Copyright by
James Gordon Sheehan
1956 CREDIT INSURANCE
FROM THE POLICYHOLDER»S POINT OF VIEW
. DISSERTATION
Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University
By
JAMES GORDON SHEEHAN, B.S.C., M.A.
The Ohio State University 1955
Approved by;
Adviser Department of Business Organization ACKNOWLEDGMENT
A debt of gratitude for help in this work is owed to many business executives, state insurance department officials, and credit insurance executives. Particular recognition is due to Professor
Theodore N. Beckman, Department of Business Organization, The Ohio
State University, for his aid and encouragement. The American Credit
Indemnity Company of New York, under the sponsorship of James L.
McCauley, Executive Vice President, and Albert Ottesen, Cincinnati
Special Agent, have rendered valuable assistance in this investigation.
11 TABLE OF CONTENTS
CHAPTER PAGE
I. INTRODUCTION...... 1
Purposes of the study...... 1
Definition and delimitation...... 3
Role of credit insurance in the American economy.. . 8
Methodology of the investigation...... 26
II. HISTORICAL BACKGROUND AND PRESENT STATUS OF CREDIT INSURANCE...... 41
Early development, ...... 41
Contemporary American companies...... 53
Extent of current coverage ...... 63
Provisions for credit insurance in other countries . . 95
III. ANALYSIS OF BUSINESS EXPERIENCE WITH CREDIT INSURANCE. . 100
Reasons for insuring accounts...... 101
Types of coverage u s e d ...... 108
Insurance adjustments...... 115
Amounts of loss paid by insurers...... 138
Cost of credit insurance ...... 147
Collection service ...... 159
Psychological value...... 163
Reasons for discontinuance of credit insurance .... 16?
IV. ANALYSIS OF THE NON-USE OF CREDIT INSURANCE BY ELIGIBLE COMPANIES IN SOUTHWESTERN OHIO...... 173
Reasons for not using credit insurance as listed by
presidents and credit managers ...... 173
iii CHAPTER PAGE
Possible conflict between credit insurance and the
duties of credit managers...... 188
Opinions Regarding the advantages claimed by insurers . 192
Estimate of possible value of insurance of accounts
for these f i r m s ...... 205
V. SUMMARY AND CONCLUSIONS...... 212
Conclusions...... 218
How credit insurance migtit be made more useful...... 224
BIBLIOGRAPHY...... 22?
APPENDIXES ...... 236
A. "N»» Policy...... 237
B. Sample of letter sent to presidents of 500 firms...... 239
C. Questionnaire sent to presidents...... 240
D. Answers of presidents to credit insurance questionnaire . 243
E. Sample of letter sent to credit managers of 5OO firms . . 245
F. Credit manager’s questionnaire ...... 246
G. Tally of answers to questionnaire by credit managers. . . 249
H. Combined credit insurance experience...... 252
I. Bad-debt loss survey...... 253
J. Credit insurance premiums and loss ratios, 1905 to 1953 • 256
K. Key to ratings...... 257
XV LIST OF TABLES
TABLE PAGE
I. Credit Insurance Losses and the Business Failure Rate. . 13
II. Credit Insurance Losses and Business Failures Over
$100,000 17
III. Credit Insurance Volume and the Rate of Business
Failures Over $100,000 ...... 20
IV. Growth in Credit Insurance Premium Volume Compared with
Gross National Product ...... 22
V. Credit Insurance Premium Volume Compared with the Volume
of all Casualty Lines...... 25
VI. Sixteen Present-Policyholders * Reasons for Insuring
Accounts...... 102
VII. Thirty-one Former-Policyholders' Reasons for Insuring
Accounts...... 103
VIII. Table of Ratings and Coverage (Large)...... Ill
IX. Table of Ratings and Coverage (Median) ...... 112
X. Table of Ratings and Coverage (Small)...... 113
XI. Adjustment 1 ...... 122
XII. Adjustment 2 ...... 125
XIII. Adjustment 3 ...... 130
XIV. Aggregate Experience for Years Policyholders held
Policies from 1912-1953...... 141
XV. Aggregate Experience for Years Policyholders held
Policies from 1946-1953...... 142
V TABLE PAGE
XVI. Credit Insursince - Premiums Written sind Losses Paid
(Less Salvage) for Past Twenty Y e a r s ...... 144
XVII. Credit Insurance Statistics for "Business Cycles
Ending with Depression"...... 145
XVIII. Primary Loss Compared with Credit Loss in Southwestern
O h i o ...... 149
XIX. Distribution of a Credit Insurance Pronium Dollar
During Twenty Years...... 151
XX. Reasons for Discontinuance of Credit Insurance...... 165
XXI. Summary of Credit Managers» Reactions to Claims of
Insurers...... 193
XXII. Summary of Presidents» Reactions to Claims of
Insurers...... 206
VI LIST OF CHARTS
PAGE
A. Credit Insurance Losses and the Business Failure Rate .... 14
B. Credit Insurance Losses Compared with Business Failures
Over $100,000 ...... 18
C. Fluctuations in Credit Insurance Volume Compared with the
Rate of Business Failures Over $100,000 ...... 21
D. Growth in Credit Insurance Premium Volume Compared with
Gross National Product ...... 23
E. Trend of Credit Insurance Premium Volume Compared with
the Volume of all Casualty Lines...... 26
F. Disposition of Average Credit-Insurance Premium Dollar. . . . 1$8
Vll CHAPTER I
INTRODUCTION
The contention that credit insurance, the insuring of accounts receivable, is one of the most controversial subjects in business, is
not without supporting evidence. To say that it is one of the most
controversial subjects in the field of credit and collections is a
platitude. This is not an ordinary controversy, but one marked by wide, if not violent, differences of opinion. The proponents and
opponents of credit insurance are voluble, and have been given promi nence in our business rhetoric and literature. Yet, there has been relatively little scholarly research on the subject, and such as has been attempted has been primarily from the insurance company point of view. No single extensive study based on an objective analysis of actual policyholder experience is available. To provide such a reference is the main purpose of the present study.
Purposes of the Study
Since the latter part of the 19th Century, credit insurance conpanies have obtained several millions of dollars yearly in premiums frcan American businesses. Many of the subscribers have been large and respected concerns from all regions of the country. That there have been many satisfied custcxners is attested by the fact that some have renewed policies for many years. On the other hand, the majority of firms have declined to insure their receivables. Have the latter failed to take advantage of a worthy means of transferring the risk
1 2
of one of the primary catastrophes that plight American business, the
bad-debt loss? Or have the credit insurance policyholders carried an
unnecessary expense, the credit insurance premium? Answers to these
and other questions concerning the essence and effects of credit
insurance are to be answered in this investigation.
American business is entitled to know the facts about credit
insurance in practice. Actual case studies often reveal important
conditions that are likely to be overlooked in theoretical explanations.
Even facts of opinion from fellow men regarding a controversy may be of
help to executives who must decide between two possible courses of
action. Both techniques were employed in gathering material for this
report, with the objective of providing the American businesanan with
the best possible information upon which to judge credit insurance in
his particular situation. Although this document has been written
primarily to aid businessmen directly, the purpose is also to provide
information which may assist credit insurance executives in offering
the best service possible to meet the needs and desires of their
customers.
Businessmen generally appear to become acutely aware of the
"credit problem" when they are either expecting or experiencing reces
sionary periods. This leads to an active interest in the possibility of transferring credit risks, and it is not surprising that credit insurance sales have recently reached a new high level, even if one discounts that part of volume due to price level increases. To the individual businessman, certain indicators suggest that he should be more cautious in extending credit; and yet, at the same time, he 3 would like to be in a position to increase sales by a more liberal credit policy.
From a social viewpoint, it would seem to be desirable to shift the bad debt risk to insurance specialists, if they are thoroughly capable and conscientious in assuming them, and to spread costs over a large number of policyholders on an efficient, scientific basis.
It has been suggested that this would have some effect in stabilizing the economy. It could possibly provide increased working capital for small businesses through the use of more liberal credit terms by large concerns which have more ready access to capital.
Against this background, there is the fact that only about three thousand credit insurance policies are in effect in the United States today. If the insurance principle is applicable to credit, why has it not been exercised to a greater extent? Could the use of credit insurance be broadened so as to result in lower premiums, better cover age, and still greater usage as a social baiefit? It is the failure to find suitable answers to these questions that prompts this investi gation.
Definition and Delimitation
Credit insurance is properly defined as the indemnifying of excess losses occurring fran the inability of debtors to pay amounts owed on open accounts. It does not cover initial losses up to an amount determined by the insurance ccMnpany as representing the normally expected losses for a particular business. As used herein, credit insurance refers to the insuring of excessive losses on accounts receivable of manufacturers, wholesalers, and advertising agencies.^
It is the current practice of the leading credit insurance companies
not to insure retail sales. Thus, these companies do not insure
amounts due on sales to ultimate consumers, for goods or services
purchased for personal use or that of family or friends. Credit
insurance applies only to mercantile credit, meaning that which one
businessman extends to another.
There is confusion as to just what is meant by "credit insur
ance." The term has been applied in recant years to credit life
insurance, which insures the life of a borrower, usually in the amount
of the outstanding balance and until the loan is repaid. Most of
this insurance is written through banlcs and finance companies that
insure the lives of persons who obtain consumer loans. This newer
type of insurance has surpassed the older industrial credit insurance
in premium volume by about five times. Further, it covers nearly ten million individuals as compared with about three thousand policies for the older insurance, and it is being written by more than three hundred companies in the United States to two companies for the industrial credit insurance. However, the larger and newer type is really life insurance and does not merit the term, "credit insurance."
Credit insurance is also frequently confused with "accounts
^Supposedly "service organizations" are credit insurable, but none other than advertising agencies were found to be insured. 5 receivable" insurance, although usually different terns are used to describe these two types. They aure both catastrophe lines of insurance suid there the similarity ends. Accounts receivable insurance indemni fies the insured for his inability to collect unpaid balances on accounts, when such inability to collect results from destruction or 2 damage to his physical records of accounts receivable. This includes damage or destruction due to fire, explosion, tornado, wind, storm, earthquake, riot, flood, strike, vandalism, acts of employees, water damage, larceny, theft, or the disappearance of records during the perils mentioned. This coverage is available to any business that is still operating successfully after three years of existence. The insurance company takes over all rights of the insured for those accounts that are paid for on adjustment under the policy. The amount of outstanding loss to be paid is reduced by the experience of the particular business insured in charging off bad debts. Credit insurance does not insure records against destruction, as does accounts receivable insurance, but it protects against the inability of a debtor to pay amounts owed on accounts because of the insolvency of debtors.
There is still another type of fire insurance which is scmetimes called "credit insurance." This insurance permits a creditor to insure current open accounts against being rendered uncollectible because of a debtor*s insolvency, but only when this contingency is due to damage or destruction by fire and/or lightning, of merchandise, furniture, fixtures, or other equipment owned, in whole or in part, and in the
^Rough Notes (February, 1948), pp. 19-20, 49-51. 6
possession of customers of the assured. The insurer is then liable
for accounts remaining uncollected ninety days after due dates which
follow the disaster. The assured must make the same collection efforts
that would have been exercised in his own behalf if he had not been so
insured. Liability is limited to a maximum amount for any one fire,
by the value of property damaged or destroyed, and by the amount which
the assured could have received from the customer, proportionately with
other creditors, on the property prior to the disaster. This insurance will not cover any loss that is insured by any other policy, except for loss sustained in excess of the amounts collectible frcsn other insur ance. Fire-receivable insurance is of relatively minor importance, and is not considered further in this study.
Export Credit Insurance
Although this investigation is limited to domestic credit insur ance, the insurance of accounts in export trade deserves some considera tion at this point. Actually no facilities exist in the United States for insuring amounts owed by foreign debtors on open accounts, even though much more formal study has recently concerned the insurance of foreign accounts than of domestic credit. The only mention of any insurance similar to export insurance offered by the American companies is the case of one insurer offering to insure foreign creditors against loss on open accounts to American debtors where the transaction is approved by the Del Credere organization.^ Still, it is probable that
^This information was gained in an interview with a credit insurance executive. coverage on foreign shipments will be made available for American
exporters in the future by either the Federal Government or private
companies.
Our congress considered this matter under the proposed Export
Insurance Act of 1946. This Act would have provided for a Foreign
Trade Insurance Division to be set up in the Sxport-Import Bank of
Washington, and would have authorized an appropriation of 1300,000 for
administrative expenses of the Division and the issuance of an insurance
capital stock of $100,000,000 to be subscribed by the United States
Government, with the amount of insurance outstanding limited to five
times the amount of this capital. The bill offered both credit insur
ance and an exchange guaranty, through insurance or reinsurance, of
payments of moneys due United States citizens or corporations from
debtors in foreign countries who might default in payment for merchan
dise. The Government insurance would have covered seventy-five per cent
of invoice value. It was to provide capital for the small exporter
to further expand his operations by being able to discount his paper
without recourse immediately. Under another feature, "transfer
insurance," the American shipper would immediately receive his dollars
for any blocked exchanges,^
The protection offered by the export insurance bill was pri marily designed to encourage fuller participation by small business concerns in foreign trade. The majority of present exporters.
^Philip J. Gray, "Foreign Credit Insurance," Credit and Financial Management. XLVIII (July, 1946), pp. 4-6. B particularly the larger ones, have eaqiressed no need or desire for the credit protection offered under the proposed bill. Polls taken among other businessmen show that while they see merit in foreign exchange insurance, they do not generally favor operation of export credit insurance by the government, but they would favor it if it were written by private companies.^ A group of American businessmen have recently considered starting a company to provide export credit insurance. The matter is not examined further in this study, except in a discussion of credit insurance in foreign countries, where export credit insurance plays a prominent role.
In concluding the delimitation of this study, it is well to mention that credit insurance is not compared with other casualty lines to determine whether it is more or less beneficial, or whether the expenses and profits of the conpanies are more or less favorable to the policyholder. Credit insurance will be considered on its own merits or demerits as related to its effectiveness in solving or alleviating the credit-loss problems of businessmen.
Role of Credit Insurance in the American Economy
Credit sales constitute about eighty-five per cent of all sales made by American manufacturers’ sales branches and merchant whole salers.^ The likelihood of accounts represented by some of these sales
^Ibid.. pp. 9-10. ^U. S. Census of Business. 1948. Wholesale Trade. Credit, pp. 3 .03-3 .04. 9 bectMning uncollectible is such that credit losses are generally regarded
by businessmen as an inevitable cost of doing business. Thus, reserves
for bad-debts appear as recurrent balance-sheet items in the records
of firms operating at these levels of distribution. Although only a
small percentage of companies, those which are heavily financed, create
an actual cash bad-debt reserve, all efficient concerns selling at wholesale include an amount for this contingency in the selling prices of their commodities or services.
Bad-debt losses of manufacturers and wholesalers were reliably
estimated at eighty-million dollars for the year 1939, as a result of a national survey.^ That these losses are about the same or greater annually than those from fire is indicative of their size, but this does not thereby point to any similar methods of control. Credit losses are of a different essaice than losses from grass fires, residential fires and brush fires, which constitute about four-fifths of all fire losses, and no breakdown is available by dollar amount of 8 fire losses applicable to business only. Furthermore, most fire losses are in the nature of a catastrophe to the uninsured recipient, whereas most credit losses constitute a small portion of the cost of doing business.
Moreover, there are other credit costs of major importance besides the bad-debt loss. The main credit cost is expended in
^"Bad Debt Loss Survey," Credit and Financial Management (June, 1939), p. 16. ®Joseph T. Trapp, Credit Insurance. A Factor in Bank Lending (Baltimore: American Credit Indemnity Company, 1953), p. 47. 10
salaries of the credit manager and his subordinate personnel, who are
charged with approving credit sales and collecting accounts. Other
expense items in the operation of a credit office, such as telephone
and maintenance expenses, together with the department payroll, normally
represent about sixty per cent of total credit expenses. Interest on
the average receivables is next in size as a credit cost, usually from
one-fourth to one-third of total credit cost. Bad-debt losses are
third in importance.^ In any consideration of effective means of
dealing with the credit problem, all credit costs should be taken into
consideration and not just the bad-debt loss. Nevertheless, the credit
problem is largely a bad-debt problem, because the amounts of losses
are not as predictable as the salaries of credit department personnel
or the rental of office space occupied. Credit losses are predicated
on business failures which result in insolvency.
An insolvency may be from causes external to the debtor himself,
such as floods or other acts of God affecting his assets or his market
area. But usually business failure lies in the individual himself.
In a study of underlying reasons for business failures for the year
ending June 30, 1953,^® Dun & Bradstreet, Inc., reported that forty per cent resulted frcm personal inexperience, fifty per cent from
incompetence, and five per cent from direct neglect "due to bad habits, poor health, marital difficulties, and the like"; fires, floods.
^Theodore N. Beckman and Robert Bartels, Credits and Collections in Theory and Practice (sixth edition; New York; McGraw-ttLll, 1955), p. 78. ^^Business Failures are Human Failures (New York; Dun & Bradstreeb, Inc., 1954), pp. 2-3. 11
burglary and similar "insurable” disasters caused about one per cent
to fail; while fraud, reflected by misleading names, false financial
statements, and irregular disposal of assets accounted for three and
one-half per cent, with reasons being unknown for the remaining frac
tion of failures studied. Every case examined in that study was said
to have gone back to "primary value," the intrinsic importance of the
individual and the necessity for sufficient planning, backing sutid 11 eaqjerience.
Thus, it seems apparent that effective credit management
is largely a matter of knowing one*s debtors, A credit manager has
available to him a variety of sources of information upon which to
pass judgment in making two decisions, namely, whether or not to
extend credit, and what limits to set as to the amount of credit
extended. He may have personal knowledge of the custcmer in ques
tion, have access to information from sales personnel, bankers,
attorneys, trade associations, interchange-bureau meetings of credit
groups or he may have a financial report from the customer himself.
Too, he may have access to rating books or special reports issued by mercantile agencies, either the general agency or a special agency in his industry. Although modern credit men employ scientific methods to select risks, the efficient credit manager is not neces
sarily one who specializes in low loss-ratios, but one who strikes a more profitable balance between maximizing sales and minimizing losses.
^ " A n American (un) Success Story," Rough Notes (November 30, 1953), pp. 1-3. l^Beckman, o^. cit.. p. 246, 12
The question appears as to why an efficient credit manager
would permit abnormal credit losses such as are within the province
of credit insurance. The answer lies in a consideration which is
often beyond the control or prognostication of both credit managers
and credit insurance executives, namely, the general economic condi
tions which produce business cycles and which have a bearing on bad-
debt losses. There would indeed be no place for credit insurance if
credit losses showed a steady trend, even though the losses were high.
It is reemphasized that it is not the basic function of credit insur
ance to control bad-debt losses, but to indemnify only in the area
of abnormal losses. Thus, more important for present purposes than
the amounts of losses are the fluctuations of business failures,
which to some extent reflect similar patterns of bad-debt losses.
The business failure rate per 10,000 concerns is shown for the
years 1906 to 1953 in Table I, and the fluctuations in this rate are
exhibited in Chart For purposes of the chart, a business failure
is considered to occur when a commercial or industrial enterprise is
involved in a voluntary or involuntary action which is likely to end
in loss to creditors. It is noted that there has been a marked fluc
tuation in the failure rate, which indicates a need for insurance
13 It should be noted at this point that failure rates are of more importance in this study than would be the total doUar-amounts of failure-liabilities in the economy. The number of commercial enterprises has varied from less than three million firms in 1932 to four million in 1952. Thus, "total failures" are of little meaning unless considered in relation to the number of firms in the economy. In contrast to this, the variation in failure rates illustrates the unpredictable nature of credit losses which provides a basis for insurance. Table I 13 CREDIT INSURANCE LOSSES AND THE BUSINESS FAILURE RATE (1906-1953) Credit Insurance Business Failure Year Loss Ratio* Rate (per 10.000 1906 4.54^ 77 1907 24.30 83 I9O8 57.10 108 1909 44.56 87 1910 60.00 84 1911 68.34 88 1912 73.47 100 1913 56.02 98 1914 47.60 118 1915 65.78 133 1916 23.24 100 - 1917 6.61 80 1918 10.28 59 1919 5.29 37 1920 18.93 48 1921 75.71 102 1922 93.15 120 1923 41.04 93 1924 46.60 100 1925 40.78 100 1926 39.24 101 1927 51.69 106 1928 55.86 109 1929 46.60 104 1930 81.70 122 1931 99.42 133 1932 95.40 154 1933 60.07 100 1934 16.37 61 1935 15.97 62 1936 13.08 48 1937 11.08 46 1938 70.34 61 1939 40.50 70 1940 23.77 63 1941 11.72 55 1942 6.18 45 1943 2.15 16 1944 Gain 2.75 7 1945 Gain 11.28 4 1946 Gain 10.22 5 1947 4 .5 9 14 1948 9.99 20 1949 7.78 34 1950 6.26 34 1951 5.77 31 1952 9 .6 5 29 1953 11.98 33 Sources; ^Unpublished reports. New York State Insurance Department, 1932-1954. ■iH^Coomercial Failures in an Era of Progress. 1900-1952. and revised data to 1954, Dun & Bradstreet, Inc. C h art A
Credit Insurance Losses and the Business Failure Rate (1906-1953) Credit Insurance Failures per Loss Ratios (Solid Line) 10,000 Concerns Per Cent iBroKen Line) ICO I— 150 90 Credit insurance Losses 140 80 130 120 70 60 100 Failure Rate 90 50 (Per 10,000 Concerns in . Business) 80 40 70 30 60 50 20 40 3 0 20
1910 1915 1920 1925 1930 1935 1940 1945 1950 Source : Table I 15
protection to stabilize cyclically credit losses of individual business
concerns. Firms which might require this protection are those with
insufficient amounts of working capital to withstand the shock of
excessive bad-debt losses in years when these losses were unusually
high. If well-managed, these firms could afford to increase their
credit expenditures in prosperous years, if they could be assured
thereby of a relatively stable bad-debt loss in periods of recession
and depression.
Further, credit insurance loss-ratios are compared with the
business failure rates, also in both Table I and Chart A. The loss-
ratios are relationships between the total premium volume of credit
insurance written and the total loss payments made by insurers to
policyholders, less salvage recovered by insurers.^ A definite cor
relation is found between the loss ratios of credit insurers and the
business failure rates. Throughout nearly a half-century in this
comparison, the timing and direction of changes in the two rates nearly
always coincided. However, it is further observed that credit insur
ance losses reached greater peaks and lower troughs than did the
failure rates. Losses were greater for credit insurers in times of
depression than was indicated by the failure rates, and insurers*
losses were lower in prosperity than the proportionate business failure rates. This suggests that sœne other more specific factor or factors
■^^hroughout this study, unless otherwise stated, these ratios are based on credit-insurance statistics for the combined v/ritings in the United States and Canada. 16 than simply the rate of business failures in the economy influences
credit insurance loss ratios, in spite of the fact that the ccmparison
indicates a close relationship between the two phenomena.
Of further significance is a comparison of credit insurance
loss ratios with the business failure rates for firms with liabilities of over $100,000, as shown in Table II and Chart B. These larger failures represent, to an actual or prospective insurer, the sizes of insolvencies that are likely to result in the excess losses which credit insurance is supposed to protect against, being mindful that insurers do not pretend to insure "normal" losses. On the one hand, when an insolvent debtor fails with liabilities of a few thousands of dollars, the loss is usually spread among a number of creditors, so that none will suffer with the loss of a very large amount. On the other hand, failures with liabilities of over $100,000 usually result in sizable bad-debt losses to individual creditors. In a comparison as provided in Chart B, between credit insurance loss ratios and the failure rates for liabilities of over $100,000, the correlation is found to be less than in the first chart. In only one of four periods of high credit insurance loss-ratios, 1932, was there evidence of a comparatively severe rate for large failures, although the timing and direction of change in the two rates were practically the same. There fore, from the statistics presented to this point, it may be reasonably assumed that credit insurance has not covered the large credit losses to the same extent that it has covered the small losses.
Further testimony to the fact that credit insurance is not serving as a stabilizing factor in the economy, to any appreciable Table II , I7 CREDIT INSURANCE LOSSES AND BUSINESS FAILURES OVER $100,000 (1906-1953) Ratio of Business Failures Credit Insurance over $100,000 to Year Loss Ratio* 10.000 C( 1906 k M 1.08 1907 24.30 2.0 7 I9O8 57.10 2.02 1909 44.56 1.65 1910 60.00 1 .7 2 1911 68.34 1.93 1912 73.47 1.7 6 1913 56.02 2.34 1914 47.60 2.47 1915 65.78 1 .9 8 1916 23.24 1.26 1917 6.61 1 .4 4 1918 10.28 1.35 1919 5.29 1.12 1920 18.93 2 .4 9 1921 75.71 4.53 1922 93.15 4.38 1923 41.04 3 .7 2 1924 46.60 3 .1 7 1925 40.78 2.80 1926 39.24 2.83 1927 51.69 3 .2 6 1928 55.86 3.13 1929 46.60 3.3 6 1930 81.70 4 .3 4 1931 99.42 4.9 6 1932 95.40 7.82 1933 60.07 4.99 1934 16.37 3 .3 9 1935 15.97 2 .7 9 1936 13.08 1.60 1937 11.08 1 .4 0 1938 70.34 1.35 1939 40.60 1 .0 7 1940 23.77 1.02 1941 11.72 .75 1942 6.18 .57 1943 2.15 .33 1944 Gain 2.75 .25 1945 Gain 11.28 .27 1946 Gain 10.22 .57 1947 4.59 1 .5 6 1948 9.99 1.58 1949 7.78 2.08 1950 6.26 1.6 5 1951 5.77 1.73 1952 9.65 2.08 1953 11.98 3 .1 1 Sources: *Table I. ^Vital Statistics of Industry and Commerce. 1900-19A5. and revised data to 1954, Dun & Bradstreet, Inc. Chart B Credit Insurance Losses Compared with Business Failures over ^100,000 Credit Insurance (1910-1953) Loss Ratios Failures over ^100,000 per 1 0 ,0 0 0 Concerns Per Cent (Broken Line)
100 Credit Insurance Losses
90 - 7 80 70 6 0
50
4 0 Failures over 100,000 (Per 10,000 Concerns in Business) 30 20
\->
19151910 1920 1925 1930 1935 1940 1945 I960
Source ' Table II 19
extent, is presented in Table III and Chart C. A comparison is made
therein between the premium volume of credit insurauice and the rates
of business failures over $100,000. There is readily found a surpris
ingly close inverse relationship between the two groups of data. The
volume of credit insurance was generally low when the rate of large
failures was high, and vice versa. The fact could derive from the
unwillingness of businessmen to assume the burden of credit insurance
premiums in recessionary periods when they actually have most need for
protection of receivables, or it could othei-wise result from more
cyclical selection of risks by insurers when they foresee slumps in
the economy. But regardless of the cause, the tendency for credit
insurance volume to decrease when the larger and more significant
business failures increased, argues against any pretense that credit
insurance has had any significant effect in stabilizing the American
economy.
The number of credit insurance policies in force in the United
States and Canada, in 1954, is estimated at about 3,000. The average
premium size of a policy is about $2,300. The annual premium volume
is currently over eight million dollars for all ccanpanies, as shown
in Appendix: J. Table IV and Chart D provide a comparison between the
trends of credit insurance premium volume and the gross national prod uct, starting at a common point in 1914, at a time when credit insur
ance had passed through a period of infancy. After lagging behind the groxifth in gross national product in the second decade of the 1900»s,
credit insurance volume surpassed the growth of the economy during the
1920»s and 1930»s. However, it has dropped behind the gross national Table III 20
CREDIT INSURANCE VOLUME AND THE RATE OF BUSINESS FAILURES OVER $100,000 (1910-1953) Credit Insurance Business Failures over $100,000 Year Premium Volume^*" per 10.000 Concerns** 1910 $ 1,136,610 1 .7 2 1911 1,187,495 1.93 1912 1,101,643 1 .7 6 1913 1,076,106 2 .3 4 1914 1,064,494 2 .4 7 1915 1,014,433 1.98 1916 1,041,192 1 .2 6 1917 1 ,252,310 1.44 1918 1,393,180 1.3 5 1919 1 ,649,469 1.12 1920 3,100,802 2 .4 9 1921 3,175.280 4.53 1922 2 ,753,673 4.38 1923 2,729,283 3 .7 2 1924 3 ,047,909 3 .1 7 1925 3,282,463 2.80 1926 3 ,279,349 2.83 1927 3,238,594 3.26 1928 3 ,204,545 3 .1 3 1929 3 ,462,317 3.36 1930 3,574,173 4 .3 4 1931 2,987,038 4 .9 6 1932 2 ,561,770 7.82 1933 1,890,800 4 .9 9 1934 1,889,192 3 .3 9 1935 2 ,075,655 2.79 1936 2 ,292,900 1 .7 0 1937 3,208,665 1 .4 0 1938 2,858,099 1.3 5 1939 2,706,269 1 .0 7 1940 2,858,198 1.02 1941 3 ,294,593 .75 1942 3,883,216 .57 1943 4 ,470,747 .33 1944 4,631,871 .25 1945 4 ,103,430 .27 1946 3,986,993 .57 1947 5,560,438 1.5 6 1948 6,191,686 1.58 1949 6,354,410 2.08 1950 6,391,352 1.65 1951 7 ,156,521 1.73 1952 7 ,362,113 2.08 1953 8 ,074,236 3 .1 1 Sources: *Frank Montesani, Examination. Credit Insurance Writing Com panies. New York State Insurance Department, 1945, p* 58, and Best*s Insurance Reports. Fire and Casualty. 1946, 1954. ^ a b l e II. Chart C Fluctuations in Credit Insurance Volume Compared with the Rate of Business Failures over ^100,000 Credit Insurance Premiums (1910 1953) Failures over^ 0 0 ,0 0 0 in Millions of Dollars per 10,000 Concerns (Solid Line) (Broken Line) 8
7
6
5
4
3 - ^ Failures over 100,000^ 3 (Per 10,000 Concerns In Business) f 2 -
I Credit Insurance Volume 0 1910 1915 1920 1925 1930 1935 1940 1945 1950 Source. T ab lein to H Table IV 22 GROWTH IN CREDIT INSURANCE PRM^EUM VOLUME COMPARED WITH GROSS NATIONAL PRODUCT in Constant (1939) Dollars (1914-1953)
Year Volume* (1939 dollars) (billions of 193 1914 # 1,479,647 53.4 1915 1,399,918 53.0 1916 1,332,727 58.7 1917 1,365,018 60.0 1918 1 ,295,657 65.6 1919 1,336,069 65.6 1920 2 ,139,553 50.9 1921 2,476,718 56.2 1922 2,285,549 62.3 1923 2,238,012 69.9 1924 2,499,285 69 .4 1925 2,625,970 74.8 1926 2,590,685 79.1 1927 2,623,261 79.3 1928 2 ,627,727 80.5 1929 2,019,100 85.9 1930 3 ,002,305 78.1 1931 2,777,945 72.3 1932 2 ,613,005 61.6 1933 2 ,042,064 61.5 1934 1,964,760 67.9 1935 2,096,412 73.9 1936 2 ,292,900 83.9 1937 3 ,112,405 87.9 1938 2,829,518 84.0 1939 2,706,269 91.3 1940 2,829,616 100.0 1941 3 ,129,863 115.5 1942 3 ,339,566 129.7 1943 3,576,598 145.7 1944 3 ,659,178 156.9 1945 3,200,675 153.4 1946 2,830,765 138.4 1947 3 ,447,472 138.6 1948 3,529,261 143.5 1949 3,749,102 144.0 1950 3 ,579,157 154.3 1951 3 ,792,957 174.0 1952 3,828,299 180.0 1953 4,198,603 189.7 Sources: *Table III, adjusted to 1939 dollars by price level of the Department of Commerce, •^National Income. Supplement to Survey of Current Business. 1951 ed., p. 146, and 1954 ed., p. 216. Chart D Credit Insurance Premium Volume Growth in Credit Insurance Premium Volume G.N.P in in Millions Compared with Gross National Product Billions of Dollars in Constant (1939) Dollars of Dollars (Solid Line] (Broken Line) 5 200 Gross National Product [ in 1939 Dollars 4 150 Credit Insurance Premium Volume in 1939 Dollars 3 100
2
50
O '— '— '— '— L. 1915 1920 1925 1930 1935 1940 1945 1950 Source ' Table Dt
ro kjO 24
product in the 1940*5 and early 1950*s, and today is lower in relation
to the production of goods and services in the economy than it was in
1914.
Although the increase in credit insurance volume has failed, in
recent years, to keep abreast of the growth in our economy as evidenced
by the gross national product, so has the volume of all casualty lines
of insurance. Yet, as shown in Table V and Chart E, credit insurance has kept pace during the past half-century with the volume of all
casualty insurances as a group.
Limitations to Usage of Credit Insurance
Generally, the basic reasons for employment of credit insurance must be to serve one of two basic considerations, if its use is to be justified: either it must serve as a real protection against excess credit losses, which would endanger a firm*s working capital position; or its use must result in added profits by lowering credit losses or increasing profitable sales. Of course, in either case, the cost of credit insurance may be too high to warrant its usage. Furthermore, competition is provided to some extent for credit insurers by factors, collection agencies, credit interchange bureaus, and the mercantile agencies upon whose ratings credit insurance is based. Only the most significant competitor, the factor, will be discussed further at this point,
Factoring provides the main competition for credit insurers.
The volume of factoring is localized in the textile industry, but it is considerably greater than that of credit insurance. It is difficult 25
Table V
CREDIT INSURANCE PREMIUM VOLUME COMPARED WITH THE VOLUME OF ALL CASUALTY LINES (1934-1953)
Volume of all Credit Insurance Casualty Lines-*H^ Year Premium Volume* (in thousands of dollars)
1934 $ 1,889,192 806,235 1935 2,075,655 866,374 1936 2 ,292,900 980,972 1937 3,208,665 1,100,175 1938 2,858,099 1,079,275 1939 2 ,706,269 1,117,009 1940 2,858,198 1,206,423 1941 3,294,593 1,412,973 1942 3,883,216 1,594,078 1943 4 ,470,747 1 ,629,777 1944 4 ,631,871 1,770,877 1945 4,103,430 1 ,933,724 1946 3,986,993 2,186,490 1947 5,560,438 2,863,533 1948 6 ,191,686 3 ,340,966 1949 6,354,410 3,666,376 1950 6,391,352 3 ,977,725 1951 7 ,146,521 4,458,101 1952 7,362,113 5,121,593 1953 8 ,074,236 5,518,206
Sources: *Table III. **Best*s Aggregates and Averages. 1950 and 1954. 26
Chart E
Trend of Credit Insurance Premium Volume Compared with the Volume of all Casualty Lines (1935-1953)
Credit Insurance Premiums Casualty Premiums in In Millions of Dollars Billions of Dollars (Solid Li ne ) (Broken Line )
/- Credit Insurance Premium Volume
All Casualty Lines
O 1935 1940 1945 1950 Source Table 3ZZ 27 to make a comparison of the two methods of transferring the risks of credit losses, because of differences in services offered. A factor advances funds immediately upon the assignment of accounts to him, while credit insurance companies charge a pranium in advance of a policy and usually do not ranit loss payments until months after a covered bad-debt loss. Further, a factor performs much of the work of a credit department for a concern, whereas credit insurance may require additional record-keeping of a client. The cost of factoring is most often around one and one-half or two per cent of invoices remitted,which seems much higher than the often-quoted cost of credit insurance as one-twentieth of one per cent of sales. However, when consideration is given to the use of funds provided by factors and the limited probability of recovering bad-debt losses under credit- insurance policies, it may be that factoring costs are less for similar services provided. This study will clarify to a greater extent the cost of credit insurance.
Improvements in communications, and other technological advances in obtaining and forwarding credit information, have lessened the need for credit insurance. Improved data for credit evaluations have also resulted fron the trend in modern business to share information. The
National Association of Credit Men has done much to bring about reforms in credit granting, based on more accurate data and scientific ap praisal. Scholars and practitioners in the field of credits and
^^Beckman, op. cit.. p. 199. 28
collections have helped to increase its efficiency. Thus the avail
ability of increasingly better means of credit appraisal may well be
a consideration that has retarded the growth of credit insurance.
Among other conditions responsible for the limited usage of
credit insurance is the narrow range within which the coverage applies,
as is explained in the next chapter, as well as the complexity of the
insurance contract. These limitations upon the applicability of insur
ance to credit problons may be necessary, because of the tendency on
the part of some subscribers to attempt "adverse selection" against
insurers. However, it is difficult to find justification for the
complex provisions of the insurance contract, which requires that
agent-salesmen be trained specialists, of whom a limited number are
necessarily available. The availability of agents is thus limited to
persons specializing in this one type of insurance, so that the wider market canvassed by general casualty agents is not solicited for
credit insurance.
Nevertheless, more accurately described as the causal factor for the small volume of credit insurance is the limited need for the service offered, in relation to the cost. It must be understood at this point, and it will be clarified later, that the credit insurers do not as a practice write single-debtor coverage, except when general coverage of all, or most, accounts of a debtor are insured. It is readily obvious that businesses having a large number of accounts of similar size have self-insurance if there is diversification geographi cally or industrially. As has been previously shown,the failures
^^The causes of business failures are discussed on p. 10. 29
due to floods or other Acts of God which plight a localized area are remote. Too, there is no need for insurance when a business has only
small amounts of money on individual accounts, regardless of the number of accounts. Neither is there danger to working capital when a firm is very heavily financed with that capital so that it can afford to self-insure. There is little justification for credit insurance where terms of sale are for short periods, as a week or ten days. The same applies when all or most of the customers of a business are rated
"AAA-1," without any one or a few of the accounts being of unusually large size. Concerns dealing only vd.th the federal Government would have no need for credit insurance, nor would those dealing only with cash sales, consignment sales, conditional sales, or other guaranteed sales. Those dealing only locally, who know their customers intimately, have little need for insurance. When consideration is further given to firms not eligible for credit insurance because the business or the industry is uninsurable, either regularly or at a specific time due to the vagaries of insurers in selecting risks, the field of justifiable prospects narrows down to a limited percentage of firms.
There is strong sentiment in credit insurance circles to the effect that credit men are unfriendly toward credit insurance, thus reducing credit insurance volume. It is said that the typical credit manager feels that credit insurance weakens his position of importance with his firm. This argument is discussed at length in Chapter IV.
A very significant reason for the lack of growth of credit insurance is the complacency of the present companies, due to excellent 30 profit positions and lack of competition. As is shown, there are two
"competitors" but little competition, because of similar provisions and rates and because of the nature of policies which are explained later.
There is little incentive for expansion of credit insurance as such, while the insurers are enjoying expansion of their capital and surplus, along with good dividends.
Regulation of Credit Insurers
Prior to 1944, credit insurance, like all insurance, was not subject to the federal anti-trust laws, because insurance was not considered as commerce by the courts until the South-Sastern Under writers ♦ decision by the Supreme Court that year.^^ Then in 1945,
Public Law 15 was enacted by the 79th Congress, which decreed that the federal statutes shall be applicable to the business of insurance to the extent that such business is not regulated by state law.^^
There is no rate-making bureau for credit insurance, because only the American Credit Indemnity Company of New York and the London Guaran tee and Accident Company, Ltd., write this type of insurance. The credit insurance companies thus file independently, but with apparently identical rates, with the New York State Insurance Department. Both companies are subject to the laws of the State of New York, which require examinations every three years concerning only the financial conditions of the companies, to determine whether or not they have
^"^Williara R. Vance, Handbook on the Law of Insur^ce (third edition; St. Paul, Minnesota: West Publishing Co.7^1951), p. 36. *1 ^ Ibid.. p. 40. 31
adequate capital and surplus to pay potential claims. There is no
similar requirement that rating examinations be held at regular inter
vals, but only that the rates be examined at the option of the New York
State Superintendent of Insurance. He may invite participation on a
zonal-examination basis by the insurance departments of other states
in which the credit insurance companies operate. As far as can be
determined, only one examination of credit insurance rates has ever
been made, and that one was in 194$.
