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57,4


55.8


Farmers Town

Total


1

' 57.4


69. l| 61.0


83.0
72.0


:.:...l79:i

63. 2i 69.2


iiio


77.4
66.4


*73.'i


79.1
66.9


80.8

63.9 68.5



1909.



1910.



1911.



Stock Companies:

or Wisconsin ,

Of other states....
Foreign fire ,

Sub-total

Forelflrn marine...
Lloyds

Total

Mutual Companies:
Of Wisconsin....
Of other states...
City and viUaerc.

Sub-total

Interlnsurers

Farmers town

Total



Tot. 1 Wis '


41.4 27.8


48.91 41.3


48.0 45.8


48.5


41.1


49.4


63.6


69.3


53.8


48.6


41.3



43.8
50.4
49.1
50.0
55.3
69.1
50.2



54.4 .54.4



81.4

50.2
55.2
98.9
90.1
55



63.4



63.3



63.3



78.21
44.01
50.41



80
72. 2|



80.7
91.9
....I .59.7
72.3! 66.6



72.4
60. 7i



72.3



89.6
78.0



44.1
54.4
52.4
53.8
50.5
49.5
53.7



44.2
73.5



72.2
47.1



69.9



31.5
51.9
51.3
50.0
19.0
34.1



1912.



Tot. Wis



1913. 5 years.



Tot. Wis Tot. Wis,



49.31 29.1

52.9 40.7

51. 8> 38.5

52.5; 38.2

49.3 41.2

63.4, 87.6

49.8 52.5 88.2



61.2
87.6
69.3
71.4
60.4
79.7
76.0



39.9
25.1



25.3
61.9



26.1



49.6
58 3
51.2
52.7
75.2
80.8
53.3



44.9
29.1



47.5
60.9
60.7
58.7
2 "

88.0

73.0 81.2



29.3
42.1



26.9 45.8

35.2 52.0

34.6 50.5

34.4 51.5

65.6 55.8

22.4 66.5

84.5 51.7



10 years.



Tot. i Wis.



29.4
45.6
42.7
43.7
58.7
42.2
48.8



49.4
43.9



50.81 46.2 56.0

9.6 88.0 50.6

56.9 57

84.6 88.1 55.6

6.1 48.81 11.9

86.4 1 82.8

61.2 88.7 69.6 44.0



45.7
55.1
61.2
56.8
54.2
68.9
56.4



44.0
43.8



29.9
44.0
48.7
42.8
55.9
40.5
42.9



.54.8
53.4
56.8
55.5
11.9
81.8
69.2



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Report op the Commissioner of Insuranoe. xiii

The companies have been classified as stock and mutual com-
panies, a sub-total being given for the strictly stock companies
and a total being given for all the proprietary business in which
there is included with the stock companies the foreign marine
and the Lloyds. The stock company business in Wisconsin is
transacted almost wholly in the cities and villages. Very little
farm business is included in the business of the stock companies.
The mutual companies of Wisconsin and of other states, and the
city and village mutuals, cover largely the same class of business
as the stock companies. The farmers' mutuals have a practical
monopoly of all the farm insurance business.

Reduced Average Rate of Premiums — Reasons

The average rate of stock premiums per $100 for Wisconsin,
has shown a marked reduction in the ten year period, from $1.63
in 1904 to $1.04 in 1913. In 1904 the average rate for the same
companies throughout the United States was $1.11, and in 1913
it was $.97. The average rate for the ten year period for the
total business of all these companies was $1.04, and for the Wis-
consin business $1.26 per $100 of insurance.

This decrease of Wisconsin premium rates is more apparent
than real. The rates in 1904 were exceptionally high, being ex-
ceeded only by a rate of $1.69 in 1896 and a rate of $1.68 in
1903, to which the rate had risen from $1.03 in 1879 and $1.09 in
1880 and in 1870. The general introduction of sprinkler equip-
ment in larger manufacturing and mercantile establishments
during the ten year period, with the consequent reduction in
these rates to from one-half to one-tenth of the previous rates,
has had a marked effect in reducing the average rate.

This is one of the few forms of fire insurance where there is
real competition in the rates made to the insured. This compe-
tition is offered by the New England Mill Mutuals and is actively
met by the stock companies. Furthermore, the increasing use of
the co-insurance clause, with the consequent increased propor-
tion of insurance carried to value, results in another large re-
duction in the average rate. Other reductions have been made,
especially in dwelling house premiums, but notwithstanding the
average reduction in premiums there has been little or no reduc-
tion in a great mass of the premiums not affected by these con-
iiderationfl.



