Insurance

Insurance, a term meaning generally “making oneself safe against” something, but specially used in connexion with making financial provision against certain risks in the business of life. The terms Assurance and Insurance are in ordinary usage synonymous, but in the profession “assurance” is confined to the “life” business, and “insurance” to fire, marine and other miscellaneous risks. Assurance was the earlier term, and was used of all forms of insurance indiscriminately till the end of the 16th century. Insurance—in its earlier form, “ensurance”—was first applied to fire risks (see note s.v. “Insurance” in the New English Dictionary).

I. General History

During the latter half of the 19th century the practice of insurance extended with unprecedented rapidity, partly in novel forms. While its several branches, such as life insurance, casualty insurance and others, have each had an independent and characteristic development, all these together form an institution peculiar to the modern world, the origin and growth of which attest a remarkable change in men’s ideas and habits of thought.

The simplest and most general conception of insurance is a provision made by a group of persons, each singly in danger of some loss, the incidence of which cannot be foreseen, that when such loss shall occur to any of them it shall be distributed over the whole group. Its essential elements, therefore, are foresight and co-operation; the former the special distinction of civilized man, the latter the means of social progress. But foresight is possible only in the degree in which the consequences of conduct are assured, i.e. it depends on an ascertained regularity in the forces of nature and the order of society. To the savage, life is a lottery. In hunting, rapine and war, all his interests are put at hazard. The hopes and fears of the gambler dominate his impulses. As nature is studied and subdued, and as society is developed, the element of chance is slowly eliminated from life. In a progressive society, education, science, invention, the arts of production, with regular government and civil order, steadily work together to narrow the realm of chance and extend that of foresight. But there remain certain events which may disturb all anticipations, and in spite of any man’s best wisdom and effort may deprive him of the fruits of his labour. These are mainly of two classes: (1) damage to property by the great forces of nature, such as lightning and hail, by the perils of the sea and by fire; (2) premature death. A useful life has an economical value. But no skill can make certain its continuance to its normal close. In the reasonable expectation that it will last until a competence is gained or the family ceases to be dependent, young men marry; but some will die too soon, and in the aggregate multitudes are left destitute. Both classes of loss are alike, in that they fall on individuals in the mass who are not known beforehand nor selected by any traceable law. But the sufferers are ruined, while the same pecuniary loss, if distributed over the whole number, would be little felt. Wherever the sense of community has existed this has been discerned, and some effort made to act upon it. Thus in feudal Europe it was customary for the houses of vassals to be restored after fire at the cost of the estate. In England in the 17th century the government practised a method of relief after accidental fires. When such a loss was proved to the king in council, the chancellor sent a king’s brief to churches, sheriffs and justices, asking contributions, and trustees for the sufferers administered the funds collected. But under the last two Stuarts gross frauds resulted, and the system fell into disrepute and disuse. At best, the voluntary relief provided by charity after losses are incurred is but sporadic and irregular. Insurance begins when the liability to loss is recognized as common, and provision is made beforehand to meet it from a common fund. The efficient organization of communities or groups for this purpose is an essentially modern achievement of social science. But the history of the conception in its formative stages is extremely obscure.

Its first appearance in business life is often sought in the marine loans of the ancient Greeks, fully described by Demosthenes. Money was advanced on a ship or cargo, to be repaid with large interest if the voyage prosper, but not repaid at all if the ship be lost, the rate of interest being made high enough to pay not only for the use of the capital, but for the risk of losing it. Loans of this character have ever since been common in maritime lands, under the name of bottomry and respondentia bonds. (See below, Marine Insurance.) But the direct insurance of sea-risks for a premium paid independently of loans began, as far as is known, in Belgium about A.D. 1300. During the next century the risks of insurance for the usual voyages between London and European ports were carefully considered, and customary rates became established. In his address in opening Elizabeth’s first parliament in 1559, Sir Nicholas Bacon said, “Doth not the wise merchant in every adventure of danger give part to have the rest assured?” In 1601 parliament created a commission to decide disputes under contracts for marine insurance, and the preamble of the act (43 Eliz. ch. 12) expresses the best thought of the British mind in that day upon the subject. Thus the business of marine insurance was intelligently and wisely practised three centuries ago. But the underwriters were private persons, acting independently, so that the insured lacked the benefit of large aggregations of capital to make his contract safe; while the insurer, who took one or a few risks, was without the security of large averages and might be crushed by an exceptional loss. A partial remedy was gradually reached in London. Men who had capital to employ in this hazardous business used to meet at fixed hours when shipowners and merchants could negotiate with them. The higgling of the open market, in view of all the circumstances of each risk—as the character and condition of the ship, its crew and cargo, the length and route of the voyage, the season, the current rate of interest and profits—determined the rate of premium; and when this obtained general assent, the written agreement was signed by each underwriter for that part of the risk which he assumed. Towards the end of the 17th century these meetings were held in Lloyd’s coffee-house, and their simple practice gradually grew into the complete and complicated system of marine insurance now general. The underwriters together evolved rules and improved methods, but continued for generations to insure severally, without corporate powers or common responsibility, so that the name Lloyd’s became throughout the commercial world the symbol of marine insurance. More recently the name has been adopted in the United States by associations of private or individual underwriters as distinguished from insurance corporations.

Although the underwriters at Lloyd’s often considered and assumed other than marine risks, and made contracts some of which were merely wagers on public or private events, there is no record of insurances by them against fire on land. But fire insurance, it is vaguely known, had previously been practised, in a crude form, in several European cities. In 1635, and again in 1638, citizens of London petitioned Charles I. for a patent of monopoly to insure houses at the rate of one shilling yearly for each £20 of rent, the association to repair or rebuild those burned, to maintain a perpetual fire-watch in the streets, and to pay £200 yearly towards rebuilding St Paul’s cathedral until finished. The attorney-general approved the project, but in the disorders of the kingdom it was forgotten. The Great Fire of 1666 revived interest in the subject, and led to practical measures. In May 1680 a private fire office was opened “at the back side of the Royal Exchange” to insure houses in London, by assuming the risk of loss to a fixed amount for a fixed premium, namely, 2½% of the yearly rent for brick houses and 5% for frame houses, the rent being always assumed to be one-tenth of the value of the fee. The estimates of the promoters are interesting. In the fourteen years since the Great Fire 750 houses had been burned in London, with an average loss of £200. A fund of £40,000 subscribed as guaranty was to be increased by £20,000 for every 10,000 houses insured, and the interest of the fund alone therefore might be expected to meet all losses and leave a surplus. Thus the security was perfect and the promise of profit great. Meagre as was the basis of facts for the calculations, and crude as was the statistical method employed, the insurance offered met a general want and the business grew rapidly. Within a year a strong demand was heard that the city of London should itself insure the houses of its citizens, and the common council voted to do so at lower rates than the fire office. But the courts put a speedy end to this movement, holding that the charter conferred on the city no power to transact such business. Thus the socialistic theory that insurance is properly a branch of government is almost as old as the business itself, though it has never found favour or been practically tested on a large scale in Great Britain or America.

The next notable step in the evolution of modern methods was the organization of mutual insurance associations. In 1684 the Friendly Society was organized. Each member paid a small entrance fee for expenses, made a cash deposit as a reserve for emergencies, to be returned at the end of his term, and agreed to meet equitable assessments for current losses. Payments were computed on the assumption that one house in 200 is burned every fifteen years. The rivalry between the proprietary and the mutual systems began at once, and has continued till now. In 1686 “the Fire Office at the back side of the Royal Exchange” petitioned for a patent of the fire insurance policy and a monopoly of its issue for thirty-one years. The Friendly Society opposed the grant. The most eminent lawyers for both were heard by the king in council, and on the 30th of January 1687 King James II. decided the case. No charter was granted, but the Fire Office might continue its business, having a monopoly for one year. Thereafter the Friendly Society might for three months sell policies, but must then suspend for three months, and so on for alternate quarters. But the Fire Office must pay the ordinance service for its work in extinguishing fires, the amount to be fixed for each fire by the king. This was the first appearance of the plan, so widely prevalent in after years, of imposing on insurance companies the support of fire departments; that is, of taxing the prudent who insure to protect the reckless who do not.

After 1688 the atmosphere of England was freer, and underwriting was soon practised without special licence. In 1704 the societies began to insure household goods and stocks in trade, and the insurance of personal property rapidly became as important as that of buildings. In 1706 the Sun Fire Office was founded, and began to issue policies on both real and personal property in all parts of England. Other associations arose in quick succession of which the Union Fire Office, dating from 1714, and the Westminster from 1717, still survive. Before 1720 both fire and marine insurance had become general in all great centres of trade. But life insurance was as yet hardly conceived. Sporadic evidences that it was needed, and that men were feeling after it, occur in very early records. It was a medieval custom to advance to a mariner goods or money, to be restored with large additions, but only in case of safe return; or to contract, for a sum in hand, to ransom him if captured by pirates, or to pay a fixed amount to his family if he were lost. To evade the usury laws life annuities were often sold at a low rate, redeemable for a stipulated sum. Life estates were sold upon some guess at their probable duration; and leases, especially of church lands, were made for one, two or three lives on rude and conventional estimates of the time they would run. Thus there was a commercial and social pressure for some intelligent method of valuing life contingencies. But the direct insurance of life, as a means of reducing the element of chance in human affairs, was hardly thought of. Indeed, such contracts were commonly regarded as mere forms of gambling, and were prohibited in France as against good morals.

The earliest known policy of life insurance was made in the Royal Exchange, London, on the 18th of June 1583, for £383 6s 8d. for twelve months, on the life of William Gibbons. Sixteen underwriters signed it, each severally for his own share, and the premium was 8%. The age of the insured is not referred to, nor was it then considered, except when far advanced, in fixing the premium. Gibbons died on the 29th of May 1584. The underwriters refused to pay, alleging that twelve months, in law, are twelve times twenty-eight days, and that Gibbons had survived the term. The court, of course, enforced payment. A few instances of similar contracts are found, mostly in judicial records, during the 17th century; but every such transaction was justly regarded as a mere wager, at least on the part of the insurer. It could not be otherwise until the principles of probability and the uniformity of large averages were understood and trusted. A few great thinkers were groping for principles which were profoundly to modify the practical reasoning of after-generations. But their work first obtained wide recognition upon the publication of the Ars Conjectandi, the posthumous treatise of Jacques Bernoulli, in 1713. Meanwhile the social need for insurance continued to express itself in empirical efforts, which at least helped to make clearer the problems to be solved. Thus in 1699 “The Society of Assurance for Widows and Orphans” was founded in London, a crude form of what is now called an assessment company. Each of 2000 healthy men under fifty-five years of age was to pay 5s. as entrance fee, 1s. quarterly for expenses, and 5s. at the death of another member; and at his own death his estate should receive £500, less 3%. On default in any payment his interest was forfeited. The society lasted about eleven years, and the accounts of its eighth year are preserved, showing the payment of £5200 upon twenty-four claims. The economic significance of this society lies in its distinct recognition of the principle of association for the distribution of losses. Together with the Friendly Society, it shows that this principle had now been so widely grasped by business men that, when embodied in a practical venture, it found substantial support.

