Encyclopaedia Britannica, 11th Edition, "Inscriptions" to "Ireland, William Henry" / Volume 14, Slice 6

by Various

Now it is clear that no office will contribute its skill and experience to such a common stock if the effect is to be that other offices may avail themselves of the information in order to undersell it. Consultation about rates and a common understanding necessarily involve a reciprocal obligation to charge not less than the rates thus agreed on; in other words, a tariff of rates is developed to which each office binds itself to adhere. The system tends to restrain and moderate the competition for business which inevitably and to some extent properly exists among the companies, and its value to them is manifest. But it is also of service to the insuring public. At first sight it might seem that free competition would suit the public best, and that a combination among the offices must tend to keep up rates, and to secure for the companies excessive profits, but a little consideration will show that this is a mistake.

It is an unquestionable truth, though one often lost sight of, that all losses by fire must ultimately be borne by the public. The insurance companies are the machinery for distributing these losses, nothing more. If the losses fell on them, their funds, large as they are, would speedily be exhausted, and the service which they render to the public would come to an end. To those who require insurance against loss by fire it must be a manifest advantage that they should have many sound and prosperous offices ready to accept their business, and no less able than desirious to earn or to retain the public favour by fair and liberal conduct. A necessary condition of this state of things is that the rates of premium paid for insurance should be remunerative to the offices, and the main object of the tariff system is to secure such remunerative rates.

This it endeavours to do by two methods—by an agreement as to what rates are to be charged, and by affixing such a penalty to dangerous constructions, substances and processes as to induce, if possible, a lessening of the danger. In other words, and reversing the order, it seeks to diminish the risk of fire, and to secure adequate payment for what risk remains. On the supposition that the offices are correct in their estimate of risks, the effect, and indeed the intention, of their rule is not so much to put money into their own coffers as to lessen the danger, and to save themselves in the first instance, and the owners of property ultimately, from the consequences of preventible fires.

These rules, as will readily be seen, must have powerful influences on trade and manufactures. Many individual warehouses and mills are, with their contents, insured for very large sums, £10,000, £20,000, £50,000, £100,000 and more. An additional charge of 5s. or 10s. % in respect of a supposed increase of risk may mean a payment by the owner of several hundred pounds a year, and may operate as a complete veto on some arrangement or some machine which it might otherwise be desirable to resort to. The occurrence of a few severe fires in one town, followed by an increase of insurance rates, may have, and indeed has had, the effect of driving some branch of trade to another locality, the seat of greater caution or better fortune. It is therefore obviously desirable that so important an influence should be exercised, not precariously or capriciously, but according to the combined wisdom and experience of those associations which may be supposed to understand the subject best, and which obtain their experience in the way that makes it perhaps of most value, by paying for it.

It is equally for the public benefit that rates of insurance should be fixed on some common scale. Suppose the system of unrestricted competition to be tried, the first effect will be a general and great reduction in rates. But it may be said, “So much the better for the insured; if the offices can afford this reduction of rate, it will only be a fair result of competition; if they cannot afford it, they will be the losers, but the public will gain; will the effect not be simply to reduce the rates to the paying point and no further?” This would be all very well if the paying point could be absolutely ascertained or determined in any way beforehand, but the rate comes first and the losses come afterwards. In other businesses prices are based on some certainty as to the cost of production, but in selling fire insurance the cost is not known till after it has been sold. In a free competition it is the sanguine man’s views which regulate the market price, and the rates therefore cease to be remunerative. The consequences are that some offices disappear altogether, others take fright in time to avoid ruin, though not to escape serious loss, persons who might establish new offices are deterred from doing so, the business gets the character of being a highly speculative and hazardous one, requiring extravagant profits to induce men to carry it on at all, and the public have to bear the cost. Unrestricted competition therefore is not for their advantage.

The combination for uniform rates has another beneficial effect; it serves to distribute the burden of losses fairly. If it is a just thing that cotton-spinners should bear all the losses that arise in cotton-mills, and not leave them to be borne by the owners of private dwelling-houses, or vice versa, it is well that the loss by each class of risks should be measured fairly. But, while the experience of any one office, taken by itself, furnishes a very imperfect criterion, each contributes its quota of knowledge and experience to the common stock, and the public get the benefit both of broad and trustworthy data and of that peculiar and intimate acquaintance with each different class of property or process which the conductors of one company or another are sure to possess.

No conventional or excessive rates can, however, be maintained for any length of time. Some member of the union is sure to perceive that popularity and profit may be gained by introducing a lower rate, if a lower rate is manifestly sufficient, or a new company starts into existence to remedy the grievance. It is to be remembered, too, that the directors and shareholders who control the offices are likewise insurers, quick to raise the question of how far the rates they have to pay as individuals are justified by the risks run; and if it cannot be shown that these rates are a true measure of the risk, offices are soon constrained by a sense of justice or by self-interest or by pressure from without to mitigate them. In short, the association is a union bound together by necessity and tempered by competition.

Adequately to measure the risk of loss by fire demands not merely reference to an extended experience but a watchful regard to current changes. While the profits of fire insurance business fluctuate considerably from year to year, and seem even to follow cycles of elevation and depression, the tendency on the whole appears to be towards a growth of risk, although excessive competition among offices prevents the rates from rising in proportion.

The Tariff system has steadily developed in minuteness of classification and in adaptation to wider experience, as well as to the changes in the character of many classes of risks by improvements in building and by the introduction Tariff difficulties. of new kinds of goods and machinery. The estimates of risk and the determination of premiums are largely governed by individual opinion and by competition, no amount of experience furnishing a statistical basis on which trustworthy predictions of average loss can be made. Hence it is only by constant co-operation among insuring institutions in the exchange and combination of their observations that justice can be done to them and to the public. The proper extent of this co-operation is easily attained where the business is free from all restrictions except those of the common law, as in Great Britain, and the competition of capital for profits is keen enough to keep the rates within reasonable limits. But in countries in which the government regulates the business in a more paternal spirit, and meddles with all its details for the avowed purpose of securing the safest and best public service, many difficulties arise. This is increasingly the case in several of the nations of Europe, notably in Austria, Switzerland and Germany.

But it is in the several states of the United States that the government supervision of insurance has most interfered with and modified the natural development of the business. In recent years, beginning with 1885, sixteen of these states have enacted legislation, dictated by the growing jealousy of corporate powers and privileges, forbidding fire insurance companies or their agents to combine in any form for the determination of rates. Companies have often been indicted, fined and deprived of authority to issue policies because of membership in associations for the purely scientific purpose of ascertaining their average experience. The courts have frequently narrowed in their interpretations the sweeping intent of such laws, but have generally sustained them as within the power of the legislature, and at the present time there is an overwhelming public sentiment in large sections of the country arrayed against every semblance of union or consultation among the companies upon the basis of their business. In several instances all the important insurance companies have withdrawn their agencies at once from particular states, and the business community has been sorely distressed for want of their protection. But the popular prejudice has not yielded to its demand, and the companies have never been able to maintain their own position with unanimity, the temptation to secure a vast business upon any terms being always too strong for some of them to resist. This form of legislation has beyond dispute increased the cost of insurance to the people, while it has embarrassed and disturbed the regular work of the companies.