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ultimately greatly reduce the cost of the insurance. No at-
tempt will be made to analyze the home office expenses, though
undoubtedly large economies could be effected in this item, es-
pecially along with a reduction of the acquisition cost.

Effective Inspection Service op New England Mill

MUTUALS

The expenditures of the New England Mill Mutuals for fire
prevention work through inspections and surveys are strikingly
lar^e in comparison with their total expenses and losses. A
table is given hereafter which shows that during 1913 the larger
Mill Mutuals doing business in Wisconsin, collected in pre-
miums $11,481,659 and returned in dividends to policyholders
*'),'{92,4ir), making the net policyholders' payments, omitting



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xxiv Report of the Commissioner of Insurance.

interest, $2,089,244. The expenses for inspections and surveys
were $367,917, or an average of 17.61% of the policyholders'
net payments. (See table No. 8.)

Inspections the Real Service to Policyholders

The expenditures for inspections have ranged from one-
seventh to more than one-half of the losses paid. Many of
these policyholders feel that they pay the premiums as much
for the inspections as for the indemnity. Experience has
abundantly demonstrated that this service pays. This ap-
plies particularly to sprinklered business and the mutual prac-
tice has now been copied to some extent by the stock com-
panies. Notwithstanding differences in the property covered,
a comparison of the 17.61% expended by the mill mutuals
with the 2% expended by stock companies for ratings and in-
spections indicates the direction in which stock company ex-
penses must be changed to best serve policyholders.

Expense op Obtaining the Business

The commissions on payments to agents are considerably
over one-half of the total expenses of the stock companies.
For the five year period this averaged $25.65 annually per
$100 premiums. This increased from $25.15 ii\ 1909 to $26.30
in 1913. The stock companies of Wisconsin, which paid $33.49
in 1909, decreased to $31.56 in 1913, averaging $32.37. The
payments to agents in 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 companies show an increase from
$22.98 in 1909 to $24.76 in 1913, an average of $23.94 per $100
of net premiums. Tables giving the figures for each class of
company by years will be found hereafter. (See table No. 7.)

This is paid to get the business. Some of the business comes
to the agent. The rest he solicits. He writes the policy and
collects the premium. He makes changes and keeps track of
expirations so that the insured may be protected and that he
may hold the business when it is to be renewed. In addition,
the agent makes some inspections and assists in gome ratings.



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Report of the Commissioner op iNSURAKcfe. Mv

Excess Acquisition Expense Does not BENEip^T Public nob

Repay Agent

With fire insurance in universal use and practically compul-
sory and the rates generally established and maintained by the
companies in cooperation, it is doubtful whether the public re-
ceives a benefit from the work of the agent corresponding to
the expense. The trouble is not that the agent gets too much
for his work, but ttat under the present system much of his
work must be misdirected. The system of commission pay-
ments, which puts a bonus on the volume of insurance pre-
miums, does not of itself tend to encourage either the reduction
of rates or the reduction of the expenses and the losses which
make up the rate. The present tendency towards continued
multiplicity of the number of agents leads to a demand all the
time for higher and higher commissions, which attracts more of
the unfit, furnishes less and worse service, and increases the cost
to the policyholder.

Commissions and Qualifications

The continued increase in the rate and volume of commis-
sions merits serious attention. The companies themselves have
attempted to deal with this through agreements which, until re-
cently, unfortunately have not applied to the larger cities.
Commissions are now being reduced by agreement in the larger
cities, but city commissions have been kept very considerably
in excess of those throughout the rest of the country, so that
while the commissions throughout the country are generally
15%, 20% and 25%, they are in many of the larger cities still
20%, 25% and 30%, or more.

It is natural that agents should oppose reductions in com-
missions. On the other hand, the agents have generally fa-
vored restrictions upon the number of agents and the require-
ment of competency and qualifications from those who act as
agents. The reason is not so apparent why companies' man-
agers and state agents should oppose such requirements. In
neither group is there a general agreement. The consequence
is that little is accomplished toward remedying the situation,
and there is a growing feeling that present tendencies will con-
tinue until cheeked by legislation.