The New York Insurance Department has been handicapped by a lack
of statistics upon which to base judgments concerning credit insurance
rates. About 1941, the superintendent of insurance appointed the
London Guarantee and Accident Company, Ltd., to gather and file
statistics yearly for both companies. However, because of the war,
this insurer was allowed to discontinue the plan in about 1944. Then
in the latter 1940’s another effort was made in this direction, and
in 1950 the first of renewed combined statistics was filed, ivith the
American Credit Indemnity Company of New York acting as statistical
agent for the New York Insurance Department. These reports include
gross premiums and losses paid, less salvage collected during the year, by major lines of business, as shown in Appendix J. It is planned that after a number of years, the Insurance Department will have enough information concerning losses by industry to exercise effective control over rates, in spite of the small volume of credit insurance written and the cyclical nature of the losses.
In any rate-making procedure, the insurers try to compensate for uneven losses over the business cycles. In a recent comprehensive 32
study of credit risks, it was concluded that the greatest hazard facing
credit insurers is general economic depression. However, as was
further explained, credit insurers have available a range of imple-
mental methods to help control the cyclical risk. They may refuse to
cover total losses, "avoid altogether credit transactions of types
especially vulnerable to cyclical disturbances, and even contract
their insuring activities in times of actual or anticipated severe
general economic decline or depression.
Loss ratios for all recorded credit insurance history appesir as
Appendix J. It must be stated that competition and more liberal
provisions were a factor in previously high losses. Further, for a
short time after the purchase of the American Credit Indemnity Company of New York by the Commercial Credit Corporation in 1936, some retail accounts were insured. This practice proved disastrous for the company and was discontinued. Exact dates are not available, but it is believed to be reflected in the high loss ratios following 1937, which would thus not be due entirely to the normal insuring of accounts of wholesalers and manufacturers.^^
^^Donald W. 0*Connell, "The Insurability of Credit Risks" (unpublished Doctoral dissertation, Colimbia University, Department of Political Science, New York, 1953), pp. 151, 309.
20This ejqjerience was related by a credit insurance executive in an interview. PI •^Most of the information used in this section concerning credit- insurance regulation was gained from interviews with J. F. Collins, Chief of Rating Bureau, New York State Insurance Department, New York, New York. 33
Methodology of the Investigation
A firm intent that the facts would be presented without bias
has been of grave concern in this study, but there has been no compul
sion to confine thinking to the limits of the observed facts. The
investigation was started with a survey of related literature, which
was found to be negligible and inconclusive. Most of the material
discovered had been written or influenced by persons professionally
interested in credit insurance frœi the insurance company viewpoint.
No previous detailed study was found which investigated the subject
primarily from the policyholder♦s point of view. As a starting point
for this present study, it was assumed that the credit risk is insur
able, and that there is need for this type of insurance.
^ design, only enough descriptive data has been included to
give the reader an insight into the provisions and workings of credit
insurance. No facts have been intentionally withheld. If any matter
of pertinence does not appear in this study, it is because it was not
discovered in a long and tedious examination of the subject. A supreme
effort has been made to state findings in a manner that will be fair to both sides of the discussion, even if they are in disagreanent.
The source of data used in the analysis is described to the extent practicable. The approach to the topic is mainly anpirical and analytical, with the findings based almost entirely upon original research. The inductive method is primarily followed in this investi gation. Only minimal attention is given to the historical aspect of credit insurance, because it seems to offer little help in evaluation. 34
Since an analysis of the credit insurance experience of all
policyholders would have been prohibitively expensive, even though
extensive research seemed desirable, a representative area was selected
for intensive study. Policyholders studied are located in the South western section of the State of Ohio, which is prominent for its
diversification of industry. This area includes the counties of
Hamilton, Warren, Butler, and Greene, and the leading cities are
Cincinnati and Dayton. Cincinnati is the largest noncoastal city in
the United States, and is a wholesale trading center for the area of
Southern Ohio, Kentucky, Southern Indiana, and parts of Virginia and
West Virginia. Both of the credit insurance companies have had offices in Cincinnati for nearly half a century.
The research was divided into three parts, to determine the
experience, in the first place, of firms now using credit insurance,
secondly, of firms which had discontinued the use of this insurance, and thirdly, of the larger group of firms which had never insured accounts receivable. Data so gathered have been analyzed and inter preted to reach conclusions concerning the possible value of credit insurance, the reasons for use or non-use by business concerns, pos sible means of improving the insurance of accounts receivable, and the best method of utilizing this service.
Personal interviews were conducted with the officials responsible for supervising the use of credit insurance in known policyholder firms.
This method was also used to glean information concerning the use of credit insurance from businessmen who no longer insure. Mailed ques tionnaires were employed to reach a large sample of firms which had 35
never insured accounts receivable. This latter technique also pro
vided information from the first two groups, but to a much more
limited extent than did personal contact and study of records. Inter
views were also held with credit insurance executives, both present
and past, in the home offices of both companies and with agents in
the field. Personal correspondence with persons active in the credit
insurance field has produced much information on the topic. Further
insight has been gained from personal interview and correspondence
with officials of the New York State Insurance Department.
Procedure Unployed in Mailing Questionnaires
Although the material gained by questionnaire is by no means
the most important evidence considered in the study, the techniques
used in obtaining that part of the information deserve special descrip
tion because of the variations in methods commonly surrounding the
employment of questionnaires. It is believed that, if opinion is
recognized as such and the results are carefully interpreted, credit
insurance is a legitimate field of investigation for a questionnaire.
It should be remembered that opinions and attitudes are facts insofar as the responses are typical of individuals. These facts of opinion are different frcm opinions about facts, which are frequently untrust worthy.^^ They represent the learnings or attitudes of persons, whether rightly or wrongly, and that was the reason for including them in this study. In this phase qf the study, it was determined to learn
22carter V. Good and Douglas E. Scates. Methods of Research. Educational. Psychological. Sociological (New York; Appleton-Gentury- Grofts, Inc., 1954), p. 920. 36 why some executives insure their accounts receivable and why others do not.
It was realized that if the questionnaires were perfect from one aspect, they possibly would be othervâse when viewed from another point. If technically precise, they would have been too exacting to be understood by all the addressees. It was felt that there would be no profit in having theoretically perfect questionnaires if persons did not respond to them. Further, they had to be attractive, and above all an attanpt was made to ask questions that would be answered tiuithfully. Sane questions were included to give an opportunity for comment, and some to give a person who was answering "yes or no" an opportunity to answer from the opposite viewpoint. The questions were asked so as to allay suspicion on the part of recipients as to any hidden purpose in the questionnaire. Signatures were not solicited in hope that questions would be answered frankly. Thus, a compromise was sought between all the positions of the persons who would respond to the questionnaires. Finally, the criticisms of qualified persons were secured before the final forms of the questionnaires were prepared for mailing.
The mailing was limited to firms doing business in Southwest
Ohio. The sample was chosen so as to include firms that were consid ered to be the most likely prospects for credit insurance among a~i i industries that were eligible for credit insurance. There would have
^^The questionnaires and letters of transmittal are shown as Appendixes B, C, D, and E. 37 been no point in getting opinions about the usage or non-usage of
credit insurance from firms that were ineligible or unlikely prospects for it. Conversely, the answers of the eligible firms that were the most likely prospects for the insurance would also know more about credit insurance. Thus, firms which were known to fall into the following categories were eliminated from consideration:
(a) Those selling for cash or on terms of ten days or less.
(b) Those having only very small individual accounts.
(c) Those selling only to the U. S, Government.
(d) Firms selling only locally, with many accounts.
(e) Those selling only on a basis of consignment, condi tional sales contracts, or chattel mortgages.
(f) Firms with very strong working-capital positions.
The sample was further selected to include all eligible indus tries and types of businesses, and in about the same proportion as presently insured firms with regard to size categories and whether manufacturers or wholesalers. About one-third of the insured firms are wholesalers and approximately two-thirds are manufacturers. The size of firms insured varies frcm the largest in some industries to small firms. However, the medium-sized group of businesses constitutes the majority of insured.
It was desired to send an equal number of two different
^^Information about the above listed conditions for all firms in the area was gained from interviews with businessmen who had personal knowledge in these matters. The sample was selected from business organizations appearing in the city directories, the Ohio Directory of Manufacturers, telephone listings, and directories and office files of the local Chambers of Commerce. 38
questionnaires personally addressed to credit managers and to presi
dents of firms, as is explained in a later paragraph. Therefore, the
names of these executives were then sought fran city directories,
credit association rosters, and by telephone calls to the firms. In
a number of cases it was learned that either a firm did not have a
credit manager, or that the president assumed that role in addition to
other duties. Consequently, I50 credit managers and an equal number
of presidents were sent questionnaires without one being mailed to an
opposite executive in the same firm. Accordingly, the mailing list
included 65O firms, of which 350 firms appeared for both a credit
manager»s questionnaire and a présidentes questionnaire. This further
meant that 500 three-page questionnaires were mailed to credit managers,
and another 5OO two-page questionnaires were mailed to presidents of
firms. That number was used primarily because it gave nearly complete
coverage of firms considered to be prospects for credit insurance in
the test area, and secondly, because it was a convenient round number.
The procedure of sending questionnaires to the two different
officials of the same firms was prompted by a desire to have the ideas
of persons on both sides of the credit insurance discussion. Leading
proponents have expressed the opinion that credit managers are biased
against credit insurance in the belief that it lessens the importance
of their jobs, with possible loss of prestige and pay. Thus, they
preferred that the questionnaires go to senior executives, but they made the reservation that the senior executives would in many cases
send the questionnaires on to their credit managers for completion.
In order to preclude this occurrence, the mailing went first to credit 39
managers, and secondly to presidents, with the explanation that inde
pendent answers were desired apart from the views of the credit
managers, which "in many cases are different," and that the credit
manager might already have received a questionnaire. Conversely,
information was not solicited solely from presidents, because persons
rejecting credit insurance pointed out that the presidents would not
likely be as well informed in the matter as would credit managers,
whose views they thought should be given primary consideration. There
fore, an equal number of questionnaires was sent to each group.
The credit manager*s questionnaire was mailed first because
there was little likelihood of him asking the president for help in
answering it. However, the reverse situation was believed to be a
distinct possibility, that the president would ask the credit manager
for ideas about credit insurance, if iiis questionnaire had been received before the credit manager’s. Thus an interval of a week was allowed between questionnaires, in the hope that presidents, upon learning that credit managers had previously completed questionnaires, would give their own independent ideas about the topic.
A stamped, self-addressed return envelope was enclosed with each questionnaire mailed, in the hope of encouraging response. But to preclude the forcing of answers, no follow-up whatever was made of the questionnaires. In the final analysis it was believed that to elicit greater returns by follow up, mail or telephone, would produce answers which would not be as reliable as those which were spontane ously offered. It was felt that the recipients who had replied without 40
special urging were doing so in a conscientious spirit, as well as one
of generosity or helpfulness. The bias of non response is not of
consequence in this study because of the very large and complete sample
mailed, and the response received.This was further ruled out by
checking returns as they were received. It was found that there was
no significant difference between the answers to the first fifty ques
tionnaires returned and subsequent answers. Finally, a check was made
which showed that the answers to different questions within the ques
tionnaires were consistent, and the comments written were in line
with the summarizing category of answers.
The process of reaching conclusions frcan the questionnaires was
by statistical inference, even though it was realized that a problem
existed in the study of detailed subclassifications, because of the
small number of cases. Yet, this may have been offset by purposive
selection of individual firms for the sample, on the basis of the most
logical prospects for credit insurance. Finally, information from the sources as discussed was classified and interpreted, and conclu sions were drawn from analyses of the facts revealed.
25 ^Completed questionnaires were returned by 134 credit managers and 162 presidents of firms. Thus, response equalled thirty per cent of questionnaires mailed, and represented forty per cent of firms on the mailing list. The difference is due to a higher return where only one executive of an individual firm was sent a questionnaire. CHAPTER II
HISTORICAL BACKGROUND AND PRESENT STATUS OF CREDIT INSURANCE
Although credit insurance is of early origin, it has only been
written on a continuing basis with noteworthy volume during the present
century. However, a review of the history of the indemnifying of
accounts receivable is undertaken to provide significant background material for an evaluation of the present methods of credit insurers.
Early Development
The first recorded project for credit insurance was in England
at the time of the South Sea Bubble, during the years 1711 to 1?29.
Later, at the time of the Seven Years' War (1756-63) it is said that a
scheme of credit insurance was submitted to King Frederic the Great by an ancestor of the Mendelsohn family of banking fame.^ A brochure was published in Leghorn, Italy, in 1839, which explained "a theory that 2 the principle of insurance can be applied to losses by failure." A mutual ccanpany insuring against the insolvency of debtors appeared in
Paris as early as 1842, and an incorporated joint stock ccanpany in 1845.
The existence of both ccmpanies was brief.3 Further reports show that short-lived credit insurance projects were instituted in England
^Wilhelm Berliner, "The Frontier of Credit Insurance," Insurance and Financial Chronicle (July 1, 1930), p. 2552. 2 H. Stanley Spain, Insurance and Financial Chronicle (May 15, 1928), p. 1848. (Quoted Mr. Lucien Vertongen from a lecture "recently given in Belgium.") ^H. J. Leman, "Credit Insurance," Encyclopaedia of the Social Sciences, pp. 557-560. 41 42 following periods of over-speculation and rapid business formation, after 1848, 1867, and 18?0.^ Thus the early credit insurance plans seem to have been developed in recessionary periods, and to have been unsuccessful.
Credit insurance was first written by a modern canpany in
Europe, when the London Guarantee and Accident Company, Ltd., started writing this insurance in the British Isles in 1869.^ However, most
European companies are of relatively recent origin. It was not until
1923 that a stable company appeared in France. In that year was activated the Mutual Insurance Society, L'Assurance Française de
Credit, writing both domestic and foreign insurance.^ Credit insurance plans were also post-war developments in the Netherlands, Belgium,
Spain, and Czechoslovakia. In Sweden, the Hansa established the first
Swedish credit insurance company in 1928, which was followed the next year by a second company specializing in that field of insurance.
Although dcanestic credit insurance was started in Europe, it had its earliest and most prcaninent development in the United States.^
The first mention of credit insurance in America appeared in a pamphlet written by William L. Haskins of New York City in 1837, and was titled,
"Consideration on the Project and Institute of a Guarantee Company on
^Berliner, loc. cit. ^Joseph T. Trapp, Credit Insurance. A Factor in Bank Lending (Baltimore: American Credit Indemnity Company, 1953), p. 5. ^Loman, op. cit.. pp. 557-560. 7 Bernard Stibel, The Insurance and Financial Chroniclm (July 1, 1930), pp. 25-59. g Loman, loc. cit. 43
a New Plan, With Seme General Views on Credit, Confidences, and Cur
rency." Mr. Haskins would have provided for the formation of a
company which would guarantee payment of notes, accounts, and other written obligations of corporations, individuals, or partnerships.
For guarantees he proposed a charge of one-fourth of one per cent per month as adequate remuneration. Mr. Haskins apparently hoped that his plan would relieve seme of the business failures caused by the panic of the 1820*s and 3 0 *s.9 There is no indication that Mr.
Haskins* plan was ever acted upon. It would have called for the formation of "a company called the New York Guarantee Company, capital ized at 110,000,000 and secured by real property.^® The purpose would have been, as it is now, to protect against excessive credit losses.
In spite of this early consideration, it was not until 1885 and 1886 that the legislatures of New York, New Jersey, and Louisiana authorized the incorporation of companies to issue policies, contracts or bonds of indemnity against losses of creditors,^ The first Ameri can Company, The American Credit Indannity Company of Louisiana was established in 1887, but was soon abandoned. The United States Credit
System, organized in 1888, operated for only a slightly longer period
^William L. Haskins, Considerations on the Pro.lect and Institu tion of a Guarantee Company, on a New Plan. With Some General Views on Credit. Confidence, and Currency (New York: D. Felt and Comnanv, Ï837), pp. 1-8.
^^Ibid.. pp. 1-8.
^Saul B. Ackerman and John J. Neuner, Credit Insurance (New York; The Ronald Press Company, 1924) • 44
of time and liquidated in 1894»^ L« Maybaum^3 of Newark wrote a
pamphlet in 1888 which served as a plan for the organization of the
United States Credit %rsteni Company. The pamphlet was published under
the title, ”A Novel Credit System.” Mr. Maybaum’s plan called for
use of the tontine plan,^ and he stated that ”no plan heretofore
(in credit insurance) has been discovered which makes the subscribers
of the company mutually interested to prevent losses.” Mr. Maybaum
proposed that insurance coverage be based on mercantile agency ratings
with the maximum coverage fixed on a per cent of the lowest capital
rating. Coinsurance did not appear in his plan, but primary loss
was figured as a percentage of sales, thus prescribing an excess
insurance.^^ In practice, 65O policies of $$,000 each made a total
of $3 *250,0 00 at risk to a series. The funds of one series could not
be used on another, unless a profit was made, in which event the profit
was applied against any deficit on prior series. The plan proved un
satisfactory and was discontinued by amending the charter granted by
New Jersey so that all funds could be applied against losses incurred.
12 John E. Beahn, A History of Credit Insurance (Baltimore: American Credit Indennity Compaiÿr of New York, 1948), p. 3»
l^Levy Maybaum, A Plan or System of Guarantee Against Loss by the Failure of Banks or Insurance Companies (Newark. New Jersey: W.H. Shurts, printer, 1889), pp. 1-3.
^Under the tontine plan a group of persons share certain benefits on such terms that upon the default of any members a part or all of the advantages enjoyed by him are distributed among the remain ing members. In the Maybaum plan, the risk of credit losses to indivi duals was lowered by spreading it among a group.
^%estfs Insurance Reports Vol. 41, No. 8 (New York: Alfred M. Best Company, December, 194w, pp. 654-655. 45
Further efforts were made to write credit insurance in 1891 by
the American Credit Indemnity Company of (New Orleans) Louisiana,
the American Credit Insurance Company, St. Paul, îlinnesota, and the
National Credit Insurance Company of î^ünneapolis, Minnesota. All three
companies were formed in that yeau*; however, the latter two discon
tinued operations in 1894* Those early policies, as today's, provided
for payment of premium and required the insured to sustain an agreed
percentage of loss before the insurer was liable. This percentage
has been termed variously, "initial loss," "normal loss," and "primary
loss." The meaning of insolvency under which the insurer would be
obligated was confined to that arising from bankruptcy, receivership,
absconding debtors with no assets, or an unsatisfied judgment.
The passage of the National Bankruptcy Act in 1898 gave the
insurers an opportunity to broaden the meaning of what constitutes a
condition of insolvency, and gave them more stability. The Act helped
prevent fraud and collusion by placing bankruptcy under federal control.
This brought more frequent claims within the terms of the credit
insurance policy, and served as an inducement to more general use of
the protection.Earlier policies insured only against the acccmi- plished legal fact of insolvency, and included only five of the twelve types of insolvency now currently covered.
In 1892 the Mercantile Credit Company of New York was established but was short lived, ending in 1897* This company had insured the
16f , E. Wolfe, Principles of Property Insurance (New York; Thomas Y. Crowell Company, 1930), p. 393* Ï^C. A. Kulp, Casualty Insurance (New York: The Ronald Press Conpany, 1928), pp. 485-6. 46
foreign accounts of manufacturers. In that same year, 1892, the
London Guarantee and Accident Company, Ltd. established a credit
insurance department in the United States, which is still in operation
under the laws of the State of New York. Coincidentally, the only
other current American credit insurance company. The American Credit
Indannity Company of New York, was organized the following year at
St. Louis, Missouri. This company was an outgrowth of the American
Credit Indemnity Company of New Orleans, and was organized for the
purpose of asauming the business of the other ccanpany.
Other firms, which sold credit insurance for a short period of
time prior to World War I, are as follows; In 1893 the Security Credit
Insurance Company of Chicago, Illinois, was organized but expired the
next year, 1894. In 1895, the Atlas Company of Boston, Massachusetts,
started writing in the business, but ended in 1898. Also in 1895
another English Company, The Ocean Accident and Guarantee Company,
Ltd., (London) New York, started writing credit insurance in the
United States, and continued in this business until 1933* The Credi
tors Guarantee Fund Association was established in 1899, and variously
sponsored for the few years of its existence by the Fidelity and
Deposit Company of Baltimore, the Mutual Mercantile Agency, New York,
the Fidelity and Casualty Company, New York, the Philadelphia Casualty
Company, and the Philadelphia Guarantee Company. It is not definitely
known when this association was dissolved. In 1904 the Credit Adjust ment Ccxnpany of Chicago was sponsored by the London Guarantee and
Accident Company, Ltd. A Palatine Insurance Company appears in the 47
literature of 1914, but no mention is made of its location or the
time it left the field.
After World War I, the National Surety Company of New York
started writing credit insurance in 1922, and wrote successfully until
1934, as is explained in a later paragraph. Then in 1924, the Southern
Surety Gompanj’’ of Des Moines, Iowa, was organized, but it left the
field in 192?. This latter company had guaranteed bank deposits,
and it was forced into insolvency by a million-dollar bank failure.
The American Credit Indemnity Company took over selected credit 19 insurance accounts from The Southern Surety Company. ^ The United
States Fidelity and Guarantee Company of Baltimore insured accounts
receivable for two years, from 1926 to 1928, The experience of this
company was unique in that an attempt was made to sell credit insurance
through regular agents selling other types of casualty insurance,
whereas the other firms used specialized agents. In 192? two more
companies appeared, the New Amsterdam Casualty Company of Baltimore
and the American Surety Company, both of which engaged to some extent
in credit insurance. In 1930, Lloyds of Chicago started insuring 20 clearing house reccmimendations, but discontinued this in 1932. This
insurer was in no way related to Lloyds of London.
Of the many firms that have written credit insurance in the
United States, only two remained after the great depression. One of
^®Beahn, op. cit.. pp. 3-4. l^This information was obtained from an interview with Mr. Jack Cohn, Special Agent for London Guarantee and Accident Co., Ltd., Cincinnati, Ohio. ^Oseahn, loc. cit. 48
these two absorbed the credit insurance business of the only two other
companies which had written credit insurance for any significant period
of time. The London Guarantee Company, Ltd. took over the business of
the Ocean Guarantee and Accident Company in 1933, and that of the
National Surety Ccmipany in 1934. In neither case was credit loss the
fundamental reason for failure, as is explained in the next paragraphs.
Aggressive management of the National Surety Company indirectly
caused the denise of the Ocean Guarantee and Accident Company. Trained
personnel are needed in credit insurance, and the National Surety under
writer gained needed agents by proselytized personnel from the Ocean
Company. The sales volume of the latter company decreased and in order
to keep premiums high, inexperienced management made lesser usage of
reinsurance facilities. Then a big account failed, which obligated
the insurer to a single loss payment of #2$0,000 and prompted the sale
of the credit insurance business. It has been reliably reported that
the policyholder who held the large account continued to insure with
the London company and has since paid in premiums more than the
$250,000 loss paid him.^^
The National Surety Company went into bankruptcy, not because
of unprofitable credit insurance business, but because of failures in
real estate mortgage guarantees. A new corporation took over the
good assets of the company, which left the claimants without recourse.
The Commercial Investment Trust Company bought the new company, but
^^his information was furnished by a credit insurance conçiany senior executive. 49
the trust company management was not experienced in credit insurance,
and sold the business to The London Guarantee and Accident Company,
Ltd,
The American Credit Indemnity Company of Hew York has been the leading credit underwriter in the United States for many years. Its president during crucial years, Mr, John F, McFadden, is the leading personality in American credit insurance. In 1922, the stockholders had planned to liquidate the company to realize a gain on their stock.
The then president, Mr, E, M, Treat, therefore found employment with the National Surety Company, and many of his agents followed him.
However, other agents were reluctant to attempt to transfer their accounts to another company. As a consequence, they had a meeting in
St, Louis and unanimously elected John F, McFadden, a Philadelphia agent who did not attend the meeting, to lead them in eui attempt to save their company. He was successful, and therewith became president of the company at the age of thirty-eight. He vigorously guided it through the depression years and its acquisition by the Commercial
Credit Corporation in 1936, until he retired because of age in 1952,
It is also of interest that the Chairman of the Board of the parent company had once been an employee of the American Credit Indemnity
Company,
Historical Data Concerning Contracts and Provisions of Credit Insurance
Insurers have operated as collection agencies for accounts turned in by policyholders since 1913,^^ This practice has enabled
22Beahn, loc. cit. 50 them to pay losses on iincollectible accounts which are filed within an allotted time, even though no technical insolvency occurs within the policy year. However, they may still collect salvage which accrues on those accounts, and retain all of it except the part due to a policy holder because of his coinsurance or uninsured portions of accounts.
They charge collection fees, with some exceptions which are explained in a later section of this study.
The first underwriting manual of credit insurance appeared in
I9I8 . This guide for agents gave primary loss rates for industries and quoted prsniums, but underwriting committees in the hcane offices of the insurers still considered each application for insurance.
Further, in 1922 the credit insurers cooperated in sharing loss sta tistics for the first time, in order to improve rate-making procedures.
In that year they also adopted a common manual of rates for the first time. Since 1934, rating manuals have been issued jointly by the
American Credit Indemnity Company of New York and the London Guaranty and Accident Company, Ltd.
The issuance of a manual tended to displace individual judgment as the sole factor in rate making. In the early years there was insuf ficient quantitative data on which to base credit insurance, so that rates had to be based on judgment. Through the years, experience has been gained by the individual companies, so as to provide some degree of a statistical basis for rates. And yet the number of insureds in any one year has been small in proportion to the total number of firms in the economy, as have been the insureds in any one industry. There fore, individual underwriting judgment is still a major reliant in 51
establishing credit insurance rates and approving policies.
From 1916 to 1922 an unlimited policy was written which guaran
teed collection of all accounts regardless of the aggregate amount of
losses. 23 In the latter year substantial losses were paid which caused
withdrawal of the plan. Since 1922, insurers have limited the maximum
amount for which they would be liable on any single account under a
policy.
From 1923 to 1953 insurers wrote policies which insured single
debtorsOn the contrary, at the present time insurers demand that
policies cover all the accounts of insureds, with the possible exclu
sion from coverage of some few accounts. Still, insurers may be will
ing to insure some accounts in amounts in excess of regular policy provisions, but only if all or most of the business of a policyholder is insured,
The "Approved Credit Risk" form of 1923 was the first individual debtor coverage offered. Under this form, policyholders would pay a minimum advance premium and then submit potential accounts to the insurer for approval or rejection. If approved, the premium amount would be deducted by the insurer from the policyholder's deposit, until it was absorbed, after which additional premium would be submitted with each account, This policy was discontinued in 1953, because insurers believed it resulted in selection of risks against them.
It should be emphasized that in the period preceding 1934,
23lbid,. p. 5. 24Actually, few single debtor types of policies have been written since 1951, 52
competition was very active in the credit insurance field. Companies
had adopted a common manual, but agents apparently quoted rates more
favorable to policyholders than those allowed by the manual and under
writers issued policies on the same basis. This practice caused one
company executive to write in 1933 that "the rates being quoted in
competition will live to plague us." He asked that uniform manuals,
policies, and riders be applied and that agents be notified to "stop
rate cutting, and other destructive methods, and restore this business
to a real one instead of a racket
Since 1934, there has been a noticeable lack of competition
between the tv/o companies which have been writing credit insurance in
the United States. Conversely, they appear to have cooperated in not
hiring each others* agents and in not making direct attempts to take
policyholders from each other. As was mentioned previously, these two
companies use the same basic manual, and have substantially similar
policy forms. Rather than quoting rates below the manual, the present
tendency is for insurers to quote higher than manual rates.
The Federal Trade Commission, apparently disturbed by the lack
of competition in the field, took action in 1954 to try to make credit
insurance underwriting more competitive. The manual had allowed back-
sales'^® coverage for a prior year only on a renewal policy. So for a
letter written by the president of a credit insurance com pany to the chief executive of another company in 1934, on file in the New York State Insurance Department. pZ "Back-Sales Coverage" refers to the insuring of sales made prior to the effective date of a policy, as is explained in a subse quent part of the present chapter. 53
policyholder to shift his business from one company to another would
mean sacrificing this back-coverage entitlement, which in effect gave
the insurer holding a policy a virtual monopoly on renewal business
with the policyholder. Under an agreement reached between government
officials and insurance company executives, the manual has been modi
fied so that the back-sales coverage will be allowed a policyholder
who renews a contract of credit insurance, even though the renewal
policy be with a different company than the one which wrote the
previous policy. It has not been clarified as to how the two companies
will settle common obligations which may arise if this plan is ever
used.
Contemporary American Companies
Of the two ccanpanies writing credit insurance in the United
States, only the American Credit Indemnity Company of New York insures
credits in Canada, where it is the only company that writes domestic
credit insurance. The other insurer, the London Guarantee and Accident
Co., Ltd., although a British corporation, does not write credit insur
ance other than in the United States. At home it writes fire, casualty
and life insurance. In this country its business is in casualty and
allied forms of coverage. Besides credit insurance, it writes policies
covering accident, health, liability, property damage, burglary, boiler,
and machinery. The American Credit Indannity Company of New York writes credit insurance exclusively, being the only ccanpany that does
so in the United States and Canada.
As was shown in the preceding discussion, both of these companies 54 have been in the credit insurance business in the United States for over sixty years, and neither insurer is independent of affiliations with other companies. The American Credit Indemnity Company has been owned and operated by the Ccanmercial Credit Company of Baltimore, a
Delaware Corporation, since the acquisition of its stock to the extent of 49,965 shares of 50,000 shares outstanding on a share for share
exchange basis in 1936. In 1940 the home office of the American credit insurer was moved from St. Louis to Baltimore, into the same building with the home offices of the Commercial Credit Company. The parent company is both a holding company and an operating company.
Its direct operations are mainly in the financing field, where it engages in installment financing, commercial loans, personal cash loans, and factoring. In the latter type of business it is in competi tion with its credit insurance subsidiary, as explained in a discussion of factoring in Chapter I. On the other hand, it is. possible for it to tie in loans with credit insurance and thus help its junior corpora tion. Other insurance companies owned include The Calvert Fire Insur ance Company, Baltimore, and the Cavalier Insurance Corporation, Balti more. In addition, the parent organization owns seven manufacturing companies engaged in extremely diverse production, ranging from meat packing to the manufacture of pipe fittings, roller and ball bearings and equipment, and printing machinery and presses.
The American Credit Indemnity Canpany has had a wholly owned subsidiary of its own since 1944, The American Health Insurance Company,
Baltimore, which writes accident, health, and hospital-surgical-medical expense insurance. Just as the Chairman of the Board of Commercial 55
Credit Ccanpany is Chairman of the Board of The American Credit Indannity
Company, the President of the latter is Chairman of the Board of The
American Health and Accident Insurance Company.
The London Guarantee and Accident Company, Ltd., has been, since
1922, owned by the Phoenix Assurance Company, Ltd., of London, a strong century and a half old institution. However, the London Company is operated as a separate organization. Companies with which it is allied as a member of the Phoenix of London group include the Columbia
Insurance Ccmipany of New York, The United Firemen*s Insurance Company of New York, The Phoenix Indemnity Company of New York, and The Union
Marine and General Insurance Company, Ltd., of Liverpool, which, early in I9I8 , purchased control of the Northern Maritime Insurance Company,
Ltd. A branch is maintained for the writing of general casualty and fire insurance in Canada. Since 1930 operations of the U. S. Branch have been conducted through a centralized management, which also con trols the activities of the closely affiliated Phoenix Indemnity Com pany and of the fire insurance companies associated with the group.
Most of the executive officers hold corresponding positions in each company.
The Phoenix Indemnity Company is actually a third company in the credit insurance field, in an insignificant way. A few policies have been witten in this company by the credit insurance agents of the
London Guarantee and Accident Company, but apparently only when a pros pective customer indicates reluctance to insure with the London Company because it is an obviously alien corporation. An inclination has been noticed on the part of some businessmen to associate the Phoenix 56
Company with the City in Arizona which bears that name. Only one policy is said to have been written in the name of the Phoenix Indem nity Company in 1953.
Both of the companies writing credit insurance have good manage ments, as evidenced by continued high ratings in reports of a reliable insurance investigator.^7 The London Ccmpany has a United States
Resident Manager, who resides in New York, and under him, a credit insurance branch manager. The American Credit Company has as its president and principal officers a group of executives who have been in the credit insurance business for many years. Both groups are well-trained in the credit insurance field. This line of insurance has been very profitable for both companies, although it is impossible to determine exact earnings on the credit insurance business alone of the London Company. Profits have been excellent in the American
Company, with the average underwriting profit equaling thirty-two and two-tenths per cent of earned premiums for the years 1945 to
1950. Loss ratios and expenses have been slightly lower for the London
Company, which appears to be somewhat more conservative in risks assumed than is the American Company. The latter has written approxi mately twice the premium volume of the London Company for many years, as may be evidenced in Appendix J hereto.
Both companies are subject to the laws governing New York cor porations. The American Credit Indemnity Company is incorporated under
27Best*s Insurance Reports. Fire and Casualty (1955 ed.) (New York: Alfred M. Best Company, 1955), pp. 45, 602. 57
the laws of New York State. Although the London Guarantee Company is
incorporated under the laws of the Kingdom of Great Britain, its United
States branch is established as an alien corporation operating under
the State of New York. Its funds, even those accrued through earnings,
are subject to withdrawal from the United States only with the consent
of the New York State Insurance Department.
The financial conditions of both of these companies are excel
lent, and they are capable of paying a U claims that might be expected
to be filed against them, with the possible exception of a sudden
general catastrophic depression. Both are well above the required
limit for doing such business in New York State, which requires capital
of $250,000 and additional surplus of fifty per cent, or $125,000.
Underwriting commitments are very conservative in relation to capital
and surplus funds. Business is widely distributed, with no unusually
large concentration in any segnent of industry. Excellent cash posi
tions are also maintained.
The London Company*s home office balance sheet as of December
31, 1952 showed capital paid in of 250,000 pounds sterling, net surplus of 2 ,079,249 pounds and assets of 13,628,498 pounds. The company is required to keep in trust, for the exclusive benefit of U. S. Branch policyholders and creditors, funds sufficient to cover liabilities and
statutory deposit requirements. Surplus of the United States Branch was $9,577,126 on December 31, 1953, and a voluntary reserve of
$774,290 was maintained. As of December 13, 1953 its funds were in trust with Guaranty Trust Company, its United States trustee, or deposited with state insurance departments in the amount of $21,654,338, 58 equal to sixty-four per cent of its United States Branch assets and ninety-eight per cent of outstanding liabilities.
The American Credit Ccanpany had on December 31, 1953, capital paid in of $1 ,500,000, net surplus of 18,196,477, voluntary reserves of $335,013, and total assets of over fifteen million dollars. This was after the payment in 1953 of $1 ,250,000 in dii/idends, which was the largest such payment in the company» s history. The capital stock of the American Health Insurance Corporation, at $720,027, accounts for seventy per cent of the amount invested in equity holdings by the parent credit insurance company.
The London Company has not shown any signs of financial weakness.
The American Ccxnpany has also had sufficient funds with which to pay all proved claims against it throughout its history. The latter has been forced, however, to reduce its capital on two occasions. In 1909, the company was examined by the New York and Massachusetts Insurance
Departments and its capital was found to be impaired, due to unusual losses following the panic of 1907 and a requirement for increased reserves. The capital was reduced from $1,000,000 to #350,000. Again in 1932 it was necessary for the company to get permission from the
New York Insurance Department to reduce capital, this time from
#1,000,000 to #400,000.
There is little difference in the agency systems of the two companies. They both maintain branch offices in the principal cities of the United States, and the American Ccmpany has offices in several cities of Canada. They both use specialized agents, who devote their 59
entire time to the credit insurance business. The local credit insur
ance offices of the London Company, however, are usually maintained at
the expense of the general agent under whose name the local insurance
agency often appears. These agents are thus given a higher commission
than accrues to the American Company agents, whose ccmpany pays local
office expenses and maintains the agency in its name. The London Com
pany sells a greater part of its volume through insurance brokers than
does the American Company. The brokerage fee is usually five per cent
of the agent»s commission, which is twenty to twenty-five per cent of
premiums.
The American Company has fifteen managers, twenty general agents,
and seventy-five special agents. The London Company has only thirteen
general agents and an undisclosed number of special agents. All appli cations for credit insurance are submitted to the executive offices in Baltimore and New York, respectively, of the two companies. In the first company, the approval must be given by an "Officers Underwriting
Committee," consisting of the president, the executive vice president, the vice president in charge of underwriting, the vice president in charge of adjustments, the vice president in charge of service depart ments, the vice president in charge of the approved credit risk depart ment, the secretary, the treasurer, and the controller. Assistant vice presidents, assistant secretaries and assistant treasurers, or other officers designated by the Board of Directors, may also serve in this capacity in the absence of or at the request of members of the Under- ivriting Committee. 60 The American Company is licensed in all states except Arizona,
Idaho, Montana, Nevada, New Mexico, South Dakota, Vermont and ^iQroming, and is also licensed in Alberta, British Columbia, Ontario and Quebec.
It is possible to give a breakdown by states of the volume of the
American Company, because it writes credit insurance exclusively.
Direct premiums writings in 1953 were distributed in thousands of dollars as follows; Alabama 55 Arkansas 50 California 224 Connecticut 103 Delaware 12 District of Columbia 24 Florida 15 Georgia 75 Illinois 515 Indiana 202 Iowa 38 Kansas 81 Kentucky 70 Louisana 74 Maryland 202 Massachusetts 318 Michigan 216 Minnesota 80 Mississippi 33 Missouri 69 Nebraska 11 New Hampshire 17 New Jersey 137 New York 1,121 North Carolina 53 Ohio 275 Oklahoma 18 Oregon 58 Pennsylvania 692 Rhode Island 34 South Carolina 8 Tennessee 174 Texas 82 Utah 19 Virginia 67 Washington 6 West Virginia 44 Wisconsin 149 Canada 406 6 1
Both companies have credit reinsurance treaties with the same three underwriters, the North American Casualty and Surety Reinsurance
Corporation, New York City, the Einployers Reinsurance Corporation of
Kansas City, and the General Reinsurance Corporation. The American
Company has automatic reinsurance contracts covering credit insurance risks from $75,000 to $1,000,000, with cedings ranging from eight per cent to twenty-five per cent to each of the three companies. Addi tional coverage is afforded by the same reinsurers on an option basis for risks from #50,000 to #75,000, and on a facultative basis for any excess over $1,000,000.28 The laondon Company regularly reinsures a greater proportion of its risks than does the American Campemy. In recent years losses on the amounts reinsured, compared with those on risks retained by the original underwriters, are of about the same gravity as those assumed. Previously, it seemed that the better grades of risks were taken by the reinsurers.29
The similarity between the companies applies to their policies and manuals, as was suggested in Chapter I. In fact, differences are more obvious than real, and minor in any event. Sometimes it appears that a difference exists, to learn later that a change of policy had been enacted by agents in one company before the agents in the other company were notified of the change. What appears as "Condition 3” in
28t o cede means to transfer by reinsurance all or part of one*s liability as insurer. An option basis implies the choice of an insurer in determining whether or not to reinsure certain accounts, and a facultative basis gives the right of decision to the reinsurer. 29The material in the preceding section was taken from Best*s Insurance Reports. Fire and Casualty. 1934 to 1954. 62 the ”N" policy of the American Company, appears as “Condition 4" in the same policy form of the London Company, and vice versa. Only one noteworthy difference in provisions has been found. That is in the provision for an extra ten per cent of coinsurance for accounts covered under the “straight” back sales rider, which both companies make it a practice to include on all standard renewal policies. However, the
London Company provides that the additional coinsurance will be charged on all accounts that were past due on the first day of the policy, whereas the American Company rider only requires the additional ten per cent coinsurance on accounts that are more than ninety days past due on the first day of the new policy. Another difference at the time of writing is that the American Company will not insure third grade credits under the insurance clause of an “K“ policy, whereas the London Company will do so. This would mean ten per cent coinsur ance on third grade credits, rather than twenty per cent where they are covered only by special riders to the policy. However, it may be that the change has not yet been promulgated by the London Company.
Although there is no rating bureau for credit insurance, the companies file the same rates in unison, as was stated in Chapter I.
