Commercialism in Fire Insurance

Mr. President and Gentlemen,--

On December 31st, 1904, the property, real and personal, of the people of this country was insured against loss by fire in companies licensed to do business in Canada to an amount exceeding sixteen hundred and fifty millions of dollars (actually $1,657,712,753), and to secure indemnity for losses sustained by fire there was paid in cash by way of premiums to the companies operating under Dominion and Provincial charters nearly nineteen millions of dollars (actually $18,674,924), or over sixty-two thousand dollars for every working day of the year. Please observe that this statement applies only to the business transacted with licensed companies, for it is impossible to ascertain the amounts paid to the unlicensed companies, or to obtain information to justify a guess as to its volume and extent. Let us not pass over this statement without a due sense of its great importance. The figures are so large as to be almost meaningless even to business men; as a matter of fact, who can adequately comprehend what sixteen hundred and fifty millions of dollars really means? I wish to state this fact deliberately that we may obtain a clearer perception of the importance of Fire Insurance, for the more fully this is realized the more generally will it be admitted that, considering its importance, there exists a deplorable ignorance of the conditions that touch the subject at every point, and an equally deplorable indifference that is only excusable because of its universality.

Fire Insurance is the offspring of a great calamity. In 1666 the City of London, England, was visited by a conflagration that has had no parallel in times of peace, and compared with which none have wrought the havoc or caused such wide-spread devastation and ruin; more than 13,000 buildings were completely obliterated, with a financial loss of over $50,000,000, and the metropolitan city staggered under the blow. This calamity set men thinking, and in the year following clubs were started granting insurance not exceeding -1500 on a single risk. In the same year one Dr. Barbon (sometimes called Barton) " set up his office for insuring houses and buildings." History does not tell us which first entered the field, the clubs or the Doctor, nor have I suggested them with a view to a claim of precedence; I have stated them merely to record

1st. That Fire Insurance had its origin in a basic principle of mutuality; and

2nd. Of Individual Underwriting.

The clubs were mutual insurance concerns, the Doctor's office was his personal business. Please remember these two statements as you follow me in a chronological record. In 1680 after thirteen years of active business, Dr. Barbon's office merged into " The Fire Office," for some time known as " The Insurance Office at the back side of the Royal Exchange." Twenty-five years later the office changed its name and called itself the " Phoenix Office"-this is not the company now known by the same name and which last year celebrated its centenary anniversary of business life in Canada. The present " Phoenix " was established in 1786, but there is no information as to the date of the death of its namesake, whenever that event may have occurred. This is certain, that from 1680 to 1710, a space of thirty years, this was the only joint Stock Fire Insurance Company in existence, but at some time unknown, for causes unknown, it gave up the struggle and exists but as a memory of an historic fact.

Confirmation of the statement that the original basis of Fire Insurance was found in the principle of mutuality will be shown in the facts now to be hurriedly presented. Bear in mind that individual underwriting and mutual insurance clubs ran side by side for some years as the sole occupants of the field. Just when the clubs ceased to exist is a matter of uncertainty, but evidently as quickly as one succumbed a newer and stronger organization took its place. In 1681 the Corporation of London took a hand in the proceedings and instituted a species of Municipal Insurance, which, however, received its quietus two years later at the hands of the Court of King's Bench. One of the main arguments used at the time in opposition to the corporation scheme was that Fire Insurance was beyond the corporate power of the city, but whether this contention held or not is not material, certain it is that the first scheme of Municipal Insurance had a brief if merry life.

At this early stage the benefit of Fire Insurance was fully realized and, consequently, at the demise of the scheme of the Corporation of London there was started in 1683 the Friendly Society, and I quote one rule from the prospectus of this institution which is of much interest to us today: " That every member shall contribute toward the making good such losses as shall happen

provided that no person be charged for any one loss above 30 shillings for one hundred pounds on brick houses and double on timber houses "-a very clear and succinct definition of mutual insurance .and of the liability that attached to it. Under the scheme of this Society the original rate charged on the acceptance of a proposal was (and for convenience I use the equivalents in present day Canadian currency) 61c. per $100 on brick and 13c. per $100 on timber houses, but each proposer had to deposit a guarantee of 33c. per $100 on brick and 66c. on timber houses; the cash payment being one-fifth of the guarantee, and this is precisely the ratio that is .in almost universal practice today, on this continent. In other words, for over 200 years, mutual underwriters have maintained the fixed basis of 5 to I, a testimony to the good judgment of the pioneers in; laying the foundations of the business.

