5. Can one ascertain what it costs the railways to carry United States mails? 6. Can the passenger service be said to be a by-product of the freight service? 7. Compare some of the leading railways from the standpoint of density of traffic. 8. What would be the economic effects of a "postage-stamp" railway rate system, in which rates vary with the weight and nature of the shipment, but not with distance? L REFERENCES ACWORTH, W. M. Elements of Railway Economics.. Bureau of Corporations. Report on Transportation by Water, 1909, 1910. HAMMOND, M. B. Railway Rate Theories of the Interstate Commerce Commission. Interstate Commerce Commission. Annual Reports; I. C. C. Reports; Statistics of Railways in the United States. JOHNSON, E. R. American Railway Transportation; Ocean and Inland Water Transportation: Report on Panama Canal Traffic and Tolls. JOHNSON, E. R., and HUEBNER, G. G. Railroad Traffic and Rates (2 vols.). Joint Committee on Federal Aid in the Construction of Post Roads. Report (1914). MCPHERSON, L. G. Railroad Freight Rates in Relation to Industry and Commerce. MEYER, B. H. Railway Legislation in the United States, Part ii. MORRIS, RAY. Railroad Administration. MOULTON, H. G. Waterways versus Railways. National Waterways Commission. Report (1909). PIGOU, A. C. Wealth and Welfare, Chap. xiii. RIPLEY, W. Z. Problems. Railroads: Rates and Regulation; and (editor) Railway SAKOLSKI, A. M. American Railroad Economics. Chap. iii. VROOMAN, C. S. American Railway Problems. WEBB, W. L. Economics of Railroad Construction, Part i. CHAPTER XXVIII INSURANCE Nature of Insurance. The essential idea of the modern institution of insurance is coöperation in the bearing of losses which are likely to happen to any one of a large group of persons but which will actually fall upon but few members of the group. It is thus directly opposed to gambling, although wagers have frequently been made in the form of the insurance contract. It may appear at first that the man who insures his house is making a wager with the insurance company that his house will burn, but this is in fact like betting on both sides of an event. If the man does not insure, he may be regarded as betting that his house will not burn, and by wagering with the insurance company that it will burn, he relieves himself of risk. For this relief he is willing to incur the certain loss of his premium. Insurance does not free the policy holders from loss, but it means many small losses in place of a few unbearable ones. In well-developed forms of insurance there is also no risk for the insurance company, because the amount of loss is approximately known in advance, as will be explained presently. The question is sometimes asked whether insurance is productive in the sense that other economic activities are productive. The answer is decidedly in the affirmative, for the feeling of security that it makes possible is a real satisfaction which we are willing to purchase. Then too, there is a very important economic gain in distributing among many persons the burden of losses which would otherwise fall heavily upon a few. Furthermore, the relief of distress among the unfortunate without compelling them to accept charity is a distinct social gain, and finally, many of our business operations are facilitated by the existence of a system of insurance. Prevention of loss is not properly a part of the idea of insurance, but nevertheless insurance as it exists today does have many tendencies in that direction, especially in such forms as fire and steam-boiler insurance. On the other hand, insurance causes a certain amount of loss by provoking to some extent incendiarism, self-mutilation, or suicide, and even normal persons are likely to be less careful when they know they are insured. On the whole, however, we can scarcely overestimate the importance to society of an institution which equalizes economic shocks and multiplies the incentives to thrift. The Law of Probabilities. — A special profession (that of the actuary) and a special branch of mathematics have grown up as a basis of the institution of insurance. It is a knowledge of the law of large numbers that changes insurance from a wager to a business of a routine-like nature. If a coin is tossed a large number of times, heads will appear about as often as tails. This may be counted upon as practically certain, but with respect to any particular throw taken by itself, there is no way of telling in advance whether heads or tails will appear. This truth has been worked out and applied most definitely to life insurance, but in other business callings also an effort is made to gather data that will make possible the formulation of statistical laws as guides in making business plans. Origin and Development. - Arrangements embodying the idea of insurance are found among the ancients, but the modern institution of insurance, although its origin is obscure, first becomes prominent in the loans on bottomry which became common during