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xiv Keport op the Commissioner op Insurance.

A table giving in full the ratfe of preminins and rate of losses
paid to gross risks written for the total business, and for the
Wisconsin business for each class of companies for the years
1904-1913, inclusive, and for the five year and ten year periods
is given hereafter. (See table No. 2.)

DwELUNG House Rates

The failure to reduce dwelling house rates in this state in the
face of the recommendations of the Wisconsin Inspection Bureau
for over five years has been commented upon before. The excess
rate is still being charged in some cities and villages, among
which are Milwaukee, West Allis, Fond du Lac, Sturgeon Bay,
Black Eiver Falls, and others. The overcharge for dwelling
houses is the more subject to criticism in that this is a case where
the policies are small and where the property owner ordinarily
cannot afford to give much time or expense to an attempt to se-
cure competition or to enforce the correct rate. Hence, on this
class of business, which affects the great mass of the people, the
rates are ordinarily too high in proportion to other rates. The
companies also recognize that the business is the more profitable
by paying for it the highest commissions, ranging from 25% to
40%.

The action of the two large associations of companies in agree-
ing to a uniform scale of commissions with a maximum of 30% on
dwellings led to a demand on the part of the public, and of some
agents in Milwaukee, that the 40 cent rate there should be re-
duced. This department urged that such reduction be made at
least to the 35 cent rate charged throughout the rest of the state.
However, the reduction actually made was only to 371^ cents.
Even the 5 cent credit which had long been allowed generally
throughout the state for non-combustible roofs, had not been al-
lowed in Milwaukee before, but is now allowed under the new
schedule.

Milwaukee Dwelling Bates Excessive

In view of experience and rates elsewhere, the Milwaukee
rates would seem to be in excess of what the people there should
pay. Milwaukee has as efficient a fire department as any city
in the country, and its people are probably as careful as any in



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Report of the Commissioner of Insurance. xv

the conntry. While the people of Buffalo have been paying 25c
per $100 for their dwelling house insurance, the people of Mil-
waukee have been paying 40 cents, which just now has been re-
duced to 37Vl> cents, the Milwaukee overcharge being 60% on the
old rate or 50% on the new rate. The city of Buffalo has the same
population and for the past year shows practically the same num-
ber of fires and the same loss ratio as the city of Milwaukee.
There is certainly nothing in difference between the two
cities which would justify an excess charge of 50% for the dwell-
ing house insurance in Milwaukee. The only reason for these
rates is the fact that the companies in combination have made
the rates, and every company or agent doing business in the city
of Milwaukee has been compelled to submit to the rate so made,
and there has been, and is now, no legal authority to which the
policyholder and property owner can look for relief.

Insurance Expenses Exceed Losses — Both have Exceeded

State Taxes

The stock fire iiisurance premiums exceed the losses and in-
creased reserve for Wisconsin by over $37,500,000 in ihei ten
>ear period. This is what Wisconsin paid for expenses and
profits* of handling this one item alone. For the same period
the direct state taxes in Wisconsin, including all levies for clu-
cational purposes, were $23,120,937.

The excess of stock premiums over losses for 1912 was $4,400,-
000. The direct state taxes that year were $3,739,588. For
1913 the excess of premiums over losses was $4,800,000. The
taxes for that year were $2,566,711. This would even go far to-
wards paying the exceptionally high state tax of $7,655,318 for
1914. The comparison should also note that the insurance ex-
cess of premiums over losses was used for temporary expenses
and profits, while of the state tax of 1914 less than one-half was
used for administration and current educational purposes, and
over $4,000,000 was levied for permanent buildings and high-
way construction. The tax for fire losses and the larger tax for
the expenses of the insurance business as collected by the stock
fire corporations have thus both been in excess of the direct tax
levied for the state government.



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^vi Report of the Commissioner of Insurance



Expenses of Obtaining the Business

The largest item of expenses in the stock companies is the com-
missions and payments to agents in salaries and expenses, which
for the five year period averages $25.65 per $100 premiums.
This is an increase from the average of $25.15 in 1909 to an av-
erage of $26.30 in 1913. The stock companies of Wisconsin show
a decrease from $33.49 in 1909 to $31.56 in 1913, averaging
$32.37. The stock companies of other states show an increase
from $25.55 in 1909 to $26.61 in 1913, an average of $25.97. The
stock foreign fire companies show an increase from $22.98 in
1909 to $24.76 in 1913, an average of $23.94.

