Introduction to Insurance

INSURANCE, INTRODUCTION TO. Insurance is the practical device by which civilized man protects himself against the contingencies of life. He has for centuries realized the regu larity with which the law of average operates when great num bers are involved and has employed his knowledge to provide by insurance against the hazards to which the products of his enter prise and his industry are at all times subject. The principle of insurance was admirably stated by a select committee of the House of Commons who, in reporting (in 1825) on the laws re lating to friendly societies, said: "Whenever there is a con tingency, the cheapest way of providing against it is by uniting with others, so that each man may subject himself to a small deprivation, in order that no man may be subjected to a great loss. He, upon whom the contingency does not fall, does not get his money back again, nor does he get for it any visible or tangi ble benefit ; but he obtains security against ruin and consequent peace of mind. He, upon whom the contingency does fall, gets all that those, whom fortune has exempted from it, have lost in hard money, and is thus enabled to sustain an event which would otherwise overwhelm him." It does not detract from the general truth of this pronouncement that a certain part of the premiums paid for insurance is absorbed in the expenses necessarily atten dant on the conduct of the business, nor is it a demerit of the system that insurance, since it produces nothing, adds nothing to the wealth of the world. It may, indeed, be claimed to its credit, in this connection, that in practice, with the assessment and modification of premiums with reference to the risks incurred, the system tends, by encouraging the adoption of preventive measures of various kinds, to diminish that waste and loss the fear of which has called it into existence. Due weight being given to the benefits of insurance, both direct and indirect, it must be con cluded that its cost to the community, as represented by the maintenance of the great number of persons whose energies it absorbs, and by the profits of those who risk their capital in pro viding it, is far outweighed by the value of the service which it renders. This, indeed, is as true of insurance on human life, at any rate in its more substantial forms, as it is of insurance against the risk of loss of material things; e.g., by fire or marine disaster.

So far as concerns the trading profits of insurance, which con stitute a comparatively minor element in its cost, Great Britain is specially favoured in that the pioneering enterprise of the British insurance companies, and the high reputation which they have long enjoyed, have attracted to them a substantial share in the world's insurance business. The profits on this business can not readily be computed, but are generally accepted as making a useful contribution to the "invisible surplus" by which the balance of international trade is maintained.

The special position of marine insurance in regard to the com mercial prosperity of Great Britain is vividly indicated by Sir Norman Hill in his contribution to War and Insurance, one of the series of works on the economic and social history of the World War published on behalf of the Carnegie Endowment for Inter national Peace. Here he sets out shortly the mechanism of the method by which the nation is, in great measure, fed and clothed by supplies from overseas. "By far the greater proportion of the cargoes at any time afloat belong not to the producers, the mer chants, or the consumers but to the financial interests who have discounted bills of exchange representing the purchase price of the goods, and who hold as their security the bills of lading and poli cies of marine insurance. . . . The security against all trading risks is ample because the advance is repaid out of the selling price of the goods on the completion of the voyage, or if the goods be lost, out of the insurance money. Moreover the bills of exchange against which the advances are made afford the most convenient means for the adjustment of international exchange and they therefore pass freely from hand to hand and from country to country in the process of these adjustments. In fact, international finance is in very great measure based on the secur ity afforded by the bill of exchange drawn against goods in tran sit, and it is to that extent dependent on the security of not only the bill of lading for the goods, but also on adequate insurance against the risks incident to the transit." On a closely related point it may be said that marine insurance has supplied the model for a system of foreign credit insurance which has recently been established at the instance of the Overseas Trade department to stimulate the export trade of the United Kingdom.

Insurance or Assurance.

The terms insurance and assur ance are employed somewhat indiscriminately to indicate "the action of insuring or securing the value of property in the event of its being lost, or of securing the payment of a specified sum in the event of a person's death." This quotation is from the Oxford English dictionary. Babbage proposed, so long ago as 1826, that the word assurance should be reserved for contracts relating to life, on the ground, in effect, that in this case the event on which the policy depends is a certainty, and that insurance would more appropriately be applied to contracts relating to con tingencies. While this convenient distinction has found much favour, it has been challenged in other quarters and is not universally adopted. In the United States the term "insurance" is generally used.

