30 DEPARTMENT BULLETIN 912-. 



an amount considerably greater than that required to pay the loss 

 for that year and to leave a part of the funds which they have con- 

 tributed in the reserve fund of the company to be used to supple- 

 ment the premiums collected in years Avhen the hail hazard happens 

 to be exceptionally severe. Unless a mutual company follows this 

 plan, it is quite 'Certain, assuming that it is operating in severe hail 

 territory, to have to prorate its losses in years of heavy hail damage. 



There is. of course, no serious objection, either moral or legal, to 

 the plan of prorating losses by a mutual company, providing all the 

 members have joined with the understanding that such action may 

 be expected in case the contributions to the company prove insuffi- 

 cient to meet the losses incurred together with legitimate expenses of 

 operation. The danger, however, is that the solicitors of insurance 

 representing the company, in their desire to secure new members 

 and to earn commissions for themselves, will permit and even en- 

 courage the prospective insured to believe that the funds collected 

 b} r the company are not only sufficient to meet all losses in full but 

 that a rebate may reasonably be expected. Members entering the 

 company with this understanding are of course sure to feel, when 

 losses are prorated, that they have been the victims of misrepresenta- 

 tion and fraud, even though the policy specifically states that losses 

 will be prorated in case such action is found necessary. 



In any case, it has been the general experience of hail mutuals 

 as well as of mutuals operating in other fields of insurance that 

 whenever it has been necessary to prorate losses the membership in 

 the years following such action has materially decreased. The man- 

 agement of the compam 7 is almost invariably blamed for the failure 

 to settle in full, regardless of the facts in the case. Many com- 

 panies have failed to survive the prorating of losses even where such 

 companies were managed by men whose integrity was unquestioned 

 among those who knew them personally. 



Another problem in hail insurance which is not found to the same 

 extent in fire insurance may be pointed out with particular reference 

 to mutual companies. This difficulty, namely, that of democratic 

 management and control of the company, arises from the fact that a 

 hail mutual, as already stated, can not be operated successfully in a 

 territory of small area. A possible exception to this rule may be made 

 in the case of certain districts where the hail hazard is relatively light 

 and where the insurance covers only one or two specified crops form- 

 ing a minor part of the acreage of each farm. 



With a fire insurance mutual operating in a limited area, a certain 

 degree of real cooperation in management is possible. Each member 

 resides within a reasonable distance of the place where the annual 

 meeting is held, and is therefore in position to be present and to make 

 his influence felt at such meeting in case he chooses. With the hail 

 mutual, on the other hand, which very properly operates in an entire 

 State, or perhaps in several States, it is not possible for the average 



