Chapter XCIX: Section CCXXXVII: (d)

REQUISITES OF A GOOD SYSTEM OF FIRE INSURANCE.

Among the chief requisites of a good fire insurance system are the following:

A. The adoption in insuring of measures for the prevention of criminal abuse on the part of the insured. No one should be benefited by the burning of his insured goods.[237d-1] Hence, the rates of insurance should be rigidly fixed according to the real value in exchange.[237d-2] In the case of houses, the value of the incombustible elements of value should be deducted; also the value of the ground and the value it possesses from being advantageously situated, etc. The simultaneous insurance of the same object in several companies without proper notice being given should be unconditionally prohibited.[237d-3] The control of all this may be greatly facilitated by requiring foreign insurance companies to obtain a special permit to carry on their business in the country, and to allow them to effect insurance only through responsible home agents.[237d-4] Most insurance companies exclude from insurance personal property which may be easily secreted, such, for instance, as jewels, cash money, valuable documents, etc.

B. There should be a just proportion between the insurance premium and the risk. This depends not only on the style of building of the houses themselves and of those in the neighborhood,[237d-5] on the situation, the too great intricacy (_Complicirung_) of which extends the ravages of fire, as its too great isolation makes assistance difficult;[237d-6] but also on the nature of the business carried on in them,[237d-7] and on the condition of the local development of fire police. Highly cultured places, especially large cities, are really much less exposed to damage from fire. To not take this into account would be not only to compulsorily dole out charity to the poorer classes of the people, and to the less cultivated portions of the country,[237d-8] but it would indirectly put an obstacle in the way of a transition to the massive construction of houses, and of good, that is, as a rule, of costly fire-extinguishing institutions.[237d-9] On the other hand, administration must be rendered much more difficult by the taking of risks of many degrees of danger, especially as it is scarcely possible, for a long time, to even hope for a statistically unassailable basis of a tariff graded in exact accordance with the risk.[237d-10] If those objects especially exposed to danger should be excluded altogether, the common utility of the institution would be largely diminished; and the insured least exposed to danger would nevertheless have to complain of a relatively too high contribution.[237d-11] If every peculiar class of risks were to be treated as one whole, the insuring principle itself would suffer.[237d-12] Where the nation or municipality engages in the business of compulsory insurance, its too rigid system of rate-fixing has something inequitable in it, inasmuch as it makes the most provident housekeeper suffer from the danger from fire of his neighbor's establishment, a gas factory, for instance.

C. The certainty of compensation for damage suffered. The government should see to it that the institution does not promise more than it can perform with its joint-stock capital and by means of its premiums.[237d-13] The good will of foreign institutions to keep their promises to the letter is best assured by requiring them as a condition precedent of carrying on their business in a country, to bind themselves to litigate only in the home courts. They protect themselves against the risk of very large insurances by the system of re-insurance, by transferring a portion of the premium as well as of the risk to one or more other insurance companies.[237d-14]

D. In all highly cultured quarters, the almost entirely voluntary fire-extinguishing system, in which the people turned out in a body to battle with the flames, made way for the fire-militia system; and if the latter should make place for what we may designate as a standing fire-army which is most easily attained in connection with the fire-insurance system, we should reach the ideal of such a system, especially if the business of insurance was in the hands of the state or of the municipality. Such a system would be in accordance with the principle of the division of labor, and, also, with the fact that usually the most vital interest is the greatest spur to action.[237d-15]

[Footnote 237d-1: The former almost unrestricted liberty of
the American system of insurance has recently been
curtailed, in most of the states, by a rigid governmental
superintendence, by special insurance boards with power to
permit companies to engage in the business of insurance, and
endowed with the right of imposing proper penalties, but of
declaring the privilege forfeited at the end of any year.
Compare _Brämer_ in III, Ergänzungshefte der Preuss.
Statist. Ztschr. und Mitth., 1871, No. 1.]

[Footnote 237d-2: The first fire insurance provisions or
regulations paid little attention to the danger of
over-valuation. Similarly _v. Justi_, Abh. von der Macht,
Glückseligkeit, etc., eines Staats. 1860, 81. Also
_Krünitz_, Oekonom. Encyclopædie, 1788, XIII, considers it
improbable that any one would have his home insured at a
higher than its real value. On the other hand, there were
formerly bitter complaints made in the United States that
the agents, on whom the determination of the rate of premium
and the control of the insurance-sum depended chiefly, were
led to make over-valuations in furtherance of their own
interests. (Mitth., 1871, 3; 1874, 95.)]