This further prompts a similarity in policy provisions, lest one ccm- pany enjoy a competitive advantage over the other. Both companies use a Standard Manual, but neither make it a practice to grant the full extent of concessions allowed by the manual. Much depends upon individual underwriting judgment in particular circumstances, and the manual has escape clauses to allow adjustment in rates upward. 63
Extent of Current Coverage
Seme knowledge of the contractual basis of credit insurance is needed for an understanding of policy forms. Credit insurance coverage begins at the time of transfer of title to merchandise. This is usually the date of shipnent, but there must be two other conditions present, namely a bona fide sale and delivery, in order for the passing 30 of title to be binding under the terms of a credit insurance policy.^
This is of further importance to a credit insurance policyholder, inas much as the credit rating of a debtor at the time of transfer of title governs, in most cases, coverage under the insurance contract. For example, a debtor may at the time of sale have a rating that indicates coverage under an insurance contract, but if the rating should be changed before the transfer of title, the shipment may not be covered.
Credit insurance coverages are based on the ratings of recognized mercantile agencies. Most policies depend upon ratings from the books and reports of Dun and Bradstreet, Inc., the only United States general mercantile agency. A rating guide for that agency appears herewith as
Appendix K. Special mercantile agencies which have been used as a basis of credit insurance policies and are considered on an equivalent basis to specific Dun and Bradstreet ratings, are as follows:
Shoe & Leather Mercantile Agency Lumbermen’s Credit Association, Inc. The Feakes Mercantile Agency, Inc. Lyon Furniture Mercantile Agency Produce Reporter Company The Jewelers Board of Trade
30see Appendix A, "N" policy, lines 13 and 14. 64
Packer Produce Mercantile Agency Smith Mercantile Agency Motor and Equipment Manufacturers Association
Policy Forms
Although most credit insui-ance policies in force are of one type,
many others are available. About nine policy forms are offered. Con
tracts offered by the two credit insurance underwriters are the same
in substance and are nearly identical even in form; therefore, the
designations and practices of the larger insurer will be followed in
this discussion. A natural division for starting a classification of
these policies is with regard to whether they commence coverage with
shipments made on and after the effective date of the policy, or
whether they start with coverage on shipments already made for some
period prior to the effective date of the policy. The first are
called "forward coverage policies," and the latter "backward coverage
policies." In 1953 the leading credit insurance company reported
that eighty per cent of premium volume, and seventy-six per cent in
number, was from backward coverage policies. In fact, seventy-seven
per cent of all premiums was from the N form of policy, which repre
sented seventy per cent of all policies written. General coverage policies accounted for ninety-eight per cent of premium volume, and ninety-two per cent of the total number of policies issued, leaving less than two per cent in premium volume and eight per cent in number of policies in individual account coverage.
Policies are designated alphabetically as follows; 65
Backward Coverage Forwai'd Coverage
N ) H ) L ) General Coverage OF ) General Coverage LF ) only XS ) ID ) Individual Account IDXS ) Coverage
There has been a further classification of forward coverage policies, as was noted above, with regard to whether the policy is of ’’general coverage,” meaning on most or all of the accounts of a policyholder, or whether it covers individual accounts. The latter type is rarely available today, being considered by insurers in the nature of selec tion of risks against them. However, some such policies are still carried by the insurance companies where they were written originally under past rules and where the experience has been favorable to the insurers.
Of course, the credit insurance companies will not start coverage with doubtful or "ailing” accounts. "Back coverage” implies that the policy will cover sales which have been made before the effective date of the policy, but on which the "due date” of payment has not yet occurred. Another limitation is that the back sales rider for a newly insured will not be covered for a period longer than the usual terms of sale of the insured, and in no event for more than ninety days. Upon renewal of a credit insurance policy of the back coverage type, a broader back sales rider may be attached, designed to include in the new policy all accounts unpaid, if for shipments made during the period of the prior policy, depending upon whether or not they were covered when shipped, and subject still further to the 66
extent of coverage in the new policy. This may entail an additional
ten per cent of coinsurance.
Thus, both basic types of policies deal with the period of
approximately a yearns coverage. The back coverage type, while by
rider covering sales made for a maximum of ninety days prior to the
effective date of the policy, does not cover sales made during the
last ninety days of the policy, which obviously will not become due
until after the policy has expired. The "forward coverage" policy
includes shipments made (transfers of title) from the effective date to
the termination date of the policy. Thus, if a policyholder *s usual
terms of sale are ninety days, then coverage on sales made during the
policy term would extend for ninety days past the termination date.
In no case, however, will a forward coverage policy apply for longer
than ninety days plus the terms of sale of the insured. In no case can
the extended period exceed 215 days.
A significant difference between the two basic policies, the
"If* and the **H" forms, has to do with filing of accounts with the
insurance companies. In the backward coverage "If* policy, which alone accounts for approximately seventy-seven per cent premium volume and
seventy per cent of total policies, it is necessary that accounts be filed with the insurers within ninety days past due date if they are to be insured against simple non-payment by the debtor. Failure to meet this requirement would mean that the accounts are covered only to the extent of actual defined insolvencies.
The forward coverage "H" policy, however, permits filing of past due accounts with the insurers at any time during the policy term 67
without the complete loss of coverage against non-payment due to
other than the contractual stipulations. Nevertheless, there is a
penalty for holding accounts after ninety days past due date under the
forward coverage policy. This is one-fifth of one per cent additional
coinsurance to be borne by the insured for each day past ninety that
the account is past due before it reaches the insurer.
A redeeming feature of the "H" form then, is that if the policy
holder prefers to wait longer, as many do, overlooks the account, or
through error fails to file in time, it will still be accepted by the
insurance company as an insolvency, subject to one per cent additional
coinsurance to be borne by the policyholder for each additional five
day period that elapses past ninety days. The privilege of filing
claims after 153 days past due date entails additional premium and
primary loss, five per cent from 154 to 184 days and ten per cent for
filing between 185 and 215 days. This policy may not be used for terms
of longer than four months from date of shipment. Another limitation
requires compulsory filing of claims at the expiration of the policy
term.
The policy accounts for fourteen per cent of the total pre mium volume and thirteen per cent of the total number of policies.
The ”H" and ' W forms jointly account for ninety-one per cent of total premium volume and eighty-three per cent of the total number of policies. Both the and "N" policies provide "general coverage" for all first and second grade credits of the insured, except that some accounts may be excluded from coverage by rider, and other third, fourth and blanlc rated accounts may be included by rider to the policy. 6 8
The ”N” form seems to be preferred by the insurers, possibly because
losses are lower on this form. Another reason for higher sales on it
is the fact that a new policyholder often is thinking of some particular
sale already made on which he desires coverage, and the ’’N’' policy may
seem to provide the back coverage he desires.
The "CF" form is a little used modification of the form.
Under it each delinquent account must be filed within ninety days past
due date under the original terms of sale, in order to have any cover
age whatsoever. This form will not cover accounts sold on terms of
longer than four months. It accounts for about four per cent of total
premium volume and only three per cent of the total number of policies.
The ”L” form of policy gives the broadest coverage of any, but with a relative low single limit of coverage on each debtor. It is a
general coverage policy applying to all accounts of an insured, unless
otherwise excluded by riders, and thus differs from the "N" form which
only covers first and second grade credits (except as others may be included by rider). This truly general coverage form is not written on a forward coverage basis. Coinsurance on this type is basically twenty-five per cent, and primary loss and premium are higher than on the other forms. The premium rates are the same for factors other than the policy amount, and this is calculated on the ”L” form at
$37 «50 per thousand, if the single limit of coverage on any one account is held to one-twentieth of the policy amount, or $50.00 per thousand if the limit of coverage is one-tenth of the policy amount, which is the maximum permissible coverage. The amount of an "L" policy is limited to $100,000 for business in classes 1, 2 or 3; is limited to 69 31 $50,000 for class k» and is not available to businesses in class 5»
The LF (limited filing) form is a backward coverage type under which the policyholder handles his own collections. The provisions are otherwise the same as those applying to the ’’N'* policy, except that the definition of insolvency is more stringent. The LF form accounts for only about one per cent of all policies and the premium volume is so small that it is not reported.
There are three policy forms for individual account coverage, the ”XS," "ID," and "IDXS" all of which are of the forward coverage type. However, at present, they are issued only in conjunction with general coverage policies. Thus, they could be considered in the same category with policy riders, because insurers will not write this coverage unless all of the remainder of a policyholder »s business is covered.
The "XS" (excess) form is designed to provide coverage on a very large account (with insurance not to exceed $200,000), but on a basis where the insurer only covers an excess above an amount, which is large in itself, to be borne by the policyholder. All policies are
"excess" policies, but in this case the policyholder*s share of the loss is usually much larger, because larger amounts are involved. As in the "LF" form, the policyholder handles his own collections. In order that a policyholder may recover on the policy, an insolvency must occur within a year after the end of the shipment period. There is
^^The classification of business for credit insurance purposes is explained on page 77, 70 no coverage on mere past due accounts. There is no coinsurance, and the premium charged is directly related to a large amount of primary loss to be assumed by the policyholder. The premium is #30 per thou sand on the excess (with ninety day terms) where the primary loss is ten per cent, |25 per thousand with a primary loss of twenty per cent, and #20 per thousand with a primary loss of thirty per cent. This form is so little used as not to be mentioned in summaries of premium volume, and accounts for only about one per cent of policies written.
The "ID” form (individual debtor) applies to debtors having first credit ratings in Dun and Bradstreet, Inc. rating books. Each account must be further specifically approved by the insurer. It is a compulsory filing type, meaning that the policyholder must file an account for collection with the insurer within sixty days past due date. There is a ten per cent coinsurance on this policy, and no primary loss as in all other forms, except where waived by special rider in return for additional premium. The premium varies from #5 to #20 per thousand, for ninety day terms, depending upon the debtor’s capital rating, but is a minimum of #75» The premium volume written on this basis is insignificant, but the percentage of total policies is about three per cent.
The "IDXS” form (individual debtor excess) is a combination of the two aforementioned forms. It requires filing of a delinquent account with the insurance company, as in the "ID" form. It pays onlj'" on excess above a first amount to be borne by the policyholder as in the "XS" form. This coverage is cancellable by either the insurer or the policyholder. The policyholder may choose between a 71
ten per cent or twenty per cent primary loss with the premium being greater on the latter choice.
Coverage
Coverages based on credit ratings may be selected by a policy holder, The insurance companies have set maximum amounts they will insure for any one debtor in each rating classification; however, if the insured finds it necessary to sell to certain debtors in amounts higher than those ordinarily allowed against their rating, they can be covered by riders attached to the policy, naming the specific debtors and the increased coverage thereon, if the accounts are acceptable to the insurer.32
A coverage schedule showing "maximum limits" based on ratings of Dun and Bradstreet, Inc., in 1954, appears below:
MAXIMUM LIMITS OF COVERAGE
First Credit Second Credit
Rating Maximum Limits Rating Maximum Limits
Aa A1 $500,000 Aa 1 $100,000 A A1 $300,000 A* 1 $ 7 5 ,0 0 0 A A1 $200,000 A 1 $ 50,000 B 1 $100,000 B+ ll $ 40,000 B 1 $ 7 5 ,0 0 0 B l| $ 30,000 C 1 $ 50,000 C+ Ig $ 25,000 C Ig $ 3 0 ,0 0 0 C 2 $ 15,000 D ll $ 25,000 D+ 2 $ 12,500 D ij $ 20,000 D 2 $ 10,000 E 2 $ 10,000 E 2^ $ 5 ,0 0 0 F $ 5 ,0 0 0 F 3 $ 3 ,0 0 0 G 3 $ 2,500 G 3 è $ 1,500 H 3 $ 1,500 H 3 i $ 7 5 0 J 3 $ 1,000 J 3â $ 500 Blank 1 ----$100,000 Blank 2 $ 2 5 .0 0 0 The material in the following sections of this chapter v vided by the American Credit Insurance Company, Baltimore, in unpub lished documents and interviews. 72
Some of the maximum limits shown above are hypothetical,
because the limit on a general coverage policy is #$0,000 on any
rating. However, riders to a policy may permit higher limits on
specifically approved accounts. Further, general limits of coverage on
any one rating may not exceed the following:
(a) On first credits, ten times the primary loss, and never higher than #$0,000.
(b) On second credits, five times the primary loss, and never higher than $2$,000.
The limit of coverage opposite a rating is, in effect, a limit
of coverage for each account that bears that rating, on the date of
transfer of title to the merchandise covered. For example, suppose
that an account were rated C Ig on the date of shipment of a #$0,000
order, and that the outstanding balance on the account was previously
#2$,000. If the limit of coverage on this account were #30,000, it would be #45,000 short of coverage for the new shipment. The policy
holder could go ahead and ship at his own risk, but coverage would
apply to only a total of #30,000 at any one time on this account.
Further, if the rating should change to G 2 before the date of shipment and the coverage on this rating was the maximum, #1$,000, then none of the new shipment would be covered. As stated, higher amounts may be covered on specific debtors by name, if the debtor is acceptable to the insurance company in the larger amount. However, only a small percentage of businesses could afford even the maximum coverages as shown above.
The latest published rating book of the mercantile agency 73
governs the ratings for coverage on shipments. However, should the
agency revise a rating by issuance of a credit report within a speci
fied time, the revised rating applies if a report is received by the
policyholder, or provided the insurer notifies the policyholder of
such revision. In case a debtor's name is not listed in the latest
book, then a report issued within four months prior to shipping date
applies. If no such report has been issued, then the first report
issued within four months after shipment shall govern the coverage
applying to said debtor.
"Available coverage" permits a policyholder to pay premiums monthly on coverage actually in use. This coverage is available only
on preferred risks, or to firms selling to debtors having Dun and
Bradstreet ratings in either the first or second column, or the equiva lent ratings of other acceptable agencies. This plan is advantageous to firms that experience considerable seasonal fluctuation in amounts owing, A report is required by the insurers of amounts owing at the end of each month. Then the premium is computed on the amounts of coverage used and applied against a minimum annual premium. If additional premium is necessary, the minimum monthly payment is ten dollars.
"Blank-blank Net Working Capital Coverage Rider" may be used to provide coverage up to $500 only, on debtors who bear "blank-blank" ratings of the governing mercantile agency. The limit of coverage may be more, however, if the policyholder has, at the date of shipment, the debtor's latest financial statement compiled within a year imme diately preceding the date of shipment. Such coverage is limited to 74 twenty per cent of the amount of the working capital shown therein.
Yet in no case may the coverage under this rider exceed $5,000. The
aggregate on this rider may not exceed twice the minimum table primary
loss. The rider is subject to twenty per cent coinsurance. There is
no "meriting" of primary loss when this rider is used, but the table
primary loss must be used, unless experienced losses have been higher,
in which case the larger experienced amount applies. The premium for
the rider is $30 per thousand on the amount of the aggregate. A few
of these riders are in use.
The "Flat Table Form of Coverage" may be attached to any general
coverage policy except the "L" (limited). It may not be used for businesses in Glass 5, nor may the face amount of a policy with this
coverage exceed $100,000. The basic premium is $125 per thousand on the policy face amount up to $5,000, and $100 per thousand above that amount. Other premium items are charged as usual. Coinsurance is ten per cent on first and second credits, and twenty per cent on third and fourth credits, with the usual additional amount on back sales.
Primary loss rates are high for this type of coverage, the same as apply to "L" policies, already discussed, and (FKC) full key coverage.
In no event may the primary loss with this form of coverage be less than $750. No division of premium and primary loss is permissible when this form of coverage is used.
There is a variation of the above type which is called the
Flat Table "B" Form of Coverage. It may be used only with the LF policy, but for all classes of businesses otherwise allowable. This permits a lower coinsurance, ten per cent throughout, and lower 75 praniumj but with comparatively higher primary loss rates and lower
allowable coverages. The minimum primary loss without any fourth
column coverage is $500, and with fourth column coverage it is $750 .
The maximum allowable coverages are lower than for the regular Flat
Table Coverage Form, and the face amount of this policy may not exceed
$40,000. This coverage may be based only on Dun and Bradstreet ratings.
The minimum premium is $150. The basic premium is calculated at the
rate of $40 per thousand on the policy amount, in addition to the other
usual premium considerations. The highest limit of coverage under
"column one" is limited to thirty per cent of policy amount and twice
the minimum primary loss; column "two" is limited to twenty-five per
cent of the policy amount and no more than the minimum primary loss;
"column three" is limited to twenty per cent of the policy amount and
one-half the minimum primary loss; and "column four" is limited to ten
per cent of the policy amount and one-third the minimum primary loss.
This coverage does not allow division, conditional exemption of coin
surance, or conditional exemption of primary loss.
The "Full Key Coverage" plan allows selection of coverage on any one or more ratings, provided that the maximum limits, as shown below, are not exceeded. This coverage may be based only on Dun and Bradstreet
Ratings. It may be attached to all general coverage forms except the
"L" type, but may not be used with businesses rated as Class 5 by the insurers. The basic premiums applicable are higher than ordinary, with other premium factors calculated in the usual manner. Coinsurance is ten, twenty, or thirty per cent as on the usual coverage forms.
The minimum primary loss is $50, and the primary loss rates are the 76 same as those used for ”L” and "flat table" coverage, being more than for other regular or combination policies. The single limit of coverage applicable to any one debtor, unless approved by name, is as follows : Column One — ten times the primary loss (minimum or table)
Column Two — five times the primary loss
Column Three— two times the primary loss
The face amount of Full Key Coverage may not exceed twenty times the basic premium, unless $2$ extra be paid for each additional thou sand. If the face amount is reduced, a premium discount is allowed at the rate of $10 per thousand of reduction. In no event may the face amount with this form of coverage exceed $100,000.
A business may not be covered by policies from more than one company, nor may a special policy be bought from the one company which would increase coverage on a debtor in excess of the maximum estab lished limits. A policyholder may apply for additional coverage subject to approval of the insider at any time prior to the expiration date of a policy. If applied to named debtors, the application must be accompanied by a form showing that amount owing and other information about the debtor. The minimum premium for additional coverage is ten dollars and a check must accompany an application, which will be returned if rejected by an insurer.
Coinsurance
In all policy types there is a coinsurance feature by which the insured participates in the covered portion of any loss. The coinsur ance on first and second grade credits is normally listed as ten per cent, while on third and fourth grade credits it is usually stated as 77
twenty per cent. If the coverage is based on back sales riders, which
include accounts over ninety days past due, the coinsurance is an
additional ten per cent. The percentage is higher in cases where, by
agreement, a lower premium is paid, A few policies are written with
out coinsurance, but with higher primary loss rates and premium pay ments, This waiver is effected by a Conditional Exonption of Coinsur
ance Rider, As mentioned, this only applies to debtors having first
or second credit ratings.
The basic idea behind coinsurance is that the policyholder*s
participation in any loss will cause him to be more cautious in
selecting credit risks, since the insurance will not cover his profits
on a transaction. Coinsurance is a deduction from the covered portion of an insolvent account. It is deducted before the primary loss deduction.
As stated by an insurer, it is expected that coinsurance will
(1) cause the policyholder to exercise care in granting credit,
(2 ) reduce the moral hazard of "unreasonable risks,"
(3 ) tend to make the insurance cover, on the average, replacement value only, rather than both cost and gross margin.
Primary Loss
Businesses are classified for credit insurance purposes on the basis of estimated relative degrees of credit risk, as determined by the insurers for use in rating their policyholders for primary loss purposes. They use the numerals I through V to rank classes of busi ness, Class I is the most preferred, or minimum risk, and Class V the greatest risk, or least preferred and usually not acceptable to 78
the insurers.
Manufacturing and wholesaling are considered separately in
arriving at the classifications, so that a manufacturer of shoes, for
example, may be Class I for rating purposes, whereas a wholesaler of
shoes might be found in Class III. It is the probable solvency of
their debtors on which an industry is rated for this purpose, and not
the solvency of the business itself. There are separate and different
primary loss tables for each class of business, showing the rate of
loss that the insured must bear before warranting an adjustment against
the insurer. The tables also list separately primary loss rates for
"regular" policies apart from "combination" policies. Of course the
primary loss rates are progressively higher for each greater class of
risk, but the premium does not vary between the classes of risk.
IVhen a firm does business in more than one classification, the one that predominates governs, licamples of businesses which are likely to be considered as Glass V and uninsurable are both manufacturers and wholesalers of beer. There is apparently a high turnover of ownership of beer retail establishments, such as bars and cafes, which would cause the wholesalers of beer to experience high credit losses, and many beer manufacturers sell directly to retailers. Further, a manu facturer of pocketbooks might be in Class II while a wholesaler of the same product might be in Class IV. It is very unlikely that a whole saler would enjoy a higher credit insurance classification than a manufacturer in the same line of business, because wholesalers them selves as debtors of manufacturers are considered less likely to become insolvent than the retailers who are customers of the 79
wholesalers. Too, the less favorable classification applies auto
matically to the manufacturer if the majority of his sales are made to
other than wholesalers. However, for this purpose mail order firms,
department stores, and chain stores are regarded as wholesalers, if
they possess capital of $125,000 or higher.
There are two exceptions wherein any policyholders doing business
with highly preferred risks vn.ll be considered as Class I for rating
purposes regardless of the industry classification. The first excep
tion applies to coverage limited to debtors rated first grade credit,
but with capital rating of not less than $35,000, or "blank 1" rating
of Dun and Bradstreet, or the equivalent. The second exception con
cerns terms of sale limited to 120 days or less (with required filing
of accounts within ninety days past due date), and coverages limited
to first grade credits or second grade debtors with capital of no less
than 1125,000.
As was stated previously, credit insurance coverage starts with
excess or abnormal losses, above an amount determined by the insurers
as representing normal or primary credit losses for each industry. The
primary loss is shown on a policy as a fixed percentage of sales, and
as a minimum dollar amount. It graduates upward ;m.th sales, but not
downward. Primary loss is deducted from the amount of covered and
proved losses after the deduction for coinsurance. It is the final
deduction in a credit insurance adjustment. The primary loss varies not only with the industry within which the insured is engaged, and his annual sales volume, but also with the extent of coverage provided by the policy. There are two sets of tables to handle the latter, one 80 is for regular policies (first and second credit ratings only), and
the other is for combination policies, meaning that third and fourth
grade accounts are covered.
The manual rates govern, except that a firm which has had very
low credit losses may receive a "merit," or lesser rate than the table
rate. To receive a "merit" rate, an applicant must have been in busi
ness for at least three years. Further, the reduced rate does not
apply to certain policy forms, namely the "L," FKC, and Flat Table
Coverage, unless the insured^s business rates as Class 1, 2 or 3 and
has been in operation for five years. In this latter event the "merit"
rate may be used, but as applied to the losses of either a three-year
period or a five-year period, whichever is higher. Conversely to the
"merit" plan, a firm which has had unusually poor credit experience
ivill be charged with a higher than table rate. Thus, the insurers
speak of "experience" rates and "table" rates. The applicable rate may
not be less than the experience rate, but may be greater than it.
To get the experience rate of primary loss, an applicant * s sales
and losses (including amount owed by debtors under or seeking general
extension) for each of the prior three years and fractional year to
date of application are considered, or for the entire business exper ience of the applicant if it is less than three years. The experience rate is determined by dividing the total losses by the total sales.
However, certain exclusions may be deducted from both total losses and total sales for this purpose.
Sales exclusions are stated in a rider attached to a policy.
Exclusions from total sales may be allowed in computing the "experience" 81 rate, if these sales are not to be covered in the contemplated policy
and if the applicant certifies as to their total amount dijiring the
base period, as follows;
(a) Gash sales, including C.O.D., sight draft-bill of lading, sales to the United States Government, states, municipali ties, educational institutions, inter-corapany sales.
(b) Exclusion of sales to certain named customers, upon agree ment with the insurer.
Deductions from loss experiences for this purpose are recoveries
in cash, merchandise, or listed stocks or bonds. Also deductible, to the prospective policyholder who understands the insurance, are losses which would not have been covered if the contemplated policy had been in force. However, the applicant must furnish a written statement naming the debtors, their locations, amounts of loss, and dates of shipment. Nevertheless, accounts not listed in rating books may not be excluded from the losses used for this computation, unless those debtors were in a line of business which is not rated by the mercantile agency governing the policy.
However, no "meriting” of the table rate is allowed when any exclusions from the loss experience are claimed, except:
(1) when exclusions claimed are only those that would be in excess of manual limits of coverage on first and second credit ratings.
(2) when the policy contemplated covers first and second credits only, then losses on inferior ratings may be excluded.
If the experience rate as finallj’- ascertained is less than the
"table” rate, then the experience rate will not govern although it will serve as a basis for "meriting," i.e., partial lowering of the 82
table rate on the basis of experience.
The "table" primary loss rate may thus be merited, when allow
able under the exceptions outlined above, by reducing the table rate
to the extent shown below.
(1) 10%, where the experience rate is 30% less than the table rate.
(2) 20%, where the experience rate is 40% less than the table rate.
(3) 30%, where the experience rate is 50% less than the table rate.
(4) 40%, where the experience rate is 70 % less than the table rate.
(5) 50%,where the experience rate is 90% less than the table rate.
One exception to the above is noted, and that is where the policy contemplates coverage on first and second credit ratings only. In
that event the reduction would be forty per cent where the experience
rate was sixty per cent less than the table rate; fifty per cent where
the experience rate was eighty per cent less than the table rate; and
sixty per cent where the experience rate was ninety per cent less than
the table rate. Then if only first grade credits are to be covered,
the merit would be sixty per cent when the experience rate was sixty
per cent of the table rate, seventy per cent when the experience rate
was seventy per cent less than the table rate, and eighty per cent
where the experience rate is ninety per cent less than the table rate.
Of course, the insurers reserve the right to increase the
primary loss, even after division, when it appears to them to be too
low. They take into consideration the business conditions in the 83 industry and the area where the applicant sells, the character and capital conditions of the customers of the applicant, his method of credit granting and collecting, and other considerations.
The minimum primary loss is:
$375 for a policy covering only first and second credits,
$500 for other than first and second credit coverage only.
$750 for an "L" policy, or one carrying Flat Table or FKC coverages.
$250 for a credit recommendation policy (CR).
A rule of the insurers, in judging and approving an application for insurance, allows that the following may be required on any par ticular account or accounts:
(1 ) additional coinsurance
(2) contingent increase in primary loss
(3 ) privilege of cancellation as to future shipments
(4) compulsory filing of accounts for collection.
Premium
Four factors enter into the computation of the insurance premium:
(1) the coverage
(2) sales volume of the insured
(3 ) policy amount
(4) additional charges for special riders or conditions attached to and made a part of the policy.
Premium is charged on first and second credit ratings under
Dun and Bradstreet ratings as follows: 84
First Premium Second Premium Credit Rates Credit Rates Ratings Groups Per M. Ratings Groups Per M.__
Aa A1 Aa 1 A A1 1 # 3.00 A 1 #14.00 A A1 A 1
B 1 B B 1 2 4.00 B # 15.00 C 1 C la
C c 2 D 3 6.00 D 2 8 20.00 D I D 2 E F 4 7.00 F 3 9 30.00
G 3 G 3& H 3 5 10.00 H 10 30.00 J 3 J 3g K 3
Blank 1 5.00 Blank 2 15.00
In addition to other charges, twenty-five cents per thousand is charged on sales volume up to two million dollars, and twenty cents per thousand on the next two million. The charge is ten cents per thousand on the next six million dollars and five cents per thousand on any sales volume in excess of ten million dollars.
The policy amount, or "face" amount, is limited to twenty-five times the basic premium, vdthout increasing the premium, but additional
"face" may be purchased at the rate of #10 per thousand up to one hundred per cent of the basic policy amount, and #5 per thousand above that. On the other hand, a reduction of #10 per thousand may be allowed if the policy amount is less than twenty-five times the basic premium. However, there are exceptions and limitations in calculating 85
the policy amount on "L" and ”CR" policies, and "Flat Table" or "FKC"
forms of coverage. In any event, the policy amount may never be less
than the amount of the largest single limit of coverage in the policy
of any aggregate limit specified in riders to a policy. When the
longest terms of sale under a policy are more than ninety days, the
premium is increased one per cent for each ten days or fraction thereof.
For terms of less than ninety days, the premium is decreased one
per cent for each ten days less than ninety.
"Division" is a means of lowering the premium by increasing the primary loss. Or, stated differently, it allows the conversion of
some part of basic premium to primary loss, under all forms of policies
except the "L" or "CR," or policies carrying "flat table" coverage.
First, the two rate elements, premium and primary loss are added to gether, then an allowance is made as follows;
l/3rd for Premium, or 2/3rds plus 1.0% for Primary Loss.
l/4th for Premium, or 3/4ths plus 15^ for Primary Loss.
l/5th for Premium, or 4/5ths plus 20^ for Primary Loss.
l/8th for Pranium, or 7/âths plus 40%' for Primary Loss.
l/lOth for Premium, or 9/lOths plus 50% for Primary Loss.
l/l5th for Premium, or 14/l5ths plus 80% for Primary Loss.
l/20th for Premium, or 19/20ths plus 100% for Primary Loss.
The basic policy amount is twenty-five times the basic premium. 86
except that if division is used, it will be twenty-five times the basic
premium after division. The cost of riders is a fixed percentage of the
basic premium, which is the sum of the first three factors. This cost
is usually five per cent or ten per cent of the basic premium for those
riders affecting coverage. Some riders do not bear a charge, as for
example, the back sales rider.
The insured may either select, subject to approval of the
insurance company, an amount of coverage on each rating (of the mercan
tile agency being used), or he may select an amount on each rating
group, both subject to the approval of the insurer. Insurers term the
former selective coverage,*’ and the latter, applying to groups
’’non-selective.” Although there is selection involved in both, the
first involves a greater range of choice than the latter. The main
difference between the two is that on ”non-selective coverage,” each
group must be covered for an equal or greater amount than is allowed
on a lower rating group. Second credits may not be covered for more
than eighty per cent of the corresponding first credits, nor third
credits for more than fifty per cent of corresponding second credits.
But in ’’selective” coverage this rule does not apply. There is no particular significance between the two except that the overall pre mium rates are less on ”non-selective” coverage, because the higher
coverages are required to be in the groups where there is less risk to insurers. Premium rates for ’’selective coverage” were shown on page 84 . The rates for ”non-selective coverage” are as follows, per thousand dollars of aggregate amount of gross coverage; 87 First Credits Second Credits Third Credits
&5.00 per M $12.$0 per M $20.00 per M
If division is not used, the minimum premium is $150. The only
exception to this is the case of the little used "ID," "IDXS," or
"XS" policies which may not have lesser premium than $75» A check
must be sent to the Insurer with an application for a policy. Partial
payment may be by promissory note, but at least twenty-five per cent
has to be paid in cash. The coverage, of course, does not go into
effect unless and until the insurer accepts the application, but if
accepted, the effective date of the policy is the date of application.
Policy Aiders
As has been indicated, credit insurers have numerous riders which are used to amend or change policy conditions. In some cases they are added during the policy term to make adjustments in coverage,
as when an account that was insured by name is no longer considered
insurable and is dropped from further coverage. Some of the most fre quently used riders, which have not been discussed heretofore, are
explained in the following paragraphs.
The "Increased Coverage Aider" is used to cover certain debtors by name for amounts in excess of usual limits, subject to the investi gation and approval by the ins^irers. This applies onljr to first and second credits. This coverage may be cancelled, as concerns further shipments, at any time by the insurer or the insured.
The "extraordinary coverage" riders are designed to cover accounts in amounts exceeding the maximum set by the insurance company for the rating classifications. To be so included an account must be 88 named, so that the insurance ccmpany can investigate, and approve or reject it specifically. If approved, the insurer retains the right to
cancel further coverage on the account at any time. If cancelled, the prenium charged will be returned to the insured on a pro-rata basis.
If the insured at any time does not need further coverage on the account, he may request cancellation and can get a refund on the same basis. Coinsurance on all coverage under this rider is twenty per cent.
The insurer may require the use of an aggregate, or overall limit on total coverages under a rider. With no aggregate, the designation is
’'Extraordinary Coverage Rider A," and when an aggregate is used, the designation is "Extraordinary Coverage Rider B.’* Without the aggregate, the premium for the rider is (in addition to other policy premiums)
$30 per thousand of gross coverage on each debtor. If a debtor is a wholly-owned subsidiary of another company, the charge may be twice the premium rate applicable to the parent company*s rating, but not more than 130.00 per thousand. With the aggregate and Rider "B,” the charge is #30 for each thousand dollars of aggregate, and an additional
#10 per thousand on the amount of all single account coverage in excess of the "aggregate.”
The "Inferior Rating Coverage Riders" apply to debtors in the third and fourth credit ratings, without a specific approval by the insured on the name of each debtor. The inferior rating rider cannot be used with "flat table" or "FKC" coverage. Both inferior coverage riders "A" and "B" carry "aggregates," and differ only as to coinsur ance and the amount of the aggregate relative to the primary loss. 89
With Rider ”A,” the amount of the aggregate may not exceed three times
the amount of the primary loss, and the coinsurance is ten per cent.
Rider permits an aggregate up to four times the primary loss, but
requires coinsurance of twenty per cent. Both types also have single
limits for any one account. The maximum limits under the inferior
rating coverage riders may not exceed one-fifth of the amount of the
aggregate with the "A” form, nor one third of the amount of the aggre
gate with the ”B" form. In addition to the above stated limitations,
the maximum limits per account under this rider may not exceed the
following;
1st credits through C 2— #10,000 1st credits C2g and below— #7,500 to #$00 2nd credits all ratings— #$00 3rd credits all ratings— #
The premium for the inferior rating coverage rider is $75 per thousand
on the amount of the aggregate, when rider "A" is used, and $$0 per
thousand on the amount of the aggregate when rider "B" is used.
Another rider that may be used to widen coverage beyond first
and second credits is the ”L" Rider. It can be attached to any general
coverage form, except the ”L” form where there is obviously no need
for it. The aggregate in any event may not exceed four times the
primary loss. Nevertheless, this is sometimes called a "blanket
inferior" rider, because it covers all debtors not otherv/ise covered,
even if they are not listed, or rated by the governing mercantile rating
agency. The debtor so covered must deal in merchandise sold by the policyholder or must otherwise have an established business. There is a single limit of coverage on any one account, which for an unnamed 90 debtor, may not be greater than thirty per cent of the amount of the aggregate. Coinsurance on losses covered by this rider is twenty per cent. An additional pranium is charged on this rider. It is based on the aggregate, but varies in amount as the aggregate relates to the single limit of coverage on each account. Thus, if the aggregate is ten times the single limit, the premium is $50 per thousand of aggre gate. But if the aggregate is more than ten times the amount of the single limit, the premium is an extra $25 for each additional thousand of aggregate. However, if the aggregate is less than ten times the single limit, the premium is reduced by $25 per thousand for each thousand that the aggregate is less than ten times the single limit.
For coverage provided on debtors by natae, charges are as stated above plus an additional amount of $10 per thousand on any excess above the single limit of coverage.
The ’’Limited-Extraordinary Coverage (LX) Rider” is a combina tion of the ”L” and ’’Extraordinary Coverage” Riders, in that it covers both unnamed and named debtors. As in the ”L” rider, the aggregate on unnamed debtors may not exceed four times the primary loss, and the single limit on any one unnamed debtor may not be more than thirty per cent of the amount of the aggregate. As in the ’’Extraordinary
Coverage” Rider, coverage may be by named debtor, subject to approval and cancellation privileges of the insurers. Furthermore, there may be an overall aggregate limiting the amount of coverage that could be proved on both named and unnamed accounts covered by the rider. The overall aggregate is not less than the combined amounts of the aggregate 91
governing unnamed debtors and the highest coverage allowed on any one
named debtor. The additional premium charged for the "Limited Extra
ordinary Coverage Rider" is figured on unnaraed debtor coverage in the
same manner as for the "L" rider. In addition, a charge of 430 per
thousand is incurred on the difference between the amount approved on
each named debtor and the single limit on any one debtor on unnamed
coverage. This is repeated for each named debtor coverage. But if an
overall aggregate is used, the premium charge is $30 per thousand on
the amount of the overal], aggregate. In addition, if the gross amount
approved on named debtors, less the single limit on unnamed debtors,
exceeds the over-all aggregate, then #10 per thousand is charged on
the excess.
It has been mentioned previously that the rating of a debtor
on the date of transfer of title to goods determines coverage. For
example, if merchandise were sold to a wholesaler on January 1st, but not shipped until January 15th, and his mercantile agency rating dropped between those dates, the policyholder might not be covered under the new rating. At best, it would be leaving the coverage to chance at the time the sale was made. However, a "construed average" rider may be bought with a policy, which provides that coverage on a debtor in effect at the date of acceptance of an order would be con strued as the coverage in effect at the date of shipment, but limited to shipments made within 120 days after the acceptance of the order.
An exception to this would be the case of an order which preceded the effective date of a policy, in which case the rating on the 92
effective date would govern, but the 120 day time limitation would
still date from acceptance of the order. The charge for this rider is
an addition to the total basic premiiun of ten per cent.
Some "specially purchased" or "processed to order" merchandise
may be worthless to a wholesaler or manufacturer except for transfer to
the customer who ordered it. A "Goods in Process Rider" protects
against default on such an order by allowing coverage to begin with
the work in process, rather than at delivery date of the merchandise.
This rider also costs ten per cent of the total basic premium, unless
the "available coverage plan" is used, in which case the additional
premium is fifteen per cent of the total basic premium.
The interim adjustment rider "A" provides for adjustment of the
covered amount on an insolvent debtor, filed and proved, within sixty
days following the insolvency. Rider "B" provides for adjustment of
covered accounts of an insolvent debtor, filed and proved, as well as on a delinquent account filed with the insurer which becomes more than ninety days past due without payment. The charge for rider "A" is five per cent of the total premium and for rider "B" is ten per cent of the total premium.
The "Alternate Governing Agency Rider" allows an alternate mercantile agency rating to govern in cases where the governing agency either does not list, or does not assign, a rating to a debtor in its latest book or report received by the policyholder prior to shipment.
Dun and Bradstreet must be either the governing or the alternate agency. The additional premium charged for this rider is five per cent of the total basic premium. 93
When a policyholder subscribes to more than one mercantile
agency for different lines of merchandise, the "Concurrent Agencies
Rider" may be used to permit the two or more agencies to govern con
currently shipments on related lines of merchandise. The charge for this rider is five per cent of the total basic prmiium.
A "Freight Rider" may permit inclusion of shipping charges as part of an invoice, where they are prepaid. Otherwise, without the rider, loss of prepaid freight through insolvency of a debtor would not be considered as a provable claim against an insurer.
A "Guarantee Rider" may be employed to permis the insured to use the guarantor's rating as a basis of coverage if he so desires.
However, the guarantee must be legally binding throughout, if this rider is to provide such coverage.
With the "Antedating Rider," the effective date of a policy may be made retroactive to include shipments made prior to the payment of the premium, but it may not include past-due accounts. The period of antedating may not exceed the longest terms of sale covered by the policy, nor exceed ninety days prior to payment of premium. This rider may also be used with a renewal policy, where the effective date of the new policy does not coincide with the termination date of the preceding policy.
An "Advertising Rider" is attached to policies issued to adver tising agencies. It merely stipulates that amounts owing the policy holder for advertising services shall be covered the same as if title to merchandise had been passed. The date of invoicing is construed 94
as the date of shipment.
There is no charge for a "Bank Rider" which will allow a
lending bank, where receivables are pledged as collateral for a loan, to be named as beneficiary to a policy. The "Consignment Rider" merely
allows the policy to apply to merchandise delivered on consignment to persons or firms other than the purchaser. Attached to all current policies is a "War Risk Exclusion Rider," which excludes from coverage any past due status which is caused by enemy attack or resistance to such an attack. Additional riders ma^^ be designed by agents or underwriters to fit particular conditions. Examples of riders amend ing conditions of policies are as follows:
Amendment of coinsurance, increasing the rates for this policy provision.
Amendment of Condition II, concerning events which prompt termination of the policy.
Amendment to the second paragraph of Condition II, which states that supplements to mercantile rating books shall be treated the same as a written report received from the rating, agency, and shall be deemed to have been received by the policyholder within five days from the issuance date.
Amendment of the fifth paragraph of Condition II, which permits coverage on longer terms than otherv/ise stated up to ten per cent of sales.
Term of the Policy
The term of the credit insurance policy is normally for one year. The exception would be in a few cases where the policy is for some months longer in order to make the expiration date of the policy coincide with the fiscal year of the insured. In this case the extra period may be provided by an "Extension of Policy Term Rider." 95
Provisions for Credit Insurance in Other Countries
As was mentioned heretofore, current credit insurance practice
was originated in England in the latter part of the nineteenth century,
preceding its activation in the United States by only a few years.
