UNIVERSITY OF CALIFORNIA
AT LOS ANGELES
YALE READINGS IN INSURANCE
LIFE
YALE READINGS IN INSURANCE
LIFE INSURANCE
EDITED BY
LESTER W. ZARTMAN, PH.D.
ASSISTANT PROFESSOR OF POLITICAL ECONOMY, YALE UNIVERSITY
NEW HAVEN, CONNECTICUT
YALE UNIVERSITY PRESS
LONDON
HENRY FROWDE
OXFORD UNIVERSITY PRESS
1909
Copyright, 1909, by
YALE UNIVERSITY PRESS
Entered at Stationer? Hall, London
Printed in the United States
Library
o
I
O
2
g PREFACE
THE "Yale Lectures on Life Insurance" appeared five
years ago. Although a considerable edition was printed,
the unexpectedly large demand soon exhausted it, and as
the plates were destroyed, for two years the lectures have
been out of print.
*> It seems desirable that either a new edition of the lec-
N.^ tures should be printed, or that something new should be
published in their place. The latter alternative has been
chosen, and instead of simply reprinting the old lectures,
the plan has been adopted of selecting special readings,
partly from the "Yale Lectures," partly from other
sources. This plan was preferred for two reasons. In the
\ first place, many changes have taken place in the insurance
business since the old lectures were given, and much new
| and valuable material has appeared. In the second place,
" ! v it has been thought that by not confining the readings to
r* the old lectures a more comprehensive treatment could be
secured. In this way it has been hoped to broaden the
scope of the new readings, and thus to increase their
usefulness. Only four of the lectures included in the old
volume are reprinted, and three of these have been partly
rewritten. Some of the matter now published has never
appeared before, and much of the remainder has been
revised.
In selecting these readings, the aim has been to avoid
those authors who treat the subject in technical language,
vi PREFACE
as well as to avoid those who make the subject more simple
than it really is, and thus conceal its real problems. The
broad selection of material would not have been possible
without the cooperation of others. It is a pleasure to
acknowledge the fine spirit of publishers in permitting
reprints from copyrighted books, and the willingness of
authors to revise articles where changed conditions made
revision desirable.
LESTER W. ZARTMAN.
NEW HAVEN,
August, 1909.
CONTENTS
CHAPTER I
ELIMINATION OF RISK
CHAPTER II
FUNCTION OP LIFE INSURANCE 14
CHAPTER III
HISTORY OF LIFE INSURANCE; PERIOD OF EARLY BEGINNINGS 36
'
into the Norwich Union Life Office, under the authority
of Parliament. The idea is rather to trace the growth
of the successive institutions founded for carrying on the
business of life assurance, and indicate their progressive
and fundamental differences. In that manner the growth
and development of the business may be sufficiently seen.
In 1707 there was projected by Mr. Charles Povey (a
name that will always be remembered in insurance annals /
as the founder of the Sun Fire Office, and the advocate of
numerous other projects), a scheme of life assurance, under
70 YALE READINGS IN INSURANCE
the title of The Proprietors of the Traders 1 Exchange
House.
In 1708 elaborate "proposals" were put forth in view
of establishing a "Perpetual Assurance Office, by a volun-
tary subscription of two thousand persons who, for cer-
tain annual payments into a joint stock during their
lives, may and will secure to themselves, or to any person
or persons they shall name (at or before their respective
deaths), such advantageous sum or sums of money as are
hereafter expressed."
All through the years 1708-20 the newspapers teemed
with advertisements of projected schemes of insurance,
of which but comparatively few addressed themselves to
life assurance alone.
The year 1720 is a memorable one in English history.
It is hardly less so in life assurance history. An atmos-
phere of speculation had pervaded the metropolis from the
commencement of the century. In the crude life assur-
ance project of 1699 a new mode of aggregating wealth
had been propounded. The notion, having taken hold
of the public mind, was skilfully but unscrupulously
worked by projectors of new schemes. Each year more
attractive projects were put forward. The very unsound-
ness of the schemes enabled unscrupulous persons to
realize promptly by putting forward for assurance un-
healthy lives. In a mutual contribution society, the
managers have no special reason (apart from motives of
honor) to object to the introduction of lives of the worst
class. They receive the entrance fees and the percentage
deduction from the claims; the more that enter, the more
the managers make personally, as the subscribers them-
selves pay the claims; the more claims that are paid, the
more rapidly contributors come in. Time alone can dis-
pel the illusion.
The movement, now inaugurated, of founding joint-
stock insurance companies, shows that the earlier system
was becoming exploded. The merits of life assurance
71
were growing increasingly apparent. The people now
said, give us solid institutions to insure in. Hence the
two projects of 1719; hence also several other attempts
in the early months of this year : for instance,
1. A Copartnership for Insuring and Increasing Chil-
dren's Fortunes, held at the Fountain Tavern.
2. Symond's Assurance on Lives.
3. Baker's Second Edition of Assurance on Lives.
(The first was a scheme of annuities.)
4. Le Brun's Marriage and Widows' Assurance Company.
Simultaneously with the life assurance projects here
already enumerated, there had been projected hundreds
of other insurance schemes and of joint stock enterprises,
altogether apart from assurance, almost from the com-
mencement of the century. One of these outside projects
outside insurance, I mean was the South Sea Com-
pany, founded in 1710, for the assumed purposes of trade
and emigration. The stock in this company became a
favorite one with speculators, and had gradually risen
to an enormous degree of inflation from par (100) to
over 800. Many circumstances seem to point to the
fact that money made in insurance projects passed into
South Sea stocks, certainly some of the young assurance
offices invested their members' money in these stocks, and
advertised that they had done so. I am disposed to think
that the promises of some of the later assurance societies
enumerated were founded upon the results of past opera-
tions, and a belief that such opportunities would be con-
tinued. To what precise extent the various projects of
this eventful period were interlaced, it is now impossible
fully to unravel. Certain it is that with the bursting of
the South Sea bubble every one of the life assurance pro-
jects of which I have already given a record, with the
single exception of the Amicable (1706), passed into thin
air and were heard of no more.
By way of adding to the confusion of the period (al-
though not so intended) there came the passing of the
72 YALE READINGS IN INSURANCE
"Bubble Act" 6 George I, Chapter 18 "An Act for
the Suppression of Bubble Companies," which recited
(Section 18), "Whereas it is notorious that several under-
takings or projects of different kinds have at some time or
times since 24 June, 1718, been publicly contrived and
practiced, or attempted to be practiced within the City
of London and other parts of the kingdom and also in
Ireland, and other His Majesty's Dominions, which mani-
festly lend to the common grievance, prejudice, and in-
convenience of great Nos. of your Majesty's Subjects, in
their trade or commerce and other their affairs; and the
persons who contrive or attempt such dangerous and mis-
chievous undertakings or projects under pretence of the
public good, do presume according to their own devices
to open books for public subscriptions, and draw in many
unwary persons to subscribe therein, towards raising great
sums of money; . . . and whereas in many cases the
said undertakers or subscribers have since the said 24 June,
1718 presumed to act as if they were corporate bodies, and
have pretended to make their shares or stocks transferable
or assignable, without any legal authority either by Act of
Parliament, or by any Charter from the Crown for so
doing. ..." It was therefore enacted that all such
undertakings and all subscriptions thereto should, from
and after 24 June, 1720, be deemed illegal and void. The
effect of this measure was to kill the more solid of the
later insurance associations those that had a capital
at their back in favor of other weaker associations
which had no legal status to support them, and which
would almost necessarily succumb in the panic which pre-
vailed.
I have tried to estimate the extent of the dealings of
the many mutual contribution life assurance offices which
passed out of sight in the year 1720. It is not possible
to define the amount of assurances they had in force.
That in the nature of the case was always an unknown
quantity. We can only estimate the aggregate of the
LIFE INSURANCE IN GREAT BRITAIN 73
contributions, as against the aggregate returns made by
the offices to their subscribers; the balance constitutes
the loss to the public. There had probably been some
fifty life assurance schemes set on foot between 1699 and
1720. Of about forty of these I have already given a
more or less detailed account. Some "entered lives"
by thousands, and others by hundreds only. Some lived
for many years, others for very few. If we estimate the
average duration to have been five years, and the average
receipts in the way of entrance payments, contributions
towards claims and to the management, at 5000 each (a
very small estimate in view of scattered facts learned
during my investigations), we have a total of 250,000
which, at the current rate of 5 per 100, would have
insured five millions sterling. Probably two-fifths,
100,000, of the contributions had been returned in the
way of claims, etc., leaving the loss to the public at
150,000.
We commence our third epoch with the year 1721, and
with the fact that there was at that period but one life
assurance office in existence in Great Britain the Ami-
coble, founded 1706. That too, so far as we have the means
of knowing, was the only life assurance association in the
world. It was very defective in its mode of working, at
the best; but it stood alone. The society had at this
date an accumulated fund of about 50,000; it had dis-
tributed in death claims 118,000. Thus it had obtained
a solid hold upon public confidence, but I suspect its
business suffered considerably from the general shock
to public credit. The days of mutual contribution life
assurance associations, as such, were gone forever in
England. This society had to take steps to mitigate the
element of uncertainty, or it would most probably have
died out. Solidity was now the one thing sought for.
The solitary survivor was not long to remain in undis-
turbed possession of the field. In the June of the pre-
ceding year there had been founded, under very special
74 YALE READINGS IN INSURANCE
circumstances, 1 two powerful corporations for the trans-
action of marine insurance business the London Assur-
ance Corporation, and the Royal Exchange Assurance
Corporation. On the 29th April, this year (1721), they
each obtained additional legal powers, whereby they were
enabled to accept life assurance risks, on the ground that
it had been found advantageous for persons having offices
and employments to effect assurances on their own lives
and those of others.
Each of these corporations, under the powers of their
additional charters, commenced to issue life policies.
Life assurance as a domestic institution, if not actually
killed by the events of 1720, was thrown back at least one
full generation. By what processes it became revived
be our next purpose to trace.
In 1725 De Moivre published his work, Annuities upon
Lives: or The Valuation of Annuities upon any number of
Lives, as also of Reversions. To which is added an Appendix
concerning the Expectation of Life, and Probabilities of
Survivorship. In this work he propounded a method of
calculating annuity values on a much simpler process than
that which Halley had adopted. This proposal afterwards
became developed into what is known to actuaries as " De
Moivre's Hypothesis": consisting of the assumption that
any specified number of persons born would be subse-
quently decreased from age to age, by some uniform
number of deaths. From this it was evident that as
the number of deaths was supposed to be invariable, so
such number would annually be in greater proportion to
the diminishing number of survivors, and thus consis-
tently represent, at successive ages, a yearly decrease in
, the probabilities of life.
In 1726 John Smart published the large edition of his
well-known Interest Tables, to which he appended a few
/remarks on annuities upon lives.
ff A small edition of Smart's tables had been published
1 1 do not recount the circumstances here; they are so widely known.
LIFE INSURANCE IN GREAT BRITAIN 75
as early as 1707. Herein he gave what may be termed
a hypothetical table of mortality for London the first
of its kind. ~~1
In 1727 Richard Hayes published A New Method of
Valuing Annuities on Lives. It has been previously noted,
that to him appears to be due the origination of the "whole-
term" assurance principle. He puts for solution the case
"To provide for a family: A clergyman or layman, aged
47 years, holding a benefice or place during life, and having
a family, would willingly make some certain provision for
them; but finding that his income will let him lay up
about 46 a year, and that upon no better security than
his own uncertain life, therefore chooses to sell the sur-
plusage of his income what is it worth? "
In 1730 there was published: The Gentleman's Steward.
and Tenants of Manors Instructed, &c. The Tables for
Valuing Estates on Lives being founded on Dr. Halley's
Hypothesis, and calculated by the method laid down by Mr.
Abr. De Moivre to 4, 5, 6, 7 and 8 per-cent., &c., by John
Richards. This author, although no mathematician, had
the acuteness to perceive that the true method of valuing
leases for lives was really dependent upon specific cal-
culation, and that the imaginary estimates currently
adopted frequently proved entirely fallacious. He accord-
ingly gave, in popular form, a series of tables, calculated
upon the principles laid down by Halley and De Moivre,
and which were of great practical utility.
Mr. Lawrence, Mr. Gael Morris, and Mr. Weyman Lee,
all published works upon leases and annuities about the
same period; and each (except the latter, who fell into a
misapprehension of an untenable character) conferred
benefit in promulgating correct views upon these ques-
tions. ' \
In 1740 Mr. Thomas Simpson published The Nature and \
Laws of Chance, &c., &c., a work which was, to a very con-
siderable extent, an abridgment of De Moivre's; and which,
being published at a much smaller cost, obtained a con-
76 YALE READINGS IN INSURANCE
siderable circulation. And being thus known, he pub-
lished in 1742, The Doctrine of Annuities and Reversions
deduced from general and evident principles, with useful
Tables, shewing the values of Single and Joint Lives, &c.
, He seems to have foreseen that the doctrine of life contin-
\ gencies was destined to be extensively employed at a future
time, and that consequently more real utility would result
from endeavoring to discover general demonstrations
applicable to all tables of observations that might be
produced from time to time, than from inventing par-
ticular hypotheses, which, however interpretative of con-
temporary data, might cease to be useful if new data
should arise. He expressed a view which, no doubt, had
been generally felt and acted upon, namely, that Breslau,
"a place where the generality of the people live to a greater
age than at London (as appears by comparing the bills
of mortality here with those observations) can be no just
measure of the probability of life in this place" (London).
He accordingly prepared a mortality table for London,
showing what he believed to be the true rate of mortality
for this city, which differed from that produced by Smart
in 1726.
Other works followed of a similar character, such as
"^ Hodgson's Calculation of Annuities on Lives deduced from
the London Bills of Mortality, &c., and Corbyn Morris's
Essay towards Illustrating the Science of Assurance (1747),
and Short's New Observations, &c. (1750), and other edi-
tions of the works already noted; but the main result
desired had been accomplished. Mortality tables had
/ been constructed on English data, and the essential prin-
ciples of life measurement were now generally understood
in England.
CHAPTER VI
HISTORY OF LIFE INSURANCE IN THE UNITED STATES 1
THE p.nlrmi.gffi who settled America were doubtless some-
what familiar with the practice of insurance as it was then
carried on in Europe, Bui at the time when America
was first settled, of the different kinds of insurance, Qep
in Europe, marine- in-euraoee was the only. kind which had
been carried on to such an extent as to be really called a
business, and even with this it was a full century after the
landing of the Pilgrims that the first corporation^ were
chartered in England whose purpose was to insure against
the perils of the .sea. Fire insurance as a business was
just taking form in Europe at the beginning of the seven-
teenth century, and life insurance did not develop on a
sound basis until the American colonies had been settled
for a century and a half.
If such were the situation in Europe in regard to insur-
ance, we should expect to find during most of the-colonkkl--
period of American history insurance playing but a small
part. As shipping increased, marine insurance developed
somewhat, m^lv carried on by a method of inter-insur-
ance between merchants, and aJl of it by means of indi-
vidual underwriters, that is, instead of a policy being
written by a corporation, it would be written by one or
more individuals. This was commonly clone in England
even upon exports from this country, but that there was
some underwriting of marine risks in America is evidenced
by the fact that a public insurance office, which in the
'By Lester W. Zartman, Assistant Professor of Political Economy
in Yale University.
77
78 YALE READINGS IN INSURANCE
language of the time meant an office where insurance might
be effected through the medium of a broker whose function
was to obtain individual underwriters, was opened- in
Philadelphia in 1721. Though most of the underwriting
continued to be done in Europe, yet all during thejeigh-
teeRth century these public insurance offices could be fouod
in the larger coast cities.
There was some life insurance business done in the first
century and a half of our colonial existence, but it was of
the nature of -marine insurance rather than 'of an inde-
pendent growth. AH- such policies on lives as were in
existence were written by the public insurance office^"
which existed primarily to write marine policies. People
had not yet realized that life insurance could be developed
as a regular business^ covering all < the contingencies to
which life is subject. Therefore so far as any trace can
be found of life insurance during the colonial period of our
history, it is found in connection with what were then con-
sidered extraordinary risks.* If a mergjiant contemplated
a v^jjage to Europe, or to the West Indies, or a journey
to the frontier regions of the West, he was likely to secure
a policy of life insurance. There were np cqmpanfcB from
which a policy could be secured and the common method
was to have a number of men in the community agree to
share the risk. The policies were written usually for not
longer than on&..yoar Since the risk of death -from a sea.
voyage corresponded closely to the hazards of the ship in
which the merchant sailed, the rate charged corresponded
to the rate then usually charged for marine insurance, 5
per cent, of the amount insured.
As an example of one of these policies, we have recorded
the following written upon the jj^of one Benjamin Lin-
coln, of Boston: "Insurance is hereby made by Benjamin
Lincoln, Esq., on his Natural life, aged about fifty-six
years, for and during the space of twelve Kalender months,
to Commence from the date hereof. . . . and we the As-
surers do agree that the liffi of the said Benjamin Lincoln
LIFE INSURANCE IN THE UNITED STATES 79
shall be rated at the sum of one Thousand pounds lawfull
money. . . . For which we have received the premium
due us of five pounds per cent. . . . In case he shall dur-
ing the said Term happen to die, then we will well and
Truly pay unto his heirs, the Sums we have hereunto
Subscribed."
The first definite step in America toward the establish-
ment of insurance as a business was the organization of a
fire insurance company in Philadelphia in 1752. In 1748
a fire had occurred in London destroying some 200 houses.
This fire seems to have directed the attention of one of the
Philadelphia marine underwriters towards London fire
insurance. Just who worked out the plan of organiza-
tion of the new company is not known. Before any public
mention of the company had been made, the project had
received the approval of the Lieutenant-Governor of the
Colony, and that most distinguished citizen of Philadelphia,
Benjamin Franklin. The first manifest incident was the
appearance of an advertisement in the Philadelphia Gazette
of February 18, 1752, asking all persons inclined to subscribe
to the articles of insurance on houses from fire to appear
at the Court House.
A charter was obtained from the Pennsylvania govern-
ment. The new company was called the "Philadelphia
Contributionship for the Insurance of Houses from Loss
by Fire." This first American insurance company was
organized on the mutual basis. Organized by public-
spirited men to protect the citizens of Philadelphia, it
never changed its original purposes and still survives,
thanks to the fact that Philadelphia has never suffered
from a disastrous conflagration, the oldest fire insurance
company in America.
It was seven years after the first fire insurance company
came into existence in America that the first life insurance
company had its origin. In 1759 the Presbyterian synods
of New York and Philadelphia procured a charter from
the proprietary government of Pennsylvania for a corpo-
80 YALE READINGS IN INSURANCE
ration whose purposes were fully expressed in its title,
"A Corporation for the Relief of Poor and Distressed
Presbyterian Mjnjgjg_and of the Poor and Distressed
Widows and Children of Presbyterian Ministers." This
institution, which has become a life insurance company,
the oldest now existing, was a grpyth, not a creation of
one year. r A uad had previously existed in aid of the
poorly supported cjgtgp, and the ministers had expressed
a wish that, by some fund, like payment could be granted
to their surviving wives and children. Donations had been
received from Great Britain as well as from America for
this purpose. The intention in organizing the corporation
was to provide for sy&tpjTja^ig relief of unfortunate clergy-
men by more systematic contributions. It was not
expected that the clergy would contribute the full amount
of funds necessary to provide for the benefits promised,
but that outside contributors would still aid. Under
such circumstances it was not likely that much, if any,
'attention was given to the principles of scientific life hv
suranjjp. That attention could not have been given to
'these principles seems evident, since it was not until three
years later that the first life insurance company in England
was organized along sound lines. Although the organizers
of this Presbyterian corporation knew little of the science
of life insurance, the company survived its early mis-
takes, changed its plans when the principles of life insur-
ance did become known, and still prospers in a humble
way.
Since so much of historic importance centers around
this old company, it is interesting to note some of the pro-
visions of its first plan of agreement. It was provided that:
"1. The yearly amount of the conlribulions shall be
two pounds, three pounds, four pounds, five pounds, six
pounds, or seven pounds, current money of Pennsylvania;
and that the respective amounts to be paid to the widows
and children of the contributors, be ten pounds, fifteen
pounds, twenty pounds, etc., respectively: and that no
LIFE INSURANCE IN THE UNITED STATES 81
alteration be ever made in the rates but that every con-
tributor abide by the rate he first chooses.
"3. That no annuity be transferable or liable to be sold;
inasmuch as that practice would frustrate the very end
of the charter, and of the pious contributions for this
purpose.
"5. That every contributor at his marriage and as
often as that happens shall pay one year's rate extraor-
dinary as he thereby makes the chance worse, by bring-
ing, in general, a younger widow upon the fund.
"8. That the contributor's widow, if there be no chil-
dren, shall be entitled to her whole annuity during her
widowhood, but to no more than half the annuity after
her marriage, during her natural life.
"9. That if there be a child, or children, and no widow,
it, or they, shall be entitled to the whole annuity for thir-
teen years after the father's decease and no longer."
.Xen years- later, the clergymen in the Communion of the
Church of England in America, of New York, New Jersey,
and Pennsylvania, organized companies- in each colony,
similar to the one already existing among the Presbyterian
ministers. There were to be contributions by the minis-
ters and the churches, as well as by charitably disposed
persons. During the American Revolution the preserva-
tion of the funds held by the Episcopal corporation, as
well as those held by the Presbyterians, was an object of
solicitude. This anxiety was justified by the outcome,
for the New Jersey fund was lost the New Jersey treas-
urer, a royalist, left the country, taking the funds with
him. After the war the Episcopal companies fell largely
into inactivity. In 1797 the State of Pennsylvania passed
an act authorizing a complete separation of the Penn-
sylvania members from the New York and New Jersey
companies, and the reorganized Pennsylvania company
82 YALE READINGS IN INSURANCE
entered upon a long career, confining its activities to insur-
ing only ojiinigters of the Episcopal denomination in the
State of Pennsylvania.
These two denominational corporations, half insurance,
half charitable institutions, form the transition stage in
American life insurance from insurance by individual
underwriters to insurance by corporations on a
basis^solejy. A beginning in life insurance had been
made, but progress was slow for almost another century.
Apart from annuity contracts, it is probable that there
were not a hundred policies in force in the United States
on the risk of life at the beginning of the nineteenth cen-
tury.
The Insurance Company of North America was chartered
by Pennsylvania in 1794 to do a general insurance business,
including the insuring of lives. But by 1799 it had not
written over half a dozen policies of life insurance and
in less than a decade had given up this branch of the busi-
ness entirely.
''That life insurance did not prosper, in the United States
during the eighteenth century, and for some time during
the succeeding century, is not strange. Life insurance can-
not be successfully prosecuted in any country which is
subject to serious fluctuations in the deathrate. In
Europe life insurance developed slowly because of the ter-
rible plagues which swept over the country. It developed
slowly in the United States for much the same reason.
The cities in the United States during their early history
suffered seriously from epidemics. Philadelphia and Nw
York had many visitations of different diseases. Small-
pox was a recurring epidemic. In 1741 an unknown
disease carried off 5 per cent, of the population of Phila-
delphia, in 1746 diphtheria caused wide-spread terror, in
1756 small-pox was prevalent again, and in 1776 small-
pox took 8 per cent, of the population of that city.
So late as 1805 -the deaths from yellow fever added 50
per cent, to the normal death rate in Philadelphia. Much
LIFE INSURANCE IN THE UNITED STATES 83
as is now known about life insurance, it is doubtful if
life insurance could flourish under such conditions. In
fact there are considerable areas in the United States to-
day in which the best companies refuse to write any policies.
Soon after 1800, however, there began to be some active
^ interest shown in life insurance covering the whole of life.
Level premium life insurance had now been in operation in
England for more than a generation. Some correspond-
ence had taken place between people in the States and
the English life insurance companies. Early in 1807 the
Pelican Life Insurance Company of London established an
office in Philadelphia. In various sections of the country
the idea of insurance was penetrating from England.
Already an association called the "Pennsylvania Company
for the Insurance on Lives" was projected, and while the
project matured slowly, it was in readiness for formal
organization late in 1^9. The organization of this com-
pany marks the beginning of life insurance in the United
States upon a business basis. This company was eapital-
iaed at $500,000. The policy forms were copied from
those in use in England and the rates charged were those
charged by the London companies, raised in some localities
to offset what was considered a heavier mortality rate.
In 1818 the Massachusetts legislature chartered the
Massachusetts Hospital Life Insurance Company. This
was a stock company capitalized at $500,000 and em-
powered to do a life insurance and trust business. One
feature of the charter provisions should be carefully noted.
The corporation was required to pay the Massachusetts
Hospital one-third of the net profits on its life business
after deducting legal interest on its paid-up capital, and
the same requirement was to be imposed upon any other
life company that should be chartered. The reason back
of the provision was evidently the belief, a belief all too
prevalent yet, that life insurance is an especially profitable
business, and that for the privilege of doing business the
company ought to pay liberally to the state. The result
84 YALE READINGS IN INSURANCE
of this charter provision was twofold the company did
very little life insurance business, and no other life insur-
ance companies were organized in Massachusetts for
twenty years.
The next company organized to do a life insurance busi-
ness was the New York Life Insurance and Trust Company.
Chartered in 1830, it issued during the first nine years of
its existence nearly two thousand policies. It, too, was
a stock company with a capital of a million dollars.
Several characteristics are common to all t three of these
first corporations organized in America to furnish life
insurance. All were stock companies with large capitaliza-
tion; all were chartered to do two kinds of business/life
insurance and. trust business; all have given up the issue
of life insurance policies and all survive as prominent
trust and banking companies in the cities where they were
first chartered.
vx/With the chartering of the New England Mutual Life
Insurance Company by Massachusetts in 1835, and the
Girard Life and Trust Company by Pennsylvania in the fol-
lowing year, a new era in life insurance history in the
United States began. So far, outside of the half charitable
plans of the Presbyterian and Episcopal corporations
already noticed, all life insurance was being conducted on
the ^qgjmj^n. News of the great success of the Equitable
of England began to be known in America. Even the siock
companies were advertising this success as a means of in-
ducing people to take out Reinsurance. Thus in 1830,
in the so-called "proposals" wmcji the Massachusetts
Hospital Life sent out, it is stated: "Life insurance has
increased very much in England during the last forty or
fifty years. . . . The Equitable Society in London, in the
course of twenty years from the year IjjjQP, made insur-
ance on 151,754 lives, being more than 7500 policies exe-
cuted annually by that single office."
The Equitable was a mutual company, that is, a corpo-
ration without capital stock. Every policy-holder was a
LIFE INSURANCE IN THE UNITED STATES 85
member and shared in the profits which were made. With
the constant attention which was now being directed to the
Eqwi&bble, it would have been strange if a company had
not been organized in America on a similar plan. The
New England Mutual Life Insurance Company of Boston
was chartered by Massachusetts in 1835 to emulate ttye
Equitable of London. But the Massachusetts legislature
was afraid of a mutual company without capital, and so
provided that the organizers of this company should fur-
nish $100,000 of guarantee capital which later was to be
refunded. This made it difficult to complete the organiza-
tion of the company, and it was not until 1843 that the
company commenced to write insurance. In the mean-
time, it happened that a stock company took the first" real
step towards the adoption of the mutual principle. The
Girard Life and Trust Company of Philadelphia, organized
in 1836, while holding to joint stock management, made
provision whereby the profits of the business might be
shared with the policy-holders. In 1844,. in accordance with
its promise, it declared its first dividend. The plan proved
so popular and the Girard prospered so much that its
competitor, the Pennsylvania Company, announced that
thereafter all premiums for one or more years of insurance
would entitle the policy-holder to a credit of one-half the
profits.
Once started, the mutual plan of life insurance spread
rapidly. The time was opportune. The conflagration of
1835 in New York had ruined many of the stock fire in-
surance companies, and a large number of mutual com-
panies had been organized to furnish fire insurance. Until
the next conflagration in 1845 they had a very successful
existence. In marine insurance, the mutual plan was
proving equally successful. If the mutual plan was suc-
cessful in furnishing fire and marine insurance, why should
it not also be successful in the field of life insurance?
Furthermore there was the known success of the mutual
companies in England. The American stock companies
86 YALE READINGS IN INSURANCE
had recognized this success and were granting one-half
the profits to. the policy-holders. If a mutual company
were organized, the policy-holders could get all the profits.
The time was ripe- for the spread of the mutual system.
In 1842 the Mutual Life of New York was organized.
In 1843 the New England Mutual completed its organiza-
tion. In. 1845 the Mutual Benefit of New Jersey was
chartered. In the same year the New York Life Insur-
ance Company succeeded in fulfilling the requirements
which the legislature had laid down as prerequisite for
organization.
With the formation of these companies begins the great
development of life insurance hi the United States, a de-
velopment which has resulted in a larger per capita amount
of insurance in force in the United States than is found in
any other country in the world. Interesting it is to trace
the spread of insurance at that time over the country.
With the formation of more companies, qompetition for
business began. The three early stock companies had
been content with such business as had come unsolicited
to the office. Under competitive conditions, the com-
panies began to appoint men in different cities to solicit
life insurance as a side issue to their other work. Minis-
ters, teachers, and lawyers were appointed agents and
given a small commission. With agents soliciting business,
more people began to be interested in life insurance. As
they became interested they wondered why a local com-
pany could not be organized. Thus it was that life in-
surance was spread over the country. Take, for instance,
the manner in which life insurance started in Connecticut.
The Mutual Benefit appointed an agent in Hartford in
1846. An active campaign for policy-holders was inaugu-
rated. The idea of life insurance was so new that wide
attention was given to it in a way little understood at
>resent. Public meetings were held to discuss the ques-
;ion. All at once the novelty of life insurance became
;he talk of the town. The Mutual Benefit agent did a
LIFE INSURANCE IN THE UNITED STATES 87
large business. The thought struck some Hartford busi-
ness men that they could as well organize a home com-
pany. In February, 1846, the agent had been appointed
for the Mutual Benefit; three months later the Connecticut
legislature chartered the Connecticut Mutual Life Insur-
ance Company.
The stock companies had opposed the chartering of
mutual companies on the ground that the mutual system
was insecure, and that already sufficient facilities were
available for furnishing life insurance. Once the mutual
companies were organized, they soon drove the stock
companies out of the life insurance field. In 1847 one
more mutual company was organized. In 1848 three
more, in 1849 two, in 1850 four mutual life insurance
companies came into being. In 1851 three more mutuals
were organized, in 1852 two mutuals, in 1853 three mu-
tuals, in 1854 two mutuals, and so on until, by 1860, thirty-
four companies had been organized to do a life insurance
business on either the strictly mutual plan or on a plan
whereby all but a limited amount of profits were to go to
the policy-holders.
In 1843 the ten life companies then in existence did not
have over six and one-half million dollars of insurance in
force. By the end of 1860 this amount had increased to
one hundred and sixty million dollars.
Rapid as was this growth in the insurance business
from the successful organization of mutual companies in
1843 to 1860, it was but the beginning of one of the most
interesting periods in any life insurance history. With
the outbreak of the Civil War there were grave doubts
among the managers of the companies as to its effect upon
their business. A large territory was cut off from com-
munication and thousands of men were going into a hazard-
ous occupation. The result was not what was expected.
Life insurance business prospered as it had never prospered
before. During 1862, as well as during each of the two
succeeding years, three new life insurance companies were
YALE READINGS IN INSURANCE
organized. In the closing year of the war nine new com-
panies were organized, and in the following year thirteen
more were brought into the field, thus almost doubling in
two years the number of life insurance corporations. Still
greater growth came. In 1867 nineteen more companies
were organized, in 1868 nineteen again, and hi 1869, which
saw the end of the movement, eleven more.
Thirty years earlier life insurance had been represented
by a few stock companies, writing a small amount of in-
surance each year. At the close of -16_ there were one
hundred and ten life insurance corporations in the United
States actively competing for business. The amount of
insurance in force had increased to nearly a billion and a
half dollars. ^ f
making a total of seventy-one life insurance corporations
which had been forced out of business in ten years. The
weaker companies had been weeded out and failures be-
came less frequent. Between 1878 and 1888 a few more
companies failed, but mostly as a result of conditions aris-
ing in the previous decade.
Along with the actual failures of many companies had
come a decline in the business of all. There was nearly
two billion dollars of insurance in force in 1870; by 1880
it had decreased to less than a billion and a half.
The causes of this disastrous period in life insurance
history have been indicated. The delusive methods of the
companies in the preceding period had caused an unwise
stimulus to the business. Companies had been organized
more rapidly than capable men could be developed to
manage them. The premium note system had resulted
in many dissatisfied policy-holders. It had been shown
92 YALE READINGS IN INSURANCE
what yet has not been learned by many, that life
insurance cannot be secured at a small cost. This had
made it difficult to secure new business, just at a time
when there was much competition for new business.
*. Severe competition resulted in the acceptance of inferior
lives; inferior lives resulted in heavy death losses; to re-
coup these losses speculative investments were made; and
then came the financial panic at the crucial time. The
cumulative result of all these causes was wide-spread dis-
aster among the companies.
By 1880 began the revival in business. The companies
which had survived had been subjected to a hard test.
Gradually they recovered their ground as financial con-
ditions improved and as memories of life insurance in
the seventies became less vivid. No new companies were
organized for twenty years, but from 1880 to 1905 the
business done by the old companies increased apace. In
1885 the total insurance in force passed the two billion
mark, five years later it had doubled, by 1900 nine bil-
lion dollars of insurance was in force, and by 1905 five
million level premium life insurance policies were in force
in the United States, insuring for a total amount of twelve
illion dollars.
/Space will not permit more than a passing mention of
the striking characteristics of this later period from 1880 to
1905. There was the extensive development of the agency
system, the increase in the expense ratio, the liberalizing
of the policy contract, the wide use of the deferred divi-
dend system, and the invasion by^SQme of the New York
companies of foreign countries. All tbee have had a
prominent part in the great development oil&fi^ business
and have been the subject of much discussion.
During the summer of 1905, starting with a personal
quarrel for control of one of the largest companies, revela-
tions were made of bad management which led New York
and other states to make an investigation into the manage-
ment of a number of companies. Exposures were made in
LIFE INSURANCE IN THE UNITED STATES 93
some cases of betrayal of trust which shocked the public.
These disclosures, coming at a time when the public mind
was already inflamed by exposures made in other lines of
business, resulted in a demand by the public that remedial
legislation should be enacted, and during the following two tl ^^,
winters-, many legislatures busied themselves in revising
the insurance laws. Nothing has been said in this sketch
of life insurance in the United States about legal regulation
of the business, but it has played a conspicuous part.
From 1860 on, nowhere else in the world have so many
laws, attempting to regulate the business to such a great
extent, been enacted as in the United States. But what
was attempted before 1905 has been surpassed by the laws
placed upon the statute books since that year. Laws
have been passed regulating salaries^-expeiisesj-and- -pre-
miums. . Standard policies have been provided. The
amount of insurance that could be written has been pre-
scribed. Surplus is limited in amount. Methods of allot-
ting dividends have been defined. Systems of control by
the policy-holders have been enacted into law. More pub?
licity is demanded. In short in many cases the climax of
state regulation has been reached. Any further attempt
at control would practically result in the states taking
over the active management of the business.
As a result of the disclosures and of the restrictive laws
which followed, the year 1905 marks something of a halt
in life insurance progress. Whether the laws will ulti-
mately have good results remains yet to be seen.
^/in any history of life insurance in the United States,
/ however brief, some attention should be given to assess-
ment plans of life insurance. Level premium or old line
Ufa, .insurance, the history of which has been traced, in-
volves the idea of charging a policy-holder a relatively
high premium during the earlier ages, and accumulating
a reserve in order that the premiums may not go higher
at the later ages as the risk of death increases. Assess-
ment insurance has followed so many plans that it is diffi-
94 YALE READINGS IN INSURANCE
cult to define, but in general it involves the idea of assessing
members just enough to pay current expenses, and current
death losses, leaving a higher death rate in the future to
be provided for by higher or more frequent assessments.
Normally, in the evolution of life insurance, assessment
insurance should precede level premium life insurance. It
is a sort of half-way development from the primitive plan
of taking up a collection for the family left in need, and
modern level premium life insurance. But life insurance
did not develop normally in this country as it did in Eng-
land. With no system of life insurance in this country,
the fully developed, level premium system was imported
from England. An abnormal beginning in the United
States resulted in an abnormal development. After level
premium life insurance had become firmly established, there
arose the assessment associations. What brought them into
existence, or where their originators got their ideas, is not
known. AssSSment_Qcieties had flourished in England in
the early part of the eighteenth century, but had long
passed away. It is probable that the first assessment
societies in the United States were suggested by the Eng-
lish friendly societies, and took the form which they did
in the United States because of the life insurance con-
dition in America at the time, namely, the prevalence of
the premium note system. '-
The first assessment society was organized in New York
in 1867. In 1868 there was organized the famous secret
association, the "Ancient Order of United Workmen."
These two early associations represent the two types which
assessmentism has taken in this country. One type has
been the associations organized for the sole object of fur-
nishing life insurance on a business basis. The other type
has been the fraternal association combining life insurance
with more or less of social objects.
Both methods of furnishing life insurance on the assess-
ment plan flourished during the seventies and eighties. It
was cheap insurance again, and proved popular. In 1880
LIFE INSURANCE IN THE UNITED STATES 95
no less than 236 of the business assessment organizations
had been chartered by Pennsylvania alone. By 1885
fifty-six had been chartered by Massachusetts. By 1889,
the country over, the business assessment associations
had a billion dollars more insurance in force than did the
old line companies. Their life, however, was to be short.
Conducted on unscientific plans, these companies soon com-
menced to fail. In the early nineties, they failed in large
numbers. Some state legislatures, finally realizing the
weaknesses of the plan, passed prohibitory laws, and at
the present time the assessment companies conducted
merely as a business venture are of little importance in the
life insurance world.
Assessmentism as developed by the fraternal society had
a slower development. The fraternals, while growing more
slowly, have had sources of power which the business assess-
ment does not possess. The fraternal ties keep men in
the order long after they would have stopped paying assess-
ments to a business company. Again, they have been
almost untrammeled by state law. Having close organ-
izations, the political party in power has not dared to
enact legislation inimical to the desires of the fraternalists,
so that even yet in most of the states the fraternal orders
are not subjected to any supervision whatever. To-day
fully seven million people are insured in the fraternal
orders in the United States, two million more than are
insured in the level premium companies.
In concluding this sketch of American life insurance,
let us consider the more important problems connected
with the business to-day. In the old line field there is
the important one of the influx of new companies. As a
result of the exposures in 1905 there developed almost a
mania for new companies in the We.sL.and South. At least
two hundred new companies have been organized. This
seems too many. Competition between them and with
the old companies will be so keen that many companies will
not be able to continue. There will be probably a period
96 YALE READINGS IN INSURANCE
of failures and receiverships somewhat akin to that of the
seventies, but without the disastrous effects upon the busi-
ness which the failures in the seventies caused.
A second important problem is what to do with the
fraternals. Something should be done. The assessment
plan of collecting premiums cannot but result in failure
and disappointment. These associations educate some
men to take out level premium policies, but in too many
cases failures of the fraternals give men an excuse for not
insuring at all. Some of the fraternal societies are volun-
tarily adopting the level premium system, and if it proves
successful, the movement may solve one of the greatest
problems in American life insurance, the problem of heavy
expenses. The state should encourage these transformed
societies and provide that no more on the old assessment
plans shall now be organized.
Lastly, of many important problems which may be men-
tioned is the problem of securing good management of the
level premium companies. There are companies which
to-day have five hundred millions of invested funds, and
the power which control of such sums involves is enormous.
Can big enough men be found to entrust with such power,
and will they be found? What can the states do to help?
If proper management can be secured, life insurance in the
United States has just begun its development.
CHAPTER VII
THE THEORY OF RISK l
To live and labor in uncertainty is the common lot of
all men. Life and health, property and income, are all
exposed to countless dangers. The precariousness of the
results of human effort has been a favorite theme of poets
and philosophers of all ages. "The best laid schemes o'
mice an' men gang aft agley," and the possibility of such
a mischance profoundly modifies the conduct of rational
beings. In their economic activity in particular the in-
fluence of uncertainty can be clearly discerned. While
exact mathematical measurements are in the nature of
the case impossible, the direction of this influence, and to
an approximate extent its degree, may be ascertained.
It has long been considered a commonplace of economic
theory that the reward of capital, and to a less extent the
reward of labor, varies directly as the degree of risk to
which they are exposed as a result of their economic
activity. But until recently, no attempt has been made
to isolate the phenomena of risk and risk-taking, and to
determine the laws which govern them. The new interest
in the subject has sprung for the most part from discus-
sions as to the exact nature of the function and reward
of the entrepreneur. Professor Mangoldt in Germany,
and Mr. Hawley in the United States, have made inde-
pendent attempts to elaborate a theory of distribution in
which the assumption of certain risks shall be the special
1 By Allan H. Willett, Instructor in Economics, Carnegie Technical
Schools. Reprinted from pages 25-34 of the "Economic Theory of
Risk and Insurance"; Columbia University Press. New York, 1901.
97
98 YALE READINGS IN INSURANCE
function of the entrepreneur, and his income the reward
for risk-taking; and though few writers have adopted
their general doctrine, the notion that in some way the
function of the entrepreneur has a peculiar connection
with risk is by no means uncommon. In all the previous
discussions, however, one will search in vain for a thorough
treatment of the nature of economic risk and the way in
which its influence makes itself felt.
We are told by the philosophers that all the activities
of the universe are obedient to law. Nowhere have they
left any opportunity for the intrusion of chance. Events
which appear to take place in a purely accidental way are
just as much determined as those whose occurrence can
be accurately foretold. The appearance of accident is due
entirely to human limitations. It is because we do not
know all the previous conditions or all the laws governing
them that a particular phenomenon appears to us to occur
by chance. In this sense, then, chance is purely subjec-
tive; it is merely an appearance, resulting from the im-
perfection of man's knowledge, and not a part of the course
of external nature. But 'the term may be used also in an
objective sense. By chance in that sense is meant the
degree of probability that a particular event will occur,
as it is estimated with the aid of all the attainable knowl-
edge of the preceding conditions. If the only fact known
about the condition of a number of balls in a bottle is
that there is an equal number of white ones and of black
ones, there is an even chance that the first ball to come
out will be white, and this chance is independent of any
personal peculiarities of the person who estimates it. It
is in this objective sense that the term is commonly used,
and, to avoid any possibility of ambiguity, it is in this
sense alone that it will be used in the following pages.
By chance will be meant the degree of probability of the
occurrence of any future event. 1 It may vary all the way
1 This term may also be used to denote the probability that an
event has occurred in the past, when it is impossible to obtain any
THE THEORY OF RISK 99
from absolute certainty that an event will not occur,
through the different degrees of probability, to absolute
certainty that it will occur.
Chance affects economic activity through the psycho-
logical influence of uncertainty. Man's conduct is modi-
fied in one way by coming events which he can definitely
foresee and provide for, though he can do nothing to pre-
vent their occurrence; it is affected in a different way by
events which are only possible, and which may never
occur, or may occur at an unexpected time. In the latter
case he will not act just as he would if he knew that they
would occur, and occur at a definite time, and he will not
act just as he would if he knew they would not occur at
all. His conduct will be modified by the very uncertainty
as to the occurrence of the future event, that is, by what
appears to him as chance.
A distinction must be made and kept clearly in mind
between the chance, or the degree of probability, and the
degree of uncertainty. Manifestly the greatest degree of
uncertainty does not accompany the greatest degree of
probability. When the chance is zero, the uncertainty
is also zero. A slight degree of probability brings with it
a slight degree of uncertainty. But the two cannot go
on indefinitely increasing at the same rate, as at the end
of the series we should have the absurd combination of
the highest degree of probability, which is certainty,
with the highest degree of uncertainty. The uncertainty
is the greatest when the chances are even, that is, when
the degree of probability is represented by the fraction J.
In such a case we say that there is nothing to show what
the outcome will be. As we go from an even chance either
towards greater probability or towards less probability,
the uncertainty diminishes, and at either end of the
series it entirely disappears. For example, there is an
certain information about it. Premiums for the insurance of over-
due ships are determined partly by the chance of loss as estimated
from past experience.
100 YALE READINGS IN INSURANCE
even chance that the first card drawn from a perfect pack
will be red or black, and there is absolute uncertainty as
to which it will be. If, however, one of the red suits is
replaced by a third black suit, the degree of probability
is altered. The chance of drawing a red card is now one in
four, and the chance of drawing a black one is three in
four. The chance has been increased or decreased, accord-
ing to the color whose appearance is made the basis of
comparison. But the degree of uncertainty has been
reduced, and this is equally true of the uncertainty about
the appearance of either color. And after a black suit
has been substituted for the remaining red suit, the chance
of drawing a red card has been reduced to zero, and the
chance of drawing a black card has been increased to a
hundred per cent., while all uncertainty as to which color
will be drawn has disappeared.
I have dwelt at such length upon this simple distinction
because of its fundamental importance for the deter-
mination of the nature of risk. The word risk, as it is
employed in common speech, is by no means free from
ambiguity. It is sometimes used in a subjective sense
to denote the act of taking a chance, but more commonly
and preferably in an objective sense to denote some con-
dition of the external world. To avoid ambiguity its
use in the following pages will be confined to this latter
sense. The act of incurring a risk will be called risk-
taking or the assumption of risk.
But even when used in this objective sense its significance
is not always the same. It is possible to think of risk
either in relation to probability or in relation to uncer-
tainty. As the degree of probability of loss increases
from zero to one hundred per cent., the degree of risk may
be said to increase pari passu. This is undoubtedly the
way in which the term is ordinarily used. A person who
should enter upon an undertaking in which the chances
were ninety in a hundred that it would result in failure
would undoubtedly be said to run a tremendous risk.
THE THEORY OF RISK 101
But if the term is used in this sense, it will not be true, as
I shall attempt to show later on that the special net reward
for assuming risk invariably increases as the degree of
risk increases. This net premium increases as the uncer-
tainty increases; but after the point of even chances is
passed, the uncertainty diminishes as the probability
increases. Beyond that point, therefore, the net premium
for risk-taking will also diminish as the probability of the
occurrence of the loss increases. When the loss is certain
to occur the premium entirely disappears, as in the case
of the ordinary replacement of capital used up in pro-
ductive operations. As, however, the risks assumed in
industrial life are usually well below the point of even
chances, so that the uncertainty as to the outcome in-
creases as the probability of loss increases, it will be more
convenient to continue the discussion as though such
risks only were to be considered. Whatever statements
are intended to apply to greater chances will be put in a
form that will make their application clear.
This is not the place to undertake to establish the law
laid down above. My only reason for mentioning it here
is to show why it seems necessary to define risk with
reference to the degree of uncertainty about the occurrence
of a loss, and not with reference to the degree of probability
that it will occur. Risk in this sense is the objective cor-
relative of the subjective uncertainty. It is the uncer-
tainty considered as embodied in the course of events in
the external world, of which the subjective uncertainty
is a more or less faithful interpretation. 1
Considering risk in this sense, we find that the method
1 This definition involves considerable departure from ordinary
usage. The word uncertainty might be used in this objective sense,
or a new term might be coined to designate its objective aspect.
But it has seemed better to keep to the term ordinarily used by econ-
omists in this connection. It is important not only to develop more
clearly than has yet been done the effect of risk on economic activity,
but also to note that many of the statements commonly made about
it are true only when the term is defined in this way.
102 YALE READINGS IN INSURANCE
by which the degree of risk may be ascertained depends
upon the relative perfection of the knowledge of preceding
conditions. In some cases it may be known directly
from the circumstances attending it. The uncertainty
about the color of a card drawn at random from a perfect
pack is of this kind. No one would consider that the
chance at the tenth trial was altered by the fact that at
every one of the preceding nine trials a red card had been
drawn. But when no such definite knowledge of preceding
conditions is attainable, the degree of risk is estimated in
a different way. It is ascertained by applying the laws
of probability to the accumulated results of past experi-
ence. The chance that a particular loss will occur is
denoted by the fraction expressing the ratio between the
actual number of such losses and the possible number in a
given period of time. If during each year for a series of
years the loss has been one in one hundred in the case of
buildings of a certain kind, the chance that a similar
building will be destroyed during the following year is
expressed by the fraction T ^ on condition that there
is no appreciable change in the methods adopted for pre-
venting loss. If for the moment we assume that it is
known that the actual number of losses every year will
correspond with the average number, the only uncertainty
for the group as a whole will be as to which of the buildings
will be the one to suffer the loss. The chance that any
particular building will be destroyed will be one in a hun-
dred, but the number of losses for the group as a whole
will be fixed.
But as a matter of fact the loss for the group as a whole
is not likely to correspond exactly with the average loss
as determined by past experience. The actual number
of losses in any year will vary more or less from the aver-
age. This variation is not absolutely indefinite. By the
laws of chance a figure can be obtained which will indicate
the probable variation of the actual number of losses from
the average. This figure will vary in different cases accord-
THE THEORY OF RISK 103
ing to the nature of the series from which the average has
been obtained. The probable variation will be much less in
the case of a series in which the losses from year to year
have varied little from the average, than it will be in the
case of a series which shows great fluctuations. Thus, to
take a simple illustration, if the losses for four years have
been 1, 11, 30, and 18 per hundred, the average is 15 per
hundred, but it is evident that the actual number may
vary greatly from the average. If on the other hand the
series had been 13, 14, 16, and 17, while the average would
have been the same as before, the actual number for the
following year would be much more likely to be near the
average. The probable variation of the actual number
of losses from the average may be ascertained by calcu-
lating the average of the actual variations during the series
of years under observation. Thus in the first illustration
given above, the variations were respectively 14, 4, 15,
and 3, giving an average variation of 9. In the second
series the variations were 2, 1, 1, and 2, and the average
was 1|. It is evident, therefore, that the greater the
fluctuations are from year to year in the number of losses,
the greater is the uncertainty as to the number which will
occur in a particular year. It must be borne in mind
that risk is connected with the uncertainty. If the num-
ber of losses may vary from 1 to 30, the area of uncertainty
includes the entire number of possible losses; but if the
number may vary only from 13 to 17, that whatever may
be the uncertainty about the fate of any particular build-
ing, for the group as a whole 13 losses can be counted upon,
and the area of uncertainty includes only the 5 losses from
the 13th to the 17th.
This distinction between the certain and the uncertain
losses is of the utmost importance. If, as I shall attempt
to show, uncertainty imposes a cost upon society, the
removal of the uncertainty will in itself be a source of
gain. Not that the replacement of the possibility of a
small amount of loss by the certainty of a large amount
104 YALE READINGS IN INSURANCE
would result in a net gain. The effect of the occurrence
of disaster is in itself the same, whether it was foreseen
or not. It is the destruction of a certain amount of capi-
tal. But the net result of the occurrence of a certain
amount of loss which was definitely foreseen is different
from the net result of the occurrence of the same amount
of loss plus previous uncertainty whether it would be
greater or smaller. And the influence of the latter element
is greater when the anticipation of future loss is based
on an average obtained from a fluctuating series of past
losses. The greater the probable variation of the actual
loss from the average, the greater the degree of uncer-
tainty.
Finally it must be noted that the probable variation
varies with the number of cases included in a group.
According to the well-known statistical law, the figure
denoting the probable variation increases only as the square
root of the number of cases. Increasing the number of
similar risks a hundred-fold increases the probable variation
by only tenfold. If, for example, we assume that past
experience, based on the observation of 10,000 cases for a
number of years, has shown that on the average one house
in every thousand is destroyed by fire each year, the
average loss has been 10 houses a year. But the actual
loss has varied from year to year. The probable variation
of the actual loss from the average can be determined only
by a calculation based on the actual losses during the
years under observation. But we will assume that for
10,000 cases this variation is 5. Then if there is no change
in the chance of destruction to which the houses are ex-
posed, the loss next year will probably be between 5 and 15.
It is probable that as many as 5 and no more than 15 of
the houses will burn. The area of uncertainty, then, is
10, or -^ of 1 per cent, of the number of cases. If we now
increase the number of houses exposed to the same danger
a hundred-fold, from 10,000 to 1,000,000, the average loss
will be 1000, but the probable variation of the actual loss
THE THEORY OF RISK 105
from the average will not increase a hundred-fold, from 5
to 500, but only tenfold, from 5 to 50. The actual loss
next year will probably be between 950 and 1050. The
area of uncertainty is now 100, or T ^ of 1 per cent, of the
number of cases. We have used the term area of uncer-
tainty to denote the number of cases lying between the
largest probable number of losses, or the average plus the
probable variation, and the smallest probable number,
or the average minus the probable variation. 1 We may
say, then, that the area of uncertainty increases as the
square root of the number of cases, and that its ratio to the
entire number of cases becomes correspondingly less.
Risk, in the sense in which we are to use the term, is, so
to speak, the objectified uncertainty as to the occurrence
of an undesired event. It varies with the uncertainty
and not with the degree of probability. In that sense
the degree of risk in any individual case is a definite quan-
tity. It may be ascertained in some cases by direct
observation of the conditions on which the possibility
of the occurrence of the event depends. When such
knowledge can not be obtained directly, it is sought
indirectly by a statistical study of the results of past
experience. The chance of the occurrence of a loss is
denoted by the fraction expressing the ratio between the
actual number of losses and the possible number in a
given period of time. The value of this figure varies
with the regularity of the series from which it has been
obtained. There is greater uncertainty about the number
of losses that will occur in a given year when the average
1 1 need not point out that the average variation itself denotes
only a probability and not a certainty. There is additional uncer-
tainty as to the extent to which the actual variation in any year will
vary from the probable. I have not thought it necessary to consider
the various devices of the mathematicians for obtaining more signifi-
cant figures than averages. My only purpose is to show that with
the increase in the number of cases the actual degree of uncertainty
for the entire group diminishes, and that fact is sufficiently well brought
out by the use of crude averages.
106 YALE READINGS IN INSURANCE
has been obtained from a fluctuating series than when it
has been obtained from one which was comparatively
uniform. The figure expressing the average variation of
the actual losses from the average loss for a number of
years is called the probable variation. The greater the
ratio between the probable variation and the whole num-
ber of cases, the greater is the uncertainty. The probable
variation increases only as the square root of the number
of cases, therefore its ratio to the whole number becomes
less as the number is increased. Consequently the more
individual cases there are included in a group, the less is
the uncertainty as to the amount of loss which the group
as a whole will suffer.
CHAPTER VIII
MORTALITY TABLES 1
TABLES of mortality, although they form the scientific
basis, were very little used for life assurance purposes
until towards the end of the eighteenth century, after the
Northampton tables had been published. Other tables
were in existence nearly one hundred years before, one of
the first being that compiled from the statistics of the
population of the town of Breslau in Silesia by the British
Astronomer-Royal, Halley, and published in 1692. Halley
at the same time advocated correct principles for annui-
ties and assurances, which were not adopted until nearly
seventy years later.
There are two principal sources for obtaining such in-
formation as is necessary for compiling a good mortality
table, namely:
(1) Population statistics, including registers of births
and deaths; and
(2) Life assurance statistics.
Other sources are occasionally used, such as particulars
of peerage families which have been carefully recorded
and published for many generations; widows' and pension
funds; employees in large corporations; army and navy
statistics, etc., etc.; but the two above mentioned are
sufficient for our present consideration, as they bring under
review all the salient features of mortality.
In order to form tables correctly from population
records, it is necessary to have an enumeration of the
1 By Henry Moir, Associate Actuary of the Home Life Insurance
Company of New York. Reprinted from pages 32-45 of the " Life
Assurance Primer"; C. C. Hine's Sons Company. New York, 1904.
107
108 YALE READINGS IN INSURANCE
people with their ages, together with a record of the deaths
which take place and the ages at death. Even with such
statistics, the results are influenced by movements in
population in the nature of emigration or immigration
during the period over which the observations extend.
Frequently, also, when an enumeration of population is
taken, the ages are misstated or given approximately.
Discriminating judgment is essential in dealing with
mortality statistics otherwise erroneous conclusions
may be reached.
The Northampton table may be taken as an interesting
example of erroneous construction, because Dr. Price,
who published the table in 1783, ignored several important
factors affecting the mortality. The statistics on which
he based his results consisted of a record of the deaths in
two parishes in the town of Northampton. No enumera-
tion of the population was taken, but the tables were
formed from the deaths, with ages at death. Dr. Price
had also a record of the baptisms which had taken place
in the community, and he found that the number of
deaths exceeded the baptisms in the period under obser-
vation (1735-1780). He therefore assumed that the
additional deaths were caused by immigration into North-
ampton at the age of 20. As a matter of fact, however,
the additional deaths were largely the result of baptisms
being less numerous than the births. There were many
Baptists in the town, and the names of their children did
not appear on the records of christenings. The baptismal
records were on an entirely different basis from the death
records, and they should not have been used together.
The assumption above mentioned was therefore inaccurate,
and moreover the mortality of the two parishes from which
the figures were taken was higher than the average of
other towns; so that the Northampton table was in several
respects unreliable. It was, however, extensively used
for many years; and, as it showed excessive mortality,
large profits were earned by life assurance companies
MORTALITY TABLES 109
which adopted its figures. On the contrary, annuity
companies suffered severely because their annuitants
lived longer than the table indicated. It is a strange and
unaccountable fact that this Northampton table is still
used in the United States for certain legal purposes, and
in some courts appears to be the only recognized table of
mortality.