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xxvi Report of the Commissioner of iNStjRANCE.

Qualifications for Agents

The public is vitally interested in having the business of fire
insurance transacted by qualified agents. If the insurance
is not properly written, the property owner may not be fully
protected and disputes and litigation are likely to result.
Furthermore, the policyholder buys, or should buy along with
his insurance, service looking toward the prevention of fires.
It is plainly a part of the duty of the agent to see that the
policyholder has this service, and to personally contribute his
part. A committee of the National Convention of Insurance
Commissioners is investigating this question and it is expected
that recommendations for uniform legislation will be made in
time for introduction into the sessions of the legislature meet-
ing in 1915, and it is the plan of this department to try to se-
cure such a law at the coming session of the legislature.

United States Supreme Court Upholds Regulation of Fire
Insurance Rates

When the enactment of a law to regulate fire insurance rates
was before the last legislature, it was urged in opposition that
this could not lawfully be done by the state. This is not now
open to question. The right of the state to regulate fire in-
surance rates was definitely upheld by the Supreme Court of
the United States in the case of German Alliance Insurance
Company v. Kansas, 24 U. S. Sup. Ct. Rep. 612, decided April
20, 1914. The court there held that the business of fire insur-
ance is so far affected with a public iinterest as to justify legis-
lative regulation of its rates.

In discussing the question the court said :

Insurance Not Private, Involves Public Interest.

"To the contention that the 'business is private we have opposed the
conception of the public interest. We have shown that the business of
insurance has very definite characteristics, with a reach of influence
and consequence beyond and different from that of the ordinary busi-
nesses of the commercial world, to pursue which a greater liberty may
be asserted. The transactions of the latter are independent and indi-
vidual, terminating in their effect with the instances. The contracts
of insurance may be said to be interdependent. They cannot be regard-
ed singly, or isolatedly, and the effect of their relation Is to create a



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ttfiPORt OF THE Commissioner op Insurance. xxvii

tund of assurance and credit, the companies becoming the depositories
of the money of the insured, possessing great power thereby and charged
with great responsibility. How necessary their solvency is, is mani-
fest. On the other hand, to, the insured, insurance is an asset, a basis
of credit. It is practically a necessity to business activity and enter-
prise. It is, therefore, essentially dlfterent from ordinary commercial
transactions, and, as we have seen, according to the sense of the world
from the earliest times, — certainly the sense of the modern world, — is
of the greatest public concern. It is therefore within the principle we
have announced.

"The principle we apply is definite and old, and has, as we have
pointed out, illustrating examples. And both by the expression of the
principle and the citation of the examples we have tried to confine our
decision to the regulation of the business of insurance, it having be-
come 'clothed with a public interest,' and therefore subject 'to be con-
trolled by the public for the common good.' "

Insueance Contracts, Risks and Invbstmbnts Alrbadt Rsgttlated.

"It is oftener the existence of necessity rather than the prescience
of it which dictates legislation. And so with the regulations of the
business of insurance. They have proceeded step by step, dlftering in
different jurisdictions. If we are brought to a comparison of them In
relation to the power of government, how can it be said that fixing the
price of insurance is beyond that power and the other instances of regu-
lation are not? How can it be said that the right to engage in the
business ie a natural one when it can be denied to individuals and per-
mitted to corporations? How can it be said to have the privilege of a
private business when its dividends are restricted, its investments con-
trolled, the form and extent of its contracts prescribed, discriminations
in its rates denied, and a limitation on its risks imposed? Are not such'
regulations restraints upon the exercise of the personal right — asserted
to be fundamental — of dealing with property freely, or engaging in what
contracts one may choose, and with whom and upon what terms one
may chooser'

Insurance Rates Arbitrary and Monopolistio.

