Actuarial principles underlying State insurance laws It is the easiest thing in the world to start an insurance company, provided adequate reserve rules are not enforced. There is always a large present payment of cash in the treasury, and the losses are necessarily deferred. This is especially true in compensation cases where the losses are paid in weekly installments over a long period of years. Many who have not understood clearly the principle involved in such cases have been quick to advocate the establishment of a State insurance fund without adequate provisions for reserves to meet deferred claims, but only sufficient to meet current losses. Such a fund is insolvent from its inception, considered from an actuarial standpoint. As the deferred payments begin to mount up they are constantly added to by current losses and the sums which must be collected in premiums must, naturally, be greatly increased also. for on a Those who advocate such a plan point to the fact that it has been established in Germany, and apparently has worked well. The truth of it is that many of those who have given close thought to the subject in Germany are yet fearful of the final outcome. Moreover, Germany has found it absolutely essential in some occupations, such as the building trades, example, to abandon the old plan and collect premiums capitalized basis. But those who cite Germany as an example to be followed in the American States are very shortsighted. With the principle of absolutism which prevails over the entire country in the German Government watched closely. Any rules that are laid down must apply to all alike. that reason, the strong companies should willingly undergo what Sometimes may seem to them to be unnecessary exactions on the part of government. I am inclined to think that even the best managed companies find that the co-operation they get from the stronger State insurdepartments in their efforts to solve the outstanding insurance problems which still await a settlement is of material assistance to them." From an address by Hon. WILLIAM TEMPLE EMMET, Superintendent of Insurance of the State of New York before the Insurance Society of New York, on Oct. 28, 1913. For ance Actuarial principles underlying State insurance laws that country is able to do many things in this direction which would be impossible of accomplishment in America, with our varied laws and conflicting jurisdictions due to State boundaries. Germany can bring enough establishments engaged in a particular trade or occupation within the operations of a particular insurance association so as to produce a sound actuarial insurance average. Any increase in subsequent years, due to insufficient premium collections in the earlier years, falls on the entire trade. Even in Germany there has been bitter complaint by employers who continued in business in being compelled to pay compensation to employés of concerns which have gone out of business. In America the conditions are radically different from those existing in Germany. There is such a small representation of many trades in particular States that no sound actuarial insurance basis can be secured. For example, where there are only two or three industries in a State, which are classified together for industrial insurance purposes in a State insurance fund, it means that these two or three establishments in that particular trade are, to all practicable purposes, carrying their own insurance. If premiums sufficient to pay current losses only are collected from these few establishments the time will come, within a few years, when the premium rate will be so high that it will be almost impracticable to create new establishments or for the old ones to continue in the same line of business in that particular State. This is especially true if the same trades have been carried on in adjoining States under a plan whereby in the years gone by sufficient premiums have been collected to pay not only current losses but deferred claims as well, on the old-line insurance plan. That is, in the State where sufficient premiums have been collected in the past, so that there is, with slight variations, a level premium for the years gone by, as well as for the future years, the industries in such States will be in a much stronger position than in the commonwealths where only sufficient has been collected to pay Actuarial principles underlying State insurance laws current losses. In other words, in the States where a level premium has been maintained this premium at the end of ten or fifteen years will be very much less than it will be necessary to collect from the same industries in the States where only sufficient has been collected to pay current losses, leaving the accrued and accruing claims of employés injured while employed by employers who have died, gone out of business or become bankrupt to be paid by those who continue in the same line of business. The inevitable result of this condition of affairs is perfectly obvious. The industries of those States where the current premium principle has been in force will find that their premiums for workmen's compensation protection will have increased in ten or fifteen years so that they will be utterly unable to compete with the industries in the States where a level premium on a capitalized basis has been maintained. The industries in the States where the current loss premium principle has been invoked will find it necessary in ten or fifteen years to either go out of business or move to the States where the level premium principle has been in force. It will be no more possible to avoid the effect of this than it will be to escape from the penalty for a violation of one of Nature's laws. In those States where there are few establishments in a particular line one or two bad losses will bankrupt the State insurance fund as to that trade or industry if the fund is segregated for the payment of losses as well as the collection of premiums. If such a segregation is not made as to payment of losses then the other trades of which there may be a considerable number will be compelled to pay the losses of those occupations of which there are only a few establishments. All of which is merely another proof of difficulty of securing a proper or safe average in relation to workmen's compensation insurance within the limits of a single State of the Union. An attempt has been made to avoid the difficulty by classifying together those trades or occupations in which the premium rate is approximately the same irrespective Actuarial principles underlying State insurance laws of the natural relation of the trades thus brought together each to the others. Some such plan was absolutely necessary to obviate the difficulties suggested. The experiment will be watched with interest. CHAPTER II ABOLITION OF DEFENSES Page ARTICLE A-INTRODUCTION.. 1. REASON FOR ABOLISHING THE COMMON-LAW DEFENSES. ARTICLE B-SPECIFIC PROVISIONS OF VARIOUS STATUTES. 69 69 71 ARTICLE A-INTRODUCTION 1. Reason for abolishing the common-law defenses. Many of the so-called common-law defenses, the origin and development of which are fully discussed in Chapter I, were greatly modified, and, in some rare instances, entirely abolished, before the compensation statutes were enacted. The alternative abolition of these defenses in the compensation acts was hit upon as a plan to escape the constitutional question raised in the case of Ives v. South Buffalo Ry. Co., 201 N. Y. 271. In that case it was held that a mandatory compensation law was unconstitutional.1 The Legislature of New Jersey thereupon passed an optional compensation statute, under which if an employer failed to adopt the 1 See the discussion beginning ante, page 11. |