[Footnote 237d-3: If the valuation were made to depend on
the purchase price or on the cost of replacing or restoring
the damaged property, even this would be some temptation to
not entirely upright men. Hence the Baden law of 1840
expressly provides that instead of this, the selling price
shall be the basis; the law of 1852, § 17, the medium cost
of the combustible parts, after deduction made of the
diminution in value caused by age. The fixing of premiums in
the case of houses should be repeated from time to time on
account of wear. According to the Calenb. Grubenh. law of
1823, § 21, every 10 years. According to the Baden law of
1852, § 28, 33, and the Württemberg law of 1853, § 12, the
city council should examine annually in what cases a new
valuation was necessary. The more certainly over-insurance
is avoided, the less need is there of the superintendence
policy adapted to a rather barbarous state of insurance,
that only a part of the value shall be made good. The
Phoenix fire insurance company in Baden for the insurance
of movable property has reserved the right to investigate at
any time and to satisfy itself as to the value of the
insured object, and to lower the amount insured in
accordance with its own opinion. The provision that the
valuation shall be made by the authorities of the place, or
that it shall be approved by them is frequently found. In
Saxony, for instance (law of Nov. 14, 1835), the Leipzig
city council gives its approval when it finds the amount
insured in keeping with the means of the insured, and
entertains no suspicions as to his honesty. To what a bad
state of things a less liberal course leads, see in
_Masius_, loc. cit., 85. This indeed is only difficult in
large cities. It is also to be considered that it is not so
much the many small amounts, but the few large ones that are
dangerous to insurance. The Prussian scheme wanted to give
up the police superintendence of insurance, but to punish
over-insurance of more than 5 per cent. of the common value,
by imposing a fine equal to the amount of over-insurance on
the insured, the agents, and on the conductors of the
business. (_Jacobi_, in II. Ergänzhefte der Preuss. Statist.
Ztschr., 1869.) The provision that the amount paid as
damages for a burned house shall be immediately employed in
rebuilding, is to be explained in part by requisite A; in
part also by the same police-guardianship against presumed
negligence which introduced compulsory insurance.]

[Footnote 237d-4: Compare _Brügemann_, Die Mobiliar V. in
Preussen nach dem G. von 1837.]

[Footnote 237d-5: _Oberländer_, loc. cit. 108, calls
insurance without classification of risks, a "mutual
benevolent institution;" and one rigidly classified
according to the probable period of burning, "an institution
for the making of advances" (_Vorschuss-Anstalt._) In Baden,
even in 1737, there was no difference made between a massive
building and a wooden hut with a straw roof in the Black
forest. (_Rau_, Archiv., III, 324.) Here, there was in 1844
to 1849, an average damage by fire in houses with brick
roofs of 1,302 florins, with thatch roofs of 1,786 florins,
with shingle roofs of 2,292 florins, to say nothing of the
greater frequency of such damage in each succeeding class.
(_Rau_, Lehrbuch, II, 1, § 26, a.) In Württemberg, before
1843, the owners of insured personal property, in houses
with thatch roofs, had, in the same time, received 22 per
1,000 compensation for damage; in houses with brick roofs,
from 8 to 9 per 1,000. (_Rau_, loc. cit.) In 17 German
insurance companies, between 1866 and 1869, massive
buildings with hard roofs paid 1,003,000 thalers and
received 612,000 thalers; the not massive with hard roofs
paid 1,544,000 thalers and received 1,339,000; houses with
soft roofs paid 2,420,000 and received 2,792,000. (Preuss,
Statist. Zeitschr. 1861, 327.) Similar observations made in
Berne during 23 years.]

[Footnote 237d-6: While in most English insurance companies,
there are only three classes: common, hazardous, and doubly
hazardous, in Rhenish Prussian insurance companies, there
are seven, according to the style of building, and in each
class two subdivisions, according to the location.]

[Footnote 237d-7: According to an English average of 15
years, there is some damage from fire yearly in the
following classes of buildings and on the following
percentages:

_Of the whole number_.
Match factories, 30.00
Lodging houses, 16.5
Hat makers, 7.7
Cloth makers, 2.6
Candle makers, 3.8
Smiths, 2.4
Carpenters, 2.2
Oil and color dealers, 1.5
Book dealers, 1.1
Coffee houses, 1.2
Beer houses, 1.3
Bakeries, 0.75
Wine dealers, 0.61
Small dealers in spices, 0.34
Eating houses, 0.86

(Quart. Rev., 1854, 23.) There is indeed a difference in the
intensity of these fires. For instance, in inns, there have
been a great many; but the damage has been for the most part
insignificant.]

