Competition, Regulation, and the Public Interest in Nonlife Insurance

By Roy J. Hensley

This title is part of UC Press's Voices Revived program, which commemorates University of California Press’s mission to seek out and cultivate the brightest minds and give them voice, reach, and impact. Drawing on a backlist dating to 1893, Voices Revived makes high-quality, peer-reviewed scholarship accessible once again using print-on-demand technology. This title was originally published in 1962.

• Language: English
• Publisher: University of California Press
• Release date: Apr 28, 2023
• ISBN: 9780520315396

Roy J. Hensley

Enter the Author Bio(s) here.

Book preview

PUBLICATIONS OF THE

INSTITUTE OF BUSINESS

AND ECONOMIC RESEARCH

Recent publications in this series:

ECONOMIC DEVELOPMENT OF COMMUNIST CHINA by Choh-Ming Li (1959)

INTRODUCTION TO THE THEORY OF INTEREST by Joseph W. Conard (1959)

ANTITRUST IN THE MOTION PICTURE INDUSTRY by Michael Conant (1960)

ECONOMIC DOCTRINES OF KNUT WICKSELL by Carl G. Uhr (1960)

A THEORY OF ACCOUNTING TO INVESTORS by George J. Staubus (1961)

ORGANIZATION, AUTOMATION, AND SOCIETY by Robert A. Brady (1961)

Competition, Regulation, and the Public Interest in

NONLIFE INSURANCE

PUBLICATIONS OF THE INSTITUTE OF BUSINESS AND ECONOMIC RESEARCH UNIVERSITY OF CALIFORNIA

Competition, Regulation, and

the Public Interest in

NONLIFE INSURANCE

by ROY J. HENSLEY

UNIVERSITY OF CALIFORNIA PRESS

BERKELEY and LOS ANGELES 1962

UNIVERSITY OF CALIFORNIA PRESS

BERKELEY AND LOS ANGELES, CALIFORNIA

CAMBRIDGE UNIVERSITY PRESS

LONDON, ENGLAND

© 1962 BY THE REGENTS OF THE UNIVERSITY OF CALIFORNIA LIBRARY OF CONGRESS CATALOG CARD NUMBER 62-15104 PRINTED IN THE UNITED STATES OF AMERICA

INSTITUTE OF BUSINESS AND ECONOMIC RESEARCH

UNIVERSITY OF CALIFORNIA, BERKELEY

David A. Alhadeff, Chairman Michael Conant John W. Cowee Howard S. Ellis Joseph W. Garbarino Robert A. Gordon Dale W. Jorgenson William J. Vatter

Richard H. Holton, Director

The opinions expressed in this study are those of the author. The functions of the Institute of Business and Economic Research are confined to facilitating the prosecution of independent research by members of the faculty.

To Evelyn and Cary

PREFACE

The purpose of this study is essentially twofold: (1) to examine some of the important aspects of market structure, market conduct, and economic performance of nonlife insurance, a financial sector of the American economy that lies somewhere between public utility and free market status; and (2) to suggest changes in market conditions in nonlife insurance that seem to offer opportunities for improving economic performance in the industry. Since there are numerous similarities among financial institutions, some of the problems examined in this study are common to other financial sectors of the American economy. Thus the questions raised here may have at least some limited applicability beyond this industry.

The body of economic theory frequently brought under the broad heading of workable competition has served as a guide for this study. The work of Joe S. Bain has been particularly useful. This study is not to be thought of as a complete industry study, however. Nonlife insurance is a broad activity. Every important aspect of the industry has not been considered; this would be an impossible task. For example, price discrimination has been considered only as it relates to other problems because there has been a recent study of this phenomenon in nonlife insurance¹ ¹ and because, despite the attention it receives in industry and regulatory circles, price discrimination does not seem to be as important as some other industry characteristics. An effort has been made to concentrate on an analysis of the aspects of the nonlife insurance market that seem to be most directly linked to performance in the industry. From the analysis of these relationships, tentative policy suggestions have been developed to assist in obtaining industry performance that is more socially satisfactory. The goal of the whole project has been oriented to consideration of plans of action.² ²

1 ¹ ¹C. Arthur Williams, Price Discrimination in Property and Liability Insurance (Minneapolis: The University of Minnesota Press, 1959).

