The Organization Of Fire Insurance Companies
( Originally Published 1911 )
Methods of organization.—There are four methods of organization for insuring property from loss by fire. An individual may undertake the risk; it may be undertaken by a group of individuals, commonly called Lloyds; it may be undertaken by a mutual company; or it may be undertaken by a stock company. It is very seldom in the United States to-day that any individual assumes the responsibility alone. There are, perhaps, individuals who are members of Lloyds that undertake such risks, but these are exceptional cases. Individual underwriting has practically passed away.
Lloyds.—The general name "Lloyds" is applied to a London organization that originated in the seventeenth century at the Coffee-House kept by Lloyd. This particular coffee-house was an attraction for men principally interested in shipping and foreign trade. The insuring of one anther's property became as much a part of their business as their individual dealings in merchandise. Naturally when a group of individuals arose to undertake the specific business of insuring property they would resort to the place where customers were to be found. This place was Lloyds' Coffee-House. The coffeehouse has long since passed away, but the name Lloyds has become a part of the common language of insurance, and out of it has grown the famous organization known as Lloyds of London.
This organization does not insure property itself any more than the Stock Exchange, as an exchange, buys or sells stocks. To become a member requires certain qualifications ; such as a deposit of a certain sum of money. As the number of members has now become quite large a set of rules has grown up for their guidance almost as minute as the regulations of any business exchange.
Lloyds of London does no insurance business, but it furnishes a room for meetings or a general place of business where the members may conduct their affairs. In addition to the headquarters, it has the most complete system in existence for the survey of vessels, with agents in every port to flash the news of their arrival and departure.
Out of hundreds of members some underwrite as individuals, others as groups, and still others form a distinct group with one acting as attorney or agent having the power to sign for all.
It is possible at Lloyds to insure almost anything, though marine business is dealt in to a larger extent than any other form of insurance. There are, how-ever, certain groups which continuously underwrite risks against fire in the United States and other parts of the world. They may underwrite surplus business which cannot be taken care of through regular channels, and they are at times active competitors with the regular companies in the different countries.
In the United States the tendency is to regulate such methods of underwriting, but even when regulated the underwriting is more or less by an individual, or group of individuals. Each individual assumes a certain part of the liability, but in the United States individual signatures are not taken, the group acting through an attorney.
Mutuals.—The mutual form of organization is an agreement on the part of certain individuals, whether few or many, to reimburse any member of the group in case of loss by fire, it being understood that the sum to make up this loss is to be figured on a pro rata basis, each individual bearing the part he expects to receive. The mutual form of insurance is naturally the oldest form, since at first insurance was a part of the merchant's business and he assumed a portion of the risk of his fellow merchants and they assumed a portion of his whenever he sent a vessel to sea. The mutual form of insurance still exists and in two fields is quite successful. First, local mutual companies; and second, the so-called New England mutuals, which deal principally with large factories.
Stock companies.—Approximately 95 per cent of fire insurance is done by stock companies. As each country and state has its own laws for corporations, it would be almost impossible to give the law for all of them; but the requirements of New York, which has the largest number of corporations, may be cited as typical. These may be briefly stated as follows: Thirteen or more persons may become a corporation for the purpose of insuring dwelling-houses, stores, and all other kinds of buildings, household furniture and other property against loss or damage by fire, lightning, wind storms, and tornadoes. They may be incorporated for the purpose of insurance or re-insurance. To do this they must file in the office of the Superintendent of Insurance a declaration of their intention to form a corporation for the purpose of transacting such business, which declaration shall comprise a copy of the charter setting forth the name of the corporation, the place of location of its office, the manner in which the corporate powers are to be exercised, and its directors elected. A majority of the directors must be resident citizens of the state. In the case of a stock corporation the director must be the holder in his own right of at least $500 worth of the stock of the corporation at its par value. The method of filling a vacancy in the office of director must be set forth, the beginning and end of the company's financial year, and the amount of capital to be employed in its business. This declaration must not be filed until it has been published at least two weeks in a public newspaper in the county where the office is to be located.
The business of such corporation is strictly limited to fire insurance, and it is to be known as a fire insurance corporation. It may not deal in trade, or in the buying and selling of goods, except such as it may assume in the settlement of losses.
Upon filing the notice as previously set forth the subscription books may be opened and the same kept open until the full amount specified in the charter is subscribed.
The surplus from which dividends may be declared is that portion of the assets over and above the capital stock and the unearned premium and all other manner of indebtedness which the corporation may owe.
The directors, until the required amount of capital has been entirely subscribed, are responsible for the funds of the corporation.
Such in brief are the main steps to be taken in the formation of a fire insurance corporation.