The acquisition expense is thus considerably over one-half of
the total expenses of the companies. The Wisconsin stock com-
panies show the lowest expenses for rating, being 37 cents per
$100 premiums, the stock companies of other states following
with 95 cents, and the foreign fire companies with $1.24. The
Wisconsin stock companies spend $1.10 for inspections and fire
patrol, against 91 cents spent by companies from other states,
and $1.29 by companies from foreign countries.

Inspection Expense Yields Best Returns

It will be noted that the companies from) foreign countries
spend more for ratings and inspections, and less for commis-
sions, still making the aggregate expenses considerably less than
that of the companies from this country. The stock companies
of other states spend more for ratings and less for inspections
than companies of this state, but spend considerably less for
agents' acquisition expenses. The companies of this state spend
the least for ratings and the most for agents' acquisition ex-
penses. It thus appears that the older and better established
foreign stock companies give greater service in ratings and in-
spections, and as a consequence obtain their business at a lower
cost, and that this results in a very material ultimate saving to the
companies. At the same time, both their ratio and the bum-
mg rate per $100 premiums is materially less than that of the
stock companies of other states, while it is not as low as that of
the stock companies of Wisconsin, which, through the payment
of a high agents' acquisition expense, obtain a highly selected
class of business.

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Report ob* i^he Commissioner op Insurance. xvii

Comparative Wisconsin Overcharge Only Part op Problem

The foregoing comparisons clearly show that the premiums
charged by the stock fire insurance corporations to Wisconsin
are excessive. This may be corrected by such reductions as
will fairly bring the rates of premiums to losses for Wisconsin
to what it is elsewhere. Such correction should of course be
made on the classes now overcharged. This, however, is only
a part of the problem. The rates, as a whole, may be excessive
or they may be inadequate, and this involves an inquiry into
the profits, expenses and losses of the companies.

Stock Companies' Profits, Expenses and Losses

The stock companies probably have the greatest control over
their profits and a part of their expenses, and the least over
other expenses and losses. Space will not permit a full dis-
cussion of all the questions involved, but attention should be
directed to a few pertinent considerations. The element of
profit in the premium is a small item in comparison with the
expense element. It is, however, an important element to the
stock business in that it necessarily is the inducement for put-
ting the capital into the business. The control of the busi-
ness, and especially of the expenditures, may to som« extent
be an added inducement.

Stock Fire Insurance is Profitable

The statements of underwriting profits and losses published
by the companies might lead to the conclusion that they are
losing money. Such is not the case. Even during the ten
year period, including the San Francisco conflagration, the
figures show that the companies as a whole have earned a good
return on all the investment in capital and surplus. In these
statements of underwriting profits and losses, premiums are
compared with losses, expenses and increased reserve, and no
account is taken of the interest earned on the assets. This is
really the greatest source of profit. If companies can do the
underwriting at a small or no loss, they are assured of a fair
profit-
Ins. — b



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xviii Report op the Commissioner op Insurance.

Profits Come prom Policyholders' Unearned Premiums

The capital stock, the surplus, and the policyholders* un-
earned premium reserve, together are kept invested and yield
from 3% to 5% net above investment expenses and losses and
shrinkages in values. The surplus may be contributed or ac-
cumulated from past profits, and during recent years has been
nearly double the capital stock. The policyholders' reserve
has been nearly equal to the combined capital and surplus.
The latter is really the property of the policyholder, and the
earnings on nearly half of the assets are really a part of the
policyholder's payments for his insurance. This reserve will
average nearly equal to the annual premiums.

Investment Gain Double Interest on Capital and Surplus

Treating all the surplus as belonging immediately to the
stockholders, together with the capital, it will be seen that they
get interest on their own money and the interest on almost an
equal amount of the policyholders' money, even though there
is no gain on the underwriting. In most businesses a gain
equal to double the rate of interest earned on all capital and
profits would be considered satisfactory. In addition, the
companies have ordinarily, and especially in recent years,
earned an underwriting profit.

