The Nonpartisan Leader Newspaper, March 15, 1920, Page 4

Fire Insurance—A High Cost Business Large Private Companies Return Only Half of Each Dollar Collected to - Insured—How Can Situation Be Improved? BY A. B. GILBERT O POINT relating to fire insurance has ever appeared in the Nonpartisan league program. The farmers’ legis- lature of North Dakota provided state insurance for public buildings, but Minnesota and Wisconsin had previ- cusly taken this step. Our federal government car- ried its own railroad insurance during the period of control. The Du Pont powder interests; with widely scattered properties of great value, have done the same. This move by North Dakota was, therefore, in no sense a new radical threat to fire insurance companies. Why then did the great fire insurance interests rush to attack the League farmers almost as soon as the League was born? Why have they turned their central organizations,. state and national, and their agents into an anti-League machine? Why have insurance interests subscribed great sums to fight the League and other progressive organiza- tions? And other great sums to old party campaigns? Obviously these interests must have scented some great danger. The source of the fear is mot hard to find. They know better than the average citizen_ the great waste and profits in their own business and they fear that an inde- pendent organization of the people will begin to think, inquire and act on these things. Another fear is that of possible reduction in mortgage interest rates. Bradstreet’s Review, the weekly maga- zine of that well-known business-rating organization, recently carried the fol- lowing summary of the fire insurance business for the 10 years up to 1919: “Fire insurance premiums of 85 com- panies in the years 1909 to 1918, inclu- sive, amounted to the vast total of $3,- 005,253,942; the losses were $1,550,523,- 942; and the expenses were $1,112,994,- 345. As the liabilities of these com- panies were augmented during the period mentioned by the amount of $238,- 336,884, it is apparent that the result of their underwriting transactions in the last decade was a net profit of $103,399,- 699, or 3.44 per cent of the premiums.” “EXPENSES” MAKE COST OF INSURANCE HIGH In percentages the above facts can be expressed as follows: Tossesridn Lata b bt N o r el Expenses Increases in liabilities Underwriting profit Total The “profit” noted is, of course, only the profit on the money handled. The profit on money invested will prove enormously higher, probably averaging 15 to 20 per cent. These figures tell us plainly what is the matter with old-line fire insurance—not the profit made, although that is large, but the expenses of doing business. The major part of this expense we have to pay for having insurance “sold” to us. So long as we neglect to take out fire insurance until four or more agents have called on us, agents must be paid, other men must be paid fancy salaries for directing these agents, advertising must be paid for and the ratio of insurance expense to premiums can hardly be less than $37 out of every $100. In the last 10 years all the stock companies doing business in Minnesota have collected $127,111,745 and have paid out in losses onmly.$74,697,731 or 58.79 per cent. And this latter figure includes thL2 unusual fire losses of 1918. If this is the best so- called financial genius can do, isn’t it time for the common people to do some serious thinking about the matter? If we were ‘all to decide to take our fire insurance as a matter of course we could establish one big state agency to collect premiums and pay losses. Fxpenses would then have a ratio of about $6 out of every $100. State hail insurance, which involves How fire insurance money is spe*:;. ly the division, under various heads, at least as much necessary expense, is normally handled on a smaller ratio. What can be done is indicated by the experience of farmers’ township mutual fire insurance associa- tions. Their premiums are so small as to appear ridiculous beside those charged by old-line com- panies. In Minnesota, for instance, where many of these farmer companies have been operating for as long as 40 years, their charges have averaged 13 cents per $100 of insuranee as compared with 43 cents per $100 levied by the stock companies. They get these results by cutting out soliciting expense, central office expense and the expense of high-paid traveling adjusters. And they do not expect profits except in terms of lower rates. Let it not be thought that fire insurance is an intricate business. The only intricate thing about it is getting people to take it. - The commissions and salaries shown in the table are paid for selling ability and not for producing ability. The man who knows most about fire insurance, the actuary ISION OF INSURANCE DOLLAR COMMISSIONS TO AGENTS 19¢ 475¢ INTEREST AND DIVIDENDS 124 ¢ This is a typical company. who calculates the rates of risk, gets a very modest salary compared with the man who presides over the selling force. And