Deposit requirement.—All states and a great many foreign countries require a deposit before permitting an insurance corporation to issue policies. In the State of New York there must be deposited with the Superintendent of Insurance the sum of $200,000, or stocks, bonds, or acceptable securities representing that amount, before insurance business can be transacted by a corporation chartered by the state.
It does not follow that each state requires a deposit. The fact that the deposit has been made in one state is frequently accepted by other states as equal to a deposit in their own state. It is, in fact, an exception for a state to require from an outside corporation a specific amount if the state in which that corporation is chartered requires a deposit. Nearly all states require at the present time a minimum deposit of $200,000.
How stock is usually sold.—In as much as $200,-000 is usually required as a deposit, and of course as only the income thereof is available to the company, it can readily be seen that a company could hardly start in business with the minimum capital only. It is customary to place the stock of the corporation at a premium, possibly at $125 for each par value of $100, the $25 above par furnishing the working capital to pay the expenses of the corporation and the means of beginning business. Of course, if the company's original capital is larger than $200,000 this may not be necessary. At the same time, as losses may occur very early and the company may permit its capital to be impaired to a slight extent only, these few losses may serve to ruin it and to cause it to cease writing insurance until the impairment is made up.
The general opinion now is that a company to be successful should, when organized, have its stock sold at a premium, this premium to furnish the working funds.
Organization.—The organization of a stock fire insurance company is similar to that of any large corporate body. The chief officer is the president, though the representative chief officer of the foreign companies in this country is usually termed a manager. In addition to the president there are vice-presidents, of which there may be more than one, depending upon the amount of business done. Next comes the secretary. In many cases one officer is sufficient to discharge the duties of this office, but there may be one or more assistant secretaries. If an insurance company con-fines all its business to a single locality it would have no necessity for other offices than its head office, but the fundamental principle on which an insurance company is founded, namely, that its liabilities must be widely spread, leads to securing business from as wide an area as possible. This makes what might seem an unsettled business a settled business, since disasters are not likely to occur in more than one place within a series of years.
In the branching out of the business the company may undertake the entire management from the home office or may divide the country into districts, with a responsible head in charge of each district. Both methods have their advocates. The majority of companies follow the district method, having what are termed departments. Chicago, for instance, is the center for the Western department; San Francisco for the Pacific; Atlanta for the Southern; and New York for the Eastern. Hartford, a very strong insurance center, is the home office for several American companies and the head office of some foreign companies. The term "general agency" is usually applied to this division or department.
Owing to its nature the insurance business must keep as close a touch as possible not only with the insured but with its representative. With a general agent near the local agent a greater degree of confidence will be inspired in the local agent, since he feels that the difficult problems will be better understood by a general agent located near him than by one located at the home office in some distant state.
Special agent.—The special agent in the list of officers comes next to the executive officers of an insurance company. He is the connecting link between the head office and the local agent, or between the general agent and the local agent. He is the commercial drummer, so to speak, of the business. He supervises the local agencies, settles the losses—at least all important ones—is in touch with the general underwriting conditions in his territory, and is more or less familiar with the risks involved. Formerly he did a good deal of the rating, if not individually at least as member of a committee of other special agents ; but as rating has now become practically a branch of the business by itself, the special agent is relieved from that duty. In regard to loss settlements also, owing to the formation of general adjustment bureaus, the special agent has been partly relieved of that work, though not as much as in the case of rate-making. He still retains the vital connection between the company and the local agent within his territory; is best informed as to the business being done; the share his company is getting and the class of risk to be written; and is thoroughly familiar with the local conditions in any village, town, or city in his jurisdiction.
Adjuster.—After the executive officers the adjuster holds probably the most important position connected with an insurance company. Fifty per cent or more of the company's income is paid out in the form of losses, so it can readily be seen that an inefficient director of the loss department would cause a drain upon the resources sufficient to make a difference between the profit and no profit, if not to bankrupt the corporation.
Inspectors. Not ranking as high as the special agent is the inspector. Owing to the growth of manufacturing industries and the necessity for accurate information about the various manufacturing risks, general inspectors are required. It must be understood that notwithstanding the information the company may obtain through inspection bureaus, etc., there is still the necessity of an inspection by a company employee, if not in all at least in doubtful cases, concerning the risk.
Other employes.—The other employes of an insurance company are such as may be found in any other corporation. In the large city department there is a local secretary in charge of the business for that city. Under him are the countermen, who meet the people desiring insurance, and who probably take care of a great majority of the cases, the more difficult ones going to higher officials. Then come the clerks necessary in any organization to perform clerical duties.