"We may venture to observe that the price of insurance is not fixed
over the counters of the companies by what Adam Smith calls the hig-
gling of the market, but formed in the councils of the underwriters, pro-
mulgated in schedules of practically controlling constancy which the
applicant for insurance is powerless to oppose, and which, therefore,
has led to the assertion that the business of insurance is of monopolistic
character and that 'it is illusory to speak of a liberty of contract' It
is in the alternative presented of accepting the rates of the companies
or refraining from insurance, business necessity impelling if not com-
pelling it, that we may discover the inducement of the Kansas statute;
and the problem presented is whether the legislature could regard it of



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XXviii tlEPORT OF THE COMMISSIONER OF iNSURA^dfi.

aa much moment to the public that they who seek insurance should
no more be constrained by arbitrary terms than they who seek trans-
portation by railroads, steam, or street, of by coaches whose itinerary
may be only a few city blocks, or who seek the use of grain eleyators,
or to be secured in a night's accommodation at a wayside inn, or in the
weight oH a 6 cent loaf of bread. We do not say this to belittle such
rights, or to exaggerate the eftect of insurance, but to exhibit the prin-
ciple which exists in all and brings all under the same governmental
power."



Effect of Decision

The eflfect of this decision clearly is to place fire insurance
rates on the same basis as the rates of railroads, telephone, gas,
light, and other utility companies. The decision also marks
a great advance in the position it takes in recognizing the fal-
lacy of the anti-compact, anti-trust and other anti-cooperative
laws, and that the economical and efficient conduct of the busi-
ness of insurance requires full cooperation between the com-
panies.

Uniform Laws on Fire Ratemaking

The National Convention of Insurance Commissioners has
for over a year been at work upon the question of formulating
a bill for uniform legislation regarding the regulation of fire
insurance rates. A special committee of the commissioners
have given to the question much time and study, and several
hearings and conferences with leading representatives of all
classes of companies have been held. These hearings have de-
veloped a marked distinction in the attitude on this question in
the Mississippi Valley states and in the Eastern states. In the
Eastern states the rates are made by ratemaking bureaus di-
rectly owned and controlled by the companies. The Missis-
sippi Valley states quite generally have laws prohibiting com-
pacts and agreements on the part of the companies with re-
gard to rates. As a result, rates have been made by so-called
independent raters.

Attempts to regulate rates by the state have gone to the ex-
tent of substituting for the anti-compact laws the right on the
part of the state to review the rates made by the companies ; to
order the removal of discriminations ; to prevent removal of dis-



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Retort op the Commissioner op Insurance. xxix

eriiniiiations by increase in the rate unless tlic increase is ap-
proved ; to fix the rate to be collected ; and in the case of Texas,
to the making of all the rates in the first instance by the state.
After a thorough investigation, the National Convention of
Insurance Commissioners has just recommended to the legisla-
tures meeting in 1915, six uniform bills for the regulation, by
the state, of fire insurance rates and rate-making. These recom-
mendations and bills are printed hereafter on pages Ixxxii — ^xciv.

Rate-making by Local Agents' Boards

The law providing for this is an anomaly and is peculiar to
Wisconsin. It makes possible a coercion of all companies and
agents into membership in the board, and enforces a compact
trust rate from which neither the companies nor the property
owners have any appeal. As witnessed in the case of dwelling
house rates, it has been a means of exacting from the great
mass of the people excessive insurance premiums. In all the
experience in Wisconsin, it is evident that only the exceptional
large insurer, giving special attention to the subject, has been
able to secure any advantages in reduction of his insurance
rates through the local boards. A change in this system was
recommended by the legislative committee of 1912. It cannot
be made too promptly in the interests of the people of Wiscon-
sin.

Legislation Required

Summarized, the legislation necessary to meet the situation
is:

1. The abolition of the power of local boards to make rates.

2. Authority to the commissioner of insurance to make ex-
aminations and report upon ratemaking bureaus.

3. A requirement that all companies be members of some
ratemaking bureau.

4. A prohibition of discrimination in rates, permitting, how-
ever, any company to vary from all the rates or the rates upon
any class of risks by such percentage as it may fix in a notice
filed in advance with the bureau.