On the other hand, the Carlisle table may be quoted
as one which was prepared on scientific principles and
from satisfactory statistics. This table was published
in 1815 by Joshua Milne. It was constructed from a
census of the population of two parishes in Carlisle in
1780, and the deaths in the same parishes from 1779 to
1787 inclusive. It is usually supposed that a second
census was taken in 1787; but the figures themselves in-
dicate that this is doubtful. Anyhow, it was found that
an increase (treated as being exactly 1000) in the popula-
tion had taken place, and allowance had to be made for
this increase as affecting the deaths also, so that the ratio
of the deaths to the numbers living could be satisfactorily
obtained. There was a larger proportion of female than
of male lives included in the statistics, and the result was
to show light mortality at the older ages. The table has
been very extensively used, and even to the present day
is considered of great value, especially in the calculation
of survivorship benefits. For general life assurance pur-
poses, however, it has been superseded by tables formed
from mortality amongst assured lives.
Mortality tables from the general population of England
have been formed on five occasions, the latest having been
published in 1897, dealing with the period from 1881 to
1890. The mortality of the entire population was given
and compared with that in various occupations. A most
useful series of tables was submitted, with details of
mortality in one hundred different occupations, showing
not only the mortality rates in those occupations, but
giving also the causes of death.
110 YALE READINGS IN INSURANCE
One of the population tables has received more promi-
nence than others, namely; the healthy English table.
It was formed by Dr. Farr from the census returns of 1851,
and the records of the births and deaths, from 1848 to 1853
inclusive, in 63 of the healthiest registration districts of
England and Wales. In all of these districts the mortality
of the general population did not exceed the rate of 17
annual deaths to 1000 living; and at the census of 1851
the total population in these selected districts was nearly
one million persons, of whom about 493,000 were males
and 503,000 females. The mortality of the sexes was
investigated separately. This table (male section) was
selected by a committee of the Actuarial Society of America
for comparison with the specialized mortality afterwards
referred to, with slight modifications at ages under 21 and
at ages from 51 to 60, and with a special adjustment for
the reduced mortality arising from medical selection
during the first five years of assurance.
The records of life assurance companies are almost free
from the errors and misstatements to which population
statistics are subject. The ages of those who take out
policies are correctly taken, and a complete record is kept
from which can be obtained the number under observation
at any age, and the number of deaths which take place
amongst them. The first table formed from the experi-
ence of a life assurance company was prepared by Mr.
Arthur Morgan, Actuary of the old Equitable Society,
and published in 1834. The records of any individual
company are not, however, so valuable as records formed
from a group, because individual companies have fre-
quently peculiar conditions affecting their mortality,
while a group is more likely to represent a fair average,
such as may be equaled by any well-managed corpora-
tion.
Accordingly, in 1843, there was published the experience
of 17 life assurance companies, now known in America
as the "Actuaries" or the "Combined Experience" table.
MORTALITY TABLES 111
The statistics from which that experience was compiled
embraced nearly 84,000 policies running from 1762 to
1833, of which nearly 14,000 terminated by death. The
average duration of all the policies was less than eight and
one-half years. The mortality amongst females was taken
out separately and it was found that between ages 20 and
50 the mortality was considerably heavier than amongst
males, but the reverse was the case above age 50.
This condition as regards male and female mortality
has been confirmed from many other sources. Amongst
annuitants, however, even at the younger ages the mor-
tality of females is less than that of males; and a careful
distinction must therefore be drawn regarding the nature
of the contract entered into. The reason for the different
condition at younger ages probably is that annuities are
generally purchased on the lives of spinsters and widows
in good circumstances; while in life assurance transactions
the same conditions do not so frequently apply.
The American experience table of mortality, now
recognized as the standard table in the United States, was
formed by Sheppard Homans and was first published in a
schedule attached to an act passed by the legislature of
the State of New York on May 6, 1868. The author never
gave full particulars of the data employed. It is gener-
ally supposed that he used the mortality statistics deduced
from the experience of the Mutual Life Insurance Com-
pany of New York as his basis, but these figures were in-
adequate at the older ages and accordingly he must have
arbitrarily adjusted the table. It has been very much
used, and has grown in popularity because it is found
to represent faithfully the American mortality amongst
assured lives after the first effects of selection have dis-
appeared. It is now generally prescribed in the state laws
as the standard for valuation purposes. Moreover, the
table has been successfully graduated by Makeham's law
of mortality, so that the calculation of complex benefits is
thereby made comparatively simple.
112 YALE READINGS IN INSURANCE
Many other important tables of mortality have been
formed, but there is no need to enter into minute details
of these, as such details do not involve particular princi-
ples. Three different tables have been constructed from
the experience of annuitants, more or less directly con-
nected with the British government schemes. The first
two of these tables, published in 1829 and 1863 respect-
ively, included some special lives carefully selected by
speculators who purchased annuities and drew the pro-
ceeds for their own advantage, a practice which was after-
wards discontinued by law in Great Britain. They also
included certain old tontine funds formed in the seventeenth
and eighteenth centuries. But the last of such tables,
published in 1883, gave statistics of government annuitants
only. The rates of mortality shown by the three sets of
tables do not differ to any material extent, and they all
prove that female annuitants are much healthier than
male. The same feature is still more marked in the latest
publication relating to the mortality amongst annuitants,
namely: the British Offices Life Annuity Experience,
published in 1903. For example, the expectation of life
at age 50 of a male annuitant is 20.7 years, while the cor-
responding expectation of a female annuitant is almost
23 years. This experience embraced a period from 1863
to 1893, and included particulars of about 10,000 male
lives and 25,000 female lives.
The most important investigations of recent years are
those conducted by the British actuaries covering the
period from 1863 to 1893. There are three particular
features of that experience which had never before re-
ceived so much attention and care, namely : the tracing
of the mortality (1) according to the duration of the
policy, and (2) according to the kind of policy taken; and
(3) the publication of full tables of withdrawals. All of
these are important influences, and as regards the mor-
tality in policy classes, it was clearly proved that endow-
ment policies, and those which call for heavy premiums
MORTALITY TABLES 113
in proportion to the risk, were subject to lighter mortality
rates than whole life policies and other forms where the
premium rate is light as compared with the risk incurred.
The reason for this is that those who take limited pay-
ment and endowment assurance policies are generally
well-to-do people in their own sphere, thrifty and prudent,
who look to the future and prefer a little self-sacrifice now
if it will provide greater comfort hereafter. The prudence
they show in their life assurance is an index to their whole
mode of life, and the discretion they exercise is rewarded
by length of days. The most important tables are those
based upon ordinary whole life policies with profits, and
in that class more than 550,000 lives were included.
The effects of selection in that class of policy were also
carefully analyzed for each year during the first ten years
of duration, and full monetary tables have been published.
The following table shows the classes of policies which
were separately investigated, and gives also the number
of lives included in the aggregate observations :
Male Lives: No. of Lives. Years of Risk.
(1) Whole Life Assurances, With Profits 551,838 7,056,863
(2) Whole Life Assurance, Without Profits 56,807 602,591
(3) Endowment Assurances, With and Without
Profits 132,043 897,673
(4) Whole Life, Limited Premiums 36,839 410,251
(5) Whole Life, Ascending Scale 23,280 207,709
(6) Joint Life Assurances 9,195 90,171
Over
(7) Contingent Survivorship Assurances 3,482 15,500
Over
(8) Temporary Assurances 11,603 36,000
Female Lives:
(1) Whole Life Assurances, With Profits 42,293 507,042
(2) Whole Life Assurances, Without Profits . . 11,050 112,010
(3) Joint Life Assurances 7,222 77,078
The Female Lives in the other classes are so few as to
be of no value statistically.
114 YALE READINGS IN INSURANCE
The mortality amongst lives assured who take policies
with the right to participate in surplus is noticeably
lighter in Great Britain than that amongst those who take
non-participating policies. The reason probably is that
non-participating policies are generally effected on the
lives of borrowers and for financial reasons; and, as already
stated, debtors and borrowers are not on the average so
healthy as thrifty people. There is reason to believe,
however, that the same condition does not hold in America.
It is thought rather that the opposite effect is experi-
enced, viz.; that non-participating policy-holders are subject
to lighter mortality rates than those who take policies
with the right to participation. The reason is that non-
participating policies in America are taken with a purpose
in view entirely different from that above outlined; in
many cases this form is taken as the result of extreme
conservatism.
One very important investigation recently completed
was that made by the Actuarial Society of America into
special classes of assured lives. In all there were 98
separate classes of risks, covering a wide range of ma-
terial, and the particulars of about two and one-half
millions of lives were furnished by the American life
assurance companies. The classes of risks may be generally
described as follows:
(1) Policies for large amounts: one class over $20,000.
(2) Policies granted on terms other than applied for (2
classes).
(3) Nationality: divided into 4 classes.
(4) Occupation: divided into 35 classes and covering
army, navy, and marine service; the more important
hazardous trades; liquor dealing; and railway service.
(5) Personal disability: covering 32 classes, including
past history of diseases such as gout, blood-spitting, etc.,
unusual weights and unusual heights.
(6) Family history unsatisfactory: covering 2 classes
dealing respectively with cancer and insanity.
MORTALITY TABLES 115
(7) Place of residence: 22 classes, each relating to a
different county in the United States.
The mortality experience in these different classes was
compared with a table which was adopted as representing
standard mortality amongst healthy lives, with allowance
for the effects of medical selection during the first five
years from the date of issue. Great care must be exer-
cised in making use of the results of this investigation,
and discriminating judgment is necessary because of two
important considerations which an inexperienced refer-
ence to the published tables might not at first reveal.
The first and most important is that the lives assured in
these special classes were all accepted by assurance com-
panies; and presumably, therefore, they represented the
very best material from these special classes. One promi-
nent example may be given by way of illustration, namely,
the class relating to personal history where the applicant
"has had blood-spitting." The rate of mortality shown
in that class is only 108 per cent, of the tabular rate adopted
as representing normal mortality. This cannot be con-
sidered as the true mortality amongst people generally
who have suffered from blood-spitting; but it does repre-
sent the mortality which was experienced by assurance
companies on lives accepted who had disclosed this feature
in their past history. It may be taken as certainty, how-
ever, that any person giving a history of blood-spitting
within a period very shortly before the date of taking a
policy would be absolutely rejected; and moreover, even
in the case of a history of blood-spitting some years before
the date of application, the case would be declined unless
the physique of the applicant in other respects were almost
perfect. If any applicant showed an under-average
physique, and gave at the same time a history of blood-
spitting, he would almost to a certainty be declined by
any assurance company. The statistics do not always
indicate the average mortality amongst persons coming
within any one of the specialized classes; but only the
116 YALE READINGS IN INSURANCE
mortality experienced by companies on lives accepted by
them ignoring entirely rejected lives of the same class.
Analogous remarks apply to many other cases; and, as
already stated, the results must be used with great care
and discrimination.
The second consideration is not of so much importance
- it is the question as to whether the standard table has
been accurately chosen as representing the average mor-
tality amongst assured lives in America. If the standard
show high mortality, then all the results appear more
favorable than they ought; while if the standard be low,
then the opposite effect is obtained.
One important question in connection with the mor-
tality of life assurance companies is the effect of what is
called selection. Before a policy is issued on the life of
any person he has to undergo a medical examination and
other restrictive tests designed to set aside all who are
below a certain standard of vitality. The result is that
persons who obtain policies of assurance are subject to
lower mortality rates than the general population at the
same age, and particularly is this noticeable in the period
immediately after the policies are taken. At that time
there are none but healthy lives; of course even those are
subject to accident and to what might be called accidental
diseases, such as fevers, pneumonia, etc. By the recent
0(M) experience the death rate per thousand amongst
selected lives at age 40 is less than 5. In the course of a
year or two, however, illnesses of a more permanent nature
make their appearance amongst policy-holders: heart,
lung, and brain diseases affect the lives to a greater or less
degree, and indeed the mortality gradually approximates
to the same rates as affect the classes of persons from
amongst whom the selection had been made. At the same
age of 40, amongst persons who have been insured for
five or more years (i.e., who effected policies at 35 or a
younger age and were 40 at date of investigation) the
death rate is about 10 per thousand, or more than
MORTALITY TABLES 117
double the rate applicable to selected lives of the same
age.
Another feature which has received a great deal of
attention as affecting the rate of mortality is the right
always enjoyed by policy-holders of withdrawing and
lapsing their policies, either by taking a surrender value
in cash or otherwise. The opinion was formerly held quite
generally that the healthier policy-holders discontinued
their contracts, while those who were unhealthy and could
not obtain assurance protection elsewhere continued their
policies year after year. It was therefore thought that
the effect of lapses would be to increase the average
mortality amongst those retaining their policies, as the
tendency would be to lower the average vitality by the
withdrawal of an undue proportion of healthy lives. Of
recent years it has been pointed out that policy-holders who
discontinued their contracts do so more frequently because
of financial embarrassment than because they are healthy
and do not require the protection. The protection offered
by life assurance is more thoroughly appreciated after it
is possessed than before; and healthy, prosperous people
value the benefits more than the improvident. It follows,
therefore, that a great many lapses take place because the
policy-holder has fallen into irregular habits, and it is
well known that the rate of mortality affecting such people
is much heavier than that which applies in the case of
thrifty and prosperous men. Lapses of this nature tend
to improve the mortality amongst those remaining, be-
cause they reduce' the proportion which the unhealthy
bear to the total number.
As is indicated above, there is an element of discrim-
ination on the part of policy-holders themselves accord-
ing to the class of policy they may take. Those who take
policies which provide large assurance protection at small
rates are subject to heavier mortality than those who
take policies of investment forms which require larger
premiums, although each class is subjected to the same
118 YALE READINGS IN INSURANCE
initial tests by the assurance companies. The circum-
stances and the basis of argument are exactly the same
as those referred to in the preceding paragraph. Prosper-
ous and thrifty people, who are looking to the future,
prefer investment forms of policies which provide not only
immediate protection, but at the same time build up a
capital for themselves in later life. The man who is strug-
gling along from year to year and living close up to his
income may feel the necessity for assurance protection
for the benefit of his family or of his business, but he strives
to obtain this protection at the cheapest possible rate;
and, as already indicated, men of this temperament are
subject to heavier mortality rates.
It is sometimes said that if a company were to issue
policies for $1000 each, on the life of every person passing
along a certain street on a given day, without medical
examination or any other test, and at the ordinary pre-
miums for the respective ages, and if the policies were duly
maintained, the result would be a most profitable one for
the company. This remark is probably quite correct;
but it is not correct to pass from this statement as is fre-
quently done and say that the companies could afford to
take all who apply without selection. If any company
were to do this, the unhealthy would apply for large
amounts, because it is easy to convince an unhealthy man
that life assurance is desirable; while on the other hand
the healthiest would refuse to be classed amongst them,
and would rather take the risk upon themselves. In like
manner, it would riot be correct to accept every person
passing along a certain street for such amounts as they
might themselves choose, because in that case the healthy
would take small amounts and the unhealthy large. The
average, therefore, would not be maintained because there
would be a greater preponderance of business on unhealthy
persons.
No single company can ever afford to dispense with
careful selection, although it is possible that at some time
MORTALITY TABLES 119
in the dim future, when social science has developed much
more fully than at present, the companies may unani-
mously agree (or legislation may require) that all who
apply should be assured for an amount determined accord-
ing to the assessed value of the life. Something in this
direction might take place if it were possible to assess the
monetary value of a person's life in a manner similar to
the assessing of the value of property for fire insurance;
and it is the only direction in which it would seem to
be possible to conduct life assurance without medical exam-
ination in its complete sense.
Various plans of life assurance without medical examina-
tion have been adopted and are more or less popular in
Great Britain, but restrictive measures other than ex-
aminations are in vogue to secure that the experience
under such policies will be of an average character. Men-
tion may be made of the compulsory assurance of employees
in the service of large corporations where every person
must be assured, the premium being often payable wholly
or in part by the employer. In such case, the average is
maintained because the assurance is obligatory on all.
Or again, as the effects of medical selection are supposed
to be of little consequence five years after policies have been
taken out (not that this supposition applies to individual
cases in any way, but only on the average), one or two
companies offer policies, subject to participation in the
surplus of their own class, and with the proviso that,
during the first three or five years, only a portion of the
face value would be payable in event of death. Another
plan which has been found very successful is to issue only
what is known as a double endowment policy. Under
such a contract, if the life assured were to survive a fixed
period, then the amount payable at that time as an en-
dowment would be double the amount which would have
been paid in event of death during the period. In this
case, also, such policy-holders participate in the surplus
of their own classes, and the premiums are sufficiently
120 YALE READINGS IN INSURANCE
large to ensure that there will be a good surplus for dis-
tribution.
These plans are all said to be successful, but they could
not under existing laws be practised throughout the
United States, because in several states life assurance
companies are expressly forbidden from issuing policies
unless a medical examination of the life shall have been
made by a duly qualified examiner.
When the rates of mortality have been ascertained
from the data of assurance companies or from population
statistics, it is usually found that they fluctuate from year
to year and do not run smoothly. For example, in an
individual case the rate of mortality at age 30 might be
found lower than at age 29, although other experiences
would indicate that the contrary should be the case, while
at age 31 again the rate might be abnormally high. Such
accidental irregularities are to be expected, more par-
ticularly if the numbers under observation are small; and
it is therefore necessary, in order to obtain a mortality
table of practical utility, to submit these statistics to a
process known as "graduation." Graduation aims at
removing irregularities which may be accidental, without
disturbing what may be peculiar features of the statistics
investigated. The adjusted results should be compared
with the ungraduated figures. The tests of a good adjust-
ment are stated to be :
(1) General regularity in the mortality rates;
(2) Close agreement in the total number of deaths in
graduated and ungraduated tables; and
(3) The frequency in change from positive to negative
deviations, which indicate that the original figures have
been closely followed.
The simplest methods of graduation consist merely in
smoothing over the irregularities by averaging the results
at two or three ages; and the process has been amplified
from this, through the graphic method, by which the
mortality is represented by a diagram, to the assumption
MORTALITY TABLES 121
of a law of mortality which has been found to adhere very
closely to the facts in several large investigations, and
which provides great facility for the solution of complex
problems. It is, however, outside the scope of an element-
ary work to enter with any minuteness into this subject,
which is one of considerable intricacy.
CHAPTER IX
ASSESSMENT LIFE INSURANCE l
THE subject of assessment life insurance represents the
pathological side, if I may so express it, of life insurance.
Instead of dwelling upon the physiology of life insurance,
upon the normal phases of it, I am invited to discuss those
phases which are abnormal and which we hope are now
passing away. In order to do so, I find it necessary to
make some explanation of how it happened that the disease
of assessmentism set in.
It is worth while for the young men of the new generation,
who scarcely know assessmentism at all, except as con-
nected with another form of insurance, to be made ac-
quainted with that which was well known to their fathers,
and but scarcely known to their grandfathers. When I
say it was scarcely known to their grandfathers, I mean
that there was a time when the pathological side of life
insurance, that is insurance of a pathological nature of
this particular type at least, did not exist, and when,
whatever other diseases life Insurance might have been
inflicted with, this particular disease known as assess-
mentism was not to be found. I shall point out to you
why assessmentism in this country became prevalent;
because diseases or disorders in life insurance, quite as
physical disease, do not originate independently, but grow
out of other pathological symptoms.
Now, the particular situation which gave rise to assess-
1 By Miles M. Dawson, Consulting Actuary, New York City. Re-
printed from pages 120-127, Volume XXVI, of the "Annals of the
American Academy of Political and Social Science."
122
ASSESSMENT LIFE INSURANCE 123
ment life insurance and its great growth in this country
was the following: In their early history the regular life
insurance companies of the United States addressed them-
selves to furnishing protection. To-day one will often
hear representatives of the fraternal societies distinguishing
between insurance and protection, and claiming that their
organizations are for the express purpose of furnishing
protection, as distinguished from investment; and I think
it is a matter of common knowledge that regular companies
doing a life insurance business in the United States at this
time give a very large part of their attention to investment
insurance, and their agents scarcely talk protection,
separate from investment, at all. This was not the case
in the early days. On the contrary, the insurance policy
was the whole life policy, a policy with level premiums
payable so long as the insured lived, the amount being
payable when the insured died, and with no other bene-
fits. These policies had no surrender values originally,
although there was every reason why some surrender
value might have been allowed; but while they had no
surrender values, the rates, being computed upon certain
conservative bases, were what we may call redundant,
and the expected mortality was much greater than experi-
enced. In consequence, there was a large margin on these
premiums and, as most of the companies were mutual,
or, if not mutual, sold participating mutual policies which
promised the insured a share in the surplus, it necessarily
followed that there were large dividends, so called, to be
paid to the insured.
Now, when men are seeking for protection, there are
two questions for them to consider, quality of protection
and the price; and these companies, or some of them at
least, at the start expected to earn dividends and to pay
them annually, equal to fully 50 per cent, of the premiums
they were charging. In order to convince the public
that they would earn these dividends, and believing that
it was a perfectly safe and prudent thing to do, they
124 YALE READINGS IN INSURANCE
offered to permit a portion of the premium, usually 40
per cent, or 50 per cent., to stand against the policies as a
charge, bearing interest; and the expectation held out to
the insured was that the charge would be wiped out by
dividends. Now consider what this would mean. Take
it on a 50 per cent, basis. It meant that when a man was
actually paying $16 for $1000 of insurance, the insured
was led to believe that his insurance was worth only $8;
and that was all he paid in cash at the time. In point of
fact, largely because men conducting companies did not
understand what they were doing, the annual dividend
expectations, in connection with which these charges
against the policies had been made, were disappointed;
and the insured found himself with an increasing charge
against his policy which amounts to a diminution of the
amount insured, and with an increasing rate to pay, in-
cluding the interest upon the increasing charge; in other
words, with more to pay and less to get. This was unsatis-
factory, and the plan became unpopular; but it left one
psychological result in the minds of unthinking people,
and that was that insurance at that age was worth only
$8. Moreover, it chanced that the death losses in some
companies were only 8, 9, or 10 per thousand for a time.
So the policy-holders declared they were robbed, mis-
treated.
Men also learned at this time that there was a reserve
in life insurance, and that the state required the company
to hold a reserve; but they had no idea concerning its
function, and they believed it to be unnecessary. They
said, these losses are only 8 or 9 out of every thousand;
there are some variations from year to year, but it is evi-
dent there is no natural increase. So a company can pay
its losses out of current premiums, can pay liberal expenses,
and have a large surplus left. There is, consequently, no
use for a reserve. That was their reasoning. The want
of surrender values, giving back to the insured a portion
of the reserve in case he was compelled or desired to stop
ASSESSMENT LIFE INSURANCE 125
his insurance, was one reason why that psychological result
was to be found in the minds of the policy-holders. So
we have two things, the issue of the fallacious, misleading,
annual dividend, loan note policy, and the refusal to give
surrender values, representing some part of the reserve.
These two things, working together, produced in the minds
of the people two ideas, one being that there was no
reason for holding the reserve, which was only a means of
robbing the policy-holders, and the other that the insured
need pay only about one-half the premiums they had been
charged by the old-line companies, which was all that was
required to pay the losses.
In the year 1868, after all these conditions which I
have described had long been present and were growing
worse, there was launched in the State of Pennsylvania, in
the little city of Meadville, an assessment plan. That
was the beginning practically of assessment life insurance in
the United States. It was not really the intention to make
this association an insurance society, but something akin
to a labor union. It was given the name of the Ancient
Order of United Workmen. Incidentally, as one will find
to be the case now in a good many thriving unions, it was
proposed to give a small protection to the members of
the union out of a common fund to be contributed by the
payment of $1 by each member whenever another died.
Subsequently, however, the organization dispensed with
the idea of assessing the members until the funds on hand
were wiped out by death losses. The labor union part of
the proposition was an utter failure from the start; but
owing to the conditions I have just mentioned, the assess-
ment life insurance feature became, after two or three
years, extremely popular. Similar institutions multiplied
throughout Pennsylvania, and in a short time throughout
the entire country, the ground having been well prepared
for assessmentism, as has been mentioned.
I want to call attention to the fact that about the time
that it became popular there also arose an extremely
126 YALE READINGS IN INSURANCE
favorable condition for it, viz., the panic of 1873. For
when the panic came it caused the downfall of a large num-
ber of the regular life insurance companies. During the
years 1872 to 1880 the amount of insurance in force in
the regular companies diminished about 50 per cent, by the
failure of companies and on account of hard times. It
was necessary for men to find some sort of life insurance
from month to month as it were and at level cost, and
according to what an extremely happy phrasemaker re-
cently named it, the most "comfortable" method of pay-
ment, namely, by monthly payments. About the same
time the tontine, or deferred dividend, plan became a
feature of life insurance. It provided that all money paid
in by the insured should be pooled for ten, fifteen, or twenty
years. We have practically an abandonment of the pure
insurance field by the regular companies at this time, or
at least by the most enterprising and progressive of the
regular companies. They began to address themselves to
those persons who, observing the enormous number of
lapses and discontinuances which took place during the
panic times, and the hard times that followed, were con-
vinced that they could make a good speculation out of
what agents called their "financial strength," i.e., their
ability to keep their policies in force; and as the hard
times caused people to want cheap insurance, protection
policies as distinguished from investment policies, con-
ditions became extremely favorable for the introduction
of assessment insurance in the United States.
It may be well to say a little more, by way of introduc-
tion, as to what assessmentism was, what it did, and how
it came to be ; and to state that if such a plan had not been
introduced at just this time by the Ancient Order of United
Workmen, it might never have been known in the United
States. The idea was conceived by Father Upchurch,
who had learned of the friendly societies of Great Britain
and knew that insurance on the assessment plan had been
furnished by these societies. Another thing that he would
ASSESSMENT LIFE INSURANCE 127
have known, had he been a deeper student, was that the
plan had been an utter failure in Great Britain, and that
the friendly societies were reforming their methods and
abandoning systems such as he introduced, adopting more
scientific modes of doing business. Traces of something
like assessment life insurance societies are to be found far
back in history, in the ancient guilds of Rome and Greece,
of Germany and Great Britain, but the sums to be paid
were usually small funeral benefits or benefits for the last
illness. Now suppose the members were charged 10 cents
a month to furnish a benefit of $50 upon the death of one
of them, it would be a high price, but it is evident that
the members would not be likely to try to ascertain whether
they should have paid 12 or 8 cents, for the simple reason
that the contributions were small and the benefits were
small. We find, however, that when a large portion of
the membership found that there was discrimination and
the amounts were larger a totally different case presented
itself.
Somewhere about the close of the seventeenth century,
the year 1706, I think, there was chartered by a special
act of the British parliament a society known as the Ami-
cable Corporation, for the purpose of furnishing insurance
upon the lives of its members. Its system was as follows:
Every member made a contribution, without regard to
age, each year. At the end of the year the funds that were
on hand were divided equally among the claimants of the
persons who had died during the year, and also without
regard to age. About a quarter of a century later there
was organized a regular life insurance company, which
furnished policies for only one year, or five or seven years,
and at a high price; so that the Amicable Society for a
half century or more had a monopoly of what we now call
whole-life insurance. Notwithstanding this monopoly, it
became necessary for the society to make different pro-
visions concerning the distribution of its funds and also
concerning the collection of funds.
128 YALE READINGS IN INSURANCE
In 1762, as a result of lectures in London by a former
professor of mathematics in Cambridge, Mr. Dodson, and
by a man whom the Encyclopedia Britannica calls the
ablest non-academic mathematician Great Britain ever
produced, Mr. Thomas Simpson, a society called the Equit-
able Society was founded. It was refused a charter by
the British Parliament on the ground that the plan it
proposed to give its members was a new idea, untried,
dangerous, and difficult to understand, and that if such
a thing was attempted at all the company should be com-
pelled to raise a very large capital, all of which seems
amusing at this time, for the system proposed was the
level premium plan. This society, the Equitable of Lon-
don, was the first regular life insurance company in the
world to do a whole life, level premium business. It is
in existence to-day with more than twenty-five millions of
assets and about forty millions of insurance in force.
After the organization of the Equitable, there continued
to be assessment plans in Great Britain, and some societies
of the "$1 a month" or "$1 every time a member died"
sort, grew to great size, and then failed or changed their
plans. All this was before the time of Father Upchurch
and might have been known by him.
As a result of the introduction of the plan in this country,
and the favorable conditions for its spread, there came to
be numerous societies on the assessment basis. Please
bear in mind that the plan introduced by Father Upchurch
was to collect just enough money to pay the claim by levy-
ing a certain sum on all members without regard to age.
There sprang up numerous small associations, some of
which grew to large proportions. The Ancient Order of
United Workmen now has more than 400,000 members
and over $700,000,000 of insurance.
In addition to the above-named societies, there are
others known as business assessment associations, where
the management is vested in persons who have the power
of perpetuating their control by means of proxies from
ASSESSMENT LIFE INSURANCE 129
the members. These societies claimed to be superior to
fraternal societies, because of the business men's services
that they were able to secure and utilize, and their superior
attention to the details in the conduct of the business.
Some of these became large institutions, and ten or fifteen
years after their first appearance a very large portion of
the life insurance of the country was in "business assess-
ment" societies.
They did not, however, proceed very far on the equal
levy, or flat assessment, system. They felt it was not only
unfair to put a man of 60 and a youth of 20 in the same
class and to charge the same rate of premium for both,
but that it also resulted in the young man aged 20 or 30
not going in or not remaining in, on account of the exces-
sive cost, while the old man persisted. In the State of
Pennsylvania at this time, for example, there were myriads
of these societies. No other part of the country was so
pestered with them as Pennsylvania. Many were called
" graveyard" associations because they allowed specula-
tion on the lives of old men in feeble health by persons
who had no interest in their lives whatever. These con-
cerns were short lived, of course.
They did not, however, proceed very far on the equal
levy, or flat assessment plan of life insurance, which was
so unfair and dangerous on account of no regard being paid
to the ages of the members upon entering. Most of the
business societies were organized on the basis of charging
a different levy or assessment according to the age of the
member at his introduction into the society. That is to
say, for instance, charging a member introduced at the
age of 20, 40 cents, one introduced at the age of 40, 60
cents, one introduced at the age of 50, $1, or whatever the
case may be. Frequently these rates were based on a mis-
apprehension of the mortality table. At the age of 20,
men die at an average say of 7 per 1000; at the age of 40,
10 per 1000; at the age of 50, 15 per 1000, and at the age
of 60, 30 per 1000. Therefore, said they, the monthly rate
130 YALE READINGS IN INSURANCE
for the man at 20 will be one-twelfth of $7, or 60 cents;
at 40 it will be 90 cents, and at 50 it will be $1.25, and at
60, $2.50. This they called equitable distribution of cost
and thought it met all requirements, forgetting that it
was good for but one year. Almost all of these so-called
business assessment life insurance societies were organized
on that plan.
Later in the development of the business there were
two modifications of the plan, one consisting of the crea-
tion of a reserve by adding a percentage to the assessment,
which reserve was to be called upon to help out the excess
cost over what the net assessment would provide. A
second method of making reserves was invented by one of
the most ingenious minds that has been engaged in life
insurance. According to this method it was proposed to
utilize the gains from lapses, that is to say, over-payments
by members who did not keep up their policies, to reduce
the premiums for all members. It was designed that
under this system both the premiums and reserves of the
persistent members would be lower than under the usual
plan which does not count the gains from lapses. In-
vestigations since that time have shown that if these gains
are discounted and applied to reduce the premiums the
reserves will not be reduced; while only in case the pre-
miums are not reduced will the reserve be reduced. Only
one company made extended use of this plan. That com-
pany was able later to reorganize as a regular life company,
and is now conducting a prosperous business as such.
For the most part, the business assessment societies
have passed out of existence. In any event, they occupy
relatively a much less important place than hitherto.
The proportion of the total life insurance in the country,
held in the business assessment associations, has steadily
decreased, and for many years the amount in force has
diminished. A considerable number of smaller societies
are still held together by special influences, and in a few
cases great economy and skill in management, resulting
ASSESSMENT LIFE INSURANCE 131
in low expenses and low mortality, has enabled the com-
panies to thrive even to this day, notwithstanding the
defects of their plans. Many of those which have gone
out of business have failed, but a respectable number were
reorganized as regular companies, dealing with their assess-
ment business in various ways, which I shall not here
attempt to discuss.
CHAPTER X
FRATERNAL LIFE INSURANCE 1
MORE than seven millions of American citizens are to-
day looking to fraternal societies like the Knights of Honor,
the Ancient Order of United Workmen, the Independent
Order of Foresters, and others whose name is legion, for
protection to their families in case of death. The dis-
tinguishing feature of these societies is that they are asso-
ciations whose members are banded together through a
spirit of charity or fraternity for mutual assistance and
protection. They are wholly outside the line of our ordi-
nary life insurance companies, which deal in insurance for
the general public on a business basis. Their membership
is chiefly made up from those of limited means who are
seeking insurance at the smallest outlay. Over one-fourth
of the population of this country may be said to be directly
or indirectly interested in these societies. A knowledge
of their principles and of the character of the insurance
which they offer is a matter which concerns every American
citizen regardless of his interest in insurance as a profession.
Nearly all our existing fraternal societies have started
within the past thirty or forty years, but they have a long
line of predecessors extending back through centuries.
Their proper understanding requires a glance at their
historic relations. To the student of sociology as well as
of economics a peculiar interest attaches both to their
origin and history. As a race we are communal as well as
1 By Walter S. Nichols, Editor of the Insurance Monitor, New
York. Reprinted with additions from pages 162-183 of the "Yale
Insurance Lectures, Life."
132
FRATERNAL LIFE INSURANCE 133
social in our very instincts, and in those instincts are the
fundamental impulses that have developed all our political
and social organizations. To the evolutionist they are
the inherited traits of a remote ancestry which man shares
with lower forms of life. We find the social organism in
its simplest type in the ruminants, which herd together
for mere association or protection. We find its fuller
developments in the more strictly communal animals and
insects. The beaver lodges join their forces to build the
common dam for the benefit of all, but when the dam is
built each separate lodge confines its attention to its own
affairs. In the ants and bees we find this communal
instinct in its extreme development. The female bee sur-
renders her maternal functions to a single queen and be-
comes a mere worker, to build and provision the common
hive and care for the offspring. The ant marshals its war-
riors to guard the common nest or to enslave its neighbors.
Thus do we find the germs of those social and political
organizations which characterize our twentieth century
civilization implanted in the lower orders of creation.
It may seem a far-away thought from the habits of the
insect and mammalian world to the subject of the present
lecture. But there is a deep significance in the fact that
the fundamental principles which underlie fraternal in-
surance are thus operative in the lower orders of life. The
fraternal society must be studied not as the mere artificial
product of an advanced civilization, but as an organization
whose roots and tendrils are implanted deep down in
our common humanity. Civilized communities have no
monopoly in this spirit of fraternalism. It was the active
force at work in primitive days when the family relation-
ship grew into the patriarchal form of government and this
in turn expanded into the tribal state. As tribes solidified
into nations this social evolution moved along lines so
familiar in the physical world. The homogeneous pur-
suits of the tribesman became the heterogeneous occupa-
tions of the civilized state. Each occupation had its
134 YALE READINGS IN INSURANCE
separate corps of workers, who banded together in a so-
ciety for their common interest and protection in the eco-
nomic struggle which followed the barter and trade between
the groups. Thus was evolved the early benevolent or
fraternal societies that are met with in so many of the
nations of antiquity.
We find them in the ancient Roman empire as numerous
and influential as now. Rome had her trade unions, and
her religious confraternities devoted to the service of her
gods, and her social clubs, and was compelled to legislate
for their regulation. Contribution to a common fund for
the assistance or burial of their needy members was then
as now a familiar feature. The downfall of Rome scarcely
interrupts the story. Phenix-like, they arose out of the
ashes of her empire when her distant provinces developed
into the industrial states of modern Europe. In Great
Britain, to which our own fraternal societies directly
trace their origin, they were known as guilds, and during
medieval times when agricultural serfdom was being
broken up and when centers of trade and manufacture
were developing, these trade societies wielded a strong
political influence. Along with them too were religious
fraternities, which were the foundation of some of Eng-
land's most important schools of learning. Aid to their
needy members in ways more or less crude was a common
feature of these associations.
As the power and influence of the guilds declined they
were succeeded by the modern British friendly societies,
from which our own have been so largely patterned. Mem-
bers chiefly from the working classes united for mutual aid
in sickness and for funeral benefits, through contributions
to a common fund. They recognized the distinctly in-
surance character of their work and sought to frame scales
of moneyed contributions which would be adequate. But
they knew little of the principles of insurance, and their
frequent and disastrous failures at last attracted the atten-
tion of the British Parliament. Investigations by that
FRATERNAL LIFE INSURANCE 135
body, aided by leading British actuaries, disclosed the total
inadequacy of their rates and the mismanagement which
characterized their affairs. Attempted legal reforms were
strongly resisted for a while by the members, and it has
required nearly a century of legislation to place the friendly
society system of Great Britain on the comparatively
sound basis where it now rests. Under the existing laws
in that country, such societies are induced to register and
to accumulate reserve funds and charge rates which, like
those of ordinary life companies, will be adequate to meet
their future obligations. When registered they are re-
quired to have expert valuations periodically made of their
resources and liabilities and proper balance sheets published
of their affairs. The knowledge of their condition thus
furnished to their members and to the public is relied on
to check mismanagement. The law makes no attempt at
further interference.
The strength of the system in that country lies in the
fraternal ties which bind the members to their societies.
It was this which enabled reforms to be successfully intro-
duced into many of them which, according to any com-
mercial standard, were already bankrupt. The strength of
the system in any country must depend on the fraternal
character of the society in fact as well as in name. The
chief weakness of the system lies in the temptation to
divorce its twofold functions of benevolence and insurance,
to regard the society either as a mere insurance organiza-
tion for business purposes, or else as a brotherhood whose
ties are strong enough to outweigh any defects in its insur-
ance methods. When the fraternal spirit among the mem-
bers is wanting, its work, to be a success, must be carried
on along the business lines which characterize the ordinary
insurance office. Such a change has actually taken place
on a magnificent scale in the more recent development of
these societies. It was from the fraternal society both
here and in Great Britain that industrial insurance was
evolved. It was just fifty years ago that the managers
136 YALE READINGS IN INSURANCE
of such a society in London conceived a plan for abandon^
ing its fraternal features and furnishing insurance to thw
poor on a strictly business basis. This was the origin of
the famous British Prudential Insurance Company, whose
policies are now found in the home of almost every work-
ingman in that country. Such was the origin too some
twenty years later of the Prudential Insurance Company
of America, which started as a friendly society in New
Jersey and whose policies along with those of its later com-
petitors are to be found in millions of American homes.
The experience of Great Britain is being repeated in
America. A similar insufficiency in the rates and ignorance
of sound insurance principles have resulted in numerous
failures and now threaten the solvency of many of our
American societies. Similar efforts are now being earnestly
made both by the more intelligent of the members and by
state authorities to place fraternal insurance on a sounder
basis.
With this preliminary historic review, I enter at once on
the discussion of the more technical features of fraternal
insurance. First let us examine the structure and legal
character of these associations. They generally consist
of one parent society with its constitution and by-laws and
having numerous subordinate local branch societies termed
lodges. These local societies are created by the parent,
from which they receive their charters or right to exist.
They are governed by its constitution and the laws which
it lays down. In all questions of dispute the parent so-
ciety has final jurisdiction. In a word, the local lodge,
while it has separate existence as a society itself, and may
within the limits allowed regulate its own affairs, remains
subject to the parent society of which it is a part. This
parent society is known as the grand lodge and is made
up of representatives chosen by the local lodges. Some-
times a further subdivision is made and the parent society
or supreme lodge is made up of representatives from a
number of grand lodges each with its local lodges.
FRATERNAL LIFE INSURANCE 137
The membership of the society as a whole is thus made
up of the members of these various local lodges. The
government is purely democratic. Every member is en-
titled to a vote in his own local society and thus has a voice
in the selection of the rulers and in making the laws for
the whole. Initiatory rites and ceremonials are a common
feature. Unlike the British societies, in which sick relief
is a prominent feature, most of our American associations
confine their insurance work to the payment of death and
disability benefits. The funds required for this purpose
are collected in the form of assessments by the local lodges
and turned over to the officers of the parent society, by
whom the insurance business of the whole is managed.
Sick benefits when allowed are usually paid by the local
lodges to their members out of their own separate funds.
Expenses are generally met by dues and initiation fees.
These local lodges thus act both as separate societies in
the management of their own affairs and as agents of the
parent society in collecting the common insurance funds
and in securing the membership.
It will thus be seen that in their constitutions these so-
cieties resemble in many ways the ordinary social club
and for certain purposes the law so regards them. The
active fraternal or benevolent features of the society apart
from its insurance work are chiefly confined to the local
societies, where the individual members meet for business
and social purposes and where the spirit of fraternity is
fostered. They resemble too in certain respects some of
our church organizations, with which the law frequently
compares them. We have our individual church societies
with their social and benevolent activities governed by
representative bodies from the various churches and the
whole united under one denominational form of govern-
ment. These correspond to the local and grand lodges.
These societies are sometimes organized under corporate
charters granted by the state, sometimes like the ordinary
club they are mere voluntary associations. Most of our
138 YALE READINGS IN INSURANCE
states now have general laws prescribing how these societies
may be formed and carried on. When so formed the law
itself becomes their constitution. Sometimes the parent
society is thus incorporated while the inferior lodges re-
main voluntary associations. Sometimes it is the reverse.
But in all laws regarding their formation their character
as benevolent societies is insisted on. They are not al-
lowed like ordinary companies to carry on insurance busi-
ness for profit, and its benefits are usually limited to the
relatives or dependents of the members. There are some
important legal distinctions between those societies which
are incorporated and those which are not, especially as to
property rights, upon which I have not the time to enter.
The courts endeavor in either case so far as the law allows
to enforce the rules which they have made for themselves,
if they are fair and reasonable. Nearly all these societies
have their own judicatories for determining the standing
and rights of their members, by whose decision the mem-
bers must abide. These the courts will refuse to interfere
with so long as they act honestly and fairly within their
legitimate province. They are mutual societies in which,
like churches, the members are expected to abide by the
form of government to which they have subscribed. A
local lodge may be cut off from affiliation with the parent
society or may cut itself loose just as a church may cut
loose from its denominational connection. In neither case
is the society itself dissolved. It simply loses the rights
which belonged to it as a member of the parent society
and must surrender whatever is in its possession belonging
to the parent. If it has a charter from the state, the state
laws governing it as a corporation are superior to any rules
of the association itself.
On one point, however, whether incorporated or not,
the courts are insistent, that is, no rule or action of the
society can deprive a local lodge or a member of insurance
or other property interests which are already vested, that
is, in which an unconditional ownership has been estab-
FRATERNAL LIFE INSURANCE 139
lished. Where they are incorporated, like other corpora-
tions they are regarded by the law as artificial persons
acting through their officers as their agents and with no
personal liability on the part of the members except those
imposed by the rules of the society itself. Where they are
not incorporated their legal character is not so easy to
define. They are often regarded as a peculiar kind of
partnership qualified by the special purposes for which
they were organized.
It will be seen from this brief sketch that these societies
in their constitution and structure are strongly analogous
to the ordinary social club or religious society, and bear all
the earmarks of their historic origin.
But they also have another aspect in the eyes of the law.
In respect to their insurance features they are regarded as
business associations furnishing a peculiar type of insur-
ance under contracts or agreements which are governed
by the ordinary principles of the law of contracts. This
leads us at once to the insurance features of these societies.
As insurance associations they are treated as mutual com-
panies regulated, of course, by their charter and by-laws,
with which every member is assumed to be familiar. An
application, much like that of the ordinary company, set-
ting forth the age and health and other details regarding
his desired insurance, is usually required of the applicant
for membership. Instead of the ordinary policy he usually
receives what is called a certificate of membership, reciting
that he is a member of the society and entitled to its privi-
leges, and to share up to a specified amount in its bene-
ficiary fund, subject, however, to the laws and rules of the
order, and conditioned on his compliance with them. This
certificate in connection with the laws of the society is
his insurance contract. It will be noted that unlike the
ordinary insurance policy, which is a mere business agree-
ment between the company and the purchaser for a specified
consideration, these certificates are simply a recognition
of the rights of the member which flow through his mem-
140 YALE READINGS IN INSURANCE
bership, to share in the benevolent fund. Unlike the ordi-
nary policy which becomes the property of the beneficiary
named in it, no matter who secured it or paid the premium,
these certificates remain the property of the member, who
can usually change the beneficiary at will.
The conditions on which those rights are to be enjoyed
are not, as in the case of the policy, set out in the certifi-
cate itself, but are to be found in the rules of the society.
Thus the mutual and fraternal idea of this insurance is
adhered to. More than this, it is not allowed under the
laws of most of the states to be a cold business agreement
for the payment of a fixed sum of money for a definite
premium. Either the amount must be capable of modi-
fication and adjustment according to the actual ability
of the society to pay, or it must reserve the right to assess
its members for enough to make up the required benefit.
The societies are thus relieved from the obligation imposed
on ordinary life companies to create and maintain a reserve
fund which will be mathematically sufficient to pay their
insurance obligations. In theory they can never become
insolvent because never obliged to pay more than they are
able or more than that they can collect from their members.
As a matter of fact, they have failed disastrously at times
because they had neither the requisite fund nor could
collect the needed assessments.
Until very recent years it has been the almost universal
practice to limit the actual funds of the society to the small-
est amount which was deemed necessary to meet special
emergencies. The constant inflow of new members, it was
argued, would prevent serious deficiencies, and the frater-
nal spirit of the members would do the rest. The prime
object aimed at was to give the insurance at the least
possible outlay to the members in a work which was as-
sumed to be benevolent in its character and not conducted
for profit. The fallacy of these views is now being gen-
erally recognized, as we shall shortly see.
The payments made by the members are not, as in
FRATERNAL LIFE INSURANCE 141
ordinary life insurance, premiums paid for the purchase
of a pure business contract, but are generally of two kinds,
initiation fees and dues, used as in ordinary clubs for the
expenses of the society, and assessments levied on its mem-
bers as contributions to its insurance fund, and are pro-
vided for in the rules of the society itself.
In the earlier days of the societies these assessments were
generally alike in amount regardless of age and were col-
lected only on the death of a member for the payment of
his benefit, thus, as you observe, carrying out still further
the idea of fraternity. But as the societies grew older the
fallacies of this method were taught the members by a
hard experience. By simply dropping his insurance which
he had already enjoyed a member could escape paying his
share of the death losses. As the members grew older
and the death losses increased, those that were younger
were not long in discovering that they were contributing
more than their share to the death losses, which were
chiefly among the old. As a result these dropped their
membership and joined younger societies. New recruits
to fill their places could not be obtained. The average
age of those that were left continued to increase and the
assessments to grow heavier. This in turn increased the
withdrawals, until at last few remained except the sick and
aged. Assessments for losses could no longer be collected,
and the society would dissolve, leaving a body of old and
infirm deprived of the benefits for which they had so long
contributed. This has been the story of scores of these
societies in the past, and where otherwise honestly managed
has been the cause of the numerous failures in this class of
insurance. In spite of all the efforts to place assessment
rates on a sounder basis, their inadequacy and inequity
as between the younger and older ages still continues to
threaten the permanence of a large proportion of our
fraternal societies. As we have stated, most of the exist-
ing societies are less than thirty years old. In many of
them the members have only within recent years reached
142 YALE READINGS IN INSURANCE
the ages where these dangers in a serious form began to
be felt. The members themselves were generally unfamiliar
with the principles of insurance. The favorite argument
was that a society of this kind was like any village com-
munity where the young continually take the place of the
old and the community as a whole grows no older. Hence
it was said that a scale of assessments which were suffi-
cient for the early years of such a society would continue
so. I emphasize this point. It has been in one shape or
another the favorite argument and popular delusion among
the members of these societies which more than any other
has been, and continues to be, perhaps the greatest ob-
stacle in the way of reform. To this day, when the need
of large contributions on the part of older members is
urged, some veteran will bring forward the old simile of
the village or town community whose average age is no
greater to-day than it was a score of years ago, and insist
that all which the society needs is to increase its member-
ship by securing new applicants in order to bring down
the death rate and make the rates sufficient.
Let us see why this is not true, for it is a vital question
in this business. The average ages of a village community
remain unchanged only after that community has reached
a normal average age and only so long as there are neither
removals from or to the village and the birth rate just
keeps pace with the death rate. But any change in these
conditions will alter that average age of the inhabitants
until a new normal age is reached. If the average age of
the inhabitants is thirty years and the births should ex-
ceed the deaths, it would begin to drop to some lower age.
On the contrary, if there should be an excess of deaths the
average age would begin to go up. The removal from or
to the village of younger members would have the same
effect. Throughout New England you will find scores of
towns made up almost entirely of elderly people. The
young folks have emigrated and the children are missing.
On the contrary, in the great West are hundreds of settle-
FRATERNAL LIFE INSURANCE 143
ments made up chiefly of young settlers and their children,
whose average will increase in the way described until a
normal age is reached as the settlement itself grows older.
The process in these societies is the same. When first
organized they are chiefly made up of younger members
among whom the deaths are comparatively few. Rates
may be charged that are not only enough to pay the claims
as they arise, but to create a surplus in the hands of the
society. This further helps to mislead the members, who
point to the surplus as a proof of the soundness of the
association. But gradually these members grow older and
the deaths increase. For a time new members who are
young can be procured to take their places. But the whole
group is still young and unless the new additions are largely
in excess of the death losses and withdrawals, the average
age in such a society, and with it the death losses, will
continue to increase until as in the village community a
normal average age is reached. If the average age of the
members in a new society was thirty, for instance, it might
gradually increase to forty, although a new young member
was added for each member that was lost. But this is
not all. As the members of such a society grow older the
death rate increases faster than the age. At forty it may
be only one in a hundred. At sixty it will be three times
as great. So that while enough new members may have
been taken in to keep the average age in such a society
down to the original figures, the actual losses will continue
to roll up through the increasing deaths of these older
members.
As the assessments for these losses grow heavier the
difficulty of procuring new members will increase, and those
who have already joined will continue to drop off and
hasten on the ruin in the way already described. The
society may really be likened to one of those Western
village communities whose inhabitants are all young at
the start, but from which the young and healthy are grad-
ually drawn away to more attractive settlements else-
144 YALE READINGS IN INSURANCE
where until the whole becomes like a New England village.
As the membership dwindles the average age continues
to increase indefinitely.
When the members of such a society have reached a
certain age, the cost of insurance becomes too heavy to be
borne by themselves unless aided by younger members.
It has been found that the average member who has passed
much beyond the age of sixty can no longer afford to pay
the heavy cost of his own insurance.
In practice, these societies start with a limited member-
ship which they increase year by year. The births as it
were at first far outnumber the deaths and as a consequence
for a while there will be no noticeable increase in the death
rate. This growth may be rapid enough to conceal the
real conditions for years. But there is another peculiar
feature here. In order to keep down the death rate, not
only must the society grow but the number of new mem-
bers added must each year become greater. Now there is
a limit to this rate of growth even under favorable cir-
cumstances. When it is reached, be it sooner or later,
then the trouble begins. This is why some of the larger
societies have gone on year after year with apparent
success while their small competitors were in distress.
They were able to increase their new membership at a
faster rate than the others. And what is worse, this long-
continued success makes the members skeptical about the
insufficiency of their rates when the assessments finally
become inadequate to meet their claims. They simply rely
on their past experience.
It has been a favorite argument too on the part of these
societies that the spirit of fraternity should be strong
enough to overcome any feeling of injustice among the
members and to induce them to make good deficiencies.
In truly benevolent organizations this fraternal feeling
has proved a valuable aid in sustaining societies that were
financially embarrassed. Both in Great Britain and
America, associations which, measured by ordinary mer-
FRATERNAL LIFE INSURANCE 145
cantile standards, would be pronounced hopelessly insol-
vent, have been carried along for years through the loyal
support of their members. Such was in fact the condition
of many of those British associations which were finally
rescued and placed on a sound basis through the adoption
of correct principles.
And just here I wish to speak of a class of associations
in this country which are often confounded with the fra-
ternal society and whose disastrous records in the past
have done much to bring reproach on these associations.
I refer to a certain class of assessment companies, organ-
ized on somewhat similar lines, whose premiums were col-
lected in the shape of assessments, but which were in reality
nothing more than ordinary life companies, carried on for
profit on the assessment principle. There were no real
fraternal features in their make-up nor fraternal feelings
among their members, who were solicited and joined solely
for the purpose of securing insurance on what was claimed
to be cheaper terms. Many of them were conducted in an
honest belief that the principle was sound. As business
institutions their history has been so replete with failures
that they have evoked the severest condemnation on the
part of state officials and called forth restrictive legisla-
tion. Their system has since been admitted to be falla-
cious by its most intelligent former supporters, and those
of them which remain have for the most part abandoned
or altered their assessment methods.
It is almost needless to say that they are not included in
the subject of the present lecture. I refer to them chiefly
as illustrations that the assessment methods of the fra-
ternal society have proved fallacious when applied to
mere business companies in which the principles of fra-
ternalism were absent.
Another favorite argument has been that inequalities
between the members on account of differences in age
would in a measure correct themselves as each member
in turn passed through the successive ages. But this is
146 YALE READINGS IN INSURANCE
assuming that each entered at the same age and survived
and retained his membership to the end, none of which are
true. Experience has shown that ordinary selfish business
instincts influence the members even in the most fraternal
of these associations, and that new members can neither
be procured nor existing members retained after finding
that it is to their interest to drop their connection.
Various plans have been proposed or adopted by the
societies from time to time in order to remedy these con-
ditions. Assessments monthly or at other fixed periods
have now been substituted for assessments on the death of
a member. Emergency and mortuary funds have been
accumulated to meet deficiencies, but generally wholly
inadequate for the purpose. Diminishing benefits at the
older ages have been proposed. Assessments graded
according to the age at entry but remaining fixed there-
after have been tried, and this is the present method
adopted by a large number of these societies. Assess-
ments increasing with each age attained by the member
have been proposed. As a compromise, assessments in-
creasing with each ten years, known as the step-rate plan,
have been recommended, as have assessments increasing
with each age attained by the member and covering the
cost of his insurance for that year, known as the natural
premium plan; but the trouble with this last is that the
cost becomes too heavy for the older members to carry.
A few have actually accepted the better class of British
friendly societies as their models and have undertaken,
like the regular companies, to charge a level assessment
rate fixed according to the age at entry and which will
be large enough to accumulate a reserve that will meet
the increased cost of insurance at the older ages, or that
modified form of the same referred to as the step-rate plan.
This is the plan now advocated both by the most intelli-
gent advisers of these societies and by state officials. It
is the plan which many of the best of these societies are
considering or proposing to adopt. It would seem to be
FRATERNAL LIFE INSURANCE 147
the only true solution of the difficulty. Their insurance
business in order to be permanent must be conducted on
the same mathematical principles as that of ordinary life
companies. This does not mean that it must in all re-
spects conform to the methods applicable to the latter.
The business of the ordinary company is carried on for
profit. Its policy-holders are like the creditors of any
other corporation. The contract is a rigid one and the
premiums are fixed; its commercial security demands that
both the premium payments and reserve funds shall be
in excess of the probable needs, in order to meet the un-
certainties of the future.
With the fraternal society the case is different. The
insurance which it promises is either simply a maximum
sum whose actual amount may be reduced by inability
to pay, or additional assessments may be levied to make
good the deficiency. The conditions which would make an
ordinary life company commercially insolvent and lead
to its closing may simply cause increased assessments or
reduced benefits in the case of the friendly society. The
fraternal tics of the members help to hold them together
hi case of adversity.
The great aim of these societies is to furnish insurance
at the least possible immediate outlay to their members,
and to avoid the expenses incident to insurance as a busi-
ness. Hence their paid officers and agents are as few as
possible. The salaries needed for expert talent are usually
wanting. The work is largely carried on through the
members themselves and their lodge system. Their
equipment for conducting the society as a financial busi-
ness corporation is limited. Surplus in the sense of busi-
ness profits is regarded as foreign to their character, and
the accumulation of funds beyond what is absolutely
needed is discouraged as a temptation to extravagance as
well as an additional tax on the members. Dividends of
surplus profits to the members are not allowed. Any
supposed excess of funds is met by reducing the assess-
148 YALE READINGS IN INSURANCE
ments, and any interest which a member might have in
those funds is lost on his withdrawal. He has no right
to claim a surrender value as in the ordinary company
on giving up his certificate.
You note how in all these features the idea of fraternalism
distinguishes these societies from ordinary life companies.
They enter directly into the question of the proper remedies
for their defects. The failure on the part of many officials
and life insurance experts to properly appreciate them has
been one of the difficulties in the way of reform. A pre-
mium rate adequate to the risk and a reserve adequate for
future deficiencies in the life insurance sense would seem
to be essentials, if they are to furnish anything more than
mere temporary or term insurance. But it does not fol-
low that this rate must be computed on a table of mor-
tality heavier than their own experience, nor that it must
be loaded with a margin for contingencies and expenses
like that of the ordinary life companies. Nor does it
follow that their reserve funds as in the case of ordinary
companies should be in excess of their obvious needs. It
would seem essential too that, as in the case of our ordinary
companies, official valuations of their assets and liabilities
and balance sheets of their accounts should be required.
It does not follow, however, that the same measure of
supervision and control over their affairs should be exer-
cised by the state authorities, since they are not ordinary
business corporations nor subject to commercial insolvency
in the strict sense of the word. It is held by many that
the functions of the state are ended when, as in Great
Britain, such valuations and balance sheets are published
and the members are left with a knowledge of the facts to
deal with their societies as they will. These are all con-
troverted questions on which I hesitate to express any
decided opinion. When, however, a society has become so
mismanaged or its affairs have become so hopelessly involved
that its ruin is inevitable, the state should at least have
power to prevent a further increase of its membership.
FRATERNAL LIFE INSURANCE 149
In new societies the needed reforms are comparatively
easy. But many of these societies have been years in
existence. The increase of their rates to an adequate
figure at the older ages means a heavy burden on their
older members which some would be unable to bear.
