by Laws 1913. 
 Nebraska, Cobbey's Annotated Statutes 1911, Sect. 12,000 et seq. and Compiled 
 
 Statutes 1911, Sect. 62S1. 
 South Carolina, Civil Code 1912, Sect. 2437 et seq. 
 Texas, General Laws 1903, Chap. XCIV, p. 119, as amended by General Laws 1907, 
 
 and Revised Civil Statutes 1911, Art. 1454. 
 Missouri now has a law, however, providing for supervision. 
 
 57 
 
for the exercise of State powers. Where a State legislates against "trusts" 
 this term may be made to include, by definition, such a combination as above 
 mentioned. Thus in State vs. American Surety Company/-^^ the court said in 
 relation to a statute of Nebraska: "Evidently the words 'trade and business' 
 are intended as a generic term to embrace all the transactions and practices 
 set forth in the preceding section, and properly include the regulation of insur- 
 ance contracts in restraint of competition." In German Alliance Insurance 
 Company vs. Hale,^"®^ such laws were regarded as a valid exercise of the 
 State's police power. The courts have held that an act providing for the 
 expulsion from the State of any foreign company participating in a pool or 
 combination was within the power of the State, which had no limitation by 
 State or Federal constitution/"'* 
 
 The question of the extent of application of a State law to combinations 
 and agreements made outside the State is a doubtful one.^'** 
 Constitutionality of Anti-Compact Laws. 
 
 Statutes designed to prohibit rate-making associations have been attacked 
 as contrary to the State and Federal constitutional provisions regarding the 
 right of contract, equal protection and due process of law. 
 
 The first of these was introduced as a basis of complaint in the case of 
 Greenwich vs. Carroll,^-"' and the decision at first favored the contention, 
 stating that the law prevented fire insurance companies from making contracts 
 which other persons might make, such as laborers fixing the price of their 
 labor. The verdict of the Circuit Court was reversed, however,^'"* and the law 
 in question^''* held not to contravene the State or Federal constitutions. 
 
 A law which provides that any insurance company connected with a tariff 
 association should be liable for 125 per cent of any loss or damage^'"* has been 
 considered not to deprive the company of the equal protection of the laws or 
 deny it due process of law.^^''* A provision that such a company could not 
 enforce the stipulations of the standard fire policy requiring notice and proof 
 of loss was held equally valid. ^^^ 
 
 Devices to Evade Anti-Compact Laws. 
 
 Wherever questioned the attempts to accomplish the same objects without 
 violating the laws have been unsuccessful. Thus where agents had formed 
 
 <2*« Insurance Laws of Arkansas, 1913, Chap. XV, Sect. 142, p. 69. 
 
 (=3) State vs. American Surety Co., 135 N. W. 365 (1912), reversing 133 N. W. 235 (1911). 
 
 <2«> German Alliance Ins. Co. vs. Hale, 21 S. C. 246 (1911); see also Firemen's Fund 
 
 Ins. Co. vs. Hellner, 49 So. 297 (1909). 
 (-•' Hartford Fire Ins. Co. vs. Perkins, 125 Fed. 502 (1903). 
 <=s> See Hartford Fire Ins. Co. vs. State, 89 S. W. 42 (1905), and State vs. Lancashire 
 
 Fire Ins. Co., 66 Ark. 466 (1899). 
 (S9) 125 Fed. 121 (1903). See also Niagara Fire Ins. Co. vs. Cornell, llO Fed. 816. 
 <80) Carroll vs. Greenwich, 26 Sup. Ct. Rep. 66, 199 U. S. 401 (1906). 
 <2i) Code of Iowa, 1S97, Sect. 1754. 
 
 t3=) Alabama Code, 1896, Sect. 2619, Code 1907, Sect. 4594. 
 <33) German Alliance Ins. Co. vs. Hale, 21 Sup. Ct. Rep. 246 (1911); Firemen's Fund 
 
 Ins. Co. vs. Hellner, 49 So. 297 (1909). 
 <'♦> Aetna Ins. Co. vs. Kennedy, 50 So. 73 (1909); Continental Ins. Co. vs. Parkes, 
 
 39 So. 204 (1905). 
 
 58 
 
an association, a requirement of which was that they were not to forward 
 policies until the same had been submitted to the "stamping department" ^^^ 
 of the association, the court held that the acts of the agents were the acts of 
 the companies, ratified by the latter also by the receipt of the premiums/''* 
 Upon th? passage of an anti-compact law in Missouri, the Association of Fire 
 Underwriters of Missouri was dissolved and an independent rater supplied 
 books of rates to the companies. Agents and brokers formed a club known as 
 the "Underwriters' Social Club" for the purpose of maintaining a stamping 
 department. This was characterized by the court as "a plain, palpable, but 
 bungling pool, trust, agreement, combination, confederation and understanding, 
 organized to avoid said anti-trust statute," and illegal/^'' 
 
 In the light of the foregoing decisions it is hard to see how insurance 
 companies can escape the effects of statutes specially prepared to apply to 
 them, regardless of the inadvisability of attempting to do so, since a rewording 
 very simply accomplishes the object of the legislator. Only two decisions^"*' 
 have been found which upheld the legality of such combinations or associations, 
 under specific prohibitory laws, and one was reversed by a higher court, al- 
 though the advantageous features of rate-making associations have sometimes 
 been admitted. '^^^' The tendency has rather been to allow the statutes a wide 
 scope than to limit their application, and recent decisions have showTi no 
 change in this attitude. In 1912 combinations of this nature, defined by law as 
 "trusts," were again stated to be unlawful.*"* 
 
 State Rating Laws. 
 
 The importance of the two types of laws described was considerably les- 
 sened, however, by the recognition of some States of the principle of co-opera- 
 tion. These States, which unconsciously took the first step toward a rational 
 treatment of the issue, admitted what they had long denied, that all com- 
 panies should charge the same rate, but determined that the States should fix 
 the rates charged. 
 
