IFIRE INSURANCE. 641 FIRE INSURANCE. to an insurance company. When a corporation adopts this plan of self-insurance, it usually sets aside an insurance fund, out of which any prop- erty destroyed by tire is to be replaced. I " losses which arc suffered fall wholly on the cor poration; the insurance fund merely enables it tn meet them without embarrassment. The prev- alence of this custom of self-insurance against fire among large corporations constitutes a seri mis indictment of the management of fire-insur .•mil' companies. A part of the gain from a system ill' insurance comes from c bining many separate risks in a single company, since the mure risks the company carries I provided, of course, they are properly classified) the less fluctuation will there be in the amount of loss, and the smaller the reserve which will have to be maintained to prepare for unexpected losses. Consequently, however many risks of its own a corporation may be carrying, it should be to its advantage to combine them with as many other similar risks as possible. That so many large corporations find it cheaper to carry their own insurance can be explained in only one way — that the insurance companies charge more for the protection they give than is justified by the risk they assume. A slight extension of the principle of self-insurance is seen in the strictly mutual insurance companies often formed, com- posed of a small number of persons all engaged in some one line of business. Perhaps the best- known example of this kind of company is to be found in the so-called 'mill' or "factory' mutuals of New England. Such a company consists of a limited number of persons or corporations en- gaged in some particular line of manufacture — as, for example, the cotton manufacture — each of whom insures the whole or a part of the value of his mill in the company. Nearly all of these companies are very stringent in their require- ments as to the protective measures to be adopt- ed by their members. The adoption of these measures greatly reduces the danger of loss by fire, and so lessens the degree of risk. These companies, however, like individuals, should be able to insure more cheaply in large insurance companies, if those companies charged no more for the business than the risk justified. The Agenct System. While fire-insurance com- panies were small and their activities were con- fined to limited areas, it was possible for all the business of any one of them to be done through a single office. With the growth of the business and the extension of the field of operation of the larger companies, the single-office system became cumbersome and unwieldy. To meet the diffi- culty, the 'agency system' was introduced, for a time tentatively and to a limited extent. It was first tried successfully on a large scale in the early fifties, by the Home Fire Insurance Company. It has since become practically uni- versal among the large companies. Under the agency system the territory constituting the field of operation of an insurance company is divided into a number of departments, varying for the whole United States from two or three to ten or twelve in number. Over each department is a general agent or manager, who is practically in charge of the business of his company through- out his department, subject to the general in- structions received from the home office. The manager appoints and supervises two classes of subordinate agents — local agents, one or more in each locality where the companj due' bust ness, and special agents, usually one for each Mate. The local agent is the one who solicits business and actually write- the insurance, mak- ing periodical reports to the general agent in charge oi the department which includes the locality in which he works. That the I i a may have the greatest ii nine to diligence in securing business, his remuneration takes the form of a commission on the premiums received. This method of payment has the disadvantage of putting the agent under a strong temptation to accept undesirable risks, or to secure business by improper methods, Eoi the sake oi obtaining his commissions. It is one of the chief functions of the special agent, or 'field man,' to keep watch over the local agents, and prevent them from sacrificing the welfare oi the company to their own pecuniary interests. The special agent is paid a salary instead of commissions, and his chance of promotion lies in making a good show- ing for his district. His interests coincide with the interests of the company he represents. That the agency system has been largely re- sponsible for the great extension of lire insur- ance in the United States cannot be doubted. The method is, however, a very costly one. The direct cost in the form of commissions is enor- mous, and is increasing from year to year. Thus, for the fire insurance written in the decade 18G1- 70, commissions amounted to $11.21 for every $100 of premiums: in 1871-80 they were $14.61 per $100 of premiums; in 1881-90, $17.89: in 1S91-1900 they varied from $17. !H) in 1894 to $20 in 1900; and they went -till higher in 1901, to $20.75. Of the $150,000,000 received in premiums during that year by the agency fire- insurance companies, more' than one-fifth, or more than $30,000,000. was immediately handed back to the agents who secured the business. Moreover, this direct expense represents but a small part of the cost of the agency system. While the companies themselves are by no means entirely free from blame for the recklessness with which at times rates are cut and risks ac- cepted, it is the uncontrollable zeal of the local agents for business and resulting commissions which usually inaugurates such a movement. The result of the movement is the acceptance of undesirable risks, or of desirable risks at too low a rate, a consequent diminution in the ratio of premiums to insurance written, and, when the effect of the poorer risks has made itself felt, an increase in the proportion of fire losses to insur- ance written, and finally the failure of weak com- panies and the depletion of the surplus of strong companies. The situation at length becomes in- tolerable, compelling a movement to restore rates to a paying basis, and general and special agents for a time exercise great care in their supervision of local agents. The effect of the bad risks accepted during the period of rate- cutting disappears after a year or two. and a period of prosperity follows, which lasts until the cycle starts anew. While local agents have done much good in extending insurance among people who would never have resorted to it un- solicited, and while it is difficult to conceive of any other system on which the business of a large company can be well carried on. still it must be acknowledged that the multiplicity of agents, the magnitude of their tax upon the in- sured, and the wide divergence between the in-
