( Originally Published 1911 )
Fire insurance defined.—Fire insurance is a pro-vision made by the insured for reimbursement in the event of a loss occurring by fire. On the part of the in-surer it is a promise to reimburse the insured for the loss that may occur. In making this promise, the insurer will take into consideration everything that may possibly increase the chance of a fire and everything that may decrease the chance of a fire, and, basing his calculation on these two sets of factors, will undertake the contract of indemnity and determine his charges and the form of contract.
Origin.—The beginnings of fire insurance are lost in antiquity. It is not known who was the first to promise reimbursement for a loss; that is, to do this in a way that corresponds with our modern contract of insurance. There was in the early ages doubtless some-thing approaching modern insurance, but it was not until 1667 that the business of fire insurance in its modern commercial aspect was founded. In the preceding year bad occurred the Great Fire of London; the greatest in history with the possible exception of that at San Francisco in 1906. Considering the difference in money values of the two periods the damage at London probably was equal to that at San Francisco.
17. Barbon and Povey: Nicholas Barbon was the first to open an insurance office in London (after the Great Fire) , and to him credit should be given for placing fire insurance on a modern commercial basis. An-other name should be linked with that of Barbon—Richard Povey; for, while Barbon led the way in the insurance of buildings, Povey about 1706 introduced the insurance of goods. These two names should be linked together in any consideration of the origin of fire insurance.
An experimental science.—Although two centuries have fixed the principles of fire insurance from a practical standpoint, the science of fire insurance may still be regarded as largely experimental. Special conditions existing in every particular case must determine whether property is insurable and what rates of premium should be charged. The conditions met by one generation of underwriters are not likely to be exactly duplicated in a succeeding age. The invention and installation of fire-detecting and fire-extinguishing apparatus necessitate constant changes in premium rates. Other conditions, too, may tend to increase or decrease the fire hazard. This means that fire underwriters must keep well abreast of the times.
As in the case of any science, the past of fire insurance must be studied if the present principles and practices are to be correctly understood. In this connection it should be remembered that the principles of fire insurance can more readily be grasped when compared or contrasted with those of marine insurance. Both forms are based on the same principle of indemnity for material loss. It is interesting to note that neither form differs essentially from those of a century and a half ago.
Early practices.—Fire insurance at first largely drew its practices from marine insurance which was at that time quite well established, its forms, laws, and customs being well crystallized. The development of the business in Great Britain was along normal commercial lines. At first it was conducted by individuals, later by a group forming an office, and finally by a corporation. The first corporations to be duly organized were the London Assurance, and the Royal Ex-change Assurance, both being granted charters in 1720. The Sun Insurance Office was the outgrowth of that founded by Povey in 1706 and is the oldest organization engaged in fire insurance.
United States—In the United States, prior to 1735, the business probably was conducted in a small way by individuals, but in that year at Charleston, S. C., a mutual company was organized that apparently had a prosperous existence for some years. This first company is not well known and only recently has come into the light. The Philadelphia Contributionship, founded at Philadelphia in 1752, of which Benjamin Franklin was a director, is the best known of the early organizations. Indeed, the latter company, which was a mutual, was for a long time supposed to be the first company organized in the United States. After the Philadelphia organization other companies in the next fifty years were organized at various points, such as Richmond, Va., Charleston, S. C., Boston, Mass., Norwich, Conn., New York City, etc.
In New York City no company appears to have been organized until 1787, although the business was fairly well established in other parts of the country long before that time. From 1800 the growth of the insurance business was very rapid, and generally sufficient to meet the needs of the commercial interests of the country. The only portion of the world, in fact, where insurance capital may still be lacking is in the so-called congested portions of the larger cities where the danger of a sweeping loss is such as to make capital extremely careful. Probably not until our cities are rebuilt with better safeguards will there be sufficient fire insurance capital employed to meet the needs of such congested localities.
Statistics.—Before considering the forms of organization and the details of fire insurance, it is better to glance at the general statistics of the business, in order to realize the amounts of the different items. All statistics quoted are based on the reports of the Insurance Department of the Stag of New York. There are some companies in the United States that do not report to the New York Insurance Department. These companies, however, are very small in comparison with the volume of business written, probably 95 per cent of the entire business done in this country being reported to the Insurance Department of the State of New York. The statistics of this department, being the most complete, are commonly used as a basis for comparison the world over.
Number of companies.—The number of stock companies in the United States reached a high point between 1871 and 1880, when 162 were engaged in the business. The record for the twelve years ending 1913 was as follows :
Year Number of Companies
1902 ..................................... 145
The number of companies that have engaged in and retired from business since 1860 is 1,000, representing a capital of $150,000,000. As the capital now invested is about one-half this sum, it will be seen that twice as much capital has retired from the business as has continued.
Capital.—The capital invested in this business has not varied a great deal, possibly not so much as might be expected, throughout the last fifty years, during which time the business has been fairly well established on this continent.
