Q It is in the public interest that stability in rates should be established to the end that unjust and discriminatory conditions should not be allowed to exist, and equally that adequacy of rate should be maintained for the purpose of securing the solvency of the insurance companies.
3. The determination of just and adequate rates must be based upon two fundamental conditions, namely, first, an accurate statistical record of fire losses in classes and terri tories ; and second, upon inspection and written surveys of properties to be insured.
4. It is practically impossible, because of the enormous cost, for companies, large or small, to prepare their own rates, and rate books, involving, as has been said, statistical information, surveying, inspecting and reporting. Co operation between them is, therefore, in some degree essential.
5. Legislation should, therefore, assist in the proper regu lation of the agencies used for rate-making purposes, and, like all supervisory and restrictive laws, should go no further than is absolutely necessary for the protection of the people.
6. Oppressive legislation, that is, legislation forbidding the association of companies for rate-making purposes, has always failed, and has resulted in demoralized commercial conditions.
7. In the State of Missouri, two years ago, such a law was passed by the legislature, whereupon all fire insurance companies, except those of domestic origin, retired from business and completely demoralized commercial credit. Conditions became so bad that the state executive called into conference bankers, manufacturers, merchants and insurance representatives, with the result that the oppressive legis lation was withdrawn and a sane law controlling and regu lating the rate-making body was substituted. The insurance companies thereupon returned to the state for active busi ness.
A condition exactly similar is now operating in the State of South Carolina. Sixty-seven insurance companies have withdrawn, and it is manifest that with demoralized com mercial credit remedial legislation must be enacted.
The whole matter of an effective, yet wise control. of various insurance rate-making bodies is of tremendous im portance and requires the most thorough and careful con sideration.
The trend of the Ontario inquiry, at the time of the writing, leads one to believe that the investigating commission will suggest to the provincial government that the superintendent of insurance be given power to declare rates to be discriminatory. This opinion is based upon the commission's comments on similar legislation in the United States.
12. Fire protection.—Closely wrapped up with the business of fire insurance is fire protection. The business of fire insurance may be said to have invented fire protection. It is quite true that there were such things as fire companies before fire insurance was known, but it is equally true that they were on a very small scale and of very primitive development. When the underwriter began to make allowance thru his schedules for certain forms of fire-fighting devices, it at•once stimulated the manufacturer to fur nish these appliances. At present, thru the under writers' laboratories of Chicago, nearly all such de vices are subject to a test and only those which have passed the test and whose manufacture is subject to inspection by the laboratory force, are accepted by the underwriters for a reduction in the rate of insurance.
Probably the important position held by the great business of fire protection may be understood better if its financial asset is considered. In the United States, about $250,000,000 worth of property is annu ally destroyed by fire. Of this sum of money 60 per cent, or $150,000,000, is subject to a return thru the insurance premium. Many fire losses of course are not covered by insurance. Forest fire losses are com
plete losses and in many other cases the property is underinsured. While $150,000,000 represent the normal amount paid for fire losses, $100,000,000 is used in various ways for expenses. In other words, we have a sum of not less than $250,000,000 paid for fire insurance premiums. Fire-fighting devices steadily reduce this sum, and if the insured can re duce his premium payment five per cent by installing fire Tails, it will be a good investment in most cases. A fire pail is the simplest, the oldest and even today one of the most serviceable fire-fighting tools that we have. One of the most modern is the sprinkler. This is a device which is attached to pipes in the ceil ing of the building. One sprinkler head is presumed to protect 100 square feet. In a wet pipe-sprinkler system, there is water in the pipes. The sprinkler is held tight by a special solder which melts at about 160 degrees. This releases the cap and the water flows out of the sprinkler head thus putting the fire out. In a building equipped with sprinklers, 90 per cent of the fires which originate are extin guished with not more than three heads opening. If it were not for the fire protection afforded to prop erties in the form of sprinklers, large manufactur ing plants, stores and loft buildings would not be possible today. We should be confined to very small units as the danger of conflagration would be so great. Again, the sums paid for fire insurance in the City of New York have not increased in the past ten years, altho the liability which the insurance companies are carrying has increased in that time nearly $1,000, 000,000. This increased liability is carried for the same amount of money because of (1) the increase in properties of fireproof construction, and (2) the in crease in the properties which are equipped with sprinklers.
In 1883, when the sprinklers were first recognized by the insurance companies, the practice was estab lished and continued, until 1905, of computing the rate of insurance in the usual way and of making a percentage allowance for the sprinkler equipment. At first this was 20; then it increased to 30. In 1905, however, especially designed schedules, based on ex perience, were introduced for risks with sprinkler equipments. The result has been a steady drop in the rate of insurance on sprinkler properties, until today it is a fairly safe statement that the difference in rate between sprinkled and unsprinkled property is, in most cases, 40 per cent.
13. Rating making of the rate of fire insurance is the difficult problem connected with the business. This work is done today almost entirely by organizations which are known as rating organizations. These may cover a single city, as Chi cago, New York, Philadelphia, Baltimore, Boston, Washington. They may cover a state or several states. The area embraced depends largely on the local conditions and the volume of business that is to be handled. The making of this rate in the coopera tive way- is one of the things which the business of fire insurance finds necessary to its existence, and at the same time it is one of the things which the insured is inclined to view with the utmost suspicion. It ex poses the business to the epithet "trust" and similar names.
When the underwriters first organized, the attitude of the states was antagonistic, and laws prohibiting such organizations went on many of the statute books. The underwriter was then obliged to conduct the busi ness of rating as a separate matter thru independent raters and, as they were guided in their work by schedules, the underwriter had at least a clue by which to measure his acceptance. The prohibitive phase has gone. The question and the change in the official viewpoint have been investigated in many states.