for future settlement of losses which had accrued on liability policies. In New York the rule for the calculation of this particular liability is found in section 86 (see Appendix J); this method provides for the division of the data for the loss reserve into two parts: first, the ascertainment of the number of notices of injury which have been received within eighteen months, and second, the number of suits outstanding upon notices received more than eighteen months before the time of rendering the report. In the case of companies which have been in the business for ten years or longer, the experience of each company is examined in order to find out what is the average amount which it has paid on its suits and also what amount it has paid on notices which were settled without litigation. These factors having been determined, they are multiplied by the number of each of the appropriate items, and from the product is deducted the amount of all payments which it has made on account of the injuries reported within eighteen months. It is difficult in a few words to properly express all of the terms of this law, and you are referred to the statute itself in order that you may learn all of its provisions.

In Michigan, the law is based upon a different theory. The number of notices and suits is disregarded and the company is required to carry as a liability 50 per cent. of the premiums received and earned, which result is adjusted by such an amount as in the opinion of the Insurance Commissioner is necessary (see Appendix K).

It is the consensus of opinion that neither of these laws gives satisfactory results, and at the present time

(November, 1910), the subject is receiving the careful attention of liability underwriters; it seems desirable from many standpoints to base the estimate of future losses upon the experience of the past, both as to the amount of payments and the length of time which will elapse between the date of loss and the date of payment. In connection with this I wish you to read an article on this subject which appeared in the " Weekly Underwriter" in February, 1908, and of which you have received copies (see Appendix L). I also wish to direct your attention to a paper which I read before The Liability Association in October, 1910 (see Appendix Q), outlining a different method for arriving at the loss reserve. In California, Connecticut, Illinois and Massachusetts the statutes governing the calculation of the loss reserve item are practically the same as the one on the statute books in New York.

Before concluding this talk on the subject of liability and credit insurance, I desire to briefly refer to the question of the "limits of risk." Under a liability policy the limitations are usually expressed in a similar manner to the method outlined for credit insurance; a policy issued on a $5,000-$100,000 basis would mean that while on any particular accident the company's liability is limited to $100,000 on all persons, it does not hold itself responsible for more than $5,000 on any one life. The limit on this policy would be $100,000. In the case of a credit insurance policy, however, a vital distinction exists, and the limit is considered to be the amount which the company will be required to pay upon the insolvency of any one debtor; in the illustration before mentioned, a $25,000-$100,000 policy, the limit would be $25,000.

There is another distinction to which your attention should be directed between these two forms; under a credit policy the company can never be compelled to pay out more than the maximum limit, while under a liability policy the maximum limit as stated applies only to one accident, and the liability of the company, therefore, continues upon subsequent occurrences.

CHAPTER XIV

Miscellaneous Liabilities- Special or Advisory Board Contracts Taxes Due or Accrued Borrowed

Money Capital Stock-Sale of Stock in Connection with Life Insurance Forbidden.

Before taking up the question of the liabilities resulting from the dividends on life insurance policies, I shall refer to the miscellaneous liabilities which are found in the statement of life insurance companies.

After disposing of the reserves and the policy claims, you will find in the annual statement blank, Convention edition of 1909 (which means the form of annual statement blank which was adopted at the 1909 session of the National Convention of Insurance Commissioners, and which is now generally used throughout the United States), an item of

Due and unpaid on supplementary contracts not involving life contingencies

You will note that this is similar in wording to the item referring to the amounts not yet due on installment contracts, with the exception that this item calls for the amounts which are due and unpaid, while the former item referred to the present item of amounts not yet due. The present item is also intended to cover another form of liability which you will find in your examination of the smaller and the more recently

formed life insurance companies. I refer to the item of amounts due on what are called "Special" or "Advisory Board "contracts. These are supplementary agreements which have been entered into by the insurance company with a certain number of its policyholders, whereby a definite amount (usually $1 per thousand of insurance in force) is set aside each year and a special fund thereby created, the proceeds from which are shared annually by the policyholders composing these special groups.

It is usual to limit these groups to 100 or 200 or 500 shareholders, and each man who takes a policy for a certain amount (usually $5,000) is entitled to one of these shares. It has been the custom of companies in the past to form various series of these Advisory Board contracts. For instance, a company will form one group which it will call the United States group, and agree to set aside each year $1 on each $1,000 of insurance on all policies written and in force in the United States; another group will be formed called the State of Indiana group, and $1 or $.50 will be set aside each year for each $1,000 of insurance written and in force in that State.

It will be apparent to you that this system entails a serious drain upon the company, but it has been objected to for another reason; it apparently creates a discrimination between the policyholders, and a recent summary prepared by the representative of a number of companies indicates that in reference to Advisory Board contracts

28 States have statutes expressly forbidding them. 9 States have forbidden them by rulings of their Insurance Departments.