the thirteenth and fourteenth centuries. A loan on bottomry meant that money was borrowed by the owner of a ship and was to be repaid with interest at the termination of his voyage, but the principal and interest were not to be repaid if the ship was lost. Sometimes this took the form of insuring the captain's life, but no scientific system of life insurance appeared until the compilation of life tables. Fire insurance received an impetus from the Great Fire of London in 1666, the first company organized upon strict mer cantile principles being the "Fire Office," organized in 1680. It had a brigade of its own to prevent and extinguish fires. In 1693 Edmund Halley made a report to the Royal Society regarding the mortality at various ages upon the basis of tables of births and funerals at the city of Breslau; but, practically, life insurance as a business dates from the organization of the " Old Equitable" in 1762. Before this, however, there were many associations for conducting insurance upon a speculative basis, which entered into wagers of every conceivable description. "Even the morality of the newspapers of that day was shocked by such proceedings: we find the London Chronicle of 1768 thus declaiming, 'The introduction and amazing progress of illicit gaming at Lloyd's Coffee-house, is among others, a powerful and very melancholy proof of the degeneracy of the time. Though gaming in any degree is perverting the original and useful design of that Coffee-house, it may in some measure be excusable to speculate on the following subjects: Mr. Wilkes being elected member for London; which was done from 5 to 50 guineas per cent.; Mr. Wilkes being elected member for Middlesex, from 20 to 70 guineas per cent; - Alderman Bond's life for one year, now doing at 7 per cent; - On Sir J. H. [mark the modesty] being turned out in one year, now doing at 12 guineas per cent; - On John Wilkes' life for one year, now doing at five per cent. N.B.-Warranted to remain in prison during that period; - On a declaration of war with France or Spain in one year, 8 guineas per cent. But,' continues the sensitive journalist, 'when policies come to be opened on two of the first peers in Britain losing their heads at 10s. 6d. per cent. or on the dissolution of the present parliament within one year at 5 guineas per cent., which are now actually doing, and underwritten chiefly by Scotsmen, at the above Coffee-house, it is surely high time to interfere.' In the United States, fire insurance was fairly well begun even in pre-revolutionary days. In 1830 the New York Life and Trust Company was organized, and twelve years later appeared the Mutual Life Insurance Company of New York, which is the oldest of the existing American life insurance companies which insure more than a restricted class of individuals. In the seventies numerous failures brought the "old line " life insurance companies into discredit, and in the following years. this fact, together with the desire for cheap insurance, caused 1 Walford, The Insurance Guide and Handbook, 4th ed., p. 27. a marked development of assessment insurance, against which there has in turn been a reaction because of its unscientific basis. Subsequently the "old line" companies again suffered a loss of prestige on account of the scandalous extravagance and corruption revealed by official investigations. The evil practices had to do chiefly with the management of the surplus, which was not under legal control as was the reserve. (These terms will be explained presently.) The accompanying table shows the growth in American life insurance since 1850. The check in 1880 may be noted. Between 1890 and 1910 the total amount of life insurance in force in ordinary and industrial companies increased fourfold. The average amount in force per family was $319 in 1890 and $801 in 1910. It is perhaps needless to state that the average amount per policy is much larger than this in ordinary though not in industrial insurance. The foregoing does not include the insurance fraternal orders, which had 10,122,169 certificates and $9,839,909,282 of insurance in force in 1911. Forms of Insurance Organization. Fire insurance may be written by stock companies, by mutual companies, or by associations of individual insurers, known as underwriters and Lloyds. Mutual companies, again, may be either local (county or town) mutuals, state or general mutuals, or the manufacturers' mutuals. The local town mutuals have the advantage that they can be conducted with a very low cost of administration, but the stock companies seem best adapted to the business of fire insurance, since it is desirable that the risk of a conflagration should be spread over a very wide territory. Life companies are also found both in the stock and mutual form. Theoretically the maent of the latter is in the hands of the policy holders they must be managed by a surance companies are also premium payments: (1) " ment, and (3) stipulated pr Where risk to offer an |