groups of underwriters undertake jointly the insurance of very large values, each company participating to an agreed percentage.

(4) Certain exceptional uses should be mentioned, although their aggregate importance is small in comparison with the services already discussed. One of these is "arbitraging," which may be defined as the practice of clipping a profit by buying and selling the same subject in two different markets at about the same time. In insurance it may happen that an underwriter closes a contract at 2 per cent and then finds that he can reinsure all or a part of the risk at the lower rate of 11/2 per cent, the difference of one-half of one per cent being his profit. If the entire risk is reinsured and if the reinsurance for which the arbitrager remains legally the guarantor is financially sound, the original underwriter has relieved himself of all liability, and may regard the one-half of one per cent difference in rates as a clear profit.

Another form of reinsurance involves the assumption by a reinsurer of all the risks of a liquidating company. For various reasons, such as impairment of capital through unfortunate losses or inability to transact business on a sufficiently paying basis, an insurance company may wish to liquidate its affairs and retire from the field. Many of its policies, however, are unterminated. These contracts the retiring company may wish to protect, and yet its desire is to liquidate before their maturity. If the retiring company possesses sufficient funds to pay the necessary premiums, it may find some other underwriter willing to take over its entire business by way of reinsurance. Consequently the policyholders are protected, the company is enabled to retire, and the liquidation is speedily and amicably effected.

Conditions Required in Effecting Reinsurance. While some fire policies are silent as to the subject of reinsurance,

others contain some such provision as "liability for reinsurance shall be as specifically agreed hereon." But while the standard fire policy leaves the arrangement of conditions governing reinsurance to the companies interested," certain fundamental conditions should invariably underlie the arrangement. In the first place, the presumption is that the reinsured company is acting in good faith toward the reinsurer. Its motive in effecting reinsurance should be to reduce a line of insurance which it regards as excessive. Reinsurance is not justified if the reinsured company, without acquainting the reinsuring company with all the facts, seeks to unload its liability because of its knowledge that the rate charged the insured is too low, or that the risk is otherwise undesirable. Reinsurance should especially be avoided where a moral hazard is found to be involved. Precaution should also be taken to prevent the reinsuring company from separating the risk, i.e., retaining the best portion, and through reinsurance relieving itself of the most hazardous portion at the rate charged for the combined risk. It is for such reasons that reinsurance agreements often provide that the reinsuring company should not have more of the risk ceded to it than is retained by the reinsured company.

The importance of the foregoing considerations is generally recognized, and reinsurance agreements almost invariably contain conditions which seek to protect the reinsuring company from such contingencies. While the wording of agreements for reinsurance varies considerably, the following agreement is representative in the fire insurance business:

Reinsurance contracts are often very complex and detailed and cover a multitude of subjects. For copies of reinsurance agreements in Marine Insurance, see Appendices XII and XIII in S. S. Huebner: 'Marine Insurance,'' pp. 224–252.

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REINSURANCE FORM

(Approved by the National Board of Fire Underwriters)

....

"This policy is issued as reinsurance to apply to Policy No. .. of the Insurance Company, and is subject to the same risks, privileges, conditions and endorsements (except changes of location), assignments, changes of interest or of rate, valuations and modes of settlement, as are or may be assumed or adopted by the said company.

The amount payable under this policy shall bear the same ratio to the amount payable by the reinsured company under any and all policies upon the property specified and contained within the limits described herein, that the amount of this reinsurance in force at the time of loss shall bear to the total amount insured by the reinsured company upon such property in force at the time of such loss, and shall be paid at the same time and in the same manner as payment shall be made by said reinsured company.

Other reinsurance is permitted without notice until required."

(If it is desired to attach a retainer clause to the foregoing reinsurance clause, the following may be mentioned as having been approved by the National Board of Fire Underwriters.)

FORM OF RETAINER CLAUSE

"The reinsured company shall retain at its own risk, on the identical property covered at the time of any loss, by this policy, over and above all its reinsurance thereon, an amount equal to the amount of this policy upon such property, and, failing so to do, the amount which would otherwise be payable under this policy by reason of said loss shall be proportionately reduced."

An examination of the aforementioned form shows that reinsurance is governed by three customary conditions with

the possible addition of a fourth. (1) The reinsurance is subject to "original conditions," i.e., "the same risks, privileges, conditions and endorsements (except changes of location), assignments, changes of interest or of rate, valuations and modes of settlement, as are or may be assumed or adopted by the said company." (2) The liability of the reinsurer for loss payment is limited to that proportion of the liability of the reinsured company that the amount of the reinsurance bears to the total insurance carried by the original underwriter on the property under consideration. (3) The reinsuring company permits the reinsured underwriter to effect other reinsurance without notice until such time as the permission is revoked. (4) If the retainer clause is attached, the reinsured company agrees that it will retain as much of the risk, over and above all its reinsurance thereon, as it has ceded to the reinsuring company. In case of failure to do so, it is agreed that the amount, otherwise payable on the reinsurance policy, shall be reduced proportionately.

Types of Reinsurance Agreements.-Agreements covering specific risks.-Large companies find it necessary to place such reinsurance on individual risks almost daily. The contracts, entered into with individual companies as distinguished from a group of companies acting collectively, may vary considerably in their terms. But in the main they follow the form already discussed, which, as stated, is attached to the reinsured policy and also made a part of the reinsuring policy.

Reinsurance "clearing houses" or "exchanges."-In such organizations all the subscribing member companies agree to observe the provisions of a detailed reinsurance agreement. They are all represented by a manager, who is the attorney or agent "of the subscriber of each identical instrument with adequate power to record cessions of reinsurance for such subscribers and who may otherwise act

for them in that connection as hereinafter provided." The agreements are usually very detailed, and refer among other things to the government of the organization by committees, powers of the manager, qualifications necessary for membership, territory to be covered, prohibitions that must be observed by the members, kinds of cessions by way of reinsurance that are allowed, expenses and commissions, settlement of losses, liability information, and withdrawals.

These exchanges are usually obligatory, the ceding company being under obligation to cede to members through the clearing house its first surplus. The interest and liability of each member, however, is several and not joint, i.e., each member bears individually all losses on reinsurance ceded to it through the clearing house and also pays the same promptly through that organization. Usually it is also provided (1) that the amount ceded by any one member shall not exceed a stipulated sum, varying according to the character of the risk; (2) that the amount ceded shall not exceed the net amount retained by the ceding company at its own risk, exclusive of treaty and other reinsurance; (3) that in no case should the net retention be less than the amount stated in the agreement; and (4) that in no case shall the amount ceded by any one member exceed a certain amount on any one risk located in certain defined districts of a hazardous nature. Illustrations of this type of reinsurance arrangement in the American fire insurance business are the "Reinsurance Clearing House" and the "American Reinsurance Exchange."

"Share" or "participating arrangements."-This form of reinsurance agreement, widely used in marine insurance, provides that the original underwriter will give his reinsurers a definite share (a proportion like one-sixth) of his business. Sometimes the agreement extends only to a single account placed by the original underwriter for his client. Sometimes the agreement covers a stated interest in all