660   BEST'S I1 S i-R_1\ CE REPORTS REPORTS—FIRE AND MARINE.

2. Provision for service of process on the Insurance Commissioner was made.

3.- A statement showing the maximum amount assumed upon any single risk, and a provision for
examining into the financial responsibility of the members were included.

4.- Provision for an unearned premium reserve of 50 per cent. on annual, and pro rata on longer
term contracts was made.

5. Provision for an annual report was made.

6. The organizations were made subject to an examination by the Insurance Commissioner.

7.- Corporations were specifically stated to have authority to become members of inter-insurance
organizations.

8.   Violation of the law was made a misdemeanor punishable by a fine of from one hundred to a
thousand dollars.

9.- A certificate of authority to operate was called for.

1 0.- A tax of 2 per cent. of the premiums collected was fixed.

NECESSARY SAFEGUARDS

The inter-insurance plan is as safe as any other plan for conducting a fire insurance business,
provided certain fundamental principles are recognized and adhered to.

An insurance contract, to be satisfactory, must be enforceable by the holder. Disputes may, and
do, occur between perfectly honest insurers and equally honest claimants. Inter-insurance exchanges
do not operate through local agents upon whom valid service of process can be secured, and as the
business of these exchanges extends almost invariably to many States, the laws of each State should
provide for the recognition of the legitimacy of their operations and for the service of process upon the
Insurance Commissioner in event of a dispute arising.

The financial stability or loss-paying ability of any concern issuing policies of inter-insurance must
be beyond question. The laws under which inter-insurance organizations operate should, therefore,
provide a standard of financial responsibility for the members of such exchanges, for their guarantee is
all that is available for the protection of policyholders who may suffer loss should the premiums col
lected prove inadequate for the payment of losses and expenses.

There should also be a standard of solvency for the inter-insurance organization as such, irrespective
of the financial responsibility of its component parts. This is recognized in the laws of New York State
in the following provision :

" Any such Lloyds and inter-insurance associations as may be thus authorized to *do business in
this State shall at all times keep and maintain a fund of an amount equal to all outstanding claims
and other liabilities, plus the unearned premiums on the policies in force, calculated on the gross sums,
without any deduction on any account, charged to the policyholder on each respective risk, from the
date of the policy, and in addition the sum of two hundred thousand dollars."

The maximum line to be written upon a single risk or subject to one fire should be limited to an
amount proportionate to the number of separate risks insured, the annual premium income, the paid-in or
accumulated reserve or surplus fund• and the assessment liability assumed by the members.

Expenses of management should be limited to not exceeding 25 per cent. of the net premiums
written. Many of the best managed exchanges are operating at a much lower expense ratio.

A amiform basis of accounting should be established, for the enlightenment alike of the supervising
authorities and the members. This has been done in respect to every other class of insurance institu
tion : inter-insurance organizations should be no exception. Publicity should be complete, as to their
operation and condition.

BAD PRACTICES WHICH SHOULD BE AVOIDED BY RECIPROCALS

In our careful review of the methods of the various offices, we have noted departures from the
established practices of the best managed exchanges, which departures have resulted or may result in
disaster. These include:

1. The appointment of agents on a commission basis for securing members.

2. The appointment of brokers in large insurance centers, such as New York, Philadelphia and
   Chicago, as correspondents, for the purpose of securing brokerage business or " surplus lines."