From Great Britain, the undervirriting of accounts receivable soon spread
to Germany, France and Switzerland, and after the end of the first
"World War spread to the Netherlands, Belgium, Norway, Sweden, Denmark,
Spain, Italy, Austria, Hungary, and Czechoslovakia. Thus in Europe
alone there are companies transacting this business in more than a
dozen countries. Mexico and Argentina have credit insurance companies,
and organizations have been attempted in Brazil and Chile. Even Russia
and Japan have at times taken steps in this direction.
Some of she European companies are linked by capital participa
tion and interlocking directorates, and it is reliably reported that
nearly all of them are allied through reinsurance arrangements. At
least, they have worked together very closely since 1926, when their
representatives gathered in London for a conference which grew into
the formation of the International Credit Insurance Association, which
was founded in 1928. The Association has provided a means for the
discussion of common problems, but it appears that little has been done
in the way of compiling composite statistics.
33 H. Stanley Spain, "Credit Insurance," The Chronicle. June, 1928, pp. 30-42. Growth of Credit Insurance," Economist. 167, May 9, 1953, p. 380. 96
The methods and practices of credit insurance differ in the various European countries, and are different from those in the United
States. The single French domestic company, for example, acts not only as insurer, but also provides credit information, as would a mercantile credit agency in the United States. There is no other credit reporting
agency in France. The French policy does not require that the insured bear a primary or expected loss, as in American policies which insure against excess loss, but provides for partial payment on all bad debts.
Their payments are limited to about sixty-five per cent of the loss, coinsurance accounting for the balance of a reported loss. Too, their premiums would have to be higher than American premiums to compensate for the omission pf the primary loss provision.
Another difference between the French insurance and American practice is that any salvage collected after assignment of an account to the insurer is kept in entirety. Under American practice, salvage is pro-rated, after deducting collection costs, so as to return to the insurer an amount equal to his coinsurance in the account (but not on the primary loss which he assumes). Thus, the French insured must attempt his own collection if he wants payment in full, because once he has assigned his account to the insurance company, he must sacrifice coinsurance.
French policies provide indemnification based on a definition of insolvency which includes payment on accounts where judgments have been returned unsatisfied. They do not have the ninety-day filing provision which is common in American policies, but pay on a claim 97 which is proved by the insured. As explained before, the practice with the majority of American policies is that if a claim is not filed within ninety days of the due date of an account, then a defined insol vency must occur during the term of the policy to make the account a proved claim against the insurer.
A significant difference in French underwriting of mercantile credits is that they have a more general use of individual account coverage, although they also write blanket coverage. French under writing appears to be very liberal, with an open blanket coverage on all accounts, up to a limit, inasmuch as they have no mercantile rat ings corresponding to those used in United States policies. Accounts above the limit are insured by name, with certificates issued for each, and granted after investigations of the accounts from insurers* records or from information provided by banks or suppliers of the debtors. The French company maintains files on more than half a mil lion businesses. It has France zoned into regions, each with a manager charged with the responsibility for knowledge of the financial status and payment record of firms in his region. It is a practice of firms to send annual audits to the insurance company, and it is reported that
French businessmen guard jealously their reputations with the insurance company, because of the direct effect the insurer has upon their access to supplier credit.
The Italian company is one of the newer European credit insurers and is copied from those in other countries, but most nearly fits the
French pattern. However, the Italian company writes retail credit insurance on consumer installment accounts. There seems to be no 98 precise formula for rate determination on the latter type of policies, but possibly each contract is negotiated separately.
It should be pointed out that insurance of accounts in inter national trade in Europe would correspond to interstate transactions in the United States. For example, a sale of a New York producer to a Pennsylvania vendee might involve a greater distance than a shipment from France to Czechoslovakia. Therefore, export or foreign credit insurance has a much greater importance in Europe, and is handled by the regular credit insurance companies which also cover domestic accounts.
Obviously, in addition to an economic risk, a political risk exists when shipments are made across national boundaries, and several schemes have been set up to cover both risks. These plans are fostered by Governments to encourage exports and to aid their nationals in selling to foreign buyers. There are three distinct types of foreign credit insurance arrangements in use. First, the Dutch plan allows private companies to write policies of coverage for both the economic and political risks. However, the government reinsures one hundred per cent the "risk political," merely allowing a fee to the private insurers for their services in writing this business.
Second, the Canadian plan calls for the government to underwrite directly the entire credit coverage on exports, including both the political and economic risks. Third, a method used by the British and
French causes two separate and distinct policies to be written in each case, one for the economic risk by a private company, and another for the political risk by the government. This latter method is most 99
frequently employed in various countries.
The reinsuring agreement among some of the various companies
in different European countries works very efficiently. For example, in insuring a French shipment to Holland, the Dutch company could assume any percentage of the risk that it desired up to fifty per cent and the French company would assume an equal percentage; the remainder, if any, going to the group reinsurers in which still other countries participate. The amount of reinsurance would depend upon the size of the risk and the amount of insurance a company already had outstanding on a particular debtor.^5
In summary, it is reemphasized that domestic credit insurance has attained less importance in Europe than in the United States.
The need abroad is primarily for foreign or export credit insurance, which has been well developed among the European countries. It is doubtful that European experiences would be of significance to
American insurers. Yet, the French plan for allowing an insured to perform his own collections while pressed by the incentive for saving a large coinsurance, seems to have merit and to warrant further study by credit insurers in the United States,
QC -^■^The foregoing material was for the most part learned from correspondence with Mr. Louis Roth, London Guarantee and Accident Company, Ltd., St. Louis, Missouri. CHAPTER III
ANALYSIS OF BUSINESS EXPERIENCE vffTH CREDIT INSURANCE
As was stated in the introduction, three lines of inquiry have been followed in interviews and questionnaires designed to gain informa tion for this study. Experience was collected from present policy holders, from former policyholders, and from business men who had never insured accounts receivable. The present chapter concerns the present policyholders and former policyholders, and their experiences will be analyzed so as to show why they purchased credit insurance contracts, what gains or losses resulted, and why many of them discon tinued using the insurance. All of these representative groups of businesses are located in Southwestern Ohio.^
As previously mentioned, some large and respected firms have insured receivables for many years, yet the great majority of firms do not use credit insurance. Of approxjjnately a half million eligible firms, only about three thousand are insured, or about six-tenths of one per cent. One New England firm has insured its accounts for over fifty years, and another in New York is in its forty-second year as a policyholder. The largest credit insurer reported in 1953 that more than a dozen of its insurers pay annual premiums exceeding ten thousand dollars each, after more than ten years as policyholders. One large
The data presented in this chapter were derived from interviews and studies of records of business firms and credit insurance under writers. Any figures quoted are approximate, with round numbers used in many cases.
1 0 0 1 0 1 firm in the Southwestern Ohio area has insured for many years, having let the policy lapse only during the great depression because there was not enough money available to pay the premium, and during which time the credit manager worried about credit losses.
Reasons for Insuring Accounts
Sixteen policyholders and thirty-one former policyholders, all of whom have used the insurance at some time during the past two decades, were interviewed to determine why they insured their accounts.
This sample represented a large majority of the firms in the area of investigation that had insured. It included all known policyholders and past policyholders, excluding only a few firms in which persons responsible for the insurance were no longer present. There was such a variety of firms in this study that no two present policyholders were in precisely the same industry. These firms also represented various size categories, both as to capital rating and number of employees.
As with credit insureds on a national scale, the average-size firm in this test group was in the middle-sized category, but with some large firms and some small ones included.
An attempt was made in all cases to interview the person who was responsible for the decision to buy credit insurance. In most cases this was the president, in some the treasurer, and in a few, the credit manager. Executives usually gave two reasons for buying credit insurance, and both reasons were recorded in the indicated order of importance to the person interviewed, as shown in the following tables : 1 0 2
Table VI
SIXTEEN PRESENT-POLICYHOLDERSt REASONS FOR INSURING ACCOUNTS
Number of Reason given Policyholders Kain Reason^- Secondary^i-
For the same reason that fire insurance is used 7 6 1
For collection service 3 2 1
As a credit yardstick 2 2
Because premium is tax deductible 2 1 1
Sell to small non-rated accounts 2 1 1
For "protection" 1 1
As substitute for credit department 1 1
For a larger bank loan 1 1
Because subsidiary is in a high-risk industry which is uninsurable alone 1 1
Fear of depression 1 1
As a reserve for bad debts 1 1
*The main, or primary reason, was the one given the most weight by the respondent at the time of his decision to insnre. -K-)(-The secondary reason is that stated by some policyholders who had a second, but lesser important, reason for insuring. 103
Table VII
THIRTY-ONE FORI-IER-PüLIGYHOLDERS» REASONS FOR INSURING ACCOUNTS
Number of Reason given Policyholders Main Reason'^'- Secondaryi^'
Salesmanship of agent 13 8 5
To insure one large account 8 6 2
For the same reason that fire insurance is used 6 5 1
Fear of depression 4 2 2
Because of a few risky accounts 2 2
Just to try credit insurance 2 2
Believed could take extra risks and increase sales 2 2
Because of a few large accounts at a distance 1 1
To protect against judgment of salesmen in credit extension 1 1
As a substitute for credit department 1 1
For collection service 1 1
To replace mercantile agency rating service 1 1
Friend of agent 1 1
* The main, or primary reason, was the one given the most weight by the respondent at the time of his decision to insure. ** The secondary reason is that stated by some policyholders who had a second, but lesser important, reason for insuring. 104
Although most of the same reasons were given by both policy
holders and past policyholders, there was a different emphasis upon
the main points. The reasons given by past policyholders for insuring
in the first place reflect some disappointment with the insurance,
indicating that it did not do for them what they had expected that it
would. The main blame was placed upon the agent salesman, and sales
persuasiveness was given as the major reason for insuring. A specific
answer given in several cases was, **fell for a fast sales talk.”
Among present policyholders, the primai’y reason for insurance
of accounts receivable seems to be due to an insurance conscienceness
among business men. In some firms it is a policy to have everything
possible protected by insurance, if the premium can be afforded. This
indicates a lack of understanding as to the significant difference between fire insurance and credit insurance. In the former, there is
often a large amount invested in one risk, while in the latter, there is more often self-insurance from a spread of investment in receivables among a number of accounts.
As indicated by answers given, some of the insureds studied had, in past years, insured only single accounts, which is impossible under present underwriting practices unless the major part of the insured*s sales are covered. If any one factor was understated as a reason for insuring accounts, it is believed to be the tax feature. High corpo rate income taxes during the past decade gave added incentive for trying credit insurance, because the premium as a tax deductible item would, in effect, othervri.se have been partially expended as taxes.
For a firm in the excess profits tax bracket, this meant that 105 eighty-two cents of every premium dollar would have been paid to the collector of internal revenue if the insurance had not been purchased.
It can be argued that credit losses also would have been tax deductible, but the premium was a fixed expense, and bad debt loss was not.
Many reasons given for insuring indicate a misunderstanding of the insurance. For example, credit insurance as a credit yardstick may be less reliable than mercantile agency rating services, because the insurers may at times turn do\m further coverage on an account when they have a concentration of risk against a debtor from other sources, even though he is a good risk. Then, too, the insurers are necessarily very conservative, and to use their approved selections as a yardstick might mean sacrificing profitable sales. Most rating-coverage in insurance policies is purchased on the basis of the policyholders* needs for coverages in various ratings based upon past sales, under the presumption that future needs will correspond with those of the past. To purchase coverages in every case to the maximum allowable by insurers, so as to thus have some sense of a yardstick, would be pro hibitively expensive in most cases.^ Further, it would not be necessary to pay a premium to learn the limits of insurers under various ratings, and even if a policy had been used for this purpose for one yesir, it would not be needed indefinitely for the same purpose.
One reason for insuring was particularly faulty, that the
2James P. 0*Brien and Arthur Todd, "Debate on Credit Insurance." Delivered before the Cleveland Association of Credit Men, November 6, 1945, as recorded Edwin H. Hammock, Official Court Reporter, Common Pleas Court, Cuyahoga County, Ohio, p. 78. 106
insurance wou].d replace the mercantile agency rating service. As has been explained in Chapter II, usage of the insurance is based upon
those ratings, and if the insurance contract is to be utilized for
loss recoveries, then the ratings must be followed when extending
credit. A firm not subscribing to a mercantile rating service would have to do so to use a policy with any degree of effectiveness. The degree of accuracy reflected in other reasons given for insuring will be considered in subsequent parts of this report.
As to reasons for continuing to insure, one policyholder pointed out that he had bargained for such a low primary loss rate, that the insurer would like to drop his policy. Obviously, if the insurer did not want his business, he did not have to take it. Yet, this points to the fact that where a firm has insured for a number of years in which losses are well below the primary loss rates for the industry, the rate will be "merited" by the insurer, resulting in a lesser rate than if taking out a new policy for the first time.
But the main inducement for a policyholder to renew a policy is that, by use of a back sales rider, an insurer may cover under a renewal policy accounts that were past due at the expiration of an old policy. An additional ten per cent coinsurance is applied by one insurer on past-due accounts so covered, and ten per cent is added by the other insurer on accounts more than ninety days past due on the commencement date of the new policy. Nevertheless, a renewal policy offers more to a policyholder than did his original contract. However, in cases where the experience with an insured has been undesirable, insurers make no pretence that they will renew the policy. 107
Some persons interviewed expressed the belief that credit insur
ance has appeal for major executives who are production specialists,
with little knowledge of credits and collections. A similar viewpoint
expressed by an insurance company executive is that firms carry credit
insurance because of lack of confidence in the credit manager. Although
credit insurance might be helpful where it is impracticable to replace
a credit manager of doubtful competence, it would seem that there is
need for some better check on his judgment, and that the cost should be
considered. Conversely, one credit manager who did not himself believe
in credit insurance thought that it was good for his senior executives,
who had lesser worries because they felt insured against excessive
credit losses.
In the case of small fimns which claim to use credit insurance
in lieu of a credit department, there is some misconception. Someone
still has to judge credits under credit insurance. A more accurate
statement would probably be that they are using the ratings in their
policies as qualitative and quantative guides in approving credit.
One credit manager of a large insured firm, who believes in credit insurance, said that if he followed this practice his firmes sale volume would be cut by twenty-five per cent.
Some policyholders maice it a practice to inform debtors that their accounts are insured, not only as a possible aid in expediting collections, but as a justification for the credit limits allowed their debtors. In other words, if a debtor is dissatisfied with the limits, the creditor blames the insurer. In more competitive 1 0 8
industries, on the contrary, some policyholders desire that their
customers not Imow that their accounts are insured, for fear that such
knowledge might result in a loss of business.
Credit insurance was used in one firm to deter salesmen from
overselling accounts beyond insured limits of coverage, which were con
sidered reasonable maximum allowances. In several cases the insurance
served as an excuse for credit limits by credit managers, when they
did not want to comply with the full amounts asked by salesmen on some
accounts. The president of still another firm said that credit insur
ance had increased the efficiency of his credit department and resulted in lowered bad debt losses. He ascribed this to the practice of checking credits more closely than had previously been the case, in order to conform to policy limits.
Types of Coverage Used
The most reliable justification for credit insurance has been determined as the protection of accounts receivable. This protection is limited mainly by single limits on accounts, and by aggregate limits on groups of accounts as found in riders to policies. As was indicated in the preceding chapter, only first and second credits are covered in the policy form that is most used, the "N*’ form, although the ”L” form covers all ratings. The face amount of a policy could also be a limitation to losses paid by insurers, but it seldom works that way in an adjustment, because of more serious limitations on individual accounts.
Policies were studied to determine what types of coverage have 109 been used in Southwestern Ohio, Present policyholders included in the investigation were found to be insured under fourteen "N" policies, one ’*L” policy, and one "ACR" policy. The latter is an Approved Credit
Risk policy, wherein the insured pays a yearly minimum premium for the privilege of sending each account considered to the insurer for approval or rejection. As was previously stated, this form has been generally discontinued. This policyholder has been told that he alone is so insured by the leading insurer.
Riders attached to these policies were as follows :
Riders to l6 Policies in Southwestern Ohio
Sales Exclusion 10
Amendments of Policy Conditions 9
Back Sales 8
Extraordinary Coverage 8
Limited Coverage 6
Increased Coverage 6
Sales Inclusion 5
Interim Adjustment 3
Freight 2
Guarantor 2
Restricted Coverage 1
War Risk Inclusion 1
Construed Coverage 1
Branch 1
Past policyholders included in the study had used twenty-seven 1 1 0
”N'* policies, three ”LC*' policies, one "AGE" policy, one "H’* policy;
and one single debtor policy. The experience under these policies will be discussed further in connection with adjustments.
Coverage is most needed where failures are most likely to
occur, which is, of course, in the lower grades of credit. Yet it is not a practice of the underwriter to include third and fourth credits
in standard policy forms. If these ratings are to be included, it must be by riders, which provide a minimcmi of twenty per cent coinsur ance, These coverages may be had by using either of two riders, as previously indicated. The so-called "extraordinary coverage riders*’ insure accounts by name that may be specifically approved and subject to cancellation (as concerns future shipment) by the insurer. Then there is a blanket inferior coverage rider, called the ”L” rider, which insures all amounts not otherwise covered in the policy, but it is limited by the insurer to four times the primary loss. This latter rider is very expensive, and is limited to a small amount of coverage on each account and an aggregate amount on all accounts so covered, as was described in Chapter II. The next coverages in order of descending importance are those below ”C+” of second grade credit.
Then the next most likely failures are " and below of first credits.
Least likely failures are the accounts rated ''B" and above (^200,000 and more estimated financial strength) in first and second credits.
However, these top ratings must be insured in most cases in order to get coverage from insurers on the greater risks.
A charge is made for the coverage, which applies as a single Ill limit to each debtor in that rating, but without limitation as to the
number of accounts insured, except that the maximum gross coverage
allowable on each account will be that shown in the table of ratings
and coverage, or in the riders. From these limits will be deducted
pro-rata collections at the time of adjustment, where the account has
exceeded the limit specified, and the coinsurance. Net losses will be
further limited by the primary loss and face amount of the policy.
Three "tables of ratings and coverages’’^ and corresponding
inferior third and fourth credit coverages are shoivn below. The first allows the largest coverages of any policy studied. The second is from a medium-sized policy, and the third shows the smallest coverages used under the "N" policies investigated.
Table VIII
TABLE OF RATINGS AND COVERAGE (LARGE)^ CGLUIvIN ONE COLUMN TWO Rating Gross Amount Covered Rating Gross Amount Cov Aa Al $50,000.00 Aa 1 $15,000.00 A+ Al $10,000.00 A + 1 $ 2,000.00 A Al $20,000.00 A 1 $ 5,000.00 B+ 1 $ 5,000.00 B + 1$ $ 6,000.00 B 1 $10,000.00 B li $ 2,000.00 C + 1 $10,000.00 G + l| $ 5,000.00 (Blank)1 #10,000.00 (Blanl{)2 $10,000.00 C lé $ 6,000.00 C 2 $ 2 ,500.00 D+ ij $ 4,000.00 D + 2 $ 1,000.00 D lî $ 2,000.00 D 2 $ 1,000.00 E 2 None E $ 1,000.00 F None F 3 $ 1,000.00 G 3 None G None H 3 None H 3# None J 3 None J 3# None K 3 None ^These tables were explained in much detail on pp. 71-72. ^For full explanation of the material included in this and the following two examples of coverage, see the section on that topic in Chapter II. 1 1 2
In addition to coverages shovm above, additional first and
second credit ratings were covered by an increased coverage rider in
total sum of $940,000. Also Extraordinary Coverage Rider "B”
carried specific account approvals to the extent of $363,000, but
limited to an aggregate of $125,000. There was no blanket inferior
coverage rider with the policy, nor any other third or fourth
credit coverage. The primary loss rate was .221 per cent, which was
figured on a sales basis of jbur and one-half million dollars, and
stated as a miniraum of $9,945» In case of an adjustment, the primary
loss would have been figured on the actual sales of $12,750 ,000, for
an absolute amount of about #28,000. The face amount of the policy was $300,000, and the premium was about $7 ,500.
Table IX
TABLE OF RATINGS AND COVERAGE (MEDIAN)
COLUMN ONE COLUMN TWO Rating Gross Amount Covered Rating Gross Amount Covered Aa Al $ 5,000.00 Aa 1 None A + Al None A + 1 None A Al None A 1 None B + 1 $10,000.00 B + None B 1 $10,000.00 B None C + 1 $ 3,000.00 C + lî $ 3,000.00 (Blank) 1 $ 7,000.00 (Blanlc)2 $10,000.00 C 1| $ 5,000.00 C 2 # 8,000.00 D + il None D + 2 None D il $ 3,000.00 D 2 None E 2 $ 3,000.00 E None F 2| None F 3 None G 3 None G 3è None H 3 None H 3i None J 3 None J 3| None K 3 None 113 Besides the table, there was an additional named debtor coverage on third and fourth rated accounts in a total amount of |/+3,000, but with an aggregate limit of $2$,000. There were no other coverages under the policy. The face amount of the policy was $30,000. The policy was written on a sales basis of $150,000 and the primary loss was .66 per cenc, and shown as a minimum of $1,000. Sales were approximately #6,000,000, so that the actual primary loss upon adjust ment ïfould have been about #25,000. The fact amount of the policy was
$50,000, and the premium was about $1,950.
Table I
TABLE OF RATINGS AND COVERAGE (SMALL)
COLUMN ONE COLUiei TWO Rating Gross Amount Covered Rating Gross Amount Aa A1 $500 Aa 1 $400 A + A1 $500 A + 1 $400 A A1 $500 A 1 $400 B+ 1 $500 B + 1-| $400 B 1 $500 B i: $400 C + 1 $500 C + $400 (Blank) 1 $500 (Blank)2 $400 C 1|- $500 C 2 $400 D+ l| $500 D + 2 $400 D li $500 D 2 $400 E 2 $500 E 2^ $600 F 2& $750 F 3 $750 G 3 $750 0 $850 H 3 $850 H 3* $750 J 3 $850 J $500 K 3 $500
In this case, there was an "L” (limited coverage) rider on third and fourth credits, with a single limit of #500 and an aggregate limit of #5,000. There were no other coverages under the policy.
The primary loss rate was .2? per cent with a minimum of $4,050.
The rate was based on sales of one and one-half million dollars, but 114
the sales were actually over two million, so in case of adjustment
the primary loss would have appeared as about 45,^00. The face amount
of the policy was about #32,000 and the premium was about #1,000.
It would be prohibitively costly to insure all sales, and thus
each policy must be tailor-made. As was stated in Chapter II, the
ratings employed are selected by the policyholder, within his ability
to pay the premium, and within limits imposed by insurers. They are
normally based upon past sales, with the presumption that the need will
be the same in the following year. If additional coverage is desired
on one or more accounts beyond the limits pemd.tted by the insurer,
if approved by name, it may be added by an "increased coverage rider,"
which is subject to cancellation by the insurer. This rider was used
in six of these policies.
Too, if it is desired that some extremely high rated accounts
be excluded from coverage, this may be effected, if approved by the
insurer, by sales exclusion rider. This was used in ten of the
policies studied. As explained heretofore in Chapter II, sales of a
subsidiary firm may be taken into coverage by use of a "sales inclusion"
rider, which was used in five cases studied.
The "H" policy, although little used in the Southwestern Ohio
area, is believed to be the most advantageous for most policyholders
because, being of a forward coverage type, it offers a better hedge
against depression than the "N" policy. The latter only insures sales
on accounts for a nine-month future period insofar as ninety-day uncol
lectible accounts are considered as insolvencies, while the "H" policy provides this coverage on sales for one year after the effective 115
date of the policy. In addition, as will be mentioned later, the
form allows accounts which are filed after ninety days to still be
considered as insolvencies, even though there is a penalty attached.
Insurance Adjustments
Adjustments do not ensue from most credit insurance policies.
Adjustments resulting in loss payments occurred on an average of only
once for each fourteen policy years, ,as determined by this study. Yet
adjustments that do occur are very important to both credit insurers
and policyholders. The study shows that dissatisfaction with adjust
ments is the second leading cause for discontinuance of policies by
individual subscribers. Of the policies which involved adjustments,
they were, by far, the leading cause of policy lapse. In this study
group, an average of one out of three policyholders, regardless of the
number of years insured, was found to have experienced an adjustment which resulted in a loss payment.
Any claim for payment of loss in excess of the primary loss
that is to be made under the terms of a credit insurance policy, must be sent to the insurer^s home office within tlxirty days following the
e:q)iration date of a policy. Adjustment will then be made by the insurer within sixty days of receipt of the "Final Statement of Claim" from the policyholder. The leading insurer maintains adjusters at
Baltimore and St. Louis who travel to the policyholder »s premises to make adjustments. If a policyholder would desire to be reimbursed for losses at the time they occur, rather than to wait until sixty to ninety days following termination of the policy, then he must 116
purchase an interim adjustment rider, thereby losses may be adjusted within sixty days after the interim claim is filed. As mentioned
heretofore, this rider costs an additional five per cent of prenium,
if only losses within the definition of insolvency as set forth in
the policy are to be so adjusted, and ten per cent additional, if
accounts over ninety days past due, which were filed with the insurer
before the ninetieth day, are to be included. This rider is not recommended, under the premise that its cost, based on an equivalent
annual interest rate, would be enormous. If the funds were needed, it would be much cheaper to borrow from a commercial bank.
Insolvencies Included in Adjustments
Insolvencies may occur, for adjustment purposes, only under conditions as defined in the insurance policy. This includes a debtor having absconded, died, been adjudged insane, been replaced by a receiver, executed a bulk sale, surrendered his stock under chattel mortgage, made a general offer to credibors of less than his indebted ness, or when there shall have been an assignment, bankruptcy, or an unsatisfied judgment. There are, of course, insolvencies that do not meet the conditions defined in the contract. The insurers argue that whatever these conditions, a policyholder can always force a defined insolvency by getting an unsatisfied judgment against a delinquent debtor. However, to the policyholder, this means an expensive and time-consuming process, with possible attendant bad publicity.
The serious limitation here is not the conditions under which a policyholder can collect against an insolvency, but with the time element. To be covered in adjustment, sales made on an account must 117 be made within the policy term, or may have been made in a preceding
policy period if specifically included in a renewal policy under a
back sales rider. However, for an insolvency to be covered, it must
occur during the term of the policy under which the claim for adjust ment is made. If an account were sold on the first day of a policy
under thirty-day terms, one month of the policy would elapse before any delinquency. Then if the policyholder allowed ninety days to
elapse without taking any direct action, four months of the policy term would have passed. If it took two months to take the debtor to court and get judgment against him, six months would be gone. If the
sheriff used thirty days to return an unsatisfied judgment, then seven months would have expired. If this process started with the fifth month or any later date in the policy year, no recovery could be expected from the insurer. If the original term of sale had been ninety days, this would have added sixty days to the time schedule mentioned above, and if the court procedure took longer to get started, the time period allowed for recovery would have been that much less.
On a renewal policy, the time for recovery from the insurers would be lengthened, if the insurer were willing to accept a particular delinquent account under a back-sales coverage rider. One company*s rider will charge an additional ten per cent coinsurance on accounts which are more than ninety days past due at the time of renewal. The other company will charge the additional ten per cent on accounts simply overdue when included in a back-sales coverage rider. The rider includes shipments made only during the previous year, within 118
the terms of the previous policy and the new policy. It is applicable
only to back-coverage policies, and with an additional coinsurance for
accounts ninety days overdue at the effective date of the new policy.
It is necessary to assign accounts to the insurance companies
at the termination of the policy period if they are to result in claims.
The policyholder must have notified the insurer within twenty days of
loiowledge of an insolvency of any debtor. Failure to do this will
result in loss of coverage on that particular account. A report
published by a mercantile agency to which the debtor subscribes is
considered as "I-cnowledge." In addition to insolvencies under the
policy, accounts are considered as insolvencies which are turned over
to the insurer for collection prior to the ninetieth day, but are
uncollected after the ninetieth day. Failure to have the accounts in
the hands of insurers by the ninetieth day would mean that the account
could then be considered as a claim only in case of an insolvency as
defined. Under the "H" policy, of course, a penalty of an additional
one-fifth of one per cent per day is added for each day the claim is
over ninety days past duo when it reaches the insurer.
If an account is to be considered as a claim in adjustment, the
terras of sale on an account must correspond to those allowed in the insurance policy, and they must be recorded on the copy of the invoice which was sent to the debtor. The products sold must have been those named in the policy for a claim to be valid. Also, the mercantile agency rating at the date of delivery, which usually corresponds with the transfer of title, will usually govern, and not the rating of the account at the time of sale, except where a "Construed Coverage Rider" 119
is purchased with a policy at an additional ten per cent premium. Under
this rider, the date of delivery will be construed as the date of sale,
so that coverage on the date of sale will govern. A lower rating on
the date of delivery might othervd.se mean that an account would not be
covered at all, or not to the extent expected when a sale is made.
Furthermore, accounts to be considered in adjustment must be
assigned to the insurer, giving him the right of subrogation. Invoices,
proofs of debt, and affidavits must be furnished the insurer upon
request. If the insurer collects eventually from the accounts thus
assigned more than the aggregate sum paid the insured, the net excess must be I'efunded, after deducting all expenses incident to collection.
If an account that has been turned-over to an insurer for
collection is v\rithdrawn by the policyholder, it may not again be filed,
nor may it be considered as a covered claim in an adjustment. The
following excerpt frcan the standard policy form gives another condition under which an account may not be covered because it would be deemed
a withdrawal;
If an account be disputed, in whole or in part, or if the Com pany deem it necessary for the purpose of enforcing collection from the debtor, guarantor, surety or endorser, or of participat ing in any proceeding involving the estate of the debtor, guarantor, surety or endorser, the Policyholder shall authorize suit or other proceedings and shall pay all expenses required in con nection therewith, promptly advancing court costs and suit fees when requested; failure so to do shall be deemed a withdrawal of said account by the Policyholder.
According to the insurance contract, in order to arrive at the net loss under any adjustment, there is deducted from each gross loss vfhich is undisputed, covered, filed and approved: 120 (1) All amounts collected from the debtor or obtained from any other source.
(2) The invoiced price of goods returned, reclaimed or replevined, when such goods are in the undisputed possession of the policyholder.
(3) Any discount to which the debtor would be entitled at the time of adjustment.
(4) Any legally sustainable set-off that the debtor may have against the policyholder.
(5) ^iny amount mutually agreed upon as thereafter obtainable.
If the indebtedness is in excess of the gross amount of coverage
specified in the policy for a particular rating or account, then the above listed deductions are made on a pro-rata basis in the ratio that the gross amount covered bears to the whole of the indebtedness. For example, if the gross amount of coverage on an account was $5,000, but the policyholder allowed credit of $7,000 on the account and collec tion was made by the insured to the extent of $1,400, the collection would be applied pro rate to the $5,000 gross coverage of the insurer and the $2,000 additional amount assumed entirely by the policyholder.
Thus, the $5,000 gross coverage would become $4,000.^ Then the coinsur ance is deducted from the aggregate amount of net losses, after which the primary loss is deducted from the balance. The remainder, if not in excess of the face amount of the policy, is payable to the policy holder. The Insurance Department of the State of Iowa would not permit the primary loss to be deducted before the coinsurance until a few years ago. The coinsurance is thus a greater percentage in relation
^This computation is as follows: ^5,000 minus ($5,000/$?,000 of #1,400) or $1,000 equals $4,000. 1 2 1
to the net loss than it is to the gross loss before deduction of
primary loss. This is a feature of credit insurance that is often misunderstood.
In the case mentioned above, assuming the coinsurance to be
twenty per cent, the deduction would be $800 (20^ of $4,000), then to
the remaining $3,200 ($4,000 - $800) would be applied the primary loss
deduction, which would have to be less than $3,200 for any net loss to
be due the insured. The upper limit would be the face amount of the policy. It is reemphasised that no case was found in this study wherein a loss adjustment was influenced by the face amount of a policy. The other exclusions and deductions predominated to keep the net allowable losses within lesser amounts.
Actual Adjustments
The burden of proof, in the case of a disputed claim, is upon the policyholder, so that a disputed claim is not an allowable loss under a policy adjustment. Further, only claims covered under the ratings and riders as specified in the policy will be allowed, and only to the extent of the coverage therein. Three examples of credit insurance adjustments follow.^
From Table XI it is apparent that, although the actual gross loss and the amount covered and proved by the insured is $37,829, the insured is allowed to collect only $19,796. The difference is accounted for mostly by losses not allowed by coverage, by the coinsurance
^Adjustments represent actual cases studied, but have been altered where necessary for clarity in presentation. Table XI 122
ADJUSTI'tlNT 1?
Name Dun & Amount Gross Loss Net of Bradstreet Gross Not Covered and illlowed Debtor Rating Loss Provable Proved Coinsurance Loss A D 2 $ 1,560 $ 1,560 None
B C 2^ 1,729 1,729 None C NIB 13,510 8,510 # 5,000 $ 1,500^ ^ ^ # 3,500 4gl^C-ÎHHS- D E 3 1,603 1,603 1,122 E F 3i 423 423 84 339 F A li 53,448 43,448 9,735 1,947 7,788 G G 2 19,928 4,928 15,000 3,000 12,000
H D 2 1,942 1,942 'îc'X- None
I F 3 3,084 3,084 None J H 4 603 603 120 483 K 2 3& 851 851 170 681
L D 2 1,915 1,915 191 1,724
M D 2& 2,699 2,699 540 2,159
#103,295 $65,466 #37,829 #8,033 #29,796 Less primary loss borne by insured . 10.000 Net amount paid by insurance company #19,796 •ifOnly two of the above had resulted in banJcruptcies, Debtor C in an amount of $13,510, and Debtor X in amount of $851, iM(-Debtors A & B had been carried fojrward from last yearns adjustment by special rider, and they still did not come within the definition of insolvency, according to the policy. Debtors H and I were not accepted as defined insolvencies. -îHHîihe coverage here was $10,000, but was reduced by a collection of $1,416 which is 2.65% of the gross loss, or a pro-rata share based on the amount covered of $265. Both accounts of Debtors F and G were filed before 90 days past due, and were thus treated as though the debtors had become insolvent. The gross loss is the amount owed at the date of insolvency, or the date of filing in these cases. ^Hî-îHt-Goinsurance of 30^ resulted from 20% coinsurance on off-rated accounts, plus an additional 10^ for accounts covered under back- sales rider which were more than 90 days past due at the commence- ment of the current policy. 7as stated heretofore, the figures given are rounded approxima tion. The form used to present this and the following two adjustments has been simplified from the insurer version. 123 provision, and by deduction of primary loss. Thus the gross loss on
Debtor "G” is #13,510, the limit of coverage is #5,000, the coinsurance is #1,500, leaving an actual net allowed loss (before primary loss de duction) of #3,500. The gross loss reported on Debtor "F‘* is #53,448, and a collection of #1,416 had been made, from which collection fees were deducted pro rata for that part of the account not covered by the policy. Any amount collected after the filing of an account with an insurer is considered as a deduction from the gross loss. In this instance the gross loss exceeded the single limit of #10,000 on the account, so a pro-rata share of the collection is deducted from the amount of coverage #1,416/#53,448 of #10,000 = #265. Thus the result is §10,000 minus #265) a gross loss covered and proved of #9,735, less twenty per cent coinsurance amounting to #1,947, for a net allowed loss (before primary loss deduction) of #7,788.
Similar calculations will be made by the insurance company after adjustment, if and when salvage is recovered from the allowed losses, except that recovery expenses are charged against any amounts obtained after adjustment. The insured retains an interest in each account to the extent of coinsurance and the unallowed portion of invoices exceeding limits of coverage. Therefore, the amount of salvage recovered on an account, less charges and expenses incurred by the insurance company thereon, will be returned to the insured in a ratio proportionate to his interest therein.
For instance, assuming that #9,965 was recovered as salvage from Debtor ”G” with expenses in connection therewith totaling #965. 12k
The net recovery of ;iÿ9,000 (#9,96$ less #96$) would be divided between
the insurer and the insured in proioortion to their interests in the
account. The insurance company would keep #$,871 (#12,000/#19,928 of
'.>9,000), and return #3,128 to the insured. Amounts which policy
holders have recovered from salvage has been negligible, a portion
of one per cent, as concluded from this investigation.
It was reported that a few years ago a request was made of an
official in an insured firm to estimate the amount that would be
recovered from the insurer in an imminent adjustment, so that the
estimate could be included in a report to the board of directors.
The estimate was in the amount of approximately #80,000. This company
had paid #16$,000 in proaiums from 1938 to 19$0, and had received
about $27,000 from the insurer as a result of adjustments until the
final policy year, when an amount of about #$,900 was received. It
was with the payment, which was obviously less than e>q)ected, that a
decision was made to discontinue the insurance. This adjustment is
shovm in Table XII.
Kost of the misconceptions surrounding a policy are brought to
light at the time of adjustment, and much can be learned by self-
study of actual examples. The same general procedures are involved
in all adjustments, so they will not be restated. A further example
of an adjustment reveals one which ended without a loss payment to
the insured. The pranium on this policy was about #1,4$0. However, it will be observed that an undue number of "prior failures" were Table XII
ADJUSTMSTJT 2
Name Dun & Amount Gross Loss Net of Bradstreet Gross Not Covered and Allowed Debtor Rating Loss Provable Explanation Proved Coinsurance Loss
A NIB $ 57 $ 57 Filed after 90 days $ None
B — 177 177 44 $ 133
C A1 1,080 1,080 Not Insolvent None Extension D — 96 96 24 72
L — 270 270 Filed after 90 days None
F — 78 78 20 53
G NIB 8 8 2 6
H — 1,642 1,642 410 1,232
I in:B 2,957 2,957 739 2,218
J H 3& 9 9 2 7
K — 3,589 3,589 898 2,691
L NIB 3o8 388 Filed after 90 days None
M NIB 254 254 Filed after 90 days None Table XII (Cont»d.)
Name Dun & Amoimt Gross Loss Net of Bradstreet Gross Not Covered and Allowed Debtor Ratin,o: Loss Provable Explanation Proved Coinsurance Loss N M B ;ÿ 2,000 $ 2,000 Insolvency 24 days None after policy termina tion 0 “ 170 0 170 # 42 à 128
P 38,285 13,285 Single-account limt 25,000 5,000 20,000 of #25,000 Cl — 122 122 Filed after 90 days None
R NIB 1,612 1,612 Filed after 90 days None
S NIB 41 Single Limt of 7,500 1,875 5,625 7,500 T NIB 928 928 Filed after 90 days None
U —— 44 44 11 33
V “ 40 40 10 30
N -- 437 437 109 328
X NIB 6,000 6,000 Filed after 90 days None
Y —— 132 132 33 99
“ 131 131 33 98
aa B li 110 110 Filed after 90 days None Table XII (Gont»d.)
Name Dun & Amount Gross Loss Net of Bradstreet Gross Not Covered and Allowed Debtor Rating Loss Provable Etcplanation Proved Coinsurance Loss
bb 92B 928 Filed after 90 days None
cc NIB 62 62 15 P 47
dd 30 30 V/ithdraivn None
ee 49 49 Prior Sale None
ff NIB 275 275 69 206
Sg 36 36 Filed after 90 days None
hh NIB 40 40 Filed after 90 days None
ii NIB 5,246 2,196 Disputed None 3,050 Filed after 90 days
jj NIB 293 293 Filed after 90 days None
kk 2,360 ,360 590 1,770
11 296 206 Piled after 90 days 90 22 68
ram 605 605 151 454
nn 496 410 Filed after 90 days 86 77
oo F 3 66 66 Filed after 90 days None
PP NIB 159 159 Filed after 90 days None Table XII (Cont»d.)
Name Dun & Amount Gross Loss Net of Bradstreet Gross Not Covered and Allowed Debtor Rating Loss Provable Explanation Proved Coinsurance Loss
qq H 3 & 0 967 $ 956 Filed after 90 days $ 1 1 0 3 $ 8
rr H 4 298 298 74 224
ss J 150 150 Filed after 90 days None
tt F 11 11 Insolvency 1 day after None policy termination
uu NIB 92 92 Filed after 90 days None
w NIB 139 139 35 104
ww —— 94 94 Filed after 90 days None
XX -- 4 4 1 3
83 Disputed y y -- 238 None 155 Filed after 90 days zz NIB 15 15 4 11
aaa NIB 232 232 58 174 $ 8 1 ,3 3 8 $ 3 5 ,1 5 1 #46,187 $10,283 $ 3 5 ,9 0 4 Less primary loss borne by insured . 29,994 Net amount paid by insurance comparé'- # 5 ,9 1 0 Coinsurance was 10^ on 1st and 2nd credits, 20$ on a specific coverage. Debtor "P," and 25$ on all other accounts. H ro o 129
included with the "Final Statement of Claims" in this case. This may
have been due to misunderstanding of coverages, or just as a routine
matter of including all insolvencies without the expectation of
recovery from them.