2 ² ² See the argument of August Heckscher, Director of the Twentieth Century Fund, in 1959 Annual Report of the Twentieth Century Fund, pp. 11-14, that we need a closer relationship between social science research and plans of action.

There is a strong tendency in nonlife insurance, as in many other areas of human affairs, to view present policies and practices as the only ones which will permit an activity to survive. This argument was forcefully made in 1944 when a Supreme Court decision¹ ³ threatened established practices in nonlife insurance. Compromise legislation eased the industry into another situation. Now this mode of operation is more and more being compared with other possible alternatives. Many spokesmen for the industry are maintaining again that any significant change will threaten the industry. No institutions are immutable, thus every alternative that offers possibilities for increasing the value of an institution to society should be explored. Such is the spirit of this investigation.

Many people have helped me with this study. I learned a great deal about the level of competition and its regulation in the industry from a number of discussions with various staff members of the U.S. Federal Trade Commission, the Antitrust Division of the U.S. Department of Justice, the Subcommittee on Antitrust and Monopoly of the Committee on the Judiciary of the U.S. Senate, and several industry trade associations and rate bureaus. Dean E. T. Grether, Professors Joe S. Bain, Michael Conant, John W. Cowee, and Harry J. Solberg of the University of California, and Professor C. Arthur Williams, Jr., of the University of Minnesota, have read the manuscript and given valuable advice at many points. The Institute of Business and Economic Research of the University of California has provided financial and clerical assistance. Mrs. Maude K. Riley, Editor, has been especially helpful. Messrs. Dean Wise and K. M. Hussain helped gather and check materials at various times. Despite all this assistance, mistakes and conclusions alike are my own.

Finally, this study was substantially completed in the summer of 1960. Since that time I have been outside the United States in circumstances making it very difficult to collect material or to follow events in the American economy other than in the most general way. It appears, however, that the trends in nonlife insurance observed in this study have broadly continued, and that whatever validity the study had when it was completed still generally holds.

Universitas Indonesia R.J.H.

Djakarta, Indonesia

1 ³ ⁸ US. V. South-Eastern Underwriters Association, 322 U.S. 533.

CONTENTS

CONTENTS

CHAPTER I The Industry, Its Performance, and the Public Interest

Property and Casualty Insurance as an Industry

The Property and Casualty Insurance Market

Economic Function and Justification of Insurance

Some Performance Criteria in Insurance

CHAPTER II Size, Number, and Organization of Firms in the Industry

Types of Company Organization and Numbers of Each

Holding Company Operations

Concentration in the Industry

CHAPTER III Channels of Distribution

Independent Contractor Agents and Brokers

Exclusive Agents

Salaried Employees

CHAPTER IV Entry and Exit

Entry

Exit

CHAPTER V Price Policy and Price Making

Meaning of Price Policy

Survey of Price Policy and Pricing Practices in the Industry

Price Making in the Industry

Summary of Price Making in the Industry

CHAPTER VI Industry Performance I: Progressiveness (Multiple-Line Insurance)

A Standard for Progress

Measuring Progress

CHAPTER VIl Industry Performance II: Progressiveness (Automobile Insurance and Accident and Health Insurance)

Automobile Insurance

Accident and Health Insurance

Summary of Progress in Product

Contract, Procedural, and Administrative Changes

CHAPTER VIlI Industry Performance III: Product Variety, Capacity, Profit Levels, and Selling Costs