Work of local agent.—The local agent is an appointee of the company having the privilege of writing risks for the company within a certain territory, hence the name "local," but usually with a restriction as to the kind of business to be written. A company seldom gives to a local agent (unless he is a person of some years' experience and one of sound judgment) the privilege of writing all kinds of business without consulting the company. The local agent is generally paid by commission; hence it is to his interest to secure as much business as possible, since his remuneration depends upon his exertions.
It is very rare that the local agent is the agent for a single company; he may represent many others. As representative of an insurance company a large responsibility rests upon him, not only to see that his company gets its proper share of the business but that the business secured is desirable and profitable to he company.
Volumes have been written concerning the local agent and more will probably be written. He is held by some to be the most important employee of an insurance company. It is sufficient, however, to say that as the greatest part of the business comes through the local agent his importance should not be underrated.
The exact number of local agents in the United States is not known, but there are single companies having eight thousand or more. It can thus be seen that while there may be several companies represented by these eight thousand agents, their number throughout the States is very large.
In the larger centers the local agent is not usually engaged in any other business but devotes his time to the insurance agency. Outside the large cities his insurance business is usually united with real estate, law, etc. The large number of different companies' agents in a small community results in the business being divided; it is therefore generally profitable only as a side issue.
Responsibilities of local agent.—The responsibilities of the local agent can be readily understood when it is understood that the state courts have generally interpreted the knowledge of the agent as being the knowledge of the company, although certain limitations are placed by the company on the agent's authority.
The United States courts have not placed an interpretation so broad upon the agent's powers. The agent should bear in mind that whatever he does will generally be interpreted as though the company did it, hence the necessity for care in the discharge of his duties.
The local agent in his field may well consider himself an underwriter having complete jurisdiction. It is quite possible that he does consider himself in this light, and to such view is due some of his errors. It may seem reasonable that he should have unlimited sway within his own territory, but it should be remembered that no man, or firm, pays for his or its own insurance in the sense that he or it contributes a sum of money sufficient to pay that insurance in event of loss : each risk merely contributes a certain proportionate sum with hundreds of others and these various contributions, being brought together into the treasury of the company, serve as a fund to reimburse the few individuals who may meet with a loss. It is well to remember that the average rate of insurance is about $1, or 1 per cent on the property insured. Taking 40 per cent of this for expenses (which is about the average at the present time) 60 per cent is left to pay losses and maintain reserves. It is evident that before any single risk could pay in a sufficient amount to be reimbursed in event of a large loss this amount must be paid in through a long series of years. There are some cases, probably, such as firms in business for a long time, where the premiums paid equal the return in event of fire. These cases are extremely rare and are counterbalanced by the fact that from the minute that a firm takes out and until it discontinues carrying insurance, it has a claim, when a fire occurs, upon this general fund for reimbursement.
To the local agent a rate may seem all right, or a form appear correct, on a certain plant or risk, but he must remember that the plant or risk is only one of many contributing to pay the losses and that an undue advantage to one is an injustice to all. If this is borne in mind, it will suffice to make the local agent understand why a risk that he has written is not accepted by the company, or a form that he has passed comes back for correction.
Underwriting.—In many features and in a large portion of its work the fire insurance company does not differ from any other corporation. It is engaged in a distinctive work ; that of furnishing indemnity against fire. It issues its policies, which provide that if the party holding such policy suffers from a loss by fire he will be indemnified up to a sum not exceeding that stated in the policy, the amount of the policy being the limit of the indemnity obtainable from the company. It will readily be seen that in the general work of the corporation its detailed clerical work is perhaps not much more difficult than that of any other corporation; neither is the management of its finances more difficult than that of the finances of another corporation. Every moneyed corporation must of necessity have more or less of its income in a transitory state, either uncollected from the debtors or in the hands of agents or in process of transmission. The character of these financial matters, and also the safeguarding of the funds, do not call for higher ability than that required for similar service by any other corporation. Because of this fact it frequently follows that the underwriter of the company may not be the chief executive, or rather may not be the one in charge of the financial matters. The underwriter may be the secretary or the vice-president; in most cases he is the president. Whatever his office, there is always some one official in charge of this branch of the business who is held responsible for the acceptance or rejection of risks.
The underwriter does not see the papers in every case. As a matter of fact, he sees them in few instances; but he does, however, determine the class of risk to be accepted, the amounts to be accepted thereon, the amounts to be accepted in different sections of a city or state and similar important matters. It should be remembered by the student that underwriting is what the company is engaged in. Whatever else it does is incidental. It hopes to make a profit by furnishing indemnity, and to furnish indemnity certain risks must be assumed. Without the assumption of these risks there would be no income and there would be no profit. Because it is his function to assume those risks which will be profitable and reject others, the managing underwriter is the most important member of the company.