INSURANCE, Credit. This is a contract issued to jobbers, manufacturers and wholesale dealers guaranteeing indemnity for losses sus tained through insolvent debtors in excess of their normal trade loss as shown by the in sured's records or as agreed with the insurer. Such a policy commonly runs from year to year and covers only such sales of merchandise as are shipped and delivered.
Credit insurance was first authorized by statute in New York in 1886, in New Jersey in 1889 and in other States shortly after these dates. The first company to undertake such risks in America was organized in New Jersey in 1888 under the title United States Credit System Insurance Company. Other special cor porations of this character followed, in Louisi ana in 1891, in New York in 1892 and in Minne sota in 1893. The field being new, these earlier ventures suffered from lack of experience on which to base the business and all but one came to an end within a few years. The general casualty corporations, already assuming varied lines of this character, were shortly qualified to assume credit risks, but the field has been left so far to a few companies which perform an increasingly useful function for the greatly expanded business credit system of the present time. The business is handled almost entirely by one New York company and the United States branches of two foreign companies.
The plan of operation for insurance was devised by the actuary of the first com pany organized and has been followed by its successors, experience affecting mainly the mat ter of rates and the selection of risks.
The basis of the whole scheme of this class of insurance is the generally accepted mer cantile ratings, as evidencing the financial strength and reliability of the debtors con cerned. The insurer, however, undertakes to give indemnity for only the excess of credit losses beyond the ordinary percentage experi enced by• the insured's business, not including single sales or transactions but the average loss sustained during not less than one year.
This insurance is not only confined to risks on parties having mercantile ratings, but the amount of sales covered is limited to a per centage of a debtor's lowest capital rating as given by, mercantile agencies. A policy may be had to apply to debtors of the first and sec ond grade commercial ratings, or for a larger premium the policy will cover in addition parties with lower ratings.
Credit policies state minutely the conditions of the contract and define liberally when a con dition of solvency exists and in what manner a claim shall be set up. Reckless management
combined with inexperience to demoralize the business during the .earlier years, and technical defenses were often resorted to as an offset to claims. In later years credit insurance became settled on stable and conservative lines and has prospered. The passage of a general bank ruptcy act by the federal government in 1898 materially aided in placing credit insurance business on solid ground.
The table here given sums up the results of all this class of business transacted in America as far as reported in the best authori ties, showing the early period of uncertainty separately, then the five-year periods to the end of 1916, and lastly the year 1917 by itself.
The table shows that, when trade conditions were normal, premiums were sufficient to pay losses and leave an ample margin for expenses and profits, but that during times of stringency and emergency, as in 1907 and 1914, greatly in creased losses followed. This dangerous uncer tainty can be met only by an ample surplus accumulated out of the years of plenty for the years of leanness that are sure to recur, whether caused by crop failure, financial disturbance, contagion, war or abrupt economic changes, as it is precisely against such surprise contingen cies that credit insurance must demonstrate its highest utility.
From the statement of an official long ex perienced in this line of protection, the benefits of credit insurance may be summarized as follows : It serves as a reserve to the insured's cap ital, equal to face of the policy, to offset un expected losses.
It serves as collateral security to accounts against misfortunes that may befall even pre ferred customers.
It protects profits against unexpected and unavoidable losses.
Joined with the other forms of insitrance it completes the chain of commercial protection.
It is readily seen that the function of credit insurance is that of all insurance— not to re lieve the creditor of responsibility for his ac counts or to invite debtors to repudiate their honest indebtedness, but to provide against those uncertain and unforeseeable events which commercially embarrass the latter and jeopar dize the enterprise of the former. By a prop erly conducted credit insurance such losses are widely distributed among creditors in similar business circumstances, so that no one is seri ously burdened.