. Stock Fire Statements Omit Investment Gain

The effect of this omission is best seen by an analysis of a
statement of the National Board of Fire Underwriters sum-
marizing the results of the past ten years. The statement fol-
lows :

"Premiums 12,675,312,651

Losses 1,502,508,435

Expenses 1,029,963,802

Increase In liabilities 159,610,657

Underwriting losses ^6,775,237"

The statement omits the net investment income of about
$180,000,000, to which the interest earnings on the policyhold-
ers' unearned premiums contributed about $90,000,000 during
the ten years when the average capital was about $80,000,000
and the average surplus about $160,000,000.

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Report op the Commissioner of Insurance. xix

Average 6% Earnings Annually During San Francisco
Conflagration Ten Year Period

The exact figures for practically the same stock fire insur-
ance corporations reporting to Wisconsin for the ten years are :

Net premiums $2,445,697,711

Net losses paid 1,377,452,748

Increase in surplus 62,682,591

Dividends paid $176,368,258

Contributions to surplus 115,476,824

Net dividends paid 60,891,434

Average capital stock 72,868,925

Average annual surplus 141,318,662

The average annual dividend including the San Francisco
conflagration year, was thus 8.4% on the capital stock, or 2.8%
on the combined capital and surplus. The average annual
stockholders' net gain (in net dividends paid and increased
surplus) was 17% on the average capital stock, or 5.9% on
capital stock and surplus.

During the ten year period the average annual stockholders'
net gain (in net dividends and increased surplus) was 5.18%
of the net premiums or 9% of the losses paid.

Average 10^% Earnings Annually During Last Five Year

Period

The more normal last five year period, 1909-13, shows
largely increased profits, notwithstanding the great shrinkages
in values of securities in 1913.

Net premiums $1,322,827,514

Net losses 681,893,514

Increase in surplus 48,651,596

Dividends paid $100,470,369

Contributions to surplus 20 , 747 , 466

Net dividends paid 79,722,903

Average capital stock 79,643,543

Average annual surplus s 166,760,492

During the five year period the average net annual divi-
dend was 20% on the capital stock or 6.5% on the capital
stock and surplus. The average annual stockholders' net gain
(in dividends and increased surplus) was 32.2% on the capital
stock or 10.7% on the combined capital stock and surplus.



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XX Report of the Commissioner op Insurance

During the five year period the same net gain to stockhold-
ers was 9.7% of the net premiums paid by policyholders or
18.8% of the losses paid to the insured.

During the year 1913, which was marked by great shrinkages
in values, the figures are as follows:

Net premiums $278»971,162

Net losses paid 147,144,688

Increase in surplus 6,263,605

Dividends paid »23,491,620

Contributions to surplus 6,125,662

Net dividends paid 17,365,968

Total capital stock 87,067,650

Surplus 173,531,281

During 1913 the net dividend was 19.9% on the capital
stock, or 6.7% on the combined capital stock and surplus. The
stockholders' net gain (in dividends and increased surplus)
was 13.5% on the capital stock, or 4.3% on the combined
capital stock and surplus. The same net gain to stockholders
was 3.9% of policyholders' net premiums, or 7.5% of losses
paid to the insured.

Additional Profit in Increase in Unearned Premiums

There is an added concealed profit in the unearned pre-
miums. The calculations of the unearned premium makes no
allowance for the fact that the larger part of the expenses in
placing the insurance on the books of the company is paid
when the policy is written, and that the risks can be rein-
sured for 60% to 80% of the unearned premiums, leaving a
gain to the company on such reinsurance of 20% to 40% of
the unearned premiums.

The New York Fire Investigation Committee estimated that
the amount of this profit in the unearned premium, which
would really go to increase the surplus, amounted on the aver-
age to 30% of the unearned premiums.

During the tep year period, the increase in unearned pre-
miums was $119,427,042. The 30% added profit would amount
to $35,828,112. This makes the total net gain to stockholders
(in net dividends, increase in surplus, and the 30% increase of
unearned premiums) $159,402,130, or an average of 6.5% of the



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Report of the Commissioner of Insurance. xxi

net premiums paid by policyholders, or 11.6% of the net losses
paid to the insured.

Daring the five year period, the increase in unearned pre-
miums was $49,227,148, on which the added profit on the 30%
basis was $14,768,144. This makes the total net gain to the
stockholders $143,142,643, or an average of 10.8% of the stock-
holders' net premiums, or 21% of the net losses paid to the in-
sured.

