INSURANCEINSURANCE is the system or machinery by which it is sought to guard against the pecuniary consequences of certain accidents to which men are liable, such as the loss of property by fire or shipwreck, or the loss of future earnings through disablement or premature death. Insurance does not attempt to prevent these accidents, nor even to protect men against all the consequences of them. It deals only with the main pecuniary loss which such accidents are fitted to occasion, provides for it beforehand, practically distributes it among the persons who are more or less exposed to the same risk; and so, when the accident does light on any one of them, its pecuniary effects are neutralized or greatly mitigated.
The three chief developments of this system—Fire, Life, and Marine Insurance—are separately treated in the following articles. A very important application of the principle has been treated under the heading Friendly Societies....
Besides the above branches of insurance, which have attained immense proportions in almost all civilized, countries, there are many other applications of the principle which have been tried with greater or less success. The conditions which seem necessary to success (in addition to good administration) are chiefly these :—there must be a risk of real loss which it ought to be beyond the power of either the insurer or the insured to avert or to hasten; a large number of persons must be liable to the like risk; the accident contemplated must be likely to fall on a comparatively small number of the persons exposed to the risk of it; the probabilities of its occurrence must be capable of being estimated beforehand with some approximation to certainty; the loss apprehended must be so considerable when it does occur as to be worth providing against; and the cost of that provision must be comparatively so small as not to be prohibitive.
Accident Insurance.— Ordinary life assurance protects against the pecuniary loss arising to a man’s family or creditors or others by his death, whether that arise from accident or disease; but it has been found that a separate insurance against the consequences of accident meets the requirements of a large class of persons. A company was established in London in 1849 for insuring against the consequences of railway accidents,—the Railway Passengers Assurance Company. In return for a payment of 3d., 2d,, or Id. made by first, second, or third class passengers respectively, for insurance during a single journey, it undertook to pay £1000, <£500, or £200 in case of death by such an accident, or a certain weekly allowance in respect of personal injury not resulting in death. In 1856 the business was extended to embrace accidents of all kinds, and there came into use a system of yearly payments proportioned to the degree of risk supposed to attach to various occupations or other conditions of life. Many other similar companies have since been established, and at the present time (1881) there appear to be about eleven such offices in the United Kingdom. The amount insured by them is estimated at nearly £100,000,000 sterling, and their yearly income is between £400,000 and £500,000. The claims absorb about 50 per cent, of the premiums, the remainder, after paying expenses necessarily large, being the profit. Various schemes are at present being organized, in consequence of recent legislation, to enable employers to insure against risk from injuries suffered by their work-people.
The business of insuring against accidents has been developed in Canada, Victoria, and New South Wales, as well as in France, Germany, Switzerland, and the United States. In the country last mentioned the premium income of the principal office engaged in this business was in 1879 close on a million of dollars.
Fidelity Guarantee.— The guarantee of employers against the fraud or insolvency of their servants has of late years become a considerable and useful department of insurance business. Private suretyship is attended by many evils, and a bond of indemnity by a joint-stock company, although it has to be purchased by a yearly payment, is now generally preferred. Such a bond is not granted without previous inquiry as to the character of the applicant and the checks which the employer is to use. Seven institutions in the United Kingdom undertake this description of business; some of them insure only against loss arising from embezzlement, while others protect the employer against any failure to make good the sums entrusted-to an employé. The yearly premiums required range from 10s. to 60s. per cent of the sum guaranteed.
Various Minor Forms of Insurance.— In those parts of the British Isles which are exposed to violent hail-storms offices have been established successfully for insurance against the loss which these often occasion. Efforts have been made also, not always with equal success, to protect farmers and other owners of horses and cattle against the loss arising from accident or disease among these animals. It has been attempted also to insure traders against loss from bad debts, and house-owners against loss of rent and against defective titles. No fewer than thirteen offices, mostly local in their operation, insure against loss from the breakage of plate glass, and three against the loss from explosion of boilers. In former times, when men were liable to be drawn to serve in the militia but might purchase a substitute, a system of insurance was established to provide them with the necessary funds. These developments of insurance, however, are of an importance quite insignificant compared with the three great departments now to be dealt with.