Hence these members are apt to favor the inequalities of
present methods. Otherwise, they say, we shall be driven
out. On the other hand, the young member argues that
the societies are for the benefit of those with dependent
families. The families of the old are no longer dependent,
and the young should not be forced to pay for their insur-
ance.
Most of the reforms thus far attempted have been a
compromise between these two views. The rates have
from time to time been increased, especially at the older
ages when deficiencies arose that actually compelled it,
but never to an adequate figure, and as the ages continued
to increase new revisions were made. In some of the older
societies such a system of compromise may be the only
solution of the problem unless their old members are to
be driven out or their ability to secure new members is to
cease and the society is allowed to collapse. But even then
the difficulty will be to so regulate the inequality between
the groups that additions to the young membership can
be kept up until such time as the rates can step by step
be finally raised to an adequate basis.
The hardest task of all has been to educate the mem-
bers up to these needed reforms, which mean to them
heavier assessments and an insurance more costly than was
promised when they joined. The insurance officials of our
various states and the best representative men of these
societies themselves are now earnestly striving both through
legislation and through the education of the membership
to solve the difficult problem. The laws regarding these
societies heretofore have been little else than mere rules
for their organization and management. No provisions
for securing their permanent solvency are made as in the
150 YALE READINGS IN INSURANCE
case of our ordinary life companies. In most of the states
they have been left to run their own course. Their mem-
bers as a body are exceedingly jealous of attempts by legis-
lation to increase the cost of the insurance which they
offer or in any way to reduce their popularity or their
freedom of action. Through the ballot box they have
stood ready by their numbers to defeat any attempted
laws which they believe to be inspired by a spirit of antag-
onism. Any attempted legislation for the regulation of
these societies to be successful must be framed in a friendly
attitude with a recognition of their rights as mutual clubs
to regulate their own affairs within proper limits.
A healthy change, however, has been gradually taking
place within the last few years in the attitude of their own
members as well as of the public. The opposition to legal
interference of any kind has, in a measure, yielded to a
growth of public sentiment favoring state regulation of
insurance. This movement has been aided by the popular
excitement which followed the exposures of mismanage-
ment on the part of some of the regular life companies
in 1905. Prominent fraternal organizations, which had
long enjoyed a wide popularity, as well as smaller societies,
have found themselves facing a threatened deficiency in
the near future in consequence of a rapid increase of death
claims. Investigations have shown their managers that a
radical increase in their rates is essential to their con-
tinued existence. Such increase has been at times strongly
opposed by those of the members who felt unable to carry
the burden. The effect of the agitation has been a more
general recognition of the fact that the rates must be fixed
according to age and must be based, like those of ordinary
life companies, on an adequate table of mortality. The
National Fraternal Congress, an association made up of
representatives of the best of the fraternal orders, earnestly
took up the subject a few years ago and urged upon its
members the adoption of such rates based upon the actual
mortality experienced by the societies, and the mainte-
FRATERNAL LIFE INSURANCE 151
nance of a reserve like that of ordinary life companies
sufficient to meet the deficiencies of the older ages, but
limited to the actual amount mathematically estimated
to be necessary, allowing, however, no margins for con-
tingencies or profits and leaving any resultant deficiencies
to be cared for by assessments, as before. Under the super-
vision of this Congress the mortality of the societies, which
it represented, was compiled and a mortality table was
framed known as the Fraternal Congress Table. The
rates computed from this table have, from time to time,
been adopted by a number of these societies and in some
states their adoption by new societies has been made com-
pulsory by statute. They are not assumed to be adequate
for societies that are in an unsound condition, but to be
an essential aid in their restoration to strength by redu-
cing the future assessments which will be required if the
prospective death rate has not already become too excess-
ive. Various states, too, during the past few years have
empowered their insurance departments to exercise a
measure of supervision over these societies and have com-
pelled the latter to make returns regarding their business.
But the supervision and returns have thus far been limited
to publicity regarding the general conduct and condition
of their business. No estimate is required of their actual
liabilities and little light is thrown on their future ability
to meet their obligations, except such as may be gathered
from the facts presented. The theory that the state is
concerned only with their proper conduct and existing
status is still adhered to.
A special interest just now attaches to fraternal societies,
in view of the popular agitation for a system of compulsory
insurance, or protection for employees analogous to those
now existing in Germany and Great Britain. The organiza-
tion of mutual companies for the insurance of various
classes of employees, similar in principle at least to
fraternal orders, has been among the methods suggested in
the United States.
152 YALE READINGS IN INSURANCE
Now a few words in conclusion concerning the character
of the insurance offered by these societies. In essential
respects it is widely different from that furnished by our
regular companies. In the first place it is strictly benevo-
lent in its character and limited to the members and their
dependents. It aims to relieve the necessities of these in
a way more effectual than the random charitable assistance
furnished by ancient associations. It needs for its suc-
cess that the members should be bound by a spirit of real
fraternity to their association, and not use their member-
ship as a mere cloak for ordinary insurance purposes. It
needs that the members should be actively interested in
the affairs of the society and should be ready to bear their
share of the burdens in case of errors in its management.
Their fraternal bonds are the chief substitute for the com-
mercial security required of an ordinary business corpora-
tion.
To that large class in the community whose instincts and
tastes lead them to seek insurance protection from such
societies they aim to offer that protection at the smallest
immediate cost. The work is done chiefly by the members.
Expenses are reduced to a minimum. No dividends are
provided for and the assessment rates are reduced to the
lowest figures. These are the strong points urged by its
advocates. Fraudulent claims too are less likely where
the members take a personal interest, and for that reason
these societies, in theory at least, should be peculiarly
adapted to deal with sick and accident risks where fraud
is a special danger.
On the other hand, this insurance must of necessity lack
those elements of commercial security which attach to the
ordinary life company as a business institution conducted
by experts protected by large cash accumulations and
regulated by laws enacted with a view to permanent sol-
vency. Until at least the reforms referred to have been
carried out, this insurance can hardly be regarded as of
more than a temporary character covering the younger
FRATERNAL LIFE INSURANCE 153
and more productive years of life, with the contingency
that the cost at old age may prove too heavy to be borne
or that inability to keep up its membership may cause
default. In view of the fact that the whole machinery of
these societies is organized on a benevolent rather than a
business basis, it has been seriously questioned how far
they should attempt to grant endowments or large life
insurance benefits which involve investments of capital
for the beneficiaries rather than a simple relief from mis-
fortune.
I believe that their work should be confined within their
legitimate sphere and that associations, whether incorpo-
rated or not, should not be permitted to organize and con-
duct their affairs as benevolent societies while they are
merely seeking through this device to sell ordinary life
insurance to the public. Those who wish to purchase life
insurance policies as they would purchase ordinary stocks
or bonds as a pure business investment, who desire insur-
ance contracts which shall be commercial and marketable
in their character and who care nothing for the institu-
tion which may furnish them, should seek their protection
from the ordinary companies that deal with insurance
simply as a business.
The numerous failures among these societies in the past
and the disappointments resulting from the errors in their
management have called forth severe criticism and even
condemnation of the system itself from many quarters.
This has been largely aided by the disastrous operations
of organizations which were in reality life companies
carried on for mere business purposes but employing the
methods of the fraternal associations. Despite the failures
it must be remembered they have furnished temporary
protection to millions of families and have distributed
hundreds of millions among the needy dependents of their
members. It should be said too that, carrying small
accumulated funds, the actual moneyed losses have been
small compared with the failures. The gravest loss has
154 YALE READINGS IN INSURANCE
been the disappointment of those whose protection failed
at an age when they could no longer afford to purchase
fresh insurance.
Despite their defects these societies are doing a great
and responsible work among those who prefer the form of
protection which they offer. The communal spirit which
created the ancient clubs of Rome and the guilds of more
modern Europe has been strengthened by the antagonistic
spirit of selfish individualism which characterizes our
commercial age. Fraternal insurance should be dealt
with as an evolution of these more primitive societies that
is here to stay, backed by the votes, if need be, of the mil-
lions who support it; but calling as in Great Britain for
beneficent laws and the intelligent cooperation of its mem-
bership to remedy its defects.
CHAPTER XI
NET PREMIUMS 1
AFTER a table of mortality and a rate of interest are
designated, the method of calculating net values in life
insurance is simple when carefully explained. The net
premium is the amount that will, on the designated data
namely, rate of interest and table of mortality exactly
effect the insurance. In this calculation, expenses and
profits are left out of consideration.
Life insurance calculations are made, first on the sup-
position that the amount insured is $1. Having obtained
the net premium that will insure $1, the net premium that
will effect similar insurance for $100, $1000, or any other
named sum, is found by multiplying the net premium that
will insure $1 by the sum actually insured. It is assumed
that the payment of the premium is made at the time the
insurance is effected; this is called the beginning of
the policy year, and the amount insured is to be paid at
the end of that policy year in which the insured may die.
Interest. The first thing to be considered, in making
calculations for net premiums, is the method by which
we determine the amount of money that will, when in-
creased by interest at a given rate per annum, compounded
annually, produce $1 in any designated number of years.
Suppose that the rate of interest is 4 per cent, per annum.
The amount that will at this rate produce $1 in one year,
when the principal and interest thereon for one year are
1 By Gustavus W. Smith. Reprinted from pages 13-33 of "Notes
on Life Insurance"; S. W. Green. New York, 1875.
155
156 YALE READINGS IN INSURANCE
added together, is expressed by ^ = ~ = $0.961538, plus
other decimal figures.
If the rate of interest is 4 per cent, per annum, the
amount in hand that will, at this rate, produce $1 in one
year is expressed by y^j = ^ = $0.956938. In general,
divide $1 by one plus the rate of interest, in order to
obtain the amount that will, if invested at this rate of
interest, produce $1 in one year.
Having obtained the amount that will, at the given rate
of interest, produce $1 in one year, in order to obtain
the amount that will, at the same rate of interest per
annum, produce $1 in two years, interest being compounded
annually, we multiply the amount that will produce $1 in
one year by itself. For instance, the amount that will
produce $1 in one year at 4 per cent, being expressed by
Yfji, the amount that will, at the same rate of interest,
compounded annually, produce $1 in two years, is
expressed by ~ X ^ = $0.924556.
If the rate of interest is 4 per cent., the expression be-
comes rs X j^ = $0.915730.
The amount that will, at 4 per cent., produce $1 in three
years is expressed by ^ X ^ X ^ = $0.888996. Interest
being 4^ per cent., the expression becomes j-^ X j-^ X ^
= $0.876297.
In general, to obtain the amount that will, if invested
at any given rate of interest, compounded annually, pro-
duce $1 in any designated number of years, the rule is:
Divide $1 by one plus the rate of interest, and multiply the
quotient by itself a number of times equal to the number of
years less one. That is to say, for two years, multiply
once; for three years, twice; for four years, three times,
and so on.
These calculations have been made, and the results,
at various rates of interest, have been placed in appended
tables.
There is at present one table of mortality in quite general
NET PREMIUMS
157
use in the United States. The American Experience
Table of Mortality is given below. It will be noticed that
it is assumed that there are 100,000 persons living at age 10.
In the column headed "deaths each year" will be found
opposite age 10 the number that will die between age 10
and age 11. This will leave a certain number living at
age 11. This number is placed opposite age 11, in the
column headed " number living," and opposite age 11 in
the column headed "deaths each year" is placed the num-
ber that die between age 11 and age 12.
AMERICAN EXPERIENCE TABLE OP MORTALITY
Age
Number
Living
Deaths
Each
Year
Death
Rate
Per
1000
Expecta-
tion of
Life
Age
Number
Living
Deaths
Each
Year
Death
Rate
Per
1000
Expec-
tation
of Life
10
100,000
749
7.49
48.72
35
81,822
732
8.95
31.78
11
99,251
746
7.52
48.08
36
81,090
737
9.09
31.07
12
98,505
743
7.54
47.45
37
80,353
742
9.23
30.35
13
97,762
740
7.57
46.80
38
79,611
749
9.41
29.62
14
97,022
737
7.60
46.16
39
78,862
756
9.59
28.90
15
96,285
735
7.63
45.50
40
78,106
765
9.79
28.18
16
95,550
732
7.66
44.85
41
77,341
774
10.01
27.45
17
94,818
729
7.69
44.19
42
76,567
785
10.25
26.72
18
94,089
727
7.73
43.53
43
75,782
797
10.52
26.00
19
93,362
725
7.76
42.87
44
74,985
812
10.83
25.27
20
92,637
723
7.80
42.20
45
74,173
828
11.16
24.54
21
91,914
722
7.85
41.53
46
73,345
848
11.56
23.81
22
91,192
721
7.91
40.85
47
72,497
870
12.00
23.08
23
90,471
720
7.96
40.17
48
71,627
896
12.51
22.36
24
89,751
719
8.01
39.49
49
70,731
927
13.11
21.63
25
89,032
718
8.06
38.81
50
69,804
962
13.78
20.91
26
88,314
718
8.13
38.12
51
68,842
1,001
14.54
20.20
27
87,596
718
8.20
37.43
52
67,841
1,044
15.39
19.49
28
86,878
718
8.26
36.73
53
66,797
1,091
16.33
18.79
29
86,160
719
8.34
36.03
54
65,706
1,143
17.40
18.09
30
85,441
720
8.43
35.33
55
64,563
1,199
18.57
17.40
31
84,721
721
8.51
34.63
56
63,364
1,260
19.88
16.72
32
84,000
723
8.61
33.92
57
62,104
1,325
21.33
16.05
33
83,277
726
8.72
33.21
58
60,779
1,394
22.94
15.39
34
82,551
729
8.83
32.50
59
59,385
1,468
24.72
14.74
158
YALE READINGS IN INSURANCE
AMERICAN EXPERIENCE TABLE OF MORTALITY Continued
Age
Number
Living
Deaths
Each
Year
Death
Rate
Per
1000
Expec-
tation
of Life
Age
Number
Living
Deaths
Each
Year
Death
Rate
Per'
1000
Expec-
tation
of Life
60
57,917
1,546
26.69
14.10
78
18,961
2,291
120.83
5.11
61
56,371
1,628
28.88
13.471
79
16,670
2,196
131.73
4.74
62
63
54,743
53,030
1,713
1,800
31.29
33.94
12.86
12.26
80
81
14,474
12,383
2,091
1,964
144.47
158.60
4.39
4.05
64
51,230
1,889
36.87
11.67
82
10,419
1,816
174.30
3.71
65
66
67
49,341
47,361
45,291
1,980
2,070
2,158
40.13
43.71
47.65
11.10
10.54
10.00
83
84
85
8,603
6,955
5,485
1,648
1,470
1,292
191.56
211.36
235.55
3.39
3.08
2.77
68
43,133
2,243
52.00
9.47
86
4,193
1,114
265.68
2.47
69
40,890
2,321
56.76
8.97
87
3,079
933
303.02
2.18
70
38,569
2,391
61.99
8.48
88
2,146
744
346.69
1.91
71
36,178
2,448
67.66
8.00
89
1,402
555
395.86
1.66
72
33,730
2,487
73.73
7.55
90
847
385
454.54
1.42
73
31,243
2,505
80.18
7.11
91
462
246
532.47
1.19
74
28,738
2,501
87.03
6.68
92
216
137
634.26
.98
75
26,237
2,476
94.37
6.27
93
79
58
734.18
.80
76
77
23,761
21,330
2,431
2,369
102.31
111.06
5.88
5.49^
94
95
21
3
18
3
857.14
1000.00
.64
.50
Various other tables of mortality are sometimes used
in making life insurance calculations, but it is not necessary
to give them here. Mortality tables are all based upon
statistical information, obtained by observation and ex-
perience. It is assumed that each insured person at any
particular age has the average chance of living for one year
that is indicated by the table at that age.
Manner of Using the Mortality Table. In illustration
of the calculation of the chance that a person may die
during any given time, let us suppose that out of one
hundred persons condemned to be shot on a given day,
all are reprieved for the day, except one, and the one to
be shot is to be the one who draws the black ball out of a
box containing ninety-nine white balls and one black
one. The chance, before the drawing, of any particular
NET PREMIUMS 159
man's getting the black ball, and, therefore, his chance
of being shot that day, is one only out of one hundred. If
two men had to die that day, each individual's chance,
before the drawing, of getting a black ball would be twice
as great as it was before; for now there are two black balls
and only ninety-eight white ones in the box. The chance
in this case would be two out of one hundred; for three
persons, three out of one hundred; and so on to the limit
of one hundred out of one hundred which would make
it certain that each man would be shot.
To apply this principle to life insurance, and to show
that the amount that will insure $1, to be paid certain
at the end of any year, when multiplied by the fraction
which represents the chance that the person will die dur-
ing the year, gives what it is worth to insure $1, to be paid
at the end of the year, in case the insured dies during the
year : let us suppose that, out of one hundred persons alive
at the beginning of the year, it is known that one of them,
and one only, will die during the year. The value of $1,
to be paid certain at the end of one year, in the particular
case of interest at 4| per cent., is $0.956938. The chance
that the person will die during the year is one out of one
hundred. To make it certain that his heirs will obtain
$1 at the end of the year, he must advance $0.956938 at
the beginning of the year. But the $1 is not to be paid
certain; it is to be paid only in case he dies. Suppose the
whole one hundred persons are insured; then, since there
is but one to die, and but $1 to be paid, each person will
have to give only the one hundredth part of $0.956938 in
order to make up what is necessary to pay this $1 at the
end of the year. Therefore, $0.956938 divided by 100
is what each man would have to pay. In case it is known
that two persons out of the one hundred will die, the
amount requisite to effect the insurance will be twice as
much as before, because $2 must be paid certain at the
end of the year. The chance that each person may die
during the year is twice as great as in the first case, and
160 YALE READINGS IN INSURANCE
is therefore two out of one hundred; and the amount that
each person will have to pay for his insurance is $0.956938,
divided by 100, and the result multiplied by 2. In case
it is known that all of them will die during the year, the
fraction which represents the chance that any particular
individual will die becomes y$$, or unity. This represents
the certainty; and to insure $1, to be paid at the end of the
year to the heirs of the insured, in case he dies during the
year, each person will now have to pay -j$$ of $0.956938
- that is to say, each must, in this case, pay enough to
make, with interest at 4J per cent, added, the full amount
for which he is insured.
To Insure $1 for One Year at Age 30. The American
Experience Table shows that out of 100,000 persons living
at age 10, there will be 85,441 living at age 30. The num-
ber of deaths between age 30 and age 31 is 720. There-
fore, tflffi is the fraction which represents the chance
that the insured will die before he is 31 years of age.
The present value of $1 to be paid certain at the end of
one year has, in the case of interest at 4^ per cent., been
found to be equal to $0.956938. Multiply this by the frac-
tion ^||fi which represents the chance that the insured
will die during the year between age 30 and age 31, and
we have $0.0081064. This is the value of the risk on $1,
or what it is worth to insure $1, to be paid to the heirs of
a person at the end of one year, in case he dies during the
year, the age of the insured being 30 years at the time
he takes out the policy. It would require one thousand
times as much to insure $1000 as it does to insure $1, and
half as much to insure half a dollar as it does a whole
dollar. We can obtain, by using the mortality table, the
fraction representing the chance that a person of any given
age will die during the succeeding year, just as we did in
this case for age 30. We have, therefore, already deter-
mined the means for calculating the sum that will at any
age insure $1, to be paid to the heirs of the insured in one
year, in case he dies during the year; but we must know
NET PREMIUMS
161
the age of the person, the rate of interest must be fixed,
and a mortality table must be available for use in the
calculations.
The following table shows the net amount that will
insure $1000 for one year at different ages from 20 to 70
inclusive, the calculations being all based upon the Ameri-
can Experience Table of Mortality, with interest at 4
per cent.
COST OF INSURANCE ON $1000 FOR ONE YEAR, AT DIFFERENT AGES
AMERICAN EXPERIENCE
Age
Cost of
Insurance
Age
Cost of
Insurance
Age
Cost of
Insurance
20 ...
$7.504
37 ...
$8.879
54 ...
$16.727
21 ...
7.553
38 ...
9.046
55 ...
17.857
22 ...
7.602
39 .. .
9.218
56 ...
19.120
23 .. .
7.652
40 ...
9.418
57 ...
20.515
24 ...
7.703
41 ...
9.623
58 ...
22.053
25 ...
7.754
42 ...
9.858
59 ...
23.769
26 ...
7.815
43 ...
10.113
60 ...
25.667
27 ...
7.881
44 ...
10.412
61 ...
27.769
28 ...
7.947
45 ...
10.734
62 ...
30.088
29 ...
8.024
46 ...
11.117
63 ...
32.638
30 ...
8.103
47 ...
11.539
64 ...
35.455
31 ...
8.183
48 ...
12.028
65 ...
38.585
32 ...
8.276
49 ...
12.602
66 ...
42.026
33 ...
8.383
50 ...
13.251
67 ...
45.815
34 ...
8.491
51 ...
13.981
68 ...
50.002
35 ...
8.602
52 ...
14.797
69 ...
54.579
36 ...
8.739
53 ...
15.705
70 ...
59.608
In further illustration of the question of net premiums
and net values of life policies in case the insurance is for
one year only, we will suppose that the age of the person
applying for insurance is 40, the mortality table used the
Actuaries', the rate of interest is 4 per cent., the insurance
to be for one year, the amount of the policy $10,000, and
162 YALE READINGS IN INSURANCE
the policy-holder is a fair average of insured lives. What
amount in hand ought to be paid to insure $10,000 as
above, leaving out all consideration of expenses, and
having neither gain nor loss represented in the chances
of the transaction?
We will first determine the amount that will insure $1.
The present value of $1 to be paid certain at the end of
one year, interest being assumed at 4 per cent, per annum,
is equal to $0.961538. From the mortality table we find
that out of 100,000 persons living at age 10, there are
78,653 living at age 40, and that 815 of these will die
during the year between age 40 and age 41. Therefore,
T tils' * s ^ e faction which represents the chance that the
insured will die during the year; and this multiplied by
$0.961538, which is the present value of $1, to be paid cer-
tain at the end of one year, will give what it is now worth
to insure the $1, to be paid in case the insured dies during
the year, or $0.961538 X yfMs = $0.009963432. This,
multiplied by 10,000, makes $99.63, plus a fraction of a
cent, which is the net premium that will insure $10,000,
to be paid to the heirs of the person insured at the end of
one year; provided he dies during the year.
If every one of the whole 78,653 had been insured for
one year in the sum of $10,000 each, the heirs of the 815
who died were respectively entitled to, and were paid,
$10,000 each. The aggregate payment of losses by death,
for the year, amounted, therefore, to $8,150,000. The
net annual premiums, $99.63 each, on 78,653 policies, when
increased by 4 per cent, interest, amounted at the end of
the year to $8,149,996.43.
It is seen from this, that the fraction of a cent omitted
in each of the 78,653 premiums amounted, in the aggregate,
to a deficiency of $3.57, in paying $8,150,000 losses by
death. The 77,838 persons who did not die during the
year, in this case receive nothing. They are not entitled
to anything; they had their lives insured during the year;
they each paid in advance a net premium amounting to
NET PREMIUMS 163
).63; the whole of this, and net interest on it, has gone
to pay at the end of the year $10,000 to the heirs of each
of the 815 policy-holders that died during the year.
Net Single Premiums for Insurance for Whole Life.
What sum paid in hand will, "on the supposition that the
mortality table and rate of interest designated as the basis of
the calculations are correct," be the exact equivalent of $1
insured, to be paid at the end of any year in which the
insured may die? In other words, we have now to deter-
mine the amount that, if paid in hand, will exactly insure
$1 for whole life. The problem before us reduces to this,
namely: First, calculate the present value of the amount
requisite to effect the insurance each separate year that
the insured may live, as indicated by the designated table
of mortality. Then add together the respective amounts
that are found to be necessary to effect the insurance each
year, and their sum will give the amount that, if paid
in hand, will effect the insurance for whole life.
Assume that the age of the person at the time he in-
sures is 40, that he is a fair average of insured lives, the
table of mortality is the Actuaries', and the rate of interest
4 per cent., compounded annually. We have already found
that the amount necessary in this case to insure $1, to be
paid to the heirs of the insured in case he dies during the
first year that is, between age 40 and age 41 is
$0.009963432. Now let us see what amount of money,
if paid in hand at the time the policy is issued (age 40), will
secure $1 to be paid to the heirs of the insured at the end
of two years, in case he dies in the second year from the
date of the policy. This problem is solved separately,
and the amount we are now to find insures only against
death in the second year.
Find the amount that will, if invested at 4 per cent, per
annum, compound interest, produce $1 in two years. To
do this, we have to divide 100 by 104; this gives $0.961538,
and this is the amount that will produce $1 in one year at
4 per cent, per annum. Multiply this by itself, and we
164 YALE READINGS IN INSURANCE
have $0.924556, which is the amount that will produce $1
in two years at 4 per cent., compounded annually.
Now, the question is, what fraction, at age 40 (the time
at which the insurance is effected), represents the chance
that the insured will die during the second year that
is, between age 41 and age 42?
By the Actuaries' Table of Mortality, we see that out
of 78,653 insured persons living at age 40, the number that
will die between age 41 and age 42 is 826. Therefore, the
fraction 826 divided by 78,653 represents at the time this
insurance is effected, age 40, the chance that the insured
will die betweeen age 41 and age 42.
Multiply the amount, $0.924556, that will, at the desig-
nated rate of interest, produce $1 certain in two years, by
the fraction y|||^ which represents the chance that the
$1 insured will have to be paid, and we have $0.009705,
which is the amount that will, if paid in hand at age 40,
insure $1, to be paid to the heirs of the insured in case he
dies in the second year.
In like manner, we can find the amount that, if paid in
hand at age 40, will insure $1 to the heirs of the insured
in case he dies in the third year and for each and every
year up to and including the table limit.
Add together these respective yearly amounts, and the
result gives the net single premium that will, if paid in
hand at age 40, insure $1 for whole life.
The amount in this case is $0.38104; multiply this by
1000, and we have $381.04, which is the net single premium
that will at age 40 insure $1000, to be paid to the heirs of
the insured at the end of any year in which he may die.
Detailed Calculation of Net Single Premiums for Whole
Life Policies. In illustration of this subject, we will
assume that the age of the insured is 50. The amount
insured is $1. The table of mortality used is the Ameri-
can Experience, and the rate of interest is 4 per cent, per
annum, compounded yearly. Opposite age 50 in the fol-
lowing table, in the column headed, " Value in hand at age
NET PREMIUMS 165
50, of SI, to be paid certain at the end of each respective year,"
we find the amount $0.956938. This is the amount that
at 4| per cent, will produce $1 in one year, and it is obtained
by dividing 100 by 104. This is to be multiplied by the
number of deaths during the year between age 50 and age
51; this number, as shown by the mortality table, is 962,
and it is placed in the following table opposite age 50, in
the column headed, "Number of Deaths." In the next
column, which is headed, "Number living at age 50," we
find the number 69,804; this, too, is taken from the table
of mortality. The product arising from multiplying
SO .956938 by 962 is divided by 69,804, and the result is
$0.013188. This is the amount that at age 50 will insure
$1, to be paid to the heirs of the insured at the end of the
year, in case he dies between age 50 and age 51.
Opposite age 51, in the same table, in the column headed,
"Value in hand, at age 50, of $1, to be paid certain at the
end of each respective year," we find the amount $0.915730.
This is the amount that will produce $1 certain in two years,
when invested at 4| per cent, per annum, compounded
annually, and it was obtained by multiplying ^ by
j^ij. Multiply this by 1001, which is the number of deaths
between age 51 and age 52, and divide the product by
69,804, which is the number living at age 50, and we
have $0.013132. This is the amount that, if paid in hand
at age 50, will insure $1, to be paid to the heirs of the in-
sured at the end of the second year, in case the insured
dies in that year that is, between age 51 and age 52.
In a similar manner, the calculations as shown in the
table are made each respective year to include age 95,
which is the limit of the table of mortality we are now using,
and the sum of all these respective yearly values gives us
$0.430037. This amount, if paid in hand at age 50, will
insure $1 for whole life on the data assumed, namely,
the American Experience Table of Mortality, and 4| per
cent, per annum, compounded yearly.
In an entirely similar manner, the calculations can be
166
YALE READINGS IN INSURANCE
made at any age included in the table of mortality, and at
any designated rate of interest.
Having found the net single premium that will insure
$1 at any age, the net single premium that will insure any
other amount at the same age is found by a simple propor-
tion.
TABLE. ILLUSTRATING THE MANNER OF CALCULATING THE NET
SINGLE PREMIUM FOR A WHOLE-LIFE POLICY FOR $1; ISSUED AT
AGE 50 AMERICAN EXPERIENCE, 4 PER CENT.
Age
Value in hand, at_
age 50, of $1.00,'
to be paid certain
at the end of each
respective year
Number
of
Deaths
Number
Living at
Age 50
Value in hand at age
50, of $1.00, to be
paid at the end of
each respective year,
provided the insured
dies during the year
Age
50 ...
$0.956938 X
962 -
69,804 =
$0.013188
50
51 ...
0.915730 X
1001 -
69,804 =
0.013132
51
52 ...
0.876297 X
1044 -
69,804 =
0.013106
52
53 ...
0.838561 X
1091 -
69,804 =
0.013106
53
54 ...
0.802451 X
1143 -
69,804 =
0.013140
54
55 ...
0.767896 X
1199 -
69,804 =
0.013190
55
56 ...
0.734828 X
1260 -
69,804 =
0.013264
56
57 ...
0.703185 X
1325 -
69,804 =
0.013348
57
58 ...
0.672904 X
1394 -
69,804 =
0.013438
58
59 ...
0.643928 X
1468-
69,804 =
0.013542
59
60 ...
0.616199 X
1546 -
69,804 =
0.013647
60
61 ...
0.589664 X
1628 -
69,804 =
0.013752
61
62 ...
0.564272 X
1713 -
69,804 =
0.013847
62
63 ...
0.539973 X
1800 -
69,804 =
0.013924
63
64 ...
0.516720 X
1889 -
69,804 =
0.013983
64
65 ...
0.494469 X
1980 -
69,804 =
0.014026
65
66 ...
0.473176 X
2070 -
69,804 =
0.014032
66
67 ...
0.452800 X
2158 -
69,804 =
0.013998
67
68 ...
0.433302 X
2243 -
69,804 =
0.013923
68
69 ...
0.414643 X
2321 -
69,804 =
0.013787
69
70 ...
0.396787 X
2391 -
69,804 =
0.013591
70
71 ...
0.379701 X
2448 -
69,804 -
0.013316
71
72 ...
0.363350 X
2487 -
69,804 =
0.012946
72
73 ...
0.347703 X
2505 -
69,804 =
0.012478
73
74 ...
0.332731 X
2501 -
69,804 -
0.011921
74
NET PREMIUMS
167
75 ...
0.318402 X
2476 -
69,804 =
0.011294
75
76 ...
0.304691 X
2431 -
69,804 =
0.010611
76
77 ...
0.291571 X
2369 -
69,804 =
0.009895
77
78 ...
0.279015 X
2291 -
69,804 =
0.009157
78
79 ...
0.267000 X
2196 -
69,804 -
0.008400
79
80 ...
0.255502 X
2091 -
69,804 =
0.007654.
80
81 ...
0.244500 X
1964 -
69,804 =
0.006879
81
82 ...
0.233971 X
1816 -
69,804 =
0.006087
82
83 ...
0.223896 X
1648 -
69,804 =
0.005286
83
84 ...
0.214254 X
1470 -
69,804 =
0.004512
84
85 ...
0.205028 X
1292 -
69,804 =
0.003795
85
86 ...
0.196199 X
1114 -
69,804 =
0.003131
86
87 ...
0.187750 X
933 -
69,804 =
0.002509
87
88 . ..
0.179665 X
744 -
69,804 =
0.001915
88
89 ...
0.171929 X
555 -
69,804 =
0.001367
89
90 ...
0.164525 X
385 -
69,804 =
0.000907
90
91 ...
0.157440 X
246 -
69,804 =
0.000555
91
92 ...
0.150661 X
137 -
69,804 =
0.000296
92
93 ...
0.144173 X
58 -
69,804 =
0.000120
93
94 ...
0.137964 X
18-
69,804 =
0.000036
94
95 ...
0.132023 X
3 -
69,804 =
0.000006
95
Total
$0.430037
If the insurance is for a limited number of years only,
the calculation is made for each year of the term, and the
sum of these yearly amounts will give the net single
premium that will, if paid at the time the policy is issued,
insure $1, to be paid to the heirs of the insured at the end
of the year in which the policy-holder may die; provided
he dies before the expiration of the term. For instance,
suppose the insurance at age 50 is to continue for ten
years only; take in the above table the amounts for the
first ten years, their sum will be the net single premium
required.
If insurance is paid for at age 50, to begin only at the
end of ten years from that time, and then continue for
life; the net single premium is obtained by subtracting
the amount that will at age 50 insure $1 until age 60 from
the amount that will at age 50 insure $1 for life.
168
YALE READINGS IN INSURANCE
If insurance is paid for at age 50 to begin at age 60, and
then continue for ten years only, subtract the net single
premium that will at age 50 insure $1, to begin at age 70
and continue for life, from the net single premium that will,
at age 50 insure $1, to begin at age 60 and continue for life.
The net single premium that will at any age insure $1,
to be paid at the end of any designated year, provided the
insured dies in that year, is found, as before stated, by
first determining the amount that will at the named rate
of interest produce $1 at the end of the designated year,
and then multiplying this amount by the fraction (obtained
from the mortality table), which represents, at the time
the insurance is effected, the chance that the insured will
die in the designated year.
For purposes of comparison and general illustration, the
following table is given, showing the net single premiums
that will insure $1000 for whole life, at ages from 20 to
70 inclusive, at 4 per cent. :
NET SINGLE PREMIUMS AMERICAN EXPERIENCE FOUR PER CENT.
Age
Premium
Age
Premium
Age
Premium
20 ....
$247.798
37 ....
$343.088
54 ....
$514.307
21 ....
251.846
38 ....
351.245
55 ....
526.645
22 ....
256.076
39 ....
359.266
56 ....
539.153
23 ....
260.472
40 ....
367.575
57 ....
551.806
24 ....
265.042
41 ....
376.167
58 ....
564.589
25 ....
269.704
42 ....
385.060
59 ....
577.482
26 ....
274.737
43 ....
394.252
60 ....
590.457
27 ....
279.872
44 ....
403.751
61 ....
603.491
28 ....
285.207
45 ....
413.551
62 ....
616.557
29 ....
290.754
46 ....
423.659
63 ....
629.630
30 ....
296.514
47 ....
434.063
64 ....
642.687
31 ....
302.497
48 ....
444.762
65 ....
655.699
32 ....
308.713
49 ....
455.744
66 ....
668.630
33 ....
315.167
50 ....
467.046^
67 ....
681.452
34 ....
321.862
51 ....
478.480
68 ....
694.137
35 ....
328.809
52
490.207
69 ....
706.647
36 ....
336.022
53 ....
502.154
70 ....
718.960
NET PREMIUMS 169
Net Annual Premium for Whole-life Policies. Having
shown how to calculate the net single premiums that will
insure $1 for whole. life at any age included in the table
of mortality, it is now proposed to see how the exact
equivalent can be determined when the payments are made
by instalments instead of by one sum in advance. It
is usual, in ordinary whole-life policies, for the companies
to charge, and the insured to pay, equal annual premiums,
the first in advance, and one at the beginning of each
following year, as long as the insured is alive. When the
net single premium at any age has been accurately cal-
culated, the question arises, What is the net annual
premium, under the conditions just named, that will
be the precise equivalent of this net single premium at
the time the policy issued?
When this net annual premium is accurately determined,
it being the precise money equivalent of the net single
premium, and the net single premium being just sufficient,
on the data designated, to effect the insurance, it follows
that its precise equivalent, paid in equal annual premiums,
will also be just sufficient to effect the insurance.
To solve this problem, first find the value, at any named
age, of a whole-life series of annual premiums of $1 each,
the condition being that the first payment of $1 is to
be made at the time the policy is issued, and that $1 is
to be paid at the beginning of each following year, as long
as the person is alive to make the payment. When this
is done, the problem we wish to solve becomes simple,
because, after we have found, at any named age, the value
in hand of this life series of premiums of $1 each, this
amount will be to the net single premium at that age as $1
is to the annual premium required. We will use the Ameri-
can Experience Table of Mortality and 4^ per cent, in-
terest.
The first thing, then, is to find the value at any age
say 50 of a life series of annual premiums of $1 each, the
first to be paid in advance, and $1 to be paid at the begin-
170 YALE READINGS IN INSURANCE
ning of each following year, as long as the insured is alive
to make the payments.
The first annual payment is to be made in hand, and its
value, at the time the policy is issued, is $1. The value
in hand of $1, to be paid at the end of one year, interest
being 4 per cent, per annum, is 100 divided by 104;
but this second payment is not to be made certain, but
only on condition that the insured, aged 50, will be alive
at age 51. The fraction which, at age 50, represents the
chance that the insured will be alive at age 51 is equal
to the number living at age 51 divided by the number
living at age 50. From the table of mortality, we find the
number living at age 51 is 68,824, and the number living
at age 50 is 69,804. The fraction in this case is therefore
if Iff- The value, at age 50, of this second payment of
$1 to be made at age 51, in case the insured is alive to make
the payment, is equal to y-^ X Hj^. In like manner,
the value of the third payment, which is to be made at
the end of two years, in case the insured is alive at that
time to make the payment, is equal to j^g X j-^, multi-
plied by the fraction which, at age 50, represents the
chance at that time that the insured will be alive at age
52 to make the third payment. This fraction is equal to
the number living at 52 divided by the number living at
50, which we see, from the table of mortality, is 59 Mi 5
therefore the value in hand, at age 50, of the third payment
of $1, to be paid only on condition that the insured is
alive at age 52, is expressed by ^ X jj^ X
In a manner entirely similar, we can calculate at age 50
the value in hand of the fourth and every payment of the
whole-life series to the limit of the table. This has been
done, and the sum of the respective values in hand, at age
50, of the whole-life series of annual premiums of $1 each,
is found to be $13.235802.
NET PREMIUMS
171
TABLE. ILLUSTRATING THE MANNER OP CALCULATING THE VALUE,
AT AGE 50, OF A WHOLE-LIFE SERIES OF ANNUAL PAYMENTS OP
$1 EACH THE FIRST PAYMENT TO BE MADE IN HAND, AND ONE
AT THE BEGINNING OF EACH FOLLOWING YEAR, AS LONG AS THE
PERSON is ALIVE TO MAKE THE PAYMENT. AMERICAN EXPERI-
ENCE 4 \ PER CENT.
Age
Value in hand, at
age 50, of $1.00,
to be paid certain
at the beginning of
each year
Number
living at
beginning
of each
year
Numerator
Number
living at
age 50
Denominator
Value in hand at age
50, of $1.00, to be
paid at the begin-
ning of each respec-
tive year, provided
the person is alive to
make the payment
Age
50 ...
$1.000000 X
69,804 -
69,804 =
$1.000000
50
51 ...
0.956938 X
68,842 -
69,804 =
0.943750
51
52 ...
0.915730 X
67,841 -
69,804 =
0.889978
52
53 ...
0.876297 X
66,797 -
69,804 =
0.838548
53
54 ...
0.838561 X
65,706 -
69,804 =
0.789331
54
55 ...
0.802451 X
64,563 -
69,804 =
0.742202
55
56 ...
0.767896 X
63,364 -
69,804 =
0.697051
56
57 ...
0.734828 X
62,104 -
69,804 =
0.653770
57
58 ...
0.703185 X
60,779 -
69,804 =
0.612270
58
59 ...
0.672904 X
59,385 -
69,804 =
0.572466
59
60 ...
0.643928 X
57,917 -
69,804 =
0.534273
60
61 ...
0.616199 X
56,371 -
69,804 =
0.497619
61
62 ...
0.589664 X
54,743 -
69,804 =
0.462437
62
63 ...
0.564272 X
53,030 -
69,804 =
0.428677
63
64 .. .
0.539973 X
51,230 -
69,804 -
0.396293
64
65 ...
0.516720 X
49,341 -
69,804 =
0.365244
65
66 ...
0.494469 X
47,361 -
69,804 =
0.335490
66
67 ...
0.473176 X
45,291 -
69,804 =
0.307011
67
68 ...
0.452800 X
43,133 -
69,804 =
0.279792
68
69 ...
0.433302 X
40,890 -
69,804 =
0.253821
69
70 ...
0.414643 X
38,569 -
69,804 =
0.229104
70
71 ...
0.396787 X
36,178 -
69,804 =
0.205647
71
72 ...
0.379701 X
33,730 -
69,804 -
0.183475
72
73 ...
0.363350 X
31,243 -
69,804 =
0.162629
73
74 ...
0.347703 X
28,738 -
69,804 =
0.143148
74
75 ...
0.332731 X
26,237 -
69,804 =
0.125063
75
76 ...
0.318402 X
23,761 -
69,804 =
0.108383
76
77 ...
0.304691 X
21,330 -
69,804 =
0.093104
77
78 ...
0.291571 X
18,961 -
69,804 =
0.079200
78
79 ...
0.279015 X
16,670 -
69,804 -
0.066632
79
172
YALE READINGS IN INSURANCE
TABLE Continued
Age
Value in hand, at
age 50, of $1.00
to be paid certain
at the beginning of
each year
Number
living at
beginning
of each
year
Numerator
Number
living at
age 50
Denominator
Value in hand at age
50, of $1.00, to be
paid at the begin-
ning of each respec-
tive year, provided
the person is alive to
make the payment
Age
80 ...
0.267000 X
14,474 -
69,804 =
0.055363
80
81 ...
0.255502 X
12,383 -
69,804 =
0.045325
81
82 ...
0.244500 X
10,419 -
69,804 -
0.036494
82
83 ...
0.233971 X
8,603 -
69,804 =
0.028836
83
84 ...
0.223896 X
6,955 -
69,804 =
0.022308
84
85 ...
0.214254 X
5,485 -
69,804 =
0.016835
85
86 ...
0.205028 X
4,193 -
69,804 =
0.012316
86
87 ...
0.196199 X
3,079 -
69,804 =
0.008654
87
88 ...
0.187750 X
2,146 -
69,804 -
0.005772
88
89 ...
0.179665 X
1,402 -
69,804 =
0.003609
89
90 ...
0.171929 X
847 -
69,804 -
0.002086
90
91 ...
0.164525 X
462 -
69,804 =
0.001089
91
92 ...
0.157440 X
216 -
69,804 =
0.000487
92
93 ...
0.150661 X
79 -
69,804 =
0.000171
93
94 ...
0.144173 X
21 -
69,804 =
0.000043
94
95 ...
0.137964 X
3 -
69,804 =
0.000006
95
Total $13.235802
NOTE. The remarks that follow the table illustrating the calcula-
tion of the net single premium that will insure $1 for life apply to the
value, at any age, of a series of annual payments of $1 for a designated
term of years.
Having shown, in the foregoing table, how we calculate
the value, at age 50, of a whole-life series of annual premi-
ums of $1 each, attention is called to the fact that the cal-
culation of the net value at any other age of a similar
series of premiums can be made, in a like manner, from
any table of mortality, and at any rate of interest.
NET PREMIUMS
173
VALUE AT DIFFERENT AGES OF A LIFE SERIES OF ANNUAL PAYMENTS
OF $1 EACH AMERICAN EXPERIENCE TABLE OF MORTALITY
4 PER CENT. INTEREST.
Age
Value
Age
Value
Age
Value
20 ...
$19.5579
37 ...
$17.0691
54 ...
$12.6280
21 ...
19.4520
38 ...
16.8676
55 ...
12.3072
22 ...
19.3420
39 ...
16.6591
56 ...
11.9820
23 ...
19.2277
40 ...
16.4431
57 ...
11.6530
24 ...
19.1089
41 ...
16.2196
58 ...
11.3207
25 ...
18.9854
42 ...
15.9884
59 ...
10.9855
26 ...
18.8568
43 ...
15.7494
60 ...
10.6481
27 ...
18.7233
44 ...
15.5025
61 ...
10.3092
28 ...
18.5846
45 ...
15.2477
62 ...
9.9695
29 ...
18.4404
46 ...
14.9849
63 ...
9.6296
30 ...
18.2906
47 ...
14.7144
64 ...
9.2901
31 ...
18.1351
48 ...
14.4362
65 ...
8.9518
32 ...
17.9735
49 ...
14.1507
66 ...
8.6156
33 ...
17.8056
50 ...
13.8583
67 ...
8.2822
34 ...
17.6316
51 ...
13.5595
68 ...
7.9524
35 ...
17.4510
52 ...
13.2546
69 ...
7.6272
36 ...
17.2634
53 . ..
12.9440
70 ...
7.3070
To obtain the net annual premium. When the net
single premium that will insure $1 for whole life has
been calculated, and the value at the designated age of a
whole-life series of annual payments of $1 each is known,
we obtain the net annual premium that will insure $1 for
whole life at that age by the following rule: Divide the
net single premium at any age by the value at that age
of a whole-life series of annual payments of $1 each, and
the result is the net annual premium that will insure $1
for whole life at that age. For instance (American Expe-
rience, 4| per cent.), at age 30, the net single premium to
insure $1 is $0.262609, the value at age 30 of the series
of $1 premiums is $17.1238, therefore we have the pro-
portion: $17.1238 : $0.262609 :: $1 is to the net annual
premium that at age 30 will insure $1 for whole life.
174
YALE READINGS IN INSURANCE
NOTE. It follows, too, from this general reasoning, that if it is
desired to convert the net single premium into a limited number of
animal premiums, or equal instalments, for a specified number of
years, we first find the value at the age in question of a series of an-
nual payments of $1 each for the designated term of years, and divide
the net single premium by this value.
The following table shows the net annual premiums
that will insure $1000 at different ages, from 20 to 70
inclusive :
NET ANNUAL PREMIUMS AMERICAN EXPERIENCE 4 PER CENT.
Age
Premium
Age
Premium
Age
Premium
20
$12.669
37 ....
$20.124
54 ....
$40.728
21 ....
12.947
38 ....
20.824
55 ....
42.792
22 ....
13.239
39 ....
21.566
56 ....
44.997
23 ....
13.547
40 ....
22.354
57 ....
47.353
24 ....
13.870
41
23.192
58 ....
49.872
25
14.211
42
24.084
59 ....
52.568
26 ....
14.570
43 ....
24.988
60 ....
55.452
27 ....
14.948
44 ....
26.044
61 ....
58.539
28 ....
15.346
45 ....
27.122
62 ....
61.844
29 ....
15.767
46 ....
28.273
63 ....
65.385
30 ....
16.211
47 ....
29.499
64 ....
69.180
31 ....
16.680
48 ....
30.809
65 ....
73.248
32 ....
17.176
49 ....
32.207
66 ....
77.607
33 ....
17.700
50 ....
33.698
67 ....
82.279
34 ....
18.255
51 ....
35.288
68 ....
87.286
35 ....
18.842
52 ....
36.984
69 ....
92.649
36 ....
19.464
53 ....
38.794
70 ....
98.393
CHAPTER XII
PROVISION FOR EXPENSES 1
THE more difficult problems of a science or art are
naturally the last to be solved. The relations of interest
and mortality to life insurance are comparatively simple
factors, and well developed. But when we descend from
the exact reasoning of these more exclusively mathematical
subjects to the division of expenses, we encounter a con-
fusion which makes it difficult to select and arrange a
sufficient amount of controlling data for a basis upon which
to erect a symmetrical structure for practical operations.
Too generally, when attempts have been made to con-
struct a scheme for distributing expenses, the actual con-
ditions imposed by competition and experience have
been ignored with a vague hope that theoretical considera-
tions might in some degree be made to govern custom.
Or they have been restricted to too few elements of
expense in an endeavor to minimize the labor of computa-
tions. While both of these considerations are entitled to
recognition, they should not be allowed to handicap the
search for a solution, by substituting deductions for in-
ductions. At the bottom of the subject must be laid a
fundamental classification of expenses themselves, derived
from companies' financial statements.
It will aid us to summarize the discussions which have
appeared. The original net premium seems to have been
loaded by a constant percentage of itself to meet expenses
and general contingencies; the latter, because the rates
1 By William D. Whiting. Reprinted from pages 214-219, Volume
V, "Transactions of the Actuarial Society of America."
175
176 YALE READINGS IN INSURANCE
of interest and mortality were considered more liable to
fluctuation than are now feared by well-regulated com-
panies. At present the assumed (3 per cent.) rate of inter-
est is theoretically fixed low enough to cover the expenses
and losses due to investments, and the assumed rate of
mortality high enough to cover all contingencies due to
the probability of dying, thus leaving the loading on pre-
miums and discontinuance gains free to cover all other
expenses without specification.
Finally a valuable suggestion came from Great Britain
to the effect that, as the gross premium was irrevocably
confined by competition to a uniform amount for each
policy year, while the expenses of the first year from the
same cause were irrevocably much greater than for any
of its successors, the first year should be treated as term
insurance, so as to obtain a larger loading therein by
releasing it from the obligation of accumulating any
reserve. Modifications of this idea have appeared by
attaching liens to the policy equal to the first year's ter-
minal reserve as additional first year's premium, leaving
the character of the insurance undisturbed.
Although much has been written and said on the subject
of providing for and assessing expenses, but little progress
has been made, and it remains in so unsatisfactory a con-
dition that an attempt, by another method, to contribute
to its solution should be tried. I apprehend that a scrutiny
of companies' statements will disclose five distinct kinds
of expenses, which are independent and cannot be greatly
modified, to wit :
1. New Business; consisting of examination fees, agents'
first-year commissions, and advertising, printing, salaries,
etc., incurred in getting new business; say, 80 per cent, of
first year's premiums.
2. Collection; consisting of agents' renewal commis-
sions, collection fees, exchange, taxes on premiums, etc.;
say 10 per cent, on renewal premiums.
3. Settlement; consisting of the expense of investiga-
PROVISION FOR EXPENSES 177
ting and resisting death claims; say 1 per cent, of face of
death claims.
4. Investments; cost of making, handling, and protect-
ing same, bad debts, losses over gains, taxes and repairs
on assets; say, one-half of 1 per cent, per annum.
5. General; all other expenses, particularly those of
general supervision, actuarial and clerical; say, $1 per
$1000 of insurance annually.
How shall we provide for these necessary and independ-
ent expenses so as to charge them equitably upon each
class of policies in proportion as they cause them, main-
tain consistency in computing reserves, surrender values,
and dividends, and yet make no serious departure from
present level office rates, without so complicating our
processes as to render them unworkable?
The first expense item for new business should
be met during the first year by each class of new entrants
for themselves, so as to avoid a loss to persistent members
being occasioned by the lapsing or death of one in arrears.
The old members have built up the company at consider-
able cost to themselves and own it. It is unjust that new
members should be allowed to participate in the benefits
of an established plant without at least paying their own
cost of entrance. It would be more proper, indeed they
should be charged a bonus for the privilege of entering,
to go to the old members in reimbursements of their early
excess of expenses in establishing the institution. Old
members should not need the new under a proper arrange-
ment for future expenses; and any scheme which is not
mathematically self-sustaining, until the last risk is dis-
posed of, and requires "new blood" to support it, is in-
solvent by confession.
It is true that the old members, left to themselves, will
gradually diminish in numbers and a certain class of ex-
penses will proportionately increase thereby. Some arrange-
ment among themselves must be made for this, and will
be treated of later under item 5 of general expenses. The
178 YALE READINGS IN INSURANCE
present contention is that each body of policy-holders must
be wholly self-sustaining, as to mortality, interest and
expenses, in order to work out a solvent scheme; and the
fallacy of "new blood," which has been the excuse for so
much extravagance and inequity, should be utterly aban-
doned. But how can the new entrant be made to pay
the expenses incurred on his account during the first year,
within that year? Ruling out the possibility of returning
to the small initial expenses of twenty-five years ago, or of
exacting a sufficient cash initiation fee, two methods are
proposed :
First, subject the insurance to an interest-bearing note
or lien equal to the extraordinary expenses of the first
year, but not exceeding the terminal reserve of that year.
The effect of this is the same as an initiation fee, not
subject to agents' commissions. But it works awkwardly
in so far as the sum payable as a claim is diminished by
the lien if not canceled by dividends; and the interest
continues payable annually after "limited premiums"
have ceased. To avoid this it has been suggested that the
lien be converted into an annuity in favor of the company,
for the same term that the premiums run; and be counted
as a diminishing asset or lien against surrender values.
Neither of these forms, although mathematically sound,
would be apt to be well received by insurance depart-
ments; and the notes or annuity liens (besides imposing
considerable clerical labor) would run the risk of being
disallowed as assets, notwithstanding being made so by
the expressed terms of the contract.
Second, make the first year's insurance a preliminary
one-year term risk, the permanent insurance to commence
one year after the date of the policy at the premium rate
for the then increased age. This method has come spon-
taneously into use on both sides of the Atlantic within a
few years, on account of the necessities of the younger
companies under the pressure of competition, and has
proved successful with agents. It has the recommenda-
PROVISION FOR EXPENSES 179
tion of high actuarial authorities, and no refusal to recog-
nize it has yet appeared from state officials where the
terms of the contract were stated so that the policy-holder
could know the exact character of the insurance he was
purchasing. This method of releasing the first year's
premium from the obligation of a terminal reserve allows
it to be wholly employed in meeting the heavy expenses
and light mortality of this period, which should be con-
fined strictly within this limit. This method works least
advantageously on short, limited payment plans, as the
permanent premium is not only based upon one year of
age higher than entry, but the number of limited payments
is lessened by one year.
With the new business made self-sustaining, in its first
year, the renewal premiums need only be burdened (item 2)
with the expense of their collection and renewal commis-
sions to agents. This, with an allowance for taxes on
premiums and occasional loss by misappropriation, is
easily covered by an average loading of 10 per cent, added
to the net premiums, which in the proposed distribution
of expenses constitutes the only loading imposed upon the
net premium. This readily permits the use of 3 per cent,
as a basis for computing net premiums without exceeding
materially the office rates now in use, except in the case
of short limited payments as before mentioned.
The third item (settlement) of expense only occurs
upon death claims, and a ready method for its provision
may also be employed to correct a glaring defect in our
present practice. Our computations of net premiums and
reserves are made upon the incorrect assumption that
death occurs at the end of the policy year, whereas claims
are actually paid, on an average, about the seventh month
and five months' interest on the face of the claim is lost
to the company. This should be altered and death as-
sumed to take place at the beginning of the policy year
immediately after the premium is due. We would thus
gain seven months' interest about $17.50 per $1000 of
180 YALE READINGS IN INSURANCE
claim which would easily cover the expenses of investi-
gation, litigation, and settlement in question. . . . The
result would be an increase in all premiums and reserves,
except endowments, of just 3 per cent, when the basis
of 3 per cent, interest is employed. On endowments the
increase would be only 3 per cent, of the term insurance
portion thereof.
The fourth item of expenses exclusively concerns the
care and investment of assets, including incidental losses
and taxes and repairs on real estate. A small amount
should be included for the time and expenses of officers
and clerks employed in this branch of the business. This
item is easily and naturally provided for out of the gross
interest and rents earned on total assets, by assuming a
lower rate of interest for computing net premiums and
reserves. Thus, if 3^ per cent, is the maximum gross rate
which can be safely relied upon during a period of, say,
thirty years to come, the net rate employed would be about
3 per cent., leaving a margin of J per cent, to cover the
various expenses included under item 4. There is a gen-
eral agreement among actuaries concerning the propriety
of this arrangement.
The residual item (5) is for general expenses which run
with the entire duration of the policy. For this reason it
cannot be loaded upon the premium (as was item 2) with-
out establishing a new and burdensome side computation
for future general expense reserves; as the premiums on
a considerable portion of business stop short of the term
of the insurance, and as this general expense (referred to
in discussing new business, item 1), should increase some-
what as the original number of policies of its class diminish
by maturity. That portion of diminution which is occa-
sioned by lapsing should be offset by a surrender charge,
and will be discussed later. Neither can item 5 be
levied against the interest earnings of the reserve (as
was item 4), because short-term insurance only has a
nominal and erratic reserve, while reserves generally vary
PROVISION FOR EXPENSES 181
widely with the kind of insurance and usually increase
rapidly.
We must therefore search for some basis which runs
with the term of insurance increasing slightly, and yet may
be easily handled as a measure for these small general
expenses. The annual cost of insurance 1 offers such a
basis, and has been warmly advocated for a much larger
role in the distribution of expenses on account of its sup-
posed equity, as already mentioned. By adding about
10 per cent, to a true q x we would derive an additional
annual cost of insurance, slightly increasing, but averaging
about $1 per $1000 of insurance. Experience shows that
this 10 per cent, is just about the difference between actual
mortality and that expected under the Combined Experi-
ence (17 office) tables generally used in the United States,
excluding first year's mortality. In other words, the
mortality tables now in use may be considered to be equal
to actual experience already loaded 10 per cent, so as to
provide the extra "cost of insurance" necessary to meet
these general expenses of item 5. Here, again, there is
no occasion for alteration of present custom.
1 The cost of insurance for the year is determined as follows: At age
56 the amount at risk on an ordinary life policy in the first year of
insurance is $970.10. Of the 100,000 people starting in the hypo-
thetical company at age 10, 63,364 survive at 56. Of these, 1260
will die during the year, making the net loss 1260 times $970.10 or
$1,222,326, which is the total cost of insurance for the year. Divid-
ing this amount by 63,364, the number living at the beginning of the
year, we obtain $19.29, which is the pro rata cost of insurance per
$1000 for the first year. In the fifth year of insurance taken at
age 56 the amount at risk is $849.67, and multiplying this by 1546,
the number of deaths, we get $1,313,589.82 as the total cost of
insurance for the year. Dividing by 57,917, the number living at
the beginning of the year, we obtain $22.68 as the cost of insurance
per $1000, in the fifth year. At 90 the amount at risk is $127.82
and the total cost of insurance is that sum multiplied by 385 or
$49,210.70. Dividing by 847, the number living at the beginning
of the year, we obtain $58.10 as the cost of insurance per $1000 in
the thirty-fifth year of insurance. (Editor.)