Historical References.

Marine risks were the subject of the earliest form of insurances. Setting aside the attractive but de batable proposition that insurance was recognizable as an element in the maritime commerce of antiquity, there is ample evidence of its use in the middle ages. A "Chamber of Insurance" estab lished in London under a patent granted by Queen Elizabeth in the object of which was to register all contracts of insur ance negotiated and to record their terms for reference in case of dispute, was a comparatively late-corner, similar bodies having been founded in Barcelona (probably in the 13th century) and in Bruges (131o). The first English statute on "assurance" appeared in 16o and dealt with marine risks. The earliest known life policy, which followed strictly the form of marine insurance, was effected in 1583.

Scope of Insurance.

Insurance was limited, until recent times, to life, marine and fire risks. Modern developments have added other subjects; e.g., the risk of personal accident, sickness, employers' liability, burglary, motoring, aviation and loss of live stock. Insurance under some of these headings includes the wide range of risks involving liability to civil action in respect of loss of life or damage to property.

While commercial insurance of every class expands continu ously, in correspondence with the growth of population and with the enlargement of human necessities and desires, the develop ments of life insurance recently are of special interest. So far as Great Britain is concerned the growth of the business under "ordinary" policies, providing substantial sums for premiums payable annually, half-yearly or quarterly, has somewhat more than kept pace with the increase of population and the change in the value of money. In North America this class of insurance has advanced remarkably, while in various European States the business has exhibited considerable recuperative power in face of the difficulties created by the depreciation or collapse of cur rencies. Industrial life assurance has made great progress on both sides of the Atlantic ; the number of policies of this type in force in Great Britain and Ireland at the end of 1926 was about 72 millions, an average of nearly two policies for every member of the industrial population. The number of such policies in the United States at the end of 1926 is also reported to have been 72 millions, while nearly four million policies were in force in Canada. Industrial assurance is also practised widely in Australia. The latest development of life insurance for industrial workers originated in the United States under the title of "Group insur ance," and has lately reached the British Isles. It is stated that some six millions of American work-people are interested in in surances under this plan, by which the employer effects a year-to year insurance on the life of each person in his employment through the medium of a single policy covering his whole staff. In certain cases the benefits of the plan have been extended, with the aid of contributions from the assenting employees, to cover sickness and accident and to provide pensions on retirement. There is, perhaps, less scope for such extensions in Great Britain, where the ground is largely covered by friendly societies, by State insurance, and, in growing measure, by superannuation or pension funds connected with particular establishments.

Interesting developments in other directions exemplify the methods by which British insurance is adapted to the require ments of the ordinary citizen. For example, the occupier who owns his dwelling, a rapidly increasing class in present conditions, is able through his building society, or other medium by which his purchase has been financed, to couple with his mortgage a policy of a special type whereby the remaining burden of his debt is lifted from the shoulders of his family in the event of his death before his instalments have been completed. Worthy of mention also is the type of policy—under various names—by which the householder may, by a single contract, insure his personal belong ings against such diverse misadventures as fire, gas or boiler explo sion, burglary, etc., and may cover his risks as an employer in respect of his domestic staff. Generally, it may be said that while the business of the majority of insurance companies is conducted on fairly conventional lines there is practically no type of con tingency for which insurance protection cannot be obtained from adventurous underwriters at Lloyd's or elsewhere.

State Insurance.