I. Fire Insurance.
Fire insurance is a matter of practical interest to a far larger number of persons than either of the other two great departments of insurance—life or marine. There are few persons to whom, in the absence of insurance, the destruction of their dwellings or of their household goods would not be a serious calamity, while to the merchant or manufacturer the burning of his premises or stock or machinery might be ruinous. No age or country has been exempt from such fatalities, and no watchfulness has been able to prevent them. Some protection against the pecuniary consequences seems an essential condition of any extended system of manufactures or commerce.
Fire insurance, however, as an organized system, has had an origin comparatively recent. There are traces, indeed, in earlier times of enforced or voluntary contributions towards the relief of sufferers by fire, but it is only about the beginning of the 17th century that we hear of proposals being made for a more systematic provision, and it was not till after the great fire of London in 1666 that these proposals took practical shape. This seems at first to have been in the form of underwriting by individuals or by clubs, and some attempts were made to engage the corporation of London in a scheme of fire insurance; but in 1681 the first regular office for insuring against loss by fire was opened by a combination of persons “at the back-side of the Royal Exchange,” and it was followed shortly afterwards by another Of the insurance offices that still survive, only one, the Hand-in-Hand, dates from the 17th century (1G96); five date from the first half of the 18th century, the Sun (1710), Union (1714), Westminster (1717), London (1720), and Royal Exchange (1720); while only three date from the second half of that century, the Salop (1780), Phoenix (1782), and Norwich Union (1797). The first fire office in Scotland was established in 1720, the first in Germany in 1750, and the first proprietary company in that country in 1779; the first office in the United States was established at Philadelphia in 1752, one of its early directors having been Benjamin Franklin; the first in France dates from 1816, and the first in Russia from 1827.
The growth of fire insurance business in Britain did not receive much assistance from Government. At a very early period, in 1694 under William & Mary, a stamp duty was imposed on fire policies (now reduced to the nominal rate of one penny), and in 1782, during the administration of Lord North, fire insurances were made liable to an annual duty at the rate of Is. 6d. for each <£100 insured. This tax, which was collected by the offices along with their premiums and accounted for by them to the exchequer, was increased in 1797 to 2s. per cent., in 1805 to 2s. 6d., and in 1816 to 3s., at which rate it continued for about fifty years. It was strongly objected to as a discouragement to prudence, and as disproportionate in rate to the cost of insurance which it was tacked to; but as it was easily collected, and yielded nearly two millions a year (£1,714,622 in 1863), it naturally died hard. In 1864 it was partially remitted, and it expired finally in 1869. The returns of the duty enable us to measure in some degree the progress of fire insurance in the United Kingdom during the eighty-five years of its incidence. Some descriptions of property, such as agricultural produce, were exempt from duty and do not appear in the returns, nor do the sums insured on property situated out of the United Kingdom; but the amount insured by British offices on which duty was paid was
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At the present time (1881) there appear to be about sixty offices established in the United Kingdom for insuring against loss by fire either alone or in conjunction with life or marine insurance. A few of these are of very recent origin. The number does not include several foreign companies doing business in Great Britain.