 While recent rate legislation may be described as consisting of laws which 
 require the States' supervision of rates and those authorizing Government 
 fixing of rates, it may be further classified as 
 
 (1) Laws requiring the filing of rates with State officials. 
 
 (2) Laws providing for a revision by the companies of rates found by a 
 
 hearing to be unfair. 
 
 (3) Acts creating State Boards to fix and enforce rates. 
 
 (I) The first type, requiring the filing of rates, is illustrated by the law 
 of Arkansas.^"* Corporations and associations doing business in the State are 
 required to file a schedule of rates with the State Auditor or Insurance Com- 
 
 '■'^' See pp. 14, 26. 
 
 <'«> State vs. Aetna Ins. Co.. 150 Mo. 113 (1899). 
 
 <^* State vs. Firemen's Fund Insurance Co., 152 Mo. 1 (1899). 
 
 ts') Greenwich vs. Carroll. 125 Fed. 121 (1903); Niagara Fire Ins. vs. Cornell, 110 
 
 Fed. 816. 
 <"" State vs. Aetna Ins. Co.. 150 Mo. 113 (1899). 
 <"^ State vs. American Surety Co., 135 N. W. 365 (1912). 
 <"> Laws 1913, Act. 159. approved March 12, 1913. 
 
 59 
 
missioner, and underwriters may employ a common expert to inspect and rate 
 risks and advise the premiums to be charged. Such premiums must be uni- 
 form for all risks rated under the same schedule. Such laws exist in several 
 States and are simply important as exemplifying the permission to co-opera- 
 tively determine rates. 
 
 (II) An example of the second type is found in the law of Kansas, 
 1909.''" Basis schedules are required to be filed with the Superintendent of 
 Insurance, showing proposed rates and any m.atters affecting such rates. Ten 
 days' notice must be given of changes in rates and the new rates filed, unless 
 otherwise permitted by the Superintendent of Insurance, who has the power to 
 order changed excessive, unreasonable or inadequate rates. Contracts may be 
 made affecting risks for which no schedule has been filed, provided a schedule 
 is filed within 30 days after the risk is written. Schedules and local tariffs 
 filed as above are open to the inspection of the public and local agents are 
 required to exhibit copies of the same. Appeals from the Superintendent's de- 
 cisions may be taken to the district courts of the State. 
 
 The law of Massachusetts provides a Board of Appeals, consisting of two 
 citizens of the Commonwealth and the Insurance Commissioner, to consider 
 complaints of unfair or discriminatory rates and make such recommendations 
 as it deems advisable/*'^ 
 
 The oldest of the three acts above mentioned, and the only one on which a 
 decision has been rendered, as far as known, is that of Kansas. This was at- 
 tacked in the courts '"' on the ground that it was unconstitutional, constituting 
 an interference with the right of private contract, guaranteed by the Four- 
 teenth Amendment. This view was not upheld by the court, which considered 
 the act a valid exercise of the State's Police Power. On April 20, 1914, the 
 United States Supreme Court decided the act was constitutional.^"* It was 
 said that "business, by circumstances and its nature, may rise from private to 
 be of public concern, and be subject, in consequence, to governmental regula- 
 tion. * * * Contracts of insurance, therefore, have greater public conse- 
 quence than contracts between individuals to do or not to do a particular thing 
 whose effect stops with the individuals. * * * it is, therefore, within the 
 principle we have announced. "^*^* 
 
 The dissenting opinion objected on the ground that the majority decision 
 opened the way to State price-fixing on any sort of an article. This is one of 
 the most important of recent rate decisions. 
 
 The State rating acts providing for the actual promulgation of rates by 
 the States remain to be discussed. 
 
 The public interest in common law actions and anti-trust statutes against 
 underwriters' associations and in the revision of rates by the State 
 
 <*=> Laws 1909, Chap. 152. A similar law recently existed in Missouri (Act of March 
 18, 1911), entitled the Oliver State Rate Act, but was practically repealed by the 
 Orr Act, March 24, 1913 (Laws 1909, Chap. 98, as amended by Laws 1913). 
 
 (*■> Acts 1911, Chap. 493. 
 
 <"^ German Alliance Ins. Co. vs. Barnes, 189 Fed. 769 (1911). 
 
 («) German Alliance Ins. Co. vs. Lewis, 34 Sup. Ct. 612. 
 
 <^*'> German Alliance Ins. Co. vs. Lewis, pp. 618, 619, 620. 
 
 60 
 
was considerably diminished by the passage of more radical legislation. 
 
 (Ill) These statutes, commonly known as State rating acts, are the 
 ones most strenuously objec1:ed to by the companies, although it must be 
 recognized that the laws providing for revision of rates by State officials 
 practically give the latter the authority to determine what the rates shall be. 
 This result is not obtained with the same ease as under the rating acts, how- 
 ever, as many revisions may be necessary to attain the desired ends. The law 
 of Kentucky,"' prominent because of the withdrawal from the State of the 
 companies upon its passage, may be selected as an example of this legislation, 
 although similar laws exist in Texas, Louisiana and Nebraska'-' and were 
 proposed in Mississippi arid Florida.^' 
 
 The super\dsion of rates is delegated to the Insurance Commissioner and 
 two citizens appointed by the auditor, and for this purpose the companies are 
 repaired to file general basis schedules, specific rates, rate cards, inspection 
 reports of towns and a basis schedule of the Analytic System. These may be 
 prepared by an agent emplt)yed by the companies in common. The rating board 
 is expected to consider the reasonableness of rates and the selection of basis 
 tables. The significant feature of the act, however, is that the Board may also 
 prepare reasonable schedules and after the promulgation of these it is unlaw- 
 ful for any company to use a rate obtained by any other. The information 
 necessary for the preparation of such rates the companies are required to fur- 
 nish. The records of the Board are open to public inspection and the com- 
 panies' agents are required to display the promulgated rates. The Board has 
 access to the records of underwriters' associations. An appeal from its de- 
 cision may be had to the Circuit Court of the State. 
 