The conception of a corporation as an artificial person to hold property and support obligations uninterrupted by the death of individuals was found in Roman law and custom. Its first use in modern business enterprise was perhaps the Bank of St George in Genoa, about A.D. 1200, a joint-stock company with transferable shares, whose owners were liable only to the amount of their shares. In England the crown, itself the chief and type of corporations sole, was the source of chartered rights, and from about 1600 the principle steadily gained recognition, the advantages of incorporation being attested by the successes of the great trading companies. Experience showed that the corporate form was the obvious remedy for the chief difficulties in the practice of insurance. Single risks were but speculative wagers; a great number must be taken together to obtain a trustworthy average. A larger capital than an average private fortune was demanded as a guaranty, and this capital must not be exposed to the dangers of trade, but set aside for the special purpose. Individual underwriters may die or fail; only a permanent institution can be trusted in long contracts. Several projects were devised on this basis. Early in the 18th century, indeed, the English government refused a charter for marine insurance, declaring that corporate insurance was an untried and needless experiment, while private underwriting was satisfactory and sufficient. But in 1720, when two sets of promoters offered £300,000 each for a charter, exclusive of other associations though not of individuals, to insure marine risks, parliament chartered the Royal Exchange and the London Assurance Company with a monopoly to this extent. The business disappointed its projectors at first, and the government accepted half the price rather than revoke the grant. In 1721 the companies extended their operations to fire insurance throughout England.

Thus the principle of insurance had now become a distinct part of the common stock of thought in enlightened nations, and gradually, by association with successive new ideas, plans and methods, was developed into a business or trade, which before the middle of the 18th century already formed an essential element of the social scheme. Most of the modern forms of insurance against the elements were known, and at least crudely practised. But there was no scientific basis for the business. Premiums were fixed, not by computation from known facts or reasonable assumptions, but by guess and the higgling of the market. Only the competition of capital checked the extortionate demands of underwriters. The first important steps towards a scientific valuation of hazards were taken in dealing with the class of risks hitherto so much neglected, those which depend upon human mortality. Marine and fire insurance had their origin in the pressure of need. The practice began before a theory existed. But life insurance had its origin in the scientific study of the facts of human mortality. Both marine and fire insurance became general before there was any intelligent study of the risks by statistical or mathematical methods, nor can it be said that much progress has since been made towards establishing a scientific basis for the valuation of risks in these classes. But life insurance may be said to have been impossible until the theory of probabilities had become a recognized part of the common stock of ideas.

The value of insurance as an institution cannot be measured by figures. No direct balance-sheet of profit and loss can exhibit its utility. The insurance contract produces no wealth. It represents only expenditure. If a thousand men insure themselves against any contingency, then, whether or not the dreaded event occurs to any, they will in the aggregate be poorer, as the direct result, by the exact cost of the machinery for effecting it. The distribution of property is changed, its sum is not increased. But the results in the social economy, the substitution of reasonable foresight and confidence for apprehension and the sense of hazard, the large elimination of chance from business and conduct, have a supreme value. The direct contribution of insurance to civilization is made, not in visible wealth, but in the intangible and immeasurable forces of character on which civilization itself is founded. It is pre-eminently a modern institution. Some two centuries ago it had begun to influence centres of trade, but the mass of civilized men had no conception of its meaning. Its general application and popular acceptance began within the first half of the 19th century, and its commercial and social importance have multiplied a hundred-fold within living memory. It has done more than all gifts of impulsive charity to foster a sense of human brotherhood and of common interests. It has done more than all repressive legislation to destroy the gambling spirit. It is impossible to conceive of our civilization in its full vigour and progressive power without this principle which unites the fundamental law of practical economy, that he best serves humanity who best serves himself, with the golden rule of religion, “Bear ye one another’s burdens.”

II. Casualty and Miscellaneous Insurance

Before proceeding with an account of the standard institutions of fire and life insurance, it is proper to glance at the modern vast extension of casualty insurance, and to notice certain novel applications of the insurance principle to other special classes of events. The novelty of these enterprises, however, is not in the general idea underlying each of them. In almost every instance in which insurance has been extended, so as successfully to cover new kinds of risks, it will be found that the suggestion is nearly as old as the practice of life insurance. Many more kinds of insurance than are even now found useful were attempted more than a century ago. But no statistical basis then existed for determining the probability of loss from various casualties, nor had the methods of canvassing, accounting, proving and checking losses, reached the perfection now recognized as necessary for efficiency and safety. The various branches of business which, in distinction from the great standard institutions of life, fire and marine insurance, are commonly treated as miscellaneous insurance, differ widely in their subjects and methods. The most general of them, and that most widely known, is insurance against personal injury by accidents of every kind. Much has already been done by the companies in collecting and analysing facts, so as to determine the average risk of injury and disablement among different classes of men. But there is as yet no such union of effort among them to combine their resources for such purposes as among the life companies, nor does the subject admit of treatment so exact as that of human mortality. Hence it is impossible to speak of a theory of accident insurance in a scientific sense; and in its practice premiums and necessary reserves are determined by the trained business judgment of individual managers rather than by the calculations of actuaries from statistical collections of facts.

The insurance of railway travellers against injury upon trains was the first form of accident insurance which proved widely acceptable. This is still practised as a special business by several companies, tickets, entitling the purchaser or his family to a fixed compensation in case of his injury or death, being offered for sale with the railway tickets. But the development of insurance against personal injuries, which is most characteristic of the times, is the wholesale insurance of the employer against liability to the employed for accidental injuries sustained in his service. This was first undertaken on a large scale by the “Employers’ Liability Assurance Corporation of London,” founded for the purpose in 1880, immediately after the passage of the Employers’ Liability Act by parliament, which made employers of labour liable for injuries sustained in their service to an extent unknown to the common law. The Workmen’s Compensation Act 1906 greatly extended the classes of employers liable for accidents to their servants, and the number of companies devoting themselves to accidents and workmen’s compensation has greatly increased, while practically every fire insurance office has taken up the business. The policies are issued to employers of labour, agreeing to indemnify them for any loss to which they may be subjected, at common law or by statute, in consequence of bodily injuries suffered by any employee while engaged in their service. In some cases the insurance company undertakes the investigation and settlement of each claim within the limits prescribed by the policy, and conducts any litigation which may result. The adjustment of damages can be made with more economy and skill by the companies than is usually possible for the employer, and the danger of fraudulent claims is largely reduced by methods experience has taught them. The price charged for such insurance is either a small percentage of the aggregate wages paid during the term, or a standard rate for each particular class of employment, or (in the case of large employers of labour) an “all-round” rate designed to cover every class of employee.

III. Fire Insurance

The growth of the business of fire insurance since 1880 or thereabouts has been commensurate with the increase of wealth and of commercial activity in the foremost nations, while the practice of it has also become general in countries in which it was formerly little known. The statistics of the subject have in recent years become far more full and more accessible than formerly; partly because many governments require detailed reports of resources, receipts and expenditures from all companies permitted to establish agencies within their jurisdiction, and periodically publish summaries of the returns; but also largely because the companies seek the widest publicity as their best means of advertising. It is to be regretted that there is as yet no uniformity of method in these returns; while some of the most important elements of the subject are not sufficiently illustrated for the student in the published statistics. Many companies of the United Kingdom transact business throughout a great part of the world, and there is no means of determining how much of their receipts or their losses must be referred to Great Britain. Further, they fail to give classified amounts at risk, so that it is impossible to estimate with any confidence the total sum for which any kind of property, such as dwellings, factories, household goods, stocks of merchandise or wares in transit, is insured. The returns of the London Fire Brigade, however, which is in part maintained by regular contributions from the fire underwriters at the rate of £35 for each £1,000,000 of risks assumed by them within the metropolitan district, continue to exhibit a regular growth. The aggregate amount insured in the metropolis was reported as follows:—

In 1882	£696,715,141
1886	741,109,316
1890	806,131,385
1895	858,899,409
1900	963,291,097
1905	1,034,819,587

It appears probable that the rate of increase here shown is not greater than the actual growth of insurable property during the same period, so that it may be reasonably supposed that the custom of protecting all exposed property by insurance was already general in London many years ago. But the transactions of the British fire offices have grown much more rapidly, and indicate that, outside of the metropolitan district, the practice of insurance has extended greatly. The returns show that there is a tendency to concentrate the business in the control of large capital and experience, for practically all the premiums received and losses paid were shared by thirty-one companies, although there are at the same time a greater number of corporations of foreign countries with agencies for fire insurance in the United Kingdom; but many of these do but a nominal amount of business, and twenty-three of them are exclusively or chiefly engaged in re-insurance. This tendency has been a marked feature in the later history of fire insurance everywhere. The companies which are now in the field are the survivors of tenfold as many projected enterprises which have failed. The records of about two thousand organizations for the purpose, in America alone, which have undertaken the work and disappeared within fifty years, show the dangers to which inadequate skill and capital are exposed. But a small proportion of these failures were the direct result of sweeping disasters, though about seventy of them followed the memorable fires in Chicago and Boston in 1871 and 1872. Many more, nearly one-half of the whole, have followed a short career, in which the helplessness of inexperience to compete with long training and complete organization was demonstrated. Many hundreds of these projects were mere speculations or even frauds from the beginning; and the better education of the community at large in the principles and methods of insurance has been the chief agent in checking such enterprises, aided by the stringent legislation of several countries and of the United States in America and by the criticism of the press.

The Mutual principle has a strong attraction for many insurers and projectors. When a large number of pieces of property, so distributed that a single fire cannot destroy a considerable proportion of the whole, are yet owned Mutual system. and controlled by persons who can fully trust one another, both for financial responsibility and for good faith, there may be no need of a large capital in hand, nor of much of the costly machinery required for general competition. A contract for the assessment on all the property of losses as they occur, at rates fixed by the estimated exposure, may form a safe basis for an association. The fixed payments may be limited to necessary expenses, with a moderate reserve for emergencies, all excess of collections to be returned to the insured. This simple conception of an insurance association, with such modifications as experience indicates, has been accepted for a time as ideal in almost every civilized community, and attempts are continually made to realize it, but in the vast majority of instances with complete failure as the result. Like every other product of human skill, insurance is, for the most part, best supplied to the market by those who make it their calling to produce it for gain. But while the mutual plan has proved poorly adapted to the general service of the commercial world, in some communities, and especially among the owners of certain classes of property, it has achieved great and apparently permanent success. This is particularly true of manufacturing districts, in which numbers of mills and factories are exposed to peculiar danger of fire by the nature of their own operations. The best safeguard they can have is by employing great skill in the construction, arrangement and conduct of their works. A group of such properties, associated for the prevention of loss, is naturally stimulated to highest efficiency when the whole group undertakes to bear all losses which are not prevented, and thus every member has a strong interest in making the protection complete. It is in associations of this character that the mutual plan of fire insurance has rendered its greatest services. The mutual plan has been widely adopted also in local associations for the insurance of dwellings and farm improvements, where the individual risks are small, and where technical classification and special safeguards against fraud are not considered necessary, often with the result of affording satisfactory protection at low rates. But the ratio of this part of the business to that conducted by joint-stock companies diminishes from year to year, even in the agricultural and rural districts of the United States. According to the reports of the insurance departments of the states, as summarized in the Spectator Company’s Year-Book, more than half of the cash premiums of mutual insurance companies are collected in the two manufacturing states of Massachusetts and Rhode Island.

