The new form eliminated repeated words and phrases and is shorter by 395 words. Different provisions are shown under special captions, and the assured is enabled to discern particular features which he should familiarize himself with before loss and have a sufficient knowledge of after loss to protect his interests. Certainly anything that will simplify the form of contract of insurance is welcome.

It is now for the commissioners to procure the adoption of the new form. To meet possible requirements some further changes, undoubtedly, will have to be made. The committee in its report stated, "It is difficult to fit the judgment of one schooled in the interests of the fire insurance corporations to that of an assured or his representative desiring the full protection of a contract based on equity."

A bill providing for this new standard form was introduced in the New York Legislature but after further consideration said bill was not pressed for passage. It was determined to consider the matter further. There are many who opposed a change in the standard form because of the long line of decisions which have been handed down covering the legality and legal effect of the provisions of the old form.

A copy of the form as approved by said committee is attached to this report as "Exhibit 1."

CO-INSURANCE.

The principle of co-insurance is basic in the equalization of the fire insurance tax. It is probably true that the public knows or understands less regarding co-insurance than any other one provision inserted in a policy. If the use of the co-insurance clause could be enforced by law, and the buyer of imdemnity be fully informed of his rights and benefits under it, it would result in placing rates on an equitable level.

The public really pays the losses plus the expenses and charges of the business and profits on the capital. The principle underlying this clause is that all property at risk should bear the burden of a loss of part of it. In fire insurance, it is applied to all policies in France, Belgium, Germany and Russia. It is used in India, Japan, China and England.

It has been used for 30 years in Chicago and has been applied to all mercantile buildings except the store and flat class in outlying districts. Co-insurance is not required in dwellings and flats and their contents.

This commission is not aware of any objections by the insured to the use of this clause. The immense volume of business conducted by the Factory Mutuals amounting to a total of four billions of dollars in this country, is conducted on a co-insurance basis.

The universal use of this clause in this country would result in measuring the fire loss sustained by the companies as a percentage of actual destruction, and with the 80 per cent clause as the basis for the rate, it would take an 80 per cent actual destruction of the property covered to exhaust the policy. Premiums based on the clause would be at a rate determined on a uniform percentage of the value of the property insured (80 per cent). Every insurer would be paying his proper percentage of all premiums collected to pay all losses. This would equalize and reduce the premium rate.

This clause is only effective in partial losses and partial losses constitute the large percentage of fire losses.

For example: We will suppose that a company is about to undertake the insurance of a large volume of property of a certain class. It has ascertained that the total of partial and complete losses is $500,000 on the average, from year to year. It has also ascertained that the value of all the properties in the group, large and small, is such that 80 per cent of each would sum up $100,000,000. The company desires only to have an abundant margin for all expenses, surplus and profit, equal to twice the volume of the fire losses, or one million dollars. If the property owners would take one hundred millions of insurance, the company could fix a rate of 1 per cent and secure the one million dollars that it requires; but if the owners of the properties concerned should say to themselves, "The losses are going to be partial, and it won't take the full value of insurance to pay these partial losses, and we will therefore insure for only a small part of the

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amounts at risk," so that instead of one hundred million dollars, only fifty millions of insurance is taken, then the insurance company must charge 2 per cent in order to get the one million dollars that it requires because the losses are always going to be $500,000, whether half the value of the property is insured or the whole value. This is the condition. The problem before the insurance company is to find a plan by which it can get the one hundred millions of property contributed so that it can name the low rate of 1 per cent instead of naming the high rate of 2 per cent. The co-insurance clause solves the problem. All of the owners in this group of property owners, who take the 80 per cent insurance that the company counts upon, contribute their full proportion to the insurance fund, but those who take less than 80 per cent become co-insurers for their fair proportion, and the company pays only the proportion of their losses that it ought to, based on the relation of the amount of insurance taken to 80 per cent of the value of the property. Of course, if any policy holder carrying such a policy with an 80 per cent co-insurance clause suffers a total loss of the property he obtains the full amount of the insurance that he does carry but loses the full amount that he has not insured.