 The companies proposed a substitute for the above law which endowed the 
 Insurance Commissioner with these powers instead of a rating board, on the 
 ground that there would be less danger of political influence; but this failed 
 of adoption. The Western Union considered the withdrawal of its members 
 from the State because of dissatisfaction with the act, but the underwriters 
 could not agree on this action and decided to bring a bill in equity in the Fed- 
 eral District Court to restrain the enforcement of the act. This Court decided 
 against the companies,**' saying "The business of fire insurance is not im- 
 pressed with a public use in the sense that the public can demand service, but 
 it has at least a quasi-public, as distinguished from a purely private, char- 
 acter." Accordingly it was held that the act was within the power of the State. 
 
 This was a great disappointment to the companies, as it was estimated 
 that the new law would cost them about $90,000.*'* Furthermore, the State 
 Board ordered that new rates involving a reduction on dwellings, for example, 
 of 30 per cent should go into effect March 15, 1913; but in March the reduc- 
 
 ^" Laws of Kentucky. 1912, Chap. 5. 
 
 <=> Texas, 1910; Louisiana, 1910, Act 219: Nebraska. Insurance Code, 1913, Art. II; 
 
 applies only to surety companies. 
 <■■■' Mississippi, February, 1912. See United States Review. February 22. 1912. Florida. 
 
 April, 1913, House Bill Xo. 3. 
 <*> Citizens Insurance Co. vs. Clay, 197 Fed. 435 (1912). 
 <=> United States Review, April 4, 1912. 
 
 61 
 
tion was diminished to 10 per cent, it having been shown that the companies 
 had made no profit even at the original rate/®^ 
 
 In the following year the law previously analyzed was modified slightly 
 by the passage of the Glenn-Greene Amendment. This was extremely radical 
 as passed by the House, giving the Board arbitrary powers subject to little or 
 no restraint, as well as the right to fix maximum rates instead of the man- 
 datory rates provided for in the original bill. Such rates would not have had 
 even the mandatory rates' advantage of preventing price-cutting and dis- 
 criminations, the real evils in insurance. This amendment was considerably 
 modified before passing the Senate. 
 
 The Kentucky rate law has been tested in. the United States District Court 
 and the opinion rendered*'' was that insurance was at least of a quasi-public 
 character and subject, therefore, to State regulation. The legislature may, 
 therefore, require companies to file data and appoint a board to fix the only 
 lawful rates, this constituting no im.pairment of the rights of a company or- 
 ganized in another State and licensed to do business in Kentucky. The classi- 
 fication of companies for rate-fixing purposes cannot be considered as denying 
 to all the equal protection of the laws and, therefore, is not unconstitutional. 
 
 In Nebraska, however, a board was provided to establish the lates to be 
 charged by all surety companies doing business within the State. In an action 
 brought by the American Surety Company the court declared that this was 
 unconstitutional, depriving such companies of property without due process of 
 law, in violation of the Fourteenth Amendment. *'*' 
 
 The constitutionality of such laws is, therefore, an open question at the 
 present time, with a tendency apparent to hold them within the States' powers. 
 Against such a tendency we find the decision in the surety case and certain 
 defects in the operation of these statutes. Likewise a strong dissenting opinion 
 which favored the companies was filed in the case of Citizens Insurance Com- 
 pany vs. Clay. 
 
 Results of State Regulation/'^ 
 
 The earliest attitude of States toward insurance combinations, as is natural, 
 was one of indifference. While the common law was available for the redress 
 of wrongs, either real or fancied, it was seldom made use of, although one or 
 two cases of comparatively early date may be found. Some State constitu- 
 tions contain prohibitions against monopoly and restraint of trade. *^'" With 
 the development of antagonism to all forms of combinations, the common 
 
 <«> New York Journal of Commerce, March 8, 1913. 
 
 <'> Citizens Insurance Co. vs. Clay, et al., 197 Fed. 435 (1912). 
 
 <«> American Surety Co. of New Yorlc vs. Shellenberger, et al., 183 Fed. 636 (1910). 
 
 <9> For an extended discussion of the historical development of fire insurance legisla- 
 tion see the author's "Commonwealth vs. Co-operation," Rough Notes, April 
 22, 1915. 
 
 *'«) Arkansas, Art. II, Sect. 19; Georgia, Art. IV, Sect. 2, Par. 4; Kentucky, Sect. 198; 
 Louisiana, Art. CXC; Maryland, Art. XLI; Mississippi, Sect. 198; New Hampshire, 
 Art. 82; North Carolina, Art. I, Sect. 31; North Dakota, Art. VII; Oklahoma, Art. 
 IX, Sect. 45; South Dakota, Art. XVII, Par. 20; Tennessee, Art. I, Sect. 22; 
 Texas, Art. I, Sect. 26; Washington, Art. XII, Sect. 22; Wyoming, Art. I, Sect. 
 30. and Art. X, Sect. 8. 
 
 62 
 
law was deemed inadequate protection and anti-trust statutes became com- 
 mon. Their object, in brief, was to destroy combination and promote — even ; 
 enforce competition. By theni the States said, "There shall be no measure- 
 ment," for measurement presupposes a standard, which is possible only by 
 co-operation. 
 
