Insurance and the state ..

Front matter

THE LIBRARY

OF

LOS ANGELES

Chapter I Pact

THE CHARACTEB OF INSURANCE AND ITS LEGAL STATUS . 1

Insurance a subject of state and not federal control — The differences in insurance legislation in different states

— Effect of this difference on the development of insurance

— The general character of insurance as a business — The absence of great risk — What is the function of the state ? — Is insurance a suitable business for conduct by the state ?

Chapter II State Insurance In Practice 14

The Italian monopoly of life insurance — The monopoly of sickness and accident insurance in Switzerland — Other examples in European countries of state insurance — The Wisconsin plan of State Life Insurance. The Massachusetts plan of Savings Bank Insurance — The Ohio monopoly of Industrial Accident Insurance.

CHAPTER HI

SHOULD THE STATE MONOPOLIZE LIFE INSURANCE? . . 80

Purposes assigned — (1) as a source of revenue ; (2) for social developmental purposes ; (3) as a complete method of regulation — Possible sources of revenue for the state — The problems of state financiering involved — The social

TABLE OF CONTENTS

PAOB

significance of insurance under a state monopoly — Could the state apply the insurance principle more widely ? — Can insurance costs be reduced ? — Is insurance subject to the law of decreasing cost ? — To what extent has private insurance insured the insurable ? — Would the state popularize insurance ? — Would the cost be less ? — The power of the state to regulate insurance — The absence of monopoly in the insurance business — The problem of politics under state insurance — Should private companies be indemnified if the state assumes the business ?

CHAPTER IV THE NATUBE op FIRE INSURANCE 83

Fire and life insurance compared — The fire insurance contract, a pure contract of indemnity — Fire insurance is not a tax — The risk in fire insurance — Conflagrations — The character of fire insurance assets — The limitations on the principle of mutuality in fire insurance.

Chapter V Should The State Monopolize Fire Insurance? . . 101

Purposes : (1) as a source of revenue ; (2) as a method of regulation ; (3) for social purposes — The profits of fire insurance companies — Sources of the profit — Underwriting and investment profits — The character of the expense

— Is there any evidence of a monopoly ? — The difficulty in establishing a successful fire insurance company — Are rates unduly high, discriminatory or inequitable ? — How rates are determined — Difficulties in state fire insurance

— The fire loss in the United States, and in Europe — Attitude of the companies towards the fire loss — The effects of valued policy and anti-compact laws.

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TABLE OF CONTENTS

Chapter VI Page

Definition of social insurance — How the need for such insurance arose — The relation of the state to such insurance — The development of the theory of employer's liability — Liability insurance in the United States — Legal and popular restrictions to its development — Present interest in plans of protecting the wage earner.

CHAPTER VH

SHOULD THE STATE MONOPOLIZE SOCIAL INSURANCE? . . 174

Methods used to protect workmen against the result of industrial accidents — The results of private liability insurance in the United States — The liability and the compensation principle distinguished — The reasons for compensation — Reasons assigned for a state monopoly of compensation insurance — Can the cost be shifted to the consumer ? — Could equally good results be secured by private companies selling compensation insurance ? — The difficulties of state compensation insurance in the United States.

CHAPTER VHI

THE RELATION OF THE STATE TO SICKNESS, OLD AGE, AND

UNEMPLOYMENT INSURANCE 208

The social significance of sickness — Sickness insurance as a state monopoly distinguished from the monopoly of industrial accident insurance — Who should bear the cost ? Methods of providing old-age insurance — Should the state supply such insurance ? — Is the insurance principle applicable to unemployment ? — Causes of unemployment — The general benefit and social significance of social insurance.

Chapter I The Character Of Insurance And Its Legal Status

ALL human progress which is essentially an increase, in social well-being has arisen from some improved method of cooperation, whether this new form of cooperation has resulted from private initiative or from public compulsion in obedience to enacted law. There is probably no other form of cooperation which is so fundamentally valuable to the cooperative members, indiscriminately, rather than to particular members, than insurance. In insurance is found every essence of cooperation. It is therefore proposed to examine the character and status of insurance as a business, upon what may be called the eve of the experiment of directing this form of cooperation by the state rather than by the initiative of private individuals. ^Everywhere in the United States, with certain minor exceptions to be discussed later, the business of insurance is under private control. It is also a business subject to the control of the various states of the Union, since the Supreme Court of the United States has decided in a very definite manner that it is neither interstate commerce nor an instrumentality of commerce. Hence it is not under the control of Congress; at least it does not fall under that section of the Constitution which gives to Congress extensive powers of controlling interstate and foreign commerce.

