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placed in reserve, set aside to meet pending claims. Leslie has determined the effect that acknowledging the relevance of these two factors would have had on the companies’ underwriting profit or loss figures for the 1954-’63 period \( the last’ decade for which data was available at \(which write about two-thirds of U.S. derwriting profit on bodily injury coverage \(on which the companies have reported much greater profits on property and physical damage insurance than were repbrted under the existing procedure. The meaning of what Leslie and others are talking about is illustrated by Leslie’s finding that 44% of the companies’ additions to their net worth in 1954-63 came from these two forms of investment income. Leslie says that the companies overreserve funds to meet pending and future claims; that is, they set aside more money ally will be required to pay claims. Such a reserve fund is considered an expense of doing business, so the greater the amount in this fund, the larger is the cut in the profit margins that the companies report. This is advantageous for the companies when rates are set and also proves a boon for them at tax-paying time. Leslie contends that the degree of over-reserving can be determined by comparing each company’s reserving practices history to Incorporating the State Observer and the East Texas Democrat, which in turn incorported the State Week and Austin ForumAdvocate. We will serve no group or party but will hew hard to the truth as we find it and the right as we see it. We are dedicated to the whole truth, to human values above all interests, to the rights of man as the foundation of democracy; we will take orders from none but our own conscience, and never will we overlook or misrepresent the truth to serve the interests of the powerful or cater to the ignoble in the human spirit. Editor and General Manager, Ronnie Dugger. Partner, Mrs. R. D. Randolph. Associate Editor, Greg Olds. Business Manager, Sarah Payne. Associate Manager, C. R. Olofson. Contributing Editors, Elroy Bode, Winston Bode, Bill Brammer, Larry Goodwyn, Harris Green, Dave Hickey, Franklin Jones, Lyman Jones, Larry L. King, Georgia Earnest Klipple, Al Melinger, Robert L. Montgomery, Willie Morris, James Presley, Charles Ramsdell, Roger Shattuck, Robert Sherrill, Dan Strawn, Tom Sutherland, Charles Alan Wright. Staff Artist, Charles Erickson. Contributing Photographer, Russell Lee. The editor has exclusive control over the editorial policies and contents of the Observer. None of the other people who are associated with the enterprise shares this responsibility with him. Writers are responsible for their own work, but not for anything they have not them the claims actually paid out. How much income do companies receive from investing claims reserve funds? Leslie says that it’s considerable, amounting to $2,637,858,796 for the 800 U.S. firms of the stock type in the 1954-63 decade-. Thus the companies, Leslie contends, are playing it both ways putting more money than necessary into a reserve account to make the rates paid by policyholders seem too low and then investing funds from this account and not considering the proceeds when rates are set: The State AFL-CIO’s president, Hank Brown, says that the companies’ position on this is “like my taking 50% from my pay check and investing it in stocks and bonds and then making a plea to my employer that I couldn’t live on my salary.” Writing in a recent issue of The New Republic, James Ridgeway illustrated another practice of the companies which, he said, puts a deceptively less favorable glow on their balance. sheets. The trick, Ridgeway wrote, “is accomplished by mixing the accrual method of accounting \(in in He cites this example: “Say you take out auto insurance December 1 and on that day write a check for $120 to cover the premium. The company works by the calendar year and closes its books December 31. Since only one month is left in the year; the company shows only one-twelfth of the premium, or in this case, $10, as income. This is the accrual method with the rest of the income spread out over selves written, and in publishing them the editor does not necessarily imply that he agrees with them, because this is a journal of free voices. Subscription Representatives: Arlington, George N. Green, 416 Summit, Apt. 41, CR 70080; Austin, Mrs. Helen C. Spear, 2615 Pecos, HO 5-1805; Corpus Christi, Penny Dudley, 12241/2 Second St., TU 4-1460; Dallas, Mrs. Cordye Hall, 5835 Ellsworth, TA 1-1205; Denton, Fred Lusk, Box 8134 NTS, 387-3119; Ft. Worth, Dolores Jacobsen, 3025 Greene Ave., WA 4-9655; Houston, Mrs. Shirley Jay, 10306 Cliffwood Dr., PA 3-8682; Lubbock, Doris Blaisdell, 2515 24th St., Midland, Eva Dennis, 4306 Douglas, OX 42825; Snyder, Enid Turner, 1706 Glenwood, EM 6-2269; San Antonio, Mrs. Mae B. Tuggle, 531 Elmhurst, TA 6-3583; Cambridge, Mass., Victor Emanuel. Adams House C112. The Observer is published by Texas Observer Co., Ltd., biweekly from Austin, Texas. Entered as second-class matter April 26, 1937, at the Post Office at Austin, Texas, under the Act of March 3, 1879. Second class postage paid at Austin, Texas. Delivered postage prepaid $6.00 a year; two years, $11.00; three years, $15.00. Foreign rates on request. Single copies 25c; prices for ten or more for students, or bulk orders, on request. Editorial and Business Offices: The Texas Observer, 504 West 24th St., Austin, Texas 78705. Telephone GR 7-0746. Change of Address: Please give old and new address and allow three weeks. the coming year. In this expense column, however, the cash method is applied: The company lists total agent’s commission, production expenses, taxes, office expenses, and profit. This totals about 35% of the premium and in the example comes to $42. Thus, while the company actually took in $120 in this premium in 1966, the books show a loss of $32. As long as the companies increase premium income each year, which they do, they will appear to be losing money.” Leslie raises another point: premiums paid in advance \(as in Ridgeway’s forecompanies. Leslie believes that since much of this money will provide protection in the future, it is money the company hasn’t yet earned. Since it is invested by the company, shouldn’t the policyholder receive some sort of consideration, since his money is yielding dividendS to someone else? Harvard Professor Robert E. Keeton believes that the answer is yes and that such income should be considered in rate making, as such premium money really doesn’t belong to the company until the coverage period has expired. “This is not income from reserves the company has built up from past business,” he said during the summer of 1965 in Austin, while teaching at the University of Texas Law School. “The company receives this part of its investment income only because it is writing current business. Thus this income should be taken into account in determining whether the company is making money or losing money on current business.” Leslie says that the part of investment income which is derived from investing advance payments of premiums is considered in rate making on house insurance that is bought for threeor five-year terms, for example, so why not on auto insurance paid in advance? Leslie cites a report of the New York Insurance Department, which says: “It would be difficult to explain to any policyholder . . . that no interest is earned on his money after the fire insurance company gets it, and that no consideration can be given in supporting term discounts.” Further illustrating this point, Leslie gives this .example. A court awards the payment of $200 monthly to a claimant for the rest of his life expectancy, say 15 years. Multiplying 180 months times $200, the result is $36,000. But does the insurance company consider that it is out $36,000? No, it sets aside a claim reserve of $28,500, presuming that the money market is paying about 4% at the time, on the expectation that the $28,500 would earn the additional $7,500 required to meet the claim. Or, if the claimant preferred a lump sum settlement, he, could be paid $28,500 immediately. Thus it is apparent that with the payment of the $36,000 claim in $200-monthly installments, only $28,500 is provided from the premium funds and the additional $7,500 is provided from ini vestment income accruing from month to month on the present net worth of the THE TEXAS OBSERVER Texas Observer Co., Ltd. 1966 A Journal of Free Voices A Window to the South 60th YEAR ESTABLISHED 1906 Vol. 58, No. 24 December 30, 1966