Common Misconceptions
As a result of interviews with sixteen policyholder firms, it
i/as found that most insureds were not well-informed on the provisions
of their credit insurance policies. Varying degrees of understanding
were found, from one executive who had an excellent knowledge of the
subject, three more who had a good understanding of the matter in a
general w/ay, to some who knew very little about the insurance, and
would be surprised, if not disappointed, in the event of an adjustment.
Thus, in two-thirds of studied policyholder firms, matters relative to
usage of credit insurance were not adequately understood by executives.
Some of the misconceptions found among policyholders include
the case of one executive handling the fii-m*s credit insurauice, who
thought that delinquent accounts were to be filed with the insurance
company after they had become ninety days past due. He did not realize,
of course, that he would lose insurance coverage on all accounts held
over ninety days past due, except as they might thereafter become
defined insolvencies within the policy terms or possibly during one
subsequent policy year vri.th additional coinsurance.
The credit manager of another firm, which had discontinued the
insurance wûthin the. year of interview after eighteen years as an insm’ed, said that the insurer was "very liberal about when accounts were filed." He did not Imow about the ninety-day filing provision. Table XIII
ADJUSTMENT 3 Name Dun & Amount Gross Loss Net of Bradstreet Gross Not Covered and Allowed Debtor Rating Loss Provable Explanation Proved Coinsurance Loss A 2X $ 277 # 160 Prior Failure # 117 # 23 # 94
B F 3i 14 14 3 11
C 2,059 1,734 Single-Limit of #500 325 65 260 and Pro-Rata Collec tion of 35^'" D IX 87 87 Prior Failure None
S D 2 79 79 8 71
F F 3& 70 70 Prior Failure None
G —— 78 78 Prior Failure None
H D 2 40 40 Prior Failure None
I 2 X 84 84 Prior Failure None
J 2 X 172 172 Prior Failure None
K NIB 76 76 15 61
L — — 49 49 10 39
M NIB 412 412 Prior Failure None G o N NIB 23 23 16 Table XIII (Cont»d.) Name Dun & Amount Gross Loss Net of Bradstreet Gross Not Covered and Allowed Debtor Rating Loss Provable Bxplanation Proved Coinsurance Loss 0 1]{ $ 2,524 $ 2,524 Prior Failure None
p 2 3 163 $ 32^ ( D ll 163 ^ 131 Q — 1,017 1,017 Prior Failure None
R D 2 474 474 Prior Sales None
S NIB 169 169 Prior Sales None
T 3 X 127 127 Prior Failure None
U — 642 142 Single Limit $500 500 100 400
V NIB 12 12 2 10
iv AAl 41 41 Prior Sales None
X —— 52$ 49 Single Limit of #500 476 95 381 and Pro-Rata Collec tion of 4 .76 % I G 3& 1,110 380 Single Limit of #1,000 730 73 657 and Pro-Rata Collec tion of 21% 2 NIB 45 45 9 36
la — — 838 579 Single Limit of #500 259 52 207 and Pro-Rata Collec tion of 48 .215* Table XIII (Cont^d.) Name Dun & Amount Gross Loss Net of Bradstreet Gross Not Covered and Allowed Debtor Rating Loss Provable Explanation Proved ;oinsurance Loss bb NIB 220 ^ 220 # 44 f 176 cc NIB 668 ^ 168 Single Limit #$00 500 100 400 dd IX 4,160 3,660 Single Limit "i500 500 100 400
ee 3X 90 90 18 72 ff 732 232 Single Limit ,$500 500 100 400
gg IX 400 400 80 320
hh J 48 48 9 39
ii 504 405 Single Limit of ^500 99 20 79 and Pro-Rata Collec tion of 80 .16^0 jj NIB 43 43 9 34
kk 42 42 8 34 #18,114 #12,804 # 5,310 $ 982 3 4,328 Less primary loss borne by insured , . . 3 6.965 Net amount paid by insurance company None
A collection to the extent of 35^ of the total account had been made, which reduced the coverage on the accour-t by that amount, from $500 to $325. Coinsurance was an additional lOp in this case, because account had been 90 days past due mder a prior policy.
fO 133
or the consequence of not using it. He had not learned this, even
though he explained that the policy had been renewed year after year
as a matter of habit, and that the decision to drop the policy came
when it was finally analyzed. However, the canpany had not had a loss
adjustment in the eighteen years during which it had held a policy.
The executive of a very large firm had a delinquent account in
excess of $15,000, which apparently had not been filed with the insurer
within the ninety-day period after it became past due. He said that
he did not have to worry about it because he would get paid by the
insurer even if it did not result in insolvency until "three years
frcsn now." Actually, an account sold on his usual terms of sale, even
if sold on the first day of a policy term, could, at most, only be
covered for a total of twenty-one months after the due date. Too,
this executive seemed not to know about coinsurance. Furthermore,
consideration would have to be given as to whether or not insurers
would want to assume such a large delinquent account on the back sale
rider of even one renewal policy. But even then, assuming that the
account became insolvent much sooner than the three year period and
that the coverage was insured in every way, there is no certainty
that the primary loss would be exceeded, after the coinsurance had
first been deducted.
The credit manager of an insured firm indicated that he thought
that the primary loss is deducted before coinsurance in an adjustment.
Still another insured did not know that his policy had both primary
loss and coinsurance provisions. He thought that they were one and the same, and he called it "coinsurance." 134
The president of a relatively small firm explained that he had
purchased credit insurance as the direct result of superb salesmanship,
and because he had one account which he sold in relatively large amomts.
His first disillusionment came when he was notified from the insurance
company home office that there would be a charge for collecting
accounts. Next, he learned that he would have to report to the insurer
monthly on any amount owing over $1,000. Then later, the large account
became delinquent in the amount of $20,000, and he telephoned the
insurance agent, who suggested that they read the contract together.
The insured believed that the provisions were not as previously
explained. He could have collected only about $1,400 fron the insurer,
and his premium had been over $1,200. He had also taken on some
borderline accounts, as the agent said he could, but now he learned
that he was not covered on them. Needless to say, after this experi
ence the policy was dropped, and ironically, the subject account was
collected frcan the debtor.
One firm reported that a credit insurance ccanpany would not
allow a claim of $3,000 on an apparently uncollectible account. How
ever the insurer told the policyholder that the account would be
assumed, if the policy were renewed. The policyholder had understood when he bought the policy that such an event would be covered. The
insured felt that he was being coerced into renewing the policy, which he refused to do. He had understood the agent to say, when the policy was purchased, that such an eventuality would be covered. Probably the insurer was technically right in not assuming the risk on the 135 policy, because the account was not ninety days past due at the ter
mination date of the policy. Under the back sales rider of a new
policy, the account could be covered. This account, too, was later
collected by the insured.
Such dissatisfactions have sometimes been blamed on agents for
failure to properly educate potential policyholders in the provisions
of credit insurance, especially as concerns adjustments. Agents have
met this accusation by explaining that they would lose sales if they
were to explain some of the points around which misunderstandings
arise. Agents might also rationally believe that all the facts of
credit insurance are too complicated to explain to policyholders.
Then too, they could point out that the insured could read his policy
and learn about credit insurance.
The latter idea would have to be discounted by the common know
ledge that the great majority of insureds do not read their policies,
and that it is doubtful if the average layman could learn the details
of credit insurance by reading the technical legal phrases of a policy.
It will be noted that policies frequently go on for one more year
after an adjustment, even when there is dissatisfaction with the adjust
ment. This is due to the fact that the adjustment takes place from
thirty to ninety days after the expiration of a policy.
In summary of the foregoing investigation into policy adjust ments, a list of the most significant findings is presented;
1. An account which is once filed with insurers for collection may be
withdrawn, but doing so will forfeit coverage under the policy. 136
Further, a withdrawn account is subject to collection fees.
2. Accounts considered in insurance adjustments must be assigned in
full to insurers with right of subrogation, even if the outstanding
amount owed is more than the insurance coverage.
3. The coinsurance stated in the insurance policy is usually ten
per cent, but riders to the policy show that twenty per cent
applies to third and fourth credit ratings, and ten per cent
additional coinsurance governs in either case for accounts that
are ninety days past due when included in backsales riders.
4. Coinsurance is deducted from the gross covered and proved loss
in adjustment procedure, before the primary loss deduction,
making it larger in relation to the net loss than the percentages
referred to above.
5. Any account which is disputed is not a provable claim against
insurers, and will not be considered in adjustments. If the
dispute occurs after an account is filed with an insurer, the
insurer may require that the insured advance court costs or suit
fees promptly when requested, and failure to do so is considered
withdrawal of the account.
6. Accounts which are filed so as to reach insurers within ninety
days past due date will be considered as insolvencies by
insurers in adjustment procedure under the N policy, which is
the form most frequently used. But after the ninetieth day,
accounts will not be considered "proved claims" unless an actual
insolvency occurs within the time specified in the policy or the
riders. Accounts sometimes are uncollectible for months or even 137
years before a defined insolvency occurs,
7. Usual collection fees are chsirged by insurers for collections
effected by them on accounts failing to meet their definitions
of "insolvency.”
8. Insurers do not charge collection fees if accounts are collected
between the time of a "defined insolvency" and before adjustment.
Therefore, and for reasons previously stated, it is to the
advantage of policyholders to file accounts so as to reach
insurers before the ninetieth day past due, but as near to the
ninetieth day as possible.
9. Any commodity sold which is not listed in the insurance contract
is not covered by the policy.
10. Accounts will not be covered unless terms of sale are used as
permitted by the policy, and only if these terms appear on the
invoices.
11. The policyholder must notify the insurer of the insolvency of a
debtor within twenty days after acquiring knowledge thereof. A
supplementary report of a mercantile agency to which the debtor
subscribes constitutes "knowledge of insolvency."
12. The rating on an insured on the date of delivery governs, instead
of the date of sale, except where a special rider is purchased
with the policy. A change in rating between sale and delivery
may mean that the account will not be covered for the amount of
sale, or that it may not be covered at all,
13. Collections made after the date of filing an account with the
insurer or the date of insolvency, whichever is earlier, are 138
applied pro rata where the amount owing is greater than the
amount of coverage on an account. This means that the amount of
coverage will be reduced in the proportion that it bears to the
total account times the amount of collections.
The above conditions should be known to insureds as a practical means of utilizing a credit insurance policy to best advantage. Unless they understand those techniques which are standard procedure in policy adjustments, these are likely to be disappointed when excess losses arise and they do not receive loss payments in amounts that they had anticipated. The next section presents experience of actual loss payments by insurers.
Amounts of Loss Paid by Insurers
Most credit insurance policyholders do not expect to collect larger sums in loss payments from their policies than they pay in premiums. Rather they desire protection from excessive losses which would damage their firms more than loss of an annual premium. They would indeed be in error to expect to make money from the policy, because by so doing they would first suffer along with the insurer to the extent of the primary loss, coinsurance, and other uncovered portions of accounts. Many of these businessmen have self-insurance in a large number of accounts, and thus should not expect frequent loss payments from insurers, who only cover "excess" or abnormal losses.
The probability of all of a creditor's accounts failing at once is slight, and, if it happened, there is little hope that an insurer would be able to meet all his obligations. The only eventuality which 139
could cause this to the average businessman would be destruction from
acts of war, and such events are excluded from credit insurance cover
age. More than ninety per cent of bad debts are caused by the inex
perience or incompetence of debtors, and no one region or industry which is credit insurable has a preponderance of incompetent manage ment.
Insurers are well informed where and when losses are most
likely to occur, and are governed accordingly in the selection of industries and firms they will insure, and in the primary loss rates that they will apply. As has been done in the past, there is reason to believe that insurers would resort to a general increase in rates, and a tightening of policy provisions if a major depression threatened.
Not only would this action be desirable to insurers, but it might be necessary for the protection of their ccanpanies.
It may be argued that insurers function to take in funds from policyholders in periods of business prosperity, to be returned to them in periods of depression. The history of credit insurance does not support this contention. Witness the year 1953, which was the most prosperous in the history of the leading insurer. A dividend of eighty-three per cent was distributed to stockholders, or $1,2$0,000 dividends from a premium volume of about five million dollars. It was not kept in the company to be paid out to policyholders when the
"inevitable depression," mentioned in company literature, arrives.
There is no question but that profits are healthy, and that credit insurers are entitled to them. Yet, it is important that policyholders and non-policyholders take a look at the record of 140 insurers to determine whether the services rendered merit the cost.
If credit insurance provided the only means that a businessman had to spread the risk of possible destructive credit losses, then the rates charged might be of secondary importance, if he could still earn a profit after paying them. But since the insurance is not vitally important to the great majority of business men, they must consider the cost in relation to expected returns in loss payments. Thus, a look at the loss ratios is a means of judging the efficiency of the insurers, who function, in their own words, "as custodian of the contributions of the many, to madce good the losses of those who have been unfortunate."
It is well to look in on the custodians to see how efficiently they are performing the function, and how much of the contributions of
"the many” never reach the "unfortunates." Table XIV was taken from the experience of a group of credit insurance policyholders in South western Ohio on whom data were available concerning premiums paid in and losses recovered. The loss ratio of 12.6 per cent meauis that the
"custodians" of their contributions kept from the insureds, as a group, 87.4 cents of every dollar of contributions. No amounts are included for the collections made by insurers, because it is generally agreed among policyholders interviewed that this service of the insur ers is no better, in quality or rates charged, than other available collection agencies.
Table XV covers the post-war years of 1946 to 1953, and is limited to businesses which insured accounts during that entire period. 141
Table XIV
AGGREGATE EXPERIENCE FOR YEARS POLICYHOLDERS HELD POLICIES FROM 1912 - 1953
No. of Premiums Recovered Policyholder Years Paid Loss Paym<
A 12 #165,104 #33,275 B 12 86,450 2,637 G 18 27,921 11,265 D 27 16,343 —— E 17 17,005 2,829 F 21 70,864 —— G 19 38,265 2,912 H 15 16,417 532 I 22 10,567 245 J 26 14,955 11,990 K 14 70,528 690 L 7 49,912 19,796 M 11 55,057 N 9 9,260 — 0 7 13,663 - P 3 9,454 —— Q 4 5,258 —— R 4 740 S 3 2,526 — T 3 1,994 -
#681,800 #86,171
Proniums Paid #681,800
Losses Received From Insurance Co. $ 86,171
Loss Ratio 12.6^ 142
Table XV
AGGREGATE EXPERIENCE FOR YEARS POLICYHOLDERS HELD POLICIES FROM 1946 - 1953
No. of Premiums Recovered in Policyholder Years Paid Loss Payments
A 8 # 4,664 B 8 8,331 C 8 18,894 D 8 51,395 E 8 7,571 F 8 10,435 G 8 28,192 I 690 H 8 19,908 2,912 I 7 49,912 19,796 J 8 6,408 K 8 22,250 L 8 7,238
1235,198 $23,398
Premiums Paid $235,202
Losses Received From Insurance Co. $ 23,398
Loss Ratio 9.9# 143
It will be noted, that the overall loss ratio for policies studied in
Southwestern Ohio was about ten per cent in the later period. The
loss-ratios of the test area are next ccanpared with those enjoyed by-
insurers on a national basis.
Table XVI is included to show the combined premium received and
losses paid on a national scale, by the two credit insurers, over the
past two decades. It may be noted that, during three wartime years,
the insurers had net "gain ratios" instead of loss ratios. Thus they
received more from salvage in those years, some of which was obviously
from accounts taken over in adjustments of prior years, than they paid
out to insurers. However, the overall loss ratio for the two decades
was 10.7 per cent, leaving the insurers Ô9.3 per cent of premiums to
cover operating expenses and profits.
This investigation into losses paid by insurers would not be
couplete without going back beyond the period of the last major
depression years. Therefore, Table XVII is included to show the
cumulative loss ratios of insurers for all the years during which
they have been recorded. Over the years of their statistical history,
the credit insurers have had a cumulative loss ratio of nearly thirty-
one per cent, or conversely, have been able to retain sixty-nine cents
out of every premium dollar for expenses and profits.
Salvage returned to policyholders by insurers has not been included in the foregoing analysis because of the insignificant amounts involved. Present and former policyholders who had received loss payments were asked whether or not they had received a share of salvage Table XVI
CREDIT INSURANCE PREMIUMS WRITTEN AND LOSSES PAID (LESS SALVAGE) FOR PAST 20 YEARS*
Cumulative Year Premiums Losses Loss Ratios Gains** Gain Ratios Loss Ratios 1934 $1,889,192 $ 309,319 16.37% 16.37 1935 2,075,655 331,627 15.97 16.16 1936 2,292,900 299,962 13.08 15.03 1937 3,208,665 355,655 11.08 13.69 1938 2,858,099 2,010,409 70.34 26.83 1939 2,706,269 1,098,792 40.60 29.31 1940 2,858,198 679,632 23.77 28.42 1941 3,294,593 386,338 11.72 25.83 1942 3,883,216 240,001 6.18 22.78 1943 4,470,747 96,293 2.15 19.66 1944 4,631,871 $12,754 2.75% 16.96 1945 4,103,430 46,297 11.28 15.02 1946 3,986,993 40,750 10.22 13.50 1947 5,560,438 255,401 4.59 12.47 1948 6,191,686 618,555 9.99 12.18 1949 6,354,410 494,452 7.78 11.72 1950 6,391,352 401,924 6.26 11.20 1951 7,156,521 413,152 5.77 10.67 1952 7,362,113 710,646 9.65 10.58 1953 8,074,236 966,874 11.98 10.70 Totals 100,701 Twenty year credit insurance loss 10.7% *Source: Files of the New York State Insurance Department, as reported by the credit insurance companies. Includes combines statistics for all companies. **Salvage from prior years exceeded losses during these years. Table m i
CREDIT INSURANCE STATISTICS FOR "BUSINESS CYCLES ENDING WITH DEPRESSION"
Average yearly Loss Cumulative Pronium in Cycle Premiums Losses Ratio Ratios Each Cycle
1905 - 1915 11 yrs. 7 ,023,410 4,234,851 60.29 60.29 638,492
1916 - 1922 7 yrs. 14,365,906 6 ,112,952 42.55 48.37 2 ,052,272
1923 - 1933 11 yrs. 33,258,241 19,718,089 59.28 55.01 3 ,023,476
1934 - 1939 6 yrs. 15,030,780 4 ,405,764 29.31 49.47 2 ,505,130
1940 - 1950 11 yrs. 51,719,833 3 ,102,501 5.99 30.95 4,701,803
Totals 46 years 121,398,170 37 ,574,151 30.95 30.95 1905 - 1950
Source: Files of the New York State Insurance Department 146
collected by the insurer. Only four of the group of seventeen believed
that they had received any such amounts. The small size, infrequency,
and late receipt of such amounts prevented a precise computation of
than, but it was obvious that they were much less than one per cent of
all premiums paid by the policyholder group.
For such return of salvage to be made, the insurer would have
to collect more than his interest in the assigned accounts, plus the
costs of collection. The charges by the insurer on "salvage," i.e.,
collections after adjustment, differ from the charges of the insurer
on "collections," i.e., recovery made before adjustment. The standard policy has the following to say about the insurer*s charges for recovery:
On claims assigned to it in adjustment, the insurer will promptly remit to the policyholder, after deduction of all charges and expenses: {a) The net amount realized on any claim in which the insurer has no interest; (b) The net amount realized on any claim in excess of the gross amount covered; (c) That portion of the net amount realized on any claim, equal to the percentage of coinsurance thereon borne by the policyholder.
Only item "c" could be regarded as likely to result in salvage from subrogation of accounts by the policyholder. Thus, most salvage is kept by insurers to cover the loss payments, for collection costs, and
"all charges and expenses."
Finally, precautions should be observed in expecting loss ratios of the distant past to be duplicated in the near future. In any event, the all-time credit insurance loss ratio of thirty-one per cent is low.
The period preceding 1934 was one of extreme competition among insurers. 147
aaid policies were more favorable to insureds, as was e3q>lained in the
preceding chapter. Since 1934 there has been no noteworthy competition
among insurers; rather there has been cooperation. Further, our
econcmiy has built-in stabilizers today that may well prevent major
depressions in the years to come. At least the outlook for the future
indicates lesser and more stable bad-debt loss ratios than in the past.
Cost of Credit Insurance
In addition to the insurance premium, the primary loss must be
considered as a cost of credit insurance. The latter is often referred
to as a deductible, and is compared with the provision of automobile
insurance by that name. However, they are incomparables, because the
primary loss is a certain loss to an insured and the deductible is not.® Credit losses are expected as normal costs of doing business by efficient credit managers, but automobile accidents are unexpected and infrequent to the average driver.
The primary loss rates on 1953 policies studied were compared with actual losses of the same firms and with all known pertinent national bad-debt loss surveys. Included was the 1939 study which was conducted jointly by the United States Department of Commerce and the National Association of Credit Men for the years 1937 and
1938. The latter year was used in this analysis because losses were heavier in that year. It is reliably reported that credit insurers
®This idea was gained from a conversation with Professor Theodore N. Beckman, of the Department of Business Organization, The Ohio State University. 148
have used this survey as an aid in rate-making. Bad-debt ratios from
that survey are shown in Appendix I, to this report.
Also used as a basis of comparison is the credit section of
the 1948 Census of Business, which reported bad-debt ratios of whole
salers and manufacturers * sales branches. Lastly, a more recent study
by the Credit Research Foundation has been used because it is more
timely than the others. The main limitation to all three studies is
the number of firms used, which was most in the case of the 1939 joint
study and least in the study made by the Credit Research Foundation.
However, these studies provide more loss statistics than a credit
insurer would get in any year, with only part of about 3,000 policy holders reporting. All policyholders studied in this investigation were included where the various tables were directly applicable to insureds* industries. Otherwise, proper comparison could not be made, and seme firms had to be omitted from Table XVIII.
It may be noted that in each case the policy primary loss wasgreater than the actual loss of the firm in question. It was not unusual for the primary loss to be ten times the actual loss. With this in mind, a policyholder might cranplain that he was being charged an average rate for an industry, and thus being penalized by rate- making which considered the inefficient firms in his industry. But more than this, a comparison of the bad debt loss studies with the primary loss rates reveals that, all firms included, the primary loss rates are still high. The averages reported in the 1952 study by the
Credit Research Foundation were lower than the primary loss rates, by a very wide margin. Further, only one of the eight firms had a primary 149
Table XVIII
PRIMARY LOSS COMPARED WITH CREDIT LOSS IN SOUTHWESTERN OHIO*
1953 Industry Loss 1953 Policy 1952** 1948*** 1938**** Lrm Actual Loss Primary Loss Study Census Study
A .15% .002$ .03% .23%
B .01 .12 .004 .15 .15
C .01 .289 .002 .07 .28
D .005 .1589 .001 .05 .14
E .01 .10 .002 .04 .13
F .50 .53 .003 .22 .30
G .01 .118 .001 .05 .08
H None .07 .001 .02 .15
*Only those firms could be used whose industries were reported in each of the studies. Some firms had to be left out because one or another study did not report on industry that would adequately describe a particular business being investigated.
•***'Results of Accounts Receivable Survey," Credit Research Foundation, New York, New York, 1953.
■***U, S. Census of Business. 1948. Wholesale Trade. Credit, pp. 3.03-3.30.
**-****Bad Debt Loss Survey, Joint Study by The Department of Com merce and The National Association of Credit Men," Credit and Financial Management (June, 1939), pp. 18-20. 150 loss ratio which was lower than the average for its industry as reported in the 1948 Census of Business. Among the other firms, there was still a relatively wide margin of credit insurance primary loss rates above the average reported for the industry from the Census. Going back to the 1938 losses, reported in the Department of Commerce— National
Association of Credit Men study of 1939, the primary loss was higher in four cases and lower in four others than the industry averages reported in the 1939 study. The primary loss rates were relatively close to the 1938 study except for a steel compauiy, in which case the policy primary loss was about fourteen times the reported industry average. However, loss ratios of insurers in 1938 were the highest of the past two decades. There is serious doubt that the primary loss rates for 1953, the most prosperous year in American history, should have been ccmparable to bad debt ratios for 1938.
The distribution of premium costs for credit insurance custo dianship, to the firms who use it, is revealed in Table XIX, based on the experience of the leading credit insurer over the past two decades.
This experience starts with the year in which credit insurance became relatively non-competitive, as it is today. The insurer will be seen to have had underwriting gains in eighteen of the twenty years included.
Also, investment gains resulted in addition to the underwriting gains reported.
It will be noted that the major cost item is the underwriting expenses of the insurer, which has been in excess of forty per cent of premiums for every year of the last two decades, except 1953. Direct Table XIX 151 DISTRIBUTION OF A CREDIT INSURANCE PREMIUM DOLLAR DURING TWENTY YEARS
Loss Payments Under Loss Under Under to Policyholder writing Expenses writing writing Year (less salvage) Expenses of Insurer Gain Loss 1934 Ôé 52* 34* 6*
1935 6 52 24 18
1936 4 57 24 15
1937 6 53 21 20
1938 70 43 21
1939 39 45 21 5
1940 21 43 19 17
1941 8 46 17 29
1942 2 43 13 42
1943 1 43 10 46
1944 — — * 41 8 53*
1945 ----- 41 9 51**
1946 “ 45 12 44**
1947 4 46 9 41
1948 7 45 8 40
1949 9 46 9 36
1950 4 44 12 40
1951 3 44 10 43
1952 8 43 11 38
1953 13 34 24 29 *The two cents above losses was derived from salvage from past years. •JHfThe one cent above losses was derived from salvage frcxn past years. Source: Data computed from statistics as stated in Best’s Insurance Guides for a credit insurance company. 152 selling expenses are the major underwriting item, and they average about twenty-five per cent of premiums.
The next major portion of policyholders* premiums in the period shown became an underwriting gain for insurers. This has been con siderable, and is difficult to reconcile with the high rates and the tendency toward less favorable coverages for policyholders. This is not to imply that profits, per se, are wrong. However, it is an indication that others might profit in the business, even though charges to customers were reduced. In this case it suggests that the risks covered by insurers are not as great as might seem, and that many policyholders might profitably self-insure. This data may even be said to lend support to a previous contention that better communica tions, improved techniques of credit checking, better educated credit management, and more stability in the economy, have all tended to lessen the bad-debt loss in the American economy. The loss expense^ follows in order of size, and over the years has exceeded actual loss payments. The latter, the loss payments, are gains to the insureds, who over the twenty-year period have averaged recoveries of about ten per cent of premiums.
It is not believed possible to pin point the cost of credit insurance as a percentage of coverage, because of the manner in which coverages apply to sales. The limits of coverage, as stated in a
^The "loss expense" includes all expenses of insurers incident to verifying and paying amounts which qualify for loss payments under the terms of actual policy coverages. The salaries of insurance adjusters is a main item of "loss expense." 153
table of ratings appearing in a policy, applies to all sales made under
those ratings, and the table provides, in effect, a limit applying to
the outstanding amount of each account sold under a rating, and not
to the total sales of all accounts sold under the rating.
Insurers often quote the cost of credit insurance as a relation
ship to sales, and yet executives admit that it is almost impossible
to ascertain the actual cost relationship because of the complicated
rate structure and the uncertainty of the number of accounts insured
under each rating. A figure that has commonly been used by insurers
as the cost of credit insurance is one-tenth of one per cent of sales.
A quotation of one-twentieth of one per cent of sales has also been
used. This figure is derived by dividing the premium by the annual
sales volume of an insured. As a random example, an insured*s
premium was $1,457 and his annual sales volume was $2,700,000. Then
the premium as a percentage of sales was about one-nineteenth of one
per cent.
The first error in this procedure is that no account is taken
of the cash sales, which according to the 1948 Census of Business are
about fifteen per cent of total sales for manufacturers and wholesalers.
So by revising the sales figure in this respect, the $1,457*43 premium must be applied against $2,295,000, or one-sixteenth of one per cent.
Next must be considered coinsurance, taking into account the amount
of sales on first grade and second grade credit, and the amount on third and fourth grade credits, in order to determine the coinsurance under the policy. This is reliably estimated to be seventy-five per cent and twenty-five per cent respectively. Therefore, the 154 coinsurance at ten per cent for seventy-five per cent of the credit sales and twenty per cent for twenty-five per cent of the credit sales would be $286,875* This amount from credit sales would leave
$2,008,125 covered to this point, which, when applied to the premium of $1,457*43» would indicate a cost of one-fourteenth of one per cent.
But to this would have to be added the primary loss, which is also an element in the cost of credit insurance. This latter is 15*89/lOOths or about one-sixth of one per cent, which, added to the premium of one-fourteenth, would give a cost of about one-fourth of one per cent of credit sales.
But just what coverage is provided on these sales? It is not correct to state even the last amount computed above as the cost of credit insurance, because if all accounts failed, they would not be covered. In fact, this cost provided a policy with a $40,000 face, or maximum possible return. In this study, as previously stated, no situation was found in which a loss payment ever was limited by the face amount of a policy, other further limitations having always pre vailed. The other limitations in this case are named coverages of
$14,000, which have been investigated by the insurance company, and
$5,000 gross maximum (before primary loss and coinsurance deductions) on any or all insolvencies on third or fourth rated accounts. The single limits on first or second credit ratings vary from $20,000 on
AAAI to $1,000 on G 3è* So if the statement is made that sales will be insured for a cost of one-tenth or one-twentieth of one per cent, it is not correct. Unlimited policies which would cover all sales are not written in practice. If the coverages were so arranged as to 155 cover al 1 sales, the cost would be enormous and certainly prohibitive.
It is easier to compute the cost of an ’*L” policy, because it
provides blanket coverage, applying to both rated and non-rated
accounts. The face amount of a policy was #10,000, coinsurance twenty-
five per cent, the primary loss one-fifth of one per cent and the
premium #458.50, with a single limit of #700 on each account. The
loss of precisely thirteen accounts of #700 each, all of which would
be covered and proved would equal #10,100. Coinsurance would be
deducted, leaving #7,500. The next deduction would be the primary
loss of one-fifth of one per cent, leaving #4 ,5 0 0 as the maximum
possible loss payment to the insured. In this case, the insured has to weigh the premium of #458 against the maximum possible protection.
Here the cost was ten per cent of the working capital "protected."
After loss adjustments, except in the case of very old policy holders with good experience to the insured, rates were found to increase. That the premium becomes increasingly larger after a loss adjustment is due to the fact that the primary loss will most likely become larger. Then, in order to have a similar amount of coverage as on the previous policy, the upper limit of coverage must be extended, example, if a policyholder had a primary loss of #3,000 and a face value of #10,000, then if his primary loss was raised to $4,000, the face value would have to be increased to $11,000 in order to have the same #7,000 in coverage. The premium on the #11,000 would be greater than that on the original #10,000.
Further, to show that rates may be adjusted upward in a reces sionary period to preclude credit insurance from serving as a hedge 156 against depression, three quotations from the speech of a credit insur ance executive are quoted;
In February of 1930, because of economic conditions, a load ing of ten per cent to the finally ascertained premium, and twenty-five per cent to the finally ascertained normal loss, was added to apply on all new business.
In October of 1930, the agents were requested to abandon the merit rate wherever possible owing to unfavorable business conditions.
In 1944, the use of the conditional exemption of coinsurance rider was suspended as a precautionary measure in view of the reconversion period which was expected to come with the end of the war.^^
Only one firm was found in this investigation which actually received a loss payment which was greater than its premium payments during the time it was a policyholder. This was possibly because the firm only insured once, and because of the peculiar circumstances under which it did so. The president of this firm bought a policy, not after contacts from an insurance company, but after looking for the insurance to cover one doubtful account. He was turned down by one company, but was insured by the other. The single-debtor coverage was for $50,000 on an account with which the company had about $350,000 annual sales. The premium was $400, with ten per cent coinsurance, but no primary loss. During the policy term, the debtor failed and the insured collected $4,800. The debtor firm was a patent medicine organization whose insolvency is said to have cost the insurers nearly
$300,000 in loss payments. This is the most celebrated case in modern
Notes from a speech delivered to agents by the president of the American Credit Indemnity Company of New York, in Baltimore, Maryland, November, 1951, pp. 7, 9. 157 credit insurance history. Nevertheless, the insured has not been able to get single-debtor coverage since that loss payment, so he has not insured since. This insured does not want general coverage, because he believes that the cost is prohibitive; the premium would cost him about $2,500 and the primary loss about an equal amount. Under these rates, he would not have gained if he had used general coverage in the example given.
Further, the feature of charging premium primarily on ratings, regardless of the amount of credit extended on each rating, does, in effect, discriminate in favor of the larger firms who sell to a larger number of accounts.
But regardless of how rates are set, the most thoroughly reliable gauge of the cost of credit insurance is the loss ratio, the relation ship between total premiums and loss payments to all insureds. That part of premiums paid by policyholders which is not returned to any of their members represents the cost of insuring to them as a group.
That cost has been high, as is illustrated by Chart F. The cost of credit insurance to all policyholders has thus been sixty-nine per cent through recorded credit insurance history, from 1905 to 1950, and eighty-nine and three hundredths per cent during the past two decades.
The second leading reason given by present policyholders for initially insuring accounts had to do with the collection service offered by insurers. It is of significance to know how policyholders and former policyholders found this service in actual practice, apart from any inducement that it may have been to originally purchase the 158
Chart F
Disposition of Average Credit-Insurance Premium Dollar
Returned to Policyholders For Expenses and Profits of Insurers
Through Five "Business Cycles" from 1905 to 1950, inclusive
Source I Table XVII
turned to Policyholders For Expenses and Profits of insurers
During the Past Two Decades 1934 to 1953, inclusive
Source-’ TableTCVr 159
insurance. This matter will be considered in detail in the next
section.
Collection Service
Credit insurers refer to their collection function as "loss
prevention" service. They will accept all of a policyholder’s past-
due accounts for collection, but they require that entire accounts be
filed, and not just covered portions. A fifteen-day free-demand-
service is offered, but otherwise collection fees are similar to those
of usual collection agencies, who nomally provide a ten-day free-
demand service. One-half the Gcmnercial Law League rates are charged when collections are made without the services of an attorney, and
the regular Law League rates apply where legal assistance is used.
Scane state laws require higher rates, and the insurers must comply with rates set by attorney groups in certain localities. Both com panies use bonded attorneys to effect collections in various parts of the country. In some localities they operate collection offices, and collections are made nearby by their salaried employees.
The American Credit Indemnity Company of New York maintains col lection offices in the following cities:^
Atlanta New York Baltimore Philadelphia Boston Pittsburgh Chicago St. Louis Cleveland San Francisco Los Angeles Toronto
^John Christenson, Report of Examination of the American Credit Indemnity Ccmpany (New York: New York State Insurance Department, 1951), p. 80. 160
The London Guarantee and Accident Company, Ltd, has collection offices located as follows
Cleveland St. Louis Chicago Los Angeles Charlotte Cleveland
Insurers offer an incentive for policyholders to file accounts early. They do not charge for collections on insolvent accounts, if made between the dates of actual defined insolvency and insurance adjustment. This free service is designed to encourage the filing of accounts ahead of insurance adjustment, on the theory that accounts depreciate with age. Under the terms of the usual insurance contract, uncollectible accounts which are accounts to be considered as insol vencies in adjustments, even though an actual insolvency does not exist, must be filed with insurers within ninety days after due-date.
Not to file within that time means that these accounts will not be provable claims against an insurer.
Once an account is filed with an insurer, it may not be with drawn except at the sacrifice of insurance coverage. Further, even though insurers offer no further protection on a withdrawn account, it is still subject to collection fees of the insurer. If an account is disputed, the insurer may take appropriate action to clarify its status, but has the right to bill the policyholder for court fees and other costs connected therewith. Any return of merchandise to the insured, or any payment made directly to him after an account has been
l^This information was furnished by an executive at the London Guarantee and Accident Company, Ltd., New York. 161 turned over to the insurer, are subject to collection charges.
About fifty per cent of the thirty-two former policyholders interviewed had used the collection service of credit insurers. Of these fifteen firms, eleven qualified this usage to "very little," and some said that only one or two accounts had been filed with insur
ers. None of the former policyholders was enthusiastic about this service, and one had been dissatisfied with it.
An executive of one firm said that insurers did not take the proper interest in non-covered claims. Still another complained that a collection was spread over a six-month period, and that the policy holder had to pay an amount each month for attorney fees. The total charge was said to be about thirty per cent. Still another executive said that an insurer sent an exorbitant bill for collection, which was later compromised, but resulted in his firm dropping the insurance.
The consensus among former policyholders was that the collection charges and services of insurers are about the same as those of other collection agencies. To them, the premium paid insurers would have to be evaluated solely against insurance features, with none warranted for collection service.
Present policyholders are making more use of credit insurance collection services than did those who discontinued policies. Twelve of sixteen present policyholders use the collection service, at least to some extent. But half of the policyholders who have used the insurers as collectors, have limited this usage to only a few accounts.
One present policyholder said that his firm has kept the insurance 162
solely because of the collection service. Those four who do not use
this service either do 1 their own collection work or use collectors
who specialize in their industries.
A possible conflict of interest between the insurance feature
and collection efforts was revealed in interviews with policyholders
eind past policyholders. It is conceivable that there could be cases
in which it would be to the advantage of insurers to delay an insol
vency, and thus not incur a loss payment to insureds.
There is some merit to the idea that credit insurance would be
better off without the collection feature. It places insurers in
competition with Dun and Bradstreet, Inc., the National Association
of Credit Men, and general and specialized collection agencies. Insur
ers, because of the required extensive coverage for relatively small
volume, both geographically and industrially, may look with disfavor
upon a policyholder who uses the service to a great extent.
In summary, the evidence at hand indicates that the collection
service of insurers is of about the same merit, at similar charges, to
a policyholder, as are other general collection agencies which are
available to him. Specialized agencies, both within certain industries
and certain localities, seem to offer advantages over the similar
function performed by insurers. However, there is geographical spe
cialization by the insurers in the vicinities of their collection
offices. In general, it is believed that credit insurance must stand
on its merits as insurance protection, with no additional value to most policyholders as a collection agency. 163 In the search for a leading general justification for credit
insurance, from the viewpoint of the policyholder, the psychological
aspect stands out. This feature appeared so frequently in the investi
gation that it was believed to warrant special attention. The follow
ing section is thus devoted to a consideration of the possible psycho
logical merits of credit insurance.
Psychological Value
The experience with credit insurance ascertained in this inves
tigation has indicated that there might be value to credit insurance
that can not be measured in contributions to profit or protection of working capital. It was evident that firms were insured which did not need to transfer the risk of bad-debt loss and could not expect any increased profit from use of the insurance. Therefore, it was decided to evaluate the possible psychological value of credit insur ance. Interviews with sixteen policyholders disclosed that thirteen of them felt that there was relief from worry about bad debts in having their accounts insured. The other three did not believe that the protection to their working capital was large enough to prevent worry.
The former policyholders, when questioned about the psychological advantage of credit insurance, were less definite in their answers.
Of thirty-one past policyholders who were asked if credit insurance had given than relief from credit worries, twenty answered in the affirmative. However, sixteen of those qualified their answers to include only the early stages of their policies, with such observations as "for a while," or "for a short time."
One former policyholder said that credit insurance at first 164
lessened his credit worries, but later increased them. Another said
that insurance of accounts is a "good thing if you never have a loss."
One credit manager said that credit insurance is a good thing in that
it relieves the credit worries of senior executives, but not of credit
managers. Six past policyholders could not make a definite statement
as to whether or not there was any psychological advantage in credit
insurance. Five of the thirty-one former policyholders answered in the
negative, saying that credit insurance did not provide any relief from
credit worries. One of these explained that a merchant must have con
fidence in his customers to do a good job for them.