this actuary’s work consists in the main of keeping statistics of fires and from them determining mathematically the rate of risk for different kinds of buildings and goods under different circumstances. " Aside from the selling problems and the work of the underpaid actuary, fire insurance is nothing more than collecting a common fund, investing the surplus in certain ways, largely determined by law because of past abuses, and paying out money for losses incurred. . : It is the public itself primarily that makes the selling problem and in addition the capital intrench- ed in the insurance business prevents fair publ_ic discussion of the situation in the press. .T_he big financiers fight for private insurance companies not so much for the dividends to be obtained from the business-as for the chance to control so much in- vesting power. The public turns in real money when it pays its premiums and this is extremely handy when J. P. Morgan & Co. or some other powerful banking group is floating a new bond or stock issue. The famous Hughes investigation in 1905 dis- -PAGE FOUR NET PAYMENTS FOR LOSSES This diagram represents accurate- of expenditures of the Phoenix com- pany for 1916. The shaded portion (less than half of the total) went for payment of losses. Many companies may be found whose reports show smaller propor_tionate payments. closed many respected insiders of the insurance companies as taking a rakeoff on stocks and bonds bought as well as many shady investments made for “friends” in Wall street. There is good reason to suppose that similar things are going on today. There is thus an element of risk in old-line insur- ance not to be overlooked in any comparison with a state system. Perhaps it is not as well known as it should be that this Hughes investigation was brought by the Ryan-Morgan group of financiers to drive strong independents out of the insurance business. Both the newspapers and investigators turned off the spotlight as soon as this object was accomplished and before the big fish could be caught. They have not been caught since and it is difficult to believe that there has been any voluntary regeneration in financial morality. In my opinion several methods are available whereby the people who need fire insurance could save most of this expense of doing business, could deprive the monopolists of their golden stream of other people’s cash, could se- cure greater safety in insurance carried, and could keep their insurance money in their own territory. There is, for instance, the plan adopted by New Zealand in 1905 of state compe- tition with private companies. The in- surance department of that common- wealth began business, with a bond issue of $10,000 and with rates on dwellings, offices and similar risks ome-third below those charged by the companies. Trade risks were lowered 10 per cent. After 14 years of competition with 33 fire insur- ance companies, New Zealand has met all claims and built up a reserve of $1,070,- 000. Lately the legislature there has been debating whether to. use this reserve for further lowering of rates or to dis- tribute it to clients as bonuses, as it does the unnecessary reserves in its state life insurance department. REINSURANCE PLAN FOR MUTUAL COMPANIES Those who like to make haste slowly would probably prefer this plan to one which would virtually take over all the fire insurance business of the state as state hail insurance does. But a more comprehensive plan which would auto- matically insure all property owners against fire losses would, of course, save much more money. In some of our states township mutual fire insurance is well developed and this could be made a great factor in building a profitless, wasteless system. This mutual plan is weak in one important re- spect, illustrated by the forest fire dis- astér in Minnesota in 1918. They insure only against normal losses, and a general local calamity leaves them stranded. The state insurance department might work out a reinsurance plan whereby these mutuals could re- insure with the state against these local calamities. Township mutual insurance would then be just as good as that of any old-line company as security on mortgages. Such a move would greatly advertise township mutual insurance and it is not unreason- able to suppose that the majority of farmers and small home owners might in time ke brought to- gether in such societies. This development of the township mutual plan might be a better method for us than the New Zealand method. The basis for it is already estab- lished. Many private companies here and in Eu- rope do practically nothing but a reinsurance busi- ness such as is suggested for the state insurance department. The simple details of local adminis- tration would be handled by local officials without pay except when some special call was made on their time. One of the advantages of such a plan of profitless fire insurance is so important that it should be men- tioned again. Instead of flowing into Chicago and (Continued on page 13)