The increase in unearned premiums for 1913 was $11,280,033,
which makes an added profit of $3,384,010. This makes the'
total net gain to stockholders from all sources $14,486,373, an
average of 5.2% of the stockholders' net premiums, or 9.8%
of the net losses paid to the insured.

Real Profits to Stockholders

It thus appears that instead of judging the stock fire insur-
ance business by the so-called underwriting profits and losses,
put out by the insurance companies, the stockholders have on
the whole fared remarkably well. As against an underwrit-
ing loss of .62% for ten years or a gain of 4% for 1913, the
figures show a gain to the stockholders in dividends paid and
in increase in their surplus for the ten year period of 17% on
capital stock, or 5.9% on capital and surplus. For the five
year period the figures show a gain of 32.2% on capital stock
or 10.7% on capital and surplus, and for 1913, 13.5% on capital
stock or 4.3% on combined capital and surplus.

Cost to the Policyholder

The cost of the use of this stockholders' money to the policy-
holders appears from a comparison of the policyholders' net
premiums with the net gain to stockholders, including the sur-
plus concealed in increased reserve. For the ten year period
this was 6.5% of the net premiums paid by policyholders,
which increased for the last five year period to 10.8%. In 1913
it was 5.2%. As compared with the losses paid, the stock-
holders' gain for the tlen year period was 11.6%, for the five
year period 21%, and for 1913, 9.8%.



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xxii Report of the Commissioner of Insurance.

Average Profits Excessive — Largest Companies* Profits

Enormous

The foregoing comparisons of stockholders' gains to total
stockholders' investment in capital and surplus show profits
which would be considered very good for the most successful
business, while this includes all the companies in the business
during the years mentioned, successful and unsuccessful. The
profits shown are therefore enormous as shown by the profits
to cap:(tal stock, amounting for the ten year period to 17%, for
the five year period to 32.2%, and in 1913 to 13.5%, on the aver-
age for all the companies. Disregarding the increase in surplus,
the average annual dividend actually paid in the ten year pe-
riod was 8.4%, in the five year period 20% and in 1913, 19.9%.

The ten year period includes insurance losses of $150,000,000
in the largest conflagration the world has known. It is plain
that these losses have been more than recouped. The year
1913 was marked by large losses in investments. While opin-
ions may differ as to what may be reasonable and what may
be excessive profits, there is no justification for public claim
that the companies are losing money based on little under-
stood statements of underwriting losses and gains which ignore
the big element of interest earnings on policyholders' un-
earned premiums. The people are entitled to know the facts
as to the entire business transactions of the companies, and
may then form their own conclusions.

Greatest Profits to Largest Companies Offering Least
Proportion op Protection

The argument is made that large profits should be allowed
for the conflagration hazard. The figures disprove the claim
that the large companies are carrying this burden. The fact
is that the largest companies furnish no more than their pro-
portion of security, and are taking the big end of the profits.
An analysis of the thirteen largest stock companies in the United
States and the two largest foreign companies, each having as-
sets in excess of $9,500,000, shows that these companies, doing
about one-half the total business, absorb two-thirds of the profits.

A table and statement analyzing the situation of the largest
companies is given hereafter. (See tables Nos. 9, 10, 11.)



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Report of the Commissioner op Insurance. xxiii

Expenses

On the whole, the expenses of the stock fire insurance cor-
porations are about 40% of the net premiums paid. In the
order of the amount expended the expenses are : commissions
and other payments to agents in salaries and expenses, home
office expenses, taxes, fees and licenses, adjustments, rates and
inspections. The taxes are a subject over which the compan-
ies have little control, and undoubtedly the small item of ad-
justment expenses, averaging 1.17% of the net premiums for
the stock companies during the last five years cannot be ma-
terially changed. The amount expended for ratings during
the same period also averages only 1%.

More Should be Spent for Ratings and Inspections

Undoubtedly this amount could properly be increased in the
interest of securing the fairest apportionment of fire insurance
tax, and also of securing a better understanding by the insured
of the hazards for which he pays. The item of expenses for
inspections, averaging .44% for the five year period, is much
smaller than it should be for efficient service. Even increased
by the payments for fire patrol it is only 1%. As will appear
hereafter, this item of inspections and prevention work should
cover one of the most important services rendered in any in-
surance, and a material increase in this item no doubt would



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