182 YALE READINGS IN INSURANCE
Thus, starting from practical conditions, a simple,
consistent, and equitable theory for the provision and
distribution of expenses as they actually exist, may be
constructed, which will permit a company to go to a 3
per cent, basis for reserves and net premiums, without
material alteration in present office rates, and which adds
nothing to the ordinary labor of computations.
CHAPTER XIII
RESERVE 1
THIS fund has by high authority been well styled "the
great sheet-anchor of life insurance." By referring to the
table of net single premiums (page 168), it will be seen that
by the American Experience Table of Mortality, and 4|
per cent, interest, the net single premium that will insure
$1000 for whole life, at age 20, is $217.448. At age 21
the net single premium is $221.155. The latter sum is the
net amount that must be charged by the company in order
to insure a person who is 21 years old. This is the sum
that the company must hold at the end of the first year,
upon the policy issued at 20, after paying the net cost of
insurance for the year. The net single premium $217.448
paid at age 20 will, when increased by net interest for one
year, furnish the required contribution of this policy to pay
death claims, and leave in the hands of the company the
net single premium necessary to effect the insurance for
whole life at age 21, in case death does not occur before.
At the end of the second policy year, when the policy-
holder will be 22 years old, the net single premium that
will then insure $1000 for whole life is $225.019, and this
is the amount that must then be held by the company to
the credit of this policy, if the insured is still alive. In
like manner, each successive year, if the policy-holder sur-
vives, the company must have, in order to comply with
its contract, an amount on hand to the credit of this policy
equal to the net single premium that will at the age the
1 By Gustavus W. Smith. Reprinted from pages 42-47 of "Notes
on Life Insurance"; S. W. Green. New York, 1875.
183
184 YALE READINGS IN INSURANCE
policy-holder has attained be sufficient to effect the in-
surance.
Deposit or "reserve" in case a policy is paid for by equal
annual premiums. From the table it is seen that at
age 42 the net annual premium that will insure $1000 for
whole life (Actuaries' 4 per cent.) is $25.554. This pre-
mium is to be paid at the beginning of each year, as long
as the person is alive to make the payment. At the end
of the first year, or beginning of the second supposing
the insured to be alive he pays the net annual premium,
$25.554, and is insured for another year; but he is now
43 years old, and $26.585 is the net annual premium re-
quired to insure $1000 for life at age 43.
Why is it that the man who was insured at age 42, and
who has been insured one year, and has paid for that in-
surance, can, at 43 years of age, be insured by the company
for a less premium than is required to insure a man of the
same age, 43, but who now takes out a policy for the first
time in that company? Taking, for further illustration, a
still greater age, we find that at age 65 the net annual
premium that will insure $1000 for life is $74.718; and yet
the person who took out his policy at age 42, supposing
he is still alive, can be safely insured at age 65 by the com-
pany for a net annual premium of $25.554.
How is this? Why is it that a man 65 years of age can
be insured safely by a company for a net annual premium
of $25.554, and another man of the same age, probably in
better health, because he has just passed a medical exami-
nation, can not be safely insured by the company for a less
net annual premium than $74.718 ?
The net annual premium is calculated to provide against
all the probabilities and risks of the insured dying in any
year, and of his policy becoming due; and also the risk of
his being alive, from year to year, to pay his annual pre-
mium. At the end of each year, after the net annual
premium has paid its proportion of the losses by death for
the year, there must be in the hands of the company, on
RESERVE 185
account of and to the credit of each and every outstanding
policy, an amount in money or securely invested funds
that will be in present value the equivalent of a life series
of annual premiums, each of which is equal to the differ-
ence between the net annual premium the insured paid on
taking out his policy and the net annual premium he would
now have to pay if he were taking out a new policy at his
present advanced age. This amount that must be in the
hands of the company at the end of each year's business,
to the credit of the respective policies, is variously styled,
by life insurance writers, "reserve" "reserve for reinsur-
ance," "net premium reserve," "net value," "true value,"
' ' self-insurance/ ' etc .
As before stated, the net annual premium to insure
$1000 at age 42 is $25.554, and the net annual premium
to insure the same amount at age 43 is $26.585. The
difference between these two premiums is $1.031. The
value at age 43 of a life series of annual payments of $1
is from the table found to be $15.374. We can find the
value at the same age of a whole-life series of annual pay-
ments, each of which is equal to $1.031, by the proportion;
$1: $1.031: : $15.374 is to the answer. Solving this pro-
portion, we find that the value at age 43 of a life series of
annual premiums of $1.031 is equal to $15.851.
If the company has the $15.851 on hand in deposit,
which is the cash equivalent of this difference in the future
net annual premiums, this amount of cash in hand, to-
gether with the smaller net annual premium due at the
age of 42, is just the same value as the net annual premium
due to age 43. This $15.851 is the amount that must be
held on deposit in trust for the policy of $1000 taken out
at age 42, at the end of the first year of the policy.
The net annual premium at age 44 to insure $1000 for
whole life is found from the same table to be $27.682.
The difference between the net annual premium due to
age 44, and that which the person insured at age 42 will
pay when he is 44 years of age, is obtained by subtracting
186 YALE READINGS IN INSURANCE
$25.554 from $27.682; this difference is $2.128, and there
must be in the hands of the company a deposit at the end
of the second year of this policy equal to the value at that
time of a whole-life series of annual premiums, each of
which is equal to $2.128, which is the difference between
the net annual premium due to age 44 and that which
the insured will pay. From the table, we find that the
value at age 44 of a whole-life series of net annual pre-
miums of $1 each is $15.119. We find the value at same
age of a whole-life series of annual premiums, each of which
is $2.128, by the proportion; $1: $2.128: : $15.119 is to the
answer.
Solving this proportion, we find the value sought is
$32.172. This is the fund on deposit, or the "reserve,"
for this policy at the end of the second year. In a manner
entirely similar, we find the amount that must be on
deposit at the end of each policy year; and if the company
has it on hand, and keeps it securely invested at the net
rate of interest, and regularly compounds the interest
yearly, this "trust fund deposit/' together with the present
value of the future net annual premiums, will always keep
the policy that is paying the smaller net annual premiums,
due to the younger age at which the holder entered the
company, just on a par with those policies that come in
later, or at a more advanced age of entry, and pay the
larger annual premium due to this advanced age.
The amount of this deposit may be calculated by a
somewhat different process, as follows: At the time the
contract is entered into, the value at that time of the
whole-life series of net annual premiums to be paid for
the policy is exactly equal to the net single premium
at that age. Remember that the net single premium
is obtained by direct calculation for insurance each
separate year, and we convert the net single premium
into an equivalent net annual premium. At the end
of any policy year, find the net single premium due to
that age, then find the value at that age of the series
RESERVE 187
of net annual premiums the insured is to pay; this will
be less than the net single premium that at that age
will effect the insurance, and this difference is the amount
that must be held by the company in deposit to the
credit of the policy. For instance, at age 42 the net
single premium to insure $1000 for whole life, actuaries' 4
per cent., is $399.184, and this is the value at that age of
the whole-life series of ten annual premiums, $25.554, due
to the age. At the end of the twentieth policy year, the
insured, if alive, will be 62 years old. The net single pre-
mium required to insure $1000 for whole life at 62 is
$623.826. Now the value at age 62 of a life series of an-
nual payments of $1 each is $9.781; multiply this by the
net annual premium the insured is paying, that is, $25.554,
and we have the value at age 62 of the series of net annual
premiums the insured is to pay. This amounts to $249.931,
but direct calculation shows, as stated above, that the
insurance on the assumed table of mortality and rate of
interest can not be effected at that age for less than $623.826
net single premium. The difference between this sum and
the value of the series at age 62 which the insured is to
pay must be held by the company in deposit to the credit
of the policy; therefore, subtracting $249.931 from $623.826
we have $373.895, which is the sum that must be in de-
posit at the end of the twentieth policy year belonging to
a policy taken out at age 42 for $1000.
It is necessary to have the value of the net single pre-
mium at each age, and all that portion of this value not
in the present value of the future net annual premiums
must be on hand in deposit. Therefore, a company that
charges a less net annual premium than that called for
by the table of mortality and rate of interest designated
by law must be required to add to what would be the
legal deposit, in case the future net premiums are equal
to those required by the law, an amount equal to the value
at that time of a series of annual premiums each of which
is equal to the difference between the net annual premium
188 YALE READINGS IN INSURANCE
called for by the legal data and the net annual premium
the company has agreed to receive.
Illustration. To illustrate the manner in which the
"deposit" must accumulate in the earlier years of a life
insurance company, in order to enable it to meet its obli-
gations when the death claims exceed the premiums, let
us suppose that a company insures 20,000 policy-holders
for $5000 each, at age 30. The net annual premium re-
quired for each person is $84.85. This, on 20,000 policies,
would make the first payment of annual premiums amount
to $1,697,000. The net interest is assumed to be 4 per
cent., and, for the first year, it amounts to $67,880. The
company has, therefore, at the end of the first year, $1,764,-
880. By the table of mortality, 168 of the insured will
die during the first year; to the heirs of each, the company
must pay $5000. The losses by death are, therefore,
$840,000; leaving on hand with the company, after all
the death claims are paid, $924,880; which would be a
handsome "surplus" at the end of the first year's business,
but for the fact that every dollar of this sum belongs to
the trust fund deposit, and is an already accrued liability
a debt.
At the end of the thirty-fourth year the deposit for each
outstanding policy must be $2464.25. The table of mor-
tality shows that 11,297 of the policy-holders will be
living at the end of the thirty-fourth year; the company
must, therefore, have on hand a trust fund deposit amount-
ing to $27,838,632.25. We find that 11,742 policy-holders
were living at the beginning of the thirty-fourth year, and
their net annual premiums amounted, in the aggregate,
to $996,308.70. There were 445 deaths during the year,
and the aggregate losses by death amounted to $2,225,000.
Thus, in this year, the death claims exceed the annual
premiums by more than one and one quarter millions of
dollars. But the company has on hand, in deposit, at
the end of the year, $27,838,632.25, after having paid the
death claims. The company, however, is not rich, nor
RESERVE 189
more than able to pay its liabilities, because it will surely
take the last cent of this amount, with all the future net
annual premiums, and interest compounded regularly all
the time, to enable it to meet and pay its now rapidly
increasing death claims.
Let us look into the accounts of the company at the end
of the fiftieth year. The "deposit" on account of each
policy at the end of this year is $3708.20; and there are
living 3080 policy-holders. The aggregate "deposit" for
the outstanding policies at this time is $11,421,256. There
were 461 deaths during the year, and the aggregate of
policies that matured during the year amounted to
$2,305,000. There were 3541 policy-holders living at the
beginning of the year, and the aggregate of the net annual
premiums paid by them amounted to $300,453.85. We
see from this that the losses by death during the year
exceeded the net annual premiums by more than $2,000,000.
The "deposit" is reduced to $11,421,256, which is less than
one-half the amount in "deposit" at the end of the thirty-
fourth year. But the company has not lost money, it
has only been paying its debts. At the end of the thirty-
fourth year it had more, but it owed more. It had enough
then, and only enough, to pay what it owed; it is in the
same condition now.
At the end of the sixty-fifth year we find the "deposit"
that must be in the hands of the company to the credit
of each policy is $4560.87; and there are twenty of the
original policy-holders living. The aggregate "deposit"
for these twenty outstanding policies is $91,217.40. The
$27,838,632.25 that the company had on hand at the end
of the thirty-fourth year is now reduced to less than
$100,000. But the company has only been paying its
debts to policy-holders not losing money. In fact, it
had none to lose of its oivn.
At the end of the sixty-ninth year the "deposit" amounts
to $4722.84; and there is one policy-holder living. He
pays his regular net annual premium the day he is 99
190 YALE READINGS IN INSURANCE
years old. The premium is $84.85. This, added to the
"deposit" on hand at the end of the preceding year,
makes $4807.69 of this policy-holder's money in the hands
of the company the day the policy-holder is 99 years old.
At net interest, which is 4 per cent., the interest for the year
will amount to $192.31; and this, added to the amount,
$4807.69, on hand at the beginning of the year, makes
$5000, with which to pay the policy of the last policy-
holder in this company.
We see that the $27,838,632.25, which the company
had in its possession at the end of the thirty-fourth year,
belonging to policy-holders, has been paid to them. The
policies were all paid at maturity; the company has
nothing left. In fact, it never had a cent of its own during
the whole time, although we have seen it the custodian,
at one time, of nearly $28,000,000 of other people's money.
It owed every cent, and it paid every cent it owed.
It is a marked peculiarity of life insurance business, as
seen in this illustration, that the annual premiums exceed
the death claims for the first 30 or 40 years; after which
time the losses by death largely exceed the annual pre-
miums. The trust fund deposit, after a table of mortality
and rate of interest have been designated, is a fixed mathe-
matical amount; it increases for each policy at the end of
every succeeding year of the existence of the policy.
RESERVE
191
DEPOSIT AT THE END OF EACH YEAR ON A WHOLE-LIFE POLICY FOE
$1000, TAKEN OUT AT AGE 45 AMERICAN EXPERIENCE
FOUR PER CENT.
Age
Deposit
Age
Deposit
Age
Deposit
45 ....
$17.24
62 ....
368.46
79 ....
$712.77
46 ....
34.98
63 ....
390.72
80 ....
730.56
47 ....
53.22
64 ....
412.91
81 ....
748.03
48 ....
71.95
65 ....
434.96
82
765.24
49 ....
91.18
66
456.82
83 ....
782.37
50 ....
110.72
67 ....
478.45
84 ....
799.49
51 ....
130.72
68 ....
499.78
85 ....
816.43
52 ....
151.09
69 ....
520.78
86 ....
832.90
53 ....
171.81
70 ....
541.39
87 ....
848.53
54 ....
192.85
71 ....
561.58
88 ....
863.28
55 ....
214.18
72 ....
581.39
89 ....
877.54
56 ....
235.75
73 ....
600.85
90 ....
891.55
57 ....
257.55
74 ....
620.02
91 ....
904.65
58 ....
279.53
75 ....
638.95
92
915.35
59 ....
301.66
76 ....
657.70
93 ....
925.41
60 ....
323.88
77 ....
676.26
94 ....
934.42
61 ....
346.16
78 ....
694.62
95 ....
1000.00
CHAPTER XIV
NET VALUATION 1
THE insurance laws of the several states require every
regular life insurance company to have on hand at all times
cash or approved securities not less in amount than the
net value of its outstanding policies, according to the
minimum legal standard of valuation.
By net value is meant the amount of the reserve per-
taining to the policy at any stated time. It is always
the difference between the present worth of the net pre-
miums to be paid on the policy, and the present worth
of the benefits guaranteed thereunder such as amounts
payable at death, at maturity, on surrender, etc.
Net valuation is the process of determining the legal
net value or reserve of a company's outstanding policies,
the net premium only not the gross premium being
considered. To understand what is meant by the term
minimum legal standard of valuation, observe that, in
the computation of the premium, it is assumed that the
reserve will earn a specified rate of interest. In the case
of most companies nowadays, the rate assumed is 3 per
cent. On this basis, the required net annual premium of
an ordinary life policy issued at age 56 was found to be
$47.76. The reserve or insurance fund, consisting of the
net premium receipts plus the interest earned thereon at
the assumed rate, suffices for the payment of all existing
policies at maturity.
1 Reprinted by special permission from pages 78-87 and 114-122 of
the "Educational Leaflets" issued by the Mutual Life Insurance
Company of New York.
192
NET VALUATION 193
It is obvious that, in order to accumulate a specific sum
within a stated time by means of small yearly deposits,
the deposits must be larger if the interest to be added to
the fund is at the rate of only 3 per cent, than if 3 or 4
per cent, interest is to be received. It is, therefore, equally
clear that, if the net premium receipts of a life insurance
company were certain to earn 3 or 4 per cent, interest,
the rates necessary to provide funds sufficient for the
payment of all policies at maturity would be lower than
when only 3 per cent, interest is realized. In other words,
when the reserve is to be accumulated at 3 per cent, inter-
est, larger net premiums are necessary than when a higher
interest rate is assumed.
In all cases, whatever the rate of interest assumed,
the reserve at the attained age of 96 is equal to the face
of the policy. The reserve at the end of the thirty-ninth
year at the attained age of 95 is $923.11. That sum plus
the next year's net premium, $47.76, plus 3 per cent,
interest, amounts to $1000 at the end of the year at the
attained age of 96. Had it been assumed in the computa-
tion that the funds would earn 4 per cent., the required
net premium would have been only $45 instead of $47.76,
and the reserve at the attained age of 95 would have been
$916.54 instead of $923.11. Observe that $916.54, plus
the next year's net premium of $45, plus 4 per cent, inter-
est, likewise amounts to $1000 at the end of the year at
the attained age of 96. Thus, as stated before, the higher
the rate of interest assumed, the smaller will be the re-
serve pertaining to any policy. A 3| per cent, reserve is
larger than one computed on a 4 per cent, basis and smaller
than a 3 per cent, reserve.
The laws of the several states prescribe the maximum
rate of interest that may be assumed, and the mortality
table that shall be used, in computing the reserve or net
value of a company's policies. This requirement is termed
the legal standard of valuation. The net value com-
puted by the legal standard is termed the legal net value
194 YALE READINGS IN INSURANCE
or legal reserve. In several states the rate of interest
fixed by the minimum legal standard, or the lowest stand-
ard prescribed by law, is 4 per cent. in others 4 per
cent. In New York, Massachusetts, and one or two other
states, the minimum legal standard calls for 3| per cent,
interest, so that a company whose premiums are computed
on a 4 per cent, reserve basis must, in order to do business
in those states, submit to a valuation by the higher standard
of 3 per cent. Many companies have recently adjusted
their premiums for new business to a 3 per cent, basis,
and are accumulating 3 per cent, reserves accordingly,
notwithstanding the lower minimum standard provided
by law.
Knowing the ages of the several policy-holders, we may
determine how many according to the mortality table
will die in each year thereafter, and how many will be
living at the end of each year, and hence the amount of
claims to be expected in each year until all existing policies
have matured, either by the death of the policy-holder or
the expiration of the term for which the contract was
written. Having these data we may compute the present
worth or present value of all outstanding policies that
is, the sum which accumulated at a given rate of interest,
say 3 per cent., will equal an amount sufficient to pay every
policy in full as the latter matures.
In like manner, knowing how many policy-holders will
be living according to the table at the beginning of each
subsequent year, to pay the premiums called for by the
several policies, we may determine the net premium in-
come of each year until the last existing policy has matured.
Hence we may compute the present worth of all future
net premiums to be collected on outstanding policies.
Let us now take for illustration the case of a company
issuing 100,000 policies, aggregating a total of $100,000,000
insurance. Assume that the present worth of those
policies that is, the present worth of the benefits to
accrue under their terms, is found to be $37,055,000.
NET VALUATION 195
This sum then constitutes the present value of the policy
obligations which the company has assumed. To pay
these policies as they mature, the company has no other
resource than the net premiums stipulated to be paid
thereon plus the interest which those premiums will earn
at the assumed rate, say 3 per cent. If now the present
worth of these premiums is likewise found to be $37,055,000,
it is obvious that the company is solvent and will if
3 per cent, interest is earned and the mortality does not
exceed that indicated by the table be able to meet its
obligations at maturity. A statement of its assumed
condition would be as follows :
CREDIT SIDE
Present worth of net premiums to be collected on existing
contracts $37,055,000
DEBIT SIDE
Present worth of benefits under outstanding policies $37,055,000
Such would be the exact status of a legally solvent
mutual company the day it begins business, after a num-
ber of policies have been written but before any premiums
have been collected.
Let us, however, take the same company after several
years' premiums have been collected and a number of poli-
cies paid, a reasonable amount of new business having been
written in the meantime. As some of the net premiums
called for by existing contracts have been received and
applied, the present worth of the premiums remaining to
be collected will no longer equal the present worth of bene-
fits under policies now outstanding. Assume, for example,
the present worth of those benefits to be now $38,000,000,
and the present worth of future net premiums $34,000,000.
The present worth of benefits promised, or obligations
assumed, will be larger than at first, because every exist-
ing policy is nearer maturity, while the present worth of
net premiums to be collected in the future will be less than
196 YALE READINGS IN INSURANCE
before, because some part of the premiums originally
called for by every existing policy have already been
collected. Our debits then in this case would exceed our
credits by $4,000,000, and the statement would now be
as follows:
CREDIT SIDE
Present worth of net premiums to be collected on existing
policies $34,000,000
Deficit 4,000,000
$38,000,000
DEBIT SIDE
Present worth of benefits under outstanding policies $38,000,000
The company is now clearly insolvent under the law,
for the present worth of net premiums to be received
its only apparent resources is $4,000,000 less than the
present worth of the benefits to be paid. This deficit
represents the legal reserve liability of the company -
that is, the net value of its outstanding policies accord-
ing to the legal standard of valuation, being the difference
between the present worth of the benefits for which the
company is liable under its policies and the present worth
of all the net premiums to be received. If the company,
however, after providing for the tabular mortality and
matured endowments, has reserved from year to year the
balance of its net premium and interest income, the funds
so reserved will now aggregate exactly the amount of the
computed reserve liability. In other words, it will have
on hand the reserve required by law to maintain solvency,
and the statement of its condition will now assume the
following form :
CREDIT SIDE
Present worth of net premiums remaining to be collected
on existing policies $34,000,000
Reserve (Cash and Invested Funds) 4,000,000
$38,000,000
DEBIT SIDE
Present worth of benefits contracted for in outstanding
policies $38,000,000
NET VALUATION 197
This suggests the definition of the legal reserve given
above, to wit: "A fund equal in amount to the excess of
the present value of benefits under outstanding policies
over the present value of net premiums to be paid on
those policies."
On the basis of the statement as last rendered, the com-
pany is technically solvent, since the credits and debits
arc equal. The form of the statement may be simplified
by eliminating the two items, "Present worth of net pre-
miums" and "Present worth of policies," and simply
carrying to the debit side of the account the difference
between the present worth of policy obligations and the
present worth of premiums to be collected, which is, the
company's legal reserve liability, or the net value of the bene-
fits guaranteed under its outstanding policies. As the
company holds cash and invested funds to the amount
of this liability, the statement will assume the following
form:
CREDIT SIDE
Cash, Invested Funds, and Credits (Assets) $4,000,000
DEBIT SIDE
Net value of all outstanding policies (Liability) $4,000,000
The comparison of a company's admitted assets
money, invested funds, and valid credits approved by the
insurance authorities with its total liabilities consti-
tutes the legal test of its solvency. By the financial state-
ment last above set out, the company in question is legally
solvent its assets being exactly equal to its liabilities;
nevertheless, a company in just that condition would in
fact be upon the verge of bankruptcy, for the loss of a
small amount by depreciation of values, extra mortality,
or other cause, would render it insolvent under the law.
Such being the case, it is of the first importance for every
company to maintain as a margin of safety an additional
fund in excess of all legal liabilities, variously termed
198 YALE READINGS IN INSURANCE
"surplus," "indivisible surplus," "unassigned funds," etc.
Under the New York law this extra fund or margin of
safety is called the contingency reserve. Assuming that
the company in question has such additional funds to the
amount of $1,000,000, a statement of its financial con-
dition would then read :
ASSETS
Cash, Invested Funds, and Credits $5,000,000
LIABILITIES
Net value of all outstanding policies $4,000,000
Contingency Reserve (Surplus) 1,000,000 $5,000,000
In the above case, a loss of assets in excess of $1,000,000
would sweep away the contingency reserve and render
the company insolvent. The smaller the amount of such
additional fund, the more imminent the danger. It is
obvious, therefore, that the measure of a company's
strength is to be gauged by the amount of extra or surplus
funds which it holds in addition to the legal reserve or
net value of its outstanding policies, as well as by the
percentage which such extra funds are of the total liabilities,
i.e., the company's "ratio of assets to liabilities." For
example: According to the statistics for 1906, a certain
company of well-known excellence had surplus funds at
the end of that year of nearly $8,000,000, and a ratio of
assets to liabilities of 108; that is, its assets exceeded its
liabilities by only 8 per cent.
On the other hand, the assets of a smaller company of
considerable prominence exceeded its liabilities by 29 per
cent., yet its total surplus funds were less than $130,000.
Assuming that the assets in each case were of the highest
class, there can be no doubt as to the relative strength of
the two organizations the same being the reverse of
what might be inferred if only the ratios cited were to be
considered. A surplus of only $130,000 might be readily
wasted or lost in a single transaction far more readily,
NET VALUATION 199
it will be conceded, than a surplus of nearly $8,000,000.
A still more striking illustration of the misleading char-
acter of this ratio is afforded by the figures of a still smaller
company with a ratio of assets to liabilities of 592 and
a total surplus of less than $21,000. In another case, if
the assets of a company were largely of real estate or of
fluctuating securities, a surplus of 8 per cent, or less
however large in amount might easily be swept away
by a sudden depreciation of values, if current market
quotations were to be taken as a basis of valuation.
Several modifications of the system of net valuation
described in the foregoing pages have been established
by recent legislation.
The statement may be safely made that the ordinary
loading of a life insurance premium is never sufficient in
the first year to meet the expenses incident to securing
the business. To illustrate: If the gross premium of an
ordinary life policy at age 56, American Experience Table,
and 3 per cent, interest, is $63.68, we find by deducting
the net premium of $47.76 that the loading is $15.92.
The principal items of expense the first year will be the
agent's commission, say 40 per cent., or $25.47, and the
medical examiner's fee, $5, making for these two items
alone $30.47, or nearly double the amount of the loading.
As the net premium can not be trenched upon, the discrep-
ancy of $14.55 is temporarily advanced from the accumu-
lated surplus, the latter to be recouped subsequently from
the saving in mortality or other gains accruing to the new
policy.
In the case of new companies, however, and others
which have accumulated but little surplus, the policy
sometimes provides that the contract shall be valued in
the first year as term insurance, the regular life insurance
policy beginning one year later. Thus the entire first
premium, less only the charge for the actual mortality of
the year, is available as a loading for meeting the cost of
new business. This method is variously designated as
200 YALE READINGS IN INSURANCE
the preliminary term, or first-year term system, and has
been adopted by most companies organized in recent
years. In the case of a preliminary term ordinary life
policy at age 56, the net premium in the first year would
be merely the natural premium, or yearly term rate, that
is, $19.31, as given above. The practice of preliminary
term companies is, however, to charge the same gross
premium in the first as in subsequent years. If the gross
premium is $63.68, we shall have, after deducting the
net premium of $19.31, a loading the first year of $44.37,
or about 70 per cent. Deducting $5 for medical examina-
tion, there remains a balance of $39.37, or nearly 62 per
cent., for commissions and other expenses.
In the valuation of such a contract the company is not,
of course, charged with any reserve at the end of the first
year, but during the second and subsequent years the net
premium required will be that of an ordinary life corre-
sponding to age 57, the attained age of the insured when
the regular life policy begins. In this case, then, the net
premium in the second and subsequent years would be
$50.13 instead of $47.76 (the net premium at age 56),
and if this amount be deducted from the gross premium
of $63.68, the balance of $13.55 will be the permanent
loading instead of $15.92. Thus it will be seen that by
this system the loading is greatly increased in the first
year, but is materially less than the regular loading in
subsequent years. There will be no reserve at the end of
the first year, and the reserve of the second policy year
will be the same as the first year reserve of a regular
ordinary life policy issued at age 57. In fact, from the
beginning of the second year the policy will be valued as
an ordinary life issued at age 57, or one year later than its
actual date, as stated above. It follows that the reserve
of an ordinary life policy issued on the preliminary term
plan will always be less than it would have been had it
been issued at the same age on the regular ordinary life
plan, because always one year behind in the process of
NET VALUATION 201
accumulation. This difference will continue until age 96,
when the reserve in either case becomes equal to the face
of the policy. It will be appreciated that smaller reserves
mean smaller cash values, and also that smaller loadings
mean smaller dividends.
We have heretofore defined the terms "level premium"
and "net valuation." Under the preliminary term sys-
tem the gross premium may be level from date of issue
of policy, but the net premium is not so. For example,
in the case just illustrated, the net premium in the first
year is $19.31 and in subsequent years $50.13, though
the gross premium is $63.68 for every year. On the other
hand, we have seen that the net premium of the equivalent
ordinary life policy on the regular legal reserve plan is
$47.76, the same fixed amount for every year including
the first. This is what is meant by a net level premium,
and the valuation of policies on this basis is strictly net
level premium valuation, though commonly termed simply
"net valuation."
In the case of a "limited premium" policy the pre-
liminary term plan varies somewhat from that illustrated.
Let us consider its application, for example, to a fifteen-
payment life. The net 3 per cent, premium of the regular
policy at age 56 would be $60.17. If the gross premium is
$78.16, the yearly loading will be $17.99. On a prelimi-
nary term basis, the equivalent contract would consist of
a combined one-year term policy and a fourteen-payment
life, the latter beginning at age 57. The net premium for
one year's term insurance would be the same as before,
$19.31. Deducting this amount from the gross premium
of $78.16, we obtain a first-year loading of $58.85. The
3 per cent, net premium of the fourteen-payment life at
age 57 would be $64.55, w r hich leaves a yearly loading of
$13.61, instead of $17.99, for the remaining fourteen years.
As in the case of the preliminary term ordinary life, there
will be no reserve at the end of the first year. At the end
of the second policy year the reserve will be $46.14. This
202 YALE READINGS IN INSURANCE
is larger than the first-year reserve of the regular policy,
but much smaller than the reserve of the latter at the end
of the second policy year, it being then $86.72. The pre-
liminary term reserve at the end of each subsequent policy
year approaches more and more nearly to the correspond-
ing reserve of the regular fifteen-payment life until the
end of the fifteenth year when, at the attained age of
71, both reserves are necessarily the same, since both poli-
cies are now fully paid up. In other words, on the regular
fifteen-payment life the reserve of a fully paid policy is
accumulated in fifteen years, while on the preliminary
term fifteen-payment life the same reserve is accumulated
during the last fourteen years.
The preliminary term system, as applied to an ordinary
life policy, is not an unreasonable method of providing
for the cost of new business in the case of a young com-
pany, notwithstanding the apparent injustice of charging
a premium of $63.68 for term insurance during a single
year, the net natural cost of which is $19.31. Indeed, only
by the use of some such expedient would it be possible
for a new company to establish itself at all on the mutual
plan, since being in receipt of little or nothing from load-
ings on old business, and having no accumulated surplus,
it would be unable to meet the necessary cost of new
insurance and provide at the same time for the required
legal reserve of the first year. Only on the stock plan, with
the stockholders personally advancing extra funds for
the purchase of new business, could a new company com-
ply with the requirement to put up the full net level pre-
mium reserves on its policies beginning with the year of
issue. The adoption of the preliminary term plan by an
old company, however, is commonly regarded as a con-
fession of weakness or of an extravagant management,
since it is a virtual admission that the company is unable
to keep its expenses within its aggregate receipts from
loadings, and that it dares not trench upon its limited
surplus.
NET VALUATION
203
If the application of the preliminary term plan to the
ordinary life policy be defensible, it nevertheless becomes
decidedly objectionable when applied without modifica-
tion to limited payment and endowment policies, as
illustrated in the following table showing the loadings
of the first year :
Policy, Age 56
Gross
Premium
Net
Natural Cost
Loading
Ordinary life
$63.68
$19.31
$4437
Fifteen-payment life
78.16
1931
5885
Ten-payment life
99.33
19.31
8002
Twenty-year endowment
72.66
19.31
53.35
Ten-year endowment
121.06
19.31
101 75
The grotesque absurdity of such loadings sufficiently
condemns the full preliminary term system, by which is
meant the application of preliminary term without modifi-
cation to all forms of policies.
In 1897, Miles M. Dawson, consulting actuary, intro-
duced a modification of the preliminary term plan, which
consists in limiting the loading of the first year on all
limited payment and endowment forms to the amount
available, on a preliminary term basis, on the ordinary
life policy. For example, referring to the table above,
while the gross premiums would vary on the different
forms as indicated, the loading could in no case exceed
that of the ordinary life policy, to wit: $44.37. From
the balance of the premium on limited payment and en-
dowment forms the company would put up a reserve in
the first year, thus reducing the net premium and increas-
ing the loadings of subsequent years. The tendency of
this plan would be to encourage the sale of ordinary life
policies rather than limited payment and endowment con-
tracts. Several modifications of "modified preliminary
term" have been legalized in different states.
204 YALE READINGS IN INSURANCE
The select and ultimate valuation method of computing
reserves was likewise suggested by Mr. Dawson as a sub-
stitute for modified preliminary term. To a correct
understanding of the system a knowledge of the several
classes of mortality tables is necessary.
Assume, for illustration, that we wish to ascertain how
many of 100,000 persons, all 30 years of age, will die
within one year. If to that end we note the history for
twelve months of 100,000 persons of the age stated, who
have just passed a rigid medical examination for life in-
surance, we shall find a much smaller number dying than
in 100,000 of the same age who were examined five years
ago, at age 25. If we note the history of both classes dur-
ing the succeeding year, we shall find a larger percentage
of deaths in each instance than in the first year, and, as
before, a smaller percentage of deaths in the first than
in the second class, but the death rates of the two classes
will now be nearer together than in the first year. In
the third year, while the death rate of each class will again
be higher than formerly, the difference between the two
rates will again be less than in the second year. With
each added year the difference in death rates of the two
classes will diminish, until ultimately, after the benefit
of medical selection has worn off, the two death rates will
be theoretically the same. It is commonly assumed that
this stage will be reached in five years.
Lives which have just been selected by a medical ex-
amination are called select lives, and a mortality table
based on the subsequent history of such lives is called a
select table.
As it is assumed that the effects of medical selection
ultimately disappear, say in about five years, a mortality
table based on the history of lives insured five or more
years ago is called an ultimate table.
A mortality table based on the history of lives insured,
some within the year, others within two or three or ten
years or more, is called a mixed table.
NET VALUATION
205
The American Experience Table of Mortality, which is
in general use in the United States, is supposed to be an
"ultimate table," its compilation having been based upon
the subsequent history of lives insured for five years or
more. The rate of mortality indicated by this table,
therefore, is materially greater in the first five years, at
least, than that pertaining to select lives at corresponding
ages. As a basis for establishing a minimum standard of
valuation and for fixing a limitation of expenses in securing
new business, the New York law assumes that the mor-
tality of select lives in the first policy year immediately
following medical examination will be 50 per cent, of the
tabular mortality of the American Experience Table; in
the second year, 65 per cent.; in the third year, 75 per
cent.; in the fourth year, 85 per cent.; in the fifth year,
95 per cent.; and in the sixth and subsequent years, 100
per cent. On this basis smaller terminal reserves will be
required during the first four years than by the American
Experience Table, though they will be the same from the
fifth year on, as illustrated in the following comparison of
terminal reserves computed by the two methods on an
ordinary life policy issued at age 56.
Termini
J Reserves
End of Year
American Ex-
perience Table
Select and
Ultimate
First
$29.90
$14.41
Second
59.94
50.84
Third
90.06
85.87
Fourth
120.21
119.13
Fifth
150.33
150.33
Sixth . .
180.36
180.36
This is the system of select and ultimate valuation pre-
scribed by the laws of New York as a minimum standard.
In this standard the new company, which might find it
206 YALE READINGS IN INSURANCE
impracticable to put up the net level premium reserves
in the first and immediately succeeding years, has a sub-
stantial measure of relief. The company collects during
the first four years, as well as thereafter, the full gross
premium. The margin in the first year's premium by rea-
son of the smaller reserve required the full reserve being
made up in subsequent years by the saving in mortality -
is available for other purposes and may be anticipated and
expended in securing new business.
CHAPTER XV
POLICY CONTRACTS 1
LIFE insurance practically had its origin in a contract
between two or more parties that was in the nature of a
wager. The pay or of the premium would win if the in-
sured died within a given period, and the insurer would
win if the insured survived such a period.
The first record we have of such a life insurance contract
shows that it was made June 18, 1583, in favor of Richard
Martin, citizen and alderman of London. The subject
insured was one William Gybbons, and the contract prac-
tically amounted to a wager between Richard Martin and
thirteen merchants of the city of London. Martin paid
the thirteen merchants about 30. If Gybbons died
within twelve months, then the thirteen merchants
agreed to pay about 400. While this was a wager
transaction, and would now be void in law, it was, in a
manner, the beginning of life insurance contracts.
A policy on the life of Nicholas Bourne, dated November
25, 1721, issued by the London Assurance Corporation
at the request and expense of Thomas Baldwin, is the
second authentic record we have of an early life insurance
contract. An interesting feature of this contract is that
it would meet the necessities of the Second Adventists,
whose considerations of life insurance are disturbed by
the prospect of being translated and thus leaving behind
1 By L. G. Fouse, President of the Fidelity Mutual Life Insurance
Company, Philadelphia. Reprinted with additions from pages 209-
228, Volume XXVI, Annals of the American Academy of Political and
Social Science.
207
208 YALE READINGS IN INSURANCE
them no evidence of death. The policy provided that
"in case he, the said Nicholas Bourne, shall in or during
the said time, and before the full End and Expiration
thereof, happen to dye, or decease out of this world by
any Ways or Means whatsoever, That then the above
said Governor and Company will well and truly satisfy,
content, and pay unto the said Thomas Baldwin, his Ex-
ecutors, Administrators or Assigns, the Sum or Sums of
Money by him Assured, and here underwritten, without
any Allowance, Deduction, or Abatement whatsoever."
The only condition of avoiding the contract was going to
sea or into the wars without written consent.
Another old contract of which we have a record is on the
life of the Right Rev. William Carmichael, Lord Bishop
of Clonfert, dated June 27, 1754. The insurance was
effected by and for the benefit of George Cockburne at
the rate of $5 premium for each 100 insured. Suicide,
or death by the hands of justice, or going outside of his
Britannic Majesty's dominions of Great Britain and Ire-
land without first obtaining license in writing, voided the
contract.
A contract of life insurance must now be supported by
a legal insurable interest. That is to say, when the insur-
ance is effected by any person other than the insured,
the beneficiary must have an interest in the continuance
of the life of the insured and not merely a monetary
interest in his death.
While it is not my province to discuss the actuarial and
scientific questions involved, it is proper to say that the
discovery of the law of mortality susceptible of mathe-
matical calculation made it possible to supplant crude
guesses at the chances of life and death by tables con-
structed from mortality observations.
The contracting parties under the policy are usually
designated in this country as the insured, the subject upon
whose life the policy is written; the insurer, the one who
assumes the obligation to pay the insurance; and the bene-
POLICY CONTRACTS 209
ficiary, the one to whom the insurance is paid in the event
of death. There are, therefore, usually three parties to a
policy contract.
Individuals under modern methods do not act as in-
surers. The laws of the several states have provided for
the incorporation of insurance companies which have per-
petual succession. Individuals die, but properly managed
corporations are supposed to live always. The powers
of a life insurance company under the statute usually
consist of effecting insurance upon the lives of individuals,
every insurance appertaining thereto or connected there-
with, and the granting and purchasing of annuities. The
companies are authorized to make by-laws for their govern-
ment not in conflict with the laws and constitution of the
state in which they are incorporated, or of the United
States. Full liberty and freedom is, therefore, vouch-
safed to the life insurance company in the making of
contracts with a single requirement applicable only to
companies known as old line or legal reserve companies.
This requirement amounts to a standard of safety adopted
by the state, which provides that whatever the policy con-
tract may be the insurance company must always have
in its coffers money or securities equal to the difference
between the present worth of what it promises to pay,
and the present worth of the net premiums the insured
promises to pay, which difference is known as the reserve.
Beyond this the state wisely does not undertake to inter-
fere with or handicap the companies. While this lati-
tude of license has probably in a degree been abused, it
has given the public a great variety of policy contracts
from which to select; and as the insuring public is becom-
ing better informed and able to discriminate between the
sound and unsound, such latitude or license is becoming
less objectionable. Indeed, by reason of the ever chan-
ging conditions it is infinitely to be preferred to any
attempt at circumscribing legal limitations to policy con-
tracts.
210 YALE READINGS IN INSURANCE
The word policy means in general a course or plan of
action or administration. During the Middle Ages it was
used to designate memoranda. In England it has been
applied to "a warrant or ticket for money in the public
funds." In the United States it is applied to a gambling
game. Among these varied definitions and uses has
arisen its universal employment to designate compre-
hensively a written instrument embodying a contract of
insurance involving, as it does, contingencies and proba-
bilities. In life insurance a policy contract is, therefore,
one involving the contingency of death, in which the
minds of the parties thereto have met and agreed upon
the terms and conditions of the underwriting.
The taking out of a policy of life insurance signifies
a sense of responsibility, frugality, and thrift on the part
of its owner. Under existing social and economic con-
ditions the life insurance contract has become a necessity.
The man who assumes the responsibility of a family and
of engaging in business needs protection, in the event of
his early death, for both. The insured or owner of the
contract often derives substantial benefit from the self-
denial and formation of the frugal habits acquired by the
preparation to meet the periodical payment of premiums.
He is also benefited by the consciousness that he is creat-
ing an estate to benefit his dependents, which, in the event
of his death, becomes immediately convertible into cash
without the intervention of administrator, executor, or
attorney. It is generally conceded by the trust officers
of our great trust companies that there are no securities
left by decedents of as great general value, because of not
being affected by market, etc., as are policies of life insur-
ance. It is only in cases of gross fraud or where the rights
of beneficiaries are disputed that any contest is made by
the companies. For example; according to the sworn
returns of 1902 and 1903 the total existing contested
claims, representing an accumulation of years, amounted
to only $668,200, while the claims paid during the same
POLICY CONTRACTS 211
years by the legal reserve companies represented $367,-
035,413. Thus the accumulated contests represented only
one-fifth of 1 per cent, of the amount of claims paid in two
years; or for every $1000 paid, only $2 were contested,
and it is safe to say that currently not more than $1 out
of every $1000 paid is contested.
For the beneficiaries of such contracts it signifies the
means of support after the decease of the breadwinners;
it means escape from the pittances or charities of the
world.
To the state life insurance signifies a much reduced poor
rate for the maintenance of almshouses and eleemosynary
institutions.
Motives in Framing Contracts. In order to get at the
motives we will take up the considerations involved in
the framing of a policy contract. It is, no doubt, true
that policies have been framed with temporary success,
having quick returns to the managers as the principal
consideration; schemes could be cited in illustration of
this statement. I shall, however, not undertake to cope
with or discuss dishonest schemes, but shall address my-
self to the difficulties involved under honest and legitimate
projects.
The consideration of first importance is so to frame the
contracts as to perpetuate the existence of the corporation.
To this end due consideration must be given to equity and
justice, and to protection against dishonesty and fraud.
A policy may be loaded down with unnecessary restric-
tions. In the earlier days of life insurance, when obser-
vations had not been made of the various supposedly
hazardous conditions, it was attempted to avoid them by
policy restrictions. Many of these have been found to
be unnecessary. Some of them are needed, and in a modi-
fied form should be retained in the interest of a sound,
wholesome public policy and of equity to all policy-holders.
While the motives involved in business getting cannot
212 YALE READINGS IN INSURANCE
wholly be ignored, they must be subordinated to the rules
of good business, sound public policy, equity and justice.
It will not do for those who have the framing of a policy
contract to "play to the galleries" by a show of liberality,
and thus secure public applause at the expense of policy-
holders.
The beginning of a policy contract is a proposal in the
form of an application for life insurance. In such applica-
tion the applicant is required to make a detailed statement
of his personal and family history, and such state-
ments are usually made the basis of the contract. If the
insured makes material misstatements, he is very much
in the same moral position as any one who obtains a thing
of value under false pretenses. Banks, business and manu-
facturing concerns, and individuals alike are protected under
the laws against that class of people who do not hesitate
to indulge in false pretenses. Notwithstanding these gen-
eral facts, in some states life insurance companies have
practically no protection. An applicant in such states
may, with malice aforethought, misrepresent a material
fact, and because of a prejudiced and pernicious public
sentiment, which has invaded the courts of justice, the
insurance management will sometimes pay rather than
take the chances of greater loss in contesting a claim
believed to be fraudulent. At best the binding obligations
are all on the company, and both the insurance depart-
ments and the courts stand ready to enforce them, while
the insured may at will discontinue the contract.
The public sentiment of which I have spoken largely
ignores the fact that insurance is effected by the money
of the policy-holders of the company; that, literally, the
policy-holders are the company, and the officers are merely
the managers. It is in part due to a condition which
obtained after the Civil War in the seventies, when many
companies were organized by men who knew absolutely
nothing of the science of underwriting, and whose num-
berless blunders forced them to the last expedient of try-
POLICY CONTRACTS 213
ing to perpetuate the existence of their companies by
evading the paying of claims. While these companies
ceased to exist many years ago, and while, if anything,
the companies at present err on the side of liberality
and promptness, the sentiment referred to remains in
a modified form.
The application should and usually does contain a war-
ranty clause in which the applicant warrants the truth of
his statements that form the basis of the contract. If any
material statements therein are found to be untrue, then
the contract, according to its terms, may be voidable or
become ipso facto null and void, and all payments, except
as expressly provided therein, are forfeited to the company.
The rule, however, is to make the policies incontestable,
except for the non-payment of premiums, after from one
to two years following the date of issuance. Under the
head of policy restrictions I discuss in some detail the in-
contestable clause.
Before execution of a policy contract the medical and
inspection departments of the company carefully investi-
gate the statements made by the applicant. They deter-
mine whether the applicant is insurable, and if so under
what conditions. The applicant's financial ability to pay
the premiums is also considered. Upon proper certifica-
tion the executive department executes the contracts.
The policy, however, as a rule, does not become binding
or operative until delivery to the applicant and acceptance
by him during his lifetime and good health, and the actual
payment of the required premium.
The title to the policy may vest in the insured or in the
beneficiary, depending upon the terms and conditions of
the contract. If the insured under the terms of the con-
tract has the right to change the beneficiary, then the
latter has a contingent interest only, which does not be-
come vested until after the death of the insured. Hence,
under such a contract the title vests in the insured because
he can, at any time, substitute his own estate or another
214 YALE READINGS IN INSURANCE
beneficiary for the one originally named. If, however,
under the terms of the contract the insured cannot change
the beneficiary, then the title to the policy vests in the latter
and can only be transferred to another by assignment.
Under the laws of most of the states a policy of life
insurance, made payable to wife and children, is not liable
for the debts of the insured, and hence, though the insured
may be insolvent at the time of death, the creditors can-
not get any part of the insurance money unless it can be
shown that the policy was contracted for after insolvency
and that the contract was made to avoid the payment of
debts and to defraud creditors.
A life policy is not consummated or completed until it
either expires by limitation or by maturity at the end of
a stated period, or by the death of the insured. In the
last event proof of death and of claim, as required by the
contract, must be made to the company. While many
policies provide for the payment of the money within a
limit of thirty or sixty days, it has become the custom of
practically all the companies to pay the insurance money
as soon as satisfactory proof of loss and claim has been
made.
It is an established principle of the law courts to con-
strue contracts against the framers or makers, on the
ground that they are familiar with the technicalities of
the law, and are presumed to frame the contracts in their
own interest.
In construing contracts, in case of apparent conflict
between written and printed clauses, preference is always
given to the written clauses.
Notwithstanding the disposition of juries to favor indi-
vidual claimants against corporations, and the disposition
of the courts to construe the contracts against the makers,
it is a fact worthy of note that more than 75 per cent, of
the litigated cases are won by the companies. This is
due to the further fact that the companies will only resort
to a contest in most flagrant, fraudulent cases.
POLICY CONTRACTS 215
Variety of Life Contracts due to Method. There are
four methods legally recognized and mentioned under this
section, each of which has its distinctive features. The
distinctions between the methods are legal, mathematical,
practical and, in part, due to prejudice and custom. Be-
cause of the distinctions mentioned, the form of contract
adapted to one method would not be suited to another
method. This has given rise to a much larger variety of
policy contracts in life insurance than we should have if
there were but one method. While the system of life
insurance may be said to be one, the methods are many.
Ordinary Legal Reserve Methods. This comprehends
the classification of companies which are by law required
to maintain a reserve at all times equal to the future de-
ficiency in the premiums, so that the fulfilment of the policy
obligations is guaranteed. There are probably as many
as one hundred and fifty different varieties of policies issued
by companies of this classification. It would be imprac-
ticable to attempt to enumerate them all, but I will men-
tion the principal policies :
1. The Ordinary or Whole-Life Participating Policy.
Premiums continuous during the life of the insured; divi-
dends applied to reducing premiums or increasing the
insurance; insurance payable at death only.
2. Limited Payment Participating Policy. Premiums
limited to a term of years; dividends as in (1), or payable
in cash at the end of the term; insurance payable at death
only.
3. Endowment Participating Policy. Premiums pay-
able during the specified term; dividends as in (2); in-
surance is payable at the end of years specified or at death
if prior.
4. Non-Participating Policy. All of the several forms
mentioned are issued at a low rate of premiums in lieu of
dividends.
In addition to the several forms of policies referred to
there may be mentioned joint life or partnership, renew-
216 YALE READINGS IN INSURANCE
able term, term, instalment, single premium or paid-up,
tontine, semi-tontine, and a great variety of deferred divi-
dend policies variously designated as accumulation, allot-
ment, survivorship dividend, tontine dividend, etc.
Industrial Legal Reserve Method, The variety is prac-
tically limited to the standard life and limited payment
policies at premium rates considerably in excess of those
charged by the ordinary legal reserve companies. This
excess is due to the fact that the companies issuing indus-
trial policies collect the premiums weekly sometimes
monthly by collectors who go from house to house.
By reason of the large premium charged, policies of the
industrial variety contain but few restrictions.
Fraternal or Lodge Method. These contracts are in the
form of certificates of membership, and usually provide
for suspension of a lodge in case payment is not made by
the subordinate branches to the supreme body. Although
the individual member may pay his dues and assessments
promptly, if the lodge to which he belongs fails to pay he
must suffer suspension. The rights of the individuals are
subordinated to the conduct and will of the majority.
The 'contracts usually specify a maximum benefit, and
are not in a legal sense guaranteed beyond the proceeds
of the assessments collected from the lodges to pay the
losses. The variety is usually limited to certificates in
which payments of the member continue during the life
of the contract.
As a rule very few restrictions are imposed.
Assessment or Non-Legal Reserve Method. Under this
method provision is made to effect the insurance by cur-
rently collecting from the members a specified or deter-
minable amount to be paid periodically. Originally this
form of contract usually specified that, in the event of the
death of the insured, the beneficiary should receive the
proceeds of an assessment not exceeding a maximum sum
specified. Later the form was modified so that the sum
payable at death should be fixed and certain, while the
POLICY CONTRACTS 217
amounts to be collected from members become variable
and uncertain, depending upon the mortality experienced.
The variety is limited to the type of policies not requiring
large accumulations for their fulfilment, and under which
the payments of the insured are coterminous with the
life of the policy. The restrictions and conditions, with
the exception of the non-forfeitable and accumulation
features, are in effect the same as in the policies of the
legal reserve class.
The truth of the statements contained in the applica-
tion must be a condition precedent to the issuance of the
policy. The payment of the premiums when due is funda-
mental to the continuance of the insurance. Provision
is generally made for the revival of the policy in case of
default in the payment of the premium if the insured be
in good health. The requirement of legal and proper
proof that the contingency insured against has happened
is also fundamental. The company that will pay a policy
without due and proper proof of death and claim is rec-
reant to its trust.
Sound public policy limits the insurable ages to the
productive period of life, and requires policies to be non-
forfeitable for any payments in excess of the current cost
of insurance, allowing the companies a small margin for
contingencies. It demands a clear and distinct statement
of the respective rights of the parties to the contract with
reference to the division and disposition of surplus. It
requires policies to become incontestable within a reason-
able time from date of issuance, except for failure to pay
premiums when due, and imposes restrictions in the inter-
ests of the general public, such as will discourage and pre-
vent fraud and crime. Suicide, which will be discussed
under policy restrictions, is an important feature of life
insurance as related to public policy.
Conditions imposed by equitable considerations require
the policies which have been issued to be kept, as nearly
as practicable, in the same classification of hazards. If
218 YALE READINGS IN INSURANCE
the insured voluntarily assumes a hazard known to be
great, and not originally contemplated in his contract,
the burden of it must either be borne by himself or by other
policy-holders. Equitable considerations require that every
insured should bear his just proportion of such burdens.
Hence in the case of military and naval service during
time of war the extra premium involved by the war hazard
should either be paid by the government served, or by the
insured, or the policy should be proportionately scaled.
Equitable considerations also demand that an extra pre-
mium should be imposed on persons who reside or travel
in certain portions of the tropics where the death rate is
fully twice as great as that upon which the premiums are
based. A further and very important consideration, but
much neglected, is that every policy should be made to
pay its own way, including the expenses of writing and
placing it. The policy should be so constructed that the
premium loading the first policy year is sufficient to pay
the expenses, and the loading in the subsequent policy
years should be correspondingly reduced. The surplus
belonging to those already insured should be apportioned
to them, and should not be diverted to the payment of
expenses incident to obtaining new business.
In a great many policy contracts conditions and re-
strictions are referred to as privileges. This use of the
word privilege is rather difficult to reconcile with the gen-
eral proposition of law that that which is not prohibited
and comes within the purpose of the corporation is per-
mitted. Therefore, unless a policy contract first limits and
circumscribes, there is absolutely no significance to privi-
leges. For example, to say, when there is no limitation
as to travel, that the insured has the privilege of traveling
or residing in any part of the known world signifies abso-
lutely nothing, as that privilege is granted by its not
being prohibited.
It may, therefore, be accepted as a guiding principle that
within the limits of the powers of the maker of the con-
POLICY CONTRACTS 219
tract, whatever is not restricted, forbidden, or prohibited
is a privilege implied although not expressed.
I have classified the important conditions and restric-
tions of fifty-one companies. These companies are re-
presentative, and the result of the classification clearly
indicates the principal policy conditions among the
American life insurance companies :
1. Only eleven of the fifty-one companies formally
announce accepting risks over sixty.
2. Thirty-seven accept women on the same conditions
as men; thirteen require extra premiums or restrict them
to certain policies, and one company refuses to insure
them.
3. Thirty-eight companies voluntarily attach copy of
application to the policy, thus giving to the insured a
complete contract, and thirteen only do so when required
or when the law requires it.
4. All companies have a provision in the policy that
it shall not become effective and binding until delivered
during the lifetime and good health of the insured and
after the required premium is actually paid.
5. Seventeen have no restrictions with regard to occu-
pation after the policy has once been issued; eight have a
restriction imposing a penalty if the insured engages in
a more hazardous occupation than the one stated in the
application; twenty-six have restrictions limited by some
to the first policy year and others to the first two policy
years.
6. Thirty-five companies have restrictions in regard to
military and naval service in time of war, requiring a
permit for which an extra premium must be paid or pro-
viding for the scaling of policies; six have such restric-
tion for either one or two policy years and ten have no
restriction.
7. Nineteen have a suicide clause for one year; twenty-
five for two years; three for three years; one without
limitation, and three have no restriction.
220 YALE READINGS IN INSURANCE
8. In the matter of dueling and violating law thirty
have no restrictions; six have them for one year; twelve
for two years; two for three years, and one constant.
9. Forty-two have no provision against intemperance;
two have it for one year; four for two years; one for three
years; two for five years, and one constant.
10. Twenty-four companies have no restriction as to
residence and travel; nine have it for one year; fourteen
for two years, and four constant.
11. Two companies have no incontestable clause; two
stipulate incontestability from date of issue; seventeen
after one year; twenty-seven after two years; two after
three years, and one after five years.
12. The policies of nine companies provide for no days
of grace for payment of premium; those of forty-one com-
panies provide thirty days, and one company' six days.
13. Fourteen companies make no provision in policies
for reinstatement or revival in the event of lapse, but
reinstate merely as a matter of grace; sixteen companies
make it a matter of contract without limiting the time;
ten limit within a year; three two years; two three years;
six five years.
14. All companies have some non-forfeiture provision
after two or three years by way of loan, or paid-up or
extended insurance; four provide cash surrender values
after two years; twenty-nine three years; six five years;
eight at periods specified in the contract; four no cash
surrender values.
15. Six companies pay dividends annually; six an-
nually after the second year; four annually after the third
year; four annually after specified periods; nine annually
after five years; twenty-two at stated periods or divi-
dends deferred.
16. Forty-four companies provide for the payment of
claims immediately after the receipt and approval of proofs
of death, and seven specify payment within thirty or sixty
days after proof.
POLICY CONTRACTS 221
I will consider the classes, as given in the above classi-
fication, in numerical order :
1. Insurance, as a matter of protection, should be limited
to the productive period of life, or to between ages 15
and 70. If an aged man applies for insurance, and pays
the premiums himself as a means of investment and a
method of increasing his estate, then there is no special
reason for limiting the age on the level premium, or reserve
method, of life insurance. Unfortunately, however, a
great many aged persons have allowed themselves to be
used as subjects for speculation. The astonishing part
is that a selfish, unnatural, and depraved desire should
sometimes develop on the part of sons, daughters, and
sons-in-law to insure their fathers and mothers under the
assessment or cheaper method in the hope of financial
gain from a speedy death.
Between the years 1880 and 1884, in the State of Penn-
sylvania, upward of two hundred assessment associations
were organized for the purpose of speculating in aged
human lives. Through the efforts of the legitimate life
insurance companies and associations, the pulpit, the press,
and the bench, public conscience was awakened, and a
law was passed in 1883 which put the speculators in human
life and the organizations through which they operated
out of business within a year. This chapter in the history
of life insurance has resulted in the refusal by most com-
panies to insure persons over the age of sixty unless the
policy be of the investment type, and the further refusal
to issue a policy if any person other than the insured seeks
to effect the insurance or to pay the premiums.
