September 1956 — Vol. 37, No. 9 —
The Protection
of General Insurance
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Everyone who owns property is under the
risk of losing it by fire, theft, storm or other malign acts
of men or of nature. Only beach—combers and vagabonds
are free of concern about such things. Even they, by the very
act of living, have certain legal obligation to reimburse
others for damage they cause.
General insurance is our protection against catastrophe.
It is the shock absorber of industry and the individual. The
farmer with his crop ripening in his fields rests easy because
it is insured against hail; the furrier with thousands of
dollars' worth of furs in his loft knows that his insurance
protects him against financial ruin by fire or theft; the
home owner who carries adequate insurance need not fear financial
disaster by fire, burglary, or public liability.
So widely are the advantages of general property insurance
accepted that, as was shown by a consumer education study
of the National Education Association in 1946, more families
in the United States have the protection of property insurance
than of life insurance.
We recognize pretty generally a wide variety of risks against
which it would be advantageous to have protection, but there
is still a surprisingly large number of chances we take. There
are four principal motivations in our disregard of insurance
protection: the "it won't happen to me" feeling; ignorance
of the fact that we are exposed to risk; unawareness of the
fact that the protection we need is readily available; and
procrastination.
More might be done to remedy this state of affairs by the
insurance companies. They could tell through organs of public
information and education what catastrophes may be averted
or remedied. They should do this in non—technical language,
and they should simplify their contracts in length, manner
of expression and arrangement. Some of the quaint wording
in marine insurance policies has been preserved of necessity,
because it has been subjected to repeated interpretation by
courts of law, and its meaning is now considered definite.
But insurance agents should be qualified and eager to tell
the applicant in his own language precisely what protection
is offered.
We cannot hedge against every possibility of loss, but we
can analyze our situation, estimate the risks, calculate the
cost of covering each risk by insurance, and then choose what
ones to cover. Prudent persons will want to insure against
any occurrence that would wipe them out financially or cause
them a major set—back. After making sure of this primary
protection, insurance against minor misfortunes can be taken
as purely a matter of choice.
The sort of insurance this Monthly Letter is about
is called, roughly, fire and casualty insurance. It includes
all kinds of insurance except ocean marine and life.
The "why" of insurance
Insurance lifts a great load from the minds of the people
who are protected by it. It removes the dread that some accident
will throw a heavy or fatal financial load on their shoulders.
It encourages those who embark upon pioneer ventures by giving
them, as it were, elbow—room in their investment operations.
The principle behind insurance protection is that what are
uncertainties to the individual can be made certainties for
the group. Take fire insurance as an example. It cannot be
known whether a particular property will be burned down, but
there is reasonable certainty, based upon statistical experience,
that about the same proportion of all similar property exposed
to fire will be burned in a year.
By the collection of data on the frequency and magnitude
of losses in the past we can construct a measure of the frequency
with which such losses will occur in the future. Thus, we
apply the principles of probability to economic risks. We
base our insurance needs on statistical measures of risk instead
of on casual or inspired estimates and guesses.
The Insurance volume of the Alexander Hamilton
Modern Business Texts points the lesson of foresight neatly:
"A catastrophe or calamity is an accomplished fact with consequences
that may be measured or defined. A risk, however, is not a
catastrophe; it has no objective existence, but is subjective,
and denotes the uncertainty where or when or upon whom the
catastrophe may fall. This element of uncertainty explains
the essential nature of risk."
Every reasonable person will try to control the risks so
as to avoid the catastrophes by limiting losses, but in addition
he will carry insurance so as to protect himself or his business
against losses he cannot control. Successful business operation,
big or small, requires judgment about the risks to be accepted
and those to be protected against. Tranquil living, in business
or personal life, depends to a bigger extent than we realize
upon making the correct decision about what risks we shall
bear and what risks we shall transfer to specialists in risk
bearing.
