Chapter XCVI: Section CCXXXVII: (a)

INSURANCE IN GENERAL.--MUTUAL AND SPECULATIVE INSTITUTIONS.

All insurance institutions fall into two classes:

A. Mutual insurance companies, in which the insured are also as a society the insurers, and share the aggregate damage, of a year, for instance, among themselves.

B. Speculative institutions, in which a party, generally a joint-stock company, in consideration of a certain definite compensation (premium agreed upon and paid in advance), assumes the risk.[237a-1]

So far as security is concerned, no absolute preference can be accorded to either of these classes. Mutual insurance companies require to extend their business very largely[237a-2] to be able to meet great damage. And even where the liability of the members is unlimited, care must be taken to distinguish between the legally and the actually possible.[237a-3] The joint capital of a well organized[237a-4] premium-association affords, in this respect sufficient security from the first, but the ratio between its security-fund and the amount of its assumed liabilities becomes less favorable as the business is extended, in case the fund itself is not enlarged.[237a-5] Mutual insurance may accomplish something analogous to that accomplished by a joint-stock fund by collecting a reserve of yearly dues in advance, thus modifying the burdensome vacillation of the amount payable each year.[237a-6] Experience, however, teaches, that the strongest form of mutual insurance, that supported either by municipalities or by the state, has been able to meet extraordinary damage from fire much better than premium-institutions, which are too quickly left in the lurch by the stockholders when the damage is greater than the amount of the stock subscribed. So also loss from fire caused by war or riots is for the most part and on principle, excluded by speculative insurance institutions.[237a-7]

In point of cheapness to the insured, mutual insurance seems to have the advantage, since it contemplates no profit.[237a-8] From a national-economical point of view, also, it is very much of a question, whether the active competition of premium institutions, in a sphere which affords little room for industry proper, is more of a spur to make them "puff up" their claims (_Reclamen_) or to the simplification of their administration.[237a-9] However, premium-institutions are more easily capable of extending the circle of their business;[237a-10] which of itself decreases the general expenses and strengthens their insuring power. Premium-insurance supposes a greater development of capitalistic speculation than does mutual insurance. But, even in the highest stages of civilization, the competition of some mutual insurance companies is desirable to protect the insured from a too high rate of profit to the insurers.[237a-11] [237a-12] And since the principle of mutual insurance has so little attraction for capitalists in a time like that in which we live that it can be maintained perhaps only by the support of the state or of municipalities, we may consider the desirableness of the state's continuing to participate in some way in the matter of insurance as established.

[Footnote 237a-1: We might, however, improperly add another
class, that of self-insurance, which lies in the proper
distribution of a large capital over a great many points.
When, for instance, a large state insures its buildings,
this seems a superfluous outlay of public money for the
benefit of private associations. Or does England insure its
ships? On this account, in Prussia, the insurance of
post-offices which Frederick William favored, has recently
been done away with. (_Stephan_, Gesch. der Preuss. Post,
195, 803.)]

[Footnote 237a-2: According to _Brüggemann_ (D. Allg. Ztg.,
1849, No., 75 ff.), 100 million thalers of an insurance-sum.
Actual American legislation prescribes in the case of mutual
insurance a minimum number of members of from 200 to 400, a
minimum amount of annual premiums of from $25,000 to
$200,000, of cash payments on the annual premium of from 10
to 40 per cent. of cash-paid yearly premiums, $5,000 to
$40,000; and a maximum amount of premium notes made by a
member of $500. (Compare Mittheilungen, 26 ff.)]

[Footnote 237a-3: Hence several mutual companies limit
themselves to a maximum liability. Thus, for instance, the
Gotha Fire Insurance Company requires from each member a
bond that in case of necessity, four times the amount of the
presumptive contribution paid in advance shall be paid
after; in Altona, six times the yearly premium is the
maximum.]