As respondents to questionnaires, the presidents of the firms
that are now using credit insurance were eight to three in the affirma
tive in reply to the question, "Would credit insurance lessen your
credit worries?" The presidents of past policyholder firms answered
in the negative, with twenty-two "no" answers, four "yes," and three
undecided. The credit managers of the firms currently using credit
insurance answered six to one in the affirmative that credit insurance
is a definite psychological advantage to top management whose accounts
are insured. Credit managers of the firms that had used credit insur
ance and discontinued it were evenly divided on the question.
The foregoing data constitute worthy testimony to support the
idea that credit insurance provides relief from worries about bad-debt
losses. This may be especially comforting to an executive who is primarily a production specialist, with little knowledge of credit management. However, the duration of this advantage varies widely, depending primarily upon loss adjustment experiences under a policy. 165 In some cases this advantage lasts for many years, in others it is
temporary. In some cases studied, the relief from worry was due to
a misunderstanding of policy terms, and the advantage subsided as knowledge of the policy was gained. Still, if a policyholder can
retain the psychological value of his policy through a loss adjustment,
it may be an advantage to him for many years.
In any event, evidence indicates that the feeling of protection from losses on receivables is a definite advantage to a majority of credit insurance policyholders. Two-thirds of those who had discon tinued policies believe in the psychological advantage of the insur ance, but only about half of this group indicated that credit insurance would still lessen their credit worries. As might be expected, those who are presently insured are more favorably disposed toward the insurance than those who have discontinued it, and the latter group sees more psychological advantage in the insurance for others than for themselves. The reason for this condition would seem to lie in the causes of policy lapse. In the next section, the reasons for discontinuance of credit insurance by former policyholders are pre sented as a means of furthering knowledge of the insurance in practice.
Reasons for Discontinuance of Credit Insurance
Of thirty-three firms in the Southwestern Ohio area which had discontinued credit insurance during the last two decades, the arithmetic-mean policy was kept for four and one-third years. But a few of those firms had been policyholders for a much longer period, so that the arithmetic mean is not typical. The mode for the time the l66
firms were policyholders was two years. The median policy lasted for
three yesurs. But of more importance than the length of insurance by
these firms was their reasons for a high rate of discontinuance of
policies. A senior executive of each of the two credit insurance
companies was questioned in this regard. One said that he believed
that the lapse rate was due primarily to changes in management of
insured firms, but that improper selling by agents ranked very high
as a cause. The other insure#- seaned to agree with the latter of the
two reasons stated, but in answer to a direct question said that there
are two reasons for failure to renew policies; first, the reason
reported by the agent, and second, the real reason. An attempt has
been made to determine the real reason for the discontinuance of
credit insurance by former policyholders. Senior executives of
thirty-three firms were interviewed and gave answers as shown in the
following table.
The main reason— that credit insurance was an added eaqiense of
doing business— indicates that these policyholders believed that the
protection afforded was not worth the expense, or that the insurance
was not making a contribution in proportion to its cost. It is
probable that some had expected to gain directly in loss payments when they bought the insurance, and not having done so, found no other
reason for keeping it.
Most of these firms did not have loss adjustments; in fact, only seven of them received any loss payments from insurers. There fore, those firms that actually experienced policy adjustments, dissatisfaction with adjustment procedures was the predominant cause Table XX 167
REASONS FOR DISCONTINUANCE OF CREDIT INSURANCE BY 33 FORMER POLICYHOLDERS
Number of First* Secondary** Firms Reason Reason
An added expense of doing business 17 11 6
Dissatisfied with adjustment procedure 7 6 1
New management 4 3 1
Only needed on a single account, and couldn’t get that coverage any longer 3 3
Too expensive 3 2 1
Collection charges 3 1 2
Primary loss was too high 2 2
Ninety days too soon to turn-over accounts for collection
Too restrictive, either lose many good accounts or take own risks on them 2 1
Too complicated 1 1
By policing accounts as expected by insurer, losses were cut to a minimum so that there was no need for insurance
Difficulty in trying to keep sales within ratings and keeping abreast of changes in ratings
Too much paper work connected with policy 1 1
Increased costs in credit department 1 1
*The "first reason" is the one stated by former policyholders as the single most ccanpelling motive for their refusals to renew policies, **The "secondary reason" applies to an additional subordinate cause for discontinuance as given by scane policyholders. 168 of policy lapse. Restated, this would mean that these policyholders learned through adjustments that the policy did not provide the pro tection they had expected. Three of the group claimed that they learned details which they had not known, and which displeased them.
Most of these firms actually carried the policy until the year follow ing the adjustment, inasmuch as the adjustment normally occurs from sixty to ninety days after the ejq)iration date of a policy, and if there is a renewal, usually after it begins. Presidents and credit managers of past-policyholder firms who were contacted by question naire were asked to comment on their reasons for discontinuing the usage of credit insurance.
Credit managers answered typically as follows
(1) No need at present.
(2) Just an added expense.
(3) It did not do the job we thought it would and cost entirely too much.
(4) We find that insurance at a reasonable price cannot be secured covering ccanpardes where, in our opinion, the risk warrants such insur ance.
(5) Not really a protection; our losses did not exceed expected or fixed loss.
(6) Doing business with highest rated corporations who discount their invoices.
(7) Too expensive for the amount received in return.
13 ^These replies are quoted verbatim. 169
(8) Found it was cheaper to handle without insurance.
(9 ) We tried it in one of our subsidiaries and could not substantiate the cost after coin surance and primary loss was considered.
(1 0 ) Carried for a specific group of accounts we no longer have.
(11) Despite the credit insurance, the average yearly credit loss was still incurred. Unfor tunately we were not able to qualify for reasonable recoveries.
(12) Premiums too high for losses sustained.
Presidents of firms that no longer use credit insurance indi cated the following reasons for dropping the policy:^
(1 ) Cost of insurance greater than loss.
(2 ) The accounts that needed insuring, or were on the border as to risk, were not insurable in any practical amount.
(3 ) Risk improved - cost of insurance high.
(4 ) Cost and qualifications surrounding protection.
(5 ) The company (National Surety) went into receiver ship in the 30»s.
(6) Not applicable to our industry.
(7 ) Unsatisfactory experience, due to excuses the company gave for not keeping their part of the contract.
(8) Because the premium represented additional expense only. The recoveries under the policy were insignificant.
(9 ) Because Dun and Bradstreet changed rating between books and, unbeknown to us, we were not covered and so suffered loss of about $8000.
^^These replies are quoted verbatim. 170
(10) Our risks are widely distributed geographically and in amount, so credit insurance did not pay us.
(11) No apparent value.
(12) Expense with no benefit.
(1 3 ) Losses lower than premium.
(1 4 ) Excellent credit experience over a period of years and the high type of customers with whom we deal.
(1 5 ) Due to low amount lost, as we check credits quite thoroughly.
(1 6 ) High cost and our present high incane tax bracket.
(1 7 ) Too costly and too much red tape in reporting and collecting, if it became necessary to file a claim.
The reason that was given most often for discontinuance, by
seven credit managers and nine presidents, was that credit insurance
was too expulsive in proportion to the coverage. Thus, essentially
the same results were obtained by questionnaire as by interview. The
high lapse rate and the foregoing attributed reasons indicate that a
significant proportion of the customers of credit insurance have been
dissatisfied. The analysis further points to a lack of understanding
of the insurance on the part of policyholders, and misconceptions
regarding it.
These conditions of policy lapse, and reasons given for buying
credit policies originally, indicate that the insurance has been
"oversold" in many instances. Some of the former policyholders, in
their responses, suggested that they thought that they could make money directly from the policies. They apparently expected to collect 171 more in loss adjustment than they would pay out in premiums, not being cognizant of the fact that insurers could not continue in business if they did not recoup their expenses and reasonable profits frran the average policy. There is further evidence that some policyholders did not need the insurance, either because they had self-insurance in a large number of accounts of small or moderate size, or for other reasons which shall be stated in the following chapter.
Experience with the collection service of insurers suggests that it is satisfactory, but no better than provided by many other general collection agencies, and perhaps not as good for particular businesses as agencies which specialize in their industries or their sales areas. Only about one-third of the policyholders reporting had used the collection service of insurers for other than a few accounts. Other insureds felt that their own credit departments or outside collection agencies did a better job than could be obtained from the insurers.
Otherwise, the evidence gathered for this chapter points out that protection of working capital, in the form of accounts receivable, is the main reason for credit insureince. This protection must be thought to be needed and must be felt to have been gained, if policy holders are to be satisfied customers of credit insurance. Where such a condition as aforementioned exists, and where the premium can be afforded, there is likely to be a continuously satisfied policy holder. Where this condition does not exist, insurers must expect a high lapse rate and insureds must beware of an added expense of doing 172 business, the credit insurance premium. It is true that some policy holders have gained considerable psychological advantage from credit insurance without needing it or without understanding it. However, later disappointments seen to have cancelled much of the gain that had been enjoyed in this manner, and much loss of goodwill for credit insurers. Nevertheless, in the overall summary of data, relief from credit worries has been found to be a real advantage of insuring accounts receivable.
In the next chapter, a survey is presented to show the reasons for the relatively small usage of credit insurance, and creditable opinions regarding the advantages claimed by sellers of the insurance.
Credit insurance is further analyzed as a possible substitute for credit management. CHAPTER IV
ANALYSIS OF THE NON-USE OF CREDIT INSURANCE BY
ELIGIBLE COMPANIES IN SOUTHWESTERN OHIO
The material in this chapter was obtained by questionnaire
from firms in Southwestern Ohio which are representative of the great
multitude of firms in our economy that do not insure their receiv
ables.^ As explained in Chapter I, five hundred questionnaires were
sent to credit managers and a like number to presidents of firms
which were considered to be the most likely prospects for credit
insurance in the region surveyed. These firms covered a wide variety
of industries, and corresponded closely with insured firms in size,
and whether manufacturers or wholesalers. Returns were received frcxn
1 6 2 presidents and 134 credit managers.
Reasons for Not Using Credit Insurance as Listed by Presidents and Credit Managers
The considered answers of presidents and credit managers con cerning credit insurance are important, because they represent the thoughts of business executives who decide what part this insurance will play in our economy. Whether these judgments concerning credit insurance are right or wrong in the light of sound logic, they are factual. The executives who gave their ideas concerning credit insur ance are representative of the greater numbers of businessmen who
^Questionnaires and detailed statistical analyses of answers are attached as Appendixes C, D, F, and G.
173 174
pattern our economy. If some of them are not informed about credit
insurance, that is significant, because it is the main purpose of the
chapter to learn why they are not using credit insurance.
Reasons for Not Insuring Receivables as Given by President
The answers of presidents of firms are of particular interest,
because insurers have expressed the thought that most credit managers
are prejudiced against credit insurance. Many agents try to by-pass
credit managers, with the belief that presidents of firms are more
easily sold.
The 162 presidents who returned questionnaires replied to the
question, "Do you believe that the credit risk can be underwritten by
an insurance ccxnpany to the benefit of policyholders, as in other
lines of casualty insurance?", 77 "yes," 34 "no,’* and 51 undecided.
It is indicated that about one-fifth of those who answered, definitely
did not believe in credit insurance, as compared with more than half
of credit managers. Further, the question was asked of presidents,
"Do you think that there is a genuine need for such coverage?" Here
the opinion was slightly in the affimative, with 62 "yes," 53 "no,"
and 47 not answered. But about one-third of the presidents were of the definite belief that there is not a need for credit insurance.
It was indicated in answer to the question, "Were you ever presented with a proposal by a credit insurance agent?", that more than half of the presidents had been vigorously solicited, SI answered
"yes," 6 1 answered "no," and 20 were not certain that they had a
"definite" proposal. This indicates, inasmuch as credit insurance agents normally go to the top management of a firm to make their 175
proposals, that they had made definite proposals to about half of the
firms answering. If the other half had been presented with a definite
proposal, more credit insurance might possibly be in use, so that this
lack of solicitation would be a limiting factor. About half of the
presidents had given thought to the possibility of using credit insur
ance and about one-fourth of them had insured at some time. Eleven
of the group of presidents are insuring accounts receivable at present.
The presidents gave detailed answers as follows as to why they were not now using credit insurance; 56 stated, in effect, that they had no need for the insurance, having competent credit departments;
37 believed that the insurance is too expensive; 5 did not believe that it was applicable to their businesses; and 17 gave miscellaneous reasons for not insuring. Some typical verbatim answers that are believed to be worthy of consideration are listed below:
(1) Credit is involved in a relatively small volume of our business. Good controls are maintained on the credit portion.
(2) Believe they would provide no benefit to us.
(3) Have effective credit department.
(4) All of our customers are well known to us.
(5) We have regular, repeat accounts, which we know well.
(6) Do not believe it applicable in the capital goods industry.
(7) Available insurance plans cover all accounts. Many of ours involve credit with little or no risk. To cover balance means too great cost when large volume of no risk accounts are in cluded. 176
(8) We maintain onr own credit department because it is less expensive and an insurance company would not ship many accounts that we can handle satisfactorily.
(9 ) Our loss reserve provision has always been more than adequate to cover losses,
(1 0 ) Our credit business is to a great extent with churches; therefore, our experience and problems are not at all typical and should not be included in a general mercantile survey.
(1 1 ) The nature of our business requires maintenance of an efficient credit department. Thus, our credit losses are practically nil.
(1 2 ) Have never felt the need and have always had good collection experience.
(1 3 ) Only a small percentage of our volume is conducted with marginal accounts.
(1 4 ) We have very few new accounts and keep close watch on all accounts.
(1 5 ) Do not see where we would particularly benefit.
(1 6 ) We have a bang-up credit department.
(1 7 ) We looked into it several years ago and decided it cost too much and would be too much trouble for us to bother with it.
(18) Terms 30 days, and very favorable loss experience does not warrant insurance coverage.
(1 9 ) Work with limited number of accounts, thirty carefully selected.
(2 0 ) Our business serves a relatively small group of accounts whose rating we constantly watch.
Thirty-seven presidents who said that they are not now using credit insurance because they believe it to be too expensive, gave explanations of which the following, quoted verbatim, are typical; 177
(1) Too expensive. Can underwrite the risk our selves for less, since such insurance only covers the best risks anyway, or is fantas tically expensive on less-than-top risks.
(2) The experience of our company clearly shows over many years that the premium would be an unwarranted expense.
(3) Our experience has shown that credit insurance would not be practical. The cost would be much more than our ordinary losses.
(4) We have found credit insurance too costly for the return received, and it is certainly equivalent to self-insuring.
(5) Consider it cheaper and more economical to use our own credit department.
(6) They want more premium, 10 to 1, than our average loss.
Although presidents indicated less opposition to credit insur ance than did credit managers, a majority of them had apparently given thought to the possibility of insuring receivables, and had definite reasons for declining to do so. Their reasons for not insuring sug gest that they had at least a general idea of the provisions or terms of the contract. A summary of reasons why these presidents are not utilizing credit insurance appears in the following table.
Summary of detailed reasons written by presidents for not now using credit insurance;
No need 56
Too expensive 37
Miscellaneous 22
TOTAL 115 178
Reasons for Not Insuring Receivables Given by Credit Managers
Reasons for firms not using credit insurance are evidenced in
questionnaires returned by both credit managers and presidents. The
credit managers indicated in their answers to the question, "Do you
believe in credit insurance," that approximately half of them did not.
The answers were 53 "yes," 57 "no," and 24 declined to give a direct
answer. Included in the latter group were those who answered both
"yes-no" and otherwise indicated indecision. Further, 15 "yes"
answers were qualified to indicate that they believed in credit insur
ance only under certain conditions. Typical qualified answers, quoted
verbatim, are as follows:
(1) This is a qualified "yes," depending on several factors. First, the nature of the business and its credit terns; second, the cost of the insur ance weighed against the per cent of credit losses.
(2) Credit insurance forces collections. On the other hand, it contributes to loss of sales due to its strictness of form.
(3) While in the case of our company, credit losses have been so extremely light that the cost of credit insurance would have far exceeded such losses sustained in any period of time, I believe that in some specific cases credit insurance can undoubtedly be used to advantage.
(4) Answer is "yes" if cost is not too high.
It is noted that the credit managers of large firms with five hundred
or more employees showed less belief in credit insurance, by about two to one, than did the credit managers of intermediate-sized firms.
The latter group were evenly divided, and the credit managers of
smaller firms with less than one hundred employees were about two to 179
one in expressing belief in credit insurance. It was further noted
that a majority of firms with large capital ratings (over $5 0 0 ,0 0 0 )
did not believe in credit insurance, 23 to 19, whereas the firms with
low capital ratings (under $75,000) believed in credit insurance to
the extent of 10 to 5, The intermediate group in capital ratings,
between $75,000 and $2 5 0 ,0 0 0 , were evenly divided, 2 3 to 22, in their
acceptance of credit insurance. In further analysis, it was found
that the credit managers of firms that had used credit insurance were more opposed than the credit managers of those who had not insured.
Of the 24 who reported having used credit insurance, 14 did not believe
in credit insurance, 8 did believe, and 2 declined an answer. Of the group whose firms had not used credit insurance, 44 believed, 45 dis believed and 21 did not answer.
It was noted that there was little difference between the answers of credit managers who worked for manufacturing firms, as opposed to those who worked for wholesalers. The wholesalers were evenly divided, and the majority of manufacturers did not believe in credit insurance, to the extent of 3 3 "yes," 2 8 "no," with 3 declining to answer. Further analysis showed that the credit managers of firms with less than one-tenth of one per cent credit losses were slightly more opposed to credit insurance than those whose credit losses were higher than that. Those with lower credit losses were 47 disbelievers,
35 believers and 14 abstaining, whereas those with the higher credit losses were 15 believers, 7 disbelievers and 7 not answering.
Further indication of why credit insurance is not used by the greater majority of firms is indicated by the answers of credit 180 managers to the question, "Do you believe that the insurance principle of spreading risk through an underwriter is properly applicable to credit risks, as it is to fire risk or burglary risk?" Fifty-six of the group answered "yes," 36 "no," and 42 did not give a definite opinion. It is e^q^ected that the 36, or about one-third of the credit managers, would not care to insure if they did not believe that the insurance principle could be applied to credit risk. It was noted that seme credit managers believed that the insurance principle is applicable, but did not believe in credit insurance as it is made available by credit insurance companies.
The majority of the credit managers did not take exception to the major provisions of credit insurance, although the number who did was large enough to eliminate this group from the most probable prospects for credit insurance. About three-fifths of the credit managers who had a definite opinion accepted the coinsurance provision, and approximately the same number accepted the collection service provision. The provision for turning over delinquent accounts within
90 days was accepted by a majority, as was the primary loss, the policy term limited to one year, and the single limit provision of credit insurance. The significance here is that the approximate one-third of all credit managers answering the questionnaire definitely refused to believe in one or more of the major provisions of credit insurance.
Perhaps the most accurate reasons why credit managers do not desire to use credit insurance can be gained from the detailed answers to the question, "Will you please state the reason or reasons why 181 your firm is not now using credit insurance?" In the group of 134 who answered, 85 said that they had no need for credit insurance, in various manners of explanation. Fifty-five of this 85 explained that they had a large number of accounts and thus were self-insured.
Twenty-nine credit managers said that credit insurance is too expen sive; 8 said that it is too restrictive; and the additional 12 gave other reasons. Some typical reasons why firms are not now using credit insurance are noted below
(1) The nature of our business results in our having a select list of customers with no credit risk.
(2) Most of our accounts have high credit rating. No use to insure high credit accounts ; the others cannot be insured anyway.
(3) They will not assure the bad risks. We do not worry too much about the good ones,
(4) Cost, we found too high. From our experience we did not feel it was needed or had any applica tion in the class of business we are selling.
(5) Our accounts must run 90 days old before action.
(6) We do not need it. With a large number of diversi fied accounts there is not much danger as shown in depressions and so called "bad times."
(?) Attorney is on retainer fee. No additional collec tion expense with his services.
(8) We are very careful in selection of accounts. We do not take many risks, and if used would suggest the idea of taking on accounts that should not be granted credit. We have grown gradually through 30 odd years and keep our factory busy.
(9) Sales made mostly to old customers and same people we have sold to for years.
2 These answers are quoted verbatim. 1 8 2
(10) The management thinks it can afford to assume the risk.
(11) Based on an extremely liberal credit policy, our credit losses have been very light, certainly only a small percentage of what credit insurance costs would have been.
(12) We are so financially situated that we can afford to carry our own insurance.
(1 3 ) Our top management does not believe that credit managers are a necessary evil.
(1 4 ) Most of our customers are not rated, which makes the costs of insurance prohibitive. With a ccan- paratively small number of accounts, each one can be given individual treatment, rather than a standard treatment which would be necessary with insurance.
(1 5 ) Nationwide distribution and but few high amounts, levels off the risk. Premiums saved have built a sizable reserve. Compliance with exacting provi sions and timetable of insurance policy consume executive and clerical time. I had twelve years of it with another employer. The year-end get- together with the insurance adjuster was a colossal job jammed into the regular credit work.
(1 6 ) I had experience with credit insurance in another firm. Refused to accept it with present firm because previous experience proved it unsatisfactory (1936-1 9 3 9), and too expensive. I still think so and bad-debt and collection costs since 1939 prove it.
(1 7 ) Our spread of risk over a number of accounts is such that we do not stand sufficient risk of abnormal loss to justify the added expense of credit insurance.
(18) Our losses have been so small it would be of no advantage to carry credit insurance. We prefer working out each situation to the satisfaction of our accounts.
(1 9) Our operations are too diversified. We cannot be restricted to any type of business or class of customers. We sell in 48 states and our spread 183
o f accounts is our insurance. It gives us a chance to select our own type of accounts.
(20) Our sales are to a type of customer that credit insurance companies will not set reasonable rates on.
(21) Company*s major customers are cream of American industry and credit losses have never in any one year been as much as cost of credit insurance.
(22) The insurance ccmpany*s representative to whom we talked would only offer to cover well rated com panies - no questionable or low rated ones. We have never had a single loss on the class they wanted to cover. In addition, we felt their fees to be exorbitant.
(23) Because it will acccmplish nothing that other sound credit practices cannot do except in rare instance. It is too expensive.
(24) We have been approached on a credit insurance plan numerous times and have always been hesitant in accepting for fear that we would lose accounts, due to the compulsory terms of the policy.
(25) On a very high percentage of our accounts, the credit department contacts personally on the average of six or seven times per week. All accounts are less than two hours» driving time from the office. Additional cost of insurance and tendency to "go overboard" because of insurance.
(26) As a capital goods supplier, we do not have the frequency of transactions with customers, and our customers are mainly prime risks which in most instances give us no collection problems.
(2?) Our accounts are few, large and well rated. Our collection experience is good. Our personal con tact is frequent. We have our own system for noting any tendency toward delinquency.
(28) Not being used because we would have to stand normal loss anyway and cost is high. Our exposure is limited - many accounts of small amounts, and our large accounts are well established and well rated. A survey made by sales department showed 184
that our sales would be increased little, if at all, through the use of credit insurance.
(2 9 ) Lack of reasonable premium for our particular business. Since the rates are based on Dun & Bradstreet ratings, and most of the furniture companies are small wholly-owned corporations which do not disclose proper credit information, this is one of the reasons for the high premium in our case.
Twenty-two credit managers stated that credit insurance rates are too high. Typical answers, quoted verbatim, are as follows:
(1) The cost of the insurance would be more than our losses.
(2 ) Cost too high in ratio to actual bad debt loss.
(3 ) Too high a cost for the risk insured.
(4 ) The amount of money involved in bad accounts would not pay my premium for one year.
These credit managers appeared to have justifiable reasons for not insuring, which are self-explanatory. Their justifications for not insuring are summarized in the following table.
Summary of detailed reasons written by credit managers as to why their firms are not now using credit insurance:
No need 85
Too expensive 29
Too restrictive 8
Miscellaneous 12
TOTAL 114 185
Conditions Under Which Credit Managers Would Recommend the Use of Credit Insurance
Very significant answers were also given to the question, "Under what conditions, if any, might you reccxnmend the use of credit insur
ance?" Some of the answers of credit managers are quoted, verbatim, below:
(1) Where it is necessary to extend large lines of credit to relatively low rated concerns.
(2) When a firm is selling a substantial amount to only a few large customers, or if credit insur ance can eliminate the expense of a credit department.
(3) Under all conditions as a routine business, insurance; under same basis as all insurance, if risk justifies premium.
(4) Simplification of the credit insurance policy seems essential. Cost of policy appears very high. Time needed to fully comply with policy terms seems excessive.
(5) A firm who is apt to take risks in excess of average, whose credit department does not function properly and will extend credit to anyone.
(6) Recommend it for any type of financing. Recom mend it when opening a new sales territory. The credit extended in this instance is usually to the competitors* bad accounts.
(7) If the insurance company would accept all risks, good and mediocre, as they appear in the customers ledger.
(8) Might be very advisable in the case of a concern doing the bulk of their business with a relatively few concerns which might not come under the classi fication of gilt-edge risks, although a satisfactory insurance risk. Also, for small concerns selling on a relatively high profit margin to small com panies in limited volume, where a credit coverage of approximately five hundred dollars could be obtained on a blanket basis. 186
(9) When a canpany is sales-minded only. Where credit is only a necessary evil.
(10) Credit insurance could be utilized if some unusual conditions existed. If a company began to sell to a different class of trade, changing from wholesalers to a retailer, or if the amount of the sale was unusual. For example, on one new account representing a considerable portion of the receivables. Credit insurance could cover the unusual items.
(11) Think credit insurance is particularly neces sary when dealing with retail accounts, or a large number of small business establishments where mortality rate is relatively high.
(12) Where a bad record for credit losses exists, for large obscure credit risks, by a supplier new in business or with an untried credit man. Where management feels that a lessening (not elimination) of worry about credit losses is worth the premium.
(13) Concern having one or more accounts which are exceptionally large compared to its working capital and its net worth, or to its other receivables generally, could properly explore the question.
(14) Businesses selling items other than the staples, such as style merchandise. Profit margins enter that picture. If past experience with losses was bad and reasonable rates were available to spread loss.
(15) A blanket coverage of all accounts sold with sole judgment on credit extension to remain with the insured.
(16) Only under certain conditions where credit is extended in large amounts to hazardous accounts, and where proper credit facilities are not avail able, and where the margin of profit is sufficient to pay for this service.
(17) For firms handling a thousand or more accounts scattered all over. Where credit information 187
was difficult to obtain. Where operating capi tal was so limited that one or two accounts could mean disaster.
(18) If an insurance policy was written that charged a premium of twenty per cent of past losses and then paid the excess of past losses in full.
In their foregoing comments concerning conditions under which they might recommend the use of credit insurance, credit managers generally indicated a desire for changes or modifications in credit insurance provisions. Coverages as written today do not provide most of the features upon which the credit managers would base their recommendations. Too, it was evident that the authors of some of these statements misunderstand present facilities. Nevertheless,
11 credit managers stated that they would not recommend credit insur ance under any circumstances.
What Credit Managers Consider to be Possible Advantages to Their Firms from Insuring Accounts
Also of interest are some of the remarks which credit managers made in stating what they considered to be possible advantages to their firms in having credit insurance policies;
(1) Premium would tend to peg credit losses each year instead of wide fluctuations in charge offs.
(2) Elimination of losses, freedom from worry; should increase sales and produce more profits through sales to borderline cases that other wise might not be sold.
(3) Small and medium sized businesses of our industry usually have heavy receivables out of proportion to working capital.
(4) It guarantees a set amount of losses, while giving a shot in the arm to sales. 188
(5) Would give certain borderline risks credit.
(6) Quicker turnover of cash receivables, and loss of bad accounts would be smaller.
(7) The losses will occur in accounts you never anticipated, and therefore you cannot prepare for the contingency except with credit insurance.
(8) A relaxing of our credit restrictions which would increase sales to the extent that it would more than pay for the premiums under the policy.
(9) Being a basic industry we could help much to get new products under way where new industries are arising and striving to make headway with their products.
The foregoing answers indicate less than an adequate knowledge of credit insurance. Yet, the psychological advantage of lessened credit worries was prominent among the remarks. This is not objection able, but the idea that sales could be increased by more liberal credit granting while worries were lessened reveals a fundamental misconception, as has been evidenced in this study of credit insurance in practice.
Possible Conflict Between Credit Insurance and the Duties of Credit Managers
As was indicated heretofore in Chapter I, there is belief among insurers that many credit managers think that credit insurance would lessen their importance to their firms. It has been attempted, by questionnaire, to learn whether or not the majority of credit managers foresee any conflict of interest between credit insurance and their own duties. The majority of credit managers did not think that there is any conflict between the use of credit insurance and their own 189 duties, by answering 94 "no," 26 "yes," and 14 undecided. This opinion was held, generally, by all groups, with those whose firms had used
credit insurance in almost unanimous agreement, with 22 ’*no," and
2 "yes" answers.
Surprisingly, the credit managers believed that an outside collection organization has an advantage over their own credit depart ments in collecting past-due accounts, by 86 "yes," 41 "no," and 7 not answering. It was not expected that the credit managers would admit that anyone else could do a better job of collecting accounts they, themselves, could do. Nevertheless, they attribute a supposed advantage for outside collectors to the presumed severe collection methods at the disposal of collection agents, who have relative freedom from loss of good-will among delinquent debtors. On the other hand, to credit managers these debtors are customers. There was no disagree ment on the matter except that credit managers from small firms were a little less inclined to believe in outside collectors and had a lower majority on this question.
A sizable majority of credit managers indicated that they would not recommend credit insurance for their firms if they anticipated a down-trend in the business cycle, 36 "yes," 80 "no," and 18 undecided.
Credit managers of large firms were more expressly opposed to the idea. It is probable that they understood credit insurance better and realized that the conditions under which they could get the insurance in a down-trend of the cycle would offset any advantages of having it at that particular time. The credit managers of firms with capital ratings of less than $75,000 were about evenly divided on the question 190 of whether or not they would recommend credit insurance, if they anticipated a down-trend in the business cycle. Fims with less than one-tenth of one per cent credit losses differed with their fellow credit managers who had larger credit losses. A majority of the latter would recommend credit insurance in a recessionary period.
Credit managers were in general agreement, by a large majority, that they would recommend that a firm having only a few accounts, all of which are large, should insure these accounts if it were possible to do so. These who had used credit insurance answered, on this question, 15 "yes," 4 "no," and 5 did not reply, whereas, those who had not used the insurance were two to one in favor of it for a few accounts. The credit managers of small fims were less inclined to recommend credit insurance for a f i m having only a few accounts.
The credit managers did not agree, however, as claimed by insur ers, that credit insurance backs their judgment as credit executives.
The answers were 88 "no," 31 "yes," and 15 not answered. Too, three- fourths of those whose firms had used credit insurance answered negatively. There was no disagreement by size groups on this question, although the fims with higher credit losses were slightly less nega tive in their replies.
While there seems to be just reason to believe that credit managers, generally, are not biased against credit insurance, sœie stated reasons for believing that there is conflict between the insurance and their duties. Typical verbatim quotations are listed below; 191
(1) Certain accounts warrant longer extension of grace period in some cases; insurance requires turning over accounts in 90 days. If by chance the account does fail you are not covered by insurance.
(2) We can see no need for a credit manager. No need to check new accounts for credit respon sibility.
(3) Majority of accounts we are selling are low rated. Insurance does not provide sufficient latitude for moral consideration in such cases, adhering strictly to mercantile credit ratings only.
(4) Too much work. Too many reports to be made out.
($) Because it would compel the stockholders to try to increase the business, but with shady accounts.
(6) The insurance company would make the decision, but a credit manager should be free to analyze each individual application.
(7) A tendency to be lax would exist. If sales are off, sales department brings pressure to bear on credit man to relax on "borderline" credit risks.
(8) It took collections out of my hands.
(9) No room for judgment on slow accounts, tends to limit sales to off-rated accounts because of risk limit. Credit men in insurance com panies have very limited knowledge of our field problems and go by mathematical experience, not selective.
(10) Credit decision is made by insurance company, because if they turn down prospect on coverage why should not the credit manager do same.
(11) Time of payment set in policies may affect some normally good pay customers.
In summary, there appears to be very little conflict between credit insurance and the duties of credit managers. Eighty per cent 192
of responding credit executives, themselves, indicated that there is
no such conflict. Most of them further indicated that they would
recommend credit insurance for firms with only a few large accounts,
if the insurance were available on that basis. Furthermore, they
expressed a belief that outside collectors have an advantage over
their own collection efforts. On the other hand, the credit managers
exhibited a knowledge of credit insurance practices when they stated
by a sizable majority that they would not recommend credit insurance
for their firms if they anticipated a down-trend in the business cycle.
The same reasoning applies to the credit managers* rejection of the
claim of sellers that credit insurance backs the "judgment" of credit
executives. This contention is simply not factual, as is apparent
from adjustment procedures presented in Chapter III.
Opinions Regarding the Advantages Claimed by Insurers
For further insight into the reasons that most firms do not
insure, an analysis is made of the opinions of business executives
regarding the advantages claimed by insurers.
Reactions of Credit Managers to Claims of Insurers^
The majority of credit managers who responded to questionnaires did not believe that credit insurance helps to maintain a more har monious relationship between the credit and sales departments. In reply to this question, "Do you agree as claimed by credit insurance
summary of replies of credit managers to questions concerning the claims of insurers is presented in Table XXI. Table XXI 193
SUMMARY OF CREDIT MANAGERS* REACTIONS TO CLAIMS OF INSURERS
Had Used Had Not Used Question Credit Insurance Credit Insurance
Do you think that more widespread use of credit insurance would increase:
amounts loaned on receivables by banks and factors? Yes 12 No 10 Yes 20 No 21
sales to more distant regions? Yes No 16 Yes ^ No 22
sales to border-line accounts? Yes No 12 Yes ^ No 26
profits? Yes _6 No 12 Yes 22 No 6 2 Do you believe that use of credit insurance by a firm would decrease:
credit losses? Yes 10 No 12 Yes ^ No 21
past dues? Yes No 18 Yes 2% No 22
executive-time spent on collec tions? Yes _8 No I k Yes ^ No 22
collection costs? Yes _2 No 12 Yes 22 No 6 2 Do you agree, as claimed by credit insurance companies, that credit insurance:
backs your judgment as a credit executive? Yes - 1 No 16 Yes 26 No 22 promotes efficiency in organiza tion and management? Yes Jt No 18 Yes 12, No 22 minimizes risk? Yes u No 11 Yes No k l helps create and maintain a more harmonious relationship between the credit and sales department? Yes No 16 Yes No 62
protects your accounts receivable? Yes 12 No _8 Yes 2 k No 22 194 companies, that credit insurance helps create and maintain a more harmonious relationship between the credit and sales department?”,
78 answered ”no,” 4 2 "yes,” and 14 did not have a definite opinion.
It is noted that credit executives with manufacturing firms were more extremely opposed to the idea, three to one, whereas wholesalers were about evenly divided on the topic. Also, those with large credit losses were evenly divided in their opinions on this question, whereas, those with credit losses of less than one-tenth of one per cent were definite in their disbelief by more than two to one. It is noted that those who disbelieved in credit insurance were almost unanimous in their statements that it does not create a more harmonious relation ship. For those who believe in credit insurance, they were about equally divided in answer to this question. Those who believed that there is a conflict between the duties of the credit manager and credit insurance were marked in their opinion that it did not create a harmonious relationship, four to one, and those who were not con cerned about a conflict were not convinced of the harmony feature by a lesser margin, one and one-half to one. Those whose firms had used credit insurance were also of the belief that it does not create harmony, two and one-half to one, more so than those who had not used it. The credit managers seemed to be more favorably disposed toward the harmony idea in inverse proportion to the size of the firm, both as to number of employees and capital rating. Credit managers of the smaller firms were fairly well divided on this question, whereas those of the intermediate-size firms were less inclined to see harmony 195 in credit insurance, and those of the very large firms, by a greater majority, believed that credit insurance would not promote harmony in their firms.
The credit managers as a group did believe that there is a definite psychological advantage, or elimination of worries about credit losses, to top managements whose accounts receivable are insured, 74 answering "yes," 46 "no," and 14 gave no definite answer.
On closer observation, it was discovered that credit managers of the large firms, both in number of employees and capital ratings, dis agreed with this contention. This trend would have been expected, inasmuch as the managers of the larger firms are less subject to personal sacrifice frcan credit losses than are those in smaller firms.
In the manufacturing group, opinion was about evenly divided, three- fourths of the credit managers favored the psychological advantage.
Those with credit losses under one-tenth of one per cent believed less markedly in a psychological advantage from credit insurance than the group with higher credit losses. Those who believed in credit insurance believed overwhelmingly that there was a psychological advan tage. Those who did not believe in credit insurance did not believe that it was a psychological advantage by a similar majority. Those managers whose firms had used credit insurance believed in the psycho logical advantage in the same proportion as those who had not insured.
The credit managers, generally, did not believe that credit insurance would increase sales, with 78 "no," 53 "yes," and 3 not decided. Among the group that had used credit insurance, the disbelief 196
was more noticeable, with 18 "no," and 6 "yes," The wholesalers did
not believe, by a slight majority, that it would increase sales, but
to a lesser degree than the manufacturers who disbelieved by about two
to one. Those with higher credit losses were evenly divided in their
opinion as to whether or not credit insurance would increase sales,
whereas those with losses under one-tenth of one per cent did not
believe, by almost two to one, that it did increase sales.
The credit managers also did not believe that credit insurance
would increase the turnover of working capital, with answers of 74
"no," 52 "yes," and 7 not answered. There seemed to be little dif
ference between the wholesalers and manufacturers in this belief, but
the credit managers of the larger firms disbelieved to a greater extent,
by two to one, While the intermediate size group was evenly divided
on the question, the credit managers of the smaller firms were not
convinced to a greater extent than the other two. The credit managers
of firms with over $500,000 in capital did not believe that the turn
over would be increased by credit insurance, two to one, while the
credit managers of the intermediate size firms were more evenly divided,
and the credit managers of the very small firms, with less than $75,000
in capital, believed by a slight majority that credit insurance would increase the turnover of working capital. The credit managers with high credit losses were equally divided on this question, and those with low credit losses were in disagreement with this contention of insurers, with 56 "no," 37 "yes," and 3 not answered. The credit managers whose firms had used credit insurance disagreed two and 197 one-half to one, whereas those who had not used credit insurance
disbelieved, but to a much lesser extent.
The credit managers did agree that credit insurance would
increase amounts loaned on receivables by banks and factors with 85
"yes," 3 8 "no," and 11 not answered. Agreement was general on this
question, when considered by size groups and institutions. The only
difference noted was between the group who had used credit insurance
and those who had not. Those who had used credit insurance felt by
a slight majority that it would increase amounts loaned, but those
who had not used it thought so by three to one.
That salvage from bad debts would be increased with more wide
spread use of credit insurance was the belief of the majority of credit managers, with 64 "yes,” 53 "no," end 17 not answered. Further analysis
showed little difference of opinion among the various categories as to their answers to this question, except that those who had used credit insurance did not believe in the contention by a considerable margin, and those who had not used credit insurance believed that it would increase salvage by nearly two to one.
The credit managers as a majority did not believe that collec tion costs would be decreased by the use of credit insurance, by a score of 81 "no," 38 "yes," and 15 not answering. The opinion was not markedly different among the various categories, except that those who had used credit insurance almost unanimously agreed that it would not decrease the collection costs.
The credit managers did not believe that use of credit insur ance by a firm would decrease executive time spent on collections, with 198
69 "no," 58 "yes," and 7 not certain. Those who had used credit insur
ance rejected this contention by two to one, whereas those who had not
used credit insurance answered negatively by only a slight margin. The
manufacturing group was evenly divided while the wholesalers were more
definitely opposed to this claim of insurers. The only difference of
significance was that the credit managers of smaller firms, both as
to capital rating and number of employees, believed by two to one that
credit insurance would decrease executive time spent on collections,
while the intermediate group was very evenly divided, and the credit
managers of the large firms, again by both number of employees and
capital rating, did not believe that executive time would be decreased,
again by a two to one margin.
Neither did the credit managers believe that insurance would
decrease the number of accounts past due, by a margin of 9 0 "no,"
32 "yes," and 12 not answered. There was no significant difference
between the answers by size groups and types of business. That credit
insurance would not decrease credit losses was the opinion of a majority
of the credit managers, by 6 4 "yes," 55 "no," and 15 not answered. Here
again, the opinions differed by size groups, with the credit managers
of smaller firms agreeing that credit insurance would decrease credit
losses; the intermediate group was about evenly divided, and the credit
managers of large firms did not believe in this claim.