In 1696, thirteen years later, the Hand in Hand Company .was established, and in 1717 the Westminster. l0th of these were started as purely mutual companies, although the Westminster at a subsequent date diverged into two classes-members who were liable for the losses and entitled to the profits, and those who had no responsibility of partnership. These two concerns for over 200 years have stood in the glare of public opinion, have passed through trials and ordeals beyond number, and yet, sad to relate, for reasons that are not understood on this continent, both have this year succumbed to the tempting offers of joint Stock Fire Insurance Companies, and both are now numbered among the " great has teens." The history and record of these two offices constitute a wonderful chapter in the history of Fire Insurance and might reasonably form the subject of a much more extended reference than I can possibly give to it now. Their history is a romance, whilst the singularity of their demise might fittingly find expression at the hands of a more capable writer.

The pronounced success of the mutual companies naturally invited emulation from those who wished to divert the profits from the participating policyholders to the few favoured individuals, and it is not surprising therefore, that in 1710 a co-partnership of twenty-four persons established the Sun Fire Office on proprietary principles. As an evidence of its early success let me state that the shares originally costing $100, held by twenty-four co-partners, were valued in 1713 at $300; in 1714 at $875; in 1715 at $2,50o, and in 1720 a share was sold for $5,000. Thus did a practical monopoly thrive. The reign of Queen Anne produced several schemes of Fire Insurance showing how the system was taking hold of the business community. In 174 the Union Assurance Society was established on the basi's of "mutual and equal advantage to all," but in 1805 this Company joined the ranks of the Joint Stock institutions. The number and extent of insurance and other schemes foisted on the British public between the years 1717 and 1720 caused the passage in the latter year of a Bill commonly denominated the " Bubble Act," which effectually stopped the period of extended speculation. Out of it, however, grew the formation of the Royal Exchange and London Assurance Corporation as marine companies, whose charters date from the year 1720, but both companies a year later obtained supplemental powers to transact fire and life business.

Whilst the Bubble Act was designed to prevent the British public being gulled by such extravaganzas as the South Sea Bubble and kindred swindles in the Fire Insurance world, it is worthy of note that the sentiment of the day demanded the reservation of the right of individual underwriting, and there is no question but that Lloyds, this now great organization, transacted fire insurance under this plan in addition to their primary function of marine insurance. If what I have so far submitted demonstrates anything, I think it clearly establishes that for the first one hundred years the principles of mutuality and individual underwriting were the conspicuous and predominating features of the subject we are discussing.

" Coming events cast their shadows before them," and it is not surprising that the early history of Fire Insurance in Britain repeated itself in the American Colonies. It is not easy to obtain reliable data as to organization and progress in the Colony, but it is said the first insurance office in America was opened in Boston in 1724, and from all accounts this was operated by and for individual underwriting. 1752 saw the establishment of the " Philadelphia Contributorship," an association on unquestioned and pre-eminent mutual principles. Two unique facts in connection with this Association are worthy of notice. In 1783 the Association sustained a loss by a house becoming ignited from its shade trees, sand promptly they refused any longer to insure houses with shade trees. A number of members seceded and Finn 1784 formed the Mutual Assurance Company, but ,;even they charged an- additional rate for houses having 'shade trees. One of the policy conditions provided that trees planted after the insurance was made must be reported to the company and the additional deposit paid, ',or "the deposit money will be forfeited and the insurance become void." This is about as vexatious and absurd a condition as many that find a place in the documents of modern companies.

The second fact in connection with the Philadelphia Contributorship, not generally known in this country, is that they now only issue perpetual insurance policies, one premium or deposit only being made. The cost of insurance in this Association, which has a very extensive business in its native land, is nothing more than the interest on the initial deposit, the principal being always at the option and disposition of the assurred. In X787 the Mutual Assurance Company of the City of New, York was formed and remained the only native organization until 1796. In 1809 it became incorporated as a joint stock company; its name was changed to the Knickerbocker in 1846, and in 1890 it passed out of existence. As a last historic fact I may mention that 1794 saw the formation of the two first insurance companies on joint stock principles in America, Philadelphia again being 'the birth-place; both are in existence today, and one is well represented in the Dominion.