A man under proper policy conditions cannot, and
would not if he could, speculate on his own life, and there-
fore, when he himself furnishes the money to pay the
premiums the transaction is legitimate at any age and free
from the suspicion of speculation.
2. Repeated mortality investigations have established
beyond any question of doubt that, when the speculative
222 YALE READINGS IN INSURANCE
and moral hazards are eliminated, women are as good
risks as men, if not better.
While there are still companies which charge women an
extra premium of about $5 per $1000 insurance yearly,
most of the companies overcome the hazards by limiting
the beneficiaries to minor children and dependents. Such
companies have had a satisfactory experience in insuring
women.
3. Twenty-four years ago the Commonwealth of Penn-
sylvania enacted a law requiring a copy of the application,
or any instrument referred to in the policy as a part of the
contract, to be attached. Other states have done the same.
This is a wise and proper provision and is being carried
out voluntarily by many companies in states where it is
not required. This law and practice are the outcome of
litigation. In cases of contest claimants frequently have
not learned until coming into court that a breach of
warranty actually existed. It is true, however, that no
company would have refused claimants a copy of the
application prior to litigation; and it is also true that the
knowledge of the contract given by the attached copy of
the application does not deter ambitious attorneys from
attempting to enforce payment of claim even in case of
material breach of warranty.
4. The provision in all policies, that they shall not
become binding until delivery during the lifetime and good
health and upon actual payment of premium, has become,
under the methods in vogue, an absolute necessity. Courts
have even held that in the event of a change in the physi-
cal condition of the applicant between the date of appli-
cation and the delivery of the contract the warranty is
continuous, and that it is the duty of the applicant to give
notice to the company of the changed conditions before
accepting the contract.
Where no consideration has passed, where the agent
has not given a binding receipt to put the policy in force
as soon as the risk is accepted by the company, such de-
POLICY CONTRACTS 223
cisions as referred to seem just and right. The applicant
for insurance, until he has actually made payment of the
premium, is in a position to temporize and procrastinate.
He often does so, and as a matter of justice his delay should
be at his own risk and not at that of policy-holders.
5. Restrictions with reference to occupations have been
materially modified or entirely dispensed with during the
last two decades. All companies at the inception of the
contract take into account the hazards of occupations and
impose conditions or rates to cover them, but it is so rare
for men to change from less to more hazardous occupa-
tions that the majority of the companies, especially after
the first policy year, have removed all restrictions, and this
is particularly true under deferred dividend policies.
6. It has often been said, "In time of peace prepare
for war." The long continued peace seems to have im-
pressed a number of companies with the idea that there
is no need of being prepared for war. Such companies
have removed all restrictions with reference to military
and naval service. In the statistics of war hazards there
is no justification for doing this. In the late Civil War,
as well as in European wars a generation or more ago,
the proportion of the insured to the general population
was so small as to produce no serious result to the com-
panies, even if they had no policy restrictions. This
condition has been changed; about one-half of the male
population is now carrying insurance of some kind. In
case of a general or extensive war the companies without
restrictions might be wiped out of existence by a few
battles. Hence, the removal of all restrictions is simply
liberality gone mad. The people who insist on having
a "wide-open" policy should realize that in several re-
spects there is great peril and danger to them in such a
policy.
It was my privilege, in the capacity of consulting actuary
for the Army Officers' Association, to review the records
of the United States War Department, from the institu-
224 YALE READINGS IN INSURANCE
tion of the department to the year 1893. From these
records tables were constructed showing the war hazards
as well as the mortality in military life. As a result I
reached the conclusion that a company which entirely
eliminates restrictions in time of war is recreant to its
trust.
The clause in the policies with reference to military
and naval service in time of war has, as a rule, been con-
structed on such equitable and reasonable lines as to
render it unobjectionable. A clause which seems to me
to be the most desirable is that which provides for the
payment of an extra premium and a permit, and in the
absence of the same provides for the scaling of the policy
in the proportion of the /war mortality to the tables upon
which the premiums are based.
It is quite possible that with the increase of the insured
population, in lieu of subsequently pensioning the widows
of deceased soldiers, on declaring war the government
might make provision for the payment of the extra war
hazard premiums of the insured who enlist. The details
of such a scheme could be worked out satisfactorily.
7. It has been assumed that a sane person will not
commit suicide, and that therefore it should not be made
a defense to a claim under the terms of the policy. This
assumption has again and again been demonstrated to be
a fallacy. While a certain proportion of suicides are no
doubt irresponsible, the great majority are rational and
thoroughly conscious of what they are doing. The proof
of this lies in the statistical fact that companies and so-
cieties which have no suicide clause in the first few policy
years have had from three to fivefold greater percentages
of deaths by suicide than they have had in subsequent years.
It is true that the deaths have not always been designated
as suicidal, but the remarkable fact remains that the so-
called accidental deaths have been much greater in the
first than in subsequent policy years. If this is not due
to a conscious selection against the companies, then how
POLICY CONTRACTS 225
else can it be accounted for? Again, some of the fraternal
societies which have had no suicide provision, by adopting
such a clause materially reduced the per cent, of suicides.
It is exceedingly difficult, in cases where suicide is sus-
pected, to get the true cause of death properly stated in
the proofs of loss and claim. Suicide at once becomes a
sort of stigma upon the immediate family, and because of
this and because a frank and honest admission might
defeat the recovery of insurance, every means is resorted
to to conceal the true cause of death.
In the interest of good morals and the elevation of the
human race every policy of life insurance for at least the
first two years should impose a penalty for death by
suicide.
8. The restrictions with reference to dueling and vio-
lating law, or death by the hand of justice, have either
been entirely removed or so modified as practically to
amount to nothing. Happily, dueling is now regarded
as an act of cowardice instead of bravery, and it is so sel-
dom resorted to for the settlement of disputes or for the
defense of honor as to make its elimination from the life
insurance contract entirely practical. There is, however,
a form of violation of law which has become quite serious
in some states, and for which no remedy has been found.
I refer to the feuds as a result of which a number of policy-
holders have been murdered in cold blood at the expense
of other policy-holders who had no part in the feuds.
Indeed, there are sections of our country where the life
companies for a time found it necessary to decline to do
business. Feuds create conditions that cannot be met
by policy restrictions.
9. The great care exercised by the companies generally
in the selection of risks, excluding all persons of question-
able habits, renders a policy clause against intemperance
practically of no value. This is why a large proportion
of the companies have no provision against intemper-
ance.
226 YALE READINGS IN INSURANCE
10. The improvement in sanitary conditions and in the
means of travel has justified the companies in eliminating
most of the restrictions upon residence. About one-half
of the companies have no restrictions whatever. A man
can take out a policy in this country to-day, pay for it,
and to-morrow travel to and reside in a country where
the mortality is admittedly twofold. I fully agree, be-
cause statistics show that a restriction in the temperate
zone is unnecessary, but I can find no justification for
allowing persons to take out policies in the temperate
zone at regular rates, and then permitting them to live in
the fever-stricken sections of the tropics without requir-
ing an extra premium. No argument against this is neces-
sary beyond the statistics of our American companies
which do business in the tropics. While it is true that
they collect a larger premium, it is also true that about
50 per cent, of such larger current premium is required to
pay the current losses, while in the temperate zone about
25 per cent, of a smaller premium is sufficient. Hence,
conservatively managed companies incorporate some policy
restriction which will neutralize the effect of residence and
travel either in portions of the tropics or in portions of
the frigid zone.
11. The public sentiment already referred to as due to
unfortunate insurance conditions following the Civil War
is responsible for a division of opinion among the life
companies with regard to the so-called incontestable
clause. One class and this class is decidedly in the
minority favors what is known as the "open door"
policy, which in effect provides that after the policy has
been issued the company is precluded from raising any
question as to the validity of the contract. This class of
companies must of necessity employ a retinue of inspec-
tors and detectives to learn all about the character of the
risk before a policy is issued. This involves a large ex-
pense which must be borne by the existing policy-holders.
Another class of companies believes that every appli-
POLICY CONTRACTS 227
cant should personally become responsible for the truth
of his own statements for a limited time usually two
years without entailing on the other policy-holders the
expense incident to the special and searching investiga-
tions necessary in case a policy is incontestable from date
of issue.
There are not only common law questions, but questions
of public policy involved. As a common law principle
fraud vitiates contracts. As a matter of public policy, no
man should be allowed either for himself or his dependents
to profit by his own fraud. Hence, 96 per cent, of the
companies do not issue policies incontestable from date
of issuance. Instead their policies become incontestable
usually two years afterward. This gives a company the
opportunity, in the regular course of business, of verifying
the statements upon which the contract is based, and if it
finds that untrue and fraudulent statements have been
made, and the insured does not voluntarily surrender the
policy when called upon to do so, equity proceedings are
usually instituted to compel its surrender.
The courts of several states have held such policies,
after the lapse of the contestable period, to be absolutely
incontestable, because the company issuing such a policy
has reserved to itself a period of time to investigate and
discover any false or fraudulent statement that would
vitiate the policy. If it fails to investigate and discover,
the fault is its own and, therefore, it cannot avail itself of
the common law principle which obtains in case the policy
is made incontestable from date of issuance, viz., that
fraud vitiates or renders null and void all contracts. It
may therefore be contended, with considerable force, that
the few companies which have no incontestable clauses are
better protected against fraud than those which do have
such clauses. On the other hand, if the fraud is of such
a character as not to be detected within two years it can-
not be serious and, by the express terms of the contract,
should not be allowed to affect it.
228 YALE READINGS IN INSURANCE
12 and 13. The feature of grace in the payment of
premiums had its origin in the desire of the companies to
do all they could within the limits of safety to avoid lapses.
Its principal effect is to postpone the last day of payment,
or the final due date. Therefore, if a policy-holder, instead
of using the days of grace as a margin to avoid lapse,
should get into his mind that instead of the final day of
payment being March 1 it is March 30, and should pro-
crastinate accordingly every year, he would lose all the
benefits of the feature.
Reinstatement should not be simply a matter of grace,
but a matter of right under the contract, upon compliance
with reasonable requirements to prevent those who pur-
posely lapse their policies from coming back into the
company after they have become afflicted with disease.
14, 15, and 16. The non-forfeiture and dividend pro-
visions, as also those covering payment of claims, are
features upon which there is such a degree of unanimity
and such uniformity of practice that there is little to be
said beyond what will be disclosed by the examination of
the policies of any reserve company.
In a general way, however, I will say that cash surrender
values are not only liable to defeat the very purpose of
protection for which insurance stands, but to encourage
selection against the company; and that the non-forfeit-
able values, through competition, have become liberal to
a fault. A company that imposes penalty for discontinu-
ance will best serve its persisting policy-holders.
The dividend clauses, whether annual or deferred, should
be explicit, direct, unequivocal, and enforcible. A con-
tract that does not clearly and distinctly draw the line
between surplus and distributive surplus, and that with-
out some governing, fundamental principle leaves the
rules and directors of the company in the future to deter-
mine what surplus is or is not distributive, is objection-
able.
The ideal policy stipulates the governing principle which
POLICY CONTRACTS 229
in the matter of distributing profits is binding both upon
the insurer and the insured.
The conditions * mentioned in the preceding sections
under the laws as they existed in 1905 are referred to as
not having been handicapped by legal restrictions, and
although the liberty resulted in abuse, the public derived
benefit from the great variety of contracts which could
have been possible only in the absence of statutory policy
provisions. What has been said in the preceding sections,
therefore, has application to over five million life insurance
contracts in existence. Conditions, however, have changed.
In the year 1906, the legislature of the State of New York,
following a legislative investigation into the methods of
a few life insurance companies of that State, enacted vari-
ous laws intended for the better regulation of the business
of life insurance. Among such laws was one providing
standard forms of policies to be used by the companies of
that State. This has already been repealed. In its place,
however, the legislature adopted statutory policy provi-
sions substantially on the line of those adopted in fifteen
other states of the Union.
Under the head of "Classification of Risks" will be
found the classification then in use by fifty-one companies.
The management of these companies classified according
to the experience of the companies and the preconceived
ideas of the managers. Such classification as to new busi-
ness has been largely eliminated, and the following statu-
tory provisions substituted, which must be inserted in the
policies :
1 The preceding paper on policy contracts was written by Mr. Fouse
in 1905. The upheaval in the insurance world which was even then
taking place produced so many changes in policy contracts that Mr.
Fouse consented to add the following pages to his former paper. What
appears in his former article applies to so many existing contracts,
however, that students of insurance cannot afford to overlook it.
(Editor.)
230 YALE READINGS IN INSURANCE
1. A provision that premiums shall be payable in ad-
vance at the home office of the company, or to an agent
upon delivery of a receipt signed by one or more officers
named in the policy and countersigned by such agent.
2. A provision for a grace of one month in the payment
of every premium after the first.
3. A provision that the policy shall be incontestable
after two years, except for non-payment of premiums and
except for violation of the conditions of the policy relating
to naval and military service in time of war.
4. A provision that the policy shall contain the entire
contract and that all statements made by the insured shall
be deemed representations and not warranties, and no
such statement shall avoid the policy unless contained in
a written application, a copy of which shall be attached to
the policy when issued.
5. A provision that if the age of the insured has been
misstated, the amount payable under the policy shall be
such as the premiums paid would have purchased at the
correct age.
6. A provision for ascertainment and distribution of
surplus annually after the first policy year (in some states
after third or fifth policy year), and that the owner of the
policy shall have the right each year to elect to receive
the current dividend upon the policy in cash; or to have
it applied to the payment of premiums, or to the purchase
of paid-up additions to the policy; or to be left to accumu-
late at a rate of interest to be specified, but withdrawable
at any anniversary of the policy.
7. A provision that the owner of the policy may at any
time after three years borrow on the sole security of the
policy a sum equal to the reserve upon the policy at the
end of the current policy year and any dividend additions
thereto, less any indebtedness on the policy and interest
in advance to the end of the current policy year, and that
failure to repay such loan or to pay interest thereon shall
not avoid the policy unless the total indebtedness thereon
POLICY CONTRACTS 231
shall equal or exceed the loan value at the time of such
failure.
8. A provision whereby, in the event of default in pre-
mium payments after three years, the owner of the policy
shall be entitled to extended or paid-up insurance, the net
value of which shall be at least equal to the entire reserve
upon the policy and any dividend additions thereto at
date of default, less a sum not exceeding 2J per cent, of
the amount insured by the policy and any dividend ad-
ditions thereto, and less any existing indebtedness to the
company on the policy; also that the policy in such event
may be surrendered for a specified cash value at least equal
to the value of such extended or paid-up insurance.
9. A table showing in figures the loan value and options
upon default in premium payments.
10. A provision for reinstatement of the policy within
three years after default in premium payments upon fur-
nishing evidence of insurability satisfactory to the com-
pany and payment of arrears of premiums.
11. A provision that when the policy shall become a
claim by the death of the insured, settlement shall be made
not later than two months after receipt of due proof of
death.
12. A table showing the number and amount of instal-
ments in which the proceeds of the policy may be pay-
able.
13. A title on the face and on the back of the policy
correctly describing the policy.
In addition to the statutory provisions as to what
clauses the policy shall contain there have also been enacted
laws prohibiting any of the following provisions:
1. A provision for forfeiture of the policy for failure
to repay any loan thereon or interest on such loan while
the total indebtedness on the policy is less than the loan
value thereof.
2. A provision limiting the time within which any
action at law or in equity may be commenced to less than
232 YALE READINGS IN INSURANCE
a specified period, varying from one to five years in differ-
ent states.
3. A provision whereby the policy would provide for a
premium rate at any age younger than age at date of appli-
cation.
4. Any provision for any mode of settlement at maturity
of less value than the amount insured, stated on the face
of the policy, plus dividend additions, if any, less any
indebtedness to the company.
The objections to statutory provisions are:
(a) They prevent development and improvement in
life insurance in accord with the experience and progress
of the age.
(6) The officials of every sovereign state, in obedience
to the law of such state, are not always amenable to comity
and, therefore, exact requirements that impose upon the
companies and consequently upon the policy-holders ex-
cessive burdens that do not benefit the business and are
in fact detrimental to it.
(c) In the absence of national supervision of insurance,
standard policies and standard provisions are not practical,
and sooner or later will be repealed, or national super-
vision will be adopted. Even though a reasonable degree
of uniformity may be secured at one sitting of the legis-
lature, at the next sitting it may be undone, and chaos
and lack of harmony with other states created.
The advantages to be gained by the statutory policy
provisions are :
(a) A greater degree of uniformity in contracts and
less difficulty and expense on the part of the insured in
interpreting contracts. This is evidenced by an examina-
tion of the classification of the restrictions of fifty-one
companies as represented above, as compared with the
restrictions and provisions set forth in this section.
(6) A careful examination will show that the provisions
and policy conditions which obtained in the contracts of
a majority of the fifty-one companies referred to above
POLICY CONTRACTS 233
have been incorporated in the statutory provisions,
and they are, therefore, in keeping with the best practice
among the better class of companies. To this extent the
enactment of the statutory provisions has been beneficial,
and, upon the whole, will serve, educationally, a good
purpose, even though such provisions should not, in the
absence of national supervision, become a permanent
feature of life insurance.
CHAPTER XVI
POLICY CONDITIONS *
IT is one of the characteristics of the American that
when he takes up a fresh line of research or a new pursuit
he is prone to concentrate his energies upon the particular
subject which happens to engage his attention until he
has exhausted its every useful possibility or developed it
to such an extent that it seems incapable of further im-
provement. It is to this national characteristic that we
owe much of our success as a people in practical pursuits,
invention, commerce, and war. For the past ten years the
architects of life insurance have been exhibiting this
national characteristic in the development of special fea-
tures in policy contracts. To such an extent has this tend-
ency been carried that the good old-fashioned forms of
life and endowment policies appear to be struggling for
an existence amidst a mass of consols, debentures, bonds,
and income policies.
These new forms of policies are generally produced by
combining with the simpler forms of life and endowment
policies a deferred annuity element guaranteeing to the
insured after a specified period of years, or to a beneficiary
on the death of the insured, an attractive income
usually, but improperly, called interest upon the prin-
cipal sum of the policy. In some instances an attempt is
made to enhance the value of the policy by paying the in-
come through a trust company or by attaching negotiable
1 By John B. Lunger, Vice-President of the Travelers Insurance
Company, Hartford. Reprinted from pages 178-211 of "Insurance,
a Text-Book."
234
POLICY CONDITIONS 235
coupons to the policy. While the spirit of life insurance
is keenly in sympathy with features intended to provide
for old age or to guard the final effectiveness of the pro-
ceeds of a policy, care should be exercised in drafting
contracts intended to subserve such excellent purposes to
include only such benefits as are within the legitimate scope
of the business. If an income (interest) is to be paid after
the maturity of the policy, the rate assumed should be
kept within the rate which the company makes use of in
computing its policy liabilities, and the payments should
be made direct to the insured or to the beneficiary. If
the rate is made to appear larger than can be earned on
a safe investment, or the deferred annuity element is
merely a subterfuge to secure an extra loading on the
premium, the policy is liable to become an instrument of
deception.
The expediency of issuing policies with negotiable in-
terest coupons is seriously open to question. It should
always be borne in mind that the function of life insurance
is to protect the family and to provide for adversity or
old age; not to furnish securities to be bought and sold
in the open market or passed from hand to hand, like rail-
road stocks or bonds. It is to be hoped that this par-
ticular feature will soon be numbered among the things
of the past.
We might properly take exception to certain other of
these basal features, but in the main the tendency has been
in the right direction, and out of the many innovations,
advantages will accrue which will prove of lasting benefit
to the business.
There are no statistics upon which to base an estimate
of the losses incurred through unwise investment of the
sums paid to beneficiaries as death claims, but when one
observes how very few have solved the problem of invest-
ing even small sums beyond risk of loss, it is not surprising
that the officers of life insurance companies should feel
great concern regarding the preservation of the sums paid
236 YALE READINGS IN INSURANCE
to beneficiaries, especially when it is considered that such
payments often constitute the only provision which the
insured has been able to make for those dependent upon
him. We should welcome, therefore, any feature which
will protect the insurance after the death of the policy-
holder and serve to safeguard the purposes for which the
insurance was taken. The plan of paying policy moneys
in instalments is so in keeping with this thought that it
is worthy of special mention and commendation. There
are two ways in which instalment policies are made pay-
able. The first form limits the payments to a specified
period of years, generally ten, fifteen or twenty, and the
second form, which is by far the more preferable, provides
for at least twenty annual payments, and if the beneficiary
is living at the end of this period, the payments are con-
tinued during the remainder of life. This latter method
of payment is embodied in what is known as the continu-
ous instalment policy, and when that policy is so drawn
that the instalments cannot be assigned or commuted dur-
ing the life of the beneficiary, it constitutes to my mind
the ideal form of protective life insurance.
One of the prominent companies safeguards its insurance
in another way. It will, at the request of the insured,
attach to its policy a certificate, in which the insured may
define his wishes as to the disposition of his policy. Gen-
erally a beneficiary is named to whom a stated income is
paid as long as the proceeds of the policy will permit.
Interest is allowed upon the fund remaining in the hands
of the company, at a rate of about J of 1 per cent, less than
the rate the company earns upon its investments. The
proceeds of a policy to which this certificate is attached
become a trust fund which is administered strictly in accord-
ance with the wishes of the person by whom the trust was
established. The payments made are free from taxation
and all other charges.
I would venture to predict, as one of the outcomes of
the present tendency amongst men of wealth to place their
POLICY CONDITIONS 237
estates in trust, that a considerable number of the policies
written in the future for large amounts will include either
the instalment or the trust features which have just been
described.
Among the special features wisely developed in recent
years under the non-forfeiting tontine or accumulation
policy is the privilege given the insured of making a choice
among various methods of settlement at the end of the first
dividend period. This feature has added greatly to the
popularity of the form of insurance mentioned. The
insured is no longer confined to one of two alternatives:
(a) remain in the company and take insurance, (6) get
out and take cash (often with a large discount); nor is he
obliged to decide at the inception of his insurance what
disposition he will make of his policy at the end of the first
dividend period. At least three options are always given,
namely, the privilege of withdrawing in cash the entire
proceeds of the policy, consisting of the reserve and the
accumulated dividend; or of applying the proceeds to pur-
chase paid-up insurance at net rates; or to purchase an
annuity. When the form of insurance permits, these
three options are supplemented by others, which consist
of combinations of cash and insurance, insurance and an
annuity, annuity and cash, and so on; the options as a
whole being so comprehensive that at the end of the divi-
dend period the insured may adjust his policy to suit his
then condition of life.
The practice of writing surrender values in dollars and
cents in the policy, instead of merely giving the rule by
which such values will be calculated, is helping to dissi-
pate the idea that life insurance contracts are full of tech-
nicalities and pitfalls. It is to be regretted that some of
our leading companies hesitate to adopt this practice, and
for no other reason, apparently, than that it increases the
liability to error in writing the policy, and puts them to a
slight extra expense. Errors can be avoided by the proper
checks, and the expense will be met many times over by
238 YALE READINGS IN INSURANCE
the diminution in lapses, which is the invariable result of
a clear and liberal policy. So far as I am informed, the
first serious mistake in writing these tables has yet to occur.
It is to be hoped that this feature will extend until all life
insurance policies are so explicit that inability to read
will be the only excuse that can be given for a failure to
comprehend them in all their details.
The embodiment of cash loan privileges in policy con-
tracts may be regarded as one of the most important new
features in life insurance. The right of the insured to an
equity in the reserve on his policy finds, in my judgment,
its best recognition in the granting of loans at stated times
upon reasonable terms and conditions. How often is it
noticed that when the holder of a policy finds himself in
trouble he hastens to apply for the cash value of his policy,
although it is evident that at such a time life insurance is
an urgent necessity and should not be abandoned without
careful consideration. How much better for all concerned
if the desired relief can be gained without the entire sacri-
fice of that which, in the event of death of the insured,
may stand between those depending upon him and penury.
The officers of companies granting cash loans will undoubt-
edly certify that in the panicky times of 1893-94 the relief
given through loans on policies saved many thousands of
policy-holders from serious financial trouble, while enabling
them to continue the much needed insurance, and those
benefited on their part will, no doubt, gladly testify to
their appreciation of a plan which confers such important
and timely advantages. In granting cash loans it is the
practice in some companies to allow the loan upon applica-
tion, without regard to the continuance of the payment
of the premium oh the policy. This practice is open to
some of the objections that may be urged against cash
surrender values. It is better to require that the premium
for the ensuing insurance year shall be paid in advance,
basing the loan upon the reserve in that year. By this
plan the insured always secures a year, at least, in which
POLICY CONDITIONS 239
to free himself from his financial difficulties and to make
provision for the payment of the ensuing premium on his
policy.
The premium lien note is but a modified form of the cash
loan, and its use is to be encouraged when the financial
difficulties of the insured affect only his power of paying
his current premium. These notes are commonly drawn
as a permanent lien on the policy, payable at the conven-
ience of the insured. This convenient time, as is the case
with most matters relating to life insurance when left to
the discretion of the insured, is apt seldom to arrive, and
the notes, therefore, generally become a permanent in-
cumbrance on the policy. It has often occurred to me
that if these notes could be drawn after the style of an
ordinary note of hand, and made payable at the end of a
stated period at a national bank, that a large percentage
of them would be paid in cash. In event of non-payment
they could be renewed for a further period, provided the
policy was continued in force.
Among the new features introduced during the five
years succeeding the Civil War was the first use of the
return-premium idea in this country. Later it came into
much wider use, and at the present time a considerable frac-
tion of the life insurance contracts issued are in effect
increasing insurances during the first twenty years of
their existence, the annual increase being equal to the
premium or to some proportion thereof. This appendix
to the original contract has, in many cases, been the source
of intense gratification to the heirs of the insured. It was
Carlyle who pointed out that the mental satisfaction de-
rived from any newly received possession depends on the
ratio of what we receive to what we expected to receive.
How often has it happened, in the settlement of death
claims of policies which carried no return-premium attach-
ment, that the deduction of unpaid fractional premiums
from the understood amount, or in more serious measure
of loans which the insured had obtained against the policy,
240 YALE READINGS IN INSURANCE
has left the net result in the minds of the beneficiaries
one of discontent, and how much more agreeable to all
concerned are such settlements when that little return-
premium attachment has provided the extra amount
which covers all the company's claims against the insurance,
and still leaves to the heirs some excess over the nominal
face of the policy.
Our business has sometimes been referred to as one of
risks, chiefly of death. Those who are familiar with the
statistics know that so long as medical directors are
restricted in their selection of lives by present rules and
traditions, the "risk of death" may be forecast to an al-
most absolute certainty, and that the resulting deaths will
be well within the tabular limits. The stringent selection
of risks is chiefly due, in my opinion, to the pressure put
upon the companies to pay large dividends. When this
pressure is reduced, and the payment of dividends becomes,
as it should be, a subsidiary feature of life insurance, the
ratio of mortality will be somewhat nearer the tabular
expectation, and there will have been a great addition to
the usefulness of the business. In the meantime, many
worthy applicants and their families must suffer because
existing conditions demand low mortality ratios.
Until mortality becomes a more elastic factor, any plan
which will give insurance to an under-average risk ought
to be as welcome to the business as a breath of cool air
to a fevered patient. Policies on under-average lives have
been issued in England for many years, but the business
has never assumed large proportions. Several small com-
panies have been formed in this country for the purpose
of making a specialty of this class of business, but those
which have not failed have either drifted into regular chan-
nels or are still in the experimental stage. It is only re-
cently that one of the prominent American companies has
entered this very promising field. That company several
years ago formed a special department for the collection
of data pertaining to its declined risks. The information
POLICY CONDITIONS 241
obtained was classified and special mortality tables were
then computed upon which that company is now issuing
policies subject to liens or extra premium, or both, to a
large percentage of applicants who, under former conditions,
would have been declined. Of all the new features in our
business, this one is capable of the largest development
and offers the best field for investigation and study. Life
insurance should be a broad business of underwriting any
reasonable contingency of life or death.
The practice of paying claims promptly, and of guaran-
teeing this in the policy, has blown away one of the clouds
that formerly cast its shadow over life insurance, and may
be fittingly referred to as a special feature. It is neither
delicate nor prudent to force money on a beneficiary at a
time when her mind is distracted by grief, but as soon as
proofs of death are made out, both good taste and judg-
ment dictate that payment of the claim should not be
delayed. "Pay all debts promptly," is as good a maxim
to follow in life insurance as in our private affairs.
There are a number of new features of minor importance
in ordinary insurance that I might refer to if so disposed,
but none of them seem to call for special comment beyond
that they, together with the more important special fea-
tures, the elimination of technical and objectionable con-
ditions and the increase in surrender values, have aided
to produce the policy of to-day, with its freedom from
restrictions, its brevity, its clearness of statement, and its
remarkable adaptability to every reasonable contingency.
The fact that most life insurance companies are con-
ducted on the mutual plan under which all profits revert
to the insured, and the desire of the insured to secure the
largest possible returns for the premiums paid, combine to
make dividends and the methods of their distribution a
subject of great importance; but it does not necessarily
follow that so much stress should be laid on these features
of the business as to lead one not familiar with life insur-
242 YALE READINGS IN INSURANCE
ance to think that payment of dividends is the chief object
of the business. More circulars were woven around, and
more arguments based upon, the $18,000,000 of dividends
that the companies paid out last year than upon the
$80,000,000 that were distributed in death claims and
endowments. Agents, in soliciting, fall into the same error,
and discourse more eloquently upon the dividend which
a particular policy will pay than upon all its other bene-
fits combined; and when two agents meet in competition,
one representing a semi-tontine company and the other
an annual dividend company, many of the intrinsic merits
of life insurance are lost sight of in the smoke that arises
from the fiery arguments for and against these two methods
of paying dividends.
The inclination to mold the policy contract to the vary-
ing conditions of life has not been confined to the benefits
secured by persistency, but is observable also in the develop-
ment of plans whereby the rights of the policy-holder in
case of the surrender of his policy are recognized. Sur-
render values were first allowed in the form of paid-up
insurance. Subsequently cash surrender values were
introduced, and more recently extended insurance has
become a feature in policy contracts of several companies.
At the present time the policies of a large number of the
companies provide, in case of surrender, for a choice between
paid-up insurance and extended insurance, or between
cash and paid-up insurance, while the policies of several
companies offer either cash, paid-up insurance, or extended
insurance. Only two or three companies offer paid-up
insurance alone, and it is but a question of time when these
companies will yield to the pressure of the general prac-
tice. Each of the allowances made in case of surrender is
computed on such a liberal basis that it would seem that
the vexatious question of the proper charge or fine in case
of surrender is being settled by requiring none at all. It
is gratifying to find that this liberality has not encouraged
POLICY CONDITIONS 243
surrenders, but has been rewarded by an increase in the
tenure of life of the policy. In fact, we are led to the pleas-
ant conclusion that the owner of a policy containing liberal
and valuable benefits is as slow to part with it as he would
be to sell any other valuable and profitable security.
As surrender values will be discussed analytically and
at length in other papers to be presented to this Conven-
tion, I shall limit this section of my paper to a few brief
remarks on the advantages or disadvantages of the three
non-forfeiture benefits mentioned.
The especial applicability of either of these benefits
can only be determined by a knowledge of the condition
of the policy-holder at the time of surrender, taken with
the standing of the policy. In the case of a policy which
has acquired considerable value, it is advisable in the
majority of cases for the policy-holder to take paid-up
insurance, especially if he is well along in years and his
income is uncertain or is growing less as time goes by.
Paid-up insurance does not entail any obligation or impose
any burden, nor is it brought to a close except by death
or surrender. It is a security which can be filed away with
the certainty that when it matures it will realize every
dollar which it represents. Extended insurance, on the
other hand, is the more advantageous benefit for those to
take who are unable to pay their premiums, but who feel
the need of a maximum of insurance, and expect within
a reasonable time to be able to reinstate their contracts
or to take new insurance. Extended insurance is generally
granted without application; in other words, it is given
automatically, thus protecting the policy in case the pay-
ment of the premium is overlooked during sickness or
absence from home. Automatic extensions have this par-
ticular value that no one is deprived of the equity in
his policy through any technicality or through indifference
or ignorance as to its value.
To my mind, in every policy issued, either paid-up or
extended insurance should be made "automatic," and the
244 YALE READINGS IN INSURANCE
companies should not rest content with merely granting
this privilege, but should, in event of lapse, wait a reason-
able time for the insured to apply for a surrender value,
but if he does not appear within this time he should be
followed up and a statement placed in his hands giving the
value of the benefit to which he is entitled.
The arguments which I have advanced in favor of making
provision in the policy for every emergency of life point
to the advisability of granting liberal cash values after
the necessity of protection may have passed away and pro-
vision for self may have become the first consideration, or
after the policy has been in force for the period for which
in the first instance it was advisedly taken out. While
the propriety of allowing cash surrender values for the pur-
pose which I have defined is apparent, there is little to
justify the guarantee of annual cash surrender values in the
early years of a policy, unless it is that we must take a very
cold-blooded view of our business, and say that an equity
in the reserve on the policy belongs to the insured, and
that he should have the right to do as he pleases with this
equity. I would contend that the insured having advisedly
entered into a compact with the company to provide cer-
tain benefits for his family and for himself, such compact
imposes on the company the obligation to protect the
insured from a hasty or perhaps a foolish step that may
defeat the good object he had in mind when he entered
upon the contract.
A man is not likely to apply for a cash surrender value
in the early years of a policy unless he has, through igno-
rance or prejudice, become dissatisfied with the company
in which he is insured, or unless he is in such a tight place
financially that he must secure cash at all hazards. A
man who demands cash for the reason first given is en-
titled only to the same consideration that we would give
to any impulsive or thoughtless request. In the case of
a man whose affairs are so badly involved that he is obliged
to resort to his policy for financial help, it is fair to assume
POLICY CONDITIONS 245
that, by reason of his difficulties, he needs life insurance
more at that particular time than at any other period in
his life. It seems more in accordance with the spirit of
life insurance to give him the desired assistance in the
form of a loan and to extend with it the opportunity of
continuing the life insurance. There are individual cases,
of course, the circumstances surrounding which call for
cash surrender values. Such cases should be taken up
on their respective merits, but it does not follow, because
cash values can with propriety be allowed in certain cases,
that the interests of policy-holders or of the company
require that they shall be given in all cases, irrespective
of conditions.
In conclusion, I wish to express a thought that comes to
me very forcibly as I write these lines. It is that the
remarkable improvements and changes in our business in
the past few years are influenced by motives more sincere
and subtle than would be dictated by mere business policy.
Can we not discover in them evidence of a growing
sense of conviction on the part of those to whom the ad-
ministration of our companies is confided, that life insur-
ance is a trust imposing moral as well as literal obligations
which must be observed to the utmost degree?
We may not claim that life insurance has reached a
state of perfection, but we may assert that the tendencies
of the business are in the right direction, and that there
are forces at work which will produce further and bene-
ficial transformations as time goes by.
CHAPTER XVII
SURRENDERS AND LOAN PRIVILEGES *
WHEN we come to consider the matter of surrender
values from the point of view of mutuality, we meet a
situation involving opposing elements. The company has
agreed for a certain premium to carry the policy for the
lifetime of the insured or for a definite term of years, and,
the premium being paid, it has ordinarily no option of
discontinuance. Its calculations rest, and must rest, on
the theory of the continuance both of its risks and of its
premium income to their normal term. But it protects
its theory by no contract to that effect from the insured.
He is free to pay or stop paying, regardless of his family's
need on the one hand, or his ability on the other. For
some reason he stops. What considerations of duty
should govern the company in its treatment of the case? To
whom now does it owe duty; and, if to more than one
person or group of persons, upon what several interests
of these is this duty grounded; by what divergence of
these interests or by what conflict between them is duty
toward one or the other of them controlled or modified;
which group is entitled to have its interests first con-
sidered?
There can be no question that the company's first duty
is to those to whom it remains under contract obligation -
its continuing policy-holders. It is first to consider how
they are affected by a withdrawal of one of their number;
1 By Jacob H. Greene, late President of the Connecticut Mutual
Life Insurance Company, Hartford. Reprinted from pages 167-178
of "Insurance, a Text-Book."
246
SURRENDERS AND LOAN PRIVILEGES 247
how the sure basis of its operations, the solvency of its
contracts, and the future cost of their administration
stand affected. The elements of the problem are definite;
the determination of their weight, the measurement of
their operative force, is somewhat a matter of varying
circumstances.
The effect of withdrawals is in three directions: they
reduce numbers, thus narrowing the basis for averages,
increasing the range of fluctuation, intensifying its effect,
and prejudicing steadiness of operation; they presumably
take out not only unimpaired lives, but the best lives, at
least those having the strongest unconscious instinct of
an enduring vitality; while this may not be and is not
always the case under ordinary conditions inviting con-
tinued confidence, it would be unsafe to predicate any
treatment of them upon any other assumption which there
is no after opportunity of rectifying, an assumption which
would be realized to an appalling degree under conditions
which impaired confidence in corporate integrity; and,
thirdly, surrenders for cash interfere, and may conceiv-
ably very seriously interfere, with that employment of
the funds of the membership which is of the essence of
financial stability and a most important factor in the
reduction of current cost to continuing members.
On the other hand, it is to be borne in mind that in
withdrawing the past member has exercised an unfor-
bidden power, and that during his membership he has not
only paid the current cost of his risk, but has also been
making annual contributions to the reserve for the pur-
pose of protecting the company against the future of his
risk; a part of his increasing share in a future greater
mortality contributed now because he is in theory expected
to remain to share it without paying a correspondingly
greater future premium. Against the greater future risk
on his life as age increases the company has been laying
aside each year a compensating sum out of a level pre-
mium. And now that future risk is eliminated by his
248 YALE READINGS IN INSURANCE
termination of what was, at his option, and in the com-
pany's anticipation, a lifelong contract. The company is
relieved of all liability for that future risk against which
it has been reserving a sum from each premium paid.
The question now is : What in all-round equity -
equity to him who has relieved the company of further
liability, and equity to his associates from whom he has
withdrawn the supporting vital and financial strength of
his membership shall be done with this man? How
shall these dual elements of a situation which the company
has left it in his power to create be held in just and true
balance?
In general terms, the answer is and must be: do that
which at once recognizes fully his free and legitimate right
of withdrawal and the termination of the liability, but
also that which is thoroughly conservative of every right
interest of the membership from which he has withdrawn
his support, of every interest, that is, which he, while a
member, had in common with the rest.
If the withdrawal of members at any time, at discretion,
did not affect the vital basis and therefore the sureness
and steadiness of the company's operations, and did not
so tend to introduce violent and dangerous fluctuations; and
did not such withdrawals also tend to disturb and, under
clearly probable conditions, to disturb very seriously those
lines of financial management which the greatest good of
the whole membership necessarily presupposes; and did
not the duty of men to protect their families, which is the
whole ground and aim of our proffered service to men and
the reason for our existence, remain always the paramount
fact and our primary point of view, and the one which
should govern our treatment of every detail, and which
gives to us the same plea to urge upon the old members
for his continuance that we use in soliciting new members,
and also lays upon us the duty to do what we justly and
fairly can to see that those families which have been once
committed to our care and sure protection are not lightly
SURRENDERS AND LOAN PRIVILEGES 249
and easily exposed again to danger through any practice of
ours, there would be no problem in the matter. We could
freely give the departing member everything left from
his past transactions with us. But every one of these
propositions must be taken in the negative and taken
seriously. The membership is the company, and the with-
drawal of members narrows the basis of operation, and
thus widens the range and intensity of fluctuation, and may
be carried so far as to be destructive of a company's integ-
rity. The company's investments are of funds held for
a future; they must be made with a view to that future,
and therefore of a character very different from those
adapted to meet sudden and uncertain demands for which
instantly and certainly available resources must be always
in readiness. The scheme of life insurance proposes that
its invested reserves shall be drawn upon only according
to the foreknown and measurable operation of the law
of mortality. The right of members to withdraw at any
time, taking their contributions to reserve in cash, nega-
tives the whole scheme, exposes the fund to be drawn upon
at will, the draft upon it being, both in time and amount,
dependent upon elements of motive which are unforeseen
and incalculable, and of whose future operation nothing
is known except that they exist, that they may be brought
into great and most critical intensity of operation at any
time by a variety of causes, and that they are uncon-
trollable by the company and have absolute free play
against it. There is no defense against them except the
blind hope that they may never operate.
The right of free surrenders for cash inverts the theory,
and the only consistent, logical, and safe practice in life
insurance, by making the reserve consist in effect of a mere
group of individual deposits, subject to check at least once
a year, and this feature of uncertain and precarious con-
tinuance of the insurance factor and of the right of with-
drawal of invested funds becomes at once the dominant
feature of the company's affairs and is the ultimate con-
250 YALE READINGS IN INSURANCE
tingency to be kept always in view in every matter. The
company, in effect, is no longer a life insurance company,
treating all its affairs on a true life insurance basis, with
withdrawal as a mere incident, subordinate in every re-
spect to the integrity of its insurance operations, but a
pseudo bank of deposit, liable to have all its funds with-
drawn in any year, needing, therefore, to have its invest-
ments immediately convertible into cash without loss,
while yet upon these funds are founded the presumably
lifelong contracts for whose prosperous administration an
entirely different theory of investment is essential and for
the management of which a bank is utterly unfit.
So long as a company is rapidly growing and the average
of its lives is still at a young age, and it has not reached
that maturity necessary to complete its exposure to all
the vicissitudes of mortuary and business experience, and
its credit has escaped attack, the practical danger of these
subverting factors will be at a minimum and their operation
partly concealed, and hope may dwell in a fool's paradise.
But the condition of growth is not an eternal one, no
matter what energy, under what stimulus, be applied. To
every company will come, ought to come, in time the con-
dition when no pressure can make its inflow of new busi-
ness exceed its outflow, and when its true normal will be
a stable equilibrium in amount at risk, in assets, income,
and outgo.
Consider a company in such a case whether large or
small does not signify meeting those general business
conditions which cause most men to take command of all
available cash resources, with a membership which has
been educated to regard their policies as tickets for cash
practically on demand, and who have taken them in such
a company because they were so available, who were
willing to protect their families so long as they did not
want to use the money themselves, but who, not having
been educated to put family protection above every other
interest and duty, would take that protection only where
SURRENDERS AND LOAN PRIVILEGES 251
it would not interfere with their free use of the money
when they wanted it, and what may that company reason-
ably, inevitably expect? It will suffer a withdrawal of its
members, proportioned to the intensity of financial diffi-
culty and pressure; in severe times a very great number,
greatly reducing its vitality basis, certainly taking out its
best and leaving its worst lives, and raising its mortality,
and requiring the conversion of its best investments into
cash at a most unfavorable moment for their sale, in order
to enable it to pay out large sums to its outgoing members,
thus destroying its own credit and furnishing strong reason
to every sound life to get out.
The danger is an absolute, immeasurable, and most
critical one. It has not yet appeared in full measure among
American companies because few, if any, of those which
are certainly exposed to its malign operation have yet
reached the static condition which will leave no practical
defense against its effects. But the conditions for a dis-
astrous experience somewhere in the future are being fully
prepared in many companies. The annual privilege of
surrender for cash is now presented as a prime attraction;
the bulk of the business is already exposed to be swept
away by its exercise. The permanency of corporate life
and uniformity of operation which are absolutely essential
to the undertakings of a life insurance company are put
completely at the caprice of members secured by an appeal
to selfish interest, not to unselfish, paramount duty. In
order to get new members the more easily, they are given
unqualified power to wipe a company out of existence in
any one year.
To do justice to the membership which remains, to pro-
tect the corporate life and integrity against capricious
self-destruction or corrupt or malicious assault, to give
still the family of him who withdraws of real necessity
some remaining measure of that protection which is our
function and their greatest need, and greatest when it
cannot be longer paid for, and yet to recognize fully and
252 YALE READINGS IN INSURANCE
equitably all that is due to the departing member whose
future claim has lapsed, the only true, completely effective
and safe method is to give paid-up insurance for the sur-
rendered policy, for its unexpired term. This retains the
member, minimizes the vital loss and the narrowing effect
of withdrawal, and prevents disturbance, for the advantage
to one, of the investments made for the common and equal
benefit. Any other treatment of a withdrawing member
ought to be rare and exceptional and governed in its detail
by those special and rare circumstances which may right-
fully constitute the exception for the individual as against
the safety, profit, and general good of all the rest.
In a word, cash surrender values are false in principle,
constantly destructive in tendency, expensive as calling
for a maximum replacement of lost business, and danger-
ous to every operation by which a company proceeds to
the fulfilment of its insurance obligations.
Concerning a proper surrender charge I wish to say
only this: where paid-up insurance is given on a lapsing
policy, the charge should have regard to the probable
vitality loss on the amount of risk surrendered, and to the
cost of replacing it by new memberships. These are vari-
able elements, especially the latter. In the case of cash
surrenders there is need of an additional charge in the
nature of a safety fund or insurance against the destruc-
tion of the company or its reduction to perilous conditions
by the free employment of the malign privilege. How
much that part of the charge ought to be we have no
means of knowing. We have only the conditions fairly
set up for the future experience which will throw light on
the matter. Some have already gone far enough to know
that the danger is not imaginary and is something more
than theoretical.
Akin to the annual cash surrender value in its destruc-
tive effect both upon the company's stability and existence
and upon the protection of the family is the loan to the
insured of the reserve upon his policy. Its sole virtue in
SURRENDERS AND LOAN PRIVILEGES 253
comparison is that it does not at once and irrevocably
destroy all the family's insurance, and leaves open the
possibility of its restoration by the payment of the loan.
But if it staves off the day of cash surrender it goes much
more than half-way toward it. It gives the cash, leaves
the full premium to be paid upon a reduced amount of
insurance while the loan runs, and adds to the unreduced
cost of a reduced insurance the interest on the loan. And,
like the annual cash value, it has the abhorrent vice of
teaching a man to consider himself first and his family
last. Both in its suggest! veness and in the pressure of its
conditions, it leads strongly toward lapse; and it is small
wonder that so few loans are paid and so many lapses
ensue.
I am aware none better that I have spoken to you,
gentlemen commissioners, against an almost overwhelm-
ing drift of practices indulged in, not because they truly
develop or conserve correct principles, but because they
make it easy, for the moment, instead of hard, to get busi-
ness; because in place of unselfish, persistent self-sacri-
ficing duty, they present self-interest and a speculation;
not because upon them one may build in assured sound-
ness from the bottom up, but because one may thereby
build rapidly and brilliantly, leaving to future storms the
revelation of rock or sand in the foundation of these houses
of hope for the families of our land. And I have so spoken
to you because as the recognized and lawful guardians of
the immeasurable public interest in these things, as those
who are presumed and bound to know the true and to
discriminate it from the specious, it is in your power to
create a public intelligence, a public opinion, and a public
conscience which will not always see the truth denied nor
made of non effect.
CHAPTER XVIII
EXPENSES FOR AGENTS l
THE premium of a policy of life insurance is composed
of two parts the amount necessary to provide for the
obligations assumed in the policy contract, and the portion
added to meet the expenses of conducting the business.
The net, or mathematical, premium is based on a mor-
tality table and a rate of interest which it is assumed will
provide for the final payment of claims whether they
mature in the near or distant future. The expense por-
tion may itself be divided into the amount required to
meet the home office cost and that which is incurred in
maintaining the agencies.
If it is proposed to start a new company, the question
will naturally arise whether an agency force is indispen-
sable in order to secure a sufficient number of members to
justify the necessary cost of maintaining an office. Whether
in the future such a company can be established on a per-
manent and satisfactory basis without agents may be a
matter of opinion. It never has been accomplished in this
country, and reference must, therefore, be had to foreign
corporations of this character for information on this
point.
Four English companies report that they pay no com-
missions. The oldest of these was organized in 1762,
and the youngest in 1835. There is at this time no
company organized since the latter date which is now in
existence and attempting to conduct its affairs without
1 By John M. Holcombe, President of the Phoenix Mutual Life
Insurance Company, Hartford.
254
EXPENSES FOR AGENTS 255
paying commissions for securing business and collecting
premiums.
The oldest and best known of the British companies was
organized in 1762. In 1839 it had about $70,000,000 of
outstanding insurance and some $50,000,000 of assets. It
has now about $41,000,000 of outstanding insurance and
some $25,000,000 of assets. Its career has been a very
remarkable one, especially in the low cost at which it has
furnished insurance to its members. It is located in the
heart of the city of London, within easy reach of some
millions of people, and through its directors and policy-
holders has a wide reputation for stability and for all those
qualities which go to make up a mutual life insurance
company satisfactory to its members. The largest num-
ber of policies it has issued in a single year in the past five
years is 290, representing insurance to the amount of
about $1,200,000. From a history of this company it
appears that within the past seventy years it has very
materially decreased its membership, outstanding insur-
ance, and assets.
The other three companies referred to have made but
little progress for many years. When these companies
were organized and became firmly established the con-
ditions were so different from those which now exist that
no conclusions can be drawn from their early history
which can be applied to the situation which would to-day
confront those who would organize a life insurance com-
pany. So far as actual experience is a guide, it does not
appear that such a corporation could, under the most
favorable circumstances, secure a firm foothold without
employing agents.
The consideration of an established company of con-
siderable size may now be taken up. If its members are
scattered over a large territory, it is for their advantage,
as well as for the protection of the corporation itself, to
have agencies at various points, in order that they may
be accommodated in the payment of premiums and in
256 YALE READINGS IN INSURANCE
taking advantage of the terms of policy contracts. If
this is conceded, then a part of the agency expenses may
fairly be said to pertain to outstanding business. But
it still remains that in a modern and progressive life
insurance company, which is growing in membership and
resources, a considerable cost in procuring new business
is incurred, not only in the agencies themselves but also
in the conduct of the home office, from which point must
emanate the materials for use in the field. Much has been
said of late about the interests of policy-holders, and it
is true that they should first be considered. Yet in this
very question the fact must not be ignored that without
new business a company will be in a condition of liquida-
tion. It is clear that much of the new insurance which
has been and is being placed upon the books of some of
the companies has cost and is costing more, taken by itself,
than it is worth to the old members. If, however, part of
these expenditures may fairly be said to be incurred in
the establishment of an agency force, looking to the future,
it may still be for the interests of policy-holders that new
business shall be acquired at what may appear to be an
excessive cost.
It seems to be a well-established fact that even in a
large community people will not to any considerable extent
voluntarily apply for life insurance. If by education the
people generally should themselves be led to seek life in-
surance, it must be considered what would be the result
if applicants were to apply from considerable distances.
In order to provide for absolute safety and equity, the
members of a life insurance company must be chosen from
a class so far similar in occupations, condition, and sur-
roundings as to put them on a practical equality, or else
the premiums must be graded according to the risks
assumed. With one scale of premiums it is very evident
that those persons who are below the average as risks
would secure good bargains if they could get protection at
the rates which were charged for select lives, and unless a
EXPENSES FOR AGENTS 257
company guards itself very carefully against the admis-
sion of under-average lives, there will be a marked in-
equality, and it is conceivable that disastrous results might
follow. Competent and honest medical examiners must
be chosen who will report the condition of applicants with
accuracy. Moreover, deceptions can be practised even
upon the most skilled examiners, and it is essential that a
company shall guard itself against misrepresentations in
stating the particulars called for in an application. Faith-
ful and loyal agents, therefore, are necessary to produce
those results which are in accordance with equity and even
financial soundness; so that it is clear that if it is best for
a company to secure business from a considerable terri-
tory, not only must agents bring the subject of life insurance
to the attention of the people, but also they must guard
the interests of the company in the applications which
are made. Old policy-holders may well pay for a service
which shall bring among their number new lives which
shall experience a favorable mortality, and which shall
share in the expenses of conducting the business.
It should not be lost sight of that in a company of con-
siderable age, not only must the interests of the older
policy-holders be guarded, but also that those who have
lately taken insurance are entitled to the same considera-
tion. In a condition of liquidation those who have been
long insured might not suffer materially, but for the sake
of the younger members the distant future should be
foretold as accurately as possible. If an agency force is
desirable in the interests of policy-holders, then it is also
important that a company should be so organized as to
make it attractive for young men to engage in agency
work to take the places of those who will from time to
time drop out. This can be accomplished only by main-
taining a strong financial condition, by issuing attractive
policy forms and by so compensating agents as to make
the business lucrative. It is true that allowances to agents
may be carried to such an extent as to prejudice the rights
258 YALE READINGS IN INSURANCE
of policy-holders, but a well-established and satisfied body
of agents is of very great importance to the permanency
and the well-being of such an institution.
That the spread of life insurance protection among the
people is beneficial not alone to those who enjoy this pro-
tection, but also to the community at large, cannot well
be doubted. It should be kept in mind, however, that
life insurance companies are not benevolent institutions
and they have no right to use the funds of their members
except for those purposes for which premiums are paid.
The reasoning which should be brought to bear upon
this whole question is from the standpoint of the policy-
holders, and while it is not practicable to fix definitely a
limit for agency and home office expenses which have to
do with acquiring new business, it may be said that these
are legitimate if they do not go beyond the point where
reasonable returns can be fairly expected.
The cost of establishing a new company is of necessity
greater than that of maintaining an old one. In the first
these expenditures are necessary. On the other hand, it
may be that an old company will be benefited by the
enlargement of its business, in which case an investment, so
to speak, for an agency plant may be made within reason-
able limits. No definite rule can be laid down on this
subject, for each case must be considered in connection
with the circumstances which surround it.
Altogether it cannot be gainsaid that an agency organ-
ization is necessary to the establishment of a new company
or to the perpetuation of an old one. Whether in any
particular case a wise investment can be made cannot be
told with certainty by mere inspection of an annual state-
ment. The best results in this business are often slow
in coming. A larger inflow than can be thoroughly cared
for may appear like prosperity, but may have in it ele-
ments of inequity or danger. The obligations imposed
by a policy contract should not be evaded or postponed,
and expenses of all kinds should be limited to those sums
EXPENSES FOR AGENTS 259
to be available after the insurance liabilities are fully pro-
vided for. Within this limit sound principles will not be
violated by wise investments in intelligent and reliable
agency forces, to which an increased revenue may be
expected at a decreased ratio of expense.
CHAPTER XIX
DISTRIBUTION OF SURPLUS *
THE ideal of the contribution method for the distribu-
tion of the surplus of a mutual company is the return to
each member of such share of the surplus as has been con-
tributed by him. To this ideal no exception can be taken.
Those who question the value of the method do so, not
because they question the equity of returning to each
member what his payments have contributed to the surplus,
but because they do not admit that by the application
of this so-called contribution method, as usually prac-
tised, this ideal result is reached with essentially greater
accuracy than by other, and perhaps simpler, methods.
The application of this method, as usually explained,
viz., to credit each member annually with the reserve or
previous accumulation from his payments, the premium
paid and the interest earned, and to debit him with his
share of the losses and expenses of the company and with
the reserve or sum which must be set aside to provide for
a deficiency in the premium or the maturity of the policy
in future, seems sufficiently simple; and so it is, merely
as a book-keeping direction. But the determination of
the equitable amount to be so debited on account of ex-
penses is one of the most perplexing questions with which
the actuary has to deal.
It is of the very essence of the contribution method that
no member or class of members shall be made to pay for
1 By Daniel H. Wells, Actuary of the Connecticut Mutual Life
Insurance Company, Hartford. Reprinted with additions from pages
361-368, Volume II, " Transactions of the Actuarial Society of America."
260
DISTRIBUTION OF SURPLUS 261
the insurance furnished to any other member or class of
members; that the cost of insurance shall not be increased
to any individual or class because of the insurance of any
other individual or class. Thus the reserves of the paid-up
business should not be burdened with the expense of pre-
mium collections, nor the expense of handling such reserves
assessed against the margins or loadings of premiums on
premium-paying business. Newly selected lives should
not be required to share the heavier death cost of those
longer insured, nor the old members the reasonable cost of
bringing the benefits offered by the company to the notice
of new members.
We shall, perhaps, all agree that the expense of caring
for investments should be paid out of the income from
investments. I do not think it necessary to discuss this
point at length, but only to emphasize it, that it may not
appear as a disturbing factor in the remaining discussion.
All forms of insurance which involve a reserve, or accumu-
lation of assets, are necessarily and inseparably connected
with investment. But this does not seem to me to warrant,
certainly not to require, that the expense attending the
investments should be paid otherwise than out of the
earnings of such investments. The man who chooses insur-
ance as an investment, or a form of insurance which in-
volves large accumulations, has no right to ask that the
expense attending the handling of funds held for his benefit
shall be paid, in whole or in part, by those who insure under
other plans. On the other hand, his funds should not be
taxed for the payment of expenses other than those charge-
able to their care, on the plea that from the nature of the
business the company is able to make long or permanent
investments, and so, perhaps, to realize somewhat better
returns than investment companies generally. Such con-
ditions are not inseparable from insurance contracts, and
if one chooses to invest under such limitations he is en-
titled to any advantage to be derived from them.
Dismissing now the matter of investments and invest-
262 YALE READINGS IN INSURANCE
ment expenses, let us consider those expenses which have
to do with what we may, for convenience, call pure insur-
ance. In common with all insurance, life insurance is but
a device for the wide distribution of losses, so that the loss
which would embarrass or crush the individual, being dis-
tributed among the multitude, is borne by them without
serious inconvenience. The service rendered is measured
by the risk covered ; the amount of the loss insured against
multiplied by the probability of the occurrence of the loss
-the death cost. If the expense incurred were propor-
tional to this benefit, there would be no room for question
as to the proper assessment of it. But to assess the ex-
pense in proportion to the benefit, wholly without regard
to the cost of rendering the service, seems to me to be an
abandonment of the principle of the contribution method
(the return to each member of such share of the surplus as
has been contributed by him) altogether. We are bound
to assume that the expense incurred is reasonable, and
necessary to the conferring of the desired benefit. Why,
then, should others be taxed to pay it?