It is, after all, only within a very limited field that the mutual principle can be adopted. 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 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. To work out the equitable solution of such a problem an amount of technical skill and extended experience is required which few bodies or communities possess. Certainly, experience in Great Britain has shown that the one system of fire insurance which 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. In France, Belgium, Holland, Russia and Norway, also, the joint-stock plan is almost exclusively employed.

The earliest plan of insurance which was successful as a business was that practised at Lloyd’s Coffee-house (see Lloyd’s) in London, and there applied almost exclusively to marine risks. Although the association known as Lloyd’s. Lloyd’s has been for generations a strong financial institution, with every modern safeguard, and since 1871 has been a chartered corporation with large funds, yet its name has become accepted as the symbol of the primitive practice of combined underwriting by individuals, each upon his own credit, for a share of the risk and without common liability.

The rate of premium varies with the supposed risk, but certain descriptions of property are specially and more elaborately rated. This has been done to a considerable extent by common agreement amongst the offices, and the arrangements are known as the “tariff system,” which requires here a few words of explanation.

We may suppose the question to arise, What ought to be paid for insuring a cotton-mill, or a flax or woollen mill, or a weaving factory, or a wharf or warehouse in some large city? The experience of any one office scarcely affords adequate data, and a rate based on the combined experience of many offices has a greater chance of being at once safe and fair. The problem, indeed, is a more complicated one than what has been already said would indicate. The property to be insured may consist of several distinct buildings and the contents of them: one building may be devoted to operations involving in a high degree the risk of fire; in another the processes carried on may be more simple and safe; a third may be used only for the storage of materials having little tendency to burn. Fairly to measure these various hazards it has been found necessary that the experience and skill at the command of many companies shall be combined, and that the rates shall be the result of consultation and a common understanding.

Now it is clear that no office will contribute its skill and experience to such a common stock if the effect is to be that other offices may avail themselves of the information in order to undersell it. Consultation about rates and a common understanding necessarily involve a reciprocal obligation to charge not less than the rates thus agreed on; in other words, a tariff of rates is developed to which each office binds itself to adhere. The system tends to restrain and moderate the competition for business which inevitably and to some extent properly exists among the companies, and its value to them is manifest. But it is also of service to the insuring public. At first sight it might seem that free competition would suit the public best, and that a combination among the offices must tend to keep up rates, and to secure for the companies excessive profits, but a little consideration will show that this is a mistake.

It is an unquestionable truth, though one often lost sight of, that all losses by fire must ultimately be borne by the public. The insurance companies are the machinery for distributing these losses, nothing more. If the losses fell on them, their funds, large as they are, would speedily be exhausted, and the service which they render to the public would come to an end. To those who require insurance against loss by fire it must be a manifest advantage that they should have many sound and prosperous offices ready to accept their business, and no less able than desirious to earn or to retain the public favour by fair and liberal conduct. A necessary condition of this state of things is that the rates of premium paid for insurance should be remunerative to the offices, and the main object of the tariff system is to secure such remunerative rates.

This it endeavours to do by two methods—by an agreement as to what rates are to be charged, and by affixing such a penalty to dangerous constructions, substances and processes as to induce, if possible, a lessening of the danger. In other words, and reversing the order, it seeks to diminish the risk of fire, and to secure adequate payment for what risk remains. On the supposition that the offices are correct in their estimate of risks, the effect, and indeed the intention, of their rule is not so much to put money into their own coffers as to lessen the danger, and to save themselves in the first instance, and the owners of property ultimately, from the consequences of preventible fires.

The Tariff system has steadily developed in minuteness of classification and in adaptation to wider experience, as well as to the changes in the character of many classes of risks by improvements in building and by the introduction Tariff difficulties. of new kinds of goods and machinery. The estimates of risk and the determination of premiums are largely governed by individual opinion and by competition, no amount of experience furnishing a statistical basis on which trustworthy predictions of average loss can be made. Hence it is only by constant co-operation among insuring institutions in the exchange and combination of their observations that justice can be done to them and to the public. The proper extent of this co-operation is easily attained where the business is free from all restrictions except those of the common law, as in Great Britain, and the competition of capital for profits is keen enough to keep the rates within reasonable limits. But in countries in which the government regulates the business in a more paternal spirit, and meddles with all its details for the avowed purpose of securing the safest and best public service, many difficulties arise. This is increasingly the case in several of the nations of Europe, notably in Austria, Switzerland and Germany.

The direction in which fire insurance as a social institution calls most pressingly for improvement is the extension of the principle of co-insurance. The importance of this can only be understood by remembering that the Need of co-insurance. aggregate losses of the community by fire are chiefly made up of innumerable small fires and not of sweeping conflagrations. The experience of every company confirms the general truth, that the number of fires in which a building is totally destroyed, or in which the loss amounts to the greater part of the property exposed under the same risk, is comparatively very small. It may be asserted with confidence that, in the grand aggregate of the business, much more than three-fourths of the loss occurs in fires in which less than one-tenth of the insurable value at risk is destroyed. The practical result is obvious. If fires destroy a million of dollars’ worth in property insured for its full value, and a million’s worth more in property insured for one-tenth of its value, the insurers will pay $1,000,000 upon the first group and more than $750,000 upon the second. But if all the insurance is taken at the same rate the insurers will have received premiums ten times as great on the former group as upon the latter. This rough illustration shows that in an equitable adjustment of rates the amount insured as compared with the value exposed is a prime element, and that premiums might justly form a scale, highest on the smallest fractions of value, and diminishing rapidly as the percentage of insurance increases. Such a scale is, however, impracticable for many reasons, apart from the endless complications which, even if it could be constructed, it would introduce into the classification of risks. Any scientific plan of insurance, therefore, must provide another method for maintaining the proportion between amounts of premiums paid and the share in its benefits obtained for them. This is the purpose of what are generally called average or co-insurance clauses. The principle is, that when a proper rate for a class of risks is found, then the insured may protect at that rate any percentage of such a risk, and in case of fire shall be indemnified for the same percentage of his loss. When once clearly grasped, this principle largely simplifies and rectifies the business. It is in universal use in marine insurance under the name of “average,” and is there recognized as indispensable. It is embodied in all fire policies in France, Germany and several other countries of Europe, and in 1826 was made compulsory in Great Britain by law in all “floating policies,” those, that is, which cover stocks of goods distributed in several places and in fluctuating amounts. But it has not yet become general in Great Britain or America, although every writer of authority on the subject, and every practical underwriter of large experience, approves it. Systematic attempts have been made since about 1892 to extend its application in the United States with much success, but they have been met by strong opposition, which shows a widespread misunderstanding of its true bearing.

The varying attitude of several civilized governments towards the institution of insurance has found significant expression in their tax laws. In Great Britain a stamp duty of 6d. was imposed in 1694 upon “every piece of vellum or Taxation of insurance. parchment or sheet of paper upon which any policy of insurance should be engrossed or written,” and was doubled in 1698. It was further increased (reaching 3s. 10d. per policy in 1713) and varied by many subsequent acts, under some of which the percentage duty on fire insurance was also made payable by stamps upon policies. But in 1865 the stamp tax was finally reduced to the nominal sum of 1d. upon each policy. A far heavier burden, however, was imposed upon insurers by the measure of Lord North in 1782, charging all fire insurances in force with an annual duty of 1s. 6d. for every £100 insured. In 1815 the general rate was made 3s. per £100, but was collected once for all upon the policy when issued; and it so remained until reductions began in 1864. The duty was wholly abolished in 1869. The revenue from this source reached its highest point in 1863, when it was £1,714,622, presumably representing insurances effected in that year to the amount of £1,143,081,333. There are no data for determining the amount of premium receipts or of losses realized on the same volume of insurance; but the tax was recognized by economists as well as by all parties to the policy contracts as an excessive burden. In many instances it more than doubled the cost of insurance. Its effect in discouraging the prudent custom of insuring against fire was very serious, and after its abolition this custom extended so rapidly that it soon became, and continues, practically universal in Great Britain. Upon the continent of Europe fire insurance is generally taxed quite heavily; most so in France, where the direct duties on the premiums, together with the registry and stamp taxes paid by the companies, have been estimated to add one-fourth, or perhaps one-third, to the cost of insurance.

In the United States the companies are taxed, each by the state in which it is domiciled, upon their real estate, and often upon their capital, surplus of profits, and are required in other states to pay fees to the insurance departments, and commonly an excise of from 1 to 2½% of their premiums. An elaborate table is prepared each year by a committee of the National Board of Fire Underwriters, showing the aggregate amount of taxes paid by the companies operating in New York in comparison with their receipts and profits. The statement received and published by the board in 1900 contained the following:—

	For the Year 1899.	For Twelve Years 1888-1899.
Premiums (fire and marine)	$134,450,639	$1,425,929,631
Losses paid (fire and marine)	91,031,677	856,978,494
Expenses	52,849,129	517,667,238
Increase of liability (unearned premiums, &c.)	8,998,526	59,104,388
Net loss in the last year	18,428,693	..
Net profit in twelve years	..	7,820,489
Amount of taxes paid	4,495,332	35,984,081
Taxes were of premiums	3.34%	2.52%
Taxes were of premiums, less losses	10.35%	6.32%

In qualification of this statement, it may be said that the reported expenses appear to include taxes, and that the additions charged, to liability are to some extent theoretical and flexible. It also appears from the state reports that upon the entire capital and net surplus of $191,000,000 employed in the business in the United States by 316 joint-stock companies, dividends to the amount of $8,000,000, or 4.2%, were paid in 1899 to shareholders. Nevertheless it is true that competition among the companies, together with unfriendly legislation, has reduced the profit upon their aggregate capital near the vanishing point, and that the taxes, the average rate of which increased 50% within the period 1891-1899, are heavier in many states than can be justified by public policy or by the analogy of other corporate interests. The true principle, doubtless, is that while the capital employed in insurance for gain ought to contribute to the state the same share of its profits as other capital, yet the premiums, agencies, policies and entire machinery representing only losses, and providing for their distribution, should be exempted, as far as the necessities of the public treasury permit.

The most complete statistics of the fire insurance business collected in any country are those presented in the United States to the National Board Statistics. of Fire Underwriters at each annual meeting. The following summary of part of the information submitted by the committee on statistics, 10th May 1900, giving the amount of fire risks insured in the United States, premiums received for them, and losses paid upon them, by all joint-stock fire insurance companies for the year 1899 will serve as an example:—

Fire Insurance in the United Slates. Joint-Stock Companies.