5. A prohibition of all agreements between companies with
regard to rates or practices other than such as are in writing



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XXX Report op the Commissioner of Insurance.

and filed with the bureau, with authority to the commissioner
of insurance to nullify by disapproval any agreement contrary
to public interest.

6. Authority to the commissioner of insurance to review any
rate, and after hearing subject to court review, to order the
removal of discrimination or to fix the proper rate.

Railroad Commission Procedure Proposed

The proposed legislation is more fully stated in the outline
for uniform legislation printed hereafter. This should be
supplemented by such provisions as to administration and
court procedure for Wisconsin as will make the practice con-
form to that which has been so successfully worked out and
used in regard to the Railroad Commission of Wisconsin.

Losses and Fire Prevention

Under present conditions it is undoubtedly true that com-
panies have very little, if any, control over losses. It is for
the payment of the losses that the business is conducted.
Whatever reduces the losses should therefore reduce the cost
of the insurance or premiums.

If fires could be wiped out altogether, there would be no
need of fire insurance. However, as long as fires occur, even
though the number and the loss is greatly reduced, there will
be need of fire insurance to distribute the loss. The carrying
of insurance will continue and is an absolute necessity.

The fire loss is an economic waste. Insurance rejpays noth-
ing. It merely distributes the loss. Furthermore, there is
nearly always a loss of property and an interruption to busi-
ness, and possible loss of life, which is not compensated by the
insurance. It follows that a sound governmental policy must
not alone encourage insurance and insist on gfcrict ecdnotny in
expenses and moderate profits, but see that the fire waste is
reduced to the minimum.

Fire Prevention

It is cheaper to prevent fires than to pay losses. Fires, are
prevented by care. This care is merely good housekeepmg.
Except in a conflagration, construction has little to do with it,



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Report op the Commissioner op Insurance. xxxi

and even the faults of poor construction can be largely over-
come by the care incident to good housekeeping and keeping
property in good condition.

The Remedy

The first thing to be done in dealing with the problem of
fire losses is to obtain as full and exact knowledge, as possible,
of the causes of fires, the extent of probable loss, and the pos-
sibility of their prevention. A controversy has long been on
between underwriters and particularly between the under-
writers and the National Convention of Insurance Commission-
ers with regard to the compiling or furnishing by the com-
panies of classified loss statistics.

Uniform Classification Adopted

Through the joint action of the National Convention of In-
surance Commissioners, the State Fire Marshals' Association,
and the National Board of Fire Underwriters, a classification
list and method of gathering statistical data has been formu-
lated and adopted. The National Board of Fire Underwriters
is preparing to do the work incident to the gathering, tabulat-
ing and reporting such statistics as may be desired by the states
and by companies, rating associations and bureaus. On the
plan proposed it is intended to secure reports of fire losses and
of amounts of insurance written in each class, and to bring to-
gether and tabulate these reports for all the companies and
for the United States.

Continued Work Necessary

This classification is wisely restricted to a few classes. While
it is now based mainly on occupancy, no doubt it will gradually
develop into a close analysis of the hazards causing the losses.
A permanent provision should be made for continually revis-
ing and perfecting the schedule of classification to make it of
the greatest possible value for the location of fire hazards and
the prevention of fires as well as for the testing of the rates
»pd charges for the insurance.



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xxxii Report op the Commissioner op Insurance.

PuuLic Want Work Well Done

In this work the correctness of the original data is of the
greatest importance. As discussed elsewhere, this data can
best be furnished through the assignment of the property to
the proper class in connection with surveys and inspections for
ratings and perhaps fire prevention. The public will have
this work done and it must be well done. The results must be
made intelligible and freely placed before the public. If the
companies will do it in cooperation in connection with other
work, no doubt they can at this time most readily and eco-
nomically furnish the necessary machinery. They should have
hearty official cooperation. If they fail, the public must do it
for themselves.