The cost of insurance sometimes deters those who have not
grasped the insurance principle. The insurance company is
a formal organization through which, for a relatively small
price to each, the thousands of policy—holders may be
assured that the small number who suffer loss will be fully
indemnified.
A few people are tempted to over—insure, thus indulging
in a waste of money. A fire policy should be large enough
to cover ordinary additions to inventory or, if on home furnishings,
the to—be—expected additions to furniture and wardrobe,
so that the insurance cover need not be changed every time
we buy something. But there is no point in carrying insurance
that is out of line with the actual value of the property
covered. An inventory will help us to avoid the danger of
underinsurance and the waste of over—insurance.
Rates and contracts
We cannot insure property unless we have an insurable interest
in it, that is, unless we have some control over it, and would
suffer financial loss if the property were destroyed or damaged.
When we have an interest in something material, like buildings,
machinery, furniture and merchandise, and can calculate the
amount of possible loss, we can protect our interest by payment
of a premium to a suitable insurance company.
The rate charged us will depend upon several factors. If
we seek fire insurance, the company will take into account
the location and construction of our building, the safety
devices we provide, the relative hazard of the building's
contents, and the fire protection available. The community
may, by substantially increasing its fire defences, bring
down fire insurance costs.
To make insurance reliable and effective, the rates charged
must fulfil certain general needs: they must be adequate,
reasonable and non—discriminative.
The insurance carrier must build up a fund from which losses
are paid, making provision in ordinary years for years of
heavy losses. It must keep its premiums within the bounds
of reasonable cost; if it does not apply actuarial skill and
keen foresight it may price its protection out of the market.
It must, in its rating system, measure the proper contribution
to be made by its clients according to the risk of the business
they offer, so that those who insure with it pay equitably
according to the possible burden they may impose through loss.
In every event, however, its maximum rate must be governed
by the rates of competing insurers.
Statistics and judgment are the important tools of the general
insurance carrier. By using them skilfully the insurance company
can approach even a big operation with confidence. Take the
Insurance textbook example as an illustration of
the working of the insurance principle and rate—setting.
In one of our many new suburban developments where there
are a thousand home owners, each with a house valued at $10,000,
all equally exposed to fire loss and having the same community
and individual protection, statistical records may tell the
insurance carrier that one house in a hundred will probably
be burned in a year, or ten houses in the group. This means
that $100,000 worth of property will be burned during the
year.
If it costs $10,000 to perform the necessary work of collection,
administration, handling and distribution, and to provide
profit compensation, then the total amount to be collected
from the entire group of insured property owners will be $110,000,
or from each owner $110. Since fire insurance premiums are
usually quoted at so much per $100 of liability assumed, the
rate in our supposed ease will be approximately $1.10.
Now, check this against the "general needs" previously mentioned:
if less than $1.10 per $100 insurance is collected, the fund
will be inadequate; if more is collected it will be unreasonable,
and if half the owners are charged $1.20 while the others
pay only $1.00 the fund will be adequate but the rates are
discriminative.
Many kinds of insurance
The oldest type of insurance for business and commerce is
"ocean marine" insurance. It applies to ships and their cargoes,
covering such risks as collision, stranding, sinking, fire,
and other "perils of the sea".
Nearly every form of personal or commercial risk that can
be put on a mathematical basis can now be insured against.
Within the past fifty years man—made hazards have been
added to those brought about by natural causes: falling aircraft,
motor vehicles, operation of atomic power installations, and
so forth. The property owner can be protected from financial
loss due to accidents to visitors. The business man may insure
against dishonesty of his employees, defalcations of people
to whom he has extended credit, and losses due to raised or
forged cheques. Promoters of outdoor events may insure against
loss due to rain. The automobile insurance policy protects
the owner against fire, theft, collision damage, liability
for bodily injury or death, and liability for damage to the
property of others.
What insurance to carry, and the amount of insurance and
the value of the premium measured against other wants and
needs: these are individual matters to be calculated against
the possible effects of not being insured.