From 1860 to 1870 the United States companies had an average capital investment of $45,000,000; 1871 to 1880, $51,000,000; 1881 to 1890, $57,000,000; and from 1891 to 1895, $51,000,000. The following is the record for the twelve years ending 1913:
1901 ............................... $54,000,000
Investment of foreign companies.—The capital investment of foreign companies cannot be considered except as special deposits may be required. It must be remembered that a foreign company doing business in the United States considers such business merely as one of agency in the same manner that a company in Massachusetts might consider the business done in Albany as the business of the Albany agency. Hence, the funds which the foreign companies may have on deposit with the Insurance Departments or in the form of assets in their United States office do not represent the entire assets of the company, since the United States branch may call on the home office if necessary and likewise be called upon by the home office.
Volume of business.—In 1908 the risks written amounted to $30,232,055,437. Some conception of the growth of the business may be gained from the statement that between 1860 and 1870 the business done reached $36,000,000,000, hardly more for those ten years than that done in the single year of 1908; 1871 to 1880 the business written was $62,000,000,000; 1881 to 1890, $100,000,000,000; 1891 to 1895, $70,000,000,-000; and from 1902 to 1913, as follows:
Year Volume of business
Premiums.—A conception of the growth in the business may again be obtained by comparing the receipts for the single year of 1913 with $291,000,000,
It may be added that in the period of ten years from 1899 to 1908 inclusive the business practically doubled.
Losses paid.—This is the one item in the business of fire insurance that shows the greatest variation.
The sum paid out including the San Francisco losses of 1906 amounted to $230,000,000, a sum greater by one-third than the entire loss from 1860 to 1870 and an amount more than twice as large as that of 1905. It is well to study these figures and carefully to bear in mind that the companies may at any moment be called upon to pay losses similar to those of 1906.
The increase in 1904 (more than that of any other single year since 1896) was due to the conflagration at Baltimore, which entailed a net loss of about $39,000,000.
Rate of premium.—The rate of premium is the amount charged for each $100 of indemnity; and so far as each risk is concerned, there are the widest differences. A large fireproof office building may be written as low as five cents per year for each $100, and there are buildings (for instance sweat shops) which command a rate of four dollars for each $100 per year. Between these extremes nearly every rate is possible, although the average rate is not subject to very large variation.
In the ten years from 1871 to 1880 inclusive, the average rate was 94 cents ; 1880 to 1890, 98 cents ; 1891 to 1895, $1.06, and from 1902 to 1913, as follows:
Year Rate of premium
It will be seen that since 1903 there has been a slight tendency downward in the rate of insurance, probably contrary to the general idea concerning this matter. The importance, however, of an increase or decrease of one cent in the average rate of insurance throughout the country can be appreciated when it is stated that on insurance of $1,000,000,000, one cent amounts to $100,000 of premium, and on $30,000,000,000 an increase or decrease of one cent in the average rate means the in-crease or decrease of more than $3,000,000 in the premium receipts.
It may be surprising to know that the rate of to-day is much less than that of 1904, the year of the Baltimore fire, when it was 2 cents less than in the year pre-ceding. When San Francisco was destroyed the rate was lower than it had been since 1902, the increase after that date being very slight (a little over 2 cents) . The rate is now still lower than in 1906.
Dividends.—Only the data of the United States companies are available in describing dividends. Furthermore, foreign dividends are affected both by business done in this country and by what is done in all countries. For fifty years fire insurance dividends have averaged about 111/4 per cent on the capital invested. From 1860 to 1870 it was 10 per cent; 1871 to 1880, 11 per cent; 1881 to 1890, 10 per cent; 1891 to 1895, 10 per cent. Since 1896 the rates have been:
The greatest variation in regard to dividends exists among the individual companies, a meager 4 per cent in some cases, rising to ten times that amount in others. The decided gain in 1910 and 1911 represents final recovery from the Baltimore and San Francisco losses.
For the risk entailed, that is, the possibility of failure at almost any moment owing to a sweeping conflagration, the dividends have been on the average rather moderate, especially when it is borne in mind that the dividends were declared on the capital and that the capital at the present time is about one-seventh of the total assets of the companies.
Expenses.—When the expenses in fire insurance are spoken of, neither amounts paid for losses nor for dividends are meant, but only the sums of money the company is called upon to pay in addition to those items. The expenses, therefore, include commissions paid to the agent, salaries, printing, assessments for inspection and rating organizations, and every other item incidental to commercial business. This expense is properly divisible into two parts : commissions, and all others.
Practically all agents work on a commission basis, a few being employed on other conditions. The commission is the one item of expense showing a steady increase, as noted below:
Year Commission Percentage
This table shows that the commission has practically doubled since 1860 to 1870, running nearly 22 per cent at the present time as against 11 per cent for that decade. It has not fallen below 21 per cent since 1903.
Other expenses have not increased, but on the contrary have decreased. The expenses and commissions combined from 1860 to 1870 were 31 per cent; 1871 to 1880, 33 per cent; 1881 to 1890, 35 per cent; 1891 to 1895, 35 per cent; and from 1896, as follows:
Year Expense Percentage
1896 ..................................... 36.14
Deducting the commission from 1860 to 1870, which was 11 per cent, we find the expenses were 20 per cent. Deducting the commission from the commission and expenses combined, the expenses for 1903, 1904, and 1905, were 15 per cent, and for 1906, 1907, and 1908, 17 per cent. The expenses other than commissions have shown a decrease with the increase in business, the true economic result to be expected.