Although the federal government may exercise some power over insurance by an exercise of the taxation power, yet this power is concurrent with a similar power of the states, and the larger powers of regulation are limited by the decisions of the federal supreme court. It therefore appears that the subject of insurance will continue to be one over which the states will exercise major control An examination of the present statutes in force in the various states on the subject of insurance discloses great variation in the laws. Some desirable uniformity has been accomplished within the past decade, but lack of uniformity is the chief characteristic of state laws affecting insurance. This condition gives no promise of change. The business is essentially interstate; that is to state, the greater percentage by far of insurance in force on the books of the companies is composed of policies from more than one state. Yet the legislature of each state persists in treating the business as a purely state business. Most of the legislatures attempt to favor, as they imagine, home companies, notwithstanding the fact that it is usually the practice of a home company only to confine its business to the state until it gets under way as a going concern. It is true that the small local mutual companies restrict the territory of operation, but every important life and property insurance company in the United States does business in other than the state of its incorporation. This confusing, burdensome, and inequitable legislation takes various forms. It may be and is generally true in the case of the taxes levied on insurance. One state may levy l£ per cent on gross premium receipts collected in the state, another 2 per cent on the same, and still another 1 per cent on the net premium receipts. One state may lay down in great detail provisions regarding the formation of a company and the sale of its stock, while another state may have few provisions in its laws regarding the subject. One state may attempt "to keep money in its borders" by requiring a large percentage of the premiums received in the state to be locally invested, while another may permit the fullest liberty of investment, not only as to the principal sums collected, but also as to the kind of securities in which the sums may be invested.

The development of insurance, not only as to the increase in the numbers of policyholders of the ordinary kinds of insurance, but also as to new applications of the insurance principle, that is, new kinds of insurance, has been greatly hindered by this burden of confusing legislation. It has added enormously to the cost of insurance to the policyholders, and it has made adjustments to new conditions difficult. New forms of insurance have slowly arisen in the United States as compared with the European countries, but it is not due chiefly to the fact that the insurance officials have been less inventive or skillful. The wonderful accomplishments which have been secured in the old established lines of insurance give some idea of what might have been secured if the business had not been hampered by restrictive and confusing state legislation. As it is, voluntary insurance in America far exceeds in number of policies and volume of insurance all that of the remainder of the world.

Before the problem of state insurance is considered in detail it will be well to examine the character of insurance as a business. Does its administration present difficult problems ? Is it a business fraught with great public or social importance ? Insurance, as has been stated, is a method of cooperation. It is the joining together of a number of individuals necessarily exposed to a risk for the purpose of collectively assuming and therefore distributing a risk otherwise borne by the individual. The total risk assumed under insurance is less than the sum of the individual risks borne previous to the application of the insurance principle. This is true because a larger degree of certainty is exchanged for uncertainty, inasmuch as the benefit of the law of average is secured. The application of the insurance principle presents no great difficulties. That is to say, in most forms of insurance the basis upon which the operation is made is well understood. The principles have been established from the study of data and experience. Insurance is, in other words, in most branches thoroughly scientific. There is no great risk to be assumed by the organizers. In life insurance the mortality statistics are, as a whole, sufficiently accurate to assure that the insurance given under them carries no risk to the insurer. In fire insurance the burning rate is fairly well known. In other kinds of insurance the data may not be either as complete or as accurate, but few inherent difficulties will be found in placing in operation the insurance principle.

Insurance is, in other words, a safe business. It is not complex. It is relatively simple so far as the fundamental principles upon which it is based are concerned. Problems indeed do arise in the administration of the business ; such, for example, as the investment of the funds advantageously and safely, and the equitable determination of charges as regards different individuals, but these facts do not disprove the original statement that the principles underlying the business are well understood and that it is relatively easy to place them in operation.. Therefore for the state to assume the business of insurance would not involve its entering upon new, untried, and dangerous grounds. Is it a business fraught with social import ? If insurance is a method of assuming and distributing necessary risks, it must have great social importance. If death, sickness, accidents, and destruction of property are risks to which every one in some form is subjected, then any means whereby the risks are reduced must have great social value. It is urged by some that such is the social value of the utilization of the insurance principle that the members of society should not be permitted to decide voluntarily whether or no they shall avail themselves of the principle, but should be forced to do so. It is undoubtedly true that no one can escape the risk, and no means of reducing the risk is known, other than that of using the insurance principle. However true this may be, it does not follow as a consequence that the state should necessarily assume this business.

