the end of the second year, therefore, the company has earned a total on all the policies in force of $101,666.67, and must have in the reserve $167,666.66.

In the third year of its business (1921) our hypothetical company must make a reserve allowance for three classes of policies. Its three- and five-year policies written in 1919 have not yet expired; and by prorating the premium we find that at the end of the year there still remains to be earned $16,666.67 of the premiums

collected in 1919 on these policies. As regards the business written in 1920, the company by the end of 1921 has only earned one-half of the premiums from threeyear policies and three-tenths of the premiums from fiveyear policies, thus leaving $60,000 of premium income not yet earned. From its new business, yielding $450,000 of premiums, the company earns only $135,000 during the year in which the policies were written, and $315,000 must be assigned to the unearned premium fund. In all, therefore, the reserve at the end of the third year amounts to $391,666.67. If our illustration were extended to the fourth year, the reserve computation would be still more elaborate, because the company would then have to consider four classes of policies, viz., the threeand five-year policies of 1919, the three- and five-year policies of 1920, the one-, three-, and five-year policies of 1921, and all the policies of 1922. (See statement required by New York Insurance Department, p. 222.)

Computation of the Reserve by Months, Instead of Years. While the foregoing rule of arriving at the unearned premium is fairly safe for practical purposes, and meets the demands of the law, it should be remembered that it is only based on a system of averages that does not always conform to real business conditions. Where a company's business is rapidly gaining, and more policies are written in the later months of the year than in the early months, it is apparent that the policies have not, on the average, run for six months, and the reserve will, therefore, not be sufficiently high. Vice versa, if the company's business is declining, the reserve, if computed on the assumption that all policies written in the year have run six months, will be more than sufficient.

For this reason, if a large company wishes to know at any time the exact status of matters, and whether its unearned premium liability is increasing or decreasing,

it is

to

desirable to compute the unearned premium fund by months instead of years. In fact, numerous companies now follow this method for their private information. As in the case of one-year policies, the assumption is made that as much business is written during one part of a given month as in another, and that consequently all policies written during a month may be assumed to have been in existence fifteen days. If a one-year policy is written in January, the company considers fifteen days, or one twenty-fourth of the premium earned at the end of the month, the remaining twenty-three twenty-fourths belonging to the reserve, while on the 31st of December twenty-three twentyfourths of the premium is earned, and one twenty-fourth unearned. If the policy is written in February, three twenty-fourths of the premium will be unearned by December 31st. Similarly, with respect to its three- and fiveyear policies written in January, the company will consider fifteen days of premium as earned at the end of the month, while on December 31st the reserve on the threeyear policies will be forty-nine seventy-secondths of the premium, and on the five-year policies ninety-seven one hundreds and twentieths. The operation of the reserve on the monthly basis may be illustrated by the following tables: 1

1 See Ralph H. Blanchard: "Liability and Compensation Insurp. 266.

ance,"

EARNED AND UNEARNED PREMIUM AT THE END OF EACH MONTH DURING THE TERM OF A ONE-YEAR

EARNED AND UNEARNED PREMIUM AT THE END OF EACH MONTH DURING THE TERM OF A TWO-YEAR

POLICY

CHAPTER XVII

FIRE INSURANCE RATES

Importance of the Subject.-During 1920, 789 joint stock and mutual fire and marine companies and 137 reciprocals and Lloyd's collected net fire and marine premiums in the United States amounting to $1,019,441,045. This figure, however, must be substantially increased by the inclusion of the premium income of numerous mutual concerns not appearing in our statistical records. If we assume net marine premiums, collected in the United States, to aggregate $231,000,000 (the total for 1918 as ascertained by an elaborate investigation), total fire premiums collected in the United States may be stated as being well in excess of $788,000,000.

The object of fire insurance is to distribute among all insured property owners of the community those losses. through fire sustained by the comparatively few. Its cost must be regarded in the nature of a tax assessed against the many for the benefit of the unfortunate few. It is the task of fire insurance companies equitably to assess, collect, and distribute this tax, exceeding a total of three-fourths of a billion dollars. The task of the tax gatherer has always been an unpleasant one, and the work of properly assessing taxes has been one of the most difficult problems of Government. The fire tax is no exception to this rule. Against its assessors and collectors-the insurance companies there has been directed for years a vast amount of unfriendly criticism. Just as with other taxes, there is a constant endeavor to lessen

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