Henry Rogers Seager American Academy of Political and Social Science.

Annals of the American Academy of Political and Social Science online

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in rates on the same risk. The objectionable feature of the law to
the companies was the extreme power seemingly vested in the
insurance commissioner. This phase of the subject is discussed
later.

State Rating Acts. Legislation of a more radical type speedily
followed the laws providing for revision of rates, in the form of
acts which create state commissions with power to actually fix rates
in the first instance which shall be charged by the companies. The
most noteworthy example of such a law is that of Texas.*^ In
tfie words of the Insurance Commissioner of Texas:**

If the state has the final say in the rate-making business, then I see no reason
why the state should not make the rate in the first instance. We have state-
made rates for fire insurance companies. We have a regular factory for making
these fire insurance rates. The employes in that factory devote their eaiiie time
and attention to the study of the rate-making business. We have very experi-
enced men employed in the department, about twenty-five in number, there

^•See 0. g.f Arkansas, Laws 1013, Act 159.

*• Kansas, e. g., Laws 1909, Chap. 152.

^ Texas, Laws 1910.

** Natunud Conmnium of Innarcmce Comtnissianert, September, 1915, p. 162.



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Ids l^E Annals of thb Amsbican Acadbmy

being appiopriated $100,000 annually for the payment of the e^Mnies of maUng

rates.

An act enabling similar action in Kentucky was the cause of
considerable difficulty in 1912, which will be referred to later.

CriHcism oflStaie Rating Acts, The dissatisfaction of the com-
panies with the Kansas act providing for a revision of rates by the
insurance commissioner afforded an opportunity for the most
important of recent decisions affecting fire insurance rates.^ The
law was attacked in the courts on the ground that fire insurance
was a business of a private nature and that the law consequently
was unconstitutional, amounting to an interference with the right
of private contract, guaranteed by the Fourteenth Amendment.
The majority decision held that "a business, by circumstances and
its nature, may rise from private to be of public concern, and be

subject, in consequence, to governmental regulation

Contracts of insurance, therefore, have greater public consequence
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 act in
question was consequently held to be a valid exercise of the police
power of the state. A strong dissenting opinion deplored the possi-
bility so created of opening the way to state price-fixing with respect
to many other kinds of articles and service.

But the acts which provided for rates actually made by the
state occasioned the greatest consternation in the insurance fra-
ternity, the results of which were most strongly evidenced in the
case of Kentucky, where such a law was passed in 1912. After
suggesting that this power be given to the Insurance Commissioner
rather than to a state commission the companies threatened to
withdraw from the state in a body. By March 9, 1914, twenty
companies are reported to have withdrawn and by March 10,
fortynseven companies had left the state. Meanwhile several
events had concretely illustrated the prime necessity of fire insur-
ance. A $150,000 fire occurred at Hodgensville in which twenty-
three buildings were destroyed while covered by only $50,000
insurance. Most of the owners were unable to build without reim-

» German Alliance Ins. Co. v. Barnes, 189 Fed. 760 (1911), and Gennaa
Alliance Ins. Co. v, Lewis, 34 Sup. Ct. 612.

** German Alliance Ins. Co. v. Lewis, pp. 618, 619, 620.



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FlRB iNSURANCfi l8d

bursement for their losses or borrowing, and they were unable to
obtain loans without insurance protection. Louisville banks,
anxious about the security for their loans, began to inquire how
much insurance was carried by their borrowers, how much matured
each month, and what arrangements for its renewal had been made.
Loans were outstanding on storage receipts representing alcoholic
liquor in bond to the amount of approximately $162,000,000. The
banks desired these loans liquidated if further insurance could not
be obtained. Commercial credit was restricted .by banks, whole-
salers and manufacturers." The pressure by business interests was
so great that it was necessary to hold a conference to determine
upon concessions which would enable the companies to resume
business, and in June, 1914, an agreement to the following effect was
reached: (1) Suit would be entered to test the constitutionality of
the law and the Insurance Board would not enforce the provisions
of the act imtil the question of constitutionality had been decided
by the courts, (2) a committee should be appointed to make a
study of rate laws with a view to formulating legislation on this
subject, (3) all companies which had withdrawn from the state
were to be permitted to resume business there without penalty,
(4) rates would be reduced by the companies' Actuarial Bureau
wherever improvements were made, and (5) a Business Men's Com-
mittee guaranteed the faithful execution of the agreement. The
companies accordingly returned to Kentucky and the Circuit Court
on June 12 held the act to be unconstitutional.