Fire insurance
Because most of us own at least a small amount of personal
or business property, the loss of which would be a hardship,
the demand for fire protection is nearly universal. People
don't usually wait to be sold fire insurance; they seek it.
Organized fire insurance began after the great fire of London
in 1666, and by 1720 there were private companies specializing
in the business. Today, nearly every article that enters into
commerce has, at many stages of its progress from natural
resource to final use, been covered by fire insurance policies.
According to a report of the Superintendent of Insurance,
fire insurance claims in Canada totalled $1,414,336,399 from
1869 to 1954 inclusive. In 1955, fire insurance claims were
in excess of $77,750,000. The total value of property at risk
under fire insurance in a year is about $45,500,000,000.
The first step toward setting up a fire insurance programme,
commercial or on a home, is to appraise the value of your
property. A home inventory should list all goods - furniture,
household equipment, clothing, books, musical instruments,
tools, and all other personal property of those living in
your house.
A good inventory is of more uses than one. It expedites
insurance settlement. It serves as a check on articles you
might not remember after the occurrence of a fire. If no fire
occurs, your inventory will be useful in checking the service
given you by a piece of equipment, and in appraising your
goods in case you wish to sell them.
The simplest listing is sufficient: article, date of purchase,
price paid. If you wish to do so, you may detail the goods
room—by—room. A copy, brought up to date periodically,
should be kept in a safe place, such as a safety deposit box,
with other valuable papers like insurance policies.
The increase in dollar cost of buildings and contents should
not be forgotten in deciding the amount of insurance needed.
The history of losses during the past ten years has shown
that many households that were adequately protected when the
policies were first written are not today carrying sufficient
insurance to offset the increased prices.
Fire insurance policies on dwellings are usually written
for three years, at a slight reduction in cost compared with
an annual rate. The amount named in the policy is the maximum
the carrier can be called upon to pay. When a loss occurs
the company pays the actual cash or market value of the property
destroyed, subject to the maximum amount named in the policy.
Casualty insurance
Casualty insurance is a recent development as compared with
marine and fire insurance. It started with the growth of railways
in England, where the first "casualty" company was formed
in 1849. Its name indicates its field: "The Railway Passengers
Assurance Company", providing accident insurance to those
exposing themselves to the danger of travelling by steam—engine.
Accident and sickness insurance companies, not including
Blue Cross, Blue Shield, and other such plans, paid $87,313,735
to policy—holders in 1955 in recompense for their expenses
or loss of wages due to accident or sickness.
Most automobile owners recognize the need to provide insurance
against the injuries and damage that may be caused by their
cars, in addition to the self—protective insurance against
theft, fire and collision damage. In fact, under some circumstances
some provinces require proof of insurance before an owner
may regain his license to operate his car after he has been
involved in an accident.
The view of some people is that automobile insurance should
be made compulsory by law, so as to protect the innocent against
the carelessness or worse of people who are financially incapable
of making good the damage they cause.
Automobile claims frequently run into large sums. Many people
think of "damage" as being the scratches or breakages caused
by collision with another car, but it can be much more. If
your driving is responsible for the overturning of a truck
laden with expensive goods that are destroyed, the resulting
legal judgment might embarrass you. If your car were to skid
when driving in to a service station, strike a pump and set
fire to the escaping gasoline, it does not require much imagination
to picture the station and cars and adjoining property falling
prey to the flames. The damage for which your car could be
held responsible might exceed your ability to pay, even allowing
for stinted living over many years.
These are the sorts of thing that justify insurance: the
crippling, disastrous accidents that occur every so often.
Obviously, the insurance against damage your car may cause
to persons or property is the most important. Damage to your
car itself is limited to its value, but the cost of claims
to which you may be subjected because of accidents is almost
unlimited. Judgments entered against you might easily wipe
out not only your car but other property you own, and your
earnings might be attached.
A typical policy on a modern sedan would afford protection
against liability for bodily injury or death up to $5,000
for one person and $10,000 in one accident; $1,000 liability
for damage to the property of others ;fire, theft, collision
($100 deductible), and miscellaneous damage.
