will be consulted and it is hoped that all will agree on a specific program which later may be referred to the National Convention of Insurance Commissioners for approval. With the support of insurance departments, and with the complete cooperation of rating organizations, of companies and of producers, it should be possible to effect a radical reduction in the loss arising out of this practice.

CONCLUSION

It is to be concluded that those responsible for the development of company organizations have, through years of experience, learned the most efficient methods of coordinating the various activities which are essential to the transaction of the business and of providing for the conduct of these activities.

The executives have had a perpetual incentive to discover the best type of organization because the expense of maintaining service is a factor which must be taken into consideration in the determination of rates and is, therefore, an item which must be justified to policyholders who eventually pay the bill and to insurance departments representing the public.

CHAPTER XII

STATE REGULATION

The insurance business differs from most other types of business in at least two important particulars:

1. In the first place, it is vested with a public interest. Insurance is an influence which tends to remove uncertainty from our daily existence and which underlies the entire structure of finance and commerce. It is in a class with public utilities—it affects everyone directly or indirectly and is a matter of public concern. This is particularly true of workmen's compensation insurance, the beneficiaries of which are workers who suffer as the result of the occurrence of industrial injury and those who are dependent upon them. Indemnity in these cases may mean the difference between poverty and decent existence.

2. In the second place, price fixing for insurance or "rate making," as it is termed, is unique in that the cost to the insurer of furnishing protection to the individual purchaser is not determined until after the insurance is sold, although in most other types of business the cost of each unit of a commodity is known in advance. This point is made in the following quotation:

The underwriter is selling indemnity against something that may never occur, so, however low his price, there is always some possibility that he will escape without a loss; at any rate he can gamble on the chance. What corresponds to the point below which the grocer dare not go without a loss is the average loss experience on the class to which the risk belongs. But this is not easily ascertained; at any rate it does not stare the underwriter in the face in the same way that the buying price of sugar confronts the grocer.1

Both of these peculiar features of insurance have a bearing on the question of state regulation.

1 Report of Merritt Investigating Committee, Albany, N. Y., 1911, Assembly Document No. 30, p. 42.

Supervision in General. The social quality of insurance has led to the establishment of strict supervisory measures by means of which the state has sought to control the business so that it might be worthy of confidence. The administration of these measures is usually entrusted to a separate department of the government known as the "Insurance Department," although, in some cases, the department has jurisdiction over other matters such as banking. In such cases it will be known as the Department of Banking and Insurance, or by some similar descriptive title.

Massachusetts was the first state to organize an insurance department. This was done in 1855. Other states soon followed the lead of Massachusetts: New York in 1859; Connecticut in 1865; Ohio in 1867; Michigan in 1871. Today in every state or territory some department of government supervises insurance carriers.

The official in charge of such a department is known as the Insurance Commissioner or the Superintendent of Insurance, or by some similar title. His duties have been described as follows:

The duties of the insurance commissioner may be said to be threefold: First, to require that laws of the state are obeyed; second, to see that the citizens of his state are justly treated by the insurance corporations; and third, to see that the insurance corporations are protected when operating under authority of the department. Insurance dealings are with a large number of individuals, involve large accumulations of money, and demand an agreement, the terms of which are frequently misunderstood or misinterpreted, and the department entrusted with these responsibilities must demand justice for all parties concerned.1

The laws which the insurance departments administer clearly define the conditions under which an insurance company may be organized. Every conceivable precaution is taken to limit the business to organizations which are manned, equipped and financed in a manner which will make them worthy of patronage. A stock company must have adequate capital and surplus, a mutual company must have a certain guaranteed volume of

1 ELLSWORTH, HON. F. H., "The Progress of Insurance through Constructive Regulation," in Proceedings of the Fourteenth Annual Meeting of the Association of Life Insurance Presidents, 1920, p. 72.

risks, and other similar requirements are imposed by law in order that the companies may safely undertake the hazardous business of insurance. Furthermore, the law is not satisfied when the company is approved, receives its license, and undertakes the actual underwriting of risks. The observation of the insurance department continues and vigorous legal qualifications must be met periodically in order that the condition of the company may remain unimpaired. It may be limited in the amount of business it may write or in the amount of liability it may assume in an individual instance and it is continually under the scrutiny of insurance department officials so that its insolvency may be immediately detected if it becomes financially involved. It must file an annual statement of its experience which shows its assets and liabilities in detail, as well as how much money was received during the calendar year, how much was expended in losses and expenses, and how much was set aside to meet its liability for future loss and expense payments. This is known as the "annual statement" and its purpose is to determine the financial status of the company and whether it made or lost money on its underwriting. Periodically, each company is subjected to a thorough audit by examiners of one or more insurance departments. Reserves. In determining the solvency of a company, reserves are an important consideration. A reserve is an amount of money set aside for a specific purpose. The principal reserves are the "unearned premium reserve" and the "loss reserve," but there are others such, for example, as a "catastrophe reserve," which is an accumulation of funds to cover any large loss which would strain the normal resources of the company.

The "unearned premium reserve" is the unearned portion of the premium and must be classified as a liability inasmuch as it is held in trust by the insurance company and cannot, therefore, be considered its property. In workmen's compensation insurance, the premium, as a general rule, covers an insurance period of 12 months and is paid in advance. Thus the company receives an annual premium before any liability for losses has been incurred. As the policy progresses toward its expiration the company is said gradually to "earn" the premium until the period of coverage is completed, when the entire premium is

"earned." The company at any given time has earned that proportion of the premium which is represented by the ratio of the time during which the policy has been in force to the total period for which the policy was written. For example, if a workmen's compensation policy is written on Jan. 1, 1924, one-half of the premium will be earned at the expiration of 6 months of coverage on May 31, 1924.

The loss reserve in workmen's compensation insurance is that amount which, with earnings from interest, is sufficient to mature the outstanding obligations arising out of the injuries of a given period. Since the obligation of satisfying all claims and of meeting all expenses on account of injuries occurring during the policy period is assumed in the contract, the loss reserve is essential. Claims and expenses arising from injuries may require disbursements for many years after the expiration of the policy term. In New York, where life pensions are payable in certain cases, it may be years before a liability of this sort can be liquidated. The loss reserve is designed to meet this deferred liability for future payments and its adequacy is therefore a matter of serious importance not only to the beneficiaries, but also to the policyholder whose legal liability is involved.

The legal or statutory loss reserve requirements vary but it is usual to require, for the latest years, a certain percentage of the premiums as the reserve against future loss payments. This percentage, usually 65 per cent, is applied to the gross premiums, after which the losses actually paid are deducted. The remainder is the loss reserve and is carried as a liability.

It is provided, however, that the carrier may itself determine the outstanding liability by having its claim department establish reserves in each individual case. This is a more accurate method inasmuch as the amount of the reserve in the individual case is determined with reference to the conditions which are revealed by a review of the files, and it follows that the aggregate result will therefore, better disclose the actual liability. Instead of a very rough approximation, this method produces a fairly reliable estimate although in the very nature of things the reserve in either case can never be exactly correct. If this reserve exceeds the legal reserve, the carrier may elect to set up and carry as a liability a