The following arguments have been advanced as showing the
inadvisability of a state rating law. Some of them also apply to
laws permitting the state to revise rates. «

1. They interfere with freedom of contract in a business which
is of a private and not a public nature.

2. It is unfair for the state to limit the amount which the com-
panies may collect in premiums, without guaranteeing them against
loss.

3. It is unfair to require the companies to contribute by taxa-
tion to a state rating board which may be of no benefit to them or

* See the insurance periodicals of this period, for instance, the United StaUt
Enieuff March 12, 26, April 23, 30, 1914. A very similar situation developed in
South Carolina in 1915-1016, the outcome of which remains to be seen.



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190 Thb Annals of the Amdbigan Acadbmt

the public and may be more costly than their own private method
of fixing rates.

4. Political influence may exert a power. In this connection
the words of the insurance commissioner of a state where a rating
law is in force are interesting. " The law should be framed so as to
eliminate politics from the board. If they can keep politics out of
the board, in my opinion the system will be a success." ^

5. State management is usually inefficient. This argument
(often merely a broad assertion) may be dismissed immediatelyi as
being no more applicable to insurance than any other subject, even
if true, which is open to question.

6. The inequalities and lack of relation present in state and
local taxation afford a presumption that the fire tax will be improp-
erly distributed under the state's supervision.

7. If the state assumed entire control of the business it could
not accomplish its objects judging from the failure of state insur-
ance in other countries to reduce rates or yield a profit. What can
be accomplished then by merely fixing rates, except to make the
companies bear the unjust burden of any losses which may result?

8. Average and distribution are bases of fire insurance and rates
cannot be correctly or safely fixed without them. Rates should,
therefore, not be founded on the experience of a single state. Never-
theless, the city of Austin, Texas, appealed to the State Insurance
Board for a reduction of rates on the ground that the rates of Austin
should be fixed upon the city's own experience and that citixens of
Austin should not be taxed to pay for fire losses elsewhere.

A statement of a state fire insurance commission claims the
following advantages for a state rating law:

1. The elimination of discriminations in favor of the large
insurer and in favor of certain localities and classes of risks.

2. A reduction in insurance rates:

(a) By improvements in cities causing reductions in thdr

key rates.

(b) By improvements in individual risks.

(c) By the removal of unnecessary hazards and the redac-

tion of hazards necessary to the risk.
, (d) By elimination of faults of management.

** John S. Patterson, Texas, Nai, Cofw. oj Ifu. CammiinMtn^ SsptsmlMr,
1915, p. 163.



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FnuD Insxtbancb 191

(e) By preventing insurance companies from advancing rates
when temporary conditions and bad losses in certain
localities make them desire to do so.

3. Stability of rates and schedules and accessibility of informa-
tion regarding the process of ratemaking.

Several obvious comments may be made regarding these
claims. The desirability of the elimination of discrimination cannot
be disputed nor the ability of the state to accomplish this denied.
Improvements in cities, in individual risks and in conditions sur-
rounding risks, however, could and did take place before the state
rating system was ever in effect. The rating schedules used by the
companies provided allowances for such improvements. With
reference to the success in preventing rate advances, it is hard to
see any equity in preventing advances in rates if such advances are
justified. Information regarding rate-making, however, is due the
public, and it is unfortunate that fire insurance rating bureaus,
local boards and associations did not sooner realize the necessity of
a campaign of education.

The principal advantages of the state rating acts were that
they fully admitted the necessity of having but one rate for each
risk, thereby endeavoring to secure the same result as the advocates
of cooperation, and second, the removal of certain evils which had
existed, and with which codperation had not sufficiently developed
to cope. But it is also evident that the possibility exists in state
rating laws for evils fully as serious as those which are removed,
especially political corruption, ignoring the principle of average and
inadequate rates. It is, therefore, legitimate to inquire whether
equally great benefits might not be obtained from legislation of
another character.