It was not believed that credit insurance would decrease the operating expenses of credit departments, with 92 "no," 26 "yes," and
16 undecided. This opinion was similar between firms that had used 199 credit insurance and those that had not. There was little difference
in the answers among the various groups to this question, except that
the larger firms overwhelmingly believed that credit insurance would
not decrease the cost of operating credit departments.
The credit managers believed by 73 "yes," 51 "no," and 10
undecided, that credit insurance would increase supplier credit to
smaller businesses. Although this is not a claim of insurers, it is
voiced by some proponents of credit insurance. Difference of opinion
on this question was found in the size groups, with the intermediate
and smaller groups being more inclined to believe that credit insurance
would increase credit to small business, while the credit managers of
the large firms were evenly divided on the question. Those with higher
credit losses were not inclined to believe that credit insurance would
increase supplier credit, while those with smaller credit losses were
again more evenly divided on the question. The real exception and
difference was noted in that those firms who had used credit insurance
disbelieved, by two and one-half to one, that it would not increase
supplier credit, whereas those who had not used credit insurance
believed that it would increase supplier credit, by about four to one.
Opinion was definitely against the idea of credit insurance
increasing sales to more distant regions, with 74 "no," 47 "yes," and
13 not answered. In this case, as in most others, the opinion differed
as to whether or not the credit managers belonged to firms that had
used credit insurance, with those who had insured disbelieving by a wider margin than those who had not. The respondents from firms s m a .1 1
in capital rating believed, four to one, that sales to a distance 200 would increase with credit insurance, whereas those frcm firms with
large capital were more than two to one against the claim. Also the
firms that had larger credit losses believed that insurance of
accounts would increase sales to more distant regions, while those with very small credit losses disbelieved by more than two to one.
Wholesalers were more evenly divided on this matter than were credit managers of manufacturing firms, who were two and one half to one opposed to the idea.
The credit managers did believe that more widespread use of credit insurance would increase sales to borderline accounts, with 74
"yes,” 48 "no," and 12 not answering. It is noted that the firms with higher credit losses were more likely to believe that insurance would increase sales to borderline accounts, by four to one, whereas those with credit losses of less than one-tenth of one per cent dis believed, but by a smaller margin. The firms with larger capital structures differed in opinion with those of smaller firms; the former answered negatively by a small margin, while the latter answered affirmatively by seven to one.
If credit insurance will not increase profits, then it must rely almost entirely upon protection of accounts receivable for its justifi cation. Credit managers generally did not believe that it would increase profits, with 84 "no," 28 "yes," and 22 not answering. Answers from firms that had used credit insurance were 15 "no," 6 "yes," and
3 not answered, whereas those who had not used credit insurance were not convinced to the extent of 69 "no," 22 "yes," and 19 not answer ing. 201
That credit insurance would not increase the length of the
dating period in credit terms was the belief of 92 credit managers,
with 33 "yes," and 8 not answered. Some proponents of credit insur
ance have believed that credit insurance would make available sales
on more liberal terms, although this is not a claim of sellers. All
groups were of similar belief on this question.
There has been a notable degree of difference in the answers
concerning claims of insurers, with credit managers of small firms
believing claims of insurers to a greater degree than large firms.
Respondents frcm firms that had used credit insurance answered nega
tively to most contentions of credit insurers, while credit managers
from firms that had not insured were more favorably impressed by the
claims of sellers. A summary of credit managers* reactions to claims
of insurers appears as Table XXI, Next, the answers of presidents were analyzed in regard to advantages claimed by insurers.
Reactions of Presidents to Claims of Insurers^
Presidents responding were not in agreement with the claims of sellers that credit insurance would be likely to benefit their firms by promoting harmony between the sales and credit departments; 1 0 5 said
"no," 40 "yes," and 17 did not answer. The presidents of those firms that had used credit insurance disbelieved, by two to one, whereas those who had not used credit insurance were more than four to one opposed
^A summary of replies of presidents to questions concerning the claims of insurers is presented in Table XXII, 202
to this contention. Those with credit losses of less than one-tenth
of one per cent were much more opposed to this idea than were the
credit managers of firms that had lower credit losses. No other signi
ficant differences or variations of opinions were noted on the ques
tion.
The presidents, generally, did not believe that the collection
service of a credit insurance company would be of considerable use to
their firms, with 113 "no,” 33 ”yes,” and l6 not answered. This belief
was generally held and no noteworthy variations in opinion were found
upon closer observation and analysis, except that advertising agencies
were nearly unanimous in their belief that collection service of
credit insurance companies would not benefit them. As in other cases,
those presidents who were not familiar with the major provisions nor mally included in credit insurance policies were more kindly disposed toward the claims of credit insurers.
The presidents did not believe that credit insurance would help their firms by endorsing their accounts receivable for banking or financing purposes, with 122 ”no,” 29 "yes," and 11 not answered.
There was much unanimity of opinion on this question and no significant variations among size groups or institutions. In answer to the ques tion, "Would you place more confidence in your debtors if they had their receivables insured?", the presidents were likewise negatively inclined with ?6 "no,” 60 "yes," and 26 not answered. The only marked difference of opinion among groups of respondents was that the small firms, by both number of employees and capital rating, answered affirmatively. Presidents of large firms were definite in agreement 203 that they would not place more confidence in debtors who insured their accounts, and the intermediate size firms had their opinions fairly evenly divided. The presidents of firms with higher credit losses were slightly in favor of placing more confidence in debtors whose accounts were insured, while those with lower credit losses were overwhelmingly of the opposite opinion. The presidents who indicated that they understood the major provisions of credit insurance were also firmly opposed to placing more confidence in debtors with insured receivables, while those who admitted they did not understand the major provisions of credit insurance were slightly in favor of placing more confidence in their debtors who insured accounts.
The question was included in the questionnaire, "Would it especially benefit your firm to know in advance just what the maximum possible credit losses would be during the caning years?" As has been indicated previously, credit insurance as written today does not permit such knowledge, but nevertheless the contention that it does is often made. The question was included in order to determine whether or not presidents desired this type of service, because it seemingly could be written into credit insurance policies. The answers were 72
"yes," 68 "no," and 22 not answered. As might be expected, presidents of large firms were almost unanimous of the opinion that it would not help their firms, while those from small firms who believed in this contention were in a slight majority. The intermediate size group was evenly divided in its opinion on this question.
The presidents did not believe that their firms could increase credit sales as a consequence of insuring accounts receivable; 110 204
answered "no,” 34 "yes," and 18 were undecided. Presidents of larger
firms were more definite in their opinion in this regard. The presi
dents agreed with the credit managers that their terms of sales would
not be more liberal, if they had credit insurance policies, with 134
"no," 19 "yes," and 9 not answered. There was no disagreement of
opinion in the group on this question. Thus, this answer is inclined
to show that credit insurance does not extend more liberal terms.
Necessarily, to do so would require a greater amount of working
capital.
The presidents did not believe that credit insurance would save
much of their time or that of their staffs which might otherwise be
spent in trying to collect salvage frcan insolvent debtors, with 115
"no," 32 "yes," and 15 not answered. There was general agreonent on
this by all groups, with the presidents who had used credit insurance
being in disagreement by six to one. Neither did they believe that
credit insurance would lessen their credit worries, with 94 "no," 56
"yes," and 12 not answered. The only difference of opinion worth
noting on this question was that the presidents of firms with small
capital ratings thought, by a majority, that credit insurance would
lessen their credit worries. It was also noted that the presidents who were familiar with the major provisions of credit insurance did not believe, by two to one, that it would lessen their credit worries.
Those who were not familiar with the provisions of credit insurance thought, by a slight majority, that it would lessen their credit worries.
A very significant fact to be learned from the foregoing analysis 205
is that both credit managers and presidents of small firms are more
in agreement with the claims of sellers, and more likely prospects
for credit insurance, than are their counterparts from large businesses.
It is also obvious throughout this study that the credit managers of
the larger firms generally know more about credit insurance than those
of the smaller-sized firms.
What were thought to be the main advantages claimed by insurers
and proponents of credit insurance were considered in the foregoing
analysis. That material is summarized in Table XXII. Other arguments
of insurers rely heavily on the •’protection” advantage, and a com parison is often made between other insurance auid credit insurance.
It has even been compared to life insurance, as when insurers claim that ’’there is a commercial mortality just as sure as there is a human mortality.” Of course, the likelihood of life ending abruptly is much greater than that of a business passing out of existence within the same length of time. Also, a business may liquidate with solvency in varying degrees, so that accounts are seldom a complete loss, whereas a life insurance company must pay the entire face amount of a policy.
An analysis of the reaction of the business public to the possible value of credit insurance is undertaken in the next section.
Estimate of Possible Value of Insurance of Accounts for These Firms
From the credit losses reported by questionnaire, it is indi cated that only a few of the firms would have recovered anything if they had paid credit insurance premiums in 1953» For most of them the losses would not have exceeded the credit insurance primary-loss plus Table XXII 206
SUMMARY OF PRESIDENTS» REACTIONS TO CLAIMS OF INSURERS
Had Used Had Not Used Questions Credit Insurance Credit Insurance
Do you believe that the credit risk can be underwritten by an insurance company to the benefit of policy holders, as in other lines of casu alty insurance? Yes 2^ No Yes 54 No 2?
Would your firm be able to increase credit sales as a consequence of insuring your accounts receivable? Yes No 26 Yes 22 No 86
Do you believe that credit insurance would help your firm, by endorsing your accounts receivable for bank ing or financing purposes? Yes _7 No ^2 Yes 22 No 90
Would you place more confidence in your debtors if they had their receivables insured? Yes ^ No 21 Yes 47 No 55
Would this insurance be likely to benefit your firm by promoting harmony between the sales and credit departments? Yes 12 No 28 Yes 28 No 77
Do you believe that the collection service of a credit insurance com pany would be of considerable use to your company? Yes 1Û No 22 Yes 23 No 84
Would it especially benefit your firm to know in advance just what the maximum possible credit loss would be during the coming year? Yes 21 No 12 Yes 51 No 56
Would credit insurance save much of your time, and that of your staff, which might otherwise be spent in trying to collect salvage values from insolvent debtors? Yes _2 No ^2 Yes 27 No 83
Would credit insurance lessen your credit worries? Yes 12 No 2^ Yes 43 No 69 207
premium. In fact, the loss ratios were below the primary loss alone,
averaging about half the primary loss for the various industries as
recorded in the credit insurance manuals.
In answer to the question, "Do you think that there are possible
advantages to your firm in having a credit insurance policy?", 96 credit
managers answered "no," to 29 who answered affirmatively, and only 9
were undecided. The credit managers who had used or are still using
credit insurance answered two to one in the negative to this question,
whereas the ratio was more than three to one in the negative for firms
not using credit insurance. Since one of the possible reasons for
insuring is the collection service of credit insurance companies, we
may well look back to that topic for help on the present question.
Although 86 out of 134 credit managers believed that an outside collec
tion organization has an advantage over their own credit departments
in collecting past due accounts, they still do not prefer credit insur
ance as a majority, even with the collection service included.
From the answers to the presidents* questionnaires, although
the direct question was not asked, it was evident that the greater majority did not believe that credit insurance would be of value to
their firms. It is to be remembered that the majority of the presi
dents had been presented with a credit insurance proposal and half
of them stated that they had considered using credit insurance. Yet,
one-fifth of them did not believe that the credit risk can be under written to the benefit of the policyholder. More than one-third did not believe that there is a genuine need for credit insurance. They 208 did not believe, by a majority of three to one, that their firms would be able to increase credit sales as a consequence of insuring accounts receivable. Neither did about half of them believe that credit insur ance would help their firms by endorsing their accounts receivable for banking or financing purposes. The majority stated that they would not place more confidence in their debtors if they had their accounts receivable insured, so could not expect this benefit from their creditors.
Two-thirds of the presidents did not believe that credit insur ance would benefit their firms by promoting harmony between the sales and credit departments. They did not believe that credit insurance would save much of their time or that of their staff which might other wise be spent in trying to collect salvage values from insolvent debtors, by nearly a four to one majority. Above all, they did not believe that credit insurance would lessen their credit worries, by about a two to one majority.
The credit managers, by a slight majority, did not believe in credit insurance, therefore, this half of the firms would not be likely to benefit from the use of credit insurance if the credit managers who would have to supervise the policies did not believe in them. By a majority, they did not believe that credit insurance would increase sales nor increase the turnover of working capital, nor sales to more distant regions, nor sales to borderline accounts, and certainly not the length of credit terms.
On the other hand, the credit managers did indicate, by a 209
majority, that they thought that credit insurance would increase amounts
loaned on receivables by banks and factors, and increase salvage from
bad debts, and would increase supplier credit to small business. Yet
they would not likely insure for loan purposes because most of these
firms do not discount receivables or use them as collateral. Further
more, an increase in supplier credit might help society, but would not
help individual firms because they insured accounts. As a matter of
fact, this would require that the firms use more working capital, and
thus the financing costs would be higher if they were to extend more
credit.
One of the most justifiable considerations in determining whether
or not to use credit insurance would be to decide whether or not it
will increase profit. Credit managers as a group indicated, by nearly
three to one, that they did not believe that credit insurance would
increase profits. Neither did the majority of credit managers believe
that credit insurance would decrease credit losses, nor that it would
decrease past-dues. Further, they did not believe, as a majority that the insurance would decrease executive time spent on collections.
It would be an important consideration and would increase profits, if credit insurance would decrease the operating expenses of
credit departments. The credit managers believed, by almost four to one, that it would not. Too, the great majority of the credit managers did not believe that credit insurance would decrease credit losses.
Although credit managers did not, as a majority, see advantage to their firms in insuring receivables, individual credit managers, even if a minority, expressed belief in many advantages for credit insurance. 2 1 0
It should be further noted that these are, for the most part, associated with small and intermediate size businesses. The great majority of
credit managers, by four to one, did not believe that there is conflict
between the use of credit insurance and their own duties.
Perhaps the best test of the possible value is to use the con
sensus of people who have insured. Sixty-eight per cent of those who have used credit insurance or are still using it do not believe,
according to evidence presented, that it has, for their firms, advan tages claimed by proponents. By nearly three to one they did not believe that it backs their judgment as credit executives. The majority did not believe that credit insurance promotes efficiency in organiza tion and management, did not agree that credit insurance helps create and maintain a more harmonious relationship between the credit and sales departments. This record indicates that credit insurance has not won the confidence of the majority of credit managers who have used it.
The question of bias has been ruled out by an analysis of those who answered as not believing in credit insurance. They answered as favorably for credit insurance on some of the other questions as those who did believe in it. Generally speaking, the smaller firms were more favorable in their answers than the larger firms, because the large firms have better capital positions and therefore have less need of protection. Also, the group of firms with the higher credit losses were generally more favorable in their cinswers than those who had very low losses. There appeared to be no difference in attitudes between 2 1 1 manufacturers and wholesalers.
On the other hand, the majority of credit managers would recom mend that a firm having only a few accounts, all of which are large, should insure these accounts if it were possible to do so. They answered affirmatively to this question, by nearly three to one. This is the most decided score on any point in favor of credit insurance.
It indicates that there is need for single debtor coverage of accounts and that it would have a ready market if rates were reasonable. Since this condition would most likely exist in a small firm which would have fewer accounts, and where they would be larger on the average in relation to the working capital, it is also indicated that credit insurance is needed for smaller businesses. Most executives who responded in this study believed that the insurance principle is appli cable to credit in the aforementioned circumstances.
This analysis indicates that the possible value of credit insurance to these firms will depend upon the actions of insurers.
The value that could be gained from this insurance can only derive from the willingness of insurers to assume risks where they exist, and to spread them among a large number of policyholders at reasonable rates. CHAPTER V
SUMMARY AND CONCLUSIONS
In summary, it is repeated that the overriding purpose of this
study is to evaluate credit insurance from the viewpoint of the policy
holder, to determine whether or not it is, as written, a worthy and
desirable tool of credit management. No previous report on the topic,
based on actual policyholder experience, was available. Therefore,
it is intended to provide a reference on credit insurance that will
aid businessmen and that will be of assistance to insurance executives
in formulating policies. This work has necessarily been limited to
credit insurance as it applies in domestic mercantile commerce, and
specifically to the indemnifying of excess losses on the accounts
receivable of manufacturers, wholesalers, and advertising agencies.
It has not been concerned with credit life insurance, fire insurance
on ledgers or debtors* property, retail credit insurance, or the insur
ance of export credit.
Status of Credit Insurance
Credit insurance has been written in the United States since
1892 by the London Guarantee and Accident Company, Ltd., and since the
next year by the American Credit Indemnity Company of New York. These
are the only two companies writing this type of insurance in the United
States today. The latter company also writes this insurance in Canada, where it is the only underwriter of credit insurance. The London
Guarantee and Accident Company, Ltd., is an English company which
operates here from a New York branch office. It indemnifies in other 212 213 insurance fields but does not write credit insurance in any other country than the United States. The American Credit Indemnity Company of New York writes credit insurance exclusively. The latter organiza tion is a subsidiary of the Commercial Credit Corporation, and the
London Guarantee and Accident Company, Ltd., is a part of the Phoenix of London Group of insurers.
Credit insurance has enjoyed a recent growth commensurate with that of other casualty lines of insurance, and now enjoys premiums of over eight million dollars a year from about three thousand policy holders, These policyholders, who pay an average annual premium of about twenty-three hundred dollars, include large and respected firms from all regions of the United States and Canada. However, the rate at which policies have been discontinued has been high, about fifteen per cent per annum. Further, the vast majority of eligible firms have not insured their receivables.
The investigation into the causes of the aforementioned condi tions was conducted by interviews with present and former policy holders, by questionnaires sent to the presidents and credit managers of firms that have never insured, and by study at the home offices of the two insurers and the New York State Insurance Department.
Why Firms Insure Accounts
One-third of the present-policyholders interviewed reported that they insured receivables for the same reason that they carry fire insurance. Others stated, in order of frequency, that they insured to get the collection services of insurers, in order to use the policy 214
as a credit yardstick, because the premium is tauc deductible, and
because they desired to sell to small non-rated accounts. Former
policyholders, on the other hand, ascribed the salesmanship of agents
as their main reasons for insuring originally. Other reasons given
by former policyholders, in order of frequency, were to insure one
large account, for the same reason that fire insurance is used, fear
of depression, because of a few risky accounts, and just to try credit
insurance.
The aforementioned answers satisfy the intended purpose of one
phase of the investigation, i.e., they indicate the reasons firms
insure their accounts receivable. Although the reasons reveal either
confusion or lack of comprehension about credit insurance, they are
important because businessmen act upon them. Otherwise, as a means of
determining the essence of credit insurance, the above answers are of
little significance.
Reasons for Policy Lapse
The main reasons for discontinuance of policies stated by one- third of the former policyholders who were queried was that credit insurance was just an added expense of doing business. However, among those who had experienced policy adjustment, the predominant cause of policy lapse was dissatisfaction with the adjustment procedure. The next most frequent reason was that insurance was only needed on a single account, which type of coverage was discontinued by insurers.
Other important reasons stated were "too expensive," "collection charges," "primary loss too high," "ninety days too soon to turn-over accounts for collection," and "too restrictive." 215
These detailed reasons for discontinuance were more specific
than the reasons for insuring originally, and were indicative of a
knowledge of credit insurance which was gained by experience. There
fore, whereas the reasons for insuring were for the most part based on
misconceptions, the reasons for discontinuing were generally based
upon factual analyses. They are of value in reaching conclusions con
cerning an evaluation of credit insurance.
Why Most Firms Do Not Insure Accounts
A response was obtained from forty per cent of the firms
mailed questionnaires to determine, fundamentally, why over ninety-
nine per cent of eligible firms do not insure their receivables. A
slight majority of responding credit managers indicated that they
simply did not believe in credit insurance. About one-third of them
did not believe that the insurance principle is applicable to credit.
Nearly two-thirds replied that their firms had no need for credit
insurance. The majority did not, however, take exception to the major
provisions of credit insurance.
Two-thirds of the presidents who answered questionnaires indi
cated that they believed that the credit risk can be underwritten to
the benefit of policyholders. In answer to why they were not using
credit insurance, one-third of the presidents stated that they had no
need for it, and nearly a fourth of them replied that the insurance
was too expensive. Half of the presidents had never been presented a
proposal by a credit insurance agent. Nevertheless, both the credit managers and presidents of small firms were much more expressive of a
need for credit insurance and the acceptance of its provisions than 216
were the executives of larger firms.
These answers of persons who have not insured indicate that
presidents of firms are more receptive to the application of the
insurance principle to credit than are credit managers. Yet, a lack
of need for the insurance was the compelling reason for non-usage as
stated by both groups. It was significant that the executives of
small firms indicated most need for the insurance, and that they
found the cost of insuring to be prohibitive. Generally, the reasons
for not insuring indicate need for changes in insuring procedures, if
credit insurance is to be utilized to any appreciable extent. However,
as a means of evaluating the essential nature of credit insurance,
the reasons for not insuring are not conclusive.
Credit Insurance Coverages in Practice
The standard credit insurance policy was found to cover only a
mid-range of possible credit losses, with most coverage on highly
rated accounts where there was the least need for insurance. There
is a lower limit of a "primary" or expected normal loss set by the
insurer. Then there is an upper limit, the "single limit," on each
account, as specifically approved by insurers or as part of a rating
group. Further, there are "aggregate limits" on certain groups of
accounts. Too, there are "pro rata" deductions from these limits for
any amounts collected on the accounts after they have been filed with
insurers, if the accounts were in excess of limits at the time of filing. Finally, there is a limit on each policy, called the "face amount." In the policies studied, however, none was found where the 217 losses reached such proportions that they were limited by the "face" amount of a policy.
Nevertheless, the overriding limitation on recovery from credit insurance policies was found to be the time limitation upon insolvency, i.e., the improbability of an account sold after the effective date of the policy qualifying as a defined insolvency before the termination date of a policy. Of course, the most used policy, the "N" form, allows that an account filed within ninety days after due date will be considered an insolvency if it remains uncollectible at the end of the policy term. However, actual policyholder experience indicates that many insureds are reticent to turn over accounts to credit insur ance collectors within that short period, for fear of losing customers.
Therefore, adjustment sheets show numerous unrecoverable items that were "filed after ninety days." Still, there is a coinsurance deduc tion of ten to thirty per cent from losses covered and proved.
Finally, and lastly, the primary loss is deducted from any ronainder.
Therefore, in actual practice, many credit losses of policyholder firms are not covered by a credit policy.
Cost of Credit Insurance
Thus, credit insurance is so complicated and evasive that the only reasonable gauge of its cost is the loss ratio, or the recovery for all policyholders in proportion to premiums paid by them. For all known policyholders in Southwestern Ohio, with policies in force from
1912 to 1953, the loss ratio was about twelve and a half per cent. As a national average, losses paid (less salvage) have been about eleven per cent of premiums during the past two decades. 218
There is no rating agency for credit insurance, but the two
insurers file jointly with the New York State Insurance Department.
There are no precise actuarial tables for determining these rates, and
statistics concerning bad-debt loss ratios are limited. However,
primary-loss rates were found to be considerably higher than bad-debt
losses reported in surveys made by disinterested parties, and premiums
appeared to be arbitrary. Recently, the New York State Insurance
Department took action to remedy this situation by requiring the credit
insurers to file yearly combined experience tables of premiums earned
and losses paid. Also, action was taken by the federal government to
increase competition between the credit insurers, to the extent that
a policyholder can now shift a renewal policy to the other company
without penalty. Effective competition apparently disappeared from
the credit insurance field in 1934, and since that time the tendency
has been to use policy rates above those listed in the manuals, whereas
before that year there was widespread rate-cutting below the manual
quotations.
Conclusions
It is concluded that the great majority of businesses have no
need for credit insurance on all their accounts, as such insurance is
generally written today. The amounts likely to be recovered under
policies are too low to warrant the expense of premiums in all except
a few cases. The following conditions would make self-insurance advis
able as an alternative;
1. Accounts are large in number; 219
2. Accounts are widely distributed geographically;
3. A company has sufficient amounts of working capital;
4. The amounts sold on credit are very small;
5. A firm sells only to governments, public and private utilities,
or corporations with excellent credit ratings;
6. Accounts held are all local;
7. The terms of sale are cash or very short;
8. Sales are made on consignment.
Credit insurance as written is not positive loss prevention, because it covers neither all losses, nor all abnormal losses. It may be negative loss prevention where it increases the costs of credit operations without an off-setting increase in net profits. Neither does insurance of receivables enable a businessman to know in advance what his credit losses will be for a given period, because there are many exceptions from coverage at adjustment time. Claims that credit insurance minimizes,lessens, or guarantees against credit risks are without validity. It functions primarily for the purpose of trans ferring risks, which it does to a limited extent at a high cost.
Furthermore, the prime objective of credit management is not merely to lessen risks, but rather to maximize sales while minimizing losses.
Analysis of Reasons for Insuring Accounts
It is further concluded that most policies in force have resulted from sales-persuasion of executives who do not adequately understand what they have bought. This is evident from the reasons given for insuring, both by present policyholders and former policy holders. For example, they said that they insured receivables for the 220
same reason that they carried fire insurance. But fire insurance is important to most firms because they have only one structure or a few buildings, the loss of any one of which might be catastrophic. However, most firms have hundreds or thousands of accounts receivables, and thus have diversified risks in case of credit as contrasted with concentrated risks in case of fire. Although there may be geographical concentration in mercantile credit, acts of God which may damage an area were shown to be inconsequential as a cause of credit losses. As has also been
shown in this study, most of the other reasons for insurance stated by policyholders were, likewise, built on misvinderstanding. The plurality of former policyholders interviewed, who had learned significant facts about credit insurance, stated directly that their original decisions to insure were due to the salesmanship of agents. There is ample reason to believe, however, that the high post-war volume of credit insurance, at a time when insurers had discontinued some of their more liberal coverages, was due in part to high tax rates, with a resulting willingness of businessmen to try credit insurance while "the govern ment was paying a major part of the premium."
Appraisal of the Cost of Insuring Accounts
Evidence has been presented to show that credit insurance rates are unreasonably high, whether considered in relation to the protection afforded working capital, or when losses paid are compared with pre miums collected. It is further indicated that most premiums are not intended as a reserve to be handed back to policyholders at such time as the econany becomes recessionary. In such an event in the past, primary loss rates were increased and risks were selected more carefully 2 2 1
by insurers. After all, the term of the credit contract is too short
to serve as a hedge against depression, considering that the time
between the policy-acceptance by insurers and the date of the last
sale covered may be less than nine months.
Possible Benefits from Credit Insurance
Notwithstanding the foregoing conclusions, credit insurance may
be necessary for individual firms, even at present high rates, in
cases where they have a few large accounts, the insolvency of any one
of which would imperil their capital positions. At least, the insur
ance protects to a limited degree against credit losses which are in
excess of the primary loss and less than the limits of coverage. Never
theless, other cases where credit insurance appears to be justified
are believed to result from misunderstandings of the insurance proce
dures, as is explained in the following paragraphs.
Undoubtedly, credit insurance provides relief from credit worries for many, even though this psychological advantage often turns
to disappointment as policy techniques are brought to light by adjust ments or other incidents. Still, as was pointed out, it is possible
for a policyholder to derive much satisfaction from the believed
"protection" of his receivables, even though his main contact with insurers be in paying annual premiums.
Two other possible "advantages" from credit insurance derive from inefficient credit management; namely, increased sales on accounts where the credit practice has been too conservative, or restricted sales to conform to policy coverages where the practice has been too liberal. Yet, on the one hand, if losses occur from increased sales. 222
the insured is the primary loser. On the other hand, restricted sales,
of course, may mean reduced profits. In either event, good credit
management can do more to correct a faulty credit department than can
a credit insurance policy. Still, it may be that a senior executive
who has little confidence in his credit manager is not in a position
to replace him. In this case, credit insurance might prompt sane
useful restrictions on credit granting, even though it could not serve
as a substitute for good management.
Precautions for Prospective Insureds
From the analysis herein presented it is clear that credit insur
ance, as written, is hard to understand. It is difficult and time-
consuming to acquire sufficient knowledge about the system so as to
get full advantage from it. If protection is believed to be greater
than exists, this may lead to over-extension of credit by an otherwise
efficient credit department, with resultant losses. Therefore, busi
nessmen who contanplate insuring receivables would do well to consider the following conclusions concerning credit insurance policies and provisions :
1. The policy is preferable to other forms for most insureds
because it offers a full year of future coverage, whereas the
more widely used backward-coverage policies offer a maximum
future term of nine months. The "H" policy is also better because
an account does not have to be filed with the insurer for col
lection within ninety days to be considered as an insolvency,
even though there is a penalty of one-fifth of one per cent
additional coinsurance for each day more than ninety days that 223
the account is past due at the time of filing.
2. In nearly all cases, if a businessman does not intend to
file accounts with insurers for collection, and to file them
by the ninetieth day past due-date, then he should not pur
chase credit insurance. Without this filing, his chances of
being covered on losses are remote.
3. Bargaining ability is important in buying credit insurance.
Policies are "tailor-made" and underwriting is based to a
great extent on individual judgment.
4. The policyholder should be cognizant while bargaining with insurers
that the "face," or policy amount, is relatively unimportant to
him, because it is seldom applicable in practice. More important
to the insured are the single limits on accounts and aggregate
limits on groups of accounts, which are more likely to preclude
a loss of proportions allowed by the policy amount.
$. The primary loss rate is important, and it gets progressively
lower as the sales basis is increased. The dollar amount of
primary loss is a minimum only, and a low minimum goes with a
high rate. The sales basis will be most favorable to the insured
when it reflects his actually expected sales, and not when the
minimum amount is low.
6. It is an advantage to a policyholder to accept a higher primary
loss in lieu of a reduced premium to the extent allowed by
insurers, because of the improbability of loss adjustments.
7. A reserve for bad debts is still needed with credit insurance, 224
because a policy ordinarily does not protect overall bad-debt
losses beyond a limited degree, and never the normal loss.
A prospective insured should look at his own records to see if
he would have gained by having had an insurance policy in the past
years. He will have to consider covered sales, whether or not he
would have filed accounts, and if he would not, whether insolvencies
would have resulted during the policy term. A businessman should not
expect to make money on credit insurance, but should realize that the
credit insurance companies must meet expenses and make profits in
order to stay in business.
How Credit Insurance Might Be Made More Useful
The one immediate way in which credit insurance could be made
more useful is to insure the accounts of single debtors, by merely
reinstating and promoting coverages that insurers wrote for mauiy
years, the individual-debtor and approved credit risk policies. This
would exercise the true insurance function of spreading risks of
individuals among a large group of policyholders. It is only when
self-insurance does not exist, as when one account or a few accounts
are so large that the failure of any one would jeopardize a business, that credit insurance is needed.
Secondly, credit insurance could be made more usable by remov ing some of the complexity from policies and provisions. Most busi nessmen do not have the study-time necessary for a proper understanding of the insurance as written today. Misconceptions concerning credit contracts cause a misuse of policies and added expense for policy holders, Even special agents sometimes fail to understand the 225
techniques of adjustment, and thereby may innocently mislead business
men. Policies could be simplified by rewording them into terminology
that is familiar to businessmen, and by adding precise explanations
of just what happens in actual adjustment cases. Insurers have
recently taken action to educate agents better in policy provisions,
and this course should be further pursued.
Thirdly, credit insurance would be useful to more businessmen
if rates were lower and more realistic. The profit record of insurers
indicates that this is desirable. Growth and stability in the economy
should also be considered in evaluating and correcting rates. Business men look upon insurers as custodians of their funds, which are to be held in trust and distributed to those who suffer losses, allowing a reasonable margin of profit for the insurers. Business executives would be more favorably disposed toward credit insurance, if they could be shown that rates bear out this principle of risk-spreading, on a mathematically factual basis. Present rates are so high as to preclude proper coverages for many policyholders. Thus, lowered rates could contribute indirectly to better and more adequate coverages. It is believed that further study would reveal means of reducing selling and underwriting expenses of credit insurance, so as to make its cost within the reach of a much greater number of businesses. Actuarial tables, such as those used in life insurance, could possibly be designed for the credit insurance field, so that less reliance would necessarily be placed upon individual underwriting judgment.
If the usefulness of credit insurance were improved, as sug gested above, then it would be employed on a wider scale. There are 226
numerous firms which have need for protection of working capital
against the insolvency of debtors. These are mostly small firms
which cannot afford present credit insurance rates. They need cover
age on specific large accounts, and not general coverage on all of
their accounts. Small business constitutes a vast untapped reservoir
of business for credit insurers, if they will provide the service
needed at reasonable rates.
Thus, results of this study indicate that the product must be
improved before the use of credit insurance may be broadened to any
considerable extent. The impetus needed to bring this about is competi
tion. It is not likely that present credit insurance executives would
be permitted by their stockholders to experiment with policies and
provisions more to the liking of policyholders. Profits have been
high on low sales volume since effective competition disappeared from
the field two decades ago. There is no assurance that greater volume would increase total profits for present insurers. In any event, the
improvements necessary to make credit insurance a generally ccxnmendable tool of credit management can probably be expected to result largely from competition provided by the entry of new underwriters into the field. BIBLIOGRAPHY
227 BIBLIOGRAPHY 228
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Kinsall, W. H. "The Advantages of Credit Insurance to the Advertising Agency," Printers Ink. 222 (February 13, 1948), p. 49.
Maloney, J. P. "Salesmen View the Credit Department," Credit and Financial Management. 53 (August, 1951), p. 10.
McCauley, J. L. "Why Your Customers Need Credit Insurance," Rough Notes. 95 (July, 1952), p. 30.
Millians, Paul M. "Credit Insurance," Best*s Insurance News. 41:8 (December, 1940), p. 2 3 .
_. "Credit Insurance Keeps Pace With Credit Technique," National Underwriter (Fire and Casualty edition), 43 (June 15, 1939), p. 17 .
Nicodemus, F. M. "The Price of Success Can be the Loss of Credit," Credit and Financial Management. 53 (September, 1951), p. 20.
0»Brien, J. P. "Coverage and Foms; Insurance Form Gives Fixed Control Over Credit Losses," Spectator (Property edition}, 14 (December 23, 1948), p. 18.
"Credit Insurance Gaining Rapidly in Favor," Weekly Under writer. 152 (January 6, 1945), p. 30
Pereira, H. F. D. "Insured Accounts Receivable - A Post War Cushion," Banking. 36 (January, 1944), p. 30.
"Rider Protects Bankers in Ccanmercial Paper Against Credit Hazards," Spectator (Property edition), 11 (March 28, 1946), p. 30.
"Sharing The Risk on Credit Losses," Business Week (July 5, 1952), p. 58 . 233
Shepard, R. D. "36 Year Story: Insuring Credit," Spectator. l6l (July, 1953), p. 1 8 .
Silverman, Herbert R. "Factoring as a Financing Device," Harvard Business Review. 27 (September, 1949), p* 595.
Spain, H. Stanley. "Ladder of Progress," Insurance and Finance Chronicle. 15 (May 15, 1 9 2 8 ) , p. 1848.
Stibel, Bernhard. "Ban King and Credit Insurance," Insurance and Finance Chronicle. 17 (July 1, 1930), p. 2559,
Stockfish, J. A. "An Uncertainty Theory of Profit," American Economic Review. 6l (March, 1951), p. 164.
Tolk, Bernard, "Ad Agencies Buying Credit Insurance," Printers Ink. 230 (March 10, 1950), p. 65.
Williams, Bruce. "Canadian Securities," Commercial and Financial Chronicle. I60 (August 10, 1944), p. 595.
C. PAMPHLETS
Argus Chart. 1954. Fifty-fifth Annual Edition, Cincinnati; The National Underwriter Company, 1954.
Credit Insurance Sales Helps. Baltimore: American Credit Indemnity Company of New York, 1952. 47 pp.
Commercial Failures in an Era of Business Progress. 1900-1952. New York: Dunn and Bradstreet, Inc. 31 pp.
"Export Insurance Act of 1946." U. S. Congress. Senate. Special Committee to Study Problems of American Small Business. Seventy- ninth Congress, second session. May 13, 1946. Washington; U. S. Government Printing Office, 1946.
Foulke, Roy A. Behind the Scenes of Business. New York: Dunn and Bradstreet, Inc., 1952. 194 pp.
The Story of the Factor. New York: Dunn and Bradstreet, Inc., 1953. 69 pp.
International Mercantile Credit. Paris: International Credit Insur ance Association, 1930. 29 pp.
Jones, H. Lloyd. Additional Security for Commercial Bank Loans Through Credit Insurance. New York: Phoenix-London Group, 1944. 234
Margold, Stella Kaplan. Export Credit Insurance in Europe Today. Washington: U. S. Government Printing Office, 1934. 100 pp.
Maybaum, Levy. A Novel Credit System. Newark, New Jersey: Doctor and Sons, printers, 1888.
A System and Plan for the Organization of a Company to Guarantee Against Loss by the Failure of Banks or Insurance Companies. Newark, New Jersey: W. H. Shurts, 1889. 8 pp.
Schule, Henry. Commercial Dawn, or Financial Security in Business. Buffalo: E. Barker and Company, 1889. 9 pp.
Statistics of Income for 1949. Part II. Washington: United States Treasury Department, Revenue Service, 1953. 470 pp.
Survival Qualities of American Business. New York: Dunn and Brad street, Inc., 1951. 15 pp.
D. ENCYCLOPEDIA ARTICLES
Hay, Woodbull. "Insurance Credit," The Encyclopedia Americana. 1954 ed., XIV, pp. 183-184.
Legg, J. G. "Credit, Insolvency or Bad Debt Insurance," Encyclo paedia Britannica. 1952 éd., VI, pp. 654-655-
Loman, H. J. "Credit Insurance," Encyclopaedia of the Social Sciences. 1948 ed., IV, pp. 557-560.
E. UNPUBLISHED MATERIAL
Bates, John L. "Credit Insurance with Relation to Commercial Banking." Unpublished thesis. Graduate School of Banking, Rutgers Univer sity, 1942.
Christensen, John. "Report of Examination of the American Credit Indemnity Company by the Insurance Department of the State of New York as of June 30, 1951.” Albany: New York State Insurance Department, 1952.
Davis, George B. "Credit Costs Are Inevitable." A speech delivered before the Eugene, Oregon, Chapter of the National Association of Office Managers on February 28, 1952. 235
"Checklist for Selling Credit Insurance." Portland, Oregon, 1951-
D»Aquila, Frank P. "Introduction to Government Export Credit Insur ance Schemes." Unpublished Master*s thesis, Georgetown Univer sity, Washington, D. C., 1940.
Hawkins, J. L. "Credit Insurance— What It Is and What It does." Indianapolis; London Guarantee and Accident Company, Ltd.
McCauley, James L. "An Introduction To Credit Insurance." From notes made for a lecture before a training class for examiners. New York State Insurance Department, April, 1954.
Montesani, Frank. "Examination by the New York Insurance Department, Credit Insurance, American Credit Indemnity Company, and London Guarantee and Accident Company, Ltd. as of May 10, 1945." Albany: New York State Department, 1945.
O^Brien, James P. and Arthur Todd. "Debate on Credit Insurance." Delivered before the Cleveland Association of Credit Men, Novonber 6, 1945, as recorded by Edwin H. Hammock, Official Court Reporter, Common Pleas Court, Cuyahoga County, Ohio.
0*Connell, Donald. "The Insurability of Credit Risks." Unpublished Doctoral dissertation, Columbia University, 1953.
Stone, August F. "Credit Insurance." Notes from a speech delivered to agents by the president of the American Credit Indonnity Company of New York, in Baltimore, Maryland, November, 1951.
"Unpublished Reports." The American Credit Indannity Ccmpany of New York, and the London Guarantee and Accident Company, Ltd., submitted to the New York City Branch Office, New York State Insurance Department, 1932-1954* APPENDIXES
236 r' Hf iq A m e r i c a n C r e d i t In d e m n i t y I ! C o m p a n y ofNew% bk
Executive Ottxce
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SJSJ f^A .i UlUih I !> I »! 1 lili tüliî i! H! i i i i f U! imu!] i i i i i ! i | { i 1 1 B'Sls^iil'Hfl ■ ' ill li: II II H ! S6B55S S3 333S 538 333 335 âs:3 :
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ceesse 6«6|i§ Ijiit ilK 'M • • **•«»* M««<« «l*n «(• HM M KCRRge KCRiei M8R ■ IBllSlI 88 8 88I8| APPENDIX B 239
SAMPLE OF LETTER SENT TO PRESIDENTS OF 500 FIRMS
Xavier University Cincinnati 7, Ohio
June 25, 1954
Mr. Louis F. Jones, President Satterfield Corp. 850 Springfield Street Dayton, Ohio
Dear Mr. Jones:
A study is being made to determine the possible value of credit insurance, the insuring of accounts receivable, to American business. This evaluation is being undertaken for The Ohio State University, under the supervision of Professor Theodore N. Beckman, of the Department of Business Organization and an authority for many years in credits and collections. It is hoped to make a contribution to scientific management by analyzing the experience of firms that have used credit insurance, as well as that of companies that have not used it.