Product Variety

Capacity

Profit Levels

Selling Costs

CHAPTER IX The Results of Past and Present Policy in Nonlife Insurance

Summary of Industry Performance

Industry Structure, Conduct, and Performance

Past and Present Policy

CHAPTER X Policy Alternatives and Suggestions

Some Policy Alternatives

A Suggested Policy Combination

Conclusion

BIBLIOGRAPHY

INDEX

CHAPTER I

The Industry, Its Performance, and the Public Interest

In the United States today, all business firms and nearly all households view property and casualty insurance as a useful, even necessary, service. The recent development and extension of this form of risk sharing are illustrated by the following premium data. Annual premium outlays for nonlife insurance in the continental United States have grown from $2.2 billion in 1939 to $17.5 billion in 1958.¹ ¹ Several factors have influenced this growth: the monetary and real expansion of property values and income flows, collective bargaining, legislation (primarily at the state level), a growing awareness of the benefits of pooling resources to meet uncertain losses, and the liberal trend in negligence case awards. Regardless of the combination of reasons underlying its growth, nonlife insurance has become an integral part of the American economy.

Nonlife insurance includes a variety of insurance forms; the relative importance of these forms for the United States is presented in Table 1. The three leading groups of similar insurance forms accounted for

TABLE 1

CLASSES OF NONLIFE INSURANCE IN THE UNITED STATES

1958

SOURCE: The Spectator, CLXVII (November, 1959), 49-50.

ft Column total does not equal 100 per cent because of rounding.

77.6 per cent of nonlife insurance premiums. In the order of their importance, they were: accident and health insurance, which includes all types of protection, except workmen’s compensation, for medical expenses or loss of income due to injury or illness;² ² automobile insurance; and fire and allied lines of insurance.

These heterogeneous insurance types shown in Table 1 offer the opportunity to insure nearly every chance of loss which is a proper subject of insurance. ³ ³ The principal risks not included are those usually considered to be life insurance; this area of insurance is defined by the State of California as insurance upon the lives of persons or appertaining thereto, and the granting, purchasing, or disposing of annuities. ⁴ ⁴

In the past each company usually sold only certain types of property and casualty insurance. In fact, before legislation in the 1940’s and 1950’s, state laws restricted each legal entity to either fire and marine or casualty contracts.⁵ ⁵ Companies circumvented this rule by forming groups of affiliates. Thus the parent company with its subsidiaries was actually a multiproduct insurance firm. By 1950 there were approximately 150 separate property and casualty insurance groups made up of some 480 individual companies. These groups, though they included only a small part of the total number of nonlife insurance companies, provided more than 90 per cent of the total property and casualty insurance sold.⁶ ⁶ When the states passed legislation enabling one company to write all classes of property and casualty insurance, company groups were no longer necessary. There has been some movement toward consolidation; this and other aspects of group operations in property and casualty insurance are considered in chapter ii.

The economic performance of a group of companies providing substitute products has some connection with the structural characteristics of the market and the conduct of the firms operating in that market. Chapters ii, iii, iv, and v are devoted to questions of property and casualty insurance market structure and behavior.

In chapters vi, vii, and viii a group of what seem to be the most important aspects of economic performance for property and casualty insurance are considered. For each aspect of performance a desirable standard or level of achievement is suggested. Wherever possible, a method of measuring each performance aspect is developed. Observed industry results are compared with suggested standards, and finally an appraisal of overall performance is attempted. Since results varied among the performance aspects examined, the final appraisal involved a balancing of various kinds and degrees of performance.

A statement of norms or standards of economic performance necessarily involves some initial judgments. The judgments postulated here are the following five: full employment of the economy’s resources without inflation; efficient use of the economy’s resources by producing at optimum capacity in optimum size production organizations; allocation of the economy’s resources by consumer preferences other than antisocial preferences, defined by prevailing ethical standards;⁷ ⁷ allocation of the economy’s resources to reach the highest growth rate in the production of goods and services consistent with other values expressed; and distribution of the economy’s real output to foster stability, efficiency, and growth, as well as individual free choice (exercised responsibly), incentives, and capacity development.⁸ ⁸

Chapter ix begins with an attempt to draw some conclusions regarding the association of market structure and conduct with performance in this industry. Then, the policies—private and public— that have influenced nonlife insurance in the past are considered. Available policy alternatives are examined and assessed in chapter x and policy suggestions to improve performance are made.