Regtdative StatiUes. At about the time state rating acts were
being considered in Texas and Kentucky, a New York legislative
conmiittee transmitted a report recommending that the companies
be allowed to continue codperative rating imder the regulation of
the state, and in 1911 a law was passed with the following important
provisions:*^

1. Corporations, associations and bureaus for suggesting,

*' New York, Laws 1900, as amended by Laws of 1011, Chap. 460, and Laws
1012, Chap. 175.



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192 The Annals of thb Ambrican Academt

approving or making rates to be used by more than one underwriter
are required to

(a) File with the insurance commissioner their articles of

agreement, by-laws and a statement of the names and
addresses of members.

(b) Submit to supervision and examination by the insurance

commissioner at his discretion and at least triennially.

(c) File rates and schedules at the request of the commis-

sioner.

(d) Keep records of proceedings and furnish the insured

with information as to his rate and a copy of the
schedule by which the same is computed.

(e) Provide means for hearing interested parties before the

proper committees.

2. Associations and bureaus are prohibited from

(a) Discriminating in rates; the commissioner may hear

cases and order discriminations removed.

(b) Requiring that all insurance be purchased from members

of such organizations.

(c) Requiring that rates quoted depend upon the placing of

the whole or a specified part of insurance at such rates.

A certain degree of progress in state action is apparent in legis-
lation of this nature, which permits cooperation by insurers, with
its attendant advantages, and on the other hand prohibits and
adopts means to eliminate the abuses which have existed. In 1913
two other states, North Carolina" and West "Virginia** passed
laws identical with that of New York, although North Carolina
has since added a provision for a hearing and examination of
rates and a decision regarding their fairness, leaving correction to
be accomplished by force of public opinion. But even more impor-
tant has been the endorsement by the National Convention of
Insurance Commissioners of the idea of regulated co(iperation.
One of its committees, after an investigation, came to the con-
clusions that,

1. Rates were at present made codperatively.

2. This co5peration exists in spite of attempts to prohibit it

» North Carolina, Laws 1913, Chap. 145.
*• West Virginia, Acta 1913.



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FiBB Insurance 193

3. The requirements of safety and economy both make inap-
plicable to insurance the anti-monopoly, anti-trust and anti-com-
pact laws looking toward unrestricted and open competition.

As a result of its investigation the committee submitted for
adoption throughout the United States six model acts,*^ as follows:

1. An act similar to the New York law just described, providing
for supervision and examination of rating bureaus.

2. An act prohibiting discrimination in rates and any require^
ment that the whole or any part of a risk be placed with certain
companies.

3. An act requiring companies to maintain and cooperate with
a public rating bureau, with equitable apportionment of expenses
and equal voice in its actions.

4. An act requiring a written survey of each risk specifically
rated by schedule.

Two other bills, favored by a number of the committee mem-
bers, were not adopted by the committee as a whole, viz:

5. Prohibiting agreements between companies except such as
are permitted by law, and

6. Authorizing the insurance commissioner to review rates and
correct the same, subject to court review.

The latter two acts are in the nature of concessions to existing
legislation, and as such a compromise with the principle of coopera-
tion with regulation.

A report to the National Convention in April, 1915,'^ indicated
that the first of these laws was in existence prior to 1915 in six
states, and was enacted in three additional states by April, 1915.
Laws prohibiting discrimination ^ were in force prior to 1915 in ten
states and three additional acts of this nature were passed by April,
1915. Act No. 3 had been passed in two states by April, 1915.
Massachusetts and North Carolina laws provide for a general review
of all rates with only the power to make recommendations. Kansas,
Kentucky and Minnesota have laws authorizing the insurance com-
missioner to review rates made by the companies and order the
proper rate substituted. Missouri authorizes the insurance super-

^ Natioiud Conyentioii of Insurance Commusioners, December, 1914, Pro-
oeedingB, pp. 1^24.