Excepting by the imposition of the duty now repealed, the British legislature has not interfered with the business of fire insurance. Any number of persons may at the present time engage in this business with or without capital, nor is there a necessity even for the publication of their accounts. By the Life Assurance Companies Act of 1870, a deposit of £20,000 is required on the establishment of a life office; certain returns also must be made to the Board of Trade for presentation to parliament, and these regulations apply to offices which conduct fire in conjunction with life insurance, as well as to purely life offices. One consequence is that, while the results of the fire insurance business of these compound offices are published regularly, those of purely fire offices need not be published, and several of the oldest and most important fire companies do in fact keep their accounts strictly private. There is no reason to suppose, however, that their experience differs materially from that of the compound offices whose figures are open to us. From the returns of thirty of these it appears that their aggregate income from fire premiums in the seven years 1870-76 was as follows :—
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The increase in six years was therefore nearly two millions and a half of yearly income, the premiums in 1876 being about 63 per cent, more than in 1870. There are no means of ascertaining how far this increase arises from the insurance of property abroad, which is no doubt a considerable item, or from an increase in the quantity of insurable property within the United Kingdom, or in the proportion of it which is insured, or in the average rates charged for insurance, but no doubt all of these causes were at work. It may be mentioned here that the thirty offices to which the above returns relate have a subscribed capital of about 40 millions, and cash assets available for fire losses, not including their life assurance funds, amounting to 20 millions. They have therefore funds in hand equal to more than three years’ income from premiums. Another return gives the premium income of forty-five’JBritish offices in the year 1879 as £8,271,000, their losses as £4,349,000, their expenses as £2,426,000, and their net profits irrespective of interest as about £1,500,000, or 18 per cent, of the premiums. The whole premium income of British fire offices is probably nearly 10 millions sterling, and the amount insured may be taken at from four to five thousand millions.
The returns of the London Fire Brigade enable us to approximate to the amount of insurances effected on property within the metropolitan area. In 1866 the sum insured was about 316 millions; in 1871, 440 millions; in 1878, 605 millions; and in 1879, 624 millions.
The essential principle of fire insurance is the distribution of loss. It does not aim, directly at least, at the prevention and only in a secondary way even at the minimizing of loss; but what it seeks to accomplish is that such losses as do occur shall not fall exclusively, and possibly with overwhelming effect, on the owner of the property destroyed, but shall be borne in easy proportions by a large number of persons, who are all alike exposed to the risk of a similar catastrophe. This work of distribution is capable of being effected in more ways than one. It might be undertaken by the state or by a municipality, and this plan has been tried in several countries, notably in the canton of Zurich. There it applies to buildings only, not to their contents. The Government insures, and raises the necessary funds for meeting losses by a ratable tax on the owners. Where, as in this case, the exact sum needed is raised and no more, the system is practically one of mutual insurance administered by the cantonal authorities. Such a system yields this collateral benefit that the authorities, and indeed all house owners, become interested in the prevention and extinction of fires, and in Zurich accordingly the construction of buildings is carefully watched and regulated; but the results do not indicate any remarkable measure of success. The rate of assessment in 1870 was nearly equal to 2s. 6d. sterling per cent. The difficulties of carrying out such a system with equity, especially in a great community, seem almost insuperable. To assess the cost fairly it would be necessary, not merely to value each individual building, but to measure the degree of risk it was exposed to from its construction, its surroundings, its uses, and its contents. To place in the hands of public functionaries the power to do this, as well as to adjust the amount of compensation to be paid in the event of a fire, would be a course attended with manifest evils. Still greater would be the difficulty of applying the same principle to household goods, merchandise, and machinery; and, if these must be insured on some other plan, there seems little to be gained by setting up a different system for the insurance of buildings alone.