Insurance has taken a prominent place in the modern conceptions of the functions of the State. The com pulsory protection of the worker against the contingencies by which his livelihood was most obviously beset originated in Ger many where in the years 1884-86 compulsory schemes of insur ance against sickness and accident (including medical treatment) for substantially the whole of the wage-earning community were brought into operation. These were supplemented later by schemes relating to invalidity and old age. That these measures took deep root and met the requirements of the people is sufficiently indi cated by the fact that they survived the shock of the loss of re serves on the collapse of the mark in 1923. Austria followed the German empire in the adoption of compulsory State insurance and in 191I it was introduced into Great Britain and Ireland by the National Insurance Act. Although a modest and experimental scheme of unemployment insurance was incorporated in this act, its principal subjects were sickness and disablement (including, with these, the provision of medical treatment and medicine), and over 15 million workers, of whom nearly one-third were women, were brought within its scope. An enlarged scheme of unemployment insurance, applying to about II million wage earners was introduced in 192o, and in 1925 provision was made for pensions and allowances to widows and orphans and for pen sions to the insured and their wives on the attainment of the age of 65. A corresponding Act was passed in the same year by the Parliament of Northern Ireland. The scope of this latest scheme is slightly wider than that of the health insurance measure, and while the number of persons who are insured under the scheme in the United Kingdom approaches 17 millions, the number of persons who are interested as actual or potential beneficiaries is about 312 millions.

Taking the whole of the schemes together, and bearing in mind the provision made by the Workmen's Compensation Act, which is also, in general, safeguarded by insurance (in this case at the cost of the employer alone) , it may be said that the indus trial workers of Great Britain and Northern Ireland are more fully protected by the action of the State in respect of the more serious contingencies of life than those of any other country. Develop ments, however, still proceed elsewhere. The General Confer ence of the International Labour Organization of the League of Nations (I oth Session, 1927) has proposed that the member States should be invited to subscribe to conventions relating to sickness insurance for workers in (I) industry and commerce and domestic service and (2) agriculture, and it is understood that the consideration of other risks is to follow. Save, therefore, in North America, where differences of economic conditions are re sponsible, at present, for differences of outlook, compulsory State insurance, in relation to a comprehensive range of subjects, seems likely to spread to the whole of the civilized world.

Where State insurance invades a field of effort such as that of the British friendly societies, a measure of controversy is, of course, inevitable. Certain distinctive merits must, however, be conceded to compulsory national schemes, even by those who are most reluctant to concur in the new activities of the State. Look ing at the matter as it concerns this country it cannot be denied, on the one hand, that the thousands of registered friendly soci eties made, and continue to make, a substantial provision against sickness and other contingencies in the case of perhaps four mil lions of those who come within the national scheme ; it has also to be recognized that apart from these bodies, whose operations are on a permanent and fairly stable basis, sickness insurance, though on a lower grade of quality, was very widely practised through unregistered bodies. But, on the other hand, there remained sev eral millions of wage-earners, women especially, whom existing agencies had failed to reach, or at any rate to attract. National in surance, enforced by public authority, succeeded at the point where voluntary agencies had failed, and brought under a meas ure of protection, moreover, all who from advancing years or inferior health were ineligible for membership of a friendly society Again, by the scheme for pensions at 65 the State was able to enforce protective measures in regard to which private effort, though exercised untiringly over many years had failed— and that conspicuously—to persuade.

Unemployment insurance as a possible subject of State action presented similar features. Available to many of those engaged in the highly skilled and well organized trades, it made little more than an exceptional appearance in the constitution of the newer trades unions which cater largely for the unskilled classes, while to the millions of unorganized workers it was wholly unattain able. When it is added that where it was practised its finance rested generally on the basis of a single craft, with all the ex tremes of risk that this implies, it will be realized that the time was ripe for comprehensive action such as the State could cer tainly take and no other agency had offered to initiate.

Widows' Pensions.