At this point arises the unanswerable question of what should be the function of the state. Upon what principles shall the sphere of state activity be decided ? The once generally accepted principle, that the state should not do for an individual or group of individuals what they could equally as well do for themselves, gives us no great aid in deciding the question. With the increasing development of democratic ideas the state has come to be considered an organ for the expression, protection, and development of social needs as distinguished from individual or group interests. Nor is the state to be solely an organ for serving the present generation, but it is more and more to be used to prepare the way for the future generations. It is maintained that the social well-being to be furthered by the state is therefore something more than the sum total of the individual well-being of the present living, and that even if the present well-being alone is considered, a unified activity of the state brings greater benefit to all than the same activity diversified by remaining under the control of private individuals.

New fields of state activity are continually being found with that increased complexity of society which calls for the nicer and nicer adjustment of one's conduct towards his fellows which can only be secured under the single directing and unifying organ of society — the state. The fact that in the United States there are many obstacles to this increased activity of the state, such as constitutions, need cause no great concern. Such obstacles must be trivial and temporary when a long, distinct vision of society is taken. Already the people are forming the habit of amending and revising constitutions or adopting entirely new ones in the states, and as they more and more realize their sovereignty they will fashion their tools, like any good workman, to do the work which they wish them to do. So far, then, as they realize that a constitution and the laws which are made under it are but expressions of the will of the people, so far will they change their past expressions to suit present ideas. Constitutions and laws therefore present but temporary obstacles to the assumption or even monopolization of the insurance business by the state. '\

It may now be inquired if the business of insurance is of a kind which is suitable for a source of private gain ; that is to state, is it a business from which individuals should be permitted to take profit in the technical sense of the word ? Or is it a business of such social importance that its costs to those whom it serves should be prime costs ? That is, should the outlay for the service be limited to wages for those who are employed to conduct the business of insurance ? Even conceding a monopoly of this business by the state, it would probably not mean a great reduction in the number of wage earners who are now employed in the business. But it certainly would mean that the business of insurance would afford no opportunity to the capitalist for the employment of capital and but a very limited opportunity for the landowner to secure rent, because insurance under government operation would be purely mutual insurance, or if it should be administered on a basis for profit, the surplus would go to the state treasury.

Whether it is or is not a suitable business for profit must be determined largely by two considerations. First, to what extent is the individual free to deal in the commodity or service ? Second, to what degree is the element of risk present whereby unusual skill, foresight, and great ability are under our present economic system supposed to justify one in taking or receiving a large return in the nature of a profit, risk interest, wages of management, or whatever we are pleased to call this unusual fund ?

As to the first point, we have but to consider again the nature of insurance. It is but a method of assuming and distributing necessary risks to which every one is in some manner exposed. The fact that many do not avail themselves of the insurance principle does not prove that they are essentially free to choose. Indeed they have chosen. The risk remains whether or not they choose to admit its existence. Their failure to reduce the risk by joining with their fellows in applying the insurance principle means that their social mind lacks development, and it means further that their fellows ultimately bear a large part of the risk. The loss of a life is usually a loss to society, not only because of the potential value of the life itself, but also because of the withdrawal of protection from those dependent upon that life for support and preparation for efficient living. The loss of a property falls immediately upon the owner, but it is also a destruction of so much social capital. The loss of time by sickness or accidents means that so much less of the work of the world is done, or perchance it is shunted upon shoulders already heavy with work. The individual ought not to be free to choose whether he shall increase social well-being by using the insurance principle, even though it be true that insurance per se gives but a very indirect benefit to the individual. Its first and fundamental characteristic is mutuality; the principle of each for all and all for each. If, then, the idea of profit to the insured is excluded by the very nature of insurance, and if it is a method of reducing neeessary risks and if the value resulting is distinctly a social value, should individuals be permitted to receive a profit from administering it ? Paradoxical as it may appear, it is the insurance officials who unconsciously argue for this view. This is most clearly shown in the taxation laws of the various states. The greater number of insurance officials, especially those connected with the life insurance companies, oppose the taxation of insurance on the ground that its character does not justify the tax. It is called by them a "tax on thrift," yet the legislators make insurance a source of considerable revenue for the state.