 This attitude is now being very generally recognized as fallacious and \ 
 inadequate, inasmuch as it offers no inducement for a solution of the problem 
 of equitable rating. State authorities speak of these laws as follows: "If 
 there are any instances of anti-compact laws having served to reduce the cost 
 of fire insurance anywhere, I have failed to find them. * * * From general 
 observation I am convinced that a rate-controlling compact or monopoly never 
 existed in the fire insurance field. * * * j think we can safely set it down 
 as a fact that the condition of free and open competition sought to be retained 
 by the passage of anti-compact laws has promoted rather than prevented high 
 fire insurance rates.""" "Inequality and injustice must necessarily result from 
 the operation of this system. * * * i^ my opinion competition in fire insur- 
 ance rates is illogical, opposed to sound public policy and undesirable from 
 every standpoint."""' The statement of the Merritt Commission of New York 
 State to investigate fire insurance may be summarized as follows: 
 
 (1) The making of equitable rates demands co-operation. 
 
 (2) Open competition weakens the protection given and eliminates the 
 
 smaller companies. 
 
 (3) The only alternative to open competition is combination, not merely 
 
 to make, but to maintain rates. 
 
 (4) The effect of anti -compact laws has been not to bring back a state. 
 
 of open competition, for this is an impossible condition, but to intro- 
 duce a weakened substitute for combination, the selling of "ad- 
 visory" rates by an independent rater. 
 
 (5) The discrimination in anti-compact States has become so offensive that 
 
 there is a strong movement toward regulation."^* 
 Lack of space alone prevents quotations from many other sources to the same 
 effect."*^ 
 
 The results of all the State rating laws were very similar. Kentucky 
 furnishes the most recent illustration. After the rejection of the companies' 
 substitute bill giving the Insurance Commissioner power over rates, the latter 
 threatened to withdraw from the State in a body. A committee of leading 
 underwriters from Hartford, New York and Chicago conferred with the Gov- 
 
 <"^ Fire Marshal Peterson, of Minnesota. See A. F. Dean, "State Regulation in the 
 Light of Experience," Chicago, 1909, p. 9. 
 
 <'=' Thomas B. Love, Insurance Commissioner of Texas. See A. F, Dean, "State 
 Regulation," Chicago, 1909, p. 9. 
 
 f'3) Report of Joint Legislative Committee of New York to investigate Insurance. 
 Submitted February 1, 1911, pp. 76, 77. 
 
 <"* W. X. Johnson, address at Nashville, Tenn., January 30, 1909; C. C. Nadal, "In- 
 surance Rate-Making Associations." Fidelity and Casualty Co. of New York, 
 1912; Attorney General Straus' advice to Governor Crothers of Maryland, in re 
 the petition to proceed against the Association of Fire Underwriters of Balti- 
 more; William Emmet, Superintendent of Insurance, New York, Report for 1913. 
 
ernor, and while meetings to consider the situation were being held a $150,000 
 fire occurred at Hogdensville, Ky., in which 23 buildings were destroyed while 
 covered only by $50,000 insurance. Most of the owners were unable to build 
 without reimbursement for their loss and were unable to obtain loans without 
 insurance protection. 
 
 Louisville banks, anxious as to their security, requested information from 
 borrowers as to the value of their merchandise, the amount of insurance car- 
 ried, the amount maturing in each month until October and what arrangements, 
 if any, had beep made for replacing this insurance. 
 
 By March 10 forty-seven companies are reported to have withdrawn from 
 the State^"* and two weeks later industrial concerns were considering the re- 
 moval of their places of business to other States. There was estimated to be in 
 bond in the State alcoholic liquor valued at $162,000,000, represented by storage 
 receipts which, with insurance policies attached, were pledged as collateral for 
 loans. The banks desired these loans liquidated, if further insurance could not 
 be obtained, and whiskey, tobacco and other commodities were not acceptable 
 as collateral for proposed loans without insurance. Commercial credit was re- 
 stricted by manufacturers, wholesalers and banks. ^"" 
 
 The pressure by business interests was so great that a conference was held 
 in April, 1914, for the purpose of having the State and the companies make 
 such concessions as would enable the latter to resume business. As the com- 
 panies' demand was non-enforcement of the Glenn-Greene Amendment and the 
 State would offer no concessions of this nature it was a flat failure/"' In June 
 an agreem.ent was reached containing the following important features: 
 
 (1) The Business Men's Committee would enter suit to test the constitu- 
 tionality of the law and the Insurance Board would not enforce the provisions of 
 the Glenn-Greene Amendment until the question of constitutionality had been 
 determined by the courts. (2) The Governor would appoint a committee, one 
 member to be selected by the State Insurance Board, one member by the Na- 
 tional Board of Fire Underwriters, and one member by the Committee of Busi- 
 ness Men, to make an exhaustive study of State laws regulating rates with a 
 view to formulating legislation on the subject. (3) The Actuarial Bureau would 
 furnish memoranda of remediable defects to the State Insurance Board on risks 
 rated hereafter, the Board agreeing to refrain from calling on the companies or 
 the Bureau for copies of surveys or classification figures except to test the 
 accuracy of the application of a schedule. (4) All companies which had with- 
 drawn from the State would be permitted to resume business without the appli- 
 cation of any penalty. (5) Rates would be reduced by the Actuarial Bureau 
 wherever improvements were made. (6) The Business Men's Committee would 
 guarantee the faithful execution of the agreement. Pursuant to this under- 
 standing, the companies resumed business in Kentucky, and the Circuit Court, on 
 June 12, held the Act unconstitutional and issued a temporary order restraining 
 its enforcement. 
 
 ^'5> U. S. Review, March 12, 1914. Twenty had withdrawn on March 
 
 <'6> U. S. Review, March 26, 1914. 
 
 <"' U. S. Review, April 23 and 30, 1914. 
 