As a progressive business leader, you have been chosen to eaqjress your opinions on this matter, in which there has been no previous study from the policyholder point of view. Will you please fill out the attached questionnaire now, merely by checking a correct answer in many cases? A stamped self-addressed envelope has been enclosed for your convenience in mailing.
Your views will appear only in summary form without reference to yourself or your firm. Your credit manager may receive a separate and different questionnaire, because often different viewpoints are taken by top management and the Credit Department, and it is desired to have completely objective answers from both sources. A resume of the findings and conclusions from the study will be mailed to you, as one who has helped in this study, as soon as it has been completed.
Thank you in advance for your cooperation in making this study possible. It is sincerely hoped that it may result in findings of interest to you.
Very truly yours,
/s/ James G. Sheehan James G. Sheehan Asst. Professor of Economics and Business APPENDIX C 240
QUESTIONNAIRE SENT TO PRESIDENTS
CREDIT INSURANCE QUESTIONNAIRE (for Presidents)
(Space has been left for comments that you may care to make, following each "yes - no" answer.)
1. Have you ever insured accounts receivable? Yes No___
If so, why did you stop?
2. Why are you not now using credit insurance?
3 . Did you every consider using credit insurance? Yes No
Were you ever presented with a proposal by a credit insurance agent? Yes No___
4 . Do you believe that the credit risk can be underwritten by an insurance company to the benefit of policyholders, as in other lines of casualty insurance? Yes No
Comment ;
5 . Do you think that there is a genuine need for such coverage?
Yes____
No_____
6. Would your firm be able to increase credit sales as a consequence of insuring your accounts receivable?
Yes____
No
Would your terms of sale be more liberal if you had a credit insurance policy?
Yes____ No APPENDIX G (Gontîd.) 7. Do you believe that credit insurance would help your firm by endorsing your accounts receivable for banking or financing purposes?
Yes_
No
8, Would you place more confidence in your debtors if they had their receivables insured?
Yes____
No
9. Would this insurance be likely to benefit your firm by promoting harmony between the sales and credit depariaaents?
Yes____
No
10. Do you believe that the collection service of a credit insurance company would be of considerable use to your company?
Yes____
No
11. Are you familiar with the major provisions normally included in credit insurance policies? Yes No_____
12. Would it especially benefit your firm to know in advance just what the maximum possible credit loss would be during the coming year?
Yes No
13. Please state what your credit losses were last year, as a percentage of sales? ______^
If you do not consider the above figure typical, please give the percentage of loss for a more normal year:
(Year)______(loss as a percentage of sales) ______%
14. Do you believe that the use of credit insurance would be a wise policy for your firm if you were anticipating a recessionary ïes Ho APPENDIX G (Gont»d.) 242
15. Would credit insurance save much of your time, and that of your staff, which might otherwise be spent in trying to collect salvage values from insolvent debtors?
Yes_____
No
Would credit insurance lessen your credit worries? Yes No_ APPENDIX D 243
ANSWERS OF PRESIDENTS TO CREDIT INSURANCE QUESTIONNAIRE* (Total 162 Questionnaires)
1. Have you ever insured accounts receivable? Yes 41 No 121
3 . Did you ever consider using credit insurance? Yes 73 No 64
b. Were you ever presented with a proposal by a credit insurance agent? Yes 81 No 6l
4 . Do you believe that the credit risk can be under written by an insurance company to the benefit of policyholders, as in other lines of casualty insurance? Yes 77 No 34
5. Do you think that there is a genuine need for such coverage? Yes 62 No 53
6. Would your firm be able to increase sales as a consequence of insuring your accounts receivable? Yes 34 No 110
b. Would your terms of sale be more liberal if you had a credit insurance policy? Yes 19 No 134
7 . Do you believe that credit insurance would help your firm by endorsing your accounts receivable for banking or financing purposes? Yes 29 No 122
8. Would you place more confidence in your debtors if they had their receivables insured? Yes 60 No 76
9. Would this insurance be likely to benefit your firm by promoting harmony between the sales and credit departments? Yes 40 No 105
10, Do you believe that the collection service of a credit insurance company would be of considerable use to your company? Yes 33 No 113
11, Are you familiar with the major provisions normally included in credit insurance policies? Yes IO6 No 45
12, Would it especially benefit your firm to know in advance just what the maximum possible credit loss would be during the coming year? Yes 72 No 68
14, Do you believe that the use of credit insurance would be a wise policy for your firm if you were anticipating a recessionary period? Yes 51 No 87 *This tally is necessarily limited to "yes-no" answers. APPENDIX D (Cont*d.) ^44
15» Would credit insurance save much of your time, and that of your staff, which might otherwise be spent in trying to collect salvage values from insolvent debtors? Yes 32 No 115
b. Would credit insurance lessen your credit worries? Yes 56 No 94 APPENDIX E 245
SAMPLE OF LETTER SENT TO CREDIT MANAGERS OF $00 FIRMS
Xavier University Cincinnati 7, Ohio
June 17 , 1954
Mr. Eric E. Morehouse, Credit Manager Auto Supply Co., Inc. 181$ Race Street Cincinnati, Ohio
Dear Miss Meyers;
A study to evaluate credit insurance is being conducted for The Ohio State University, under the supervision of Professor Theodore N, Beckman, of the Department of Business Organization and an authority for many years in credits and collections. A factual analysis will be aimed to answer questions such as the following:
If the insurance principle is applicable to credit, why has it not been employed to a greater extent?
If unsound, why is credit insuranc e used by some of the leading companies in all regions of the country?
Your wide experience and position of leadership in the credit field makes your ideas of foremost value in determining the possible advantages or disadvantages of insuring accounts receivable. Will you please fill-in the attached questionnaire now and mail in the enclosed, self-addressed, stamped envelope. All information furnished by you will be so treated as not to divulge your name or that of your company in connection therewith.
In recognition of your help, a summary of the findings and conclusions will bq sent to you when the study is completed, in order that you may know to what extent credit insurance is being used, the unique credit experience of executives who are using it, and the convictions of those who are not. Your cooperation in this matter will be greatly appreciated.
Sincerely yours.
/ s / James G. Sheehan James G. Sheehan Asst, Professor of Economics and Business APPENDIX F 246
CREDIT MANAGER*S QUESTIONNAIRE
(I have left space for comments that you may care to make, following each "yes - no" answer.)
1. Do you believe in credit insurance? Yes_____ No _____ Why or why not?
2. Do you think that more widespread use of credit insurance would increase:
sales? (Yes No )
turn-over of working capital? (Yes No )
amounts loaned on receivable by banks and factors? (Yes No )
salvage from bad debts? (Yes No )
supplier credit to small business? (Yes No )
sales to more distant regions? (Yes No )
sales to border-line accounts? (Yes_____ No__ )
length of credit terms? (Yes No )
profits? (Yes No )
3 . Do you believe that use of credit insurance by a firm would decrease;
credit losses? (Yes No )
past dues? (Yes No )
executive-time spent on collections? (Yes No )
operating expenses of credit departments? (Yes No )
collection costs? (Yes_____ No_)
4 . Do you agree with the procedure of inclusion in credit-insurance policies of:
CO-insurance provision (or 80% or 90% coverage)? (Yes No )
deductible provision ("primary loss")? Yes No ) APPSNDIX F (Cont»d.) 247
single-limit provision (maximum allowable loss on any one account)? (Yes No )
requirement for turning over of delinquent accounts within 90 days? (Yes No )
policy term limited to one year? (Yes No )
collection service by insurance companies (at one-half legal law rates except where a lawyer is used)? (Yes No )
5. Will you please state the reason or reasons why your firm is not not using credit insurance?
6. Do you think that there is any conflict between the use of credit insurance and your own duties as credit manager? (Yes No )
Why?
How?
7. Has your firm ever used credit insurance? (Yes No )
If the above answer is "yes,” will you please indicate why the insurance was dropped:
8. Do you think that there are possible advantages to your firm in having a credit insurance policy? (Yes No )
Will you kindly state, if your answer is "yes," just what they are:
9. Do you believe that an outside collection organization has an advantage over your credit department in collecting past due accounts?
Yes___
No
10, Do you think that there is a definite psychological advantage, or elimination of worries about credit losses, to top management whose accounts receivable are insured?
Yes___
No APPENDIX F (Cont»d.) 248
11. Please state what your credit losses have been during the past year, as a percentage of credit sales?
If that was not a typical year, will you please name one?
year _____ ; loss as % of credit sales _____
12. Do you agree, as claimed by credit insurance companies, that credit insurance:
- backs your judgment as a credit executive? (Yes No )
- promotes efficiency in organization and management? (Yes No ]
- minimizes risk? (Yes No )
- helps create and maintain a more harmonious relationship between the credit and sales departments? (Yes No )
- protects your accounts receivable? (Yes____ No )
13. Would you recommend credit insurance for your firm if you antici pated a down-trend in the business cycle?
Yes___
No
1 4. Would you recommend that a firm having only a few accounts, all of which are large, should insure these accounts, if it were possible to do so?
Yes____
No
1 5 . Under what other conditions, if any, might you reccanmend the use of credit insurance?
16 . Do you believe that the insurance principle of spreading risks through an underwriter is properly applicable to credit risks, as it is to fire risks or burglary risks? APPENDIX G 249
TALLY OF ANSWERS TO QUESTIONNAIRE BY CREDIT MANAGERS* (Total 134 Questionnaires)
1. Do you believe in credit insurance? Yes 53 No 57
2. Do you think that more widespread use of credit insurance would increase:
a. sales? Yes 53 No 78
b. turn-over of working capital? Yes 52 No 75
c. amounts loaned on receivable by banks and factors? Yes 85 No 38
d. salvage from bad debts? Yes 64 No 53
e. supplier credit to small business? Yes 73 No 51
f. sales to more distant regions? Yes 47 No 74
g. sales to border-line accounts? Yes 74 No 48
h. length of credit terms? Yes 33 No 93
i. profits? Yes 28 No 84
3. Do you believe that use of credit insurance by a firm would decrease:
a. credit losses? Yes 55 No 64
b. past dues? Yes 32 No 90
c. executive-time spent on collections? Yes 58 No 69
d. operating expenses of credit departments? Yes 26 No 92
e. collection costs? Yes 38 No 81
4. Do you agree with the procedure of inclusion in credit insurance policies of:
a. coinsurance provision (80% or 90% coverage)? Yes 67 No 42
b. deductible provision ("primary loss")? Yes 55 No 47
*This tally is necessarily limited to "yes-no" answers. APPENDIX G (Cont»d.) 250
4. (Cont*d«) Do you agree with the procedure of inclusion in credit insurance policies of:
c. single-limit provision (maximum allowable loss on any one account)? Yes 51 No 48
d. requirement for turning over of delinquent accounts within 90 days? Yes 62 No 48
e. policy term limited to one year? Yes 57 No 46
f. collection service by insurance ccsnpanies (at one-half legal law rates except where a lawyer is used)? Yes 67 No 42
6. Do you think that there is any conflict between the use of credit insurance and your own duties as credit manager? Yes 26 No 94
7 . Has your firm ever used credit insurance? Yes 24 No 110
8. Do you think that there are possible advantages to your firm in having a credit insurance policy? Yes 29 No 96
9 . Do you believe that an outside collection organization has an advantage over your credit department in collecting past due accounts? Yes 86 No 41
10. Do you think that there is a definite psychological advantage, or elimination of worries about credit losses, to top management whose accounts receivable are insured? Yes 74 No 46
12. Do you agree, as claimed by credit insurance companies, that credit insurance:
a. backs your judgment as a credit executive? Yes 31 No 88
b. promotes efficiency in organization and management? Yes 23 No 95
c. minimizes risk? Yes 72 No 54
d. helps create and maintain a more harmonious relationship between the credit and sales departments? Yes 42 No 78
e. protects your accounts receivable? Yes 87 No 33 APPENDIX G (Cont'd.) 2$1
1 3 . Mould you recommend credit insurance for your firm if you anticipated a down-trend in the business cycle? Yes 36 No 80
1 4 . Would you recommend that a firm having only a few accounts, all of which are large, should insure these accounts, if it were possible to do so? Yes 81 No 38
16. Do you believe that the insurance principle of spreading risks through an underwriter is properly applicable to credit risks, as it is to fire risks or burglary risks? Yes 56 No 36 Ç0!-3I'KD EîCPBrtIBNCE ç^i T 'Êr^_imcï
Calend^TeH-feyja£j>®.cem¥.r ,lli. .1^2
MAHUFACTURERS _ JCB^.HS ^(^WHOIÆS«ÆRS)_ _ Cross Direct Gross Direct Premiums Written Gross Direct Premiums Written Gross Direct Less Return Losses Paid Less Return Losses Paid Mp.Iot Line _of Code Premiums Less Salvage Code Premiums Less Salvage I Kood md Kindred Products 20 L 90 i_lj01xlJ!6..98 A%_ja9e86_ Tohftcco 21 2 ^hZ,.qo ^ L _ A 3.9 ..U 91 -2..9AL 99 5 .019.93 Textllee and Related Products 22 92 Broad-Woven ^ehr’cs 221 923 Knlt Fabrice 225 925 Carpets, Ruga end Other Floor Cov=rinra 227 927 Other Coitllos 22 _6.^8a 06. ^ _99A 2q,.28 92 S i ? x 8 9 . Z ^ _8lx25q..6j?_ Ik-i Apparel & Other Finished products Made From 5’e ■rl cs H and Similar Materials 23 93 _ - l W 6i,_n _.lx869._21__ Hi Lumber and Vood Products (Except Furnltu-e) 2d 99 295^228.29 _iqxl56..96.. % Furniture and Fixtures 25 WiJll-JR 95 9 A 9.9..52 &x2]2x2 5 _ 03 Paper and Allied Products 26 J^c0't3..8o _L2 AZ5 .A2 96 A L 2Z2aZ3 ^qqjtq.. s b< Printing, Publishing and Allied Industries 27 69.625.90 1 6 . 0 96.66 97 _____-1-22x20 Chemicals and Allied Products 28 V55cll8rOA le5RZx69 W Jlx5oq.-9J Products of Petroleum and Coal 29 92,288^6 S ISeiSO-Al _ ^ . Z 26._2_‘* 99 _ z — 532x7.9__ w R’jbbar Products 30 89.200.86 8 6 ^ 8 50 AOxlllxZi 123 ..95. _ Leather and Leather Products 31 2 8 - & ^ 9 ^ --IZxZioJ* 51 112x6S l Æ _iqxZ9Ax58_ 3? - 2 .691,79 Stone, Clay and Olaes Products u i j f i j u n ix7.85..JZl 52 't2^qo_6._6jn I Primary Metal Industries 33 -H.1x69Z-_9,2 53 1^1x187^ _z_ixÜ2CqÂ- Fabricated Metal Products (Except Machinery end Transportation Equipment) 39 59 Cutlery, Hand Tools and General Hardware 392 592 » Heating Apparatus and Plumbers Supnlles 393 593 Metal Stamping and Coating ]96 596 Other Fabricated Metals 39 __ _J_A2A ?2 59 _ 6 6 J 9 2 . 1 2 _lelA3x5.1. Machinery (Except Electrical ) 35 Ji,Oe20fAl5 ^ . c O o q . A 2 55 _l46^l6x97 _y.xZ6q.,u. Electrical Machinery, Equipment and Supplies 36 591,092.3c 56 -101x822x^12 -iqeglOxli. Transportation Equipment 37 __ 158x218^ 57 - . i i a ^ t A s 520.78 Professional, Scientific and Controlling In struments, Photographic and Optical Goods; Watches and Clocks 36 57.100.27 58 __23x255x29_ _=__ 161x 22. Miscellaneous Manufacturing Industries 39 296.88 59 _-]8L8È9x26. Miscellaneous Ncn-Manufacturing and lior,-Wholes a le Lines 60 606,725.59 _ 29. x % Z x ^ ro \JS TOTALS l2x95A2Z9Z.J2 $251x822x69. ro APPENDIX I
BAD-DEBT LOSS SURVEY TABLE 1—Proportion of Bad Debt Losses to Credit Sales of Wholesalers,
Biss Ofoupe (Baaed On T otal Saks For l«U )
T o ta l o f A ll Orosqm 88.000JOO a nd OTW SlMflOOtD»JOOuOOt 6600.6OOtoilJIQOAl
N u m b e r 1887 1088 N u m b e r 1037 i n s N o B ib o r 1M7 1686 Naaahar 1687 o f reporta o f reporta o f reporta o f reporta
A u to m o tiv e s u pp lie s...... IM 0.60 0.67 14 0 6 6 0.62 12 0.84 v> — Insuffiolont reports to show data TABLE 2—Proportion of Bad Debt Losses to Credit Sales of Manufacturers, br S ite Groups (Based O n T o ta l Rales F o r 198) In d u s try T o ta l o f A ll G roups 86,000,000 and over 81,000,000 to 86,000,000 6500,000 to 51.000.000 N u m b er 1037 1938 N u m b er 1937 1938 N u m b er 1937 1928 N u m b e r 1937 o f reports o f reports o f reports o f reports IQI Confectionery...... 166 0 21 0.24 7 0 13 0.14 25 0.17 0.23 26 0.36 H o u r, cereals a nd o th e r grain m ill 641 p ro du cts...... 22 0.13 0.18 10 0 23 0.32 Other food products...... 97 0.10 0.10 S 0.07 0.07 33 0.12 0.15 16 0 31 Meat p a c k in g...... 26 0 13 0 14 9 0.13 0.18 9 0 10 0.14 6 0.27 OU Clothing, men's, except hats ...... 31 0.14 0.33 14 0 10 0.35 0.86 Clothing, women s, except m illinery... 23 0.32 0.45 5 0.14 0.2H 7 0.49 lù iit goods...... 11 0.12 0 20 6 0.14 0.34 0 Ü Other textde products...... 66 0 10 0.16 10 0.07 0 14 19 0.17 0.17 7 0 16 F u rn itu re ...... 45 0 33 0 35 to 0.26 0 23 9 Lumber, timber and other 044 mis^Ianeoua forest products...... 35 0 22 0.30 4 0 11 0.12 6 Paper, writing, book, etc...... 22 0.36 0.26 6 P aptf, boxes and other paper products. 66 0.11 0.14 6 0.08 0 10 13 0 OH 0.18 7 0.20 ill 17 0 38 0.10 — — — 6 0 27 0.17 4 0.74 P r in t^ ^ ^ u b lis h in g and allied OH ^ , in du strie s ...... 76 0 46 0.46 ——— 7 0 38 0.60 Paints and varnishes ...... 64 0.86 0.62 13 0.82 17 Pharmaceuticals and proprietary S.S 27 0.46 0.46 7 0.88 0.38 7 Other chemical products ...... 37 0.23 0.21 8 0.13 0 11 12 0.86 0.89 6 P etro le um ...... 31 0.18 0 16 13 0 13 0 16 8 0 06 2ÎÎ R u bb e r p rod nota...... 12 0.46 0.31 4 0 23 SIÎ 6 Boote and shoes...... 84 0 18 0.38 4 0.12 0 16 14 0.86 0 61 13 S i I^eather*. tanned, curried and finished.. 86 0.13 0 19 4 0.00 0.16 10 0.16 0.20 11 Other leather products ...... 36 0.14 0 36 8 Stone, clay and glass products...... 66 0 24 0.38 18 0.17 0 31 H a rd w a re...... 16 0.14 0 13 6 0.11 0.17 6 0.29 Stoves, ranges, steam heating I apparatus...... 0 24 0 36 6 0.16 Other iron and steel products...... IM 0.08 0 06 15 0.05 0l02 24 SIS 0.14 Jewelry and fewelers supplies...... 27 .0.1 9 0.23 4 0 33 0.36 6 o i l Non-ferroas metals and their products. 31 0.06 0.06 7 0 03 0.03 8 0.37 0.85 6 Electrical machinery, apparatus and o ù 90 0.31 0 19 9 0.20 0.20 39 0 16 0.11 18 o n Other maehiosry, apparatus and supplies...... 138 0.64 0.69 9 0.71 0.73 87 0 3.4 0.46 M o tor‘Vehicle p a rts...... 43 0.10 0 13 14 0.08 0 13 7 Miscellaneous industries ...... 71 0 30 0.30 6 0.14 0 09 31 0.18 0.20 10 0 54 0 e: — Insufiioitni reports to show data. Creiil andFinancial Management ...... June, 1*39 254 APPENDIX I (Cont*d.) gjgj of Business, Classified by Size o f Establishment, 1937 and 1938 S tM G roup# < ^ a # d O n T o ta l Sola# F om r 1 ) 000 9908VM 9 W 990&000 8100.0119 to 9900.0M 990M19 to 0199.01 ÜB 4er499M 0 " 1917 1900 N w a b a r 1907 1930 N a m bar 1937 1908 N u m b a r 1907 1909 N u m b e r 1937 1903 o f m n r M o f ra pcfta o f reporta o f reporta » 0.70 0 07 99 0 90 O.ftft 09 O f t 0 81 98 0.80 ft. 79 14 1 ftft I.M 9 0.40 0 09 4 0.09 9 49 ft 0 73 0 83 8 1.44 1.60 3. I f 0 W 0 7 9 4 O.SO O.ftO ft 9 49 9.91 4 0.97 1.07 4 0 30 ft 97 11 O f f 0 9 9 0.49 0.09 II 0.7ft 0 4ft 12 0 ftft 9 83 0 . 0 0.09 29 0 4ft 0.97 98 0 07 9 44 ft 0 23 ® s ft 7 0.99 0.00 19 0.40 0.92 ft 9 40 9 44 4 0 31 0.99 f OM 0 4 9 ft O.ftft ft 47 • ft 07 ft 87 — —— 0 93 0 49 0.49 97 o.co O.M 04 9 41 9 4ft 10 1.01 1.8ft 4 1.29 i 0 .10 0.97 O.M 0.09 0.04 0.91 19 O .fti O.M 4 9.2» 1.01 0 0 0 0 0.48 9 M ft SO 0.01 0.99 90 0.49 0.84 99 9 09 ft Oft 14 0 71 0 89 8 0 49 0 O.M 0 9 0 1ft 1.04 1.00 1ft I . M 9.99 7 0 S3 0.81 6 0 «9 0.99 ft 0.74 0 97 7 1 10 1 1ft ft 0 4ft O ft: 0 0.00 0 9 9 11 1.40 0.90 8 9.70 1.89 —-* — 0.71 0.90 8 9 IS 9.98 __ _ — — 7 0.70 O.M 10 9.4ft ft 08 7 0.91 ft 49 0.71 0.99 0.01 0.99 7 0 9 7 0.28 ft 0.04 9 4ft ft 0 40 1 ftft 0.40 0.40 14 ft 99 0.37 10 ft. 18 ft 14 ft O S l DM ft 0 74 0.01 4 0 45 0.78 1 0.09 0.99 9 0.9ft ft 48 ft 0 31 9.14 ([inH of Business, Classified by Size o f Establishment, 1937 and 1938 8Ûw G roupa (Baaed O o T o ta l Sales F o r 1938) POO.OOO to 1500,1no tooovBOO to 8000.000 3100,000 to 8200,000 «50.000 to 8100.000 Un»1er «50,000 XsabK 1997 1908 ^ u m b e i^ 1937 1938 N u m b er 1937 1938 N u m b er 1937 1938 N u m b er 1937 1938 diapoh" o f reports o f reports o f reports £ 0.41 O.ftO 92 0.08 0.4ft 95 ft «1 0.47 22 0 40 0 60 5 0 64 0.5ft 4 0 Oft 0.91 __ — 80 0 57 ft. 45 4 0.71 1.00 IS 0 ft) ft 55 5 0 31 1.23 — — 4 0.40 0.81 0.28 0.24 0 30 0.81 10 0.43 0.40 0 21 0 29 11 O.M 0.59 ft 0 48 0.81 ft 0 82 ft 68 —— — “ 1 0.49 O.ftft 4 111 0.7» 5 0 49 • 31 ft 0 70 0 80 — — — 4 0 29 0.36 11 0.01 0 97 9 ft. 49 0.20 5 0 41 0 43 4 0 23 0 19 ft. 48 0.47 a ft 44 0 83 14 0 61 0 M 15 1 21 0.75 » 1.00 0.04 W 0.80 ft 7ft ft ft 7ft ft 97 11 9 2ft 1 13 4 0 71 0.41 — — ft 1.19 1.10 _ ___ — — — 4 0.04 0 59 — 4 ft 75 0 63 — — — _ _ _ — 4 0.58 0.47 4 ft 06 0 OR 7 0.23 0 59 5 0 37 0 94 4 0.01 ft ftft 8 0.93 ft 7ft ft ft 09 0 S3 4 0 95 ft 49 4 0 25 0.26 __ 0.54 0.89 4 0 18 0 S3 12 0.37 0.23 30 0.39 0.23 11 0 14 0 2ft 8 1 04 1.33 ft 0.30 1 38 7 0.40 0.38 4 0 34 0.69 “ _ 14 0 47 0.08 9 0.50 0.58 ft 0.55 0 62 7 0.37 0 30 -- _—— w 0.35 ft 59 14 0.02 0 59 17 0.57 0,47 10 0.4ft 0.24 7 0.23 0.37 ft 0.97 0.57 4 0.59 1.19 IS 0.34 0.54 5 1 03 1.00 ft 0.97 0 51 7 0.74 0 38 CndU tuid Ftmuwial Management 1 9 ...... J a n e , 1939 APPENDIX I (Conttd.; T A B L E 3 Proportion of Bad Debt Losses to Credit Sales and Proportion of Credit Sales to Total Sales of Wholesalers, by Kind of Business, 1937 and 1938 Bad D e b t Lorn N um ber Pwoantacee SmWWToW% Kind of Rmilnav of reporte Automotive products...... IS4 0 67 C h em icals...... 14 0 24 Paints and varniahe* , 23 0.20 0 SO f’lothin* and furnishirn. except shoes U 0.20 0.35 ■ i Shoea and other foota-eiix.. 34 0.23 0 40 C o a l...... 13 0 07 0.00 Dniin and drug sundries .. 78 0.62 0 60 i D ry goods...... 0 37 Electrical goods...... 0.33 i >11 r arm prorlucta—consumer goods...... 34 Farm supplies...... Furniture and house furnishings . e Groceries and foods, except farm products. li Meats and meat products...... I Wine and spirituous liquors...... I Siî General hardware...... 147 0.40 0.45 Haavy hardware...... 30 10 56 Industrial supplies...... 0.13 8:S 1 lumbing and heating supplies...... 1% 0.67 0 63 Jewelry and optical goods...... 37 0.60 0.79 Lurolw and building materials...... 47 0.67 Machinery, equipment and supplies, except cleetri^ 40 0.66 S1Î I Surgical equipment and supplies...... 40 0 53 0.39 M e ta ls...... 23 0 31 0.35 Paper and Its products...... 63 0 39 0.43 P e tr o le u m...... 15 0.28 0.28 Tobacco and its prwlucts...... 143 0 21 0.26 T,«ather and «hue findings...... II 0 81 0.78 4:% Miscellaneous...... 44 0.20 0.87 66,077 31.983 I U. 8 Total.. 0 35 0.87 33,389.1601 32,070,485 33,300 383 33,280,3» 03.3 91.6 T A B L E 4 Proportion of Bad Debt Losses to Credit Sales and Proportion of Credit Sales to Total Sales of Manufacturers, by Industry, 1937 and 1938 Bad Debt Loss C rs d ltS a lm T o jy a M e e PraportionorOefil Num ber Psrrentagss (000‘s) <000*0} Sales t oro i talB d n in d u s tr y o f reports 1937 1938 1937 1988 1187 1938 1937 1686 Food and kindred products, total...... 348 0.15 0.16 393,361 857,989 983,157 *6.041 * 9 M .l ConfectioDfTy...... 166 0.31 0.24 308,890 199,306 315.138 $«,736 97 1 98.1 F lo u r, cereals and other g rain m ill products 22 0.18 0.13 64,345 59,388 88 341 68 51$ 73.9 66.7 Meat packing...... 35 0.18 0 14 127.894 115,080 130,613 117,454 97.5 M 6 Distilled liquors ...... 0.13 0 03 43,083 37,160 44,689 $7,476 M 3 99.2 Malt liquors...... 12 0.81 0.17 66,795 71,767 70,893 7 5 ^ M 3 953 18 0.32 1.01 20,184 16,304 30416 .17436 99 4 M l O th e r food products...... 97 0.10 0.10 363,710 859,016 418478 W 6.3» MO H! Textile# and their products, total...... 130 0.13 0.31 358,108 282412 365,481 389,407 MO 974 C lo th in g , men s. except h ats ...... 31 0.14 0.33 55,886 43 665 56 384 44,601 M 3 976 Clothing, women s. except m illinery __ 23 0 32 0.45 17,639 15,274 18,061 »,774 97.7 966 ■tfiit goods...... 11 0.13 0.20 27,683 83,901 38,411 34486 97.4 972 Other textile products ...... 65 0.10 0.16 356 931 199,373 362,735 304,446 M.O 97.5 Fore*t products, to lil ...... 30 0.33 0.39 75,135 56,109 77,974 5748$ M 4 979 F u rn itu re ...... 45 0.33 0.85 43,881 31,968 43.438 $ 3 6 » 87.5 96.6 Lumber, timber, and other miscellaneoua forest products, ...... 35 0 33 0.20 33,814 34,201 34.646 .38481 MO Paper and allied products, total...... 95 0.17 0.17 183,761 159,063 187459 163480 98 0 66955 I Paper, writing, book, etc...... 32 0.36 0.26 34,433 31,151 34.898 M.488 M l 55! Paper, boxes, and other paper products.... 56 0.11 0.14 118,645 96,164 117,714 87,680 08.3 964 Wax paper...... 17 0.38 0.19 43,604 41,738 44,947 68411 9 7 $ 666 Pnoting, publishing and allied industries ...... 76 0 45 0 4 5 37,496 34450 37,873 . * , « $ 9 0 $ 25 C h em it^ and allied products, total...... 128 0 36 0.36 190,733 181,148 110,450 189.463 M 9 2-! ^ n ts and Tarnishes ...... 64 0.55 0.62 62,940 51,156 65,349 g,901 M 8 2 ! Pharmaceuticals and proprietary medicines 27 0.46 0.46 27,896 37,997 38.197 . * , 7 » 52! 21 Other chemical prodtwte...... 37 0.33 0.21 100.388 101,995 117.004 106440 M 8 65 5 P etro le um ...... 31 0.18 0.16 569,821 534.657 901,879 851758 68.8 25 R u b b e r p ro du cts...... 12 0.40 0.21 32.836 28.07? 38,0» 39,394 M 5 998 Laathvand Its products, total...... 94 0.16 0.23 355,079 319,823 363,494 834,981 M g 977 Roots and snoee...... 34 0 19 0.25 151.634 142,013 158473 144,808 M .7 2 ! Leather: tanned, curried, and finished..... 35 0.18 0.19 91,333 68,087 91,995 60,036 00 8 975 Other leather products ...... 25 0.14 0.26 12,122 9,773 18,137 10,668 M 8 91 7 Stone, clay and dees products...... 56 0.24 0.28 59,214 63,798 63 483 87,705 M 8 2 ! Iro n and steel and th m r products, to ta l...... 168 0.09 0.08 644,914 410,014 654 738 414475 M 8 .2 ! 37ardware...... 15 0.14 0.13 34,688 37431 34,818 37438 M 8 MOO atovee, ranges, steam heating apparatus... 19 0.34 0.35 33.850 23.339 33,898 38,446 MO 965 Other iron and steel products...... 129 0.08 0.06 576,406 800444 586,007 $04,794 M 4 968 Non-ferrous metals and their products, total... 53 0.03 0 10 380,845 209,062 909.80$ 881434 M 6 949 Jewelry and Jewelers* snppliea...... 37 0.19 0.33 48,853 43.043 54436 46,436 M.$ M 7 O th e r non-ferrous m etals...... 31 0.00 0.06 241.493 166.919 355.477 174,798 M 8 95 5 Machinery, not iiwloding transportation squint.. 318 0.36 0 36 826,298 431440 535,840 438,46$ M $ 995 E le ctrical m aehiiM ry, apparatus and supiNies. 00 0.21 0 19 390.700 338443 394,177 389.608 M 8 25 Other machinery, apparatus and suppliée.... 133 0.54 0.58 235.568 183,797 341.883 188,704 97.8 96.5 Motor vshiMs parts...... 43 0.10 0.13 78,143 43,940 83,454 46490 80 6 M .8 MisesUansDue industries...... 71 0.30 0.30 134,006 136400 U 6 4 M 120469 N.i 97.8 U . B. T o ta l.. im o 0.18 0.30 04J87,0» $3.617499 $4444470 864$641T M $ 898 M ...... IBM, IM 2$6 APPENDIX J CREDIT INSURANCE PREMIUMS AND LOSS RATIOS, 1905 TO 1953* Premiums Loss Premiums Loss Year Written Ratio Year Written Ratio 1905 None 1930 $3 ,574,173 81.70 1906 4.54 1931 2,987,038 99.42 1907 24.30 1932 2,561,770 95.4 I9O8 57.10 1933 1,890,800 60.07 1909 44.56 1934 1,889,192 16.37 1910 11,136,610 60.0 1935 2 ,075,655 15.97 1911 1,187,495 68.34 1936 2 ,292,900 13.08 1912 1 ,101,634 73.47 1937 3,208,665 11.08 1913 1 ,076,106 56.02 1938 2 ,858,099 70.34 1914 1,064,494 47.6 1939 2 ,706,269 40.60 1915 1,014,433 65.78 1940 2,858,198 23.77 1916 1,041,192 23.24 1941 3 ,294,593 11.72 1917 1 ,252,310 6 .61 1942 3,883,216 6.18 1918 1,393,180 10.28 1943 4 ,470,747 2.15 1919 1,649,469 5.29 1944 4,631,871 Gain 2.75 1920 3,100,802 18.93 1945 4 ,103,430 Gain 11.28 1921 3,175,280 75.71 1946 3,986,993 Gain 10.22 1922 2,753,673 93.15 1947 5,560,438 4.59 1923 2,729,283 41.04 1948 6 ,191,686 9.99 1924 3 ,047,909 46.60 1949 6 ,354,410 7.78 1925 3,282,463 40.78 1950 6 ,391,352 6.26 1926 3 ,279,349 39.24 1951 7 ,156,521 5.77 1927 3,238,594 51.69 1952 7,362,113 9.65 1928 3,204,545 55.86 1953 8 ,074,236 11.98 1929 3 ,462,317 46.6 *Prani\mis are gross amounts for both companies. Loss ratios are ccanbined for the two companies and represent the percentage that net losses less salvage bear to the total net premiums earned. Source: Frank Montesani, Examination. Credit Insurance Writing Companies, New York State Insurance Department, 1945, p. 5S; unpublished reports. New York State Insurance Department, 1932-1954; and Best * s Insurance Reports. Fire and Casualty, 1946-1954» Apptaioix 2,7 KEY TO RATINGS KEY TO RATINGS ESTIMATED FINANCIAL STRENGTH COMPOSITE CREDIT APPRAISAL A a O v e r $1,000,000 AI I l'/2 2 7 A + O v e r 7 5 0 ,0 0 0 A l 1 l'/2 A $ 5 0 0 ,0 0 0 to 7 5 0 .0 0 0 A l 1 l'/2 2 8 + 3 0 0 .0 0 0 to 5 0 0 ,0 0 0 I ''/2 2 2 7 2 B 2 0 0 ,0 0 0 to 3 0 0 ,0 0 0 1 l'/2 2 2V2 C + 12 5 ,0 0 0 to 2 0 0 ,0 0 0 1 1/2 2 2 '/2 C 7 5 ,0 0 0 to 12 5 ,0 0 0 I'/z 2 2 '/2 3 D + 5 0 ,0 0 0 to 7 5 ,0 0 0 l'/2 2 2 '/2 3 D 3 5 ,0 0 0 to 5 0 ,0 0 0 I'/z 2 2'/2 3 E 2 0 ,0 0 0 to 3 5 ,0 0 0 2 2'/2 3 3'/2 F 10,000 to 2 0 ,0 0 0 2'/2 3 31/2 4 G 5 ,0 0 0 to 10,000 3 3'/2 4 4 '/2 H 3 ,0 0 0 to 5 ,0 0 0 3 3'/2 4 4 '/2 J 2 ,0 0 0 to 3 ,0 0 0 3 3'/2 4 41/2 K 1,000 to 2 ,0 0 0 3 3'/2 4 41/2 L Up to 1,000 3'/2 4 4 '/2 5 CLASSIFICATION AS TO BOTH ESTIMATEO FINANCIAL STRENGTH AND CREDIT APPRAISAL FINANCIAL STRENGTH BRACKET EXPLANATION When only the numeral (1, 2, 3, or 4) 1 $ 125,000 to $1,000,000 appears, if is an indication that the a n d O v e r estimated financial strength, while not definitely classified, is presumed 2 20,000 to 125,000 to be within the range of the(S) fig ures in the corresponding bracket ond 3 2,000 to 20,000 that a condition is believed to exist 4 U p to 2,000 which warrants credit in keeping with that assumption. NOT CLASSIFIED OR ABSENCE OF RATING The absence of a rating, whether as to estimated financial strength or as to credit appraisal, and whether expressed by the dash ( — ), or by the (x) sales listing (see below), or by tfie omission of any symbol, is not to be construed as unfavorable but signifies circumstances difficult to classify within condensed rating symbols and should suggest to the subscriber the advisability of obtaining additional information. LISTINGS ONLY AS TO ESTIMATED ANNUAL SALES When, after investigation has been mode, the information obtained regording con cerns listed in the Reference Book is not sufficiently conclusive to permit the ossign- menf of any of the symbols in the above Key to Ratings, in preference to listing these names with no indication of their relative importance, the symbols (Ix, 2x, 3 x , a n d 4 k ) may be used to express, in wide ranges, the stated or estimated annual sales os on index to assist in appraising size. These sales symbols hove no other significance; credit appraisal is neither inferred nor implied. The soles bracket ranges are as follows: ESTIMATED ANNUAL SALES BRACKET Ix $500,000 and Over Annual Sales 3x $10,000 to $75,000 Annual Sales 2x 75,000 to $500,000 " " 4x Up to 10,000 INVESTIGATING "Inv." in place of the rating is an abbreviation of investigating " It signifies noth ing more than thot o pending investigation was incomplete when this book went to press. See inside cover o f Reference Book for completekey. Q)(m 9/" ,^nc. JANUARY, 1955 258 AUTOBIOGRAPHY I, James Gordon Sheehan, was born in Falmouth, Kentucky, June 7, 1918. I received my secondary school education in the public school of that city. My undergraduate training was obtained at The University of Kentucky and at Xavier University, Cincinnati, Ohio, from which I received the degree Bachelor of Science in Commerce in 1941. I then served in the Quartermaster Corps of the United States Army until retired as a Lieutenant Colonel in 1951. From the University of Cincinnati, I received the degree Master of Arts in 1952. I was in residence at The Ohio State University from the Summer Quarter of 1952 through the Summer Quarter of 1953* I served as Assistant Pro fessor of Econcanics and Business at Xavier University in 1953-54, and as Assistant Professor of Marketing at the University of Cincinnati in 1954-55, while completing the requirements for the degree Doctor of Philosophy. J. G. SHEEHAN PUBLICATION NO. 16,099 PLEASE NOTE THAT THE REPRODUCTIONS IN THE APPENDIX ARE "POOR COPY" IN SEVERAL PLACES. THE PRINT IS SMALL AND BLURRED IN SOME INSTANCES. WE HAVE DONE THE BEST WE CAN WITH THE AVAILABLE MATERIAL. UNIVERSITY MICROFILMS