As to the second point, viz. whether there is such a risk present in conducting the business as would justify the taking of a profit. This question has been answered in part by the consideration of the basis or principles upon which the business is conducted. These principles have been in most kinds of insurance long known and well understood. The results of many years' application of the principles are known. The data are available, and in most cases are organized or capable of being organized, so that no great element of risk is present. This is not to state that perfection has been reached in applying these data, but certainly with our present knowledge there is no excuse for dangerous experiments. Mortality and morbidity statistics are available and are becoming more accurate. Marine and fire insurance experience extends over a long series of years. The costs of insurance are well known, or at least we know that a certain minimum amount must be collected. How much less might be sufficient is a debatable question, but there is no necessity to answer that question in the event the state should decide to monopolize the business. In short, the application of the insurance principle presents no great difficulties or risks. It is not a venture upon unknown seas.

Chapter II

IT does not follow from the preceding description of insurance that great ability and skill are not required to administer the business. Nothing could be farther from the truth. Not only is great organizing ability required, but also great financial ability is demanded in investing and caring for the enormous trustee funds. It may be argued that it is in connection with the investment of these funds that the element of risk appears which justifies the profit to the individual. But an examination of the interest rate assumed and actually earned, together with the course of the interest rate during the past centuries and a study of its probable range in the future, removes any great doubt on this point. Very few of those who receive either interest or profit from the insurance business would be bold enough to maintain that this was a return either for the risk they had assumed or for their great foresight in investing insurance funds. Before considering in detail the problems of state insurance of each of the kinds of insurance, a description of what has already been done by the different nations in state insurance will be of value.

The most notable case of state insurance is that established by the Italian law of April 4, 1912. This law makes life insurance a state monopoly. The issuing of all policies of life insurance is intrusted to a National Institute of Insurance, a department of the state to which the treasury of the state issues the money necessary for its operation. The net profit of operation goes to the public treasury for a fund to provide workingmen pensions. However, it is not primarily financial in its purpose ; for, as Minister Nitti insists, "the essential thing is not to obtain revenue for the state, but to render life insurance popular with the classes and to make it accessible to all." It must be emphasized that whatever profit results does not go to pay the normal expenses of the state, but is to be set aside in toto for the specific social purpose of providing pensions for workingmen.

It is to be especially noted that the law applies only to life insurance, and even in this case the social aspect of such insurance is recognized by exempting the following classes of life insurance organizations: (a) Provident Institutions authorized by law to the service of pensions or annuities. (6) Banks of Providence recognized by royal decree, (c) Mutual societies the aim of which is not speculation and which insure their members for a sum not in excess of 1000 lire or pay an annuity not to exceed 400 lire, (d) Public and private institutions which directly grant pensions, rewards, or aid at the time of death of their employees, (e) Life annuities stipulated and acceding to the Articles of 1789 and following the Civil Code. The law nullifies all contracts of life insurance made after the law of 1912 is placed in effect and denies a hearing in Italian courts on insurance contracts made in foreign countries. It is made an offense for a company or its agents to solicit life insurance, and in case this is done, the agent is fined, the contract is nullified, and the informer is given a part of the fine.

All tontine and annuity companies are prohibited, and the present business of such companies, either foreign or domestic, must be liquidated. The law requires each company having insurance policies in force to file with the government a detailed statement of each policy, and all such policies not so scheduled are declared null and void. Each policy-holder is requested to see that the company so declares his policy, and if the company has not done this, the policyholder must. It has been decided to grant a certain number of years during which the transfer from private to state insurance may take place without causing too much damage. This interval also gives time for the National Institute to prepare itself to function properly.

The following principles govern the relationship between the new state and the old private insurance.

(a) No indemnity of any kind will be given to the private insurance companies, either domestic or foreign. Italy has no constitution. All laws are constitutional, and the Italian courts have no choice but to apply the law. Foreign companies, therefore, can have no indemnity granted by the Italian courts. What will be the result of the request which has been made by some of these foreign companies to their departments of state to take up the subject with Italy is a matter of conjecture. Such a question might reach the Hague Tribunal, and if an award in favor of the foreign companies were granted, an embarrassing situation might arise. If foreign companies were indemnified, certainly the Italian companies should also receive indemnities.

(&) During a period not to exceed ten years existing companies may continue to do business under certain restrictions. Some of these restrictions are that the company must turn over 40 per cent of every risk to the National Institute ; within thirty days after writing the risk the company must send to the Institute a full description of the risk and give it an opportunity to accept or reject the risk. If the Institute accepts the risk, it becomes a creditor for a part of the premium to cover that part of the risk assumed.