 64 
 
In Missouri similar events transpired. After a long dispute the State 
 finally realized the impossibility of imposing such onerous burdens on the 
 companies and agreed that the Orr Law, passed in 1913, should not be en- 
 forced pending an investigation by a commission. The Commission's report in 
 1915 formed the basis of a proposed law of the type next to be described.*"" 
 
 The foregoing description of State rating laws makes it apparent that 
 these, although possessed of proper purposes, namely publicity, protection of 
 the public and prevention of discrimination, are stronger medicine than the 
 disease requires. They are but one step in the development of a logical, rea- 
 sonable treatment of the rate question. The power to revise is, in the last 
 analysis, the power to establish; we may consider in the same place, there- 
 fore, the objections to the laws which provide for the revision or fixing of 
 rates by State boards. The following are alleged to be the difficulties and 
 evil results of State rating: 
 
 (1) It is contended that they interfere with freedom of contract with re- 
 spect to a business which has, as we have seen, been held by some courts to be 
 of a private and not of a public nature. This view was very clearly stated in 
 the companies' brief in connection with the Kentucky law."^* 
 
 "Has the State the power or the legal right to fix the price at which a 
 purely private corporation shall sell its commodities ? 
 
 "The test of whether a use is public or not is whether a public trust is 
 imposed upon the property, whether the public has a legal right to the use 
 which cannot be gainsaid or withdrawn at the pleasure of the owner. 
 
 "The business of fire insurance is not a public business, and it is not im- 
 pressed with a public use, but, on the contrary, it is a private business, trans- 
 acted by purely private companies. 
 
 "State regulation of the rates and charges of purely private corporations, 
 or private individuals, who transact a private and not a public business, is 
 clearly prohibited by the Fourteenth Amendment to the Constitution." 
 
 (2) It is unfair for the State to limit the amount which the companies 
 may collect in premiums, without guaranteeing them against loss. If the 
 State has the privilege of deciding what rates are not exorbitant, it should also 
 assume the burden of recompense if it has fixed rates which are inadequate.'^' 
 As stated by Mr. George W. Babb: "It appears to me to be self-evident that 
 whoever pays the losses should make the rates, and whoever makes the rates 
 should pay the losses. If the State makes the rates the State should pay the 
 losses and take the premiums. If the State makes maximum rates for the in- 
 surance companies, leaving the latter to pay the loss, the State should guar- 
 antee a reasonable profit on the business.'"-*"' It may say that any dissatisfied 
 underv/riter may withdraw, but the results of this attitude have been de- 
 scribed. 
 
 (3) The companies have urged that it is unfair to require them to con- 
 
 <"> Report of Commission to Investigate Insurance, Missouri, 1915. 
 <"> The analysis given appeared in the United States Review. 
 
 (M) President's address, Proceedings of 46th Annual Meeting of the National Board 
 of Fire Underwriters, May. 1912, p. 28. 
 
 65 
 
tribute through taxation thousands of dollars to support a State rating board, 
 which will be of no additional benefit to them and the cost of which may 
 exceed that of the method which they privately maintained. Thus in Ken- 
 tucky a fund of $25,000 was required to be pro-rated among the companies, 
 and this was considered by them as confiscation of property without due 
 process of law/'''^ 
 
 (4) Political influence may exert a power for the benefit of special classes 
 which should be used in obtaining justice for all. The New York Legislative 
 Committee in its report said:^"* "This is a very dangerous power; it is con- 
 ceivable that it might be used for political purposes; at any rate he who 
 exercised the power would have effective pressure brought to bear on him 
 from only one direction, that is, to reduce the rates, while, at least in certain 
 emergencies, the situation might demand an increase." 
 
 (5) The supervision of the business, although requiring ability and ex- 
 perience, will generally devolve on those whose only qualification is their par- 
 ticipation in political activities. To make the rates the State must collect 
 statistics, presumably from the companies; employ experts, presumably ex- 
 perienced insurance men; and use schedules, either those now used by the com- 
 panies or their own expensive substitutes. "The situation must be very aggra- 
 vated that would warrant the State in assuming such an extended and tech- 
 nical piece of work."*^* "Our investigation leads us to the conclusion that 
 any attempt by the State to assume the function of creating or originating 
 rates for fire insurance would be a serious mistake. "^"*^ 
 
 (6) The inequalities and lack of relation present in State and municipal 
 taxes afford a presumption that the fire tax will be inequitably distributed. 
 
 (7) The compilation of statistics is possible only with the co-operation of 
 underwriters. 
 
 (8) If the State assumed entire control of the business it could not accom- 
 plish its objects, judging from the results in other countries where State insur- 
 ance has been tried. Their experience, it is claimed, shows that insurance 
 conducted by the State neither reduces rates nor yields a profit.^"'* What can 
 be accomplished then merely by the control of rates? 
 
 (9) Average and distribution are bases of fire insurance and rates should 
 not be founded on the experience of the separate States. The theory of the 
 Texas Board at the outset was that Texas premiums should pay for Texas 
 losses.*""* The issue correctly stated would be, shall Texas policyholders evade 
 liability for losses in other States and outside policyholders help to pay Texas 
 losses? The New York Committee report states: "Insurance is based on gen- 
 
 ^21) United States Review, April 4, 1912. 
 
 <22) Report of the Joint Committee of the Senate and Assembly of New York on Insur- 
 ance Investigation, February 1, 1911. 
 
 ^22) Ibid., p. 52. 
 
 f-*> Report of Illinois Fire Insurance Commission, 1911, p. 74. 
 
 <25) A. E. Wall, "Some Popular Fallacies with Regard to Fire Insurance," "The Mar- 
 ket World and Chronicle" (now "The Economic World"), November 8, 1913, 
 p. 607. 
 
 <«> United States Review, March 14. 1912. 
 