Companies.		Fire Risks assumed.	Fire Premiums received.	Fire Losses paid.	Premiums per $100 of Risk.	Loss per $100 of Risk.	Loss per $100 of Premiums.
		$	$	$	$	$	$
American	218	12,251,299,499	93,577,169	59,119,018	.7638	.4826	.6318
Foreign	35	6,087,570,275	42,958,472	29,865,014	.7057	.4906	.6975
All	253	18,338,869,774	136,535,641	88,984,032	.7445	.4852	.6517

These returns do not include mutual companies. The compilers of the Insurance Year-Book, however, obtain from the several state departments of insurance the reports of all companies made to them of the business done within each state; and from these it appears that in 1899, for example, 160 mutual companies assumed fire risks to the amount of $1,119,772,848. Many small local associations have made no returns, but their operations are too limited to materially affect the aggregate. It is noteworthy that while mutual companies transact less than 6% of the business of the whole country, yet in the state of Rhode Island, a densely peopled manufacturing community, they have more than 78%, and in Massachusetts nearly 24%; and that, while less than one-ninth of the insured property of the United States is situated in these two states, they contain nearly two-thirds of that which is insured by mutual associations.

In the United Kingdom the statistics of fire insurance are less accessible and less complete, no official records being made of the local distribution of the property insured, while the published accounts of the companies are not sufficiently uniform and detailed to make a trustworthy summary of the entire business possible. Much of it is done by foreign companies, of whose British business we have no separate statement. A statement of the revenue accounts of the various British companies insuring against fire will be found in the annual Insurance Blue Book and Guide.

In the Dominion of Canada the insurance companies make detailed reports to the government bureau, and the statistics of the business are full and accurate. The following table shows the aggregate business of five companies in the Dominion in 1869 and 1907:—

Companies.	Net Cash Premiums received.	Amount of Policies taken.	Amount at Risk in 1869.	Amount at Risk in 1907.	Losses paid.
	$	$	$	$	$
Canadian Companies	54,849,706	5,663,696,931	59,340,916	412,019,532	36,073,543
British Companies	159,372,986	14,745,342,255	115,222,003	937,240,828	105,203,259
American Companies	32,449,482	2,801,078,045	13,796,890	265,401,198	20,129,323
All Companies	246,672,174	23,210,117,231	188,359,809	1,614,661,558	161,406,125

Upon the continent of Europe the fire insurance business is conducted partly by local companies in each country and partly by the great international offices of Great Britain and Germany. The local associations in Austria, Germany and Switzerland are of three classes—public assurance organizations connected with local governments, private mutual companies and joint-stock companies. It is impossible to obtain balance-sheets of all, nor is any information available concerning the local distribution of the risks, or the whole amount of property insured. The capital employed by stock corporations in this business in each country, and the aggregate premium receipts and payments for losses in the last year of which a report is available will be found in the annual Post Magazine Almanack.

While most of the fire insurance business in the Australian colonies is in the hands of British companies, local institutions for the purpose have had a considerable development on the same general lines as in Great Britain and with similar freedom from interference by the governments. But no accounts of the receipts and losses are available, most of the companies conducting a marine or life insurance business, or both, under the same general management.

IV. Life Insurance

Guesses at the probable length of life for the purpose of valuing or commuting life-estates, leases or annuities were made even by the ancients, and crude estimates of the number of years’ purchase such interests are worth occur in History. Roman law and in many medieval writings. In 1540 the English parliament enacted that an estate for a single life should be valued as a lease of seven years, one for two lives as a lease of fourteen years, and for three lives as a lease of twenty-one years. More than a century later The Cambridge Tables for renewing of Leases and purchasing Liens, a standard work in England, with the certificate of Sir Isaac Newton to its accuracy, proposed, as a remedy for the inequity of this fanciful rule, to make the increase for each additional life less by one year, so that, valuing a single life at ten years, two lives shall be reckoned as nineteen years and three lives as twenty-seven years. No distinction of ages was recognized, and the results, tabulated to decimal parts of months, are worthless. Thus the foremost minds of the world had as yet no apprehension of a true method of reasoning on the subject. The first clear insight into the character of the problem appears in Natural and Political Observations on the Bills of Mortality, published in 1661 under the name of John Graunt, a haberdasher and train-band captain of London. Graunt recognized the principle of uniformity in large groups of vital and social facts, and actually prepared, from the mortality registers of London, what he calls a “Table showing of one hundred quick conceptions, how many die within six years, how many the next decade, and so for every decade till 76.” This was the earliest crude suggestion of a table of mortality, and Graunt’s interest in the inquiry was scientific, without definite practical purpose. But a little later the sale of annuities was pressed upon governments as a method of discounting future revenues. In 1671 John de Witt, grand pensionary of Holland, reported to the states general a plan for such sales upon a scientific method, the insight and skill of which, had he possessed proper statistical data, would have anticipated results only reached by later generations. The report, however, was buried in the Dutch archives and forgotten for nearly two centuries. It was unknown in England when, in 1692, the government undertook the sale of annuities. A loan of £1,000,000 was offered, each £100 paid in to purchase a life annuity of £14, without distinction of age. A table accompanied the offer, purporting to show how many of 10,000 persons now living, old and young taken together at random, are likely to die in each year from one to ninety-nine. The purchasers, though without clear understanding of the principle, were instinctively shrewd enough to select healthy young lives for annuitants, and the nation paid enormously for the error. This speculation of the public treasury led the eminent mathematician and astronomer, Dr Edmund Halley, to examine the subject. In 1693 he presented to the Royal Society a study of “The degrees of mortality of mankind.” The parish registers of England took no note of age at death, and Halley, perceiving that the average duration Halley’s Table. of life in large groups of persons can only be determined when ages at death are known, sought in vain a statistical basis for such an inquiry in his own and in many other countries. But it happened that the city of Breslau in Silesia had kept such records, and he succeeded in obtaining the registers for five years, 1687-1691, including 6193 births and 5869 deaths. No census of the city having been taken, Halley made the best estimate he could of the population, and computed how many of a thousand children taken at the age of one year will die in each succeeding year. Arranging the results in three parallel columns, showing in successive lines the age, the number living at that age, and the number of deaths during the year, he formed the first mortality table. The arrangement was itself a discovery, exhibiting at a glance the essential data for valuing life-risks, and suggesting solutions for problems which had puzzled the ablest students. This general form of the mortality table remains in use as the natural and best for such collections of facts. The method of using such a table in calculating the values of life contingencies was also discovered by Dr Halley. He showed that where a payment is to be made at a future date, if a named person be then alive, its present value is the sum which compounded at interest during the interval will amount to that payment multiplied by the fraction representing the probability that the person will survive. These two elements, compound interest and the probability of life or death, are the foundations of the theory of life contingencies.

From Halley’s time the progress of the theory has been in three directions: first, in accumulating facts from which averages are deduced, and analysing the data so as to eliminate disturbing influences, that is, in constructing trustworthy tables of mortality; secondly, in extending the inferences from such tables, and multiplying their applications to needs of practical life; and thirdly, in facilitating the calculations which these applications require. But while Halley thus firmly and lastingly drew, in outline, the theory of life contingencies, the numerical results attained by him were grossly imperfect. Forced by the lack of data to assume that the population was stationary, and to rely on a rude estimate of its numbers, he well knew that his conclusions were but provisional. Yet they were far in advance of the general mind of his time. As late as 1694, and even in 1703, parliament substantially re-enacted the old law for valuing leases at seven years for each life. The meagre Breslau Table long remained the only serious attempt to utilize actual observations of mortality for scientific purposes. In 1746 A. de Parcieux (1703-1768), a mathematician of Paris, published an Essai sur les probabilités de la durée de la vie humaine, in which he presented mortality tables formed by himself, one from the records of certain Tontine associations, and five others from those of several religious orders in Paris. The Tontine experience table was a much closer approximation to the true course of mortality, as shown by later investigations, than any of its predecessors, and indeed now appears, despite the crude manner in which the materials were treated, to have been more accurate and more trustworthy than the Northampton or even the Carlisle Table of much later date. The essay of de Parcieux was an important source of information to advanced students in France and Germany, but attracted no general or popular interest, nor was it followed up by progressive researches of the same character in continental Europe, while it remained almost unnoticed in England.

Throughout the 18th century the customary treatment of life annuities was as chaotic and fanciful as before, though some writers of eminence, most notably Dr Thomas Simpson of London (1752), treated the theory of the subject with great intelligence, and in 1753 James Dodson of London (great-grandfather of Augustus de Morgan) projected a life insurance company in which the premiums should be accommodated justly to the ages of the insured. But life insurance as a business really began with the Equitable Society of London, founded in 1762. The associates petitioned for a charter, but the law officers of the crown refused it, saying that the scheme depended for success on the truth of certain tables of life and death, “Whereby the Chance of Mortality is attempted to be reduced to a certain standard. This is a mere speculation, never tried in practice.” The society was organized as a voluntary association, and began business in 1765. Its premiums were computed from the Breslau Table, with some corrections from the London Bills of Mortality, and were far higher than any now in use. But the managers, in face of actual business, needed more light. Dr Richard Price, a student of the new science of life contingencies, was consulted, and soon devised tests of the society’s experience and measures of the financial results, which are in principle those still practised. He also aspired to construct a more accurate table of mortality, and discovered data in certain parish registers of Northampton which promised to represent the average of life in England. Northampton Table. From these he formed in 1780 the Northampton Table of Mortality, and computed a new and largely reduced scale of premiums for the society. The historical importance of the Northampton Table lies in the profound impression it made on the general mass of intelligent persons. Although mortality had long been recognized by special inquirers as a promising theme for statistical inquiry, its actual treatment, except in the narrow school founded by Johann Süssmilch in Germany (1746), and in the isolated and almost prophetic work of de Parcieux in France, had been speculative and vague. Demoivre handled it with mathematical acuteness, but framed his scale of mortality (about 1750) on a hypothesis of his own, not on known facts. Out of each group of eighty-six deaths, according to this scale, one dies on the average each year till all are gone; so that x being the present age, the probability of death within a year is always 1/(86-x). This conjecture, which, during middle life, served as a rough approximation to the truth, almost as well as some of the early tables of repute, long found remarkable acceptance among men of science. Dr Price’s researches first brought to general apprehension the conviction that a large basis of observed facts is the only source of real knowledge. The government of the day felt the influence of the movement. In 1786 Pitt, then chancellor of the exchequer, consulted Dr Price on plans for the conversion of debt, and in 1789 the government first showed knowledge that in granting annuities ages must be distinguished, and that the prospective life at ninety and that at twenty-five are not to be estimated as equal. About 1808 a conversion of 3% into annuities was planned. The Northampton Table was adopted, and Morgan computed rates from it which were used for twenty years. It proved to represent a mortality far in excess of the average, and in 1821 John Finlaison, being made actuary to the debt commissioners, protested against the rates in use. But not until 1828, when the treasury had lost two millions of pounds by selling annuities too cheap, was the law repealed. Finlaison then constructed a new and less wasteful scale for conversions, but singular results followed. At the age of ninety, for instance, £100 would purchase an annuity of £62. Combinations were formed to purchase annuities on the lives of old people selected for their vigour; 675 of these were taken, with a further loss of at least a million to the treasury. The Northampton Table, in fact, like the earlier Breslau Table, was formed without a census, and upon the false assumption that the population was stationary. Dr Price’s estimate, founded on the recorded baptisms, was much too low, many of the people being of a sect which rejected infant baptism. His table represents an average life of twenty-four years, whilst subsequent inquiries indicate a true average of about thirty years at that time in the same parishes. The actual mortality in the Equitable Society proved to be less by one-third than that anticipated by the table. The error had consequences of vast moment. The immediate and dazzling prosperity of the societies founding rates on this supposed scientific basis excited the public imagination, stimulated the business exceedingly, and led to many extravagant projects, followed by fluctuations and failures which impaired its healthy growth and usefulness.