« N. C. of I. C, April, 1915, ProoeedingB, pp. 11-12.
*■ Not all following the model bilL



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194 The Annals of the American Academy

intendent to order rate reductions which will insure only a reason-
able profit to the companies. Oklahoma delegates similar power to
an insurance board. New Hampshire has long had a law enabling
the insurance commissioner to review rates and fix a reasonable rate
at which companies are required to write business under penalty of
a fine. Although existing laws are difficult to classify because of the
variety of their provisions," the following table** shows approxi-
mately the legislative situation with respect to fire insurance rates
and rating associations at the present time. Colunm A contains
^ the names of states having an anti-compact law, forbidding com-
panies or agents from combining to fix rates. Colunm B enumerates
the states in which an act providing for the supervision and exam-
ination of rate-making bureaus and associations is in force. Column
C shows the states in which there is an act prohibiting discrimina-
tion in fire insurance rates. Coliunn D indicates the existence of
acts requiring companies to be members of a rating bureau. Coluntm
E shows the various state acts permitting agreements between com-
panies relative to rates, subject to the approval of the insurance
commissioner. Column F shows the existence of acts providing for
the making of rates by the state. Column G indicates the acts
which authorize representatives of the state or state officials to
revise or compel revision of rates made by the companies.

A^ B Q» D E F Q



Aris.




Ari2.








Ark.




Ark."








Ga.




Ga.








Idaho


Idaho


Idaho


Idaho


Idaho


Idaho


Iowa


Iowa


. Iowa


Iowa




Iowa


Kan.










Kan.




Ky.


Ky.


Ky.


Ky.


Ky.


ik.




La.

Ma68.>








Mich.»


Mich.


Mich.


Mich.




Mich.*




Minn.


Minn.


Minn.


Minn.


Minn.


MiBB.













** For instance in Iowa the old anti-compact law was allowed to remain on
the statute books and in addition acts similar to the model bills Noe. 1, 2, 3, i,
and 6 were passed. In certain states some authorities still hold the anti-tnist
statutes to apply to insiurance companies.

^ Compiled from replies to inquiries sent to the state insurance departments.



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Fire Insubancb 196



A^


B


CM


D


E


F





Mo.


Mo.


Mo.
Mont.








Mo.


Neb.














N. Hamp.













N. Hamp.«


N.J.»


nVy."

N.Car.


N.J.
N.Y.
N.Car.








N.J.«

N.Y.


Okla.


Okla.


Okla.




Okla.






Qre.»
















Peniuk.


Penna.


Penna.


Penna.






S.Car.


S.Car.


S.Car.








S.Car.


S. Dak.«














Tenn.














Tex.




Tex.






Tex.




Wa8h.>


Wash.
W.Va.


Waah.
W.Va.








Wash.*


Wiac.»















^ In Wisoonain the law forbids companies from fixing rates and requires that
they be fixed by looal boards, composed of local agents.

'In South Dakota rates are made by a general inspection company and
associations and companies must file affidavits that they are not in an agreement
to maintain rates.

* Inspection bureaus may, however, be formed.

* Only where rates are discriminatory.

' A board constituted to hear cases and make recommendations — enforce-
ment depends upon public opinion.

* Only where the rate is so low as to endanger solvency.
' The courts have held combinations illegal.

* Applies only to companies not incorporated in the state.
*Upon complaint.

10 Companies are compelled to pay 125 per cent of any loss if members of a
taiifiF association.

^ Law requires all rates made under the same schedule to be uniform.

u This compilation does not include general anti-trust acts, not specificalfy
enumerating insurance, which exist in many states, as previously described.
In Illinois a fire insurance combination is now being prosecuted by die insurance
superintendent under such a law.

^This compilation does not include so-called anti-rebate laws, prohibiting
agents from returning to purchasers of insurance any portion of their commission
for writing the business.

The following states and territories have no legislation of the
types considered: Alaska, California, Canal Zone, Colorado, Con-
necticuty Delaware, District of Columbia, Florida, Hawaii, Illinois,



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196 The Annals of the American Academic

Indiana, Maine, Maryland, Nevada, New Mexico, North Dakotai
Ohio, Philippines, Porto Rico, Rhode Island, Utah, Vermonti
Virginia, Wyoming.