(c) All companies foreign or domestic may call upon the Institute to assume all its contracts of insurance written previous to Dec. 31, 1911. Companies continuing business under the ten-year limit can surrender their business at any time. The Institute must accept the business if the proper reserve is held on the policies.

(d) If contracts are not surrendered, they must be executed the same as if there was no state monopoly.

The National Institute of Life Insurance has a legal and financial autonomy. It is a public service under inspection, with provisions to exclude politics from its operation. It has its own budget, although the state guarantees the obligations assumed. The capital of the Institute is exempt from taxation, but the contracts of insurance are taxed. It has the postal and telegraph franchise. In addition to the administrative officials and office force, agents are employed who are paid on a commission, proportional to the amount of the business secured. All persons actively engaged or interested in politics are forbidden to hold any administrative positions, and in addition certain qualifications for the particular position must be possessed. The tenure of office is also secured.

Switzerland, after a referendum vote, passed a law June, 1911, which provides for a state monopoly of insurance against accidents and sickness. In addition certain cantons have government insurance against different risks. Some of them provide insurance against fire. This insurance is compulsory. The canton of Neuchatel has public life insurance. These various forms of public insurance do not, in most cases, provide for a public monopoly of the business. They compete with the private companies for business. In several of the German states public insurance is also found, but in no case is a monopoly of the business established. Bavaria, for example, has public insurance against fire, live stock, and storms. The German plan of workingmen's insurance by the imperial government will receive consideration later. In Norway public insurance against fire and accidents is found, but not as a monopoly. In Belgium and other European countries other examples of public insurance are found. The recently enacted National Insurance Law of England needs only to be named to call attention to this far-reaching experiment in state insurance. England has offered for many years industrial insurance through its post-office organization. Annuities have also been offered for many years without securing large results. In France state insurance is one of the most important questions of the day. During the last several sessions of the Chamber of Deputies bills have been introduced organizing a state monopoly of insurance, and important officials of the various governments of late years have declared themselves in favor of the plan so soon as a means of realizing the work can be devised. There exists already public insurance in France against accidents and fire, but these are without a monopoly. In some of the Australian states, especially New Zealand, life insurance by the state is provided, but here also it is found in competition with private companies. The United States also affords various examples of state insurance, the most interesting of which is probably the plan recently placed in operation in Wisconsin. The law passed by the legislature of 1911 provides for the sale of life insurance policies by the state, beginning Jan. 1, 1913. The law provides for a life fund beyond which the state is not responsible. The state treasurer is custodian of the fund, and all other matters in relation to the sale of the insurance are under the supervision of the commissioner of insurance. The premiums are based upon the American experience table of mortality with interest at 3 per cent. The net premium thus provided for has added to it as a loading two dollars per year per thousand dollars of insurance and "an amount distributed equally through each of the possible premium payments, the present value of which shall be equal to one sixth of the present value of the costs of insurance on the basis aforesaid " ;

that is, one sixth the present value of the net natural premium for that year's insurance.

The factory inspectors of the state, the clerk and treasurer of every county, town, city, and village, and even state banks are made agents, and it is the duty of each to transmit to the insurance departments applications, when requested to do so. The commissioner of insurance and the state board of health pass upon all applications after a medical examination by a local physician has been made. The law provides for the accumulation of a surplus which is made up of 50 per cent of the net profits on each policy for the first year, and thereafter 5 per cent less for each succeeding year until the ninth year, and thereafter 10 per cent of such profit during the continuation of the policy. The interest on this surplus fund also becomes a part of this surplus which is to be held " to meet losses from unexpected or great mortality, or depreciation in securities or otherwise." The remainder of the profits are distributed annually to the policyholder. No revenue is sought by the state, but the expenses of transacting the business are to be met from the life fund. Any person is authorized to transmit applications for insurance to the state department, for which a fee of twenty-five cents is paid. Likewise a fee of 1 per cent is paid for collecting and transmitting any premium, and such a person is held to be the agent of the insured. Similarly the individual may transmit his own application or premium and retain twenty-five cents or 1 per cent of the premium. Policies of life insurance are issued under most of the ordinary forms sold by private companies, but are in a sum of $500 or multiples thereof up to $1000 on a single risk until the number of insurants equals 1000, to $2000 until the number insured reaches 3000, and then not in excess of $3000 on a single life. The age limits are fixed at twenty and fifty years. It will thus be observed that the plan provided is conservative.