There is, however, a natural temptation presented to particular classes or communities to speculate in the insurance of their own property, in the hope of making a profit, or at all events of saving for themselves what would go as profits to the companies which would otherwise insure them. Sometimes this temptation seizes the inhabitants of a particular town, sometimes the persons interested in some particular trade, sometimes an ecclesiastical body. A community which has taken out of the hands of joint-stock companies the supply of its own gas or water, and finds itself as well served as before, perhaps better served and more cheaply, is apt to think that it may insure itself against fire as well. But, besides the complications in the problem which have been already alluded to, and which require technical skill and extended experience for their equitable solution, there are few bodies or communities which possess a sufficiently wide area to make insurance profitable or even safe. If there had been such a system at Boston or Chicago or St John’s when these considerable cities were ravaged by fire, the effects would have been still more disastrous to them than they were. Certain classes of property again seem liable almost to epidemic fires, from causes which are often not far to seek; and if, for example, the owners of any particular class of mills were to combine in a scheme of mutual insurance, they might find that, besides the great difficulty of agreeing on how each mil], was to be rated, or on the compensation to be awarded on the occurrence of a fire, they were exposed to exceptionally numerous claims just when their own trade was most depressed, or when their relations with their work-people already loaded them with sufficient anxiety. Schemes of so-called mutual insurance are tried from time to time, but scarcely ever without being based on a subscribed or paid-up capital (the contributors to which have to be remunerated), or without looking for outside business to give breadth and ballast to the enterprise.
Accordingly the system of fire insurance which has virtually superseded all others, and has contributed most to the public benefit, is that which is conducted by joint-stock companies, offering to the insured the guarantee of their capital and other funds, and looking to make a profit by the business. It is a department of commercial activity eminently suited for joint-stock enterprise, requiring for its success, and indeed almost for its safety, that its transactions should be various in character and spread over wide areas of space and time, and be invested with a certain amount of publicity, and enjoy that prolonged existence which attaches more to corporate than to individual effort.
Fire insurance as a business consists in undertaking a certain risk more or less considerable in amount, in return for a comparatively small sum, received beforehand, called the premium. While the amount of risk undertaken is strictly limited to the sum insured, the degree of risk is an element extremely difficult to measure, and liable to much fluctuation. Whether of ten thousand houses or shops, or stores, or factories, ten will be more or less injured every year by fire or a hundred is a matter partly of experience, but partly also of conjecture and, as we say, of chance. Assuming that the proportion would always be the same under precisely the same circumstances, not perhaps every year but ou an average of years, the questions remain whether the circumstances will always be the same, and whether if they be the one thousand cases on which we have made our own calculations are a sufficient basis for dealing with ten thousand cases. The slightest observation reveals an endless diversity in the risks undertaken, and, even if an absolute law could be reckoned on, the risks would require careful and accurate classification before the law could be deduced. But, in point of fact, the risks are always changing. If we take what from an insurance point of view is the simplest and safest “risk,” a private dwelling house in a large town, the question suggests itself, How has this risk been affected by the age of the building, the character of the occupants, the introduction of gas or paraffin or lucifer matches, by the proximity of more dangerous property, and by the improvement or deterioration in the public supply of water and the public arrangements for extinguishing fires 2 Infinitely greater changes take place in the degree of risk attending warehouses and manufactories, and many of these developments are of an unexpected character. The great fire in Tooley Street, London, in 1861, was aggravated by a prodigious escape of burning tallow, which literally set the Thames on fire, and long defied all efforts to extinguish it. More lately at Leith a highly inflammable spirit recently introduced into trade exhibited similar characteristics. At Newcastle a fusion of nitrates of soda or potash mixed with burning timbers caused a prodigious aggravation of a fire; and at Glasgow and elsewhere the fine flour dust of a corn mill, when mixed with a certain quantity of atmospheric air, was unexpectedly found to be as explosive as gunpowder.
But the speculative hazard of fire insurance as a commercial enterprise is limited by a very important circumstance. The contracts, in the United Kingdom at least, are seldom made for a longer period than one year, and often for less, and need not be renewed on either side unless their safety and reasonableness are confirmed by experience, so that from day to day the insurance company is able in a measure to revise its terms, and to correct the errors arising from imperfect data or a too sanguine generalization. The business on the whole has been a profitable one. There have been comparatively few absolute failures of fire insurance offices in Great Britain, and none of any magnitude ; nor do British companies regard it as any distinction that “they have always paid their losses in full.” The returns of those companies whose accounts are published indicate general prosperity, and the quotations of the share market and other circumstances show that the companies whose accounts are not made public have had at least equal success. The thirty companies whose experience has...
