The Nonpartisan Leader Newspaper, April 4, 1921, Page 6

Why Not Study Up on Fire Insurance? What Becomes of the Farmer’s Money and Why, as Shown by the BY E. B. FUSSELL OST farmers carry fire insurance. All of them should. But aside from those farmers who are officers or directors of farmers’ mutual insurance com- panies, there are not as many farmers who understand the insurance game as there should be. The object of this article is to study up a little on fire insurance, just as we studied up on banking and the newspaper business a short time ago. Fire insurance originated in England about 250 years ago, following a great fire in London which impressed thousands of people with the idea that there must be some protection for property owners. Says Nelson’s Encyclopedia: “Early in the history of fire insurance in England two distinct ideas developed as to the manner in which it should be conducted—that of “the stock company and that of the mutual. Groups of private speculators, the forerunners of our modérn stock companies, were the first to write insurance in large volume, and when, about 1684, the mutual idea was launched, those already in the field invoked the aid of the government against the newcomers.” Because the government was with the private speculators, rather than with the co-operators, the private insurance conipanies kept the field and have maintained their advantage to the present time. Within the last 20 years the co-operative mutual companies have been able to make small inroads, principally in farming districts, but the- private companies still hold the great bulk of the business. The theory of fire insurance is the co-operative theory. It is the theory that all who face a com- mon danger ought to put what money is needed in a common fund to be used to pay the small percent- age who, as we know from experience, will suffer loss each year. Under co-operative or mutual insurance virtually all the money collected 1s paid back in settlement of fire losses. NEARLY HALF OF COLLECTIONS GOES FOR “EXPENSES” OF COMPANIES But with private fire insurance it is different. Private fire insurance companies claim that out of every dollar they collect in premiums, 45 cents is ecaten up in expenses, leaving only 55 cents to be paid back in losses. The 45 cents is divided into these items: 1, ex- penses of maintaining home and branch offices (in- cluding salaries and commissions); 2, profits to stockholders and, 3, reserve. The last item requires explanation. While the average fire loss, year by year, is approximately the same, sometimes a great conflagration, such as the San Francisco fire, makes extraordinary demands. To be in a position to meet such demands an honest fire insurance company, instead of distributing practically all of its .45- cent margin in profits, salaries and commissions, transfers a few cents each yedr to “reserve,” in- vesting this money in bonds, mortgages or other securities until it may be needed. If it is not need- ed, of course, this money belongs in law to the stockholders of the company. The theory of fire insurance is. that rates should be so adjusted that each company will collect in premiums each year not quite twice as much as will be needed to pay losses—that is, if a company ex- pected losses of $55,000, it would fix rates that would bring in premiums of $100,000, and thus have $45,000 (the 45 per cent) left for expenses,. - profit and reserves. j Year by year, except in the ycar of a great dis- aster, fire losses are about the same, slightly less when times are good and slightly more in times of financial stringency, because a certain class of business men often burn down their stores to col- lect insurance when they ean make money in no other way. With 250 years’ experience fire insur- ance men know pretty accurately what their losses are apt to be and can fix rates that will give them 55 per cent to pay losses and 45 per cent for ex- penses, profits and reserves—if they want to. MILLION DOLLAR EXCESS COLLECTED FROM OWNERS OF DWELLINGS But do they fix such rates? To answer this question let us look at the report of the insurance commissioner of Minnesota, entitled, “Underwrit- -ing Experience by Classes for Minnesota for 1919,” the last year for which figures are available. In the class entitled “Dwellings” the report shows that during 1919 the private fire insurance companies collected in premiums in Minnesota $2,853,795, and that they paid back in losses only $911,122, In other words, instead of dividing the “pot” of money collected, 45 per cent for them- selves and 55 per cent for the insured, they divided it 68 per cent for themselves and only 32 per cent for the insured. ; Let us put it another way. The total losses on dwellings were $911,122. This is 556 per cent of $1,656,685. Therefore $1,656,585 was the amount that should have been collected for the 55-45 divi- sion of insurance money. This division would have provided $911,122 (55 per cent) for fire losses and $745,463 (45 per cent) for the insurance companies for expenses, profits and reserves. But instead of getting $745,463 for expenses, profits and reserves the insurance companies actually got $1,942,673, or $1,192,210 more than they deserved under their own . ‘claim of the right way to divide the money. WHO PAYS INSURANCE MONEY— In the following diagram a line one inch long represents the collections of insur- ance companies in Minnesota for the year 1919 for each of three classes in which farmers’ insurance is listed, and.the second, shorter line shows the proportion of col- lections turned back to the class in payment of losses: Dwellings——Collecfe Paid . Farm risks—Collected ... Hail insurance—Collected Paid ( $2,853,795 EEEEE—— 911,122 === 431,985 mErEE——— 148,749 mm 517,195 e 135,484 mmmm AND WHO GETS IT Again we use a one-inch line to indicate the collections of insurance companies, for the three classes of insurance named, in angsota for the same year, and the second line, much longer, indicates the amount paid out for losses: Miscellaneous manufacturing——({)ol!gcted Paid ~Railway risks—Collected ... Paid $737,02]1 E—— 30,179 m— 178,710 By Insurance Companies’ Own Reports - Let us look at another large class of business— fire insurance on mercantile. establishments.. In 1919 the fire insurance companies paid losses in Minnesota of $1,480,686. To enable them to pay these losses and to keep 45 per cent, the fire in- surance companies should have collected $2,692,156 and this should have been divided 55 per cent, or $1,480,686, to pay losses, and 45 per cent, or $1,211,- 470, to the insurance company for expenses, profits and reserves. But instead of collecting the $2,692,- 156, the insurance companies collected $4,182,965, and instead of having 45 per cent of their total collections for themselves, they had 65 per cent, or $2,702,279 more than they needed to meet losses. . The difference between the amount that they should have collected on the 45-55 per cent basis and the amount they actually collected was $1,490,809. Now the insurance companies will probably say in answer to this that 1919 was a good business year, that for this reason practically no merchants burned down their stores, but that rates had to be charged that would be high enough to add to their reserves, so that later, when merchants began burning their stores and stock of goods, the insur- ance companies would have enough money to meet increased losses. g - We have thus far accepted every theory of the insurance men—the theory that they had to keep 45 per cent of all the money they collected included —(though this is an extraordinarily high collection rate). For the sake of argument, let us accept this theory also.” The insurance men might also claim that it was necessary to charge a higher rate on dwellings in 1919, because owners might burn down their own houses! As a matter of fact there are very few established cases of a man burning down his own dwelling, in comparison to the fairly fre- quent cases of dishonest business men burning their places of business. But' supposing we even grant that people are - sometimes apt to burn down their own houses for the sake of the insurance (although the companies only pay about two-thirds of the value of the house) there is at least one class of insured property that has no “moral hazard”—that is, never burred down to make a profit. WHY SHOQULD A MINISTER BURN DOWN HIS CHURCH? The writer of this article would be willing to wager that no reader of the Leader, or any one else, ever heard of a minister and his deacons getting to- gether and deciding to burn down their church so that they might -collect insurance money. But take the item of “Churches and Chapels” in the Minnesota _insurance report. In 1919 the Minne- sota fire losses on churches and chapels were only $36,310. On the 45-55 per cent basis premiums of $66,000 would have been all that was needed to pay all losses and to give 45 per cent of the money col- lected to the insurance companies. The insurance companies actually collected $122,005 — twice as much as was needed to pay losses, on their own basis of figuring. Instead of taking 45 per cent of the total collections for expenses, profits and re- serves, and turning back 55 per cent to the churches, the fire insurance companies took 71 per cent for themselves, and turned back only 29 per cent to the churches—a smaller percentage than with any other line of business; although the “moral hazard” was altogether absent! d Let us take two o'ther;' classes-of business written by the fire insurance companies in which farmers are especially interested—*“Farm Risks” (separate from insurance on farm dwellings) and hail insur- ance. On “Farm Risks” fire insurance ‘companies paid losses of $148,749 in 1919. They should have ‘col- lected to meet these losses $270,453, They actually collected $431,985. On hail insurance the companies paid losses of $135,484. They should have collected (on the 45-55 basis) $246,335. They actually ‘collected $517,195, taking 74 per cent of the collections for themselves and turning 26 per cent back to the farmer. In North Dakota, with state hail insurance, the cost.of administration in 1919 was 3 per-cent. The insurer (the state) kept 3 per cent of collections and turned 97 per cent back to the farmers, in place of (Continued on page 14)