For oxir purpose, we may distinguish two major cost categories 

 which the insurer has to meet In order to run his business profit- 

 ably. The first cost category consists of expenses for the adjust- 

 ment of claims and the payment of losses. The second includes 

 acquisition costs and all other genersil expenses of handling the 

 business which are not allocated to particular losses, including 

 taoces and accumulation of reserves. When aJ.1 costs equal the 

 received net premium, the insurer breaks even. This division of 

 costs may be crude and arbitrary in many respects, but it is use- 

 ful for illustrating the plight of the majority of insurers. 



The response of the insurers to our inquiry disclosed that, 

 for hull ajid protection ajid indemnity insurance, risk carriers 

 break even if the first , category of costs are between 60 and 70 

 percent of earned premliims. For a few insurers the ratio may be 

 as high as 75 percent. A high break-even ratio indicates a more 

 efficient concern and a larger proportion of earned premiums 

 available to meet expenses for the adjustment of claims and to 

 pay losses. 



Differences in the break-even ratio among insurers are partly 

 explained by the fact that in practice there are understandable 

 differences in definition of administrative costs and expenses on 

 the adjustment of claims. More importajit is the fact that some 

 insurers are more efficient than others by operating at lower 

 acquisition and other costs of the second category. Long estab- 

 lished American firms, cooperatives, and most alien concerns seem 

 to operate more efficiently thein inexperienced underwriters with 

 limited insurance facilities and voli:mie of business. 



2. Loss experience of hull insurance . The annual ratios of 

 expenses for the adjustment of claims and paid losses to earned 

 premiums for hull insurance appear in table 11. The average ratio 

 for the five-year period is 65-9 percent in New England, 69. per- 

 cent in the Gulf Area, and 44.^1 percent in California. The field 

 work experiences in this study seem to indicate that over-all loss 

 experience in each area may have been between 5 to 10 percent higher 

 than the ratio indicated by each sample because of possible escapager/ 

 in the recording of paid losses. Assuming this to be the case, the 

 loss ratios for the period 1950-5^ may have averaged from 71 to "jG 

 percent in New England, 7^ to 79 percent in the Gulf Area, ajid ^9 

 to 5^ percent in California. Thus, the loss experience ratios in 

 New England and the Gulf Area, for the period, may have been as 

 high as or higher than the breaJc-even ratio of the most efficient 

 insurers in each area, while the loss experience ratio in California 

 presumably has been less than the least efficient insurer in that area. 



2/ The term escapage refers to policy records which escaped review of 



field workers for various reasons such as "records lost or destroyed", 

 "non- cooperating firm", etc. 



57 