In spite of gross defects, the Northampton Table remained for a century by far the most important table of mortality, employed as the basis of calculation by leading companies in Great Britain, and adopted by the courts Recent actuarial progress. as practically a part of the common law. Parliament, followed by some state legislatures and many courts in America, even made it the authorized standard for valuing annuity charges and reversionary interests. But in life insurance practice it is now wholly antiquated. Like its most famous successor, the Carlisle Table of Joshua Milne, it rested upon observations of the population of a town. How far this limited and peculiar group represented the nation was still doubtful; no less so how far the rate of mortality among applicants for insurance, accepted by the offices, would correspond with that of the urban citizens or of the whole body. As soon as the companies had sufficient records of their own experience the work began of striving to construct, for business use, tables which should truly express it. This branch of research has ever since been prosecuted with all the resources they could command of industry, practical judgment and mathematical skill; and the successive achievements in it may be accepted as in general the sum and measure of the progress of actuarial science. Now the recognition of an ascertainable uniformity in human mortality has become part of the general stock of thought. But actuarial science, which originated in Great Britain, was long the peculiar and almost exclusive possession of British students, and even till now has been practised most fruitfully in its first home, mainly by the actuaries of life insurance institutions, but with important contributions from other inquirers, especially those in the service of the registrar-general. The most complete storehouse of technical and practical learning on the general theory and on all its applications to life insurance practice is found in the successive volumes of the Journal of the Institute of Actuaries. The tables published by the Institute in 1872, founded on the experience to 1863 of twenty companies (see Annuity), still remain the most authoritative expression of the mortality of insured lives, and have largely replaced all earlier standards in the valuations of the British companies, more than three-fourths of which, in their latest returns to the Board of Trade, compute their reinsurance reserves by the Hm. and Hm.5 tables. But for several years a committee of the Institute and of the Scottish Faculty of Actuaries has been engaged in collecting and arranging for investigation the far vaster experience which has now accumulated in the hands of sixty companies, including the records of more than a million policies. The large basis of facts thus obtained will be treated with special reference to different classes of risks, and will throw much light on difficult questions of selection, which have hitherto been treated speculatively, or at least without the conclusive evidence of large averages, and are still more or less in controversy. Some of these will require more detailed notice hereafter.

Elaborate efforts have been made by several governments to employ the machinery of census bureaus for determining the general rate of mortality, and it has been the worthy ambition of able actuaries to devise trustworthy methods of utilizing the census returns for this purpose. The British Statistical Office under Dr William Farr and his successors, and, later, the Swiss Federal Bureau of Statistics have accomplished Rates of mortality. the best work in this direction, and the series of “English Life Tables,” founded on successive decennial censuses, interpreted by the registered deaths during the intervals, are the most useful data now available for the average value of civilized life. But all such general tables are as yet but tentative and provisional. The imperfections of mortuary registries and of census returns are great, and corrections are largely conjectural. Until more complete methods of collecting the facts are practised, the experience of life insurance companies promises to furnish the only mortality tables having claim to authority. It is already becoming evident that the general rate of mortality, and in particular the rate at each age of life, not only differs widely in different communities, but undergoes important changes in successive generations. A multitude of forces are at work in civilized society which must influence the average duration of life, such as the extension and concentration of many industries, the vast growth of cities, the progress of medical and hygienic science, the increase of wealth, comfort and luxury, the changes in the frequency and destructiveness of war. It is plausibly maintained, on the one hand, that these and other causes have already added some years to the average lifetime of civilized man; and, on the other hand, that their combined effect has been to lessen the sharpness of the struggle for existence, to rescue the weaklings from destruction and enable them to multiply, and so to weaken society at large. The final decision of the question will be found in the gradual modifications of the true table of mortality through successive epochs.

For the purposes of life insurance the future of mortality tables looks to less ambitious problems. The business calls for exact equity in determining the value of all life contingencies, and therefore for the most precise forecast attainable of the dates at which the amounts assured must be paid. Some idea of the historical progress of this inquiry may be gathered from the accompanying table, which epitomizes the general characteristics of a number of typical tables of mortality, showing at ages which are multiples of five years the annual death-rate indicated by each of them. The comparison will be found interesting in many ways, most strikingly, perhaps, as suggesting what is confirmed by a detailed examination of the facts, that insured life on the average in Great Britain is decidedly inferior to that in the United States, but superior to that upon the continent of Europe, and especially in Germany. From a careful investigation of the published experience, Dr McClintock concludes: “It is an ascertained fact that after the first five years of insurance the probability of death,” in Great Britain, “is fully one-fifth greater at any given age than the corresponding probability shown by American experience”; while “the average value of assured life in Germany is as much inferior to that shown in the Hm. experience as that in America has been found to be superior.”1

Table showing the number of Persons who will die in a year out of 100,000 who have attained the given Age, according to several Tables of Mortality.

Age.	North- ampton.	Carlisle.	Seventeen Offices.	Institute of Actuaries.	Institute of Actuaries.	American Experience.	Thirty American Offices.	Twenty- three German Offices.	Four French Offices.
	1780.	1815.	1843.	Hm. 1869.	Hm.5 1869.	1868.	1881.	1883.	1895.
10	916	449	676	490	400	749	648	..	364
15	922	619	694	287	325	763	659	..	515
20	1,403	706	729	633	833	780	676	919	690
25	1,575	731	777	663	1,050	806	703	854	628
30	1,710	1,010	842	772	920	843	748	882	698
35	1,870	1,026	929	877	1,000	895	821	999	807
40	2,090	1,300	1,036	1,031	1,132	979	936	1,176	975
45	2,401	1,481	1,221	1,219	1,294	1,116	1,120	1,437	1,236
50	2,835	1,342	1,594	1,595	1,712	1,378	1,417	1,814	1,638
55	3,350	1,792	2,166	2,103	2,219	1,857	1,893	2,506	2,258
60	4,023	3,349	3,034	2,968	3,064	2,669	2,653	3,535	3,213
65	4,902	4,109	4,408	4,343	4,461	4,013	3,864	4,943	4,675
70	6,493	5,164	6,493	6,219	6,284	6,199	5,778	7,276	6,897
75	9,615	9,552	9,556	9,816	9,949	9,437	8,779	10,647	10,241
80	13,433	12,172	14,040	14,465	14,577	14,447	13,407	15,516	15,119
85	22,043	17,528	20,509	20,988	21,010	33,555	20,363	22,211	22,332
90	26,087	26,056	32,373	27,945	28,244	45,455	32,815	32,356	32,225

No final explanation has been given, and there is no proof that the average life in America is longer than in England or Germany. Dr McClintock inclines to believe that one potent cause of the great difference in the insured experience Problems of selection. is that, while European offices have generally awaited applications, which are commonly prompted by some sense of need for insurance, the custom of American companies is actively to solicit business through agents. On the average, lives which are only induced by persuasion to insure are better than those which voluntarily apply. That this suggestion points out a real and perhaps an important differentiating influence upon groups of risks is not doubted, but the measure of its effects has not yet been determined. The question is one of many which yearly assume more prominence, and which, as a class, are conventionally termed problems of selection. Assuming that the general rate of mortality is precisely known, any deviation from it occurring in a special group of insured lives, as the result of some influence peculiar to that group, is called the effect of selection. If insurance were offered on equal terms to all, the feeble and dying would apply in disproportionate numbers, and the mortality would be excessive. To avoid this danger careful medical examinations are required, excluding risks which appear to be impaired; and this selection by the insurer uniformly reduces the mortality below the general average during the earliest years of insurance. During these years large numbers of the insured withdraw, either from inability or from indisposition to pay their premiums, but the motive to do so is weakest with lives which have become impaired. The average vitality is lowered by the loss on the whole of a superior class, and the average mortality of those who persist rises. The extent of this influence varies widely with the proportionate number of lapses and the motives which induce them, increasing in a startling degree when lapses multiply in a discredited company, and remaining small, or even at times doubtful, under very favourable conditions; so that the ascertainment of its amount in different circumstances, and for different groups of the insured, is a problem of extreme complication. Its importance is increased by two tendencies which have grown stronger in the practice of recent years: first, to permit at all times the withdrawal by any policyholder of a substantial part of the technical or average reserve upon his assurance, a privilege which legislation and public opinion in the United States have extorted from the companies; and, secondly, the extensive introduction, under competition for public favour, of forms of policies which grant the option, at fixed dates in the future, between withdrawing the entire “accumulations,” or technical reserve and surplus, and continuing the insurance. It is well known that at the maturity of these options the motive is strong for impaired lives to remain insured, and that the cash withdrawals are so largely of superior lives that the subsequent rate of mortality is much increased. Other problems in selection arise from varieties in the forms of policies. It is commonly recognized that there are general and marked differences between the mortality experienced upon assurances issued at low and those at high premium rates. Policies for short terms, on which the computed net rates are the lowest, have been found so unprofitable to the insurers that they are rarely granted, and only with a very heavy loading of the tabular value. Upon those insured for life, with annual premiums, there is a large and constant excess of death losses above the endowment assurances, while groups of policies with tontine or cumulative features or reserved bonuses, available only after surviving a term of years, uniformly experience a low mortality.

It is also to be remarked that it is found in general that the average amount of policies matured by death is higher than the average of all policies in force; and some actuaries incline to believe that tables of pecuniary loss might, for practical use, take the place of tables of mortality, since the actual claims are in units of money, not of lives. The vast field of inquiry opened to actuaries by these and many more special questions of selection promises to engross more and more of their attention and labour. The technical methods of reducing and treating the data of mortality have been brought to a high degree of perfection, but the necessity for a better classification of the data themselves, with reference to special groups of lives or policies, differentiated by social or local circumstances, by business methods, by forms of contract, by race or personal characteristics, must assume ever greater prominence. It is conceivable that, at some period hereafter, the practical reliance of the offices will be more upon tables to be computed for such special groups, from select experience, than upon those drawn from vast aggregates without discriminating among their somewhat incongruous divisions.