Property and Casualty Insurance as an Industry

It is convenient to think of the firms that provide the various classes of property and casualty insurance as an industry; these organizations share common problems, regulatory rules, and rate-making practices. In 1950, Alfred M. Best Company, Inc., insurance analysts, noted that the community of interest between fire and casualty companies is emphasized by the fact that about 150 separate stock, mutual, reciprocal and Lloyd’s insurance company groups made up of some 480 individual units include both fire and casualty companies. That this same community of interest does not exist between life and either fire or casualty carriers is borne out by the fact that less than a dozen groups include life insurance companies. ⁹ ⁹ Since 1950 there has been an increasing tendency for property and casualty insurance groups to form or acquire life insurance affiliates. In 1959 the same Alfred M. Best Company reports that 74 of 137 capital stock fire and casualty groups included life insurance companies.¹⁰ ¹⁰ This movement probably is the result of a desire to share in the expected rapid expansion of life insurance premiums in coming decades and to acquire facilities to provide a family insurance package that will include all insurance needs and may be merchandised on a monthly-payment plan. Nonlife and life insurance may ultimately merge in this way. The final answer is a number of years away, and it will depend on a number of factors, including permissive state legislation, industry and consumer acceptance, and the growth of social insurance.¹¹ ¹¹

Important differences between life and nonlife insurance continue to exist; moreover, it is convenient to distinguish the two in terms of availability and manageability of data. Thus in this study we will consider the nonlife industry to include all companies engaged in furnishing one or more classes of property or casualty insurance. Companies that sell accident and health insurance exclusively are in the nonlife industry; those that sell life and accident and health are in the life industry. This method of distinguishing the two is followed by state regulatory agencies.

The Property and Casualty Insurance Market

The larger company groups are licensed to transact insurance in all states and territories of the United States. Many of the smaller companies are entered in several states.¹² ¹² Ordinarily, only the small township or county mutual companies operate on a local basis.

In 1913 an insurance writer described the United States’ insurance market as follows: The business is essentially inter-state; that is to state, the greater percentage by far of insurance in force on the books of the companies is composed of policies from more than one state. ¹³ ¹³ In the years since this was written, the percentage of interstate insurance has grown even larger.

The information, quantitative and qualitative, available to judge the performance of the industry is based largely on nationwide aggregates.¹⁴ ¹⁴ Evidence appears to justify treating the industry as operating in a national market.

Economic Function and Justification of Insurance

The courts long have held that insurance is a service in which the public has a special interest, though the industry has not been specifically designated a public utility. Courts have indicated that ordinarily the public does not have a right to demand and receive service from an insurance company. But the public does have an interest which extends beyond the individual, isolated contracts made between insurance companies and members of the public. Such contracts are interdependent, for they create a fund of which the insurance company is the depository and out of which losses are paid. In this way losses are distributed over a wide area—the disaster to an individual is shared by many.¹⁵ ¹⁵

This distribution of losses in advance over large groups and its effects constitute the economic function and justification of insurance. The demand for insurance for this purpose has been summarized as follows:

The demand for insurance is due to one of the inevitable facts of human existence—that despite his best efforts to escape them, man is at all times exposed to risks and uncertainties. In the course of time it has been discovered that some types of these risks can be largely eliminated by means of a system of pooling, or insurance. If risks can be spread over a sufficiently large and varied group, what was for the individual a small chance of a severe, perhaps disastrous, loss becomes for the group, and for each member of it, the certainty of a small loss, or in other words, a small, regular expense which can be provided for in advance like other expenses.16

Frank H. Knight notes that uncertainty is one of the fundamental facts of life. It is as ineradicable from business decisions as from those in any other field. 17 So long as there is change, there will be uncertainty. Part of this uncertainty arises from instances which occur under conditions of sufficient uniformity and in sufficient numbers to permit establishment of an empirical probability of a given outcome. But the outcome of an instance viewed in isolation will continue to be uncertain. G. L. S. Shackle says, It is universally agreed that the probability of a single, isolated event has no meaning. … 18 It is only when similar events are pooled that uncertainty becomes a measurable or actuarial risk.19 For the individual or firm facing the possibility of loss from an event that has a numerical probability, insurance is a device to eliminate the risk arising from the dispersion around the mean value of the numerical probability of loss.20