Results of Rbgxtlativb Legislation

The tendency during the past two years has been unmistak-
ably toward a type of legislation which recognizes the difficulties of
state rate-making and on the other hand shows appreciation of the
light of the public to be protected from arbitrary action and unnec-
essary inequity. The advantages of a statute combining the prin-
ciples of private cooperation and public regulation may be most
concretely shown by a review of the results where such a law has
actually been in existence.^ One of the oldest laws of this nature
is that of New York, passed in 1911 after a very thorough investi-
gation of fire insurance conditions. This state thereby became the
leader in this kind of fire insurance legislation as it was in certain
phases of life insurance legislation some years ago. The results of
its activity were as follows:

1. As shown by the map on page 177 four rate-making asso-
ciations operate now and have for some time operated in New York
state. One of the results of delegating the power of supervision to
the superintendent of insurance was to bring about cooperation and
harmony of action among these associations. While the first impulse
in this direction came from the state, the associations readily re-
sponded and brought about mai^ reforms on their own initiative.
Frequent meetings of managers of the respective associations
resulted in the adoption and promulgation of uniform rules, prac-
tices and forms. Thus the conditions were removed which occa-
sioned the statement by an investigator in 1913 that ''no one person
is familiar with all these rules and until recently there has been no
systematic attempt to collate them." ••

2. Along with the former diversity of rules went non-uniformity
in rates. A second beneficial result of the work of supervision has
been to gradually eliminate inconsistency in premium chaiges.
Variance between rates on risks of the same degree of hazard but

** A considerable portion of the data for the following statemeats was ob-
tained from a letter to the author by Hon. J. L. Phillips, Superintendent of Inmr-
ance of New York.

** See Fire Underwriters* Aasociations in the United States, pp. 41, 42.



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FiRB INSX7RANC2 197

located in the jurisdiction of different rating associationsi inequali-
ties in rates charged by the same association' on similar risks in
different portions of its territory and unjust distinctions between
different classes of risks were all considerably remedied. It is stated
that it was not necessary to make frequent application of the power
vested in the superintendent of insurance, its mere existence accom-
plishing the desired results in most cases.

3. As has been previously stated cooperation has been a status
favorable to the development of a science of fire rating, one of the
most important phases of which development was the supersedence
of "judgment rating" by "schedule rating." The New York law
has encouraged this. Dwelling and farm schedules have been de-
vised with the resultant advantages of schedule rating, all of which
cannot be enumerated here." It is sufficient to say that thereby
discrimination is more surely detected and avoided and property
owners are made more fuUy aware of the deficiencies of their
property. Thus the law seemingly offers no check to the preventive
and protective functions of the associations.

4. To some degree the law has resulted in sati8f3dng the well-
nigh universal desire for lower rates. During the first few years the
orders to remove imfair discriminations resulted in a considerable
saving in premium, to an amount suggested by careful estimates as
$1,000,000 per annum. In many cases the removal of discrimina-
tions resulted in readjustments which lowered some rates and
advanced others, without extensively reducing the total premium
income obtained on the class as a whole. Unascertainable saving
in premiums resulted also from owners remedying property defects
which were indicated.

Conclusion

In many directions the legislators have sought a method of
removing unsatisfactory conditions among the agencies engaged in
fire insurance rating, sometimes recognizing the fundamental prin-
ciples governing the business of furnishing indemnity, but often
ignoring or being ignorant of such principles. The statutes passed
and considered have been prompted by a variety of motives and
have had a variety of effects, but there is faintly discernible in
early years, and distinctly apparent in later years, a tendency to

•' See F. C. Moore's Univenal MercarUOe Sehedtde, p. 8.



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198 The Annals op the American Academy

recognize, in a measure, the benefits of co5peration. The com-
panies as well as legislators and officials have made mistakes, but
many in both groups seem now to see a method of procedure which
affords a solution of the difficulty. One of the principal agencies of
late years in bringing about a more rationed treatment of the
problem involved has been the National Conventioii of Insurance



Online LibraryHenry Rogers Seager American Academy of Political and Social ScienceAnnals of the American Academy of Political and Social Science → online text (page 52 of 91)