The mortality tables in common use, however, have been proved by a vast experience to furnish a safe and fairly equitable basis for the business of assuring lives. Assuming that the table shows how many of a large group now The interest factor. assured may be expected to end in each succeeding year, the present value of the claims upon them depends exclusively upon the rate of interest at which funds will accumulate. Exact foresight of this rate being impossible, the insurer must assume a rate which can with certainty be realized. The difficult problem of determining the limits of safety in this assumption attracts the more attention now, because of the recent persistent decline in the average productiveness of invested capital. The actuary is forced to observe that the interest factor in his calculations is much less definitely fixed by known facts than the mortality factor. The longer a contract has to run, the greater the effect of the difference in rate. The value of a payment to be made in thirty years is greater by above one-half with interest taken at 3% than at 4½%, and one to be made in thirty-six years is more than twice as great. Hence the most careful study of the forces determining for long periods the average rate of interest is fundamental in life insurance. The tendency of opinion is to hold that a progressive lowering of interest rates must result from the accumulation of wealth. In support of this belief it is pointed out that from 1872 nearly to the present time there has been a general and somewhat uniform decline in the yield of invested capital, as represented by government stocks, mortgage loans, savings bank deposits and discounts in all commercial nations. The movement has been disguised by wide fluctuations, temporary or local, but has been on the whole world-wide and continuous, when great masses of capital, such as the investments of life companies, are kept in view. The fall has been greatest, too, in countries where rates were formerly highest, suggesting that as the great financial markets of the world become more intimately connected the normal rate of interest assumes a more cosmopolitan character, with an increasing tendency to equality among them. These considerations have had an important influence upon the computations of life insurance companies. In Great Britain, and commonly in continental Europe, the leading offices from the first assumed lower rates of interest than those in America, usually 3½ or 3%; and the reductions in their estimates have as yet been moderate, only thirty-one out of seventy-four British offices having lowered the interest basis in their valuations reported to the Board of Trade.

There are not wanting, however, indications that the protracted decline in rates of interest in the world’s markets may have been checked, and even that a reverse movement has begun. Rates of discount everywhere, interest on government loans except in America, and on mortgage loans in Europe, have on the whole advanced, the minimum average rates having been reached, after twenty-five years of gradual reduction, in 1897. These facts are entirely consistent with the conclusions suggested by the history of the subject. No uniform or secular tendency to reduction in the average rate of interest, which is the index of the average productiveness of capital, not of its amount, can be found to have prevailed. Fluctuations in the average rate are found, quite independent of the local and temporary fluctuations, which are often extreme; and these long tidal waves of change have at times, for generations together, risen and fallen with some approach to periodicity. The prevailing rate has been a little lower on the average in the 19th century than in the 18th, but was lower through the middle decades of the 18th century than through those of the 19th. On the whole, it seems clear that the accumulation of wealth in itself has no necessary tendency to diminish the productiveness of capital; that this productiveness, on the general average, has not materially varied in many generations; but that the promise and expectation of productiveness which prompt the demand for its use depend upon the activity of enterprise, growing out of the prevailing spirit of hope; upon the rapidity with which new inventions are made, industries extended, and floating or loanable capital expended in permanent works. These conditions are subject to fluctuations extending through considerable periods, so that for a number of years the rate may be higher, and then for a similar series of years lower than the normal rate, determined by average productiveness, but always tending to return to this normal rate, as the tide-swept surface of the ocean to its normal level.

The business of life insurance being founded on well-ascertained natural laws, and on principles of finance which in their broad aspect are of the simplest description, there exists no necessity for frequent close scrutiny of the affairs of an Assets and reserve. insurance office, in so far as the maintenance of a mere standard of solvency is concerned. We have seen that the premiums charged for insurances are based on certain assumptions in regard to (1) the rate of mortality to be experienced, (2) the rate of interest to be earned by the office on its funds, and (3) the proportion of the premiums to be absorbed in expenses and in providing against unforeseen contingencies. If these assumptions are reasonably safe, an insurance office proceeding upon them may be confidently regarded as solvent so long as there is no conspicuously unfavourable deviation from what has been anticipated and provided for, and so long as the funds are not impaired by imprudent investments or otherwise. The ascertainment and division of profits, however, require that the affairs should be looked into periodically; but the fluctuations to which the surplus funds are liable within limited periods of time are generally regarded as furnishing a sufficient reason why such investigations should not take place too frequently. Accordingly in most offices the division of profits takes place only at stated intervals of years—usually five or seven years—when a complete survey is taken of the whole engagements present and future, and of the funds available to meet these. The mode in which the liability of an office under its current policies is estimated requires explanation.

All statistical observations on the duration of human life point to the conclusion that, after the period of extreme youth is past, the death-rate among any given body of persons increases gradually with advancing age. If, therefore, insurance premiums were annually adjusted according to the chances of death corresponding to the current age of the insured, their amount would be at first smaller, but ultimately larger, than the uniform annual payment required to insure a given sum whenever death may occur. This is illustrated by the following figures, calculated from the HM mortality table at 3% interest. In column 2 is the uniform annual premium at age thirty for a whole-term insurance of £100. In column 3 are shown the premiums which would be required at the successive ages stated in column 1 to insure £100 in the event of death taking place within a year. Column 4 shows the differences between the figures in column 2 and those in column 3.

From this table it appears that if a number of persons effect, at the age of thirty, whole-term insurances on their lives by annual premiums which are to remain of uniform amount during the subsistence of the insurances, each of them pays for the first year £1.130 more than is required for the risk of that year. The second year the premiums are each £1.111 in excess of that year’s risk. The third year the excess Is only £1.093, and so it diminishes from year to year. By the time the individuals who survive have reached the age of fifty-four, their uniform annual premiums are no longer sufficient for the risk of the following year; and this annual deficiency goes on increasing until at the extreme age in the table it amounts to £95.207, the difference between the uniform annual premium (£1.880) and the present value (£97.087) of £100 certain to be paid at the end of a year. Now, since the uniform annual premiums are just sufficient to provide for the ultimate payment of the sums insured, it is obvious that the deficiencies of later years must be made up by the excess of the earlier payments; and, in order that the insurance office may be in a position to meet its engagements, these surplus payments must be kept in hand and accumulated at interest until they are required for the purpose indicated. It is, in effect, the accumulated excess here spoken of which constitutes the measure of the company’s liability under its policies, or the sum which it ought to have in hand to be able to meet its engagements. In the individual case this sum is usually called the “reserve value” of a policy.

Age, 30 + n. (1)	P30. (2)	|1A30+n. (3)	P30−|1A30+n. (4)
30	£1.880	£.750	+£1.130
31	1.880	.769	+ 1.111
32	1.880	.787	+ 1.093
..	..	..	..
..	..	..	..
..	..	..	..
53	1.880	1.806	+ .074
54	1.880	1.916	− .036
55	1.880	2.042	− .162
..	..	..	..
..	..	..	..
..	..	..	..
95	1.880	61.848	−59.968
96	1.880	79.265	−77.385
97	1.880	97.087	−95.207

In another view the reserve value of a policy is the difference between the present value of the engagement undertaken by the office and the present value of the premiums to be paid in future by the insured. This view may be regarded as the counterpart of the other. For practical purposes it is to be preferred as it is independent of the variations of past experience, and requires only that a rate of mortality and a rate of interest be assumed for the future.

The preceding formulae indicate clearly the nature of the calculations by which an insurance office is able to ascertain the amount of funds which ought to be kept in hand to provide for the liabilities to the assured. In cases Net liability. other than whole-term insurances by uniform annual premiums, the formulae are subject to appropriate modifications. When there are bonus additions to the sums insured, the value of these must be added, so that by the foregoing formula (1), for example, the value of a policy for 1 with bonus additions B is (1 + B)Ax+n − P(1 + ax+n). But the general principles of calculation are the same in all cases. The present value of the whole sums undertaken to be paid by the office is ascertained on the one hand, and on the other hand the present value of the premiums to be received in future from the insured. The difference between these (due provision being made for expenses and contingencies, as afterwards explained) represents the “net liability” of the office. Otherwise the net liability is arrived at by calculating separately the value of each policy by an adaptation of one or other of the above formulae. In either case, an adjustment of the annuity-values is made, in order to adapt these to the actual conditions of a valuation, when the next premiums on the various policies are not actually due, but are to become due at various intervals throughout the succeeding year.

Valuations may be made on different data as to mortality and interest, and the resulting net liability will be greater or less according to the nature of these. Under any given table of mortality a valuation at a low rate of Effects of different data. interest will produce a larger net liability—will require a higher reserve to be made by the office against its future engagements to the insured—than a valuation at a higher rate. The effect of different assumptions in regard to the rates of mortality cannot be expressed in similar terms. A table of mortality showing a high death-rate, and requiring consequently large assurance premiums, does not necessarily produce large reserve values. The contrary, indeed, may be the case, as with the Northampton Table, which requires larger premiums than the more modern tables, but gives on the whole smaller reserve values. The amount of the net liability depends, not on the absolute magnitude of the rates of mortality indicated by the table, but on the ratio in which these increase from age to age.

A prevailing fallacy in the popular mind, which has grown out of the practice of net valuations, is the inference that the average technical reserve represents the value of the individual policy. Each risk is properly assumed at Fallacy of single-policy reserve. its probable or average value at the time. But from that moment its circumstances are constantly changing in directions then unforeseen, and the expectation that such changes will occur is the motive for insuring. To treat them singly as unchanged in value at any later time is as illogical as it would be after some have matured. The actual value of any one risk borne by a company is indeterminate. It may become a claim to-morrow, or not for a generation to come. In the former case the company must now hold funds to pay in full; in the latter, the future premiums will perhaps more than suffice, so that no present reserve is needed. An entire reserve for the whole body of risks is essential, and its amount is definite, upon the reasonable assumption that the general average remains undisturbed by individual changes. A distinct reserve for a single policy is inconceivable. To recognize it is to deny the first principle of insurance. The average amount by which the reserve of a company must be increased, because of the existence of policies of a given class, is to the actuary an important fact, and is commonly accepted as his best guide in the distribution of surplus. But a popular theory has seized upon the assignment of this average sum to each policy, in the technical shorthand of the actuary, and holds that it is in each case the special property of the owner of that policy. The practical consequences are serious when, as often, many of the insured cease to pay premiums, and each demands the amount of the supposed individual reserve. His right to claim it is countenanced by a widespread public opinion, which has inspired statutes in Massachusetts and some other states, requiring companies to redeem all policies lapsing after the first two or three years of insurance at a price founded on the technical reserve. Yet, in by far the majority of instances, the lapse of policies is of itself a loss to the company. It is deprived of business secured at much expense before it has derived any of the advantage expected from the accession. It is compelled to pay numbers of its profitable contributors for ceasing to contribute. The burden falls in a mutual company upon the insured who fulfil their contracts. Such laws favour those who withdraw after few payments at the cost of those who maintain their insurance to the end, or for many years. The American companies formerly yielded to the pressure of a mistaken public sentiment, and competed for favour by promising excessive values in case of surrender.2 Similar conditions exist in Switzerland, Austria, and other countries in which the business is minutely regulated by government bureaus. But in Great Britain the companies are largely free from such influences, while an open market exists for policies which have a commercial value, with results on the whole more satisfactory to all parties interested than any rule of compulsory purchase which could be enforced on the companies.