The cost varies according to the classification of the owner,
the use to which the car is put, the value of the vehicle,
and the area in which the car is mostly operated. It can range
from $70 to $325 in Montreal, while in rural Manitoba the
identical protection would call for a price spread of from
$24 to $119. The difference in cost in various areas is determined
by the actual losses incurred, and this information is known
from complete statistical records of these areas which must
be maintained according to law.
Claims under automobile insurance in 1955 totalled $99,229,507
in all Canada.
Legal liability
Not only automobile owners, but all who own property or
are responsible for it, must meet the hazard of claims for
damages. It is a well—established principle in British
law that a person is held liable for the consequences of his
acts and omissions if through failure to exercise reasonable
care another person suffers accident or damage to his person
or property. He is also liable for similar hurt caused by
his employees or members of his family.
This is a state of affairs that should be closely attended
to by home owners and business people. Any person who is injured
on your premises is free to bring action against you. He may
be a guest, a customer, a meter reader, a delivery man, or
a messenger. The claim may be big or small, resulting from
a big or little fault. If you don't clear the snow off your
house steps, and somebody slips and fails, you may get a claim
for injuries. If your dog or cat causes injury, you may have
to pay the bill. If one of your children runs into another
with his bicycle, you may be held financially responsible.
If a tool breaks away from you or flies out of your hand;
if the tree you are trimming strikes a passer—by; if
an icicle falls from your roof on a caller: judgment may be
given against you in a suit for damages.
Even small demands may be troublesome and expensive, while
damages given in serious accidents can be enormous. The obligations
assumed by the liability insurance company usually include
the furnishing to the insured of certain services, the payment
of certain costs, and the payment for damages assessed upon
the insured because of negligence.
Theft, burglary, etc.
There are many types of theft, burglary, robbery, larceny
and mysterious disappearance insurance, covering property
at home or abroad. An increasing number of "personal property
floater" policies is being sold.
The first requirement for an intelligent theft insurance
programme is to determine the amount of coverage required.
Then you must decide whether you need insurance for your belongings
only in your home, or, if you travel, in hotels and on vehicles.
Certain goods, such as expensive cameras, projectors and equipment;
musical instruments; jewellery, watches, furs, and so on,
may be specially covered under policies issued by casualty,
fire and general insurance companies.
Learning about insurance
What has been written here is merely indicative of what
is offered in the way of general insurance coverage; it is
only a hint as to how an individual should go about estimating
his insurance needs. It is the function of the insurance agent
or broker to give skilled assistance in determining the type
of contract and the estimates of values the individual requires.
There are more than 300 competing companies in the fire
and casualty insurance business in Canada, registered with
the Federal Government, and several hundred incorporated in
the provinces. All of them operate subject to government supervision,
and all are required to maintain reserves calculated to be
sufficient to protect their policy—holders. The fire
and casualty business has more than $300 million in compulsory
reserves with the Federal Government.
The prevention of loss is closely associated with insurance.
The life insurance companies are energetic in promoting health
measures and movements. Fire insurance companies co—operate
with fire departments and safety associations in urging the
removal of fire hazards and the inspection of factory, home,
school and public hall fire protection. Many communities enforce
building laws that tend to prevent conflagrations. The steam—boiler
insurance companies have succeeded admirably in their effort
to prevent by inspection service every boiler explosion that
could possibly be prevented.
Education by the insurance companies, by community organizations,
by public and high schools, and by newspaper and magazine
editors, can do much in two areas of the unhappy tendency
of human beings to get into disastrous trouble. We may learn
to prevent what we can prevent by thoughtfulness and carefulness,
and we may learn about insurance, so as to protect ourselves
against the perils that are beyond our control.
Published by RBC Financial Group. All editions from the RBC
Letter collection are available on our web site at www.rbc.com/responsibility/letter.
Our e-mail address is: rbcletter@rbc.com.
Publié aussi en francais.
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