ance carrier will be described, its advantages and disadvantages considered, and conclusions presented in so far as experience in this branch of insurance warrants. Since the field of competition between different types of companies is limited almost entirely to compensation insurance and since the same principles and practices apply to both employers' liability and compensation business the statistics and illustrations. used will be taken largely from experience under the newer form.

THE STOCK COMPANY

Characteristics.-The principal characteristic of a stock company and the feature from which it takes its name is the issuance of stock as evidence of ownership and in return for capital contributed by the stockholders. This capital, which the law requires the company to keep unimpaired, serves as the basis of operations and, combined with any surplus which the stockholders may have contributed or which may have accumulated in the course of business, represents the financial interest of the stockholders and the financial backing as security for creditors. In consideration of their services in advancing capital the stockholders become the owners of the company and as such are entitled to a pro-rata participation in the payment of dividends. The management of the company is supervised by the board of directors who are elected by the stockholders, and is in active charge of salaried officials, appointed by the board to operate the company in the interests of the stockholders.

It is the practice of stock companies to charge a

definite premium to the policyholder for the risk assumed. If losses and expenses exceed the amount of premiums collected the company must bear the extra burden; if premiums are more than sufficient to meet losses and expenses, the excess is held as surplus or distributed in the form of dividends.

History and Present Position of Stock Companies. -Before workmen's compensation was adopted in the United States the business of insuring employers against liability for accidents to their employees was carried on almost wholly by stock companies, only a very small proportion of the total business being carried by mutuals. With the advent of compensation the proportions have changed and, while the stock companies still carry about eighty-five per cent of the business written by private companies, there has been great activity in the organization of mutuals during the last five years. The state funds have also written a considerable amount of compensation insurance, although the stock companies continue to command a major share of the premiums in states where competition is permitted, receiving, during 1915, compensation premiums amounting to $31,348,758.

Of the premiums collected, an average of about forty per cent is required to meet the expenses of conducting the business, the remainder being devoted to the payment of losses, including allowance for reserves. Any amount still remaining after the payment of losses is considered as underwriting profit and may be carried to surplus or paid out in the form

6

See Chap. XXI.

of dividends. If losses total more than the proportion of the premium which is allotted to them the deficit, or underwriting loss, must be met out of other funds.7

Arguments for Insurance in Stock Companies.—1. Undoubtedly the advantage of insurance in stock companies which has greatest weight is the definiteness of the transaction. By the payment of a known percentage of his payroll the insured is guaranteed complete protection against loss, regardless of the adequacy of the premiums collected. Of course, if the insurance company has insufficient assets to meet the payment of losses the policyholder is not fully protected, but careful regulation by state officials and high legal standards of solvency reduce the danger of this event to a minimum. The insured may well feel that a contract with a reliable stock company relieves him of all necessity for worry regarding liability for injuries to his employees.

2. The security offered by a stock company is enhanced by the capital fund which it is required to hold and which is available for the satisfaction of claims if other sources fail. The amount of this capital is carefully regulated by state law and it must be kept unimpaired if the company is to continue in business. A further security lies in the business interests of the owners of the company who have contributed capital in the expectation of receiving dividends. Since dividends cannot be paid until all losses and expenses have

"It should be remembered that receipts from investment income and accretions may provide the company with sufficient funds to more than offset an underwriting loss.

been met, there is constant pressure on the management to collect sufficient premiums to provide for · profits and to keep the company in a prosperous condition.

3. Another argument frequently advanced in favor of stock company insurance is based on the experience in the business accumulated through many years of liability underwriting. It should be remembered that experience in compensation insurance is necessarily limited to the five years during which there has been occasion for it. Therefore claims of greater efficiency and stability because of experience must rest on the analogy between the practice of liability and of compensation insurance, and on the presumption that, in general, the older business organization justifies the greater confidence. It is also to be noted that this field of insurance has been developed recently, only eleven of the twenty-seven domestic stock companies now operating having been organized prior to 1900. The following table indicates developments along this line:

8

8 Dec. 31, 1915 (as listed in the Insurance Year Book for 1916. Except where otherwise noted further figures used in this chapter will be from the same source). Six foreign companies also transact this business through United States branches.

4. The extensive territory over which a stock company usually does business gives it a wide exposure and promotes diversification of risk, two factors which make for more accurate operation of averages and hence contribute to the stability and efficiency of the corporation by reducing fluctuations in disbursements.

Arguments against Insurance in Stock Companies. -The objections to stock company insurance arise both from the fundamental purpose of stock organizations and from the methods in general use among them which express themselves in the form of a higher net premium cost to the policyholder.

1. The stock company is, of course, operated in the interests of the stockholders and their desire is to secure as large a net profit as possible. This profit must be contributed by the insured in the form of premiums. Although the extra cost entailed by profit-taking may be offset by superior service or by economies in other directions, it must, in itself, be considered a disadvantage.

2. Another item which contributes to a larger premium is that of acquisition expense, which consumes 17.5% of the premium and which is due to the general practice of soliciting risks through agents and brokers who receive commissions in proportion to premiums written. This element of cost may be justi