[Footnote 237a-4: In France, every premium-insurance-company
has to be approved by the government (Cod. de Comm., art
37), and the approval is not given until 1/5 of the
joint-stock capital has been deposited. (_Block_, Dictionn.
de l'administration, Fr. 153.) Many recent American laws
require that the shares of insurance companies should be
registered with the name of the owner.]

[Footnote 237a-5: The Aix-Munich Fire Insurance Association
raised its joint-stock capital after the Hamburg fire from 1
to 3 million thalers.]

[Footnote 237a-6: Usually so that the regular yearly
contribution is higher than the average damage and cost of
administration; this excess is then returned in the form of
a dividend, either immediately at the close of the yearly
account, or which is still safer, after several years. In
the Stuttgart private insurance company, the reserve must
amount to one per cent. of the amount insured, before the
premium-surplus is returned. The Gotha fire insurance
company, between 1821 and 1842, paid back an average of 46
per cent.; and even in 1842, after the Hamburg
conflagration, there was an after-payment of only 98 per
cent. necessary. This collection in advance of a fund for
extraordinary losses is more secure than borrowing in case
of need, and paying back in good years. Thus, the Baden
Landes-Brandkasse had a debt in 1837 of 800,000 florins.
(_Rau_, in the Archiv., III, 320 ff.) In a mutual insurance
company, where entrance and exit are free, this would be
scarcely possible.]

[Footnote 237a-7: Nearly three-fourths of the public
insurance institutions insure also against fire caused by
war (Mitth., 1874, 85), a matter of importance even as war
is waged in our own days, since in 1870-71, the damage from
fire by the Franco-Prussian war in France was estimated at
141,000,000 francs. (Mitth., 1873, 33.)]

[Footnote 237a-8: In Prussia, the mutual fire insurance
companies, in 1865 and 1866 had an administration outlay of
0.24 and 0.22 per 1,000 of the amount insured; the premium
insurance companies of 0.80 and 0.96; the latter doubtless
including large assessments for common purposes. (Preuss.
Statist. Ztschr., 1868, 269.) In all Germany, the outlay for
administration is, for public institutions, 4 per cent. of
the contributions; for premium institutions, inclusive of
their dividends, 37.1 per cent.; for the more important
French private institutions, even 68.8 per cent. (Mitth.,
1874, 89, 92.)]

[Footnote 237a-9: German public fire insurance institutions
generally have a territory of their own, in which that
institution is the only one of the kind. On the other hand,
the premium institutions in the whole empire keep about
80,000 agents, i. e., a number 50 times as large as the
number of officers of the former, (loc. cit. 90.)]

[Footnote 237a-10: Mutual insurance companies, as they have
extended, have sometimes split up into several; for
instance, the insurance companies against damage by hail at
Lübeck, Güstrow, Schwedt and Griefswald, daughters of that
at New Brandenburg.]

[Footnote 237a-11: The founder of the Mutual Fire Insurance
Company of Gotha expressed the hope that in it, it would be
possible to insure 60 per cent. cheaper than was customary
in the joint stock companies of the time. In the system of
agricultural _Einzelhöfe_ in Germany, small mutual insurance
companies are possible, and insurance then may be very
cheap.]

[Footnote 237a-12: On the premium associations, _Bernoulli_
Ueber die Vorzüge der gegenseitige Brandasscuranzen vor
Prämiengesellschaften, 1827. _Per contra_, _Masius_, Lehre
der Versicherung und Statische Nachweisung aller V.
Anstalten in Deutschland, 1846. In Prussia, premium
associations are growing more rapidly than mutual: the per
capita amount on the whole population insured in the former
against damage from fire in 1861 was 116.6 thalers; in 1866,
154.2; in 1869, 176.6; in the latter in 1861, 103.5; 1866,
124.3; 1869, 154.3 thalers. (_Engel_, Statist. Zeitschr.,
1868, 268 ff.; 1871, 284 ff.) In France, in the former, in
1857, almost 36 milliards of francs; in the latter, in 1864,
13 milliards. (Mitth., 1871, 51.)]