But it is, perhaps, in respect of widows' pensions that compulsion has been of chief value. "Adverse selection" is an element against which insurance on a voluntary basis has constantly to contend, and where the subject is such as pensions to widows and temporary allowances to dependent children this element would operate on a voluntary scheme, de pendent on its own resources, with quite paralysing effect. Few with the exception of the married would insure; few, if any, of the insured would keep their policies up when, with the lapse of years, the need of them seemed to disappear. In the re sult the cost of insurance would be altogether prohibitive. The State, by compulsion applied from early youth to the whole of the wage-earning population, could obviously secure (with or with out a subsidy) what private effort dared not attempt. The need for such a scheme, no less than its usefulness in practice, is at tested by the fact that in the earliest months of the scheme it relieved the boards of guardians in England and Wales of expen diture at the rate of nearly £2,000,00o a year. This indeed is the lesser relief ; the greater is the removal from the ranks of pauper ism of scores, if not hundreds, of thousands of fatherless children.

Personnel and Statistics.

The professional interests of the insurance official and the technical education of the junior grades are served by many organizations of which three British bodies may be singled out, both on the ground of seniority and as enjoy ing the dignity of incorporation under Royal Charter. These are the Institute of Actuaries, the Faculty of Actuaries in Scotland and the Chartered Insurance Institute. The number of those en gaged, in all grades, in the practice of insurance at the last census of Great Britain is given as 133,000, of whom one-third were women. Those employees whose remuneration is not more than f 25o a year are insurable under the Unemployment Insurance Acts, and in 1927 this class included 86,000 persons.

The statutory returns of the British insurance companies and societies (which do not include the underwriters at Lloyd's) show that in the latest year of account (generally 1926) for which fig ures are available the total amount received in premiums for business of all kinds was f 242,000,000. Of this total £134,000,000 were attributable to insurance contracts other than life, and it is probable that a very substantial part represented business over seas. Claims reached a total of f 13 7,000,000, and reserves of all kinds, of which the funds accumulated under life assurance con tracts represented about four-fifths, exceeded the massive aggre gate of £I,000,000,000. (A. W. W.) INSURANCE: MISCELLANEOUS. Under this head are considered various types of insurance which are not dealt with under separate heads (see INSURANCE ARTICLES).

Burglary:

Private Dwellings.—Policies are issued to cover the risks of house-breaking and larceny, although larceny is ex cluded if plural tenancy exists or, in the case of a flat, if it is not self contained. Premiums are based on the full value of the total contents, an excess premium being charged if valuables, i.e., gold and silver articles, jewellery and furs, exceed one-third of the whole. Damage to the building caused by burglars, for which the insured is responsible, is included in the normal policy.

Business cover is more restricted, the larceny risk always being excluded, whilst frequently only theft following "actual violent and forcible entry to the premises" is insured. The rates vary with the nature of the stock to be insured and the means of protection employed. Insurances are generally effected for the full value of the stock at risk and the condition of average (similar to that used in fire business) is freely used.

Cash Insurances.

Cash may be insured whilst in transit in the custody of an employee of the insured (including the integrity risk) and thereafter whilst contained in an approved safe or strongroom until paid away. The premium is calculated on the estimated carryings, subject to adjustment at the end of the period of insurance. The limit of liability for any one occurrence is the maximum amount stated by the insured to be carried at any one time. Cash is also insured whilst deposited in an approved securely locked safe, but loss following the use of the key, unless obtained by threat or violence, is excluded.

"All Risks" Insurances.

Such cover is frequently sought in respect of jewellery, furs, works of art and other items of value, and insurances may include or exclude the fire risk. The cover is usually comprehensive and excludes only losses due to deteriora tion, vermin, war and kindred risks. The sum set against each item in the policy is generally agreed to be its value as between insurer and insured when the policy is effected and represents the insurers' liability in the event of total loss.

Fidelity Guarantee.

Commercial guarantees are sought for most responsible officials handling money and are provided by insurers after satisfactory enquiries have been made as regards the antecedents of the applicant. The employer's statement to the insurers forms the basis of the contract and discloses the sys tem of check used, which must not be altered without the consent of the insurers. Policies are issued either for individuals or a col lective guarantee may be given for an entire staff. In the latter event each employee is mentioned by name and the sum guaran teed on his behalf is stated.

Plate Glass Insurance.