The above will show the application of the principle involved in coinsurance that the common peril shall be shared by all interested.

Particularly the dwelling class has been exempted from co-insurance because of the immense volume of practically similar values and the small amounts carried. In New York City this distinction is recognized by exempting from co-insurance, values below $2,500, and affixing the clause to policies where the amount is in excess of that value.

AGENTS AND AGENT'S QUALIFICATIONS.

The agency system is faulty in many of its characteristics. The agent should be placed under greater responsibility for the results to the company and to the property owner. He receives the same rate of commission upon desirable and undesirable risks, having the same classification. His mind is bent on obtaining a volume of business. The skillful agent can combine the desirable and the undesirable risks and give to his company an average of hazard. The company accepts the business as a whole because it finds the same profitable as a whole, although it knows at the time that it takes the risk that it is not being adequately paid for certain portions of the business. This is not safe handling of the insurance business. A business man may often sell some of his wares at less than cost because the business as a whole is profitable. But the application of this commercial idea in ordinary business, is unwarranted in the fire insurance business. To base the agent's compensation upon a fixed percentage and a contingent profit in the event that the business submitted by the agent proves profitable, is one method adopted by some of the companies to procure a high class of risks. This is certainly desirable from the public standpoint and from the standpoint of the company in the long run.

This is termed the contingent commission basis as distinguished from flat commission. It was discussed under this subject: "What is to become of the poor risks? Shall the careless company take them all or should all companies take the good with the bad?" This commission believes good and poor risks should be taken, at corresponding rates, but believes the agent should be responsible, in some degree, for placing hazardous risks on the books of his company without so describing them to his company before the policy is issued. This may mean some inspection by the agent. Many believe there should be an inspection by the agent of every risk before the policy is issued. This would not be necessary in all cases, especially in large cities or of the average dwelling risk. The agent obtains a substantial portion of the premium, and unless he is willing to earn it by informing the applicant of penalties which increase the rate also, what corrections will reduce it, and, on the other hand, is honest and square with the company when offering it hazardous risks, then there should be some means adopted by which applicants for insurance could apply directly to the company, obtain the information desired, procure their policies and pay a premium less the pertaining agent's commission.

The commission takes the liberty of quoting from a statement made by Mr. A. W. McAllister before the recent Fire Insurance Investigating Committee of North Carolina:

"The American system for the conduct of the business of fire insurance may be termed 'the flat commission system,' which provides as compensation to the agent who passes upon and accepts the risk for the insurance company a flat percentage of the premium charged. It is a system that is wasteful, thriftless, and unbusinesslike. It not only affords no incentive to the agent to fidelity and efficiency in his representation of his principal, the insurance company, but it furnishes to him a positive inducement to be unfaithful and careless and irresponsible. It is a shiftless, senseless system. The agent is supposed to stand guard for his company and to keep his company off morally hazardous risks and excessively insured risks, and yet the system not only does not reward him for declining these undesirable risks, but actually penalizes him every time he does the careful, square, and honest thing, and every time he does his duty by refusing to accept risks which he knows his company desires to avoid. If he declines to issue his company's contract of indemnity to a man whose good faith he suspects, he loses his commission on the premium involved. If he knows that his customer is applying for more insurance than his property is worth, and insists upon reducing the amount, he thereby cuts his own compensation, which is a flat commission on the premium charged. The larger the amount of insurance, the larger the agent's pay. The more careful and faithful an agent is, the smaller his income. That is just the way it works. Instead of rewarding fidelity and honesty, it actually remunerates carelessness and inefficiency and encourages dishonesty. It is an ever present temptation to irresponsible representation, and makes the way of uprightness in his business as difficult as it can be made for the local agent. The remedy is very simple: Make a substantial part of the agent's compensation contingent on his fire losses, contingent on the profits of his agency, contingent on his fidelity and efficiency as evidenced by the record of his agency. When you have done that, you have reversed the present order and have placed a premium upon careful, diligent, efficient representation, and you have penalized careless, negligent, irresponsible representation of insurance companies; and when you have done that, you have eliminated one of the greatest contributing causes of fire losses-the careless, irresponsible underwriting of the man on the ground who decides upon the desirability of the risk. * * * When one thinks of the enormous destruction of property that occurs every year as a result of overinsurance, it is staggering to contemplate, and it is strange that such a condition is allowed to go unchanged. This thing of overinsurance, resulting from an irresponsible agency system, not only produces enormous fire waste and loss of life, but it is the one thing that is responsible more than anything else for the high insurance rates which prevail in this country as compared with other countries. the older countries of Europe, where the loss ratio is one-fifth of what it is in this country, and where the fire insurance rates are correspondingly low, there is nothing that bears any resemblance to the American Agency System. There the business is accepted by salaried sub-office managers whose tenure of their job depends upon their efficiency and fidelity, and this explains in large part that vast difference in loss ratio and insurance rates. The salaried sub-office manager is hardly practicable in this country, but the contingent plan of compensation is, and if a substantial part of the agent's compensation is made contingent, it will serve much the same purpose as if he were working on a salary."