 66 
 
eral average; no one locality is sufficient for this, not even a State, not even 
 the United States in the case of large conflagrations. If rate-making were 
 lodged with the State and the experience of that State had been favorable, the 
 tendency would be to make rates purely upon this experience. The most serious 
 effect of this would be that, in case of a large conflagration, it would be im- 
 possible for a company to recoup itself, for each State in standing upon its own 
 experience would refuse to contribute to any outside loss; the result would 
 be that the State in which the conflagration occurred would have to pay the 
 entire loss. This would, of course, break down the very first principle of in- 
 surance, for one State is insufficient to stand the shock of a large conflagra- 
 tion." *''^' Notwithstanding, the danger of a single city's experience being 
 taken as a basis appears. In April, 1912, the City of Austin, Texas, applied 
 to the Texas Insurance Rating Board for a compulsory reduction of its rates 
 to a lower plane than those of any other city in the State. The argument 
 advanced was that the rates for Austin should be based upon the city's own 
 experience and that citizens of Austin should not be compelled to pay pre- 
 miums sufficient to take care of fire losses in other communities. On the 
 other hand, in some States the fallacy of such an arrangement is realized. 
 Mr. F. W. Potter said:^"^* "I am more than ever persuaded that it is the duty 
 of those States having rational insurance laws, and making a fair contribution 
 to the common fund, to prohibit by law the admission of companies which 
 operate in States where, under the statute, fire insurance is not permitted to 
 exercise its functions with reasonable freedom, nor to collect a premium com- 
 mensurate with the hazards in such States." 
 
 This awakening of some States necessarily has its disadvantages from the 
 companies' viewpoint. They seem to be between the upper and lower mill- 
 stones — compelled to do business in some States at inadequate premiums and 
 prevented from collecting any at all in others because of it. It would seem, 
 therefore, that State rating laws serve only to reduce premiums and that to 
 such an extent as to jeopardize the safety of the companies and to cause them 
 to withdraw from a business without profit. While the State rating boards 
 have the power to correct the evils which have been stated to exist, it would 
 be advisable to attain this end by a less dangerous method. 
 
 In brief, State rating laws appear to be, in the first place, a stronger 
 remedy than the disease requires and, secondly, one which, even as it cures, 
 creates new ills. It would be advisable to retain the economic advantages 
 of associations and to eliminate their objectionable features by less stringent 
 measures. This is provided for by laws similar to that of New York, West 
 Vrrginia and North Carolina.*^' Such acts stop short of actually fixing insur- 
 
 <"> Report of New York Legislative Investigating Committee, 1911, p. 52. See also 
 E. G. Richards, "Experience Grading and Rating Schedule." 
 
 <2s> Annual Report, Commissioner of Insurance, 1912. Also see New York Journal of 
 Commerce. August 25, 1913, and "The Market World and Chronicle" (now 
 "The Economic World"), July 5, 1913. 
 
 «2n) New York Laws 1909, Chap. 33, Sect. 41, as amended by Laws 1911, Chap. 460 
 and Laws 1912. Chap. 175. North Carolina, Laws 1913. Chap. 145. West Vir- 
 ginia. Acts 1913. Other States have since adopted this form of law. 
 
 67 
 
ance rates, and avoid all of the objections and disadvantages inherent therein. 
 They allow the associations which have been so beneficial in the past to exist 
 and yet subject them to the closest supervision by the Insurance Department. 
 
 Laws Providing for Supervision. 
 
 The New York, West Virginia and North Carolina laws are identical 
 and provide that corporations, associations and bureaus for suggesting, approv- 
 ing or making rates to be used by more than one underwriter shall: 
 
 (1) File with the Insurance Commissioner a copy of their articles of 
 
 agreement, by-laws and a statement of business addresses and 
 names of members. 
 
 (2) Furnish such other information as the Commissioner may require. 
 
 (3) Submit to visitation, supervision and examination by the Commissioner 
 
 as often as he deems expedient and at least once every three years. 
 
 (4) File rates and schedules at request of the Commissioner. 
 
 (5) Keep records of proceedings and upon request furnish the insured with 
 
 information as to his rate and a copy of the schedule by which his 
 property was rated. 
 
 (6) Provide means of hearing interested parties before their governing 
 
 or rating committees or other proper authorities. 
 The associations and bureaus are prohibited from: 
 
 (1) Specifying that the rates depend upon placing the whole or a specified 
 
 amount of insurance at such rates. 
 
 (2) Requiring that all insurance be taken with subscribers to such or- 
 
 ganizations. 
 
 (3) Discriminating in rates. The Commissioner may hear cases and order 
 
 discriminations removed and they shall not be removed by an 
 increase in rates unless justifiable. 
 
 Whereas other laws prohibited co-operation, even attempted to enforce 
 competition and took away the right of the companies to say at what price 
 they would sell insurance, these acts permit and recognize associations with 
 all their benefits, on the one hand, and prohibit abuses, on the other. In New 
 York all complaints seem to have been promptly investigated and evils are 
 being corrected. An extensive investigation of the most important association 
 in New York was conducted, which analyzed its deficiencies at length. 
 
 The report of the Merritt Committee of New York, acknowledged to be 
 the fairest and most intelligent summary of the business yet given, said: 
 
 "It is, therefore, recommended that no anti-compact bill be passed, but 
 that in place thereof a statute be enacted that will permit combination under 
 State regulation, such regulation to stop short of actually fixing the price at 
 which the companies shall sell their insurance, but which will be of such a 
 positive nature that all forms of discrimination in rates will cease." * * * '^"^ 
 The recent report of the Missouri Investigating Committee states: "A rating 
 or actuarial bureau should be open for membership to all authorized com- 
 
 ^'''> Report of the Joint Committee of the Senate and Assembly of New York, February 
 1, 1911, p. 125. 
 