Essentially an insurance against breakage, the risk of fire is excluded from the plate glass policy. Only glass specified in the policy is insured, and wooden frame work and lettering, the latter, unless specially insured, is not covered. Premiums are calculated according to the superficial area and type of the glass to be insured. Stained and other valu able glass, lettering and painting are rated on a percentage of value.

Third-party Insurance.

Indemnities in respect of the legal liability of individuals or corporations to pay compensation to third parties for personal injuries or damage to their property caused by negligence on the part of an employer or his employees, or due to defects in the ways, works, machinery or plant used in the employer's business, are almost universally sought. Policies are issued to cover the insured's entire legal liability, excluding, however, liability to a member of his family or to a person in his service, or liability assumed under contract. Within the limits of indemnity selected the insured is relieved of all monetary re sponsibility, including law costs incurred in defending claims, fraudulent or otherwise. All claims negotiations are conducted by the insurers who may if they wish relieve themselves of all further liability at any time by paying to the insured the maxi mum sum for which they are liable in respect of any one acci dent. The limit of indemnity for any one accident mentioned in the policy is defined as meaning "any one accident or series of accidents arising out of one event." Policies suitably modified are issued to almost every trade and may be obtained to cover most contingencies likely to affect third parties.

Property Owners' Indemnity.

Such policies cover the lia bility of the insured to pay compensation for personal injuries to and damage to the property of third parties caused by defects in buildings. Claims are commonly due to falling slates, tiles and copings, whilst poorer class properties are subject to falling ceil ings, defective railings and staircases and many other causes. Such insurances are similar in operation and conditions to third party policies, and may be extended to include liability which may be incurred in connection with defective stop-cocks and defective sanitary arrangements. (A. G. M. B.) Hail Insurance.—Hail Insurance is carried mostly to protect growing crops, policies being written for the principal ones. The coverage is limited to a given maximum amount per acre for each type of crop, and the rates vary with the crop and the territory. In general the liability of the Insurance Company applies only after the crop is in a healthy growing condition. Earthquake Insurance.—Policies for earthquake insurance protect from all direct loss or damage from earthquake or volcanic eruptions and removal from premises endangered by them. A 1o% exemption clause and a 7o% coinsurance clause are cus tomary. The policies do not assume liability for fire, wind or tidal waves or loss due to neglect of the insured to diligently protect his property.

Tourist Baggage Insurance.

Personal effects can be insured while in transit within defined geographical limits. Usually the protection covers fire, lightning, cyclone, flood, navigation and transportation risks and theft provided the insured promptly notify the local police authorities. Some policies omit theft or limit the liability to a stipulated per cent of the amount of the policy on furs, musical instruments, jewelry, plate, clothes and watches. The amount of premium is dependent on the size of the policy and the length of time it has to run.

Explosion Insurance.

These policies are designed to cover loss or damage from all explosions except those originating within steam boilers, pipes, flywheels, engines and machinery, as these are covered by Engineering Insurance policies (q.v.).

Use and Occupancy Insurance.

Use and occupancy insur ance is also known as business interruption indemnity insurance. It is needed particularly by manufacturers of advertisml and popular goods, merchants, hotels, laundries, theatres, warehouse and public utilities. The policies protect against losses resulting from interruption or suspension of business that follow a fire or some other calamity. Partial payments are provided for partial inter ruption of business and it is considered advisable for full protec tion to be insured for an amount equal to one year's estimated net profit and fixed expenses. Shorter terms are available and are often used on similar policies to protect from loss of rent resulting from the same causes.

For Aviation Insurance : See AERIAL LAW ; Damage to Machin ery Insurance: See ENGINEERING INSURANCE; Drivers' Policies: See MOTOR VEHICLE INSURANCE; Lightning Insurance : See FIRE INSURANCE ; Riot and Civil Commotion Insurance : See RIOT AND CIVIL COMMOTION INSURANCE; Soldiers' Insurance : See PEN SIONS : THE UNITED STATES ; Tornado Insurance : See TORNADO