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Here the thought strikes one that the more restrictive the laws are that are passed by the different states the harder it will become for the average agent to do business and, the more difficult it becomes to obtain business, the greater will become the demand for men of brains and power who, really, are the only ones qualified to handle the business.

The qualifications of fire insurance agents have a very important bearing upon the fire loss. The agents are in a position to lower the loss ratio of an insurance company. The efficient and well qualified agent suffers on account of the inefficient agent and by reason of the acts of those agents who are unfit and unscrupulous. Agents' qualification laws are placed upon stat

ute books to improve the business and with the end in view of placing the solicitation of insurance on a higher and more efficient plane. There is no specific authority given the Insurance Superintendent under the Illinois law to revoke the license of an offending fire agent, no matter how bad his practices may be. Such a law is needed in Illinois and, to be of practical benefit, should vest the insurance superintendent with sufficient general power so that he would be justified in revoking an agent's license for breech of trust, such as making misrepresentations, extending rebates, failure to pay balances due his company, overinsuring any property or having been guilty of an infraction of any insurance law. No agent should remain the holder of a license if he embezzle the funds of the company he represents, and yet, strange to say, in only a few states is an agent's license revokable for failure to pay to the company he represents the amount due to it. Overinsurance, or even full insurance on badly kept risks, is a menace to adjoin. ing property and to the community, because it breeds incendiarism and slothfulness.

It is stated that ninety per cent of the fire insurance written in the United States is procurred through local agents, therefore, the State has a vast interest in the qualifications of such agents. The annual fire waste, amounting to one-fourth of a billion dollars, would be very materially reduced if agents were better qualified to advise the insured with reference to proper insurance and the precautions which the insured might take for the prevention of fire. Agents of all companies should be made to obtain a license to transact business. Local agents should be subject to the same supervision as agents representing companies of other states. The power to revoke the license of an agent is one of the most, if not the most, effective means of supervision.

The local agent comes in contact with his customer and has a better opportunity than the company to judge as to the moral hazard of a certain risk. An agent who carelessly or negligently assumes for his company a hazardous risk is himself morally bound for the results of his act. The company might exercise its right to reject a risk, but it must mainly rely on the judgment of the agent. The business of soliciting insurance is too highly commercialized and the agent oft times forgets that in a certain sense he is, to some extent, a quasi-public servant. The insured do rely on the agent, believing him to be morally and mentally fit to place insurance upon their property. The public demands the elimination of the unfit. The law declaring what the qualifications of an agent should be should not be carried to the extent of interfering with the individual's right to follow a certain vocation. It is not necessary that he should be an expert in insurance matters but it is essential that he should be a person with a good record, of some knowledge of insurance; and obligations should be imposed upon him, at the time the license is granted, to conduct his business honestly from the standpoint of the public as well as from the standpoint of the company and always according to the law. It is a serious thing for the State to license one to place fire insurance. Many deem that license as a warranty of ability and integrity.