Many events and decisions confronting individuals and firms are essentially unique. No well-founded probabilities for different outcomes can be established empirically or deductively. Human reactions to the uncertainty arising from ignorance of the outcome of these virtually isolated, nonclassifiable instances are important in economics and other social studies.21 This study considers, however, the economic performance and policy aspects of an industry that has grown up to distribute the losses from events which ordinarily are classifiable and about which probability estimates of future behavior may be obtained. The study’s only direct concern with uncertainty not susceptible to measurement arises because measurable uncertainty shades gradually into immeasurable uncertainty. In addition, the vague dividing line between measurable and immeasurable uncertainty will shift as the quantity and quality of data improve. Wide past experience plus an ability to appraise similarities among instances may enable probability forecasts and the provision of insurance before the probability calculus in the strict sense can be applied.22

A distinction may be made between the interest of consumers and business firms in insurance. Basically, both types of purchasers are using insurance to eliminate the uncertainty associated with particular events, but apparent reasons for wanting to eliminate uncertainty and the effects of doing so may differ in each case.

CONSUMER INTEREST IN INSURANCE

There appear to be a number of reasons why an individual might consider the purchase of insurance against hazards affecting his property or income.

(1) Knowledge of the probability of a particular outcome in a given situation is of little value to an individual who conducts the experiment only once or, at most, a few times. Deviations from the average outcome may cause an individual consumer’s experience to be quite different from the mean expectation. For example, knowledge that the burning rate for private dwellings in the United States is one per thousand per year does not indicate what an individual owning one house may expect. His particular house may never burn or it may burn within the hour. The uncertainty arising from the dispersion around mean values of probable outcomes may be eliminated by the device of insurance.²³ ²³

(2) An individual consumer may wish to spread his losses through time. Insurance offers that opportunity for insurable risks. Insurance does not, however, reduce the total loss in the economy, unless insured property or income becomes less susceptible to loss upon being insured. Thus, as a group, purchasers of insurance will pay for all losses plus administration costs and profits of insurance organizations. But for an individual the payment of regular premiums serves to spread losses equally through time, though losses will be occurring erratically. This will tend to stabilize the income available to a household. Albert G. Hart points out that increasing the stability of income is likely to increase the total satisfaction derived from any given average income. And large, unpredictable income changes in either direction occasion some waste of past expenditures.²⁴ ²⁴

(3) The effects of large losses and gains are not expected to be symmetrical for a household. A large loss, whether it be destruction of property or loss of income through personal disability or unemployment, may threaten the standard of life of the household. For this reason, consumers might be expected to wish to eliminate chances of large losses whenever possible. In addition, society may find it undesirable to have individuals assume some types of risks even if they are willing to do so. Commenting on this latter factor, Frank H. Knight says, "Clearly there are limits to the terms on which the members of society are to be allowed to take chances, and notably when the independent members have dependent upon them other members in whom society is peculiarly interested/’ ²⁵ ²⁵ Many of the hazards faced by individuals are associated with the type of economy or civilization in which they live. For example, the risks of unemployment, industrial injury, and automobile accident might be viewed as part of the present American industrial society. Spreading losses from these and other similar sources would appear to be desirable to protect minimum standards of living, to allow individuals to develop fully their capabilities, and to assist in stabilizing the economy.

(4) Many consumers may have an aversion to risk. This will be true because of the much-maligned principle of diminishing utility. …²⁶ ²⁶ That is, progressive reductions in income deprive the individual of successively larger amounts of satisfaction. Therefore, he will seek to avoid chances of loss leading to reductions in income or property. This proposition is essentially a wider application of the increasing disutility of large losses suggested in the previous section. Insurance enables those who feel an aversion to risk to exchange uncertainty for certainty. The widespread sale of insurance and the existence of an extensive social insurance system are evidence of a desire to avoid risk.

Risk is not abhorred by all, however. Many seek it. Gambling, amusements, and sports furnish examples of this. Often individuals attempt to eliminate particular kinds of uncertainty and at the same time readily accept other kinds of uncertainty by entering into wagering contracts. These apparently conflicting desires seem to be widespread.²⁷ ²⁷ Our concern in this study is with insurance and its value to those who wish to avoid risk.