"In perspective" this statement now naturally asserts itself: "A certain element of mutuality exists in all companies." This must be so by the very nature of things, and no people of this or any other country have had this fact hammered into them more persistently, than have our manufacturers by the representatives of what are now called " old line," but which in reality, as I have shown, are " new line " companies. No one fact has been more distinctly and emphatically asserted than that the companies must obtain from the insuring public enough money to pay losses, expenses, dividends, and to provide the necessary reserve fund to run off the, risks on their books. The method adopted by the companies in recent years to obtain the money required for these purposes is well known to you all, and no room is left for doubt that, as far as premiums are concerned, the principle of mutuality defined in the good old adage " bear one another's burdens " has been applied unsparingly and with an eminent disregard for all considerations of justice or equity. Why one having property to insure located in an absolutely isolated and unendangered position should be called upon to contribute a largely increased premium under a class of risk that even the insurance companies do not claim has been unprofitable, because a Toronto conflagration has entailed the payment of large sums hitherto unprovided for, is one of those things beyond the comprehension of ordinary Mortals.

It must be frankly stated, however, that mutuality in joint stock companies begins and ends with the obligations of the insured. Commercialism then steps in and takes the place of equality, the key-stone of mutualism; thenceforward the interest of the insured is subservient to that of the stockholder and the one and only concern and consideration becomes the profit the business will to those whose money is invested in the enterprise. e hear much in these days of the advantage of curbing the dividends allowed to be paid to stockholders of public utility companies and if Fire Insurance companies could be included in this category by which the fate of dividend would be limited to a fixed, even if a most generous, percentage, I venture to assert the premium burdens of the insured would be materially lightened.

"In perspective" let me now speak of the effect of commercialism upon joint stock Fire Insurance companies. I have already indicated to you that the first organized stock company showed such fabulous results as to warrant a $100 share changing hands within ten years at $5,000, a gold mine indeed! This Company in 1904, with a capital of six hundred thousand dollars, paid a dividend of $570,000 or 95%. Noting this fact I have dug up some other facts that I will try to present to you in a manner unoffensive to all. Last year was a particularly bad year in the United States and Canada wing principally to the Baltimore and Toronto disasters, yet from a statement published in the Insurance Chronicle of Montreal in their issue of November 3rd last I find that 17 British offices licensed to do business is Canada (i6 being represented in the United States) paid dividends to shareholders amounting to oven $9,000,000 (actually $(9,144,920), or an average of over 3o% on the paid-up capital. The following information is quoted without naming the Companies

I know that this statement will be met at once by the remark, "Yes, but those are British Companies, doing a world-wade business; they paid their dividends in spite of the United States and Canada out of the interest on funds accumulated in past years and more favourable periods, and their quotation can only be regarded as a weak effort to raise a point that positively .has no bearing on the argument you are trying to make." Part of this I agree with, part I take issue with. I quote the facts as typifying the influence of commercialism on joint stock Fire Insurance companies, and if a dividend of 95%, however obtained, is justifiable on a business that merely acts as distributing agents for funds received from the many for the benefit of the few who suffer, it must show one of two things-either that the many have paid much too liberally to the distributors for services rendered and interest on capital, or that the interpretation of what is fair and just remuneration is the subject of considerable difference of opinion.

For the past twenty years we have had repeated ever and anon the old story that joint stock fire insurance companies have been poor commercial investments, and while this is the case both in respect to our Canadian Companies and also to some Companies of British and United States origin, the reverse is clearly and easily proved as far as British Companies now operating is concerned. Of the seventeen companies mentioned an the statement from which I am now quoting, I am only able to compare the actual results of eleven of them as between the years 1884 and 1904, and whilst a comparison of them all would have been perhaps fairer, I fail in the attempt because five were not then doing business in Canada and their records are not readily obtainable, and one had no capital with which the necessary comparison could be made. However, I believe the eleven whose record I have been able to trace would be found on full investigation representative of the whole seventeen, and the comparison may, therefore, be regarded as fairly reliable

Comparisons of 11 British Offices, 1884 and 1904.

This is no fairy tale, nor fancied agglomeration of figures; they are startlingly true, and surely testify in language that cannot be misunderstood that, at least so far as eleven British offices are concerned, the commercial aspect of Fire Insurance has neither been lost sight of nor gone without a reward beyond the dreams of ambition and avarice. In 1884 three United States Companies were doing business in Canada; the capital employed was then, as in 1904, $6,250,000. The dividends in 1884 I have not ascertained, but in 1904 they paid an average of 20% (actually $1,279,325). Six other Companies doing business in Canada in 1904 that were not represented here in 1884 also paid average dividends of 20%. The whole average is not equal to that paid by their British confreres, but it is tempting enough to almost make one forget the losses and disasters which are held up to us as making the business most precarious and alarming. That the three Companies doing business here in 1884 also show an increase in their accumulated funds of $21,605,890 is nothing, we shall be told, when consideration is given to the increased liabilities, but we find also that, in addition to the large dividends these Companies have paid, they have by strict attention to business and rigid economy more than doubled their actual net surplus (actually, 1884, $5,366,557 1904, $12,147,907; increase, .$6',781,350) after providing all necessary reserve to run off the risks in force on their books.

