the premium will only be so much additional, to be charged to the loss account, over what would normally be charged off when not carrying any credit insurance.

Another criticism against credit insurance as practiced today is aimed at the method of computing the initial or normal loss. It will be observed that in determining the normal loss the insurance company computes all losses, including those which are not allowable under the policy because of inferior ratings and other stipulations of the agreement, notwithstanding the fact that the losses on these accounts constitute an important or even major part of the aggregate losses. If off-rated accounts are not allowable under the policy, they should not be considered in arriving at the initial loss to be borne by the insured. Thus, the normal loss of $7,000 undoubtedly includes losses of the character of C, D, G, H, K, and L, whose ratings are too poor for the purposes of the policy. Since these losses amount to $6,285 (gross loss less salvage), it is necessary that the insured sustain a total of $13,285 ($7,000 plus $6,285), disregarding other stipulations for the normal losses, before the insurance company would have any liability. This treatment has been condemned as unfair to the insured.

From the foregoing it is apparent that credit insurance, as at present conducted, protects the insured to a limited degree against certain unanticipated losses. It has already been fully demonstrated that over a period of years credit insurance necessarily adds to the cost of doing business an amount equal to the premiums paid out over and above the amounts received as indemnification for losses under the policies. Insurance companies, in order to remain in business, must receive premiums greatly in excess of the losses paid. From this excess all expenses incurred in soliciting and conducting business are covered, as well as a profit secured. Should the losses in any one year exceed the premiums received, the difference will be more than made up during subsequent years, because the normal losses of the insured are automatically raised and the premium paid also becomes correspondingly larger, partly because of the increase in the face value of the renewal. It is, therefore, argued that because it is cheaper in the long run for a merchant to carry his own credit insurance, also because his risks are scattered over a large number of accounts, he should merely set up a reserve for bad debts sufficient in amount when accumulated from year to year to

cover all possible unexpected losses. In the case of some concerns selling relatively few accounts, however, and where the risk is, therefore, inadequately distributed, it may be advisable to have their risks underwritten. But such firms are likely to find the cost of protection prohibitive. Moreover, many credit managers feel that accounts insurable at reasonably low rates represent a sufficiently high degree of credit responsibility to obviate the necessity for protection, and that where the insurable rates are high, the accounts represent inferior credit risks to whom credit could not be extended without protection. The cost of protection on these cases, however, is so high as to absorb nearly all profit, leaving little, if any, benefit to the insured from insuring against losses from such risks.

Foreign Credit Insurance.-During the first two years following the World War, many losses were sustained by exporters because of bad debts. These losses were undoubtedly due to the disturbance of economic equilibrium caused by the war, and the carelessness with which credit was extended during the period of general prosperity. Apparently, without a careful analysis of these factors, many exporters felt that exporting must cease on a credit basis, or else some form of protection should be devised whereby excessive losses could be eliminated or minimized. Instead of seeking the remedy within each concern, through more careful investigations of credit risks on the part of credit managers, a group of manufacturers attempted early in 1919 to organize an association for the purpose of providing some form of credit insurance on a mutual basis. An investigation disclosed the impracticability of attempting to insure against all contingencies because of the prohibitive cost of such protection. Since losses from actual insolvency of foreign buyers, death, disappearance, etc., were relatively low, it was decided that insurance be offered against such contingencies at a reasonable rate.

From contributions made by interested parties, a department was organized for the collection of data on which to base rates for insurance. Considerable information was secured from the credit files of numerous American and foreign banks, culminating in the issue of a rating book covering numerous buyers in Latin America. Actual insurance against insolvency of foreign buyers was finally begun in the early part of 1921.* 4 POOLE, GORDON C., "Export Credits and Collections," p. 68.

The membership grew, as a result, from 100 at the beginning of the year to about 500 at the end of the year. In the early part of 1922 an organization was formed in New York City which offered to sell foreign insurance against all contingencies. It is doubtful, however, whether it will succeed in selling complete credit insurance to any one exporter covering a given transaction. In the absence of adequate data upon which to base premium rates, these rates would of necessity have to be sufficiently high to afford protection against wrong guessing on the part of the insurer. Even though sufficient statistical data were available as a basis, the cost of complete insurance would undoubtedly prove prohibitive. Furthermore, losses would materially increase on account of the carelessness in collecting accounts which such protection would stimulate.