[Footnote 237d-8: In Paris the houses insured had a value of
2,370,000,000 francs, but the damage from fire amounted to
only 0.016 per 1,000! (Dictionn. d'Econ. politique, I, 89.)
On an average, the premiums in France amount to 0.85 per
1,000. In Prussia, 1867-69 on an average: in the province of
Prussia, 9.46 per 1,000; Posen, 3.75; Brandenburg, Berlin
not included, 2.82; Pomerania, 2.52; Westphalia, 2.15;
Schleswig-Holstein, 2.09; Hanover, 1.99; Silesia, 1.68;
Saxony, 1.47; Hesse-Nassau, 1.46; the Rhine country, 1.34;
Sigmaringen, 0.56; city of Berlin, 0.28 per 1,000. (Preuss.
Statist. Zeitschr., 1871, 289.) How largely a higher
civilization tends to arrest the spread of fire by the
reason of the great facilities of rendering assistance is
shown by the fact that for 100 buildings totally consumed in
Posen, in 1837-40, there were 13.4 only injured: in 1866-69,
32 were injured for 100 totally consumed. In Prussian
Saxony, 1839-44, 34; 1867-69, 57. (loc. cit., 329.) In
Baden, the district called the _Seekreis_ got from the
fire-fund, in 1845-49, 80 per cent. more than it contributed
to it; the middle Rhine district contributed 37 per cent.
more than it received. The Bavarian Reza district, 1828-29,
received only 11.4 per cent. for damages, and paid 19 per
cent. of all premiums; the Lower Danube district, 10 and 8.8
per cent. (_Rau_, Lehrbuch, II, § 28, 26.) The city of
Leipzig contributed from 1/19 to 1/17 of the insurance paid,
1864-68, to the insurance companies taking risks on real
property in the kingdom of Saxony, and received back only
from 1/662 to 1/114, although its fire extinguishing
institutions cost, in 1870, 26,182 thalers. (Official.)]

[Footnote 237d-9: Even premium-institutions have frequently
very different rates for the same risk, according as they
fear greater or less competition, or desire to recommend
themselves in a new place, etc. Hence the tricks of the
trade with which most of them surround their tariff.]

[Footnote 237d-10: In Würtemberg, theaters, powder mills,
places where brick and lime are burned, porcelain factories,
iron-works, etc. cannot be insured at all. In
Calenb-Grubenh. and Bremen-Verden, shingle-roofed houses can
be insured only at 2/3 of their real value.]

[Footnote 237d-11: Thus, for instance, in the electorate of
Mark, each of the four classes of houses bears its own loss
alone. To the fourth class, for instance, belong smithies,
brick factories, and buildings with steam engines, etc. The
Baden law of 1852 puts the same burthen in the same place,
upon houses exposed to danger in a greater or lesser degree;
but provides for 4 classes (_Gemeindeclassen_) with
different rates of contribution, and assigns each _Gemeinde_
every year, according to the relative magnitude of the
losses of the previous year, to one of those classes. How
risky it is for large cities to confine their insurance,
because of the ordinarily small amount of damage to them
from fire, only to insurance institutions of their own, is
shown by the case of Hamburg in the year 1842, where three
joint stock insurance companies could pay only from 75 to 80
per cent., and the Bieber Mutual Insurance Company, only 20
per cent.]

[Footnote 237d-12: In the case of buildings, the greater
risk is generally calculated by correspondingly multiplying
the insurance-value, but in case of damage by fire, it is
simply made good.]

[Footnote 237d-13: In the insurance companies specified by
_Masius_, loc. cit., 176, the aggregate amount of their
insurance, stood to the amount necessary to cover it, by
means of receipts from premiums, reserve, and joint-stock
capital:

In the Leipzig Fire Insurance Company, as 100:1.87
In the Trieste Fire Insurance Company, as 100:1.80
In the Elberfeld Fire Insurance Company, as 100:1.19
In the Aix-Munich Fire Insurance Company, as 100:1.15
In the Cologne Colonia Fire Insurance Company, as 100:2.44
In the Karlsruhe Phoenix Fire Insurance Company, as 100:3.7
In the Berlin Fire insurance Company, as 100:6.3
In the Gotha, about as 100:2.6
(including the four fold after payment note)

In the same companies the amount of damage and of expense
for the last preceding year were, on every 100 thalers, of
insurance, 46 pfennigs (1/300 thalers), 44, 29, 48, 67, 55,
35, 42; an average of 45, that is 1-1/2 per 1,000. Besides,
much depends on the degree to which the joint-stock capital
can be applied. Thus, for instance, in Berlin, on every
1,000 thalers 200 are paid in cash, and a note
(_Solawechsel_) given for the rest, payable in two months
after notice. Where the unpaid remaining stock is but a mere
book-debt, and may even be evaded by disclaiming the stock
itself, it of course affords very little security.]

[Footnote 237d-14: Compare _Volz._ Tübinger Zeitschr. 1847,
349 ff.]

[Footnote 237d-15: The preparatory steps towards this ideal
were taken long ago. Thus, for instance, the
personal-property insurance companies have offered premiums
for special merit in extinguishing fires (Calenb.-Grubenh.,
1814, § 35), saving things from a burning house is looked
after by the agents of personal property insurance
companies; compensation is almost universally made not only
for the damage done by fire, but also that caused while the
fire is being extinguished. The excellent fire-extinguishing
institutions of England are maintained by the common action
of the insurance companies. There have been complaints,
however, that they have shown a preference for insured
objects. (Mitth., 1874, 113.)]