Disregarding for the present the distinction between
old and new business, we note that certain items of ex-
pense expenses incurred for the general supervision, care,
protection, and extension of the business, such as salaries
of officers and of a considerable part of the clerical force,
legal expenses, most of the cost of advertising and sup-
plies, a part of the expense for postage, telegraphing, etc.,
and, perhaps, a part of the taxes and fees paid are de-
pendent, in a general way, upon the magnitude of the
interests at risk, rather than upon the number of indi-
vidual policies, the amount insured under individual poli-
cies, or the premium rates. That is to say, the larger the
interests at risk, the greater the labor and expense which
must necessarily, or may profitably, be devoted to such
matters; although such labor and expense are not directly
dependent upon the number of the insured or of the policies
upon the company's books, as are in large part, for instance,
DISTRIBUTION OF SURPLUS 263
the expense of medical examinations and the clerical labor
of keeping the agency accounts; nor upon the premium
rates, as to a large extent agency commissions are. There
is no controlling reason for the assessment of such general
expenses pro rata of the membership, the policies in force,
the amount insured, or the premium income. As invest-
ment expenses, which depend in a like general way upon
the magnitude of the investments, are properly assessed
pro rata of the income, the benefit earned, and not of the
individuals interested, so it would seem the most equitable
way to assess these general insurance expenses pro rata of
the insurance benefit received, the death cost, or "cost of
insurance."
I am aware that it has been urged against the assess-
ment of expenses on the death cost, that it makes the
expense on some forms of policies increase with the age.
Probably this has had something to do with the introduction
of the more usual practice of assessing such general ex-
penses pro rata of the amount insured. But if the death
rate at age 65 is four times the death rate at age 40, it is
certain that, assuming the same amount at risk on each
life, the company assumes four times as great a risk on,
renders four times the service to, a life aged 65 as to one
aged 40. The insurance of a given number of lives at 65
would involve as great a probable loss, with double the
probable fluctuation, as the insurance of four times that
number of lives aged 40. Would not essentially as great
care and expense in the supervision of the business, in
the selection of territory, of agents, of forms of contract,
in the investigation and settlement of the equally numer-
ous claims, in all the varied expenditures required for the
replacing of the business lost by death and otherwise, be
as necessary or advisable in the first case as in the second?
And finally, while we cannot justly disregard the cause or
origin of the expense, it is better to err in the assessing of
it by making it follow more closely the benefit rendered
than to err in the opposite direction.
YALE READINGS IN INSURANCE
Certain other items of expense, such as collection fees,
the 'bulk of agents' commissions, exchange, and taxes on
gross premiums, are based upon the premiums collected,
and may, properly, and without serious practical diffi-
culty, be so assessed.
Medical examinations and a part of the expense for
clerical labor attach to policies, with but little or no refer-
ence to the amount insured, the premium, or the risk. If
such expenses cannot be assessed against the individual
policies, and such a course is impracticable under existing
conditions and perhaps undesirable under any conditions,
the death cost furnishes the best basis for their assessment.
The medical examination, while exacted as a necessary
condition of membership, and so properly to be assessed
against the applicant, is intended to protect the members
of the company against the introduction of under-average
risks and an increased death rate; and so is for their pro-
tection and benefit in proportion to their proper share of
the death cost. The expense for such clerical labor as has
direct relation to individual policies is but small, and may
be assessed on the death cost at least as equitably as on
the amount insured or the premiums.
It seems to me, therefore, that the equity which is the
aim of the contribution method, is most nearly attained
by an assessment upon the investment income to pay
all investment expenses, upon premiums to cover such
expenses as are determined by the premiums, and upon
the death cost, or what is technically called the cost of
insurance, to cover all other expenses.
The cost of procuring new business has been increased
by excessive competition until it has become a very seri-
ous tax upon the companies. I do not attempt at this
time to set a limit to the expense which may be legitimately
incurred for the procuring of business. I have to do only
with the proper assessment of such expense. Whatever
may be the cost of bringing insurance to the attention of
the public, or the value of the new insurance placed, its
DISTRIBUTION OF SURPLUS 265
value is to those insuring or their beneficiaries, not to
those previously insured. It is true that some slight ad-
vantage may accrue to the existing membership from the
broadening of the field for the operation of the law of aver-
age; and, in theory, some slight decrease in the expense
rate might be possible later from the increase in volume
of business. But certainly any such incidental advantage
to the existing membership is more than offset by the
advantage to the incoming member. He cannot in fair-
ness ask that the special expense involved in bringing the
benefits of the company to him should be shared by the
existing membership on the plea that his incoming broadens
the field, when the existing membership constitute the field
to which he only adds his mite; when the benefits to him
from the existence of such a membership are a hundred
thousand times any benefit he can confer upon them. It
is certainly sufficient that he be admitted to the common
advantages of a more stable experience and a decreased
expense ratio, if such result, without requiring that others
be taxed to pay the cost of giving him these advantages.
The assessing upon the old business of the expense of pro-
curing new business cannot then be justified either upon
the ground that the expense is due to, or is for the benefit
of, the old business.
It is a difficult matter to analyze the expenses of the
company with which one is officially connected, and with
whose operations one is personally familiar, and arrive
at a fairly approximate estimate of the expense directly
or indirectly due to the writing of new business. It be-
comes an impossibility in the case of other companies.
Yet I think I am warranted in saying that the average
expense cost of new business, other than term business, as
now written by our life companies, including, so far as
chargeable to new business, commissions, salaries of man-
agers of agencies, superintendents and special agents,
traveling expenses, salaries of medical directors, medical
examinations, advertising, rents, salaries of officers and
266 YALE READINGS IN INSURANCE
clerks, etc., is probably over rather than under $30 per
$1000 of new business on which a full year's premium is
collected. Against this, the cost of caring for old business,
exclusive of investment expenses, is probably considerably
under $3 per $1000, and the saving from the lighter mor-
tality on the new business for the first three or four years
after its issue does not exceed an average of about $7 per
$1000. Deducting the sum of these from the expense of
new business, we still have a balance of at least $20 per
$1000, to be provided for before the new business would
be entitled to share on the same basis as the old in the dis-
tribution of surplus. These figures are in the rough, but
they will serve the purpose of illustration.
If, now, a company writes $100,000,000 of continuing
new business, on the average not less than $2,000,000 is
sunk, planted if you prefer, for the time being, in excess of
all that will be recovered from a reduced mortality, and
under the present method of valuation the surplus is de-
creased by at least that amount to the injury and loss of
the existing business. This sum is only recovered through
a decrease in future dividends on the business so written,
through future expenditures for the procuring of other new
business. The existing membership is continually taxed
for the procuring of new business, and no corresponding
tax laid upon such new business in the future can ever
adjust the injustice done to the continually changing exist-
ing membership. Further, the cost of new business is so
large that no matter what may be assumed to be its value
to the company or to the insured, a limit is put upon the
amount a company can afford to write, varying with the
size and surplus of the company.
The most satisfactory, and indeed the only satisfactory
way of dealing with the matter seems to me to be to make
the initial expense (and all the expense) of the business
an element of our computations. A necessary and reason-
able expense in the securing of new business, as well as
every other necessary expense, may as properly betaken
DISTRIBUTION OF SURPLUS 267
into account in the computation of premiums, reserves,
surrender values, surplus, etc., as may death claims, and
should be so taken into account. It is time to do away with
the idea that all expenses and contingencies are to be pro-
vided for by a more or less arbitrary loading or margin
added to the computed premium, and, lest that should
prove insufficient, by further holding an enormous undi-
vided surplus; and to provide for them in a more rational
manner by suitably modifying our fundamental assump-
tions and computations.
A life insurance company has two sources of income:
the premiums paid by its members, and the earnings of its
investments. These must suffice to provide for the policy
claims and the expenses of the business ; the latter as truly
and as certainly as the former. If all investment ex-
penses, and all taxes and losses on investments, are to be
charged against the earnings on investments, as they
should be, the rate of interest assumed in the computations
should be such as the company, so far as human foresight
can avail, will be certain to realize, net, over all such
expenses, taxes, and losses.
As ample provision should be made for investment ex-
penses in the assumption of the interest rate, and not by
an arbitrary addition to the premium, so ample provision
should be made for such of the ordinary and continued
insurance expenses as are properly assessable upon the
death cost by a loading of the death rate or mortality
table. For the ready and equitable distribution of the
surplus, the mortality table should express the relative
probabilities of death at different ages. It is not neces-
sary that it should express the actual probability of death,
but only that the actual probability should bear a fixed
and known ratio to that given by the table. The table
used should, then, represent a fixed per cent, of the prob-
able mortality at each age, such per cent, being taken high
enough to provide amply for all the ordinary expenses
properly assessable upon the death cost as well as for the
268 YALE READINGS IN INSURANCE
death cost itself. An addition of 25 per cent, to the prob-
able mortality after the expiration of the first five years
of insurance should be more than sufficient. To the pre-
mium computed on the basis of the assumed interest rate
and the modified mortality table should be added, as a
provision for the first cost of new business, an annuity,
contemporaneous with the premium payments, the present
value of which is equal to the necessary first cost of such
new business in excess of the subsequent annual expense
and of the gain in the first two or three years from a favor-
able mortality. The sum so found should be increased
by a small per cent, to provide for such continued expense
as may be assessable against the premium.
In the computation of the premium we have provided,
in what seems to me a rational way, for (a) the first special
expense of the business, (6) a percentage charge against
the premium year by year to cover expenses so assessed,
(c) a margin of income from investments to cover invest-
ment expenses, (d) a percentage of the death cost to cover
other expenses, and (e) policy claims. If it is thought
more equitable to assess general expenses upon the amount
insured rather than upon the death cost, it is only neces-
sary to add to the premium computed upon the unmodi-
fied mortality table and the assumed rate of interest an
annuity for the premium-paying term, the present value
of which is equal to the present value of an annuity equal
to the expense to be provided for and running through the
term of the policy, instead of increasing the assumed
mortality.
The proper reserve would be the single premium for the
insurance, less the present value of the future premiums
receivable, if any, deducting from such premiums, however,
for purposes of valuation, the final percentage loading,
which was added to provide for certain continuing annual
expenses, and presumably will be needed for that purpose,
which loading is not offset by any corresponding loading
of the single premium. The computation should be based
DISTRIBUTION OF SURPLUS 269
upon the modified mortality table and the assumed rate
of interest. A reserve so computed would take account
of the necessary cost of new business, so that such cost
would not be at the expense of the existing membership,
and would also provide for all the expense attending paid-
up business. Under such a computation of premiums and
reserves there should be no need of any considerable amount
of undivided surplus. Contingencies and expenses are
otherwise provided for. Sufficient surplus only is needed
to serve as a balance-wheel to enable the company to pay
a uniform dividend undisturbed by temporary fluctuations
of values and mortality.
The foregoing is a very simple statement of what seem
to me the principles which should guide in the distribu-
tion of the surplus and the determination of the requisite
reserve of a mutual life insurance company. In applying
these principles in practice all sorts of difficulties will be
met with. I venture to refer to some of them.
Investment income earned will vary in rate in case of
an established company iDut slowly, and can be to some
extent forecast. Death claims may vary irregularly by
considerable amounts year by year; but it is to be remem-
bered that it is the risk of death the company insures
against, and just as in the case of an individual the com-
pany does not make the cost to him dependent upon his
living through a given year, so in the case of 100,000
individuals it should not necessarily vary the cost to them
of the risk assumed according as more or less of them die
in a given year. The number dying in any year may
assist in determining the risk of death age by age, but does
not determine it. A reasonable surplus should be carried
to provide against fluctuations, and serve as capital for
the prosecution of the business.
Again, a uniform or slowly decreasing cash payment is
very desirable. The desirability of a fixed income from a
given investment is recognized by almost every reliable
and well-established financial corporation in existence.
270 YALE READINGS IN INSURANCE
The shares of any railroad or other corporation would
very quickly decline in value if the dividends of its stock-
holders varied year by year according as the year chanced
to be more or less prosperous. So it is desirable that the
cost under a life insurance policy should not vary greatly
from year to year but should be substantially uniform.
A carefully determined scale of dividends should not, there-
fore, be lightly thrown aside because for a given year the
business has been more or less prosperous.
The method of distributing its surplus in case of a mutual
company should also take account of the history and tra-
ditions of the company. What method have its members
been led to expect? What method has been tacitly agreed
upon among themselves by the past history of the com-
pany and the results with which they are familiar under
different classes of policies? Do not hastily substitute
your individual opinion of what is right and proper for the
custom of years past approved by the bulk of the members.
Competition, too, is to be considered. It may be that
a given kind of business must be done at a given cost or
not at all, and one may be driven to consider whether it
is wise to do a certain class of business at the price at which
it can be done.
Freedom in the choice of methods of distributing surplus
may be limited by legal enactments. If such enactments
do not meet your views of what is right and proper you
may strive for their repeal or modification, but so long as
they remain as legal enactments it is the duty of a good
citizen to conform to them.
The above are by no means the only difficulties that
beset the path of one who endeavors honestly to determine
to whom and in what proportions the surplus of a mutual
life insurance company belongs, but they will perhaps
serve as illustrations. Remembering, then, that the pre-
ceding is only a statement of general principles to be applied
to each particular case as circumstances permit, we may
proceed to apply it to an assumed case.
DISTRIBUTION OF SURPLUS 271
Let us assume that the company earns a net income,
after providing for the cost of its investments, of 4J per
cent.; that its death losses, less the liability from which
it is relieved by the payment of them, are 75 per cent, of the
tabular cost of insurance or contribution to death claims;
that it reserves on the basis of the American Table of Mor-
tality and 3 per cent, compound interest; and that it is
required to find the tenth annual dividend per $1000
on 20-payment life policies issued at age 35 at a premium
rate of $36.20. For convenience of reference we add that
the reserve at the end of the ninth year upon such a policy
is $226.31 per $1000, and that at the end of the tenth
year is $255.78 per $1000; and that the cost of insurance
for the tenth year is $8.06. Let us assume, also, that the
cost of new business less the saving in mortality is $20 per
$1000 in excess of the subsequent cost. This $20 equals
an annuity of $1.42 a year through the premium-paying
period, which, having been appropriated already, reduces
the effective premium to $34.78. Let us assume that the
expenses chargeable to the premiums upon the business
as a whole are 1\ per cent, of such premiums, and those
chargeable to the cost of insurance are 20 per cent, of such
cost. The dividend, then, may be found as follows:
Reserve at the end of the 9th year $226.31
Plus the effective premium 34.78
Plus interest for a year 11.10 $272.19
Less reserve at the end of 10th year $255.78
7 per cent, of the premium 2.72
95 per cent, of the cost of insurance 7.66 $266.16
Leaving a dividend of $6.03
The mathematical work may be somewhat abbreviated,
and the form of it will depend somewhat on the means at
hand, and is, of course, immaterial.
The method suggested of determining the reserve which
a company should make has not come into use, and may
272 YALE READINGS IN INSURANCE
be dismissed with very brief reference. It substantially
regards business on the books as an asset. In view of the
first cost of such business it is such. By distributing such
first cost as an annuity through the premium-paying
period, it to that extent equalizes the expenses and so the
annual cost of the insurance while still making it a charge
against the individual policy on account of which it was
incurred. In the event of the surrender of the policy,
any balance of such cost still remaining as a charge against
future premiums should be collected as a part of the sur-
render charge.
CHAPTER XX
DEFERRED DIVIDEND POLICIES
THE Blank Life Insurance Company is prepared to in-
sure lives upon a method which has never before been prac-
tised by any life insurance company, and which, it is thought
by those who have given it the most study and reflection,
mil render life insurance popular to a degree hitherto un-
known. Government bonds and bonds and mortgages on
real estate are considered by many persons the safest kind
of investment. They regard money paid for insurance of
any kind rather as an expense than as an investment add-
ing value to their estates. To obviate this in the fullest
degree, the present method has been devised, which is
now for the first time presented to the public.
Tontine annuities, which were first made attractive by
Lorenzo Tonti about the middle of the seventeenth cen-
tury, have become exceedingly popular throughout Europe
and in some parts of South America. A tontine is quite
the reverse of life insurance, it being, in fact, a combination
of persons who contribute to a common fund which shall
be enjoyed by the survivors only; so that as years roll on
and the numbers surviving diminish, the income is, of
course, constantly increasing to those who live, until the
last members of a class enjoy most extraordinary advan-
tages from the system. In 1689 the last survivor of the
1 Reprinted from a circular issued in 1869 by & life insurance com-
pany, announcing a new scheme of declaring dividends. Since so
much controversial discussion has taken place over deferred dividends,
it has been thought best, since it detracts nothing from the value of
the pamphlet, to omit the name of the company which issued it.
273
274 YALE READINGS IN INSURANCE
tontine in France, a widow, just before her death, enjoyed
an income equivalent to about $20,000 of our money for
her original subscription of about $80. So popular has
this system been in Europe, that governments have used
it for the purpose of raising money for national support.
Those who invest in tontines care little for leaving money
to those who may come after them (who they may con-
sider have little or no claim upon them), and prefer to
enjoy while living a large annual income, which, combined
with entire safety, their money could not produce, in the
shape of interest, in any other way. Life assurance, as
has already been observed, is quite the reverse of the
tontine principle, and the arguments which induce per-
sons to invest in securities of this character appeal to
higher and more unselfish motives than those which influ-
ence investment in tontines. The apprehension arises in
the minds of many persons who are asked to assure their
lives, but who have not given life assurance much study,
that in case of a long life the investment may prove a bad
one; but a careful investigation will prove that this objec-
tion is not well founded. We have before us a policy in
one of the leading mutual companies, issued more than
twenty-five years ago, taken out originally for $5000, on
which, when the policy became a death claim, more than
$10,000 was paid by the company, the excess over the
original amount of the policy being more than 7 per cent,
interest on all the payments received by the company. It
is proper to state that this result was due not only to the
marvelous power of compound interest, but also to the
fortunate increase in the value of investments, the large
return of surplus premiums, and other gains incident to
the business. The case cited is not an isolated one; the
same thing has been often repeated and may again be
repeated. At the same time, it must be acknowledged
that the gain from investments in life policies is greater
in the case of early death; and the popular mind seeks
for some simple method by which an equalization of the
DEFERRED DIVIDEND POLICIES 275
benefits of life insurance can be secured, whether the in-
sured die soon or late. The system now under considera-
tion, though differing from either tontine or life assurance,
combines all the advantages of both, and has been brought
out under the supervision of two mathematicians, Mr.
George W. Phillips and Mr. Sheppard Homans, author of the
contribution plan of dividends. This system is known
as the "Tontine-Dividend System," under which, by a
skilful adjustment of the dividends, a recompense is given
to those life assurants who live nearly up to or beyond the
period known among actuaries as their "expectation" of
life. If a person at the age of 35 insures his life in a com-
pany for $25,000 and pays a premium of $659.50, and dies
during the year, while theoretically as much profit is made
by the company from insuring his life as from insuring the
lives of those who are long lived, because the tables are
adjusted to meet this exigency, still, in a practical sense,
certainly no money is realized from the individual trans-
action. It would appear exceedingly equitable that the
person who dies early, and whose family receives the face
of his policy, equal to a profit of 100, 500, or even 5000
per cent, on the money he has invested, should not receive
a further sum in the shape of dividends, and that those who
continue to pay their premiums through a long series of
years should have the benefit of the accumulated divi-
dends, in addition to the face of their policies respectively,
giving them a profit on their outlay somewhat approximating
to that of those dying early. The "Tontine-Dividend Sys-
tem" aims, among other things, to accomplish this equitable
distribution of surplus. And it is thought by the Super-
intendent of Insurance of the State of New York, Hon.
Wm. Barnes, and many of our most prominent business and
financial men, that it will popularize life assurance to a
degree hitherto unknown.
The plan as applied to a particular case is simply this:
If a person at the age of 35 years insures his life for $25,000,
and pays the annual premium of $659.50, interest on these
276 YALE READINGS IN INSURANCE
annual premiums is to be theoretically compounded at
the rate of 10 per cent, per annum, until such premiums,
with interest as specified, amount to the face of the policy,
which, at the age mentioned, would be in 15.5 years.
During the intervening period the company issuing the
policy makes its annual dividends on this and all other
tontine policies, keeping the profits on the same separate
from the rest of its policies, and setting them apart as a
fund belonging to the tontine class, but not payable in
any case until the end of the specified period of 15.5 years,
and then only on such policies as shall be actually in force,
those policies terminating in the interval receiving no
dividends. The person holding the tontine-dividend policy
above mentioned will, at the end of the 15.5 years, begin
to benefit by the dividends already declared; and further
dividends will be made annually thereafter throughout
the remainder of the term of the policy. These dividends
will be payable in cash, thus reducing or canceling the
annual premiums, and afterwards yielding a constantly
increasing cash annuity as well. It has been calculated
by the best actuaries that the dividends on such policies
will be three or four times greater than have hitherto been
declared by any company. The same principle is applied
to policies on lives at other ages; the distinctive feature being
that there is no participation in profits until the premiums
paid, compounded at 10 per cent, interest, equal the face of
the policy, and then the survivors receive the whole accumula-
tion of profits.
Persons dying during the non-dividend period receive
the amount secured by their policies respectively without
further profits.
Persons discontinuing their policies prior to the dividend
period receive no surrender values therefor.
Policies are to be issued at the rates charged in the
"Ordinary Life Table" or in the "Endowment Table 1 '
(with twenty years or more to run), payable in either case
by premiums continuing during the whole term of the
DEFERRED DIVIDEND POLICIES 277
policy. These premiums may be paid annually, semi-
annually, or quarterly.
This plan will admit of a number of variations; for in-
stance (1), the division of profits may begin at the end of
an arbitrary period of ten, fifteen, or twenty years; or
(2), a separate class of policies may be issued on either
of the foregoing plans, upon the surrender of which paid-
up policies will be given for the value thereof, in case the
same are allowed to lapse by non-payment of premium
before the dividend begins, but on which no dividends
will be paid in case of death before the dividend period. It
is not to be expected, however, that the dividends will be
as large as in the previous classes, because one of the
material sources of profit is diminished.
In order to carry out the views above suggested, the
Blank Life Insurance Company has determined to estab-
lish for its assurants tontine-dividend classes, which
any, who may hereafter assure, may enter on giving due
notice of their election so to do.
Class A
In this class (designated in "application 1 ' and "policy"
as Class A), policies are to be issued at the rates charged
in the "Ordinary Life Table," or in the "Endowment
Table" (with twenty years or more to run), payable in either
case by premiums continuing during the whole term of the
policy. These premiums may be paid annually, semi-
annually, or quarterly.
No dividends will be paid until the premiums, with
compound interest thereon, at the rate of ten (10) per cent,
per annum, shall amount to the sum assured by the policy.
In case of death before the dividend period begins, the
assured will receive the sum secured by the policy.
The society will allow no surrender value to those who
give up their policies, or dividends on those policies that
may become death claims, before the dividend period
begins; but will reserve all profits resulting from such
278 YALE READINGS IN INSURANCE
sources, as well as the profits accruing upon the policies
of those who persevere in paying their premiums, until the
premiums paid by the latter, with compound interest
thereon, at the rate of ten (10) per cent, per annum, shall
have amounted to the face of their policies respectively.
The dividends then are to be equitably adjusted on the
contribution plan accordingly as each class and age has
contributed to the surplus, and paid on such policies as
are actually in force; of course allowing for irregularities
incident to a small number of policies in any sub-class, but
faithfully regarding the general course of mortality at
different ages and in different classes, and the growth of
profits as affected by the difference in the length of time
for which the division of profits at the various policies
shall be deferred.
The dividends will be applied to the reduction of sub-
sequent premiums falling due during the continuance of
the policy, and in case of a surplus after doing this, as is
probable, the excess to be applied to the purchase of an
annuity to continue up to the termination of the policy.
Annual dividends, thereafter, will swell this annuity,
so that the policy, which was a burden in its early years,
will yield an increasing income, payable yearly in cash.
It is estimated by the most competent actuaries in this
country, that dividends on policies in this class may be
more than three times as great as have hitherto been de-
clared by American companies.
Class B
In order to meet the views of those who may not desire
to lose the privilege of receiving a value for their policies,
if obliged to give them up before reaching the dividend
period, the society will establish another class (designated
in "application" and "policy" as Class B), in which the
original policies will be exchanged for paid-up policies
according to the rules of the company.
As in the previous class, no profits will be paid on policies
DEFERRED DIVIDEND POLICIES 279
which may become death claims before the dividend
period begins. Although the final dividends in this class
will not be as great as in the first, still they will be much
larger than those which have been hitherto declared by
any life insurance company.
Class C
Again, as some persons may prefer to have their divi-
dends come due at the end of a stipulated term of ten,
fifteen, or twenty years, policies will be issued containing
such a stipulation, but in other respects not differing from
those issued in Class A. (This class will be designated
in ''application" and "policy" as Class C.)
Class D
Policies will also be issued on which the dividends will
become due at the end of a stipulated term of ten, fifteen,
or twenty years, but in other respects not differing from
those issued in Class B. (This class will be designated
in the "application" and "policy" as Class D.)
The profits on each of these tontine classes (namely,
those in which neither surrender value nor paid-up policies
are given for policies surrendered before the attainment of
the dividend period, and those in which a paid-up policy
for a certain amount is given) will be kept separate, so
that those who bear the greater risk will receive a GREATER
RECOMPENSE.
In the payment of premiums on all policies in the ton-
tine classes, a grace will be allowed of as many months
(not exceeding six) as will correspond to the age of the
policy in years; thus the payment of any premium for the
first year of the policy may be deferred for one month, of
any premium for the second year, two months, and so on,
- provided that in all cases when this grace is availed
of, a fine at the rate of ten (10) per cent, per annum will
be exacted. Thus there need be no accidental forfeiture
of a policy, and the greater the value of the policy, the
280 YALE READINGS IN INSURANCE
longer is the grace allowed for the payment of premiums
upon it.
Such is the proposed system of tontine dividends. What
are its advantages?
It will be seen that by this system, if an assurant dies at
any time, even on the last day, before the period is reached
when participation in profits begins, his representatives will
receive more than ten (10) per cent, compound interest upon the
money paid into the society for premiums. If he dies within
the first few years of his assurance his representatives will
receive many times 10 per cent. ; if during the first year it
may be 5000 per cent. At the age 35, on a life policy, the
dividend will commence in 15.5 years; an assurant there-
fore on this plan may secure in case of death during that
time a 10 per cent, investment at least. And afterwards,
it is probable that on such a policy the dividend will
not merely pay the premium in full, but secure a very
comfortable annuity besides to the assurant during his
life.
Now, is not this just what many men in the community
need something to protect their families in case of sud-
den early death an investment which is certain to pay
ten (10) per cent, compound interest at least for, say
fifteen years (at the average age of asssurance); then
afterwards the requirement of no more premiums, the
assurant receiving instead a considerable annuity, com-
mencing just at the time when age begins to impair the
faculties ?
Does not this plan do in effect what the policies payable
in ten, fifteen, or other limited number of annual payments,
aim to do the complete paying up of the premiums
during the productive years of life, and the securing of an
income from the policy at middle life and in old age. And
though the tontine-dividend policies receive no dividend
for some ten or fifteen years, yet as the ordinary life pre-
mium at the average age is but half the ten-year premium,
the result in actual outgo on a tontine-dividend policy
DEFERRED DIVIDEND POLICIES 281
will be more satisfactory than that on a ten-annual pay-
ment policy, at the same time that the lightening of the
pressure of the payments required will be often very
desirable during the first year or two of the policy, when
the policy-holder, perhaps just starting in business, can
spare with difficulty the amount required by the lowest
tables.
Again, to compare the tontine-dividend system with the
stock system without profits, is it not better to pay a some-
what higher mutual premium for, say fifteen years, with
the expectation that after that time not only will no
premiums be required, but that a very considerable income
will be received from the policy, rather than to pay up to
the very end of a long life as a penalty, it would seem,
for superior vitality a stock premium, somewhat lower
indeed, but without the least abatement in old age ?
It would seem that this plan, while it gives the class who
pass the dividend period all the advantages of the mutual
plan, also gives them all the benefits of the stock plan as
enjoyed by the holders of stock in companies of that kind;
the class who pass the dividend period obtain their insur-
ance at the net rate, while the profits of those policy-holders
who fail to pass the dividend period go to swell the annuity
of the former, which same profit in a stock company would
contribute to enlarge the dividends of the stockholders.
It is claimed by the Blank Company that the system of
tontine dividends is adapted in a most remarkable man-
ner to the wants of those persons who have mortgages upon
their real estate which they may either not care or not be
able to pay off. Their unwillingness may be owing to the
fact that the money borrowed is more valuable to them
in their business than the current rate of interest which
they pay for its use; their inability to the fact that their
necessary expenses make it difficult for them to save
enough money to make very rapid progress in removing
the mortgages. In either case the apprehension may weigh
heavily upon their minds that in case of their sudden
282 YALE READINGS IN INSURANCE
death the mortgages might prove unfortunate, if not disas-
trous encumbrances, at a time when all available moneys
are needed in winding up their estates; as many a time
a mortgage made during the lifetime of an owner proves,
in case of his death, the loss of the entire property to the
family. So great have been the changes produced during
the last ten years in the prices of living and the general
expenses of the man of family, that many persons have
been anxious to buy homesteads rather than pay the large
rents and suffer the inconveniencies and uncertainties
incidental to the rental of houses. This proceeding would
in all cases probably prove a wise one provided the per-
sons in question could be guaranteed a long life, but they
have frequently been obliged heavily to mortgage these
homesteads in order to carry out and fully perfect their
plans. The reflection which is sure to come over their
minds of the trouble that would result to their families
in the event of their sudden death often causes untold
anxiety; and the difficulty they experience in saving from
their incomes a yearly sum sufficient to give promise of a
liquidation of such mortgages within any reasonable time
fills them with evil forebodings for the future. Now it is
proposed in a most easy and simple manner to obviate all
this trouble. Let the person so situated insure his life
on the tontine-dividend plan for the amount of his mort-
gage. While the sum, as before mentioned, which may
be saved year by year, is small as compared with the
amount of the mortgage, it may still be enough and more
than is necessary to pay the annual premium required to
cover the entire amount of the mortgage. Having done so,
the person may dismiss this anxiety entirely from his mind,
and devote himself to his business with a heart free from
care, for he then knows that in case of death at any time,
even the very next day, his policy would pay off his mortgage.
And as years roll on and he reaches the period when the
dividends commence, his premium will be almost if not
entirely extinguished, and the annual dividends thereafter
DEFERRED DIVIDEND POLICIES 283
will soon yield him a cash annuity, at first almost, and
then entirely sufficient to pay the interest on his mortgage.
So that the policy, which was first and during the produ-
cing years of his life an annual expenditure to him, may in
the end, as fully as a government bond, produce a yearly
revenue sufficient not only to pay the premium on the
policy but interest on his mortgage and prevent the same
from being any burden to him. If the person should be
able to spare a slightly increased premium, it would be
wise for him to take a "twenty-year endowment policy"
instead of an ordinary life policy. The same advantages
would then be gained with the additional feature that
the person would in twenty years, if then living, himself
receive the amount of his policy, and the mortgage could
then be discharged, instead of waiting until the time of
his death.
The same principle which has been thus described in
regard to the owners of mortgaged premises applies with
equal force to the case of those persons who may have
incurred debts which they are at present unable to pay
with convenience, but for the satisfaction of which they
consider it both their duty and pleasure to provide, if
possible.
The arguments supporting the tontine-dividend sys-
tem address themselves with peculiar force to many
persons who are in the possession of large incomes. These
may be divided into two classes: (1) those who are pos-
sessed of large assets, and who enjoy large incomes as well,
and (2) those whose large expenses during their business
life have prevented their accumulating much, but who
are, nevertheless, earning large incomes by the exercise
of their hands or brains.
Let the first class remember that their estates, as a
whole, are worth, much more to-day, if they are living, than
to-morrow, if they are dead. No one can settle an estate,
and disentangle the meshes in which a man's business is
oftentimes entwined, as well as the owner. It is well
284 YALE READINGS IN INSURANCE
known to most business men that, in the majority of their
investments, living they gain, dying their representatives
lose. It is now proposed to such persons to cast an anchor
to windward. Let them wisely hedge themselves in at
least one of their investments. Now the characteristics
of life insurance are, in some respects, directly the opposite
of those we have described, as peculiar to most other
investments. For the sake of the parallel, we will assume
(what nevertheless is untrue), that life insurance will prove
a loss to the person who lives long; for no one will deny
that in the event of his dying soon it will be a large gain;
and it is a demonstrable fact that this gain may be as great
as 100, 1000, or even 5000 per cent, on the actual outlay.
Thus the business man, who, dying early, will lose to his
family a portion of his investments, may by the same stroke
make a gain to them of a sum quite as large. The tontine-
dividend system brings this argument home to business
men with greater force than it could be presented by the
ordinary system of life insurance, from the fact that the
profits upon the policies of this class, as specified above,
will probably be three or four times as great as have
hitherto been declared by any life assurance company;
and, in the opinion of the most competent judges, a policy
of this kind will pay a remunerative rate of interest, in the
end, upon the whole investment.
To those having large incomes, but who have not accumu-
lated sufficient to make them independent, policies of this
class present strong attractions. There are few men pos-
sessing the ability and industry to earn annually large
sums of money, and having great and constantly increas-
ing experience and knowledge in the pursuits to which
they devote themselves, who do not feel a confidence
(provided their lives are spared) that they will be able to
maintain, and even enlarge, their power to produce the
same results during the early and middle portion of their
lives, if they can only keep their minds free from anxiety
in regard to the future prospects for their families. Such,
DEFERRED DIVIDEND POLICIES 285
however, may be their love of luxury, and their determina-
tion to surround themselves and their families with present
comforts, that they may not see any practicable way of
rapidly providing an independent competency for those
they leave behind them. But they can easily save a suffi-
cient amount from their annual incomes to insure, as the
case may be, for either 10,000, 25,000, 50,000, or 100,000
dollars, and, having done so, feel quite as great a certainty
that their families will be provided for in the event of
early death as if they were possessed of an equal amount
in United States bonds, or other marketable securities.
Such persons might hesitate before using the sum of money
which would be required to pay the premiums, in any way
which they might consider an expense, but it would seem
a most wise and commendable thing for them to invest
such money in a tontine-dividend policy, which will be
in the end an investment as profitable to them as a gov-
ernment bond could be, and which possesses the power
(to be found in no other kind of security) of providing for
their families a sum much greater than the amount paid
in whenever they may die. There is no kind of investment,
excepting life insurance, in which present paj^ments of
trifling amount, and the promise of future payments while
the investor lives, are received in full satisfaction for the
amount deemed necessary for the support of a family,
which is paid down in cash, whether the death occurs
early or late.
To those who may already have policies upon their
lives, issued upon any of the plans hitherto practised by
life insurance companies, it is thought that this tontine-
dividend plan presents strong arguments for taking ad-
ditional policies. The profits on such policies (which,
upon any of the ordinary plans, would be enjoyed by the
general mass of the policy-holders, and are on this plan
given only to those who pass the period when the divi-
dends begin) are, by the power of the tontine principle,
augmented to such a remarkable extent that, while the
286 YALE READINGS IN INSURANCE
taking of the additional policies is wise in itself as a new
security, the annuity ultimately to be derived from the
same may most opportunely aid in the payment of the
premiums of the policies already in force, and thus
"make assurance doubly sure."
CHAPTER XXI
ECONOMIC ASPECT OF LENGTHENING HUMAN LIFE '
CONCERTED action by life insurance companies to
lengthen human life would mark, I believe, one of the
greatest steps, if not the greatest step, ever yet taken
toward the improvement of human longevity. The nearest
analogy is perhaps to be found in the work of fire insur-
ance companies in reducing the number of fires. But it is
a general truth that the best success of any movement is
found only when, in a sense, it reaches the commercial
stage in other words, when it is made to pay in some
tangible way. Philanthropy is keen to lead the way to
reform, but becomes a broken reed if depended upon for
its support continuously or on a large scale.
The insurance men whom I have consulted as to whether
it would pay to engage in the saving of lives have been
unanimously affirmative in their answers. So obvious
does this seem that the question arises, why have insur-
ance companies never attempted it before? There seem
to be three explanations:
First, the continuance, until recently, of the tradition
that human mortality follows a nearly invariable law, and
a law which cannot be appreciably affected by any act of
man.
Second, after it became known to experts that human
life is greatly extensible through public and private hygiene,
this knowledge was possessed by so few, that the general
1 By Irving Fisher, Professor of Political Economy in Yale Uni-
versity, President of the Committee of One Hundred on National
Health. Reprint of a speech delivered before a meeting of the
Association of Life Insurance Presidents.
287
288 YALE READINGS IN INSURANCE
public, and even the rank and file of the medical profession,
remained of the contrary belief, and the inertia of their
conservative opinion prevailed.
Third, it seemed too large a task for any one company
to prolong life for the whole country, and there seemed no
way to prolong the lives of its own policy-holders alone,
so long as unsanitary conditions prevailed throughout the
communities in which these policy-holders lived, while
finally there seemed no way of bringing the various life
insurance interests to agree on concerted action.
It seems now, however, that the time has arrived when
all three of these objections can be removed. I assume
that before this audience there is no need of presenting
evidence or arguments to prove that human life may be
lengthened by hygienic measures, and shall therefore
merely run over very briefly the most salient and general
facts, as introductory to the formulation of a practical
plan of action.
It has long been known that there is no iron law of
mortality, but that mortality depends on the hygienic state
of the community. Baines, in a recent paper in the Jour-
nal of the Royal Statistical Society, has calculated that
the average duration of life in India is only twenty-three
years for males and twenty-four years for females, or less
than half the life span in the advanced countries of Europe.
The estimates of Finkelnburg show that in Europe human
life has probably doubled in the last 350 years. More
recent and more reliable figures show that life is lengthen-
ing to-day more rapidly than ever. If we take life tables
for different periods for England, France, Prussia, Denmark,
Sweden, and Massachusetts, we find that human life
lengthened during the seventeenth and eighteenth cen-
turies at the rate of four years per century; that during
the first three-quarters of the nineteenth century it length-
ened at the rate of about nine years per century; that at
present it is lengthening in Europe generally at the rate
of seventeen years per century, and in Prussia (which is
LENGTHENING HUMAN LIFE 289
perhaps the home of preventive medicine) at the rate of
twenty-seven years per century. For this country the
rate can only be judged from the statistics for Massachu-
setts, which show that life is lengthening by about fourteen
years per century, or approximately half of the Prussian
rate. These rates may not continue in the future, but the
opinion of our best authorities on longevity, such as Ray
Lankester and Metchnikoff, is that there is still great room
for improvement, especially after middle life. Hitherto
almost all the improvement has applied to ages before
50, and only the most recent figures show any tendency
toward improvement beyond that age. It is significant
that backward India in spite of the enormous room for
improvement shows during twenty years no rate of
improvement whatever.
The statistics of insured lives show that the insured poor,
as represented by the industrial companies, have a mor-
tality from 50 to 80 per cent, higher than the insured rich
or well-to-do, as represented in the ordinary insurance
companies. The unsanitary districts of Glasgow and
Paris show a mortality more than double that of the sani-
tary districts, while cities in general show a much higher
mortality than the open country. A fall of the death rate
always promptly follows sanitation. Colonel Gorgas cut
the death rate in Havana in two, bringing it down to
between 20 and 24 per 1000. The New York death rate
responded at once to Colonel Waring's clean streets, and
that of Rochester to Dr. Goler's milk crusade. And now
it is announced that the death rate of New York is 16.5,
the lowest on record a result, in all human probability,
due to the hygienic work of Dr. Darlington, the efficient
health officer, Mr. Nathan Straus, the milk reformer, and
the public agitation for health prosecuted by the New
York Times, the Journal, and other media, allied with the
health work of the Committee of One Hundred on National
Health, the Tuberculosis Association and Committees, and
other organizations.
290 YALE READINGS IN INSURANCE
These and other facts and the mass of detailed figures
which they represent show conclusively that human life
is long or short precisely according to the hygienic condi-
tions under which it is lived; that human life can be pro-
longed as these hygienic conditions are improved, and that
there is still enormous room for improvement. Farr,
twenty years ago, in his masterly work on Vital Statistics,
stated that any community could attain an average dura-
tion of life equal to that in the so-called "healthy districts"
of England, where the average duration of life was then
fifty-one years. To bring all England up to this level
would at that time mean a lengthening of life by one-fifth,
or 20 per cent.
A report which I have recently prepared for the Con-
servation Commission, based on data contributed from
acknowledged American authorities, shows that human
life in America could, by the adoption of hygienic reforms
already known and entirely practicable, be lengthened by
over one-third that is, over fifteen years. This cal-
culation has been made very conservatively and is prob-
ably several years inside the truth. The statistics and
estimates on which it is based have been taken from pub-
lished sources, as well as contributed by some score of
American authorities medical, actuarial, and hygienic.
A safe minimum estimate was made of the degree of
preventability of the deaths from each of the ninety prin-
cipal causes of death in the United States. For instance,
for typhoid fever, experience in Lawrence, Massachusetts,
has shown that the introduction of a public water filter
reduced the typhoid mortality by 80 per cent. In Munich
the cleaning of cesspools and other hygienic measures
reduced the mortality from typhoid by 97 per cent. On
the basis of these and other facts, it was conservatively
estimated that 85 per cent, of the deaths now occurring
from typhoid fever in the United States could be easily
prevented. Professor Sedgwick recently announced the
truth of Hazen's theorem that for each life saved from
LENGTHENING HUMAN LIFE 291
typhoid, two or three lives are saved from other diseases.
This cumulative effect, however, was not taken into
account in the calculations, nor was account taken of the
constant advance being made in preventive medicine.
For these and other reasons, the calculated estimate
of the improvability of human life is regarded as ultra-
conservative. Tuberculosis is known to be preventable.
In my table, it is entered as only 75 per cent, preventable ;
pneumonia as 45 per cent, preventable ; typhoid as 85 per
cent. ; diphtheria, 70 per cent. These conservative figures
are among the highest allowed. Many diseases, such as
cancer, are recorded in the table as zero per cent, prevent-
able, although the best expert opinion would allow some
degree of preventability, if prevention begins early enough
in life.
On the basis of these ratios of preventability, or rather
postponability of death, has been computed the possible
extension of the average human life by saving lives now
lost by preventable diseases. The calculation is made on
the assumption that those thus saved from death enjoy
as their new lease of life only the expectation of life now
belonging to their respective ages. This assumption is
very conservative, for it means that lives once saved shall
receive no further benefits from improved mortality, but
shall die off at the old rates of mortality.
Even on these safe premises of partial postponability
of deaths, we find that about two years of the possible
lengthening of human life would be due to the elimination
of preventable tuberculosis; .6 of a year to the elimination
of preventable typhoid ; .5 to the elimination of preventable
diphtheria; .9 to the elimination of preventable accidents.
It is estimated that at least eight years could be added to
human life merely by securing reasonably pure air, water,
and milk.
A grouping by ages will bring home these figures to life
insurance companies. It was estimated that for diseases
of infants under one year of age, such as broncho-pneu-
292 YALE READINGS IN INSURANCE
monia, diarrhoea, and enteritis, at least half of the deaths
were preventable that is, postponable. For diseases of
childhood such as meningitis, diphtheria, and scarlet fever
the same is true; for diseases of middle life, such as typhoid
fever, tuberculosis, pneumonia, and accidents, over one-
third are postponable; and for diseases of late life, such as
Bright's disease, heart disease, and apoplexy, at least one-
fourth of the deaths are postponable.
These ratios may seem high at first glance, but only
because no one has previously attempted to assemble all
ratios of preventability. Each investigator has seen
clearly the preventability within his own special sphere,
but assumed that outside that sphere the preventability
was less. One specialist knows that tuberculosis is, for
the most part, preventable; another, typhoid; a third,
diphtheria; a fourth, infantile diarrhoea. And yet each
clings to the idea that disease in general is unpreventable.
Some of the very experts of the Yale Medical School and
state and federal health officers who contributed the in-
dividual estimates and these experts include eighteen
of the best and safest authorities in the United States
have been surprised to find how large in the aggregate
the resultant preventability is. It shows that over a third
of all deaths which now occur could be prevented that
is to say, deferred. Every precaution has been taken to
make these figures so safely within the truth as to avoid
the possibility of any reasonable criticism. I will add that
those who contributed the statistics, estimates, and expert
guesses on which these aggregates are based were espe-
cially urged to be conservative. The eighteen estimators
included Drs. Flint, Blumer, Swain, and Osborne of the
Yale Medical School; Dr. Wilbur, Chief of Vital Statistics
of the United States; Health Officers Townsend of Con-
necticut, Baker of Michigan, Wright of New Haven,
Woodward of Washington, Chapin of Providence, etc.
These gentlemen made their estimates independently, but
they agreed remarkably well. This would indicate that
LENGTHENING HUMAN LIFE 293
they were correct. These gentlemen are not given to
exaggeration, but even if their estimates are three times
too great, the preventable deaths still exceed 10 per cent.
By working out the ratios of preventability for each of
the principal causes of death, it is possible to construct an
ideal survivorship table which may then be compared with
existing survivorship tables. Actuaries' tables show that
a reduction of one-third in mortality would enable the
premium to be reduced by over 15 per cent. Even if
only a third of this possible reduction were obtained, or 5
per cent., the insured in the United States would be saved
many millions annually. Of course whatever saving is
possible can not be secured without effort or cost. Not
all of it can be obtained at once, and some of it can be
obtained whether insurance companies take a hand or
not. But by so doing they can greatly accelerate the
improvement. While it would be manifestly impossible
to estimate exactly what returns could be made on the
investment, it is clear that even if the most meager
returns could be secured, the gain would pay.
It can scarcely be imagined that the companies would
lose anything. I understand that $200,000 a year is
about two cents per $1000 of insurance carried. It would
be strange if $200,000 could not be expended in such a
manner as to secure a saving of a postage stamp a year
on each $1000 policy! As one of your actuaries, Mr.
Messenger, has shown, $200,000 is only one-eighth of 1
per cent, of present annual death claims.
The chance of failure is further reduced when we remem-
ber that the effect in reducing mortality is progressive or
cumulative, while no cumulative effect is needed to return
the money invested.
The conclusion seems safe that here is a rich unexploited
field for saving money. And the beauty of it is that these
gains bring with them gains far more precious to the nation
than dollars immeasurable gains of longevity, vitality,
efficiency, and happiness. Life insurance is not philan-
294 YALE READINGS IN INSURANCE
thropy, but it is a beneficent business. Though at first
glance it might seem that to prevent the pollution of
streams, to improve the milk supply, to obtain pure foods,
and freedom from accident is no part of the business of
life insurance, yet it is easy enough to see the very vital
connection. By far the larger part of the cost of the
insurance business is not management nor agents' fees but
cost of mortality. It is the right, if in fact it is not the
duty, of any business to reduce its cost. To pare down
salaries might not save the policy-holder 1 per cent, of his
premium, but to reduce mortality cost might save him
many per cent.
Another point may be emphasized. The mere announce-
ment that insurance companies intended to improve
health conditions would have an effect in improving those
conditions. This effect would be felt in two ways: First,
it would convince millions of the ignorant and indifferent
that the public health movement must have substantial
merit to be an object of interest by life insurance com-
panies. People are easily led by those whose opinions
they respect. In spite of the great progress of the health
movement, there are still vast hordes of our people who
know nothing of it. Knowledge of its merits is largely
confined to scientific and medical men, who constitute
only a small fraction of the population. The actuaries
and medical boards and other insurance officials constitute
a still smaller class. Yet these classes can easily sway the
whole. The second way in which the mere announcement
of your purpose to labor for health would have immediate
effect is in spurring numerous officials and firms to reform.
Every health officer, every food manufacturer, every milk
dealer in the United States that heard of the intention
of the insurance companies to improve health conditions
would become ambitious to make a good showing. Local
pride in every community would result in efforts to keep
abreast of the best records and avoid the reputation for
being an unhealthful place in which to live. Insurance com-
LENGTHENING HUMAN LIFE 295
panics sometimes charge, I believe, higher rates for policies
involving tropical residence, but in the United States are
not allowed to make local discrimination. There is, there-
fore, all the more reason why they might properly endeavor
to lower the mortality in say Mississippi if the mor-
tality is high there in order that they might be enabled
to do business there.
In the history of fire insurance, the mutual companies
first made the effort to reduce fire risks. When the im-
portance of exercising the function of preventing fires, as
well as indemnifying against fires, once entered into the
plans of stock companies, they soon overtook, if they did
not outrun, the mutual companies in the success of their
efforts. It is estimated that the risk from fire in certain
particular classes has been reduced, through the fire insur-
ance companies, some 70 per cent. In New England
seventy years ago the rate on cotton and woolen mills
averaged three or four dollars per hundred. To-day these
mills are being insured at a total cost per annum of seven
cents per hundred. In some cases the cost has been
reduced to 1-100 of the former amount. This enormous
decrease has been accomplished by slight expenditures. In
some factories the cost of improvements has been more
than paid for in the saving of premiums for fire insurance
in one year. The stock companies were forced by the
competition of the mutual companies to take up preventive
measures. They now employ fire insurance engineers to
maintain a laboratory in Chicago which is well equipped
for the purpose of studying fire-resisting materials, fire-
resisting devices, new apparatus, and fire prevention in
general. Many fire insurance men believe that this
laboratory is their best investment. No reduction in rate
is guaranteed until fire-fighting devices are approved by
the laboratory. Now that the stock companies have gone
into this work of fire prevention systematically, they are
regaining the ground that they lost by allowing the mutuals
to get ahead of them.
296 YALE READINGS IN INSURANCE
In employers' liability insurance, the idea of prevention
has made great headway. Here the companies are all
stock companies, but they have learned that their function
is not simply to distribute losses, but to lessen them as well.
So also accident companies have aided in passing laws
which tend to prevent accidents to life and limb. Here
they have reached the very threshold of public health.
It is manifest destiny that if insurance companies now aid
in legislation to save the arms and legs of workmen, they
will soon aid in legislation also to save lives. In fact,
protection from accidental injury is also protection from
accidental death; and if you strive to reduce the deaths
from accident, why not reduce the deaths from other
causes? If casualty companies work for improved safety,
why should not life companies work for improved sani-
tation and improved hygiene in general? In fact, the
Industrial Department of the Metropolitan Company has
just announced that if prevention of tuberculosis and
reduction of the death rate will give cheaper insurance, the
company hopes to cooperate with existing agencies for
the eradication of this and other diseases, and to place at
their disposal its machinery and the statistical material
which it has gathered since its organization.
According to the plans which I have in mind, the money
to be invested in life-saving would be largely in the educa-
tion of the public and especially policy-holders in health
matters, and cooperation in every legitimate way to
improve the public health offices and service in the
municipalities, states, and the federal government. In
this latter way, the result of the expenditure of money by
the insurance companies would be to induce the govern-
ment to spend much larger sums, and the money invested
by the insurance companies would be multiplied in effi-
ciency several fold. If, for instance, by the expenditure
of $200,000 a year the public throughout the country
could be made to appreciate the importance of clean
streets, pure water supply, etc., sufficiently to result in
LENGTHENING HUMAN LIFE 297
municipal expenditure by the cities of the United States
for public health of an additional $20,000,000 which would
otherwise not have been made, every dollar invested would
be multiplied a hundred-fold. In other words, the insured
lives would not have to carry the entire load, but could
induce the tax-payer to do his share. Our public health
laws and administration leave vast room for improvement.
As Dr. Welch has said, neglect of public health is a dis-
grace to the nation. Some states have no boards of health.
Few have good ones. A minority have accurate registra-
tion of deaths and not one has accurate registration of
births. We therefore lack even the first step toward
efficient national health protection good vital statistics.
Just as fire insurance companies endeavor to secure in
municipalities adequate fire protection, so life insurance
companies might properly endeavor to secure adequate
municipal health protection, and they might likewise
bring their influence to bear in securing the passage of
model health laws by our states in respect to slaughter
houses, pure food, and other health reforms. The present
great and needless waste of human life brings its heavy
financial weight largely on insurance companies. The
Prudential Company pays out annually $800,000 for
death claims on account of tuberculosis alone, a disease
which is known to be preventable.
As to a practical plan for participation by the life in-
surance companies in the health movement, two methods
suggest themselves. The first is for the life insurance com-
panies, in combination, to establish their own machinery
for disbursing funds intended to improve the public
health. The second is to contribute to one or more
organizations already existing for this purpose. I shall
speak in favor of the second, and in particular of the
advantages to be obtained by using the Committee of One
Hundred on National Health, of which I am president,
as the agent for this distribution. I will say at the outset,
however, that I think our committee would be willing, if
298 YALE READINGS IN INSURANCE
need be, to stand aside in favor of any plan which the
insurance companies should prefer. We have been inter-
ested in this work from a philanthropic point of view
only, and have borne its burden because no other organiza-
tion was doing the work. It has been a tax on our time
and purses, and we should, if the same work could be done
by others without this tax, be only too ready to hand it
over. We believe, however, that there would be a distinct
advantage to the insurance companies in utilizing our
agency, instead of creating a new one. Since the work is
largely one of educating and convincing public opinion, it
seems an advantage that the movement should have a
scientific as well as a commercial flavor. Our committee
was appointed by the American Association for the
Advancement of Science, and consists, for the most part,
of men of national reputation.
As to the methods of expending the proposed fund to
be created by the insurance companies, details can be sub-
mitted to the committee appointed to consider them.
This would include the enlargement of our magazine, the
pressing of health bills before Congress and the legislatures
of the several states, the publication and distribution of
leaflets of information in continuation of the series of
twenty-six which we have already published, a campaign
of newspaper publicity and education, especially through
plate matter prepared and given to 10,000 country news-
papers. It would also include efforts to enlarge the Ameri-
can Health League so that it may fulfil two functions:
first, create an interest in a large number of people in
healthful individual living, and, second, create and for-
mulate public opinion which shall secure public health
legislation.
CHAPTER XXII
CONTROL OF LIFE INSURANCE COMPANIES l
FROM the standpoint of control, there are three classes
of life insurance companies: stock companies, mixed com-
panies, and mutual companies. The stock companies were
the first in the field, writing a small amount of purely non-
participating business. About 1840, companies began to
be organized on a mutual basis, and these soon drove the
three old stock companies out of the life insurance field.
In the twenty years following 1840, practically all the
prominent mutual companies of to-day were organized.
Following the organization of these successful mutual com-
panies came the formation of a large number of stock and
mixed companies, as a result partly of the desire on the
part of capitalists to engage in an apparently profitable
business, and partly of the enactment of state laws, which
from that day to this have made the formation of a mutual
company difficult.
Control of stock companies is, of course, lodged in the
hands of stockholders, and problems connected with their
management would be no more serious than those arising
in the management of any joint stock company, if it were
not for two conditions. In the first place, these com-
panies are permitted to write participating as well as non-
participating policies; that is, they are allowed to solicit
business on promise of a division of profits among pur-
chasers of their product. This differentiates a stock life
1 By Lester W. Zartman, Assistant Professor of Political Economy
in Yale University. Reprinted from pages 531-541, Volume XV,
Journal of Political Economy.
299
300 YALE READINGS IN INSURANCE
insurance company from any other joint stock concern.
Although some of the leading stock companies may have
paid nearly as large dividends to their participating policy-
holders as have been paid by mutual companies, it is still
true that the privilege granted these companies is of doubt-
ful advantage to the best interests of the business. If the
dividends upon the capital stock are limited in amount,
there is no added incentive to the officials through the
existence of the capital stock to manage the company well,
and the capital stock remains as a dangerous weapon by
means of which men can obtain control of the company.
If the dividends are not limited in amount, there is the
possibility that the participating policy-holders will be
mulcted to the advantage of the stockholders. If, as in
the case of some companies, the dividends beyond a cer-
tain amount which the company can pay upon the capital
stock are limited to the profits made from the non-partici-
pating policy-holders, the division of the fixed charges of
the company can be so arranged as not to do substantial
justice to the participating policy-holders. For these
reasons the state is justified, if not in prohibiting stock
life insurance companies from writing participating policies,
at least in exercising much more control over their affairs
than is exercised over other corporations.
The second peculiarity differentiating stock life insur-
ance companies from other corporations is that the stock-
holders of the life company soon come into nearly absolute
control of much larger assets than the capital originally
invested. To be sure, this is true in a way also of banks
and other fiduciary institutions, but the insurance company
differs radically from a bank in that its reserves, unlike
deposits, cannot be withdrawn at the will of those to whom
they belong. No matter how inefficient the management
of a stock company, there may be no weeding out of
incompetent men. The policy-holders, who are the most
interested, have no redress. They cannot withdraw their
savings, thus showing their disapproval of the manage-
CONTROL OF LIFE INSURANCE COMPANIES 301
ment, without a considerable financial sacrifice. They
cannot change the management. The men in control own
the capital stock, and to displace them it is necessary that
a controlling interest in the capital be purchased. Not
always have owners of a majority interest been willing
to sell; only an aroused public opinion has forced them to
part with the control of a company.
Furthermore, stock-life insurance companies are at the
mercy of designing financiers who may seek to control
them. All the stock companies are subject to this danger,
and many have suffered already. The American Life of
Philadelphia was wrecked in two years by men who sur-
reptitiously purchased a controlling interest. 1 These men
never had any intention in purchasing the stock other than
to possess themselves as quickly as possible of the Ameri-
can's valuable assets. A similar disaster to the Phoenix
Life of Hartford, which at one time had a guarantee capital,
was averted only by a special session of the Connecticut
legislature, which passed an act changing the Phoenix
into a purely mutual company. 2 The Equitable and the
Washington of New York are at the present time under the
domination of one man. The Prudential of New Jersey is
controlled absolutely by a small group of men who, in
1902, tried to avoid the necessity of keeping even six million
dollars invested as a controlling interest in Prudential stock.