A special form of life insurance, which has wonderfully developed, is the family insurance of the labouring people by the so-called industrial companies. Until recently this class of people had no satisfactory share in the benefits Industrial Insurance. of insurance, although the friendly societies in Great Britain, and many forms of beneficial associations in the United States, were attempts, often in part successful, to provide for special wants, mainly for maintenance of the sick and for the costs of burial. Most of them, however, lacked a scientific basis and an efficient and permanent organization, while thousands of them were grossly mismanaged. In Germany an elaborate scheme of compulsory insurance for labourers was established by a law of the empire in 1883, and extended in subsequent years; and similar legislation has been enacted in several other countries, most thoroughly in Switzerland and Austria. The ultimate value of this great social experiment cannot yet be determined. That it relieves much want and does a great service in preventing pauperism is not disputed; but that it also undermines the independent spirit of the people, and that it imposes a burden upon the national industry, which not only hampers it in the world’s competition, but reacts with special injury upon the class it aims to benefit, are criticisms not satisfactorily answered. No scheme of government insurance, certainly, is adapted to a people impatient of paternalism in its rulers and thoroughly habituated to voluntary association for all common interests. The solution of the great problem, how to apply the insurance principle to the most pressing needs for protection of the class supported by the wages of labour, is now sought in Great Britain and America mainly in the universal offer to them of industrial insurance. The Prudential Assurance Company of London was the pioneer in this work, beginning it experimentally in 1848, but gradually adapting its methods to the new field, until a generation later they showed themselves so efficient that an extraordinary growth resulted, and has continued without interruption. This company and others upon a similar plan insure whole households together for burial expenses in case of death, and a small provision for dependants or for old age, charging as premiums small fractions of a day’s wages, which must be collected weekly. The great difficulties encountered were the cost of small and frequent collections, and the high rate of mortality, which is from 40 to 90% more than that in the experience of the older companies. This high death-rate is due not so much to the fact that life is shorter in the labouring class as to the lack of efficient medical selection, which would be too costly. The premiums, at best, must be made higher than in offices insuring for annual payments, but the demand for insurance extended as rapidly as the system could be explained, and the Prudential is said to have now in force some 12,000,000 policies, with an average premium of twopence a week, secured by an accumulated insurance fund of £17,000,000. It has superseded a host of petty assessment societies of various classes without scientific basis or business responsibility, which deluded and disappointed the poor. The British government in 1864 undertook to administer a plan for the insurance of working men, but in thirty years accomplished less than the work of one private company in a year. In addition to the many insurance companies which transact industrial business in the United Kingdom, a large number of friendly societies have adopted similar plans.

There are various sources from which a surplus of funds may arise in an insurance company: (1) from the rate of interest actually earned being higher than that anticipated in the calculations; (2) from the death-rate among the insured Division of surplus. being lower than that provided for by the mortality tables; (3) from the expenses and contingent outlay being less than the “loading” provided to meet them; and (4) from miscellaneous sources, such as profitable investments, the cancelment of policies, &c.

Supposing a valuation to have been made on sound data and by a proper method, and to have resulted in showing that the funds in hand exceed the liabilities, the surplus thus ascertained may be regarded as profit, and either its amount may be withdrawn from the assets of the office or the liabilities may be increased in a corresponding degree.

Various methods are employed by insurance companies in distributing their surplus funds among the insured. In some offices the share or “bonus” falling to each policyholder is paid to him in cash; in others it is applied Bonuses. in providing a reversionary sum which is added to the amount assured by the policy; in others it goes to reduce the annual contributions payable by the policyholder. A method of more recent introduction is to apply the earlier bonuses on a policy to limit the term for which premiums may be payable, thus relieving the policyholder of his annual payments after a certain period. Another method is to apply the bonuses towards making the sum insured payable in the lifetime of the policyholder. The plan of reversionary bonus additions is most common, and when it is followed the option is usually given of exchanging the bonuses for their value in cash or of having them applied in the reduction of premiums.

Not only are there different modes of applying surplus, but the basis on which it is divided among the insured also varies in different offices. In some the reversionary bonus is calculated as an equal percentage per annum of the sum insured, reckoning back either to the commencement of the policy in every case, or (more commonly) to the preceding division of profits. In others the rate is calculated, not only on the original sums insured, but also on previous bonus additions. In others the ratio of distribution is applied to the cash surplus, and the share allotted to each policy is dealt with in one or other of the ways above indicated. The following are some of the ratios employed by different offices in the allocation of profits: (1) in proportion to the amount of premiums paid (with or without accumulated interest) since the last preceding valuation; (2) in proportion to the accumulated “loading” of the premiums so paid; (3) in proportion to the reserve values of the policies; (4) in proportion to the difference between the accumulated premiums and the reserve value of the policy in each case.

Some offices have a special system of dealing with surplus, reserving it for those policyholders who survive the ordinary “expectation of life,” or whose premiums paid, with accumulated interest, amount to the sums insured by their policies. This system is usually connected with specially low rates of premium.

In those branches of insurance where the contract is one of indemnity against loss, the risk remaining the same from year to year—and where the consent of both parties, insurer and insured, is required at each periodical renewal—no Surrender values. question of allowance in respect of past payments can arise when one party or the other determines to drop the contract. It is quite recognized that the premiums are simply an equivalent for the risk undertaken during the period to which they apply, with a certain margin for expenses and for profit to the insurer, and that therefore a favourable issue of the particular contract supplies no argument for a return of any part of the sums paid. In life insurance, however, we have shown that the premiums contain a third element, namely, the portion that is set aside and accumulated to meet the risk of the insurance when the premium payable is no longer sufficient of itself for that purpose.

When a policyholder withdraws from his contract with a life insurance office, the provision made for the future in respect of his particular insurance is no longer required, and out of it a surrender value may be allowed him for giving up his right to the policy. If there were no reasons to the contrary, the office might hand over the whole of this provision, which is in fact the reserve value of the policy. No more could be given without encroaching upon the provision necessary for the remaining policies. But the policyholder in withdrawing is exercising a power which circumstances give to him only and not to the other party in the contract. The office is bound by the policy so long as the premiums are duly paid and the other conditions of insurance are not infringed. It has no opportunity of reviewing its position and withdrawing from the bargain should that appear likely to be a losing one. The policyholder, however, is free to continue or to drop the insurance as he pleases, and it may fairly be presumed that he will take whichever course will best serve his own interest. The tendency obviously is that policies on deteriorated and unhealthy lives are kept in force, while those on lives having good prospects of longevity are more readily given up. Again, the retiring policyholder, by withdrawing his annual contribution, not only diminishes the fund from which expenses are met, but lessens the area over which these are spread, and so increases the burden for those who remain. Considerations like these point to the conclusion that, in fairness to the remaining constituents of the office, the surrender value to be allowed for a policy which is to be given up should be less than the reserve value. The common practice is to allow a proportion only of the reserve value. Some offices have adopted the plan of allowing a specified proportion of the amount of premiums paid. This plan is not defended on any ground of principle, but is followed for its simplicity and as a concession to a popular demand for fixed surrender values.

Another mode of securing to retiring policyholders the benefit of the reserve values of their insurances is that known as the non-forfeiture system. This system was first introduced in America, whence it found its way to the United Non-forfeiture system. Kingdom, where it was gradually adopted by a large proportion of the insurance companies. In its original form it was known as the “ten years non-forfeiture plan.” The policies were effected by premiums payable during ten years only, the rates being of course correspondingly high. If during those ten years the policyholder wished to discontinue his payments, he was entitled to a free “paid-up policy” for as many tenth parts of the original sum insured as he had paid premiums. The system, once introduced, was gradually extended first to insurances effected by premiums payable during longer fixed periods, and ultimately, by some offices, to insurances bearing annual premiums during the whole of life. The methods of fixing the amount of paid-up policy in the last-mentioned class of cases vary in different offices, but the principle underlying them all is that of applying the reserve value to the purchase of a new insurance of reduced amount.

An office, in entering on a contract of life insurance, does so in the faith that all circumstances material to be known in order to a proper estimate of the risk have been disclosed. These circumstances are beyond its own Conditions of insurance. knowledge, and as the office for the most part (except as regards the result of the medical examination, which may reveal features of the case unknown to the proposer himself) is dependent on the information furnished by the party seeking to effect the insurance, it is proper that the latter be made responsible for the correctness of such information. Accordingly it is made a stipulation, preliminary to the issue of every policy, that all the required information bearing upon the risk shall have been truly and fairly stated, and that in case of any misrepresentation, or any concealment of material facts, the insurance shall be forfeited. In practice, however, this forfeiture is rarely insisted on unless there has been an evident intention to deceive. Other systems and conditions of life insurance policies may be shortly noticed.

The usual division of policies is into “non-participating” and “participating.” Non-participating policies are contracts for the payment on death of a certain fixed sum in consideration of a given premium, and these amounts are not affected by the profit made by the company. Participating policies entitle the holders to a share in the profits of the company. These profits are applied in various ways, as described above. A policy may be a whole life one, that is, the policyholder may pay a periodical premium throughout life, or it may be a limited payment one (the holder paying a premium for a limited number of years), or an endowment policy, under which the insurer receives the amount he has insured for at a given age, say fifty-five or sixty; or if death occur previously, the sum is paid to his representatives. There are also endowment policies for children, under which parents or others receive a specified sum on a child attaining a given age, the premiums being returnable if the child dies before the specified age.

No branch of social statistics has been more diligently studied than life insurance, and several governments publish classified accounts of corporations insuring lives within their jurisdiction. But the reports are not uniform in method and in periods covered, and aggregates derived from them must be used with reserve. By the Life Assurance Companies Act 1870, and amendments made in later years, each company issuing policies in the United Kingdom must deposit with the Board of Trade every year its revenue account and balance-sheet for the preceding year, and must at fixed intervals cause an investigation of its financial condition to be made by an actuary, and furnish the public through the Board of Trade with the detailed results, in forms prescribed by the act. Thus these returns are the highest authority for the conditions and operations of the offices, which often supplement or anticipate them by voluntary publications. In the United States the laws exact still more minute and much prompter reports to the insurance departments of the states; and every annual statement is required to show the results of an actuarial investigation. All these facts are collected, classified and compared by statisticians for several standard annuals in both countries, especially the Post Magazine Almanack, Bourne’s Directory and Manual and the Insurance Blue Book in London, and The Insurance Year-Book of the Spectator Company in New York.

V. British Post Office Insurance

In 1864 Mr Gladstone, then chancellor of the exchequer, advocated the extension of life insurance amongst persons of small means, and, encouraged by the remarkable success of the Post Office Savings Bank, then recently established, proposed that the services of the postmaster-general should be enlisted in the promotion of insurance. The result was the passing of the Government Annuities Act 1864. This act authorized the commissioners for the reduction of the national debt, for the first time, to insure a life without granting an annuity upon it, and enabled the postmaster-general to act as the agent of the commissioners in the issue of life policies and the grant of annuities. The limits of insurance were fixed at £20 and £100, and of annuities at £4 and £50; and the purchase of deferred annuities or old-age pay, by monthly, or even more frequent instalments, was sanctioned. The work was eagerly accepted by Lord Stanley of Alderley, the postmaster-general of the day, and the machinery for putting the act in action was elaborated by Frank Ives Scudamore of the Post Office and Sir Alexander Spearman of the National Debt office. The business was commenced on the 17th of April 1865. By the end of the year 560 policies of insurance had been issued, and 94 immediate and 54 deferred annuities granted. In the first twelve months these figures had increased to 809 policies and 230 annuities. The opportunity thus given of insuring through the Post Office with government security was not, however, embraced with the warmth which had been anticipated. In 1882, when Mr Henry Fawcett, then in office, examined the subject, he found that the average number of policies of insurance granted annually during the seventeen years which had elapsed was under 400—less, in fact, than during the first twelve months of the system. The purchase of annuities had increased slightly, but the business was transacted chiefly in immediate annuities, and hardly indicated any progress in provision for old age by means of early savings. Mr Fawcett procured a Select Committee of the House of Commons on the subject. Before this committee Mr James Cardin, then assistant receiver and accountant-general of the Post Office, propounded a scheme for combining the annuity and insurance business of the Post Office with that of the savings bank. The Committee recommended the adoption of this scheme, together with some enlargement of range and some relaxation of conditions. The recommendations of the Committee were embodied in the Government Annuities Act 1882, which came into operation on the 3rd of June 1884, and which forms the basis of the present system.