 68-. 
 
panics * * * subject to visitation, inspection and examination of the 
 Superintendent of Insurance."*'" The report of the North Carolina Investigat- 
 ing Committee recognized in part the advantages of the association/"-' A vice- 
 president and counsel of one of the large companies wrote:'"' "There would 
 seem to be, however, a middle course between the two extremes of State rate- 
 making, on the one hand, with all the consequent defects * * * j and, on 
 *^h«.^ther hand, complete company control of rate-making without the steady- 
 ing influencef i.-xj^H^ control of laws and State supervision to hold the rate- 
 making body up to a full avw* of responsibility for its action to the repre- 
 sentatives of the people. The »cessary joint control and balancing of in- 
 iiuc^nce can, I think, be secured ,y leaving the companies' selection of the 
 person or pexi^l'^'^ns who shall make-ates, but giving to the Superintendent of 
 Insurance the power <' " - the office and methods of the rate- 
 
 making body, * * compel removal of discrimination in 
 
 rates, * * * jurisdiction to review complaints that the schedule used by 
 the rate-making body has not accurately applied to a particular risk." 
 
 Since this study was begun the principle of association with adequate 
 regulation has received greater recognition. Prior to 1915 six States, New 
 York, New Jersey, West Virginia, North Carolina, Washington and Kentucky, 
 had adopted legislation of this nature and during the past year Pennsyl- 
 vania, Michigan, Missouri, Minnesota, Iowa and Oklahoma enacted such laws. 
 Kentucky and Missouri, which have tried radical prohibitory legislation, will 
 be noted in this list. 
 
 In foreign countries little objection has been made to insurance associa- 
 tions making rates. In England one tariff association of practically all com- 
 panies has existed since 1858, which determines rates for all important classes 
 of property and it has never been found necessary to organize mutuals in 
 order to reduce rates. The same situation exists on the Continent.^^' In Ger- 
 many the private fire insurance companies formed a "Kartell," or association, 
 in 1899, which has almost completely done away with competitive rate- 
 making.'^' 
 
 After a discussion of various aspects of fire insurance rates and under- 
 writers' associations a general summary of the conclusions reached would /^ 
 *reem to be advisable. C^ 
 
 (1) Fire insurance rates are receiving great consideration at the present 
 time and are the greatest problem of the insurance business. 
 
 (2) Underwriters' associations, far from being useless or vicious, have 
 certain definite economic functions. 
 
 (3) Certain evils are complained of, some of which are due to competition 
 and others to lack of regulation. 
 
 (4) The evils complained of will not be removed by prohibiting combina- 
 tions or by the State assuming price-fixing powers. 
 
 (5) Rational regulation, arising from careful investigation, and knowledge 
 of the principles involved, of those associations which have hitherto performed 
 their functions with reasonable success, will yield the greatest benefit to under- 
 writers and the public/^** 
 
<-^'> Report of Findings and Recommendations of the Missouri Fire Insurance Com- 
 mission. 1915. 
 
 *•-> 1915, p. 7. • 
 
 <"3) David Rumsey, "A Suggestion of a Metliod for the Control of Fire Insurance 
 Rates," "The Market Woild and Chronicle" (now "The Economic World"). 
 December 6, 1913, p. 740. 
 
 <■'••> L. W. Zartman, "Discrimination and Co-operation in Fire Insurance Rating," Yale 
 Readings in Insurance, Yale Univtrsity Press, New '"ivfu. »■ lijff 
 
 <"•'•> Fritz Brauer, "Wirkungen des Feii < rung Kartells." 
 
 •■'^> As is usually the case with cum. wnic problems the biblidiii ilrLs 
 
 subject is scattered and not eavsii.\ ai cessible. The follo'^^fe is a list oi ]ijac- 
 tically all the books, rejiorts and periodicals whicH-'^''^ ^frectiy i^rtain \o the 
 subject: 
 
 BIBLIOGRA^'HY.-iPOOKS. 
 
 American Corporation Manual. J. S. Park' ' i m Mimiial c,,.. ;;4 Nas- 
 
 sau St., New York. 
 
 Clement, G. A. Law of Fire Insurance, litos. Vol. 2. pp. 615-617. Notes on Asso- 
 ciations. 
 
 Dean, A. F. "Fire Rating as a Science." J. M. Murphy, Chicago, 1901. 
 
 Deitch, G. Digest of Insurance Cases (published annually). Bobbs-Merrill Co., In- 
 dianapolis, 1913, 1912. 
 
 Hardy, E. R. "Fire Insurance" in Modern Business Series, Vol. VIII, New York. 1911. 
 
 Huebner, S. S. "Property Insurance," Chaps. XVI and XVII. D. Appleton & Co., 
 New York, 1911. 
 
 Noyes. Intercorporate Relations, pp. 763 et seq. 
 
 Richards, E. G. "Experience Grading and Rating Schedule." 
 
 Standard Universal Schedule for Rating Mercantile Buildings, Continental Insurance 
 Co., New York. 
 
 PAMPHLETS, ARTICLES AND REPORTS. 
 
 Affeld, F. O. "State Fire Insurance Rating." Hamburg-Bremen Fire Insurance Com- 
 pany, New York. 
 
 Blake, Frank. Superintendent of Insurance, Missouri. Report for 1912. 
 
 Commonwealth of Pennsylvania. Bill of Complaint, Commonwealth vs. AUemania Fire 
 Insurance Co., et al.. Court of Common Pleas No. 2, of Allegheny County, Pa. 
 
 Dean, A. F. "Classification." Chicago, 1913. 
 
 Dean, A. F. "Classified Experience," a paper prepared for the Classification Com- 
 mittee of the National Association of State Insurance Commissioners, Chicago, 1912. 
 
 Dean, A. F. "Standardization." An address at 42d Annual Meeting of the Fire Un- 
 derwriters Association of the Northwest. 
 
 Dean, A. F. "State Regulation of Fire Insurance in the Light of Experience." Chi- 
 cago,. 1909. 
 