BROKERS.

The broker is a middle man. He represents the assured. An agent represents the company. A large volume of business is handled in the city of Chicago through brokers. It is said there are no brokers in the State at large outside of Chicago. There are many incompetent brokers as well as agents. Too many "ne'er do wells" resort to the solicitation of insurance as a means of livelihood and in most such cases the business is carried on as a side line without any knowledge of the business whatsoever. No requirements are made of them by the law and there is no provision for licensing them. They are a development of the times and here to stay. They should be licensed by the State, and reasonable qualifications required. Legislation accomplishing these things will protect the public as well as the competent and honest broker.

REINSURANCE.

Reinsurance by an insurance activity of risks in excess of the line it desires to retain is accomplished either by the facultative method or obligatory treaty method. Under the former, direct writing companies exchange business, accepting or rejecting that which is offered as judgment dictates. Under the treaty method, the company to which the business is ceded is usually required to accept all business offered. The reinsuring company may, and in large lines usually does, retrocede to others a portion of the business.

Ten years ago the foreign fire insurance companies reporting to the New York Department that did no business other than that of reinsurance numbered but fiye. In 1913 there were twenty-three foreign reinsurance companies and one American company, controlled abroad, licensed in New York. The report of the New York Department for the year 1913 stated that foreign companies, regularly admitted for fire reinsurance business exclusively, had in force on December 31, 1913, premiums amounting to $45,338,540. A study of this report shows that the amount at risk, received from agents by agency companies, was $548,511,136. These agency companies had $104,862,205 of premiums reinsured on December 31, 1913, or 19.12 per cent of all business in force which had come to them direct. Of the total amount of reinsurance premiums, 56.76 per cent, or $59,505,665, was ceded to other agency fire companies. In 1903 the amount of net premiums in force in foreign reinsurance companies amounted to $7,485,707, and the premiums reinsured in other agency companies on December 31, 1903, amounted to $27,202,394.

Therefore, the increase in premiums in force on business reinsured in agency companies in ten years has been $32,321,271, and the increase on amount business reinsured in treaty companies has been $37,842,833. The of premiums on reinsured business has just about trebled in ten years, while the total business of agency companies has not quite doubled.

The above figures do not represent the total of reinsurance in this country. Some of the larger agency companies reinsure vast volumes of business in non-admitted foreign companies. The ceding company carries in its statement the reinsurance reserve on the business, and the larger companies have surplus funds, sufficiently large, to permit this being done on an extensive scale. It has been stated that many of these non-admitted institutions are small, local concerns, mutuals, Lloyds, and in some instances single individuals, of which no actual information is obtainable.

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The European war, with its tremendous devastating results, has made more bitter the attacks on non-admitted reinsurance and retrocession companies. These companies are practically in the same position as admitted surplus line companies and associations. They have no funds or deposits with or under the control of any insurance department.

The situation in Europe causes grave concern for the reason that a great conflagration at the present time might embarrass agency companies that rely either directly or indirectly on some of the non-admitted reinsurance companies. Should such embarrassment occur, the agency companies have no one to blame but themselves. This, of course, does not apply to the licensed or duly admitted foreign insurance companies, whose contracts of indemnity are amply protected by deposits in this country.

A comparison of assets and premium account, in this country, of the treaty reinsurance companies with assets and premium income of reputable American companies, shows a marked difference. In 1913 about twenty companies admitted to New York State, conducting reinsurance under the treaty plan, had total liabilities at that time of about four billions of dollars, with total assets of $37,854,673, or about $3,400,000 more than the premiums received by such companies during the year 1913. In some cases, the premium income exceeds the total assets of such company in this country.

During the year 1913, twenty United States companies retired from business. The principal reason for such retirement was, said companies were unable to secure adequate agency representation, because local agents preferred to place their larger and better business with the companies writing "Jumbo" lines.