Consumers have at least two additional interests in insurance. They are concerned with the variety and the price of the product. Assuming that insurance is desired by consumers for the reasons suggested, and perhaps others, the price at which the product is offered is an important factor. Presumably the consumer would like the price to be as low as possible, consistent with the provision of necessary services and the maintenance of organization solvency. And since consumers’ reactions to risk will differ, they will be interested in having some variety of insuring methods and insurance contracts from which to choose.

BUSINESS INTEREST IN INSURANCE

Many of the factors mentioned in the discussion of consumer interest in insurance apply equally well to business. For example, the industrial purchaser of insurance also has an interest in price and product variety. It is also true that insurance may enable a firm to distribute some of its losses through time as a certain premium is substituted for an uncertain chance of loss. There are a number of other ways in which insurance may serve an economic function for business.

(1) Hart describes the purchase of insurance, the maintenance of liquidity, and the use of unspecialized productive equipment as uncertainty reactions. He says these things

… are commonly thought of as devices by which the standard deviation of net receipts’ prospects is reduced at the expense of reducing their expectation value. To explain the willingness of businessmen to make this supposed sacrifice of income expectations, ‘risk aversion’ is attributed to them, in the face of much evidence that in some quarters danger is courted.

This view of the uncertainty reactions … is inadequate. They may be, and commonly are, devices for raising the expectation value of net receipts for the life of the firm by reducing their standard deviation for the near future. Risk aversion, then, is not necessary for their explanation.²⁸ ²⁸

For those situations to which businessmen have an aversion to risk, insurance is useful. As Hart suggests, it may also be useful where risk aversion is not a factor.

(2) Carrying insurance will often improve the credit rating of a firm. This may mean it can obtain more outside funds, and perhaps at lower rates of interest. Paying insurance premiums ordinarily will not reduce appreciably the firm’s net receipts in favorable circumstances, but it does offer substantial improvement if events are no longer favorable.²⁹ ²⁹

(3) Losses and gains are asymmetrical, particularly in the early life of a firm. A small number of unfavorable outcomes amounting to a large enough fraction of a firm’s net worth may force it into bankruptcy. For example, a large uninsured fire loss may reduce net worth to a level that creditors consider dangerous, and liquidation might follow. Under such circumstances, purchase of insurance is a rational expenditure for the businessman.³⁰ ³⁰

(4) If a capitalist economy is to operate at satisfactory levels and to grow, businessmen must make a succession of investment and other decisions which involve varying degrees of uncertainty. The outcome of many or most of these decisions is not predictable in a strict probability sense. William Fellner states, The actual instances faced by businessmen do not belong in homogeneous universes. ³¹ ³¹ Part of the uncertainty which surrounds many business problems may be eliminated, however, by insurance and other devices. For example, property and income may be insulated from many hazards that are sufficiently amenable to the probability calculus to permit insurance; any reduction in overall uncertainty might be expected to facilitate decision making.³² ³²

Some Performance Criteria in Insurance

Much has been written in the last two or three decades on what is desirable economic performance for the economy in general and individual industries in particular. This discussion has produced some agreement on the broad outlines of economic performance.³³ ³³ Complete agreement is impossible and probably undesirable, for establishment of desirable goals of economic performance involves a considerable amount of subjective evaluation. Quite naturally, this leads to varying conclusions, but, in the main, the variations seem to occur largely in what might be called the less relevant rather than the more relevant aspects of economic performance.

Certain aspects of economic performance will be more important for particular industries and segments of the economy than for others. Moreover, some aspects of performance, no matter how desirable they may be for the economy as a whole, are not appropriate for a particular firm or industry. For example, a level of full employment (however defined) is a desirable result for the economy. Yet it would be difficult to relate such a norm directly to a firm, or even an industry, while the assumption of a capitalistic form of organization is maintained.³⁴ ³⁴

The task faced here is the specification of performance criteria which appear to be of particular importance to this industry and its relationship to the economy. Any performance norm one establishes is based upon a set of value premises. Those upon which this study depends were discussed earlier in this chapter. The performance criteria which appear to be the most important in evaluating the property and casualty insurance industry are briefly discussed in the following sections.