Unlike domestic credit insurance policies, foreign policies, as at present employed, expire 30 days from the date when the account covered matures, although such policy is renewable at a certain specified monthly premium at the option of the insured. Thus, if a shipment is made to a merchant in Montevideo on terms of "60 days sight draft against documents," the account becomes due approximately three months from date of invoice, assuming 30 days to have been consumed by the goods in transit. If this shipment is covered by insolvency insurance, the merchant in Montevideo must become insolvent within four months from date of shipment; otherwise the exporter cannot collect insurance on the bill. Even though the merchant became insolvent within the specified period of time, the exporter may not be informed on time, unless he instructs the banker with whom the draft was placed for collection to notify him by cable in case of non-payment of draft at maturity. This constitutes an expensive procedure, particularly when reasons for non-payment must be cited in detail. The other alternative is to renew the policy before the status of the draft has been definitely determined, thus involving additional and frequently unnecessary expenditure. In any event, the protection is costly, particularly when disputes arise regarding the date of arrival of the goods, amount of draft, and the like, requiring an extended period of time for final settlement. But since the outcome is somewhat problematical, it would be necessary to incur additional expenses if protection is sought, by constantly re

newing the policy at monthly intervals until the bill is finally settled.

In its main outlines foreign credit insurance differs but slightly from domestic credit insurance. Exactly the same principles apply to both. What is true of one, as far as usefulness of the protection is concerned, is equally true of the other. Because of the preponderance of objections, one is forced to the conclusion that the strong, able, and watchful credit manager who has complete knowledge of all factors affecting the risk is apt to consider credit insurance a burden carried for the benefit of the weaker creditor. The well-informed, well-trained credit manager usually adopts such measures and follows such principles which tend to minimize losses. On the other hand, if losses are covered by insurance, it is not the credit manager, if disposed to shirk his responsibilities, who renders decisions, for credits are then based on the terms of the policy; and in granting credit he does so because the account is covered by his policy; or in refusing credit against his own better judgment, he takes that action because the account for some reason does not come within the requirements of the insuring agreement.

SELECTED REFERENCES

BREWSTER, S. F.: "Legal Aspects of Credit," Pt. IV, chap. 20.

ETTINGER, R. P., and GOLIEB, D. E.: "Credits and Collections," pp. 361-376. HUEBNER, S. S.: "Property Insurance," rev. ed., 1922, chap. 31.

POOLE, G. C.: "Export Credits and Collections,” chap. 9.

RIEGEL, R., and LOMAN, H. J.: “Insurance Principles and Practices," chap. 22.

APPENDIX

CUSTOMARY TERMS OF SALE

The following customary credit terms are submitted in order to acquaint the student with some of the practices in different lines of trade. The bulk of this information has been gathered together by W. H. Steiner, of the Statistical Department of the Federal Reserve Board, and charted by John Whyte, Director of Education and Research of the National Association of Credit Men, in the "Credit Man's Diary" of 1923. Certain portions of this list were adopted from a compilation made by R. F. Prudden in his "Bank Credit Investigator," and the remainder supplied by the author.

Anthracite Coal: S.D.-B.L. to 30 or 60 days net. In certain cases terms are one-half per cent 10 days, net 30 days.

Automobiles: To dealers, S.D.-B.L. attached.

Automobile Accessories: Manufacturers' terms, 2/10, net 30 days. Bacon: One-half per cent 10 days; also one-half per cent 10 days, net 30, Bale Goods: 2/10, net 60.

Bars (Sheet): One-half per cent 10 days, net 30.

Beans: One and one-half per cent in 10 days, net 30 days.

Bearings: 5/10, net 30.

Bedding and Pillow Material: 2/30, net 60.

Blankets (Retail): 2/10, 60 days extra.

Blanks (For cut glass): 1/30, net 60.

Bolts, Rivets, Nuts: Less than 1⁄2 inch, 1/10, net 30.

Bottles: 1/10, net 30.

Boxes: 1/10, net 30.

Brass, Copper, Rods, Wire Sheeting and Tubing: 1/10, net 30.

Brick (Common): Five per cent E.O.M.; varies as low as 2 per cent,

depending on locality, etc.

Brick (Face): 1/10 days; also 2/10 days.

Builders' Supplies: Two per cent, tenth proximo.

Candy (Bulk): 2/10, net 60 days.

Canned Goods, General (Maine and Colorado): 12/10, net 60.

Carpets (Regular Stock): 4/10, 60 extra.

Carpets (Made to Order): 4/10, net 60 days.

Cement: 3/10 days.

Chemicals and Drugs: 1/10, net 60; also 2/10th proximo; medical and

technical, 1/10, net 30; chemicals, Pacific Coast, 1/30, net 60; drugs,