Has the effect of commercialism on the Fire Insurance business been for the benefit of the insured in any sense of the word? " He that runs may read," and surely there can be no uncertain conclusion drawn from the facts just submitted. Lest, however, there should still linger in the minds of anyone any doubt on the subject, I would like to hurriedly present to you some further figures. I freely confess that I am drawing them from both the United States and Canada, in those spheres and conditions which most favourably affect the view I am trying to impress upon you; and I make no apology for doing so, because, while they are the most favourable, they are the most natural sources from which to draw. In the republic to the south, the centre of mutual Fire Insurance is found in the States of Rhode Island and Massachusetts; in Canada it is in our own Province of Ontario. The figures I now give you are for the three years preceding the present one. They are taken from the official reports and are subject to verification.

Comparison of Rhode Island, Massachusetts adn Ontario Stock

and Mutual Companies, 1902-1904 (Inclusive)

I cannot expect that you will readily absorb the full meaning of this last statement, but it will, I believe, well repay careful perusal. In regard to the Ontario Companies, we have little with which to make a comparison, but it is well known that the stock companies charge and average rate of 1.50% for three years on a precisely ' similar class of business to that transacted by the Ontario Mutuals, whose average is 62 cents, and it is also well known that the average of losses incurred to risks written is not less than 1.10%, against an average of 44% of the Mutuals. I cannot possibly touch upon the development in recent years of the principle of individual underwriting. This branch of the subject offers material that would of itself occupy the half hour allotted to me today. All that I can say is that I believe this particular feature will yet achieve a position of great importance in the insurance world, and possibly out of it may come a large measure of relief from the ills to which mankind has fallen heir through that spirit of commercialism that I have tried to fairly represent to your Our insurance friends one and all tell us that the record for thirty-six years past shows that the Companies have made no money, and as they are not philanthropists what alternative have they than to make the people pay? Their contention is that the Canadian blue books show:

(a) An average loss ratio during that period of. ................69.61%

(b) An expense ratio of say ... ........ 30.00

(c) A further sum to run off risks in force say of.................3.50

Total outgo .... .. .... . .. 102.11%

In other words, that the business has just about met losses and expenses; it has not provided funds to run offexisting risks (a feature that I at once admit must be reckoned with in considering results), and it certainly has not paid dividends on capital invested. I am, however, obliged to dispute the correctness of this statement, for I find by the record that during the last thirty-six years the actual cost of doing the business has averaged 26 -7q.%; in other words, the record has been :

(a) Average loss ratio .; . . . . . . . . 69'61%

(b) Expense ratio 26'74

(c) Necessary to runoff risks .. . . ...... 3'50

Total outgo 99'85%

Therefore the Companies have made 0'15% on over two hundred millions of dollars (actually $201,575,618) taken as premiums during the thirty-six years, or $312; 362, truly a sum too insignificant to be worth considering. Whilst I have been delving into the books to get the information I have just given you I have extended the scope of my enquiry, and one or two most interesting facts have presented themselves. I think they are sufficiently interesting to give to you position, as, judging from the geometric progression in each of the succeeding decades, it is reasonable to believe that in the first ten years the expense of conducting the business must have been less than the figures I have arbitrarily applied. The following comments seem to me to be exceedingly pertinent:--

(1) During the thirty-six years, $53,901,320 of the people's money was paid to agents and brokers by way, of commission.

(2) That as the rates of premium went up, the ratio of commission increased, a condition of things which, from the standpoint of the insured, is beyond excuse or justification.

(3) That a saving of even 5070 on the commission paid to agents would have either saved to the insured, or preserved in the coffers of the Companies a sum of over ten millions of dollars, a respectable profit on the turnover.

(4) That with the commission on .the ascending scale there is certainly no incentive to agents and brokers to seek to reduce rates or to make it a pre-eminent part of their business, as it should be, to put forth every effort to reduce the fire waste of the country.

(5) Conflagrations occur and pass into history; after these events the public are called upon to make good the amounts paid in consequence thereof, but on no single occasion have the Companies evidenced the slightest desire to alleviate the burden or rise to the possibilities .of the occasion by curtailing an expenditure well within their power to regulate.