PROGRESSIVENESS

Progress in property and casualty insurance may be viewed in two ways: in terms of product and process innovation which increase both the variety and want-satisfying power of the services making up the industry’s output; and in terms of changes which reduce costs in the industry and make its services available at lower prices. Both of these aspects of industry progressiveness are directly important for consumers and business and indirectly important for the economy.

For economic aggregates, progress in insurance may mean the indirect promotion of higher levels of investment and greater economic stability as uncertainty is further reduced and losses are more widely distributed.

Cost-reducing changes mean more efficient use of and better allocation of resources. If cost reductions are not passed on to the buyer as lower prices or better products, profit and income distribution patterns will be affected.³⁵ ³⁵

PRODUCT VARIETY

The variety of forms and combinations of insurance protection offered by the industry should be large enough to meet all of the socially desirable wants of purchasers. Yet the variety should not be needlessly large; the distinctions between contracts should be genuine. Mere proliferation of insurance policy types that are essentially the same is apt to create costly confusion rather than satisfaction. This will be especially true if directions for the purchase and use of insurance are poor.

CAPACITY

Capacity involves the ability of the industry to meet the demand for various types of insurance protection. If the benefits from the distribution of losses are to be fully realized, the industry must have sufficient facilities and capital funds to enable any legitimate insurance buyer to obtain protection. Yet there must not be chronic excess capacity in the industry. In insurance this would be represented mainly by unnecessary capital funds. Since insurance capital and reserve funds are subject to quite strict investment regulation, any unneeded funds might find more productive employment elsewhere. Concentration of industry production in units of the most efficient size also is desirable.

PROFIT LEVELS

Profit levels involve cost-price relationships in the industry. The insurance buyer is interested in obtaining the service at the lowest price consistent with reasonable service and assurance that future losses will be paid. Profits over time need not average more than the return on capital necessary to enable the industry to perform expected services adequately. Profits in excess of those necessary to call forth the needed supply of insurance service affect the distribution of income in the economy. This in turn is expected to have effects on such things as the level of employment and the stability of the economy.

SELLING COSTS

Selling costs might be considered a special subcase of the cost-price relationship treated under profits. There are essential differences, however. Total costs may be inflated as a result of excessive selling expenditures, yet profits may be small or nonexistent. Only by examination of selling costs per se is it possible to determine whether an industry is devoting excessive quantities of resources to this activity. Insurance would appear to be a type of industry that might be susceptible to larger than necessary selling expenditures. The industry produces a service with which the ordinary purchaser is unfamiliar, and there are no feasible ways to test the product before purchase.

Selling costs are also related to industry capacity—particularly the aspects of chronic overcapacity and lack of optimum size units.

SUMMARY OF INDUSTRY PERFORMANCE CRITERIA

The public has an interest in insurance being available for all socially desirable activities that are susceptible of actuarial handling. Not everyone—consumer or producer—will wish to exchange uncertainty for certainty in all insurable situations, but the choice should be available. This means an adequate supply of insurance service at all times. Moreover, the public has an interest in insurance being supplied efficiently with the smallest necessary profit and selling cost payments.

The above industry performance criteria have been selected because they seem to offer the best possibility for determining whether or not the industry is meeting the needs of the economy as well as may be expected. Each of these dimensions will be examined in detail in chapters vi, vii, and viii.

1 ¹ ¹ U.S. Bureau of the Census, Statistical Abstract of the United States: 1947 (68th ed.; Washington, 1947), pp. 446, 450; and The Spectator, CLXVII (November, 1959), 49-50. The federal government does not collect insurance statistics. Such data as are published in federal reports are reprinted from private-agency publications. For example, the source of the above Bureau of the Census data was The Spectator, Philadelphia, Pa., Insurance Yearbook, Insurance by States Volume. The Spectator organization and Alfred M. Best Company,