VI. Marine Insurance

Marine insurance long antedates the kindred businesses of fire and life insurance. Villani, a 14th-century Florentine historian, speaks of marine insurance as having originated in Lombardy in 1182. This proves, at History. least, that in his day it was no novelty. It is mentioned in a Pisan ordinance of 1318, and in Venetian public documents of the early years of the 15th century. The earliest form of policy known is that given in the Florentine statute of 1523. It is uncertain whether insurance was introduced into England directly from Italy or by way of Flanders. The earliest policies issued in England which have yet been discovered are in Italian, but the subscriptions are in English (“Santa Maria di Venetia,” Cadiz to London, 1547, “Santa Maria de Porto Salvo,” Hampton to Messina, 1548).

A contract of marine insurance is a contract of indemnity whereby the insurer undertakes to indemnify the insured, in the manner and to the extent agreed, against marine losses, i.e. the losses incident to marine adventure. Definition. The contract may by its express terms or by usage be extended to cover risks on inland waters or land risks incidental to any sea voyage. There is a “maritime adventure,” where any ship, goods or other movables are exposed to maritime perils, such property being termed “insurable property”; also where the earning of any freight, hire or other pecuniary profit or benefit, or the security for any loan or expenditure, is endangered by the exposure of insurable property to maritime perils; and where any liability to a third party may be incurred by the person interested in or responsible for insurable property by reason of its exposure to maritime perils. By “maritime perils” are meant the perils consequent on or incidental to the navigation of the sea, i.e. perils of the seas, fire, war perils, pirates, rovers, thieves, captures, seizures and restraints, and detainments of princes and peoples, jettisons, barratry, and any other perils, either of the like kind or which may be designated by the policy.

The owner of insurable property may insure its full value even though some third party have agreed or become liable to indemnify him in case of loss: a mortgagor has the same right of insuring to full value; while a mortgagee may insure only up to Value. the sum due or to become due to him under the mortgage, unless the mortgagee is insuring for the benefit of the mortgagor as well as for himself, in which case, even though he insure in his own name only, he may insure up to the full value. A consignee may insure in his own name the total amount of his interest and that of others for whose benefit he insures. Where no special contract is made between insured and underwriter, the insurable value of certain matters of insurance is ascertained as follows:—Ship—Her value at the commencement of the risk, including outfit, provisions, stores, advances of wages, and any other outlays expended to make the ship fit for the voyage or period of navigation covered, plus cost of insurance upon the whole. In the case of a steamship, the word “ship” includes machinery, boilers, coals and engine stores. In the case of a vessel engaged in a special trade, the word “ship” includes the ordinary fittings necessary for that trade. Freight (whether paid in advance or not)—The gross amount of freight at the risk of the assured, plus cost of insurance. Goods—The prime cost, plus expenses of and incidental to shipping and cost of insurance. Other interests—The amount at the insured’s risk when the policy attaches, plus cost of insurance.

To be admissible in evidence a contract of marine insurance must be embodied in a document called a policy, which must specify the name of the assured (or of his agent in the effecting of the policy), the objects insured, and the risk Policy. insured against, the voyage or time (or both) covered, the sum insured, the name of the assurers. The signature of the assurer is necessary; it is found at the end of the policy, and the assurer is often on this account called the underwriter. The objects insured must be designated with reasonable certainty, regard being had to customary usage. The undertaking to insure is usually expressed by saying that the insured or his agent “doth make assurance and cause himself to be insured.” The risks are either the whole body of maritime perils detailed above, or any one or set of these, or any other named peril against which the assured desires protection. There is no restriction by law of the length of voyage that may be insured, but time policies are, subject to the Finance Act 1901, invalid if made for more than one year; a voyage and a period of time may be covered on one policy. Policies are classed as “time” or “voyage” policies. It is not necessary to state in the policy the value of the objects insured, but generally the value is given; policies are therefore classed as “valued” or “unvalued,” the latter being often called “open” policies. The values of objects insured under open or unvalued policies are the insurable values given above. As it frequently happens that merchants desire to have all their shipments of whatever nature covered, by whatever vessel they may come, they require insurance in general terms; such a policy is termed a “floating” policy. It states the limits of voyage and value covered by the underwriter, and the class of ships to be employed. The particulars of each shipment are declared as the shipments occur, and in the order of despatch or shipment, the declarations being usually endorsed on the policy. All shipments within the terms of the policy must be declared at their honest value, or in accordance with the special provisions of the policy, if any. An omission or erroneous declaration may be corrected even after loss or arrival, provided it was made in good faith.

It frequently happens that before a vessel has completed the venture on which she is engaged arrangements have already been made for her future employment. Where a vessel is insured on time, this is of no moment as respects her Voyage insured. insurance. It has likewise been decided that where any insurable object is covered by a voyage policy “from” or “at and from” a named place, the policy is not rendered invalid by her not being at that place when the insurance is concluded; but, on the other hand, there is an implied condition that she will begin the venture within a reasonable time, and that if she fails in this the underwriter may avoid the contract. If the delay springs from circumstances known to the underwriter at the time of conclusion of the contract, or if the underwriter then acquiesces in it, the implied condition is nullified. If the insured abandons the venture insured, the contract expires; e.g. if, before the risk commences, the vessel’s destination is changed to one not covered by the policy. Where the policy specifies a place of departure, and the ship does not sail from that place, the risk does not attach. If, however, the vessel actually starts from her intended port of departure, and commences the venture, and thereafter it is decided to change her destination, this decision constitutes a change of voyage. In default of provision to the contrary, the underwriter may elect to avoid his insurance from the time of that decision, although the ship be still in the course she would have followed in her originally intended venture.

In every contract of insurance there are certain conditions precedent to the liability of the underwriter and incumbent on the insured, which must be fully and literally complied with, whether material to the risk or not. These Warranties. conditions are known in insurance as warranties. The name is unfortunate, as in every other branch of the law of contract it bears another meaning; still it is convenient, and its insurance signification is now firmly established. Failure on the part of the insured to fulfil a warranty literally entitles the underwriter to avoid his contract as from the moment of breach,4 but it does not limit his obligation up to that moment. Breach of warranty is not nullified by subsequent remedy of the breach, consequently loss occurring after breach of warranty is not at the charge of the underwriter, even although before the loss the insured has again complied with the warranty. But breach of warranty may be waived by the insurer. Breach of warranty is excused in two cases only: (a) when by change of circumstances the warranty ceases to be applicable to the contract, (b) when by subsequent legislation the warranty becomes unlawful.

When the main points of the preceding particulars of the contract of insurance are summarized it may be said that the transaction is (1) a contract of indemnity reduced to written or printed words, (2) made in good faith, (3) referring to a defined proportion or amount, (4) of a genuine interest in a named object, (5) being against contingencies definitely expressed, to which that object is actually exposed, and (6) in return for a fixed and determined consideration.

It may happen by accident or by design that an insurance object has been covered twice or more times, and that in consequence the sum of the insurance effected exceeds the value in the policy or the insurable value, if an unvalued Multiple Insurance. policy has been employed. This occurrence involves a new set of relations between the insured and his various underwriters; the underwriters themselves are brought into relation to one another. As regards the insured, he may, in the absence of agreement to the contrary, claim payment from whomsoever of the underwriters he may select, but he is not entitled to receive in all more than his proper indemnity. Each underwriter, whether his policy be valued or unvalued, is entitled to receive credit for his proper proportion of the sum obtained by the insured under any other policy. If the insured does obtain any sum in excess of indemnity, he is regarded as holding it in trust for his whole body of underwriters. It thus appears that in case of multiple insurance each underwriter is bound, as between himself and the other underwriters, to contribute to the loss rateably in proportion to the amount of his liability under the policy; and if any one pays more than his proper share, he is entitled to sue the rest for contribution. Should the insured get any of his premium back? It would not be equitable to enforce a return from any underwriter who has at any time stood alone so as to be liable to the full extent of his policy; but if overlapping policies were accidentally effected all at the same time, the case is rather different. This leads to the general question of return of premium. Such return may be claimed under the terms of the policy, in which case the claim for return is simply the carrying out of the agreement between the parties; it may refer to the whole or to a part of the interest insured. But there are other circumstances in which returns can legally be claimed. For instance, it may turn out that interest insured by a particular vessel and for a particular voyage is never shipped in that vessel for that voyage; the underwriter has in this case run no risk, and therefore the consideration for which he received the premium totally fails, and the premium is properly returnable to the intending insured, unless there has been fraud or illegality on the part of the insured. Similarly, in the case of part of the interest insured on a policy, if that part is distinguishable in the policy or by custom of trade. But the interest might have made the voyage in the vessel, and the intending insured might yet remain without insurable interest. In this case, in absence of fraud or illegality, and if the policy is not merely a gaming or wagering contract, the insured is entitled to return of his premium. Similarly, in the absence of fraud or illegality, if the underwriter legally voids his policy from the beginning of the risk; as he runs no risk, he receives no premium. The only cases, except those of fraud and illegality, in which the underwriter can retain his premium without running risk, are those of risks underwritten “lost or not lost,” and arrived safely without the underwriter’s knowledge, in which the underwriter takes his chance as to the condition and situation of the ship when he assumes the risk. But this is practically a case of agreement that there shall be no return.

When the insured has overinsured on an unvalued policy, a proportionate part of the premium is returnable. But where double insurance has been knowingly effected by the insured or any earlier policy has at any time borne the entire risk or a claim has been paid on a policy in respect of its full value, no premium is returnable.

The policy issued by the underwriter to the insured makes mention of certain perils against which the insurance is granted, and unless the policy otherwise provides, the underwriter is liable for any loss proximately caused by any of these perils, but is not liable for any loss not proximately caused by a peril insured against. He is not responsible for any loss due to the wilful misconduct of the insured but, unless the policy otherwise provides, he is liable for any loss proximately caused by a peril insured against even though it would not have happened but for the misconduct or negligence of master or crew. Nor is he responsible for any loss caused by delay, although the delay be caused by a peril insured against; nor for ordinary wear and tear, ordinary leakage or breakage, inherent vice or character of objects insured, loss from rats or vermin, or injury to machinery not proximately caused by sea-perils.

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