The scheme for effecting this release was as follows: The
Prudential Insurance Company was to purchase a con-
trolling interest in the Fidelity Trust Company, and a con-
tract was entered into between the Fidelity and the majority
interest of the Prudential stockholders, in which the latter
contracted to seil their holdings of Prudential stock to the
trust company. 3 In this way the directors of the Prudential
could have perpetuated their control without any financial
1 The Insurance Spectator, 1890, p. 305, and the Pennsylvania Life
Insurance Report for 1889.
2 P. Henry Woodward, " History of Insurance in Connecticut, " p. 97.
3 Massachusetts Life Insurance Report, 1902. Preface.
302 YALE READINGS IN INSURANCE
outlay whatever. The plan was defeated by an appeal to
the courts, brought by the Massachusetts Insurance Com-
missioners, 1 but President Dryden has since announced that
the "good" results of such a merger have been secured in
an unobjectionable manner. 2 A New Jersey investment
company controls the Bankers' Life of New York, 3 while
a few years ago a coterie of New York financiers purchased
a controlling interest in the United States Life of that city.
It is not asserted that all the companies which have here
been enumerated have suffered through the control exer-
cised by the capital stock; on the contrary, some of them
have been most excellently managed by stockholders.
Some, however, have already suffered seriously, and it is
believed that all in which the control is lodged exclusively
in a few hands are in a precarious position. The assets
which the stockholders control really belong to the policy-
holders, and yet the policy-holders cannot withdraw that
which belongs to them, since they have entered into long-
time contracts.
Certainly the problems connected with management of
stock life insurance companies are serious; so serious, in-
deed, that it is urged in many quarters that the state should
not allow such companies to be organized. All insurance
is essentially mutual in principle; the mutual system
has demonstrated its fitness in dealing with life contin-
gencies, and if the states would amend their laws, capital
stock would be unnecessary in starting a life insurance
company; 4 legislatures might not be entirely unjustified
in prohibiting the formation of stock life companies.
I The Insurance Spectator, 1902, p. 223.
II Massachusetts Insurance Report, 1903, p. xxxix.
3 The Insurance Age, 1904.
4 Nearly all states insist upon a system of net valuation of policies.
Under such a system it is practically impossible to start a new life
insurance company, unless capitalists stand ready to make up defi-
ciencies during the early years. In other ways, state laws have been
so framed as seriously to discourage the formation of any but stock
companies.
CONTROL OF LIFE INSURANCE COMPANIES 303
As regards control, a company which is mixed that
is to say, a company which has capital stock but which
allows policy-holders to vote possesses no considerable
advantage over a purely stock company. The restrictions
placed upon the policy-holders' voting powers are such in
most cases that the concession has little practical value.
For instance, the Michigan Mutual is a mixed company
with $500,000 of capital stock. Each share of stock has
a vote. In addition, policy-holders insured for life for
$5000 in amount may vote in person only. 1 The manage-
ment can rest assured that 5000 persons carrying $5000
policies of a particular kind will never present themselves
in Detroit to cast their ballots in person. In the Metro-
politan of New York there are 40,000 shares of stock.
Policy-holders paying $100 premium per annum may vote,
but two-thirds of the directors must be stockholders, so
that the privilege granted to the policy-holders is worth-
less. 2 The Manhattan has a thousand shares of stock, each
share entitling its owner to one vote. Policy-holders pay-
ing an annual premium of $75 on a life policy may vote,
but half of the directors must be stockholders. 3 Half of
the board with the president is all that is needed for con-
trol, even if the policy-holders should elect all the directors
to which they are entitled. The Home is likewise a mixed
company. Policy-holders paying $80 annual premium may
vote. 4 The testimony before the Armstrong committee
showed that the Home has never been troubled with policy-
holders voting; in the forty-seven years of its existence,
only one policy-holder has appeared to cast his ballot. 5
It does not appear that mismanagement has been so com-
mon in the history of mixed companies as in the case of
stock companies, and this is due, perhaps, to the latent
1 Article IV of Constitution.
z New York Laws of 1868, Chap. XL VIII, 6 and 11.
3 Charter, 5, 8, and 9.
4 Charter, Art. V.
8 Testimony of George E. Ide, Armstrong Report, p. 3587.
304 YALE READINGS IN INSURANCE
possibility that policy-holders will assert their rights;
nevertheless a mixed company would seem to be, for all
practical purposes, a stock company, and as regards con-
trol it presents most of the problems and dangers inherent
hi a stock company.
Nor is the question of management and control solved
when companies are made mutual in their organization.
The system of mutual life insurance contemplates a manage-
ment elected by the policy-holders and responsible to them.
This theory of government has, however, never been worked
out in practice in the United States according to the spirit
of its constitution. The long distances and the expenses
of traveling have made it impossible from the beginning
for policy-holders to cast their ballots in person. Resort
has been made to proxy voting, and the result of proxy
voting, as allowed by most of the states, has been to make
the management of mutual companies as certain of tenure,
and hence as careless of the rights of policy-holders, as have
been the managements of stock companies. State laws
have placed few restrictions on the collection and voting
of proxies. In some instances policy-holders have even
signed a proxy when making application for a policy; in
many instances they have given their rights to the officials
for long periods. A part of the agents' work each year
has been to gather proxy votes, and send them in to the
home office, so that the management should have at all
tunes a sufficient number of proxy votes to defeat any
movement of opposition on the part of dissatisfied policy-
holders. The companies have always gone about the
gathering of proxies quietly, for they have not cared to
remind members of their rights, yet they have succeeded
in keeping a large number always on hand.
Whoever in the company controls the proxies, controls
the company. In 1870 there was an internal conflict hi
the Mutual Life. On the day of the election a consider-
able number of policy-holders appeared in person to vote.
President Winston of the company controlled ten thousand
CONTROL OF LIFE INSURANCE COMPANIES 305
proxies. In the afternoon, with the outcome of the elec-
tion in doubt, Winston appeared with several thousand of
the proxy votes, cast them in favor of himself, and the
day was won. 1 The same thing has happened often enough
to show the policy-holders the futility of opposition. Policy-
holders have come to take no interest in the active manage-
ment of companies, and certain officials have stayed in
power so long that they have come to look upon their
company as a personal asset, the sense of private property
becoming so strong in some cases that they have felt that
control of a company ought to be inherited. 2
Officers of all the companies are practically unanimous
in declaring that the present system of voting in mutual
companies, or rather what was the system a year and a
half ago, should not be changed. That section of the Arm-
strong law which changed the method of voting in mutual
companies was vigorously opposed by the New York
companies, and during the past winter similar legislation
in other states has met the opposition of the mutual com-
panies in those states. Many of the officials recognize that
the old system is far from ideal, but they believe that the
proposed reforms will lead to worse conditions in making
an annual contest for the control of the companies a prob-
able event. They hold that any changes in the laws cal-
culated to make such yearly contests for control inevitable
will do more harm to the insurance business than the pres-
ent system has done. They urge that it is not fair to sub-
ject a company, which has been brought to a successful
stage of its existence through efforts of its officers, to annual
contests for control. Such contests, it is believed, will
surely follow the adoption of the proposed reform methods
of voting. They point out that men are always willing
to listen to evil reports regarding anybody in power; and
1 President Winston's circular letter of April 16, 1877, to the policy-
holders of the Mutual Life. See also, Julius Wilcox, Scribner's Mag-
azine, Volume XIV, pp. 382, 383.
2 Wisconsin Life Insurance Report, 1903, Preface.
306 YALE READINGS IN INSURANCE
that the greater the ease with which a change in adminis-
tration can be secured, the greater the chance of success
for selfish and unjust methods which will be used for secur-
ing a change. As a final objection, they maintain that
the expense attendant upon an annual repetition of such
a demonstration as has been witnessed in New York during
the year past is a greater strain on a company than is a
good sized "graft"; while the annual throwing of mud
and the staining of a company's reputation, with the con-
sequent loss of policy-holders and trouble in getting new
members, entail far greater expense and loss than any
sort of extravagance. On these grounds, the officers oppose
the [changes in insurance laws revising methods of electing
trustees.
If such conditions as indicated would result from any
method enabling policy-holders easily to express their
desires, then we should unite with the companies in oppos-
ing the new laws. However, it seems that the officials
of the various mutual companies have become unduly
alarmed. With complete power in the hands of the policy-
holders and an easy method of voting devised, it is not at
all probable that there would be an annual contest for
control. A management which is capable and conscientious
may be sure that policy-holders will have sense enough to
keep it in power. Crafty financiers may seek to get a
board of trustees elected of their liking, but they will soon
learn the folly of going to the heavy expense of a campaign
to oust an efficient management. It is almost safe to say
that it will be many years before we shall witness another
campaign like that carried on during the past year for con-
trol of the two large New York companies.
Some of the officials have expressed the fear that
in a campaign for control of a mutual company, policy-
holders will not know what is to their advantage. They,
therefore, are afraid to trust the issues to them. Such
statements remind one of the arguments in favor of an
autocratic form of government. An autocratic form of
CONTROL OF LIFE INSURANCE COMPANIES 307
government is good if the autocrat is wise and beneficent.
But since autocrats in the past have not always been wise
and beneficent, a government responsible to the people
has worked better. So it will be in life insurance cor-
porations. Policy-holders are the company, its gain is
their gain, its injury is their injury, and they will soon, if
not immediately, begin to examine closely the men who
are seeking their votes to oust an existing management.
Besides the natural conservatism of investors which will
work in favor of the management in power, there is still
another advantage which the officials possess. It will
practically always happen that the agency force will work
in favor of the administration party, and with the agency
force so disposed, the men in power will have such an ad-
vantage in a campaign that even better men will have a
hard task in defeating an administration ticket. This is
as it should be. The end that is desired by those who see
the evil of the old system is not an annual scramble for
control of the companies, but such an easy method of
removal that the officers will at all times be forced to keep
in mind their responsibility to policy-holders.
A more fruitful question for discussion to the man who
desires a change from the old system is whether an easy
and effective method of voting in mutual companies can
be devised. New York has made a serious attempt to
put the policy-holders in control. In the revision of the
insurance laws of the state, in 1906, it was provided that
two lists of policy-holders' names and addresses should be
filed by each mutual company with the Superintendent
of Insurance at Albany, and two similar lists with the
general agents in each state and foreign country in which
business is transacted; that the tickets be nominated by
the administration five months prior to the election, and
by an opposition party at least three months before the
election; and that policy-holders should be allowed to vote
in person, by mail, or by proxy.
One election has already taken place under the New
308 YALE READINGS IN INSURANCE
York law. Some criticism may be offered of the method
adopted. In the first place, the companies are bitterly
opposed to that section of the law which provides for public
listing of the names and addresses of policy-holders. The
New York companies would rather have this provision
repealed than any other of the so-called Armstrong laws.
Officers of mutual companies in other states will make no
compromise on this subject. The contention of the com-
panies in this respect is well grounded. Such a public
posting of names does a serious amount of damage to the
companies compelled to obey the law. Agents of rival
companies prize a list of policy-holders in another company
very highly, not only for the purpose of twisting the policy-
holders into their own companies, but also because the best
purchasers of insurance are those who already have policies.
For this reason, the companies regard this provision of the
law as a violation of their rights not to be condoned.
Yet such a measure, or some substitute for the measure,
is absolutely necessary if there is to be any appreciable
opposition to the administration party. In the past when
there has been among policy-holders wide-spread dissatis-
faction with a management, opposition has been ineffectual
because it never could be united. If such opposition is
ever to accomplish its ends, it must be concentrated, and
no sort of cooperation is possible unless the policy-holders
have some means of communicating with each other. So
long as the administration alone possesses a list of the
voters with their addresses, it has an advantage which a
scattered opposition cannot overcome. All that is left
to the opposition under these circumstances is commu-
nication by means of advertisements in the papers, an
expensive method, as well as one of doubtful utility.
Therefore, unless some method is devised of allowing the
opposition to communicate freely with voters, the system of
control by policy-holders fails. However, it is not neces-
sary that the list of names should be open to public inspec-
tion. It might be practicable to have all the literature
CONTROL OF LIFE INSURANCE COMPANIES 309
which any opposition ticket may wish to send out addressed
by the state at the expense of the opposition, or even sent
out by the administration under the supervision of the
state, but still at the expense of the opposition. Company
officials do not take kindly to either suggestion, holding
that the opposition has no right to this advantage of inter-
communication. In doing so, they are carrying their
opposition too far. The officials have no inherent right
to hold their positions irrespective of the wishes of the
policy-holder, and the latter rightly insist upon some
means of close cooperation.
Insurance men are further opposed to the enactment of
laws similar to those of New York, on the ground that the
carrying out of such a system of voting entails a very
heavy direct expense. They point to the situation in
New York where the cost of counting the ballots alone
reached $50,000 for each one of the large companies. They
assert that such an annual expense is a heavy burden to
place upon the policy-holders, when, in most cases, it is
not necessary. Without desiring to criticize too strongly
the men who were in charge of the counting of the ballots
in New York, it seems that the work was unnecessarily
drawn out. As a matter of fact, if the inspectors of elec-
tion appointed by the officials of the two large companies,
and paid by the companies $25 per day for their services,
had counted ballots as rapidly as do the judges of elections
in our political contests, the votes would have been counted
in perhaps a third of the time it did take to count them.
As the ballots in the insurance election were the simplest
possible to count there being no split ballots and prac-
tically only one office for which to count, and in one case
only two tickets, and in the other three, in the field it
does seem that the suspicion raised in some quarters that
the contest was drawn out for political effect is well
grounded.
If this is true, the heavy expenses of the present election
cannot be used as an argument against the proposed
310 YALE READINGS IN INSURANCE
changes. If the suspicion is without truth, and the elec-
tions are really expensive, it has been already pointed out
that few elections will be carried out on the scale that the
present contest has been waged. Admitting, however,
that annual elections will cost from thirty thousand to fifty
thousand dollars for each company, it is no conclusive
argument against the reform measures. The states might
well relieve the companies of taxation, and make them
have annual elections for the sake of securing the gain
that will accrue from such a change.
It should be noted that the reformers, as well as insur-
ance officials, criticize the New York law. The Armstrong
law still allows proxy voting. The application of proxy
voting in mutual life companies is a misapplication of a
system working fairly well in joint stock concerns. Under
the old system of electing trustees, it was necessary to
allow the officers to collect proxies, but when policy-holders
are allowed to vote by mail, the system cannot be justified.
The man who under the reformed conditions gives his
proxy is the man who is not interested enough to care
what the outcome is, and gives his proxy as a personal
favor to the first one who solicits it. The administration
is the only party which has the machinery necessary to
solicit these proxies, therefore the disinterested or indiffer-
ent policy-holders control the outcome of the election
rather than the men who are interested and have informed
themselves. That administration tickets won the New
York elections was largely due to the work of agents in
solicting proxy votes. While not desiring to express any
opinion upon the outcome of the New York elections, as a
general principle it is wrong that the careless and indiffer-
ent policy-holders should dominate the situation. There-
fore, the right of proxy voting should be abolished.
Company officials need not be alarmed if such a system
of voting as is here advocated be carried out. It will
not mean frequent changes in management because such
changes will be unnecessary. The system has been tried
CONTROL OF LIFE INSURANCE COMPANIES 311
for many years in the largest company in the British
Empire, the Australian Mutual Provident Society. No
serious difficulties have arisen in connection with the opera-
tion of the system. There has been but one revolution
in the company, and this one demonstrated the merits
of the plan. Incidentally it is worth noting that this
company has been one of the best managed in the world.
Mr. Dawson says that in nearly all respects, dividends,
economy of management, small ratio of lapses, growth, and
favorable mortality experience, its career is unprecedented. 1
Some have said that these large companies cannot be
run on the basis of control by policy-holders because the
party system cannot be adopted. It is hoped that the
last part of this statement is true. The control of these
business corporations should be free from politics. It
would be suicidal to subject them to a change in manage-
ment each year. This, as has been pointed out, is not
contemplated in the proposed changes. Under the plan
which is submitted, it is believed that managements will
be just as stable as they have been in the past, indeed
more so. At every election it will be the administration
against the field, and if the record of the men in power
has been satisfactory, it will commend the administration
ticket to the policy-holders. The desire to let well enough
alone will be sufficiently strong to resist a change, and
because there exists an easy method of turning out corrupt
managements, these managements will try not to become
corrupt. The officers will still have a chance to stay in
the business for life, developing a great company, not
because they control twenty or thirty thousand proxy
votes, but because they are efficient.
1 " The Business of Life Insurance, " p. 128.
CHAPTER XXIII
MISTAKES IN STATE REGULATION OF THE INSURANCE
BUSINESS 1
DURING the last three years we have heard a great deal
about the system of American life insurance being on trial,
and while, as a whole, it has shown a remarkably clean
record, unfortunately some of the charges made have been
proved. The public in this situation knew of but one
resource, legal regulation, and without stopping to con-
sider how legal regulation has worked in the past, demanded
more of it as the remedy for present evils.
The public has not realized that the system of life insur-
ance has not been the only culprit before the bar. Prac-
tically every indictment against the insurance companies
has been an indictment against state supervision, with
which the public has fondly hoped to reform the other
criminal. For more than fifty years the states have been
trying to regulate the business of life insurance. No con-
stitutional limitations have hindered them in their work.
The problem before them has been clear-cut, for the present
is not the only time that abuses in management have been
exposed. Other exposures have been made, and there has
been the same sort of legislation; yet it has failed to pre-
vent a recurrence of the abuses. Before 1905, the State
of New York had seen fit to amend her law regulating
investments twenty-one times, but it was found necessary
to make an entirely new revision in the following year.
Since the states have been well aware of the problem
1 By Lester W. Zartman, Assistant Professor of Political Economy
in Yale University. Reprinted from pages 24-43, Volume XVII,
Yale Review.
312
MISTAKES IN STATE REGULATION 313
before them, and have not been neglectful of their oppor-
tunities to try to regulate the business, yet have failed,
something must be radically wrong. Either they have
pursued wrong methods of supervision, or the system of
supervision by the separate states is incapable of accom-
plishing the desired results, or both reasons explain the
half century of failure.
Let us examine the situation and find out wherein the
trouble lies. In the first place, have the states attempted
to accomplish the desired results by wrong methods of
supervision? Without going into any extended history of
state regulation, let us summarize, briefly, the main lines
along which the states have worked.
1. They have laid down standards of solvency; that is,
they have determined what shall be the maximum rate of
interest, and the rate of mortality used in computing the
liabilities of the life insurance companies.
2. They have regulated investments. Usually the regu-
lations have simply restricted investments to certain classes
of securities, though many attempts have been made to
prescribe the territorial limits within which the invest-
ments must be made. In doing this, the chief object has
been to make the companies' investments secure, but there
has also been the idea of helping out the commercial
interests of the state. 1
3. They have attempted to secure some measure of
publicity. They have provided for annual reports by
each company to the state, compulsory investigation by
the state into the affairs of the companies, and to carry
out the provisions of these laws have created special state
machinery, that is, departments of insurance.
4. They have passed measures to secure equitable treat-
ment of the policy-holders, such as non-forfeiture laws,
incontestability laws, etc.
1 For a full description of the limitations placed upon the invest-
ment powers of the companies, see the author's "Investments of Life
Insurance Companies," Holt & Co., 1906, Chapter VI.
314 YALE READINGS IN INSURANCE
Under these four general headings can be grouped about
all the regulations enacted by any state prior to 1906.
During that year and the previous one, several legislative
committees found the life insurance business apparently
so mismanaged that some of the states came to the con-
clusion that they ought to manage the business of life
insurance themselves. They wanted to do this without
assuming the responsibility which state life insurance would
involve; they would leave the business in the hands of
private men who would thus bear the responsibility, but
the legislatures would direct the business.
The way in which the states have attempted to manage
the business without assuming responsibility has been by
enacting laws :
1. Limiting salaries.
2. Limiting amount of expense to secure new business.
3. Limiting surplus.
4. Limiting amount of new business.
5. Prescribing the methods of allotting dividends.
6. Restricting the field of investment.
How much of all this legislation is good; how much of
it is bad? How much of it is in the right direction and
will accomplish good results; how much of it is in the wrong
direction and will do no good and perhaps cause serious
injury? These are questions which ought to be settled
correctly before the laws are in operation any longer, and
before other states follow the example of those which have
already enacted such legislation.
Let us examine this legislation in detail. In the first
place, should the states lay down standards of solvency,
that is, prescribe the rate of interest and the mortality
table to be used in computing the liabilities of a life insur-
ance company? There is not much objection to such laws.
As a matter of fact, these laws have been practically harm-
less. The standards adopted by the states have almost
always been much more liberal than those which the
companies have voluntarily adopted. In laying down
MISTAKES IN STATE REGULATION 315
these fixed standards of solvency, the states have hindered
the development of new plans for cheaper insurance, but,
generally speaking, no very serious objections can be raised
against them. 1
Should the states regulate investments? There are grave
reasons for believing that they should not. The best that
they can do in this respect is to limit the companies to
certain classes of securities; to select specific securities
would be suicidal. But there is no class of investments of
which all in the class are good. A study of life insurance
mismanagement will show that mortgage loans have been
used just as much for speculative purposes as has any
other class of securities. There are good securities in all
classes, and good insurance managers ought not to have
their privileges in this respect curtailed. To curtail them
will mean a loss to policy-holders. The scheming, self-
seeking manager will find in any law, which can be enacted
regarding investments, so many chances to accomplish his
ends, that to limit the field of investments is to injure the
good manager without accomplishing any desired results. 2
The history of investments shows that the wise manager
of insurance funds will scatter his investments. This
cannot be done if the states restrict investments to certain
classes. Such laws should therefore be repealed.
While space will not permit of any extended discussion
of individual acts, particular attention should be directed
J Cf. Emory McClintock, "Insurance, a Text Book," pp. 129, 130.
Also Sheppard Homans, Insurance Year Book, 1890, p. 532, and the
report of the committee on insurance appointed by the New York
Legislature, Insurance Times, May, 1882.
2 The question of restricting investments has been of such impor-
tance that many able articles have appeared on the subject. See J. B.
Gillison, Transactions of the Faculty of Actuaries, Volume II, Part II,
p. 104; Mr. Wegenast, Transactions of the Actuarial Society of Amer-
ica, Volume VII, p. 361; the Insurance Spectator, Volume VI, p. 308;
T. B. Sprague, Assurance Magazine, Volume XVI, p. 79; also George
King, Journal of the Institute of Actuaries, 1892, Volume XXIX, p.
496.
316 YALE READINGS IN INSURANCE
to laws compelling investments to be made in certain
localities. The states which have had insurance com-
panies of their own have made attempts, from time to time,
to compel these companies to invest their assets within
the state. 1 On the other hand, the states without such
companies, but paying premiums, have thought that they
were being drained of their capital, and so have passed
laws compelling the companies to invest at least a portion
of the reserves within the state where they originated.
It seemed a few years ago as if this type of legislation,
inspired by such selfish motives, had disappeared. How-
ever, within the last year, the demand for such legislation
has reappeared, especially in the South, and has resulted
in action by one state. In 1907 the Texas legislature
passed the Robertson bill, and it became a law. Accord-
ing to the provisions of this act, all companies doing busi-
ness in Texas must invest 75 per cent, of the reserve upon
Texas policies in Texas securities, bonds, stocks, and
mortgage loans, and deposit these securities in Texas,
subject to local taxation. The motive back of the bill
was not to secure safety to the policy-holders; it was passed
partly to create a market for Texas securities, but mostly,
judging from the debate hi the legislature, to secure
revenue for certain counties. Since the local rate of taxa-
tion is about 2 per cent., the law meant the confiscation of
nearly one-half the interest necessary to mature the con-
tracts. Even companies which had a sufficient sum in-
vested in the state to cover their reserves were compelled
to withdraw to avoid the excessive taxation. Valuable
agency organizations were broken up, and though Texas
is already realizing the mistake made, the experiment will
cost policy-holders everywhere a goodly sum. This is an
extreme example of state regulation of investments, but
it is typical of the motives which have actuated much
legislation.
1 Cf . "Investments of Life Insurance Companies," H. Holt & Co.,
pp. 160-165.
MISTAKES IN STATE REGULATION 317
Should the states enact laws to secure the equitable
treatment of policy-holders? Like almost all restrictive
legislation these laws were passed to remedy certain abuses,
but competition among the companies was well on the way
to give all the advantages which these laws give, before
the first one was enacted. The companies have now
gone much further in granting liberal advantages to the
policy-holders than the laws require. In fact, if the com-
petition goes much further, the legislators, if they are
true to their traditional policy of intervention, will have
to enact laws prohibiting the companies from being too
liberal to their policy-holders.
Of course, if a state, in attempting to secure equitable
treatment of the policy-holders within the state simply
secures what the companies have willingly given, no objec-
tion can be raised. But some of the states, in trying to
secure equitable treatment of their policy-holders, have
enacted very bad legislation. A large number of states
make it a necessary condition of entrance that out-of-state
corporations shall pledge themselves, in the event of any
legal difficulties arising, not to take the cases out of the
state courts. 1 The purpose of the laws is to prevent com-
panies from making litigation expensive, a situation which
they could stand better than most policy-holders; but the
result is that the companies are deprived of what really
is a constitutional right, the right to a trial in an unpreju-
diced court.
As another example of similar legislation, Alabama, a
few years ago, enacted a law providing that if a life insur-
ance company contested a policy in that State on the ground
of misrepresentation in the application, the company
should, before the case could be tried, deposit with the
court all premiums paid by the assured upon the policy.
If the company won the case, that is, proved the mis-
1 Wisconsin Insurance Laws, section 1947 (5) ; Indiana Insurance
Laws, section 361; Illinois Insurance Laws, section 375; Colorado
Insurance Laws, section 29; Kentucky Insurance Laws, section 631.
318 YALE READINGS IN INSURANCE
representation of facts in the application, the court should
pay back all the premiums to the defrauding ex-policy-
holder. 1 What did this law virtually say to the citizens
of Alabama? It told them to go ahead and cheat the insur-
ance companies, to get policies by fraud if they cared to
do so. If they were not caught, well and good; if caught,
they would get their money back. The law was unjust
in principle and demoralizing in its practice; yet it was
passed after consideration by an American legislature.
Coming now to the new type of legislation, that enacted
since 1905, and which enters into the details of manage-
ment, what shall be said of it? Is it the wise thing, the
proper thing, for the states to limit the salaries which a life
insurance company can pay to its officials? Salaries of
such men may be too high, but there is serious objection
to lowering them by statutory means. How much is a
man worth? To most men $25,000 is a large salary; in
fact, few men are worth that amount. Yet some men
may well be paid twice that sum and still be cheap, because
they will effect economies or reap profits which will pay
their salaries several times over. There are presidents
to-day of insurance companies receiving so-called large
salaries, who, from the standpoint of efficiency, are worth
twice as much as other presidents who are receiving half
as much salary. It takes genius to maintain the agency
organization of a life insurance company at the highest
point of efficiency; it takes ability to invest and care for
several hundred million dollars of assets. State legis-
latures might well think twice before placing a limit on
salaries, lest in so doing they make it impossible for the
companies to secure the kind of men they need.
How much ought a company to pay to secure new busi-
ness? Frankly, it is a difficult question for the most skilful
of actuaries to answer. 2 If life insurance is good for the
W. H. Mylrea, "Insurance, a Text Book," p. 871.
2 Cf., Published letters of the noted English Actuary, George King,
to T. B. Macaulay, September, 1906.
MISTAKES IN STATE REGULATION 319
individual and, through the individual, for the public, then
it is worth a price. Truly enough the price may be too
high, but that is a problem for the individual to solve, just
as is true of the price of bread and opera tickets. The
function of the state in the matter is not to regulate the
price, but simply to put the individual in possession of
the facts and allow him to judge for himself.
Should the state limit by law the amount of new busi-
ness which a company can write? The idea back of such
a law is either that a company will become so large as to
make the men controlling its assets exercise a power dan-
gerous to the welfare of the state, or that if some restraint
is not placed on size, the race for bigness will lead the
officials into bad practices. From either standpoint the
law is a curiosity. 1 If a company is well managed it will
not hurt the state by its size; if it is growing rapidly be-
cause it supplies insurance cheaply, it ought to be allowed
to continue its growth. That is what we want, cheap
insurance and lots of it. Therefore, let each company
write all the insurance it can. The other viewpoint, to
limit expenses by simply limiting size, is absurd. It is
an attempt to reverse economic law similar to that made
by a Western legislator who offered a bill calling for the
repeal of the law of demand and supply.
Finally, should the states regulate the amount of surplus
which the life insurance companies may accumulate?
Before they do so, they will have to decide how much sur-
plus a company ought to have. It was suggested in the
report of the Wisconsin special committee on insurance
that 4 per cent, would be about the right amount. 2 The
legislature of New York thought that 5 per cent, was the
1 Mr. D. P. Fackler in an address before the commissioners of
insurance in convention at St. Paul, 1892, gave arguments in favor of
regulation. See also, Report of New York Legislative Investigating
Committee, p. 297.
2 Report of the Wisconsin Insurance Investigating Committee,
1906, p. 90.
320 YALE READINGS IN INSURANCE
proper amount for large companies, and so enacted. 1 In
less than a year events proved that it was a very good
thing that the companies had more. If they had not pos-
sessed on January 1, 1907, through past accumulations, a
greater surplus than 5 per cent, of liabilities, and if the
insurance laws of the state had been strictly enforced, we
would probably have had, by December 31, 1907, the spec-
tacle of large companies placed in the hands of receivers.
The amount of surplus needed depends upon the character
of assets, and the states might well leave its amount to
be determined by the men who are responsible for the
safe conduct of the business.
What then is our conclusion concerning state regulation?
It has failed to prevent abuses in management; it has not
succeeded in keeping companies from failing. The laws
have attempted too much. Many of them have been
useless; some of them have been harmful to the business
and to the public; and some of them positively dangerous.
Some one asks, have not evils really existed in the busi-
ness of life insurance for the correction of which the laws
were designed? Yes, they have existed from time to time.
Were there not abuses which were really serious? Yes.
Well, why not remedy them? Every one who has the best
interests of the business at heart believes in remedying
them. Some insurance men are asking for the repeal of
the present restrictive laws, not because these laws are
bad in principle, but because the laws place obstacles in
the way of their ambitions. These men want the laws
repealed in order that the business may be carried on
again under the conditions which existed prior to 1905.
It is not the purpose of this paper to advocate a repeal
of the insurance laws for any such purpose. It is devoutly
hoped that many of the conditions existing in the insurance
business prior to 1905 have passed away forever.
These restrictive laws are opposed because they are
wrong in principle, and are bound to injure the legitimate
1 Insurance Laws, 1906, section 87.
MISTAKES IN STATE REGULATION 321
interests in the insurance business, while all the good
which they can accomplish could be accomplished in some
other way. This other way has been suggested by others,
but since it has not been adopted, it should be urged again.
There is good reason for believing that if laws were passed
securing real publicity and proper responsibility, prac-
tically all the other laws limiting and restricting the insur-
ance business could be repealed. 1
It is urged against such a simple remedy that we have
had publicity in the insurance business for years and years,
and that if it were such a panacea, it would have had better
results. Some good results have come from publicity, but
the trouble is, in spite of assertions to the contrary, that
we have not had publicity. To be sure, there have been
annual reports of each company published by the state,
and investigations of companies by state officials, but
until the last year or so very little has been published
that the companies have not wanted published. The
public has relied upon the state departments of insurance
for information regarding the insurance companies trans-
acting business in the state, and these departments have
not succeeded in giving the facts. Every state has created
a separate department to look after the insurance interests
of the commonwealth, and has endowed this department
with power to investigate companies and to publish a
report of the findings. Either these departments of insur-
ance have not found out the facts in company manage-
ments, or, having found the facts, have not revealed them
to the public.
Nowhere in our public life can be found better examples
of inefficiency than in our state departments of insurance.
The reason for this is not difficult to discover. Like all
the other state positions, they have been made the spoils
1 The value of publicity and responsibility in the insurance busi-
ness was suggested many years ago by Mr. Finch of Indiana in an
address before the National Convention of Insurance Commissioners,
held at Harrisburg, Pa., September, 1876.
322 YALE READINGS IN INSURANCE
of the politician. In a score of states, the commissioner
of insurance, as the head of the department of insurance
is usually called, is elected by a direct vote of the people. 1
Under such a condition, the official is bound to be a poli-
tician. In several other states he is elected by the legis-
lature, and in the remaining states he is appointed by the
governor, in each case with no better results than when
elected directly by the people.
To illustrate the political degeneracy of the office, a
description of the organization of a department of insur-
ance in one of the states may not be out of place. This
department at the time referred to employed fifteen men,
besides a number of stenographers. The head of the
department was a noted politician in the state, who, after
a year's tenure of office, had not yet taken the trouble to
read the insurance laws or to post himself with regard to
the requirements of the reports which his department was
expected to secure from the companies. The attorney
for the department, although on a regular salary, found
little time to give to his work, since a political campaign
was on that year and his chief, the governor, needed help.
The chief clerk, on a salary of $3000 per annum, came
down to the department each morning to open the mail,
a task the two negro janitors might have performed very
creditably, and did perform when it was stormy. Similarly,
throughout the department, there were men with official
titles who knew nothing about the insurance business,
rendering no service, but drawing good salaries. In the
rear room were three men who were the insurance brains
of the whole department. Holding office during succes-
sive administrations, no commissioner dared to discharge
them, for without their aid not even the routine of the de-
partment could be carried through. 2
1 In a few states only is the commissioner of insurance as such elected
by the people ; in a large number of states, however, some state official,
who is elected by a direct vote of the people, is ex-officio insurance
commissioner.
a Since one of the charges which Governor Hughes brought against
MISTAKES IN STATE REGULATION 323
So it is in most of the states. To be sure, now and then
an able man has been given the position of commissioner
of insurance, but most of the commissioners have been
simply able politicians. Even the able commissioners
have not succeeded in accomplishing much, for the tenure
of office is short, and time has not been given to learn the
details of a very technical business. The able helpers in
the rear office have done what they could to protect and
foster the insurance interests of the state, but, without
authority, they have not exercised much influence. They
can only make recommendations to the head of the depart-
ment, who decides concerning these according to the way
in which his political life will be influenced. This, in gen-
eral, is the kind of state departments which we have had,
and now have, to administer the insurance laws.
The states, in giving to the departments of insurance the
power to make an investigation of the companies whenever
they saw fit, had the idea that the departments would
watch the companies carefully, and would make searching
investigations of the affairs of the different companies to
see that no irregularities took place. How differently has
state supervision worked out in practice! In many cases
there has been no investigation into a company's affairs
until the public demand for such an investigation has
grown so insistent that the department could not longer
remain inactive. 1 Many of the abuses revealed by the
Armstrong committee were common knowledge to insur-
ance men as early as 1903. Syndicate operations, year-end
transactions, use of money to help out other enterprises,
all these evils were freely hinted at in insurance circles.
Under such circumstances, it was the duty of the insurance
departments to make thorough investigations of those
companies under suspicion. Instead of doing so, the New
Mr. Kelsey was that he had not yet read the insurance laws, although
having been in office nearly a year, it might be well to state that the
description here given does not refer to the New York department.
1 The Insurance Spectator, Volume LV, p. 295.
324 YALE READINGS IN INSURANCE
York department held back, and it was not until the public
had become thoroughly aroused by the disclosures made
in the family quarrel in one company that finally the super-
intendent of insurance bestirred himself.
Even in the cases where the insurance departments have
made investigations, these investigations have not meant
much. Sometimes thorough examinations have been
made; more often the examinations have been largely a
farce. When an examination is made, the laws give the
commissioners the privilege of making public only such
portions of their findings as each may deem fit. Under
such a law, a thorough examination has not much terror
to evil-doers. Pressure can be brought to bear upon a
complacent commissioner to publish nothing disagreeable.
The management promises to reform, the commissioners
agree that nothing more could be done if the findings were
made public. The result is that disagreeable things are
covered over, and no one is the wiser.
Under such circumstances, it is not strange that there
has been some mismanagement. Really, the only wonder
is that there has not been more, for it must be remem-
bered that notwithstanding the searching investigations
which have been made into insurance affairs during the
past several years, very little actual stealing has been
found. That this has been true speaks well for the high
character in general of the men in charge of these great
trust interests.
However, the weak managers, the inefficient managers,
the wrong-doing managers, must be eliminated from the
business. To accomplish this result, there must be pub-
licity. Are there campaign contributions? Find it out.
Are some of the officials engaging in syndicate operations
at the expense of the policy-holders? Find it out. Are
some companies depositing large amounts in trust com-
panies to make those companies profitable? Find it out.
Are some of the managers so inefficient that they cannot
get business in any other way than by paying twice as
MISTAKES IN STATE REGULATION 325
much for it as other managers are paying? Find it out.
The policy-holders have delegated to the state the duty of
finding out these things. The state should find them out,
and having found them out should publish all the facts.
That would be real publicity.
Opponents of this policy say that since no one reads the
insurance reports, there is no use of publishing in them so
many facts. It is true that the general public takes but
little interest in insurance matters, save in a time of great
exposures, but it is a mistake to assume that no one reads
the annual reports of the insurance department. The
most vigilant lot of men in the country are studying these
reports the agents of rival companies. They are look-
ing for faults of management in other companies, and if
there were real publicity of the insurance business, the
mismanaged companies would go to the wall quickly or
reform their methods of doing business. Just to show
what a little publicity will accomplish, let us consider the
action of a large company a few years ago. 1 The company
was a good one, but it was not accustomed to giving large
surrender values to lapsing policy-holders. One year a
few of the states demanded that the companies report how
large a per cent, of the reserves they gave to lapsed policies.
The next year this company practically doubled the amount
it had given heretofore. It could not afford to allow rival
agents that weapon against it. If a little publicity will
secure such a reform, it is easy to see that full publicity
will bring great results.
Along with publicity must go responsibility. The day
of the trustee who lends his name to dignify the literature
of a life insurance company, and expects to give nothing
else, cannot pass away too quickly. In theory, the trustees
are supposed to watch carefully the conduct of the execu-
tive officials, and to pass upon the general business plans
to be pursued. No one expects them to manage the com-
1 Report of the Wisconsin Insurance Investigating Committee,
p. 207.
326 YALE READINGS IN INSURANCE
panics, that is the work of the executive officials; but
the insuring public does expect these bodies of trustees to
know perfectly well what is going on within the company.
That the trustees have not known what was going on has
been amply demonstrated. If a trustee has been more
than ordinarily conscientious, he has attended the monthly
meetings of the board. He has listened to the report of
the officials, comparing the month's business with the busi-
ness of the same month a year before, has approved reports
of finance and other committees, perhaps has asked a few
questions, and then has gone away none the wiser. What
he has learned about the actual condition of the company
is whatever the officials have chosen to tell him. The
whole system is largely a farce, and one can only wonder
that business life will tolerate such conditions.
The practice ought to be changed. Make the trustees
something more than dignified figure-heads. 1 Since it is
the function of trustees to know what is going on in their
company, make them know. This could be accomplished
by a very simple law. Make it obligatory for the trustees,
or at least a committee of the trustees, to sign the annual
report of the company, and then hold these men legally
responsible for any misstatement contained in the report.
What would be the result? Before the committee of
trustees would sign the report they would make a searching
investigation of the affairs of the company, or, more prob-
ably, would call in professional accountants to make such
an investigation as would reveal the true state of affairs.
Thus, such a law would accomplish two good results; it
would make the trustees familiar with the operations of
the company, and it would insure to the public true annual
reports.
As an indication of the need of such investigations into
a company's affairs by capable men, the experience of a
1 This question is discussed at length in an article by the author on
"The Control of Life Insurance Companies," Journal of Political
Economy, November, 1907.
MISTAKES IN STATE REGULATION 327
large company a few years ago may be cited. Certain
changes in the office force made it desirable that an exten-
sive investigation be made into the company's affairs. A
well-known firm of accountants was employed, and the
officials of the company themselves were surprised at many
of the revelations made. There had not been much actual
dishonesty, but the officials did not know the business.
They had known, in a general way, the total expenditures
and total receipts, and that so much was going for agency
expenses and so much somewhere else, but of what ex-
penditures were paying and what were not, they were
ignorant. Thus a law securing responsibility might not
only secure good moral management; it might secure
more efficient management.
The simplest and best remedy then for the abuses in
insurance management is publicity and responsibility. To
whom shall we look to give the public this sort of legisla-
tion? The individual states could follow out the suggestions
which have been made in this paper, and it is to be hoped
that they may adopt them. But if we are ever to have a
comprehensive solution of the problem of legal regulation
of the insurance business in this country, it will have to
come through supervision by the federal government.
The history of the insurance business in this country is
pretty well known. The companies started as local con-
cerns, and as such they took out state charters, thus com-
ing under the jurisdiction of the state incorporating them.
However, the companies soon found it convenient to
expand into other states. Such expansion was necessary
to secure a wide distribution of risks and to secure the econo-
mies of business on a large scale. That this expansion is
desirable for a life insurance company, few would dispute,
and in the case of a fire insurance company it is absolutely
essential. Thus, some of the companies have come to do
business in practically all the states, and all the companies
are writing insurance in a number of states. With a sys-
tem of supervision by the individual states, not only is
328 YALE READINGS IN INSURANCE
each company under the jurisdiction of the state which
chartered it, but it is also under the jurisdiction of each
state in which it writes policies.
Under such a condition, even if we had the very best
state supervision possible, there would be trouble. The
business of a life insurance company is a unit; it cannot
be divided up into forty-six different pieces. Therefore,
when any state begins to make regulations concerning the
business of one of the companies, it is legislating for the
whole country. This would not be so bad if each state
would make the same laws, but they do not and they
never will. A problem of a course of action put to forty-
six good and wise men will be solved in forty-six different
ways. Similarly, if the problem of supervising the insur-
ance business is put to forty-six legislatures, no matter
how intelligent and broad-minded those legislatures may
be, we are going to have forty-six different solutions.
Witness the New York, Massachusetts, and Wisconsin
laws enacted to remedy the abuses revealed by the Arm-
strong committee. One would be rash in saying that the
legislatures of these states went about their work with an
open mind, but in general there was a fairly honest endeavor
to get at some solution of the difficulties. All three legis-
latures struggled with the same problem, yet each reached
a radically different solution as to the proper way to super-
vise the business so as to prevent a recurrence of the evils.
So it has been for half a century. Each state has gone
ahead and enacted laws regulating the insurance business
without giving much consideration to what the sister states
were doing. Sometimes the laws passed in various states
have been contradictory, but even when they have not been
contradictory, they have imposed many hardships upon the
companies. Therefore, because it is a good thing for the
public that a company should do business in every state,
and since the business of a company is a unit, supervision
by the federal government would still be preferable to the
system of state supervision working at its very best.
MISTAKES IN STATE REGULATION 329
However, we must not compare federal supervision with
ideal supervision by the individual states, but with state
supervision as it actually works out in practice. To have
the best state supervision it would be necessary to have
legislatures free from prejudice. We do not have such
legislatures. They are composed of politicians whose
success often depends upon their catering to local interests.
They do not go about the task of finding out what is the
best thing to do for the insurance business in general,
but, actuated by narrow motives, enact laws designed to
favor their own particular state. Supposedly, these laws
are for the best interests of the people of the state which
enacts such laws, but granted that they are, does any
state have the right to pass such laws as will interfere with
the business of legitimate corporations of other states,
and injure the citizens of other states? This question is as
old as the country, but the sooner it is answered in the
negative concerning insurance affairs the better it will be
for the public.
The feeling of animosity shown by many of the states
towards the insurance companies of other states has
resulted in so much hostile legislation that the big problem
before us is not to protect the people from this class of
corporations, but to protect these great institutions against
the people. Hostile insurance legislation has cost this
country far more than has mismanagement of insurance
companies.
While much harm is done to the insurance business
because of the jealousy among the states, the abatement
of that hostility brings out other weaknesses in state super-
vision. As has already been pointed out, if there is to be
any effective publicity in insurance affairs, the supervising
officials must make searching investigations into the affairs
of the companies. Under the system of state supervision,
which state shall make these examinations? Shall it be
the duty of every state in which the company does business
to make such an investigation? If all the states should
330 YALE READINGS IN INSURANCE
do so, the insurance companies would have time for little
other than examinations. In the early history of super-
vision, there was a great deal of examining done by
each state of companies, no matter where chartered. It
became such an intolerable nuisance, however, that there
has grown up a sort of custom among state insurance
departments, called state comity. Under this official cus-
tom, each department tacitly allows the state in which
any company is incorporated to investigate the financial
soundness of that company. In substance each official
says to the others, you let me manage the companies of
my state, and in return I will let you manage your com-
panies. Such a solution of this difficulty was necessary,
but what is the result? Simply that the whole country is
more or less at the mercy of the insurance official of one
state. Frequently it has happened that certain officials
have had charge of important companies and have neg-
lected their duties, yet the other commissioners, bound
by custom, have been forced to stand by and allow the
companies to pursue their wrong course undisturbed. 1 This
is bad for the business; it is bad for the country; the
remedy is national supervision.
Very few are in favor of national supervision of the insur-
ance business unless it means an end to state interference
with interstate business. To have the state departments
remain with all their present powers, and to add to these
a national department of insurance, would simply be
complicating an already very complicated situation. If
national supervision, however, would mean an end to
state supervision over interstate insurance, there are very
few who understand the business who would not welcome
the change. The change ought to be made. It is a cer-
tainty that state supervision will never be able to cope
1 For examples of how this works out in practice, see address of
Colonel Hahn, Insurance Commissioner of Ohio, Transactions of the
National Convention of Insurance Commissioners, 1895; also Journal
of Insurance Economics, 1905, Volume XII, p. 113.
MISTAKES IN STATE REGULATION 331
with the situation. It is not a question as to whether one
is a believer in states' rights or a disbeliever. It is simply
a question as to whether we are going to have efficient gov-
ernmental supervision over this important business.
Besides the great advantage which national supervision
would enjoy over state supervision in securing publicity
and in putting an end to selfish, sectional legislation, there
would be incidental benefits of great importance. 1
1. There would be a great direct saving in expense over
the present system. It is wasteful to have forty-six depart-
ments each duplicating the work of the other. Forty-six
voluminous reports are issued each year, all containing
practically the same information. Forty-five forty-sixths
of this is unnecessary, and would be done away with under
national supervision, resulting in the saving of several
million dollars annually.
2. National supervision would, it is hoped, result in a
more equitable system of taxing the insurance business.
Under the system of state taxation, the man who pays his
premiums into a life insurance company is frequently
taxed twice, and in some cases three times. That such
burdens should be placed upon men because, having to
provide for their families, they must needs have recourse
to life insurance, is a national disgrace, excused only on
the ground of ignorance of the real nature of the business.
Since much of this taxation is the result of jealous fear of
the states that the others are profiting through the insur-
ance business at their expense, national supervision would
probably bring at least partial relief from this burden.
Some have objected to national supervision on the ground
that the insurance laws enacted by Congress for the Dis-
trict of Columbia are about the worst on record. 2 The
1 For a discussion of the value of national supervision in Canada,
see an article by Mr. Frank Sanderson, Transactions of the Actuarial
Society of Edinburgh, Volume III, p. 171.
2 M. H. Robinson, " Government Regulation of Insurance," Papers
and Discussions of the Nineteenth Annual Meeting of the American
Economic Association, p. 149.
332 YALE READINGS IN INSURANCE
laws for the District are bad, but this does not mean much.
It takes time, energy, and ability to work out a code of
laws regulating so technical a business as that of life insur-
ance, and it is easy to see that while Congress would not be
willing to give much thought to a code applying only to
the District of Columbia, the situation would be entirely
changed if the question involved the insurance business
of the whole country. In one case, a few hundred thousand
people, with no representative in Congress, are involved;
in the other, eighty millions are concerned. 1
Finally, is national supervision possible? This has been
a question of warm discussion during the last ten years.
A careful study of the decisions of the United States Su-
preme Court would seem to indicate that national super-
vision of the insurance business can come only through
an amendment to the Constitution, which makes the
situation nearly hopeless. However, notwithstanding the
definiteness of the decisions of the Supreme Court, there
are two grounds for believing that national supervision
may yet be possible. In the first place, all the decisions
rendered by the court have arisen from cases dealing with
state law. Congress has never passed a law regulating the
business, and in our theory of government, a power not
exercised by the national government is left to the indi-
vidual states. If Congress would once exercise control
over the insurance business, the Supreme Court very pos-
sibly might uphold the action as constitutional. The
other ground on which to base hope for federal super-
vision lies in a possible change of mind on the part of the
Supreme Court. Conditions change, the personnel of the
court changes. With these changes, the court several
times has found occasion exactly to reverse previous
decisions. 2 It is not unreasonable to hope that now, since
1 For further objection to national supervision, see E. P. Marshall,
Transactions of the Actuarial Society of America, Volume V, Number
19, p. 242.
2 The Supreme Court has reversed previous decisions regarding the
MISTAKES IN STATE REGULATION 333
insurance has become of such national importance, the
court may change its decision regarding the power of the
states to supervise this business.
Summing up then the main contentions of this paper,
the conclusion is that the indictment against state super-
vision can be sustained. It has failed seriously in the half
century that it has been on trial. This failure has been
due partly to the fact that the states have directed their
activities along wrong lines, and partly to the fact that
there are conflicting interests among the states. The
remedy which has been suggested is in laws securing pub-
licity and responsibility, these laws to be enforced by a
national department of insurance.
legal tender qualities of greenbacks, the constitutionality of income
taxes, the citizenship of corporations, and the power of railroads to
obstruct navigation on streams.
CHAPTER XXIV
FEDERAL SUPERVISION OF INSURANCE *
WITHIN twenty-five years what may be called the
"insurance principle" has come to be a notable factor in
the traffic, credits, commerce, and the family life of this
country. Invited by trunk-line railroads, the telegraph,
the telephone, and the welcome of a homogeneous people,
the tendency of all our activities has been to expand.
Insurance has kept pace with the opportunity. It now has,
through its various forms, relations with substantially
every man, woman, and child in the Republic, and has large
international relations as well. It operates everywhere
under governmental supervision. In this country alone
it must obey the behests of forty-six different legislatures,
each of which claims sovereign authority not only over its
activities in that particular state, but, in effect, over all
its activities throughout the world. A mere statement of
the situation prepares the mind for the confusion and
injustice which characterize insurance supervision as it
exists to-day.
It is a principle in physics that two bodies cannot occupy
the same place at the same time. The Great Teacher said :
"No servant can serve two masters. ... Ye cannot serve
God and Mammon." The problem which faces the man-
agement of an active insurance company to-day is, how
1 By Darwin P. Kingsley, President of the New York Life Insur-
ance Company. Reprinted from an address delivered before the
students of the University of Missouri. The substance of this address
was published as an article in The North American Review for April,
1909.
334
FEDERAL SUPERVISION 335
may it profitably, effectively, and peacefully serve forty-
six masters. The problem is insolvable. Under the
present practice of insurance supervision there is no
remedy. But there is elsewhere a remedy, and, to many
people, it seems to be the only remedy, viz., federal super-
vision of interstate insurance.
I by no means think that federal supervision would
bring in the millennium, but it would be a long step away
from the chaotic and destructive tendencies which have
developed under the existing plan. Is federal supervision
possible? As against the decisions of the Supreme Court
-made not once but several times is there any prob-
ability of such relief? l
Relief through an amendment to the Constitution of the
United States would be effective, but that is practically
unattainable and is probably unnecessary.
Is there not a great deal in the history of the nation,
in the development of national sentiment, in the develop-
ment of national ideals, since the Constitution was adopted,
which foreshadows not only the probability but, under an
increasing necessity, the certainty that interstate insur-
ance will ultimately come under federal control? I think
there is. I ask you now to consider that probability.
President-elect Taft recently called attention to some
of the great virtues of the Constitution, namely : it is brief,
general in its terms, and obviously constructed so that the
powers granted to the general government could be de-
veloped and determined as the nation developed. This,
as a matter of fact, is what has happened.
It is perfectly clear to one who studies the history of the
nation under the Constitution, that but for the wisdom of
the great men who interpreted that immortal instrument
during the early years of its operation, national develop-
ment might have taken on a form that would have defeated
the purposes of the men who planned it. It is probable
1 Paul v. Virginia, 8 Wallace, 168; Hooper v. California, 155 U. S.,
646; Cravens v. New York Life Ins. Co., 176 U. S., 962.
336 YALE READINGS IN INSURANCE
that we as a people owe almost as much to Marshall, the
great Chief Justice who gave the Constitution its national
meaning, as to the men who drafted it. The doctrine
which Marshall laid down, which was later on reaffirmed,
which has now come to be perhaps as fixed in its meaning
as the Constutition itself, is substantially this:
"The action of the general government should be applied
to all the external concerns of the nation, and to those
internal concerns which affect the states generally; while
to the states is reserved the control of those matters which
are completely within a particular state, which do not
affect other states, and with which it is not ^necessary to
interfere for the purpose of executing some of the general
powers of the government." l
Many of the problems which have arisen since the
adoption of the Constitution involve the question of
whether it is necessary for the general government to
"interfere" for the purpose of executing some of its general
powers. Is it necessary now, is it likely to become in-
creasingly necessary, that the government should interfere
in insurance for the purpose of executing some of its
general powers?
I speak, of course, as a layman. I shall not attempt
to make what may be called a legal argument. I speak
as one having close relations to an interest which involves
people in every state in the Union, and in nearly every
country of the civilized world. I speak as a practical
man, dealing with one of those situations which make the
lawyers now and then understand, and make even the
Courts understand, that laws and courts and constitutions
exist for the people, that the people do not exist for the
benefit of institutions.
In order to consider what the probabilities of federal
supervision are, it will be profitable to review briefly some
of the things that have happened in the course of our
national development.
1 Gibbons v. Ogden, 9 Wheaton, 1.
FEDERAL SUPERVISION 337
You understand, of course, that the radical difference
between government as it existed under the old Confedera-
tion, and government as it has grown up under our Consti-
tution, is this: The Confederation was strictly a union
between independent states acting as states; our present
government is a union between states in which the central
government acts directly upon the individual citizen, and
not upon the states composing the government. This
is supposed to be our great contribution to the science of
government. There is a sharp difference of opinion as to
who discovered it. Some credit its discovery to Benjamin
Franklin and some to Pelatiah Webster; but Mr. John
Fiske has pointed out that the principle was embodied
in the ancient federation of Greek cities known as the
Achaean League, and is present in the modern federation
of the cantons which constitute the republic of Switzerland.
He further declares that the principle was never fairly
demonstrated and never could be until it was applied to a
large and populous country through a considerable period
of time. We have supplied these conditions and this is
properly speaking our contribution to the science of
government. And beyond question in its continued
success lies the best hope for the future peace of the world.
The difference between the two kinds of government
does not at first blush seem to be great, but, as a matter
of fact, the two types are almost as far apart as the poles.
The departure involved in the new type was much
clearer to our forefathers than it is to us. Under the Con-
federation they had won independence. They recognized
the pressing need of a different and a stronger plan, but
about the old plan clustered traditions and the memory of
struggles which went back almost to Jamestown and to
Plymouth. In order to create the beginnings of a nation,
they had to exercise a forbearance, a charity, and a wisdom
which are a constant source of wonder to the student of
that period. Once get yourself into the atmosphere of
those times, get even an approximate idea of their passion
338 YALE READINGS IN INSURANCE
for local self-government the idea of sovereignty which
had seized on the people of each of the original thirteen
states understand the variety and even the hostility
of their interests, and then consider the instrument which
that devoted body of men wrought out in Philadelphia in
1787, and the marvelous work it has since done in nation
building, and you will understand why Thomas Jefferson
pronounced it the work of demigods; and you will have a
higher appreciation too of the truth of what Gladstone
said later, namely, that it is "the most wonderful piece
of work ever struck off at a given time by the brain and
purpose of man." It was a series of compromises com-
promises between the larger and the smaller states, com-
promises with slavery, compromises all through but the
great principle then adopted, which has more and more
asserted itself, which has developed the instinct of nation-
ality, which preserved the nation through a fearful war,
which has developed it territorially from the Atlantic to
the Pacific and across the Pacific, is, that the general
government acts for the general welfare, that it acts
directly on the individual and acts in whatever way it is
necessary for it to act for the purpose of executing its
general powers.
However keen the vision of Washington and Franklin
and Madison and Hamilton the men who dominated
the Constitutional Convention however much they may
have seen that the future of free government and the de-
velopment of human liberty were wrapped up in their
plan, the people of that time were impelled by no such
motives. They were passionately devoted to their local
sovereignty. To them the creation of a new style of
government was largely a question of commercial peace
between the states and with foreign countries. The situa-
tion substantially compelled them to recognize the neces-
sity of a central government strong enough to keep the
peace and to regulate commercial intercourse. The Revo-
lution itself had been largely brought about by commercial
FEDERAL SUPERVISION 339
considerations. The British government sought to keep
the colonies in subjection for purposes of favorable trade,
and against this the colonies rebelled. After independence
had been won a situation bordering on anarchy quickly
developed. Foreign countries were unwilling to enter
into treaties with the United States under the articles of
Confederation. The Confederation had no control over
commerce, and commercial war l in a variety of forms soon
developed. This condition growing out of the feebleness
of the federal government resulted in a deep and general
1 Only British built ships, owned and navigated by British sub-
jects, were allowed to trade between New England and the British
West Indies. American ships trading directly with Great Britain
were allowed to carry only articles produced in the particular states
of which their owners were citizens. Massachusetts, New Hampshire,
and Rhode Island prohibited British ships from carrying goods out
of their harbors, and imposed a heavy duty on all goods brought in by
such ships. New York imposed a double duty on goods imported in
British ships. Pennsylvania levied duties for the benefit of local
manufacturers. Congress was unable to persuade the states to carry
out the recommendations it had agreed to in the treaty of peace with
England respecting the treatment of loyalists and the payment of
private debts owing to British subjects. In retaliation and to the
great humiliation of the new nation, British garrisons were not with-
drawn from Ogdensburg, Oswego, Niagara, Detroit, and Mackinaw
until eight years after the adoption of the Constitution. The Confed-
eration had no power to lay and collect taxes or duties, and it was
unable to pay the ragged Continentals who had won our independence.
