nies compensation he may be put to the expense and trouble of defending himself in court or before an administrative commission, besides satisfying any award which may be made. Naturally, the assumption of these risks by a third party is a distinct service to the employer, since it relieves him of the uncertainty entailed by their existence and permits him to devote all of his attention to other problems, and he will be willing to pay for the service in proportion to the importance which he attaches thereto. It is for the performance of such a service that insurance organizations have been formed and it is to the employer's willingness to pay for the service that they owe their existence.

The primary problem which confronts the management of an insurance organization is that of quoting a price for its service. The premium rate, as the price for insurance services is designated, must be sufficient to cover all losses, pay all expenses and, in the case of stock companies, yield a margin of profit. On the other hand, it must be low enough to induce employers to transfer their risk to the organization and, in the interests of justice, must not be excessive and must discriminate between industries and employers according to the relative burden assumed by the insurance carrier. In fine, a measure of the risk assumed is necessary in the interests of both parties to the contract of insurance.

The insurer finds such a measure in past experience and applies it to a given risk in accordance with the laws of probability, bearing in mind the necessity of homogeneous groups, of accurate data, and of a broad

exposure. Suppose, for example, that during the past three years employers in the boot and shoe industry have had an average expense on account of liability for injuries to their employees of twenty cents per one hundred dollars of payroll per year. Suppose

that, during the coming year, circumstances affecting the occurrence of injuries, their severity, and liability for damages are not changed. An employer, in whose plant average conditions obtain, desires a quotation of a premium rate for the assumption of his liability risk. The insurer can add to the "loss cost" of twenty cents an amount for administrative and acquisition expenses, unforeseen contingencies, and profit, and quote a rate. Supposing these additions to total forty per cent of the final premium the rate in this case would be thirty-three and one-third cents per one hundred dollars of payroll per year.

The receipts in premiums from this employer may not cover the disbursements made necessary by the assumption of his risk, but the receipts from all employers should cover all disbursements and leave a reasonable profit. It is because of their ability to combine risks that the insurance company can safely assume a risk which it would be folly for the individual employer to carry. The employer can provide for the securing of accurate data and may have homogeneous groups, but only in exceptional cases are his groups large enough to bring into play the law of average. This is the peculiar function of the professional insurance carrier.2

It is true that some of our large corporations are in a position, because of their size, to become successful "self-insurers"

Practical Qualifications.—In the application of the theory of probability to the business of insurance many difficulties are encountered. It is often necessary to quote rates before sufficient experience has developed. In many classes of risks conditions change so rapidly that statistics of the past lose some or all of their value as a basis for estimates of future happenings. Again, certain classes are too small in extent to furnish a true average.

Difficulties of this sort are met in two ways; by the exercise of judgment in allowing for probable inaccuracies, and by accumulating a fund which may be drawn upon to meet unexpected disbursements. Sometimes judgment is used in quoting rates for a given risk by making use of the statistics of losses on analogous risks, sometimes an estimate of the effect of changed conditions will be applied to accumulated statistical experience with the type of risks in question. Judgment was a particularly large factor in the quotation of employers' liability insurance rates; it is still a factor of importance in rates for the insurance of workmen's compensation.

The contingency reserve or surplus is an essential feature of any kind of insurance where statistics are not a thoroughly reliable guide to the future. Such funds are very necessary in the conduct of liability and compensation insurance, in which there are still many statistical problems to be solved and in which the accumulation of experience covers neither sufficient risks

and attain accurate results in the application of the theory of probability to their past experience. Such cases are, however, unusual.

nor a sufficient period of time to be considered thoroughly reliable.

REFERENCES

WILLETT, A. H. "Economic Theory of Risk and Insurance," Columbia University Press. New York (1906). MUDGETT, BRUCE D. "The Measurement of Risk in Life Insurance," Chap. XI in S. S. Huebner, "Life Insurance," Appleton, New York (1915), pp. 119-129.

CHAPTER XIV

METHODS OF INSURANCE

Self-insurance. The term self-insurance is usually applied to the practice of employers who do not shift their risk of loss to an insurance organization. The term is a misnomer unless the business in which the employer is engaged is sufficiently extensive to produce dependable average results and unless a sufficient fund is accumulated actually to insure the payment of claims. Where these conditions do not obtain the employer is merely "carrying his own risk," the very opposite of insurance.

The employer, in refusing to shift his risk of loss, is moved by a desire to save expense. If he carries his own risk he will not be obliged to contribute to the costs of maintaining an insurance organization. Further, his payments of losses will reflect conditions in his plant and he will retain for himself any savings from accident prevention. He will, however, be subject to the embarrassment of unusually large losses and to the trouble and expense of adjusting claims and administering the payment of benefits.

To the employee the possible disadvantages of “selfinsurance" are very great, so great that it is not permitted under the laws of six states. The state does not maintain the same careful supervision of the