Fire Prevention Laws

Beginning with the year 19J1, there has been a very consid-
erable agitation throughout the country, and especially in Wis-
consin, in favor of fire prevention as a means of reducing the
fire and insurance losses. A special legislative committee
which conducted public hearings during 1911 and 1912 di-
rected special attention to this subject. Legislation enacted
pursuant to its recommendation at the session of 1913 resulted
in the immediate establishment of a system of effective period-
ical inspections by the state fire marshal through the fire chiefs
in all cities and villages. The public attention directed to the
subject, and especially the recurring inspections, have greatly
improved conditions and removed temporary hazards, such as
accumulation of rubbish, defective wiring, flues, chimneys and
other carelessness which lead to the great mass of fires.

Fire Department Inspections

Wisconsin is the only state which has a general law requir-
ing periodical inspections throughout all cities and villages in
the state. In the enforcement of this law there has been the
most cordial cooperation on the part of the fire departments.
The effect is already marked with regard to business house-
keeping and care, and the work has undoubtedly had the effect
of saving hun^rec^s of thousands of dollars in fire losses.



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Report of the Commissioner of Insurance, xxxiii

To the credit of the fire departments it should be said that
this work has been done in most cases without additions to the
force or increase in the expenses to the cities. This means that
the cities are getting a greatly increasd value for the money
expended upon their fire departments. As the returns from
this work become more apparent and more fully understood by
the people, there is no doubt that city councils will generously
support and increase the appropriations made for the work.
It is cheaper to prevent fires than to put them out. The com-
munity is also richer for every fire prevented. Business is more
secure and certain, not to speak of property and life.

If the work of inspection be thoroughly done, and a consis-
tent program for reducing the fire hazard be formulated and
carried out, as time and the means available will permit, the
fire losses will not alone be reduced but the demand for equip-
ment will be materially reduced. Not the least advantage will
be that the increased interest in city planning and better build-
ings will make for more permanent, healthier and better cities,
attracting and benefiting residents and visitors alike.

Fire Department Dues

One of the changes making possible the progress in inspec-
tions in Wisconsin is the payment of fire department dues by
the companies to the cities and villages through the state. B}>
this means the local cities and villages are relieved wholly
from any expenses connected with the collection of these dues,
and the dues are paid in a lump sum to the local treasurers.

The state fire marshal is required to certify to the commis-
sioner of insurance the cities and villages which maintain the
fire department required by law. Fire department dues are
collected for all such cities and villages, and further certifica-
tion is required of all departments making the periodical in-
spections required by the law. If any department fails to
make such inspections, the fire department dues are withheld
for that year to be expended under the supervision of the state
fire marshal for inspections for such city or village.

During the past year 315 cities and villages shared in this
fund, amounting in all to $127,762.23. The amount was 2%
of the gross premiums paid. The amounts for the larger cities

Ins. — c

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xxxiv Report op the Commissioner of Insurance.

and villages throughout the state are sufficient ordinarily to
more than wholly provide for the cost of the inspections.
While these funds are quite generally paid into a pension or
relief fund, this makes it no less a payment to the city in that
payments to such fund really relieve the city from the burden
of making an equivalent contribution for the same purpose.
The largest amounts paid for the year are :

City Premiums Paid Dues

Milwaukee $2,091,745.90 $41,834.97

Superior 398,987.94 7,979.48

Racine 199,657.62 3,992.51

Madison 164,191.29 3,284.12

Oshkosh 160,156.28 3,202.63

Green Bay 134,435.76 2,688.82

Sheboygan 133,455.07 2,668.85

La Crosse 116,667.85 2,333.32

Wausau 104,451.66 2,089.12

Fond du Lac 97,662.31 1,953.00

Manitowoc 90,796.54 1,815.89

Kenosha 87,094.16 1,741.84

Eau Claire 87.026.71 1,740.54

Marinette 84,752.65 1,695.03

Appleton 73,865.39 1,476.42

Janesville 73,265.66 1,465.32

MerrlU 55,980.05 1,119.29

Edgerton 55.508.66 1.110.09

Beloit 55,056.75 1,100.84



Online LibraryWisconsin. Dept. of InsuranceReport → online text (page 3 of 94)