a large percentage of office regional agents, therefore, will restrict its field organization outside of the large cities in which general agencies or branch offices are located. There is no limitation upon the number of regional agencies which an individual company may appoint in a city or town in which it does not have a general agency or branch office except the limitation for the state.

Procedure. The Conference has effected a simple organization for administering the rules. There are two agency committees. One of these has jurisdiction over Greater New York; the other over the remainder of the country. Each committee functions in close cooperation with the New York Insurance Department and is provided with an executive staff to handle the details of the work.

Each company chief executive is required to file with the committees a pledge that he will, so far as the direct employees of his company are concerned, hold himself responsible for strict adherence to the rules of the Conference and that he will, by incorporating a clause in agency contracts or by other suitable means, secure a similar pledge in writing from the general agents, regional agents, supervising special agents, district agents and borough agents of his company. He must also register with the Conference every appointment of his company which carries with it a rate of remuneration in excess of the basic acquisition cost. Finally, he is required to file copies of his agency contract forms together with all riders and endorsements which are used in connection therewith.

With these data on record the agency committees are in a position to control the uniform application of the rules, to deal with complaints and violations and, in general, to maintain proper practices. They also observe the situation constantly for the purpose of suggesting modifications of the rules wherever conditions warrant such action.

The committees of the Conference have done excellent work and while it would be claiming too much to say that commission conditions throughout the country are perfect, it can be stated with assurance that a marked improvement is shown. In certain cities. where the situation has been intolerable for years there is today

little or no disturbance.

generally.

Much the same condition obtains

The voluntary effort now being made through the Conference to deal with this subject as a matter to be controlled entirely by the companies will be closely watched by everyone interested because it is generally conceded that, if this attempt should fail, the next step may be drastic regulation by statutory enactment in the several states.

CHAPTER XVIII

DISTRIBUTION OF "SHOCK" LOSSES1

The institution of insurance rests upon the paradox that uncertainties, when taken in the aggregate, produce certainty. It is the function of the insurance company to assume the individual uncertainties of its policyholders and, by pooling these, to commute them into a single and definite certainty. Such is the process which creates the confidence so indispensable to the transaction of the world's business.

As the insurance business is actually conducted, there are fundamental principles which must be obeyed if proper results are to be obtained. Perhaps the most important of these principles is that the paradox in question does not function unless applied to large exposures. It follows that the less frequent a given type of loss, the greater the spread of exposure necessary to absorb it. If a type of loss which occurs infrequently be also one of considerable magnitude (a "shock" loss), the requirement of broad exposure to permit its proper absorption with safety and certainty can be more readily appreciated.

As respects some of its obligations, an individual insurance company, particularly if its operations are limited, may stand in a position similar to that of any one of its policyholders. There is always the possibility that an extraordinary loss arising out of its transactions may seriously impair its financial status and possibly force it into insolvency. Even an insurance company may require means of relieving itself of uncertainty. In fact, there are cases where approximate certainty is not secured until the risk of abnormal loss has been distributed and redistributed to the uttermost ramification of the insurance business.

1 This chapter is, in large part, based on a paper by G. F. MICHELBACHER which appeared in the Proceedings of the Casualty Actuarial Society., vol. VII, pp. 235-266.

The methods employed by companies underwriting workmen's compensation and employers' liability insurance in providing for the distribution of these shock losses constitute an important phase of the casualty insurance business since the obligations assumed involve the potentiality of "catastrophes "1 of unlimited severity. There are few companies with sufficient resources to stand by themselves in this field. As a general rule, outside assistance is necessary for the attainment of desirable safety of operation. It is here assumed that individual companies recognize the existence of this problem and exert all normal means to safeguard themselves; that reserves and surplus are accumulated against unknown contingencies. But even though this be done, there are companies whose resources will not guarantee absolutely that catastrophe or shock losses will be absorbed without disrupting their operations. These are the cases where some method of distributing abnormal losses over an exposure broader than that provided by the resources of the individual company not only is desirable, but is necessary to the safety and welfare of the business.

Extent of Obligations Assumed by Insurance Companies.It is necessary for companies underwriting workmen's compensation insurance to cooperate in dealing with certain phases of this insurance. Many of the companies use a standard policy form with appropriate endorsements rendering it applicable to the legal conditions of the several states. The obligation under section one (a) of the Universal Standard Workmen's Compensation Policy refers to the employer's legal responsibility for payment of compensation. As compensation benefits are clearly set forth in the workmen's compensation statutes, the obligation, as respects the liability arising out of the injury of a single employee,

1 The term "catastrophe" may be defined as an accident which involves at least five death or permanent total disability cases. Catastrophies are presumed to result in shock losses. Shock losses may originate in other ways, however, as for example, where a verdict for injury to one individual exceeds $50,000, or where, under a workmen's compensation law with liberal benefits, the compensation allowed on account of injury to a single employee exceeds $25,000. There are many cases where the loss from an accident involving less than five persons reaches a sum which is substantial enough to warrant the use of the term "shock loss."

is limited, although the various statutes differ a great deal in the amount of compensation allowed. In some states life pensions are granted; in others the maximum compensation period is limited. In New Jersey, for example, compensation payments do not extend beyond a period of 400 weeks from the date of injury. There is, however, no limit to the number of claims which may result from a single accident. This is where shock losses originate. A gas explosion in a mine, the collapse of a structure, a fire in a factory building, a railway disaster, a boiler explosion, and other occurrences of this type involving the possible death or disablement of numerous employees, create hazardous situations for the company. And it should be noted that this hazard affects every insurance company, whatever its field of operations for, while the chance of shock loss is greater in some industries than in others, it is, even in the industries of lowest normal hazard, a potential source of trouble.

The obligation under section one (b) of the Standard Policy covers any negligence law liability which may arise out of accidental injuries sustained by employees of the assured. It supplements the workmen's compensation coverage and is intended to complete the provision for every contingency which may develop as the result of an industrial accident. Here, also, there are possibilities of catastrophe losses.

The situation is such that, even with the most careful underwriting, the individual company in workmen's compensation insurance assumes obligations which involve serious possibilities. "Prohibited lists"-lists of risks which the individual company will not assume under any circumstances offer some protection in that they permit the carrier to avoid certain extra hazardous lines. But the catastrophe hazard exists in some measure even though the operations of the carrier be limited to those industries which have the lowest normal hazard. In fact, it may be said that the lower the normal hazard, the greater the necessity for special provision for handling shock losses, for in these cases, while the abnormal losses occur infrequently, when they do occur they loom particularly large in relation to the normal premium income. Methods of Distributing Shock Losses. There are several methods whereby the company transacting workmen's compensa