 Dean, A. F. "Fire Hazard — Is It Measurable?" Committee on Publicity and Education, 
 Chicago, 1910. 
 
 Emmet, R. T., Superintendent of Insurance of New York. Report for 1913. 
 
 Fortai^sh, G. T. "Notes on Rates and Rate-making," a lecture before the Insurance 
 Library Association of Boston, 1912. 
 
 Hexamer, C. A. "Rates and Schedule Rating." Annals of American xVcademy of 
 Political and Social Science, September, 1905. 
 
 Illinois Fire Insurance Commission, Report of, to the Senate and House of Repre- 
 sentatives, 47th General Assembly, January 4, 1911. 
 
 .Johnson, W. N. Address before a Conference of Tennessee Business Men at Nash- 
 ville, Tenn., .January 30, 1909. 
 
 Ivremer, J. B. "The Agency." Address before Insurance Society of New York, 91st 
 Meeting. Pu? lished January, 1914. 
 
 Lock, Frank. "Some Methods of the Fire Insurance Business." Address before the 
 
 70 
 
. Fire Insurance Club of Chicago. In New York Journal of Commerce, Marcli 25, 
 1914. 
 
 .Missouri Legislature. Report of the Fire Insurance Commission, 1915. 
 
 Xadal, Charles C. "Insurance Rate-Making Associations." Fidelity and Casualty Co. 
 of New York. 
 
 National Board of Fire Underwriters. Proceedings 46th Annual Meeting, 1912; Pro- 
 ceedings 47th Annual Meeting, 1913: Proceedings 4Sth Annual Meeting, 1914; Pro- 
 ceedings 49th Annual Meeting, 1915. 
 
 National Board of Fire Underwriters. Committee's Report on explanation of prin- 
 ciples and methods of fire insurance. October 1, 1899. 
 
 National Board of Fire Underwriters. Report of Special Committee on Uniform Classi- 
 fication of Fire Insurance Experience, 1913. 
 
 Xational Convention of Insurance Commissioners, Proceedings of. 
 
 National Fire Protection Association. "Story of the National Fire Protection Asso- 
 ciation." National Fire Protection Association, Boston, Mass. 
 
 New York Fire Insurance Exchange. Annual Reports of the Manager. 
 
 New York Insurance Department. "Report on Examination of New York Fire Insur- 
 ance Exchange," by Samuel Deutschberger, .luly 21. 1913. 
 
 New York Legislature. Report of Joint Committee of Senate and Assembly of New 
 York to investigate the affairs of insurance companies. Transmitted to the Legis- 
 lature February 1, 1911. 
 
 North Carolina Legislature. Report of Investigating Committee on Insurance, 1915. 
 
 Pennsylvania Legislature. Report of Joint Legislative Committee, 1915. 
 
 Potts, R. M. Report to Governor of Illinois on Investigation of Fire Insurance in 
 Illinois, 1915. 
 
 Richards. E. G. "Classification — Discrimination." address before Insurance Society of 
 New York, 1913. 
 
 Richards, E. G. "Why I Believe in Rate-making from Classified Experience," address 
 before Insurance Library Association of Boston, 1916. 
 
 Robb, W. D. "New York Fire Insurance Exchange." Popular Insurance Magazine, 
 Januarj% 1911. 
 
 Rumsey, David. "A Suggestion of a Method, for the Control of Fire Insurance Rates." 
 "The Market World and Chronicle" (now "The Economic World"), December 6, 
 1913, p. 722. 
 
 Rumsey, David. "The State and the Insurance Company." An address reported in 
 New York Journal of Commerce, March 25, 1914. 
 
 Smith, J. G. "Fire Insurance: Its History, Principles and Problems, with Special 
 Reference to Conditions in North America." A lecture before the Insurance 
 Institute of Toronto, Canada, January 15, 1914. 
 
 Wall. A. E. "Some Popular Fallacies with Regard to Fire Insurance." "The Market 
 World and Chronicle" (now "The Economic World"), November 8, 1913. 
 
 Wiederhold, Louis, Jr. "Underwriters' Associations and Their Benefit to t/he Public." 
 Bulletin of the Fire Insurance Society of Philadelphia, Special Supplement, May, 
 1912. 
 
 Zartman, Lester W. "Discrimination and Co-operation in Fire Insu'rance Rating." 
 Yale Readings in Insurance, Chap. XI. Yale University Press, New Haven, 1909. 
 
 CONSTITUTIONS, BY, LAWS AND RULES OF VARIOUS ASSOCIATIONS, 
 
 SUCH AS: 
 
 Board of Fire Underwriters of Allegheny County. Constitution and By-Laws, as 
 
 amended April 15, 1909. 
 National Board of Fire Underwriters. Constitution and By-Laws. 
 Underwriters' Association of the Middle Department. Rule Book, April 10, 1911, with 
 
 revisions. fl 
 
 Western Union Rules, special edition of October, 1911, supplemented and revised to 
 
 September, 1912. 
 
 71 
 
« r -^ • *^ • S 
 
 New York Fire Insurance Exchange Rating Schedules. 
 
 New York Fire Insurance Exchange. Handbook of the New York Fire Insurance 
 
 Exchange, July, 1910; revised to January, 1914. 
 Philadelphia Underwriters' Association. By-Laws, Agreements and Rules, June, 1908; 
 
 revised to 1913. 
 Rating Schedules of various associations. 
 
 NEWSPAPERS AND MAGAZINES. 
 
 "The Economic World" (formerly "The Market World and Chronicle"), weekly. 
 
 Chronicle Co., Ltd., 80 Wall St., New York. 
 United States Review (weekly), 411 Walnut St., Philadelphia, Pa. 
 New York Journal of Commerce and Commercial Bulletin (daily), 32 Broadway, New 
 
 York. 
 
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