How to Read the Statement of Condition of an

Insurance Company

The following is intended to be a non-technical explanation of the principles of insurance accounting for the enlightenment of the layman :

A policy of fire insurance is an agreement on the part of the institution issuing it to indemnify the policyholder for loss or damage caused by or arising out of the occurrence of a fire. It usually continues in force for a considerable period. To afford ideal protection, the policy must be enforceable under the most adverse possible conditions, which means that the institution issuing the policy must be, beyond question, responsible, both at the time the policy is issued and the time the loss occurs; and that the terms of the contract shall be clear and comprehensive, the minds of the insurer and the insured meeting on every essential point. In this article, however, we deal only with the analysis of the statements of fire insurance companies, and not with the preparation of forms.

Fire insurance companies file an elaborate annual statement with the insurance departments of each of the States in which they are licensed to operate. These are prepared as of December 31st, and are practically uniform throughout the United States. They include detailed information concerning assets, liabilities, income and disbursements. Knowledge of a few fundamental principles of underwriting and insurance accounting will make them clear even to those who have no deep technical knowledge of insurance.

Fire insurance companies are always subject to the possibility of sustaining great losses through a conflagration. Their assets should therefore be liquid and of sufficient volume to offset all liabilities, including capital, and leave a substantial surplus, which in well managed companies is maintained at an amount at least equal to the paid-in capital. Such companies might find themselves called upon to pay for conflagration losses, at any time, an amount equal to their premium income for six months, or more. Consequently, a fire insurance company doing a general business of average character should not write annually in net premium an amount greatly exceeding its combined capital and surplus, unless the business is more widely distributed than is usually the case. On the other hand, since fire insurance is based upon the law of average, it is desirable that a company operate in a sufficiently wide territory to be able to make up with reasonable promptness losses sustained at any one point by means of the income derived from other sections.

In applying these few general principles the following items in the statements of the companies should be considered :

Assets.— In their statements the companies set out in detail the nature and amount of their assets. In most States the kinds of investments permitted are carefully restricted, but in other States consider-ably more latitude is allowed, and frequently abused. Heavy investments in real estate are undesirable because non-liquid and because arbitrary increases in valuations may be made to conceal excessive losses. Good real estate mortgages, bonds and stocks are more desirable, but, .of course, the desirability of all of these investments varies greatly, and the lists should he closely scrutinized. Securities in the least degree speculative are undesirable ; the shrinkage recently in even standard securities has been so great that the supervising insurance officials agreed to permit fire insurance companies to list their securities at the end of 1917 at the average of the quotations of November 1, 1916, and the first of February, May, August and November, 1917 ; and a similar process was approved for the statement as of December 31, 1919, resulting in considerable inflation ,of the returns. From, one point of view this is equitable, but policy holders must remember, in scanning the statements published this year, that the companies could not realize on these securities at anything like the figures reached by this averaging process — unless there should be a most unexpected recovery in the next few months. Therefore, the surplus shown should be proportionately discounted.