The nation was too poor to bribe the Barbary pirates and too weak
to chastise them, and American ships were plundered in the Medi-
terranean and American sailors citizens who had established our
independence were sold as slaves in the markets of Tripoli and
Algiers.
Under the union between the states as such, with no power in the
central government to act directly on the individual citizen, control
over what was common to all the states naturally failed, and it was
followed by a commercial war between the states themselves. Con-
necticut opened her ports to British ships and levied duties on imports
from Massachusetts. Pennsylvania discriminated against Delaware
and New Jersey. New York required vessels from Connecticut and
New Jersey to pay entrance fees and obtain clearances at the custom
340 YALE READINGS IN INSURANCE
conviction that commerce ought to be regulated by Con-
gress, and found expression in the commerce clause of the
Constitution. As to the breadth of the powers contained
in this clause, Chief Justice Marshall said:
"It is not, therefore, a matter of surprise that the grant
should be as extensive as the mischief, and should compre-
hend all foreign commerce and all commerce among the
states."
The departures of the new instrument from the old were
so radical that many of the states hesitated, and yet, as
we can see now and as they came to see, there was nothing
house the same as foreign ships. Crippled in her foreign trade and
oppressed with debt, Massachusetts laid a heavy tax on land, and
presently what is known as Shay's Rebellion broke out.
The same chaos existed in monetary affairs. There was no national
coinage law until 1785, and no money was coined until 1793. The gold
and silver coins in use were English, Spanish, French, and German.
Notwithstanding the disastrous experience of the country with the irre-
deemable paper issued by authority of Congress during the Revolu-
tion, seven of the states resorted to the same expedient and some of
them attempted to enforce its use as legal tender. This resulted in
litigation and a general paralysis of local trade. The efforts of Rhode
Island to enforce the use of paper money as legal tender gave her the
nickname of "Rogues' Island."
That commercial necessities initiated the movement which resulted
in calling the convention which framed the Constitution is a fact not
generally known. In 1785 Washington became president of a com-
pany for extending the navigation of the Potomac and James rivers.
This could not be done unless Virginia and Maryland acted together.
Washington's plans involved a connection between the head waters
of the Potomac and the Ohio, and therefore Pennsylvania was invited
to become a party to the enterprise. The papers as finally sent to
the legislatures of Maryland and Virginia contained a suggestion made
by Washington himself, that these two states should agree upon a uni-
form system of duties and other commercial regulations and upon a
uniform currency. Both states ratified such a compact, and Mary-
land then proposed that Delaware also be consulted, and that the plan
include a canal between the Delaware River and Chesapeake Bay.
Maryland finally suggested that all the states be invited to send com-
missioners to the conference. Nine states complied, and delegates
from five states met at Annapolis in September, 1786. New Jersey
instructed her delegates "to consider how far a uniform system in
FEDERAL SUPERVISION 341
else for them to do. It was this or anarchy. But even
after the states had all ratified the Constitution, and the
new nation had been launched upon its career, the people
found it difficult to take their own medicine.
But steadily the national ideal gained ground. Slowly
the general government extended its operations from the
external concerns of the nation and from those internal
concerns which affect the states generally, to those with
which it was necessary for it to interfere, and with which
it had the right to interfere through its direct operation
on the citizen, for the purpose of executing its general
their commercial relations and other important matters might be neces-
sary to the common interest and permanent harmony of the several
states." The conference noted the phrase "other important matters"
and considered it an improvement on the original plan. In this
appears a recognition of the necessity of some action dealing with the
general commercial chaos which then ruled. The Annapolis confer-
ence resulted in no definite action except the adoption of an address
written by Alexander Hamilton, urging that commissioners be ap-
pointed by all the states to meet in Philadelphia in May, 1787, "to
devise such further provisions as shall appear to them necessary to
render the Constitution of the federal government adequate to the
exigencies of the Union, and to report to Congress such an act as,
when agreed to by them, and confirmed by the legislatures of every
state, would effectually provide for the same." This address, born of
a commercial question, resulted directly in the Constitutional Conven-
tion. At first, the Continental Congress refused to notice the Annap-
olis conference and the address which resulted from it. They said
the conference was an irregular body without authority. But the
states, wiser than the Congress, led by Virginia, began to appoint
delegates, and when New York refused her assent to a plan of Congress
for levying and collecting duties on imports, thereby further emphasiz-
ing the impotency of Congress itself, a reluctant consent was given,
and, as a salve to the pride of its members, Congress itself issued a call
for a convention identical with that of the Annapolis conference. This
convention in the summer of 1787, working behind closed doors,
finally produced an instrument which did not satisfy any one at the
time, to which some of the states gave tardy and reluctant assent
and almost no state was more grudging and tardy than New York
but to which all the states finally assented, although in two cases
assent was delayed until after government under the Constitution had
existed for some time.
342 YALE READINGS IN INSURANCE
powers. Every inch of the ground, however, has been
fought over. And that contest, involving always more or
less clearly the development of national powers as against
the powers of the states, has been a leading issue between
political parties whenever there has been a clear issue
from that day to this.
Naturally the Federalists who had been most active in
advocating the adoption of the Constitution favored a
liberal construction of it. They wanted it to become
effective. Their opponents then called Republicans
favored a strict interpretation of it. The Federalists,
forced by the situation to take the initiative, obliged to do
whatever was necessary through taxation and otherwise
to carry on the new government, did not long endure.
Then came Thomas Jefferson, nominally the founder of
the party of strict construction. The burden of the new
government, with its then more or less undefined relations
to the states, with its powers undeveloped, fell on men
who were supposed to be least in sympathy with the
national idea. An emergency which put them to the test
quickly arose. In the struggle for the possession of the
Mississippi, Jefferson proposed and Congress authorized
the purchase of the Island of Orleans and what was called
West Florida. In the end they bought the whole ancient
province of Louisiana, a tract of land richer and larger
in area than the original thirteen states. Although
Jefferson had advocated the smaller purchase, and there
was no difference in principle between what was originally
proposed and what was finally done, yet he believed that
in signing the treaty of purchase he had "done an act
beyond the Constitution." He could find in the Consti-
tution no authority for such a proceeding. His friends
believed that in the treaty-making power he had sufficient
authority, and Chief Justice Marshall in 1828 confirmed
that view in an important decision, when he said :
"The Constitution confers absolutely on the government
of the Union the powers of making war and making
FEDERAL SUPERVISION 343
treaties; consequently that government possesses the power
of acquiring territory either by conquest or treaty."
Such are the curious ways of politicians that the
Federalists, who before the purchase had urged the most
extreme measures to secure navigation of the Mississippi,
now vehemently questioned both the constitutionality
and the wisdom of an act which not only secured the
Mississippi but an empire besides.
The people, however, with an instinct which fore-
shadowed the decision of Marshall, approved the act; they
recognized that it was clearly in the line of national aspira-
tions, that it tended to insure the peace and the safety of
the Republic. This was perhaps the first great instance
in which, by interpretation and by acquiescence on the
part of the people, a way was found.
Following the path upon which Jefferson first entered,
we purchased Florida, we discovered, explored, and settled
the Oregon country, we annexed Texas on the petition of
its people. We acquired California, Nevada, Arizona,
New Mexico, and portions of Colorado and Oklahoma.
We purchased Alaska. We annexed Hawaii on the peti-
tion of its de facto government. We took the Philippines,
Porto Rico, and Guam. In five of these eight cases, addi-
tions to our territorial domain were made and the highest
function of sovereignty was exercised, when the federal
government was under the control of the party popularly
known as the party of strict construction.
Twelve amendments were made to the Constitution
during the first fifteen years of its existence. During the
next sixty-two years none were made. In this era the
Constitution was being interpreted. The executive and
the courts were slowly finding out the powers granted
either specifically or by implication, and they found all
that was necessary to carry on the national government.
The growth of federal power during that time was very
great, and in that period the citizens of the states trans-
ferred to their national citizenship a large part of the love
344 YALE READINGS IN INSURANCE
and reverence which they had formerly bestowed upon
their state citizenship. The conviction constantly in-
creased that under the Union and the Constitution there
was, upon the whole, better freedom and greater happiness
than could possibly be secured in any other way. The
purchase of Louisiana and the second war with Great
Britain led the administration irresistibly along the path
of a liberal interpretation of the Constitution. They may
not have altogether liked it. There was nothing else for
them to do. The embargo which they had denounced in
1793, they employed in 1807. The United States Bank,
which they had denounced in 1791 and refused to recharter
in 1811, was rechartered by an almost unanimous vote in
1816. They followed so closely the lines laid down by
the Federalists that Josiah Quincy declared the Repub-
licans had out-federalized federalism. But the triumphs
of both parties were the triumphs of national ideals. This
is probably much clearer to us than it was to them. The
father of strict construction took the first step in the
policy of expansion which has secured us our preeminence
on the North American continent, and the last of his great
contemporaries, by an equally wise and daring exercise
of executive power, put an end to foreign aggressions
upon this continent. The Monroe doctrine has no other
standing in the Constitution than this: that the Constitu-
tion made the United States a sovereign nation with cer-
tain ideals which are to be pursued, and with which further
foreign aggressions in this hemisphere would interfere.
It is curious that this doctrine also has found its strongest
supporters amongst the strict constructionists, and in our
own day a President who would not annex Hawaii upon
the petition of its de facto government put more stiffening
into the backbone of the Monroe doctrine than it had
received since Secretary Seward politely requested Napo-
leon III to get out of Mexico.
With the expansion of the national domain to the
Pacific came the necessity of easier access to that coast
FEDERAL SUPERVISION 345
and of a naval station in Caribbean waters. The story
of negotiations forwarding these purposes is a long one,
and includes many failures, but the idea has never been
abandoned, and now the United States owns Porto Rico
and is making the "dirt fly" in digging a canal connecting
the Atlantic and the Pacific, a great waterway which,
when completed, will be entirely under the control of the
United States.
The supreme event in the development of national ideals
came to an issue in 1860. African slavery existed in every
state of the Union but one when the Constitution was
adopted, and its status under the new government was
one of the compromises of the Constitution. The words
slave and slavery were carefully avoided in wording that
instrument, and it was then the general opinion that the
institution would gradually die out. The ordinance of
1787, one of the last enactments of the old Confederation,
assented to by all the states, had consecrated the North-
west territory to freedom, but the Louisiana Purchase
contained no such provision, and over the settlement and
government of that vast region was ultimately waged a
conflict which tested the vitality and established the
power of the nation. During the years which preceded
this conflict, the anti-slavery party pursued its ideal of
limiting slavery within a certain area, while the pro-
slavery party persistently followed its purpose of pro-
tecting slavery in the unorganized territory of the country
and in the erection of new slave states whenever the
people so desired. Both parties claimed the sanction of
the Constitution.
We sometimes lose sight of the great issue of that fear-
ful struggle. We have just celebrated the centenary of
the birth of Abraham Lincoln, whose election to the
Presidency precipitated the conflict. We have heard
much of Lincoln the "Emancipator," and we have been
told that the Civil War was fought in order to abolish
slavery. Lincoln knew better than this. He realized
346 YALE READINGS IN INSURANCE
that the great thing to be done was to preserve the Union
and the principles of government and of nationality which
it embodied. You remember, in his first inaugural address,
he said to those whom he called his "dissatisfied fellow-
countrymen":
"You can have no oath registered in Heaven to destroy
the government, while I shall have the most solemn one
to 'preserve, protect, and defend' it. The mystic chords
of memory, stretching from every battlefield and patriot
grave to every living heart and hearthstone all over this
broad land, will yet swell the chorus of the Union, when
again touched, as surely they will be, by the better angels
of our nature."
He stated the issue as between the Union and slavery in
1862, when Horace Greeley published in the Tribune an
open letter urging a more decided policy on the part of
the government with respect to slavery. Lincoln replied,
in that immortal declaration with which you are all
familiar :
"If there be those who would not save the Union unless
they could at the same time save slavery, I do not agree
with them. If there be those who would not save the
Union unless they could at the same time destroy slavery,
I do not agree with them. My paramount object is to
save the Union, and not either to save or destroy slavery.
If I could save the Union, without freeing any slave, I
would do it; if I could save it by freeing all the slaves, I
would do it; and if I could do it by freeing some, and leav-
ing others alone, I would also do that. What I do about
slavery and the colored race, I do because I believe it helps
to save this Union. And what I forbear, I forbear be-
cause I do not believe it would help to save the Union.
I shall do less whenever I shall believe that what I am
doing hurts the cause, and I shall do more whenever I
believe doing more will help the cause."
Lincoln's supreme purpose and the issue of the war was
the preservation of the Union. When he thought that
FEDERAL SUPERVISION 347
such action would help to save the Union, he issued the
Emancipation Proclamation. But it was a war measure
distinctly unauthorized by the Constitution up to the time
of the adoption of the thirteenth amendment.
Another long struggle which resulted in a great advance
in national ideals was in the field of finance. When the
Constitution was adopted, the nation as such had no
revenue, no credit. But Alexander Hamilton, the first
and greatest Secretary of the Treasury, putting into effect
the powers granted by the Constitution, soon wrought
what seemed a miraculous change. As Webster said:
"He smote the rock of the national resources, and abundant
streams of revenue gushed forth. He touched the corpse
of public credit, and it sprung upon its feet." One of the
means employed was a United States Bank, chartered by
Congress. The strict constructionists contended that the
government had no authority to charter a bank. Its right
to do so was upheld by the Supreme Court on the ground
that it was a suitable agency in borrowing money which
the government had an undoubted right to do. The con-
test was a long and bitter one and the strict construction-
ists refused to recharter the bank in 1811, but were glad
to do so in 1816 when the currency had been demoralized
by the second war with Great Britain. Prosperity brought
some abuses, and all the old rancor, and the bank was dis-
continued in 1836, and a new era of wild-cat money fol-
lowed in certain sections which lasted until the Civil War.
Again the banks suspended specie payments and the federal
government issued legal tender notes, established the
national banking system, and finally taxed state bank
issues 10 per cent. The first and last of these acts were
opposed as unconstitutional, but they were upheld by
the Supreme Court. 1 Thus what is peculiarly a preroga-
tive of sovereignty was transferred from the states to the
1 McCulloch v. Maryland, 4 Wheaton, 316; Legal Tender Cases,
12 Wallace 457; 110 U. S., 447; National Bank v. United States, 101,
U. S., 1.
348 YALE READINGS IN INSURANCE
national government through a process of interpretation,
in response to national needs and through interference
which was necessary in order to carry out the general
powers of the government.
Let us consider a little more closely the logic by which
this great transformation was accomplished. We may
find some comfort therein. Fifty years ago, if any one had
said that within ten years we should have only national
currency and none issued by state banks, he would have
been laughed at. Where would Congress find authority
to take this prerogative away from the states? Let us
follow the Supreme Court's logic.
The Constitution gives Congress power "to borrow
money on the credit of the United States and to coin
money, regulate the value thereof, and of foreign coin."
The Constitution as a whole makes the United States a
sovereign nation. Now notice the links in the chain of
reasoning. Congress has power to borrow money; therefore
it may charter a bank as an aid in borrowing money. A
bank so chartered may be taxed by the states only in such
a manner as Congress permits. Congress may borrow
money, and the United States is a sovereign nation ; there-
fore it may emit bills of credit and make them legal tender.
Congress has power to borrow money; therefore it may
enact a national banking law authorizing banks thereunder
to issue circulating notes based on the security of United
States bonds deposited with the government. Congress
may borrow money; having under this power undertaken
to supply the country with a stable currency, it may pre-
vent the circulation as money of any notes not issued under
its authority by taxing all other issues out of existence.
This was going a long way; it was clearly one of the
occasions when Congress found it necessary to "interfere,"
for the purpose of executing its general powers.
A striking example of the exercise of sovereignty which
is not contemplated in the Constitution is seen in the con-
trol and disposition of what is known as the public do-
FEDERAL SUPERVISION 349
main. To Maryland belongs the credit of taking a step
which was of far-reaching importance in arousing a national
sentiment. When the Articles of Confederation were
proposed, Maryland refused to adopt them unless certain
other states would cede their unorganized Western lands
to the United States. This was done, and these lands
became the first strong bond of union. Settlers on these
lands and those afterward acquired took title from the
general government, and there are few pages in our history
which, upon the whole, record sounder and more construc-
tive statesmanship than those which relate to this subject.
Under whatever law the settler took his title, the fact
was that the general government was using, and wisely
using, the national domain to develop a national ideal.
It all followed logically from the act of Maryland, from
the Louisiana Purchase, and from the construction put
upon the Constitution by Chief Justice Marshall.
But these public lands have also been used to foster
education. It is estimated that over one hundred million
acres of the public domain have been given to the different
states for educational purposes. Where in the Constitution
is specific authority given to Congress to give away public
lands to men who settle on them and improve them, or to
states for educational purposes? The word education does
not occur in the Constitution. Congress has power to make
all needful rules and regulations respecting the territory or
other property belonging to the United States, and from
these few words has been deduced the authority to govern
territory belonging to the United States as well as absolute
control of her lands whether within state or territorial
limits. Clearly these provisions for education were made
with slight reference to explicit constitutional authority.
The action was taken because, under our form of govern-
ment, homes and education are amongst the most cherished
national ideals; because it seemed necessary that the gov-
ernment interfere, in the execution of its general duties and
powers.
350 YALE READINGS IN INSURANCE
The states ceded to Congress under the new Constitution
the power to regulate commerce with foreign nations and
among the several states and with the Indian tribes, but
here again they found it difficult to take their own medi-
cine. It was not easy to give up this prerogative of
sovereignty. Almost immediately the question arose,
What is commerce? It was soon decided that commerce
was something more than traffic or trade, it included
transportation, transportation of passengers as well as of
goods. When steam came into use as a motive power,
that became an issue; but it was decided that commerce
included all the means as well as the subjects of trans-
portation. When the electric telegraph came into use,
it was decided that this was a medium of commercial
intercourse. When the telephone came into use, the same
reasoning made its use between states interstate commerce.
At first Congress was considered as having jurisdiction
only over waters affected by the tide, but this authority
was soon extended to all navigable waters upon which
interstate commerce is carried on, and to bridges over
navigable waters separating two states. At the present
time the authority of Congress extends to the places, the
means, and the subjects of trade and commerce. 1
Since the passage of the Interstate Commerce Act of
1887, there has been a remarkable increase in the activity
of the federal government with respect to control over
interstate commerce. President Eliot of Harvard Uni-
versity not long ago stated that our entire domain between
the Atlantic and the Pacific, between Mexico and Canada,
was really not as large as New England was sixty years ago,
and, as a problem in commerce and transportation, nothing
like as large as the original thirteen states. We have
1 Gibbons v. Ogden, 9 Wheaton, 1 ; Gloucester Ferry Co. v. Penn-
sylvania, 114 U. S., 196; Moran v. City of New Orleans, 112 U. S., 69;
Passenger Cases, 7 Howard, 283; Walling v. Michigan, 116 U. S., 446;
Tel. Co. v. Texas, U. S., 460; Pa. Tel. Co., 48 N. J., Eq. 91, 20, Atl.
846, 27 Am. St. Rep., 462.
FEDERAL SUPERVISION 351
moved on into what is almost a new world. We are facing
new problems. We are facing the further development
of national ideals. We cling as tenaciously as our fore-
fathers did to what we call the right of local self-govern-
ment. What we are now and then asked to give up seems
to us much more vital than what they were asked to sur-
render in the general interest. We can see how necessary
it was for them to do it. It is not so easy for us to under-
stand the force and direction of the conditions which we
face. We have the most extended system of railroad
transportation in the world. The use of the telegraph
and the telephone has extended throughout the nation.
Many important types of business are organized on con-
tinental lines. The question, then, is: When we insist on
what we call local self-government as against the obvious
significance of such facts as these, are we not as short-
sighted as our forefathers would have been if they had
carried their opposition to the Constitution further than
they did? The fact is, we are still entirely devoted to
local self-government. But what is local self-government?
When a business naturally extends over all the states of
the United States, is it local self-government to attempt
to regulate it in forty-six different places by forty-six
separate sovereign authorities? Under these conditions
is not the local idea plainly encroaching on the national
prerogative?
On all these large questions the government has not
acted until it was obliged to. There has been no aggression
as against the states. Looking back at these contests
in which the issue was frequently doubtful we see that
no other solution was possible, that there was nothing
else for the government to do, nothing else for the Supreme
Court to do. When Livingston and Monroe purchased
Louisiana, there was nothing for Jefferson and Congress
to do but just what they did. When the question of a
national currency became critical, there was nothing for
Congress to do but what it did, or something similar, and
352 YALE READINGS IN INSURANCE
there was nothing for the Supreme Court to do but to
sustain it. When the question of railroads arose, it was
already a large question before it became a federal ques-
tion; it involved interests so extensive that the country
generally appreciated its importance and understood that
half-way measures would not do.
Unfortunately for us, the Supreme Court declared
insurance to be neither commerce nor an instrumentality
of commerce in the case of Paul v. Virginia (1868), long
before many people had any adequate notion of what
insurance was to do and to be. It is useless now to con-
jecture what the makers of the Constitution would have
done if insurance had at that time been the large subject
it is to-day. It is useless to conjecture, too, what the
Supreme Court might have done in the case of Paul v.
Virginia, if Congress had previously legislated upon the
assumption that interstate insurance was interstate com-
merce.
The chaotic condition which existed in the commerce
between the states was, as we have seen, one of the things
that drove the states toward a "more perfect union."
That condition, in a more or less aggravated form, has
existed in insurance for eighty years. In 1829 Pennsyl-
vania levied a tax of 20 per cent, on the premiums of other
state companies. This was done under the familiar plea
of protecting the business of domestic corporations. There
was a similar tax of 10 per cent, in New York from 1828
to 1837. In 1851 New York by means of a deposit law
drove all other state companies but two beyond its borders,
and when the other states retaliated, the New York State
companies withdrew from them. In 1874 California by
radical legislation drove twenty-nine companies out of her
jurisdiction. Recently nearly all the life companies with-
drew from Texas and Wisconsin because of oppressive
legislation, and eight withdrew from New York State for
the same reason. A Missouri law allows no company to
do business within her borders which pays salaries above
FEDERAL SUPERVISION 353
a certain limit. Many of the states refuse admission to
companies of other states unless they in advance agree to
surrender the protection of the Federal Courts, and to that
extent their rights under the Constitution of the United
States. Most of the states have on their statute books,
in their insurance laws, that relic of barbarism, the lex
talionis, the law which exacts an eye for an eye, a tooth
for a tooth. The condition is becoming progressively
worse. It is akin to those which existed one hundred
and twenty years ago with respect to commerce. It is
not unlike those which then existed regarding foreign
intercourse, public credit, currency, and that comity
between states which makes for union and peace. The
problems of commerce, of expansion of public credit, of
currency, were solved by the action of the general govern-
ment either through its specific or its implied powers.
There is apparently no other method by which the problem
of insurance supervision can be solved.
The Supreme Court has said that insurance is not com-
merce. It has further said that a state may exact from
a foreign corporation seeking admission to its borders,
compliance with any condition it sees fit to impose. 1
These two pronouncements face insurance on the one side,
and the chaos resulting from trying to obey forty-six dif-
ferent masters at the same time confronts it on the other.
Toward these decisions of the Supreme Court we main-
tain the attitude that Lincoln assumed toward the Dred
Scott decision. He said:
"It is not resistance, it is not factious, it is not even
disrespectful, to treat it as not having yet quite estab-
lished a settled doctrine for the country. . . . The Court
that made it has often overruled its own decisions, and
we shall do what we can to have it overrule this. We offer
no resistance to it."
While the Supreme Court has several times flatly said
Nutting v. Massachusetts, 183 U. S., 553, 556, 46 L. Ed., 324, 325,
22 Sup. Ct. Rep., 238, 239.
354 YALE READINGS IN INSURANCE
that insurance is not commerce, I think it by no means
impossible that later on it may take a different view. I
am not sure that it has not already done so. The relations
of things have changed. And wise courts interpret con-
stitutions in the light of changed conditions and in the
interest of all the people.
Insurance is business. It includes the purchase and
sale of contract rights which have become an almost
indispensable factor in business, in credit and in traffic.
It is a business that from its very nature is most secure
when widely distributed, and it naturally and inevitably
has become an interstate business. It is a business which
from its character requires a reasonable measure of govern-
mental supervision, and at the present time it is more ex-
tensively supervised by governments than any other class
of business. There is, perhaps, no business in which
efficiency and economy are so much promoted by uni-
formity of legal requirements everywhere; no business
that is more easily embarrassed, harassed, and rendered
inefficient and unprofitable by conflicting laws and con-
ditions.
But the Supreme Court has said that it is not com-
merce. The transportation of goods and passengers is
commerce, and all the means used as instrumentalities
thereof are commerce. The sale of goods by sample by
drummers is commerce, but the sale of life insurance
policies by agents is not commerce. A telegraphic message
relating to a life insurance policy or any other kind of
business is commerce, but the policy itself, sent by mail
or otherwise, is not commerce. If a company talks to
an insurant in a neighboring state over the telephone, the
talk is commerce, but the subject of the talk is not.
I have now briefly reviewed some of the instances in the
history of the country which have resulted in the develop-
ment of national ideals and the expansion of national
power. My purpose has been to show that Congress,
FEDERAL SUPERVISION 355
under the Constitution and under the wise rulings of the
Supreme Court, has always had power sufficient to meet
any emergency, and that such emergencies have always
been met in the interest of the whole people. I might
rest here and have, I think, a very good case. Having
pointed out the inevitable chaos and confusion which
have followed the attempt entirely to supervise the busi-
ness of insurance by forty-six different authorities, having
shown the hopelessness of any attempt to secure efficient
administration through harmony of action amongst the
states, it is a fair deduction to say that a business invol-
ving such large interests, capable of such great usefulness,
a business so necessarily interstate in its nature, is entitled
somehow, some way, to just supervision and wise control.
And as that cannot be had under the present system,
relief from the general government must in time come by
force of circumstances and through the logic which has
so nobly served the people from the time of John Marshall
to the present day.
The force of such conditions has already asserted itself,
and unless I misread the mind of the Supreme Court in a
leading case, relief from an illogical and reactionary con-
dition is already in sight.
In 1902 the Supreme Court of the United States, in its
interpretation of the powers of Congress under the com-
merce clause of the Constitution, went farther than ever
it had gone before. The case before the Court was that
of Champion v. Ames, and will be familiar to you as the
"Lottery Case." * By this decision the validity of an act
of Congress for the suppression of lottery traffic through
international and interstate commerce and the postal
service was sustained. As I read the entire case the pre-
vious declarations of the Court that insurance is not com-
merce are therein substantially overruled; and, under the
doctrine laid down, it seems reasonably clear that if Con-
gress should now pass an act providing for federal super-
Champion v. Ames, 188 U. S., 492.
356 YALE READINGS IN INSURANCE
vision and regulation of interstate insurance, the Supreme
Court would be bound to sustain it.
Counsel for the lottery company urged that a contract
of lottery was substantially the same as a contract of
insurance, and that the principle in the two could not be
distinguished. The minority of the Court, for whom
Chief Justice Fuller delivered the dissenting opinion,
urged the same doctrine, and pointed out that the Court
had already decided that insurance contracts are not
articles of commerce; that they are not subjects of trade
and barter offered in the market as something having an
existence and value independent of the parties to them;
that they are not commodities to be shipped from one
state to another and then put up for sale. The logic of
which was that the sale of lottery tickets being indistin-
guishable in principle from the sale of insurance policies
must necessarily fall outside the commerce clause and
outside the power of Congress to regulate. In effect,
therefore, the relation of insurance to the commerce clause
of the Constitution was before the Court and was fully
discussed. Not only was it discussed in the briefs of the
appellant, but it was apparently a part of the oral argu-
ment; and the case of Paul v. Virginia was the leading case
upon which the minority of the Court based their dissent.
In delivering the majority opinion of the Court in the
lottery case, Mr. Justice Harlan, singularly enough, made
no reference to the insurance cases. Insurance, as such,
was not before the Court, and there was, therefore, no
controlling reason why the Court, if it believed that the
doctrine laid down in Paul v. Virginia was an error,
should so state. If, however, a majority of the Court
believed that the sale of lottery tickets could be distin-
guished in principle from the sale of insurance policies, it
is fair to assume that they would have said so. This
would have been the natural thing to do. The argument
of the lottery people was: Lottery is like insurance, there-
fore it is not commerce. The Court decided, without
FEDERAL SUPERVISION 357
refuting the argument on that point, that the interstate
sale and carriage of lottery tickets is commerce. In
reaching this decision the Court sought first for a defini-
tion of the word "commerce" as used in the Constitution,
and, amongst other things, said:
"Undoubtedly the carrying from one state to another
by independent carriers of things or commodities that are
ordinarily subjects of traffic and which have in themselves
a recognized value in money constitutes interstate com-
merce. But does not commerce among the several states
include something more? Does not the carrying from one
state to another by independent carriers of lottery tickets
that entitle the holder to the payment of a certain amount
of money therein specified also constitute commerce
amongst the states?"
After various citations, seeking rather to arrive at a
definition of what commerce is, the Court said:
"They (the cases cited) show that commerce among
the states embraces navigation, intercourse, communica-
tion, traffic, the transit of persons and the transmission
of messages by telegraph." (He would now add trans-
mission of messages by telephone.) "They also show that
the power to regulate commerce among the several states
is vested in Congress as absolutely as it would be in a
single government having in its Constitution the same
restrictions of the exercise of the power as are found in
the Constitution of the United States."
Then without specific reference to that case, the Court
met the doctrine laid down in Paul v. Virginia in this
language :
"It was said in argument that lottery tickets are not
of any real or substantial value in themselves, and there-
fore are not subjects of commerce. If that were conceded
to be the only legal test as to what are to be deemed sub-
jects of commerce that may be regulated by Congress, we
cannot accept as accurate the broad statement that such
tickets are of no value."
358 YALE READINGS IN INSURANCE
This language is very significant. In logical effect
it overrules the doctrine laid down in Paul v. Virginia.
It intimates that an interstate transaction may be com-
merce even if the article transported has no value in
itself. But, finding some actual value in a lottery ticket,
the Court brushed all other considerations aside and said:
"Lottery tickets are subjects of traffic, and therefore sub-
jects of commerce."
Every element of value which the Court found in lottery
tickets exists also in insurance policies. The Court found
that lottery tickets had value because of a large capital prize
to be paid to the holder of the winning ticket, because of
large deposits of money in different banks in the United
States insuring the prompt payment of prizes. Lottery
tickets were subjects of traffic because they could be sold,
and they had a value even in states which made the draw-
ing of lotteries illegal. The parallel between such condi-
tions and those which attach to insurance is almost perfect.
Whether the Court recognized at the time that the
doctrine in Champion v. Ames overrules the doctrine
in Paul v. Virginia, must be a matter of opinion until a
direct test is made under similar conditions; but it is
evident from the text of the two opinions then rendered
that there was a vigorous interchange of ideas between
the various members of the Court before the opinions
were arrived at.
"Could Congress," asked the Chief Justice, "compel a
state to admit lottery matter within it contrary to its own
laws?" And the answer of the majority opinion clearly
would be, "Yes, Congress could." It would simply be
unwise legislation, and by way of rebuttal the majority
opinion adds:
"The possible abuse of the power is not an argument
against its existence. There is probably no governmental
power that may not be exerted to the injury of the public.
The remedy is that suggested by Chief Justice Marshall
when he said : ' The wisdom and the discretion of Congress,
FEDERAL SUPERVISION 359
their anxiety for the people and the influence which their
constituents possess at elections, are in this, as in many
other instances, the sole restraints on which they have to
rely to secure them from abuse.'"
Apparently anticipating that some one might miscon-
strue the effect of the lottery decision, the Court said :
"We decide nothing more in the present case than that
lottery tickets are subjects of traffic among those who
choose to sell or buy them; the carriage of such tickets by
independent carriers from one state to another is, there-
fore, interstate commerce."
Insurance, with a hesitancy which is not readily under-
stood, has never made any serious attempt to secure
action by Congress. The insurance cases went before the
Court supported by no declaration from Congress that the
business is commerce, a situation which itself invited
an adverse conclusion. Whenever the question has been
raised since then, immediately Paul v. Virginia and the
other cases in which opinion has followed the doctrine
of that case have been cited, and the matter has been
dropped as hopeless. But the lottery case has vastly
changed the whole situation. These insurance cases may
now be treated as Lincoln treated the Dred Scott decision.
They "have not quite established a settled doctrine for
the country." The lottery case affords abundant warrant
for a request that Congress now act. A law should be
drawn on the theory that interstate insurance is commerce,
and that the power of Congress to regulate insurance in
its interstate relations is absolute. Presented with such
an act, the Supreme Court, with the deference which it
has always observed toward Congress, would, we believe,
be disposed to accept the declaration by Congress that
interstate insurance is commerce and is subject to control
by Congress. If a case were to arise under such an act,
it is difficult to see how the Court could render any
different decision from that in the lottery case. In the
lottery case the Court was probably seeking to put an
360 YALE READINGS IN INSURANCE
end to a great public evil, to abate a great public
scandal. It was obvious that the evil would not and
could not be ended by the states, and therefore the
power to deal with the situation, which must lie some-
where, was recognized as being in Congress under the
commerce clause.
Insurance would present a case in which the law and the
Court would be invoked, not to abate or destroy an evil,
but to conserve and protect a great public utility. It
probably would not go before the Court with the pressure
of a wide-spread public demand behind it. It would go
before the Court stating, first, that it is commerce; second,
that it is in distress and confusion and needs the relief
which a single authority alone can give; third, that it is
irrationally supervised; fourth, that it is harassed by a
multitude of exactions and requirements; fifth, that it is
unequally and unjustly taxed; sixth, that its operations
are, in practice, almost universally interstate and often
international; and seventh, that the governmental regu-
lations which it now observes have begun to narrow its
field of activities, a condition which, carried to its logical
conclusion, threatens ultimately to limit the operations
of every insurance company to the state of its domicile.
There must be relief somewhere. The problem will not
be solved by the states. It cannot be. The solution lies
in the commerce clause of the Constitution, and an act
of Congress, drawn on the theory I have suggested, would
bring insurance before the Court in a proper way. It
would be able to present its just claims, and they could be
argued from the standpoint of a powerful precedent. So
presented the question would at least be settled and insur-
ance would know finally whether it may go forward or not.
I do not believe, therefore, that an amendment to the
Constitution of the United States is necessary. I believe
that insurance is commerce. I believe the Supreme
Court, which has, as I see it, already said so by implication,
will ultimately say so by definite decree.
FEDERAL SUPERVISION 361
State supervision of insurance is not as logical as the
union of the colonies under the Confederation. The
colonies had in their Congress at least one point of contact.
There is no point of contact in state supervision, no com-
mon authority.
There was chaos under the Confederation; there are
chaotic conditions now under state supervision. The
colonies needed a larger, a stronger, a broader plan. They
found that plan in the Constitution. Society itself presents
much of the savage individualism that would certainly
have destroyed the colonies under the Confederation.
The rule of the strong is the law of society. Waste, in-
efficiency, brutality, selfishness, the lack of any compre-
hensive plan, make even the best of civilizations more or
less inhumane. Society would like to be humane, but it
has little time and no sufficient program. Society has
advanced only to that condition of efficiency which was
exemplified in the Confederation. It needs a Constitution
which shall provide a more perfect Union. Insurance
fire insurance as an instrumentality of credit and traffic,
and life insurance as a sure and just method of capitalizing
human life presents a plan, and, so far as it goes, an
adequate plan. But, like the Constitution, it operates, if it
operates effectively, directly on the citizen and not on the
several states. In other words, the plan of insurance
especially of life insurance is the plan of the Constitution.
Through federal supervision we seek the adoption of
this social constitution. When that is done, the chaos
of the Confederation, of state supervision, will disappear
as certainly as it did in 1789. Otherwise the outlook is
not hopeful. Reaction has begun. There is no escape
ultimately from one of two conditions: either federal
supervision, with an increase in the usefulness and the
strength of insurance, which always follows a change from
confused to sound methods; or, retreat. Retreat means
immeasurable loss; it means ultimate retirement for every
company to the confines of the state of its domicile.
362 YALE READINGS IN INSURANCE
Will insurance act? Will Congress act? Will Congress
and the Supreme Court, through the commerce clause of
the Constitution, or through some of the government's
implied powers, open the door to that larger field which
the business alone is qualified to occupy?
The door is there. It has swung open many tunes.
It opened and through it passed that stately procession
of commonwealths which has added thirty-three stars
to the flag.
It opened and through it passed the Monroe doctrine.
It opened and through it came the Emancipation Procla-
mation.
It opened and through it came a national currency.
It will open again indeed, it seems almost ajar now -
and through it in some form will come federal supervision
of interstate insurance
CHAPTER XXV
NECESSITY FOR REFORM OF LIFE INSURANCE TAXATION *
LAST year the life insurance companies of this country
paid $12,000,000 to the states as the share which the
holders of life insurance policies should contribute through
the companies to the expenses of government. A number
of methods were used by the states in collecting this amount.
Two millions were secured by means of fees levied primarily
for the purpose of supporting the state insurance depart-
ments. The rest was collected through taxes levied on
all the assets, or on part of them, and to a much greater
extent by means of taxes levied upon gross or net pre-
miums collected by the companies. The problem before
us is to determine whether this tax should be levied on
life insurance, and if it should, whether the ways in which
the tax is imposed are best adapted to secure justice, as
far as possible, to every one concerned.
Much of the discussion which has hitherto taken place
on the subject of insurance taxation has not accomplished
much. On one side have been arraigned those favoring
the imposition of heavy taxes on the life insurance business,
and on the other those who have taken the standpoint that
no taxes on insurance should be imposed whatever. Now
it is always of great advantage in clearing up a knotty
problem such as this one of insurance taxation to find out
as well as we can what are the motives actuating those
1 By Lester W. Zartman, Assistant Professor of Political Economy
in Yale University. Reprint of a speech delivered before the second
annual meeting of the Association of Life Insurance Presidents and
printed in the proceedings of that meeting.
363
364 YALE READINGS IN INSURANCE
who are advocating various lines of action. Let us find
this out in the present case. In the first place, upon what
have the advocates of insurance taxation based their
claim that the states ought to levy such a tax? A careful
study of the situation will reveal four different reasons.
They are, first: the belief that in many cases some tax
ought to be levied on the insurance business in order to
do justice as between all the citizens of the state. The
ideal of legislators is to place taxes so that they will bear
equally upon all citizens of the state. To secure this
object, they have believed that a tax ought to be levied
upon the insurance business in some way, and have adopted
the present systems as expedient methods. The second
reason why taxes are levied on insurance is that, in the way
in which they are imposed, the tax is easy to collect. Sup-
pose that a tax placed upon insurance corporations does
fall ultimately upon the policy-holders, as is claimed by
insurance experts, the policy-holders do not know it, and
if they do, they are unaware of the extent of the burden.
In other words, a tax on insurance is an indirect tax and
as such possesses all those characteristics which make
an indirect tax so pleasing to the legislator whose tenure
of office depends upon his pleasing his constituents. The
third reason why heavy taxes are imposed upon insurance
is popular ignorance as to the true nature of level premium
life insurance. Despite all attempts which have been
made towards educating the people in life insurance matters,
it is perhaps not too much to say that ninety-five out of
every one hundred people, yes, even more, do not under-
stand why it is necessary to accumulate a reserve. The
public sees millions of assets accumulating in the posses-
sion of a corporation. What more fit subject for taxation
than this? The legislator who may or may not know the
reason why the reserves are accumulating is only too
ready in most cases to gratify the popular demand that
the business should be taxed. Lastly, the reason why
heavy taxes are imposed upon life insurance is that in
LIFE INSURANCE TAXATION 365
many states the business is carried on almost entirely by
foreign corporations, that is, corporations created by other
states. In most of the states, a domestic corporation is
none too popular; the foreign corporation is an enemy
which should be hurt, and especially when it is one which
is supposedly taking millions of dollars out of the state
each year. Such a corporation in the popular judgment
should be heavily taxed.
It is not maintained that whenever a tax has been im-
posed on insurance that every legislator who voted for
the tax was actuated by all four of these motives. Some
have believed in a tax for one reason, some for another.
My object has been simply to indicate that no one cause
has been back of the action taken.
Three of these reasons for taxing the insurance business
will be taken up and discussed. So far as the heavy taxes
are due to popular ignorance of the necessity of accumu-
lating large reserves in level premium life insurance, all
that can be done here is to urge the spread of general edu-
cation on the subject. For this purpose nothing will be
more valuable than the wholesale failure of fraternal life
insurance which is bound to come during the next twenty
years.
On the other hand, those who have argued most strongly
against life insurance taxation have frequently taken a
wrong point of view. They have seen so clearly wherein
life insurance differs from any other business, and have
felt so keenly the injustice of the present methods of taxa-
tion, that they have urged that no taxes whatever should
be imposed upon the business, irrespective of the way in
which other businesses are taxed, and irrespective of the
system of taxation in general. They are wrong. The
question of taxing life insurance cannot be isolated from
the problem of taxation in general. To have a system of
taxation, we must have a plan which takes into considera-
tion all other taxes that are levied. No man, however
sound his judgment, or however great his reasoning power,
366 YALE READINGS IN INSURANCE
can work out an equitable system of taxing the railroads
in a state unless he also knows what taxes are levied on
factories, and on real estate. In the same way, a method
of taxing life insurance should take into consideration all
other taxes that are levied by the governing units having
jurisdiction.
Let us examine the situation. We have seen that taxes
have been collected in the shape of fees, in the shape of
taxes on assets and on premium income, for reasons which
have been stated. In the first place, not because of their
importance, but mainly to get the subject out of the way,
let us consider the fees that must be paid by life insurance
companies to maintain the supervisory departments of
the various states. From time to time during the past
century, the states found it necessary to establish control
over various kinds of businesses. First was banking, then
followed transportation and insurance. In most cases,
it was necessary to create new state officials to exercise
these supervisory functions. In order that the burden
upon the general state revenues should not be increased,
it was usually provided that the new officers should be
supported by fees collected from the corporations or in-
dividuals engaged in the industries supervised. If this
system of fees is applied to banking, transportation, and
other specific businesses, then it should be applied to insur-
ance. As a matter of fact, the fee system of supporting
supervising departments as it has worked out has not been
a success, and cannot be defended. It has resulted in
extravagant supervision. Fees have been made so large
that with the great increase in business much more has
been obtained than is necessary. To use up the surplus,
needless offices have been created, with the result that
supervision is costing much more than is necessary, and
much more than it would have cost without the fee system.
We now come to a consideration of the taxes levied on
life insurance for the support of government in general,
that is, to taxes based on assets and taxes based on pre-
LIFE INSURANCE TAXATION 367
miums. In this problem, as has been pointed out, there
are two distinct questions: first, should taxes be imposed
at all upon the insurance business, and secondly, are the
present methods the correct methods? Should level pre-
mium life insurance be taxed? One cannot answer this
question offhand. It all depends upon what the system
of taxation is in the state levying the tax. This makes
the problem complicated, for the system of taxation varies
greatly in different states. As a matter of fact, however,
the system of taxation in use in most of the states is the
general property tax. Under a general property tax sys-
tem, taxes are levied on the value of property as a basis,
including under the category of property on the one hand
such physical things as real estate, railroads, factories,
stores, warehouses, and goods, and on the other hand so-
called intangible property, namely, rights such as mort-
gages, bonds, and stocks. Without at this moment going
into a discussion as to whether the general property tax
system can be defended or not, we must accept it as the
existing condition to which the insurance taxation is to
be adjusted. Under this general property tax system,
when an individual owns real estate he is taxed according
to the value of the real estate he possesses. Should not
the insurance company which owns real estate also be
taxed? No one, so far as known, has had the temerity
to deny that it should not be so taxed. Then proceed one
step further. When an individual owns mortgages, bonds,
and stocks, with a general property tax law in force, he
is taxed upon their value. When these are owned by an
insurance company, should they not also be taxed as was
real estate when so owned? It is here that those who
oppose insurance taxation refuse to follow.
The reasons given for not believing in taxing insurance
are various. One says that it is a tax upon liabilities.
This is not true. What the state is aiming at is to get at
the bonds and stocks and the mortgages for purposes of
taxation. These assets exist, they belong to somebody,
368 YALE READINGS IN INSURANCE
they are subject to taxation. For the time being, the
insurance company is the owner, and it is forced to pay
the tax.
The chief argument used by those opposed to life insur-
ance taxation is that life insurance is a means of providing
for the future. A great deal is said of the widow and orphan
and that taxes levied upon insurance are particularly
burdensome. As a matter of fact all capital is laid by
for the future. A man does not in his own mind differen-
tiate between the capital which he spends for life insurance
and that which he invests in corporation and other securi-
ties. It is said that the man who pays his money for level
premium life insurance does not come to use personally the
capital which he saves. This may be true, but with sur-
render and loan privileges in practically all policies nowa-
days, he may use for himself the capital which he has
saved, and as a matter of fact frequently does so use it.
At any rate, the economic unit to be considered is the
family and not the individual.
It will not avail anything to say that taxation dimin-
ishes the volume of life insurance. Undoubtedly it does,
but does not a tax on any industry discourage it? Rail-
road transportation is important to-day, we could not have
the modern organization of society without it, there would
be more railroads if they were not taxed, but most people
believe that they ought to be taxed. Banking is a bene-
ficial business, the bankers would probably like to have
their taxes remitted, to do so would encourage the busi-
ness, yet we must tax the banking business. We must
have government. If we have it we must pay for it.
Taxes are not a penalty placed upon a people. The indi-
vidual is a gainer in so far as he can evade paying any
part of the costs of the government, but the people as a
whole gain because the taxes are levied and paid.
All these arguments against taxing the insurance busi-
ness are beside the mark. As a matter of fact, under a
general property tax system there is no reason why level
LIFE INSURANCE TAXATION 369
premium life insurance should not be taxed in some way.
Property rights surely exist, as exemplified by the accu-
mulation of assets by a level premium company. The
general property tax includes property rights as taxable
possessions. Therefore hi levying a tax upon life insur-
ance, the states, so far as they are attempting to bring
insurance taxation into conformity with the general prop-
erty tax systems, are justified in their action.
The simplest method which has been adopted to make
the insurance tax correspond to the general property tax
has been the taxes imposed directly upon the assets.
But a tax upon assets could not be adopted by all the
states. Successful companies are located in a few states,
the assets have been accumulated in the home office, the
states from which much of them have been collected have
not been able to get at these assets, and so they have
levied a tax upon premiums. Notwithstanding the other
arguments which have been made in favor of taxation of
premiums, perhaps the great underlying reason for the
almost universal adoption of the premium tax and its
persistent use has been the feeling that under a general
property tax these assets ought to be taxed in some way.
Why should they not be taxed under a general property
tax system? With every level premium policy there are
certain investment features. Level premium insurance
involves the necessity of accumulating in the early years
of the policy in order that the cost may not increase in
the later years. It is claimed that it is the policy-holder
who pays the tax. That is true. Why should he not
pay it if the state in which he lives continues in force the
absurd, mediaeval, general property tax. Take a con-
crete example. Consider two men, A and B. Each has
$500 of income yearly with which he wishes to provide
for the future. A buys a natural premium life insurance
policy for $10,000 at an initial cost of $120. The remainder
he uses to purchase bonds. B buys a 20-year endowment
policy of $10,000 from an insurance company for $500
370 YALE READINGS IN INSURANCE
annual premium. The company uses $120 of the premium
at the start to pay the current death losses, and invests
the rest in precisely the same kind of bonds which A pur-
chases. Under a general property tax A is taxed upon
his investment in bonds. Under the same system of taxa-
tion should not B also be taxed upon the bonds which he
has purchased through the medium of the company? If
the tax burden is to be borne according to ability to pay
and ability to pay measured by what a man is worth,
both A and B should be taxed alike.
This is the answer to the question, Should life insurance
be taxed? The answer is yes, if we are to continue levy-
ing a general property tax, including under it, as taxable
objects, mortgages, bonds, stocks, and similar property
rights.
But it does not follow from this that the ways in which
the states have levied the tax upon the business have been
just or practical. Neither the tax on assets nor the tax
on premiums can be justified. The state in which a com-
pany is located does not have the moral right to levy a
general property tax upon all the assets of such companies
as happen to have their home offices in that state. No
successful insurance company has gathered its assets
even for the most part from the savings of citizens within
the state where it is located. Its assets are the result of
premiums that it has collected from every part of the
country. These assets belong in large part to citizens of
other states. A life insurance company from the stand-
point of taxation is to be compared to a trust company
or a savings bank. The assets which it possesses are de-
posited for the time being in the home office by the policy-
holders, to be held until the policies mature. Few state
legislatures have gone to the extent of taxing a trust com-
pany or a savings bank upon its deposits. Why then
should they levy a tax upon the deposits in a life insur-
ance company? There would be more justice in a state
taxing its trust companies upon their deposits, than taxing
LIFE INSURANCE TAXATION 371
an insurance company upon its deposits, since trust com-
panies are more local in their activities. Most of the
deposits of a trust company belong to citizens of the state
in which it is located. To levy a tax upon its deposits
could be justified on the ground of expediency in the
collection of the tax. Yet few states have taxed such
deposits. How much more then should they not tax the
insurance company upon its assets which do not belong
to citizens of that state? Whatever rights a state may
have in regard to the share of the assets belonging to its
own citizens, it does not have the same right over assets
belonging to citizens of other states. With but few notable
exceptions, the states have realized this and have aban-
doned the tax on assets.
Neither does it follow from the fact that under a general
property tax system insurance ought to be taxed that the
states should levy a tax upon premiums. A lax levied
on premiums can be defended on one ground only, that of
expediency. It is an easy tax to collect and this is a great
consideration in the mind of the administrator. But the
system of taxing insurance by levying on premiums is
an illogical method, the application of which leads to three
classes of discriminations:
1. Discrimination between policy-holders of different
states.
2. Discrimination between different classes of policy-
holders in the same state.
3. Discrimination between policy-holders and non-policy-
holders.
Before discussing these discriminations it is well that
we should understand in unmistakable language who pays
the tax on life insurance. Undoubtedly it is the policy-
holder. This fact is so well understood by those who
know the nature of life insurance that no attention would
need be given it, if there were not so many who do not
understand the theory of level premium life insurance.
To-day level premium life insurance is sold in two ways:
372 YALE READINGS IN INSURANCE
by means of participating policies, and by means of non-
participating policies. In participating insurance, insur-
ance is secured at absolute cost. Whatever increases that
cost increases the expense of insurance to the policy-
holders. Taxes increase the cost of insurance by even
more than the amount of the tax, therefore they increase
the expense of insurance to the holders of participating
policies. Most policies are of the participating kind, but
it can be shown in precisely the same way that the
holder of the non-participating policy also pays the tax
on insurance. The non-participating policies are sold at a
fixed rate. This rate must be high enough to cover all
the costs to the company selling such a policy and leave
a margin for profit. The margin of profit must remain.
In every business where capital is invested there must be
some profit, or capital will leave that industry. This is
true of non-participating insurance. If the cost of fur-
nishing insurance be increased, the price to the man who
wants it must be increased. Decrease the cost and com-
petition between the companies will reduce the price to
the policy-holder. A tax is one of the costs. An increase
in it means higher prices for insurance. A decrease means
lower prices. Thus it is that no matter how life insurance
is sold, the tax upon the business is borne by the policy-
holders.
Having established the fact that taxes on premiums
are ultimately paid by the policy-holders, we are now
ready to discuss the discriminations due to the present
method of imposing taxes on premiums. The first class
of discriminations resulting from taxes levied on premiums
is due to the fact that some states levy much heavier
premium taxes than other states. Five state legislatures
have thought that a tax of 1 per cent, upon gross premiums
is the right amount in order to equalize the burden of
taxation as between policy-holders and non-policy-holders
in their states. Six other states have thought that 2 per
cent, is necessary to make the burden equal as between its
LIFE INSURANCE TAXATION 373
citizens holding policies, and those not holding policies.
But how does such a tax work out as between policy-
holders of different states? A life insurance company does
not, it should not, confine its activities to one state. To
do so would be bad for the citizens of every state. To
do business on such a small scale would increase the ex-
pense of insurance, and it would not allow the companies
to obtain that wide distribution of risks which is absolutely
essential to safety. Therefore we find an insurance com-
pany doing business in a large number of states, paying
taxes of | per cent, in one state for its policy-holders upon
their premiums and 2 per cent, in others. In theory life
insurance ought to cost more in a state levying a tax of
3 per cent, on premiums than in a state levying only 1
per cent. It does not. Why? Because the companies
cannot split up their business into forty-eight units and
treat each one independently, giving the policy-holders in
each their just deserts. The practical difficulties of such a
course of action are insuperable. It would require the uni-
form action of all companies in placing the burden of taxa-
tion upon the policy-holders of a specific state, and such
uniform action is impossible. The business is too intensely
competitive to allow of uniform action in such a matter
vitally affecting the policy-holders. Even if the com-
panies could once agree, they would not be able to prevent
this first class of discriminations, as the states levying
the high taxes would in all probability pass legislation
prohibiting such action. Therefore notwithstanding the
higher tax in one state than in another, life insurance costs
the same in all. The companies accept the tax as one of
the general costs of the business and apportion it upon
all policy-holders equally. The result is that premium
taxes as they are levied to-day, high in one state, and low
in another, force policy-holders in one state to help bear
the burdens of government in another state. Such a
condition of affairs is repugnant to our sense of justice.
In the second place, a tax on premiums discriminates
374 YALE READINGS IN INSURANCE
and is unfair in that it does not bear equally upon all
policy-holders. The theory of the general property tax
is that it is levied on individuals according to their ability
to pay, ability to pay being measured according to the
value of their property interests. A tax of a fixed per-
centage each year upon the level life insurance premium
is a tax levied upon the individual irrespective of his
ability to pay. The policy-holder who pays $120 as the
second renewal premium on a 20-year term policy, on
which a tax of 2 per cent, is levied, is really paying a tax
of 10 per cent, upon the value of the equity which he
possesses, while the man who is paying in his twentieth
renewal premium of $500 on an endowment policy, and
is taxed $10, is taxed at the rate of only a fraction of
1 per cent, upon the equity which he possesses. A tax
levied in such a way is unjust and unfair.
The third way in which taxes as they are now levied
on life insurance are unjust is that they discriminate
between policy-holders and non-policy-holders in the state
levying the tax. It has been urged in this paper that
under a system of taxation based upon the general property
tax insurance ought to be taxed. This is true. But
whenever a modification is made in the general property
tax affecting non-policy-holders, a modification should
likewise be made in the tax upon holders of life insurance
contracts. This has not been done. In all but four states,
if a citizen of a state buys shares of stock in a corporation
created by that state, he is exempted from the general
property tax upon those shares. If another citizen of the
same state, instead of buying the shares directly, buys
life insurance, and the company purchases the same shares
of stock, no exemption is made in the tax which the com-
pany directly, and the policy-holder indirectly, pays to
the state. If an exemption should be made in one case,
it should be made in the other. It is not, and in this way
the policy-holders are discriminated against.
Besides resulting in discriminations as just described,
LIFE INSURANCE TAXATION 375
a tax upon premiums is illogical, that is, if the tax is
collected by the state from the companies. If a state
decides that premiums must be taxed, it does not follow
that it has a right to collect the tax from the insurance
companies. The companies have a fixed contract with
their policy-holders. The annual premium is determined
when the contract is made by the company, and the state
insists that this premium must not be increased no matter
how urgent are the needs of the company. When a state
levies a tax upon premiums, the life insurance company
cannot return the reserve upon its policies in that state to
the policy-holders, thus terminating its contracts, and in
this way avoiding the tax. The state demands that the
contracts be carried out to the stipulated time and for
the amounts previously agreed upon. At the same time,
the state assumes the right to exact payments from the
companies which may imperil their ability to carry out
their contracts. To say that the states probably will not
levy such a burdensome tax is not meeting the objection.
The right to levy a tax involves the right to levy a heavier
one. The situation is illogical. The state cannot con-
sistently rule that the contract must be a fixed contract,
and at the same time make it impossible for the com-
panies to carry out their contracts.
The conclusion then is that even under a general prop-
erty tax system the tax on life insurance premiums can-
not be defended. It is unfair as between citizens of the
same state, unfair as between different classes of policy-
holders, unfair as between insurers and non-insurers, and
essentially illogical.
Two things can be done: first, abolish the general
property tax or modify it in such a way as to abolish its
offensive features, or secondly, if this cannot be done, to
levy a tax on life insurance in such a way as to make it
fit in properly with the general property tax as it now ex-
ists. The better solution would be the first. The general
property tax system must sooner or later be abolished.
376 YALE READINGS IN INSURANCE
Its faults are so evident, its injustices are so burdensome,
that a radical change must be made. If the system is to
be continued in its main features, at least a careful dis-
tinction must be made in the objects which are subject
to the tax. Most of the difficulties in our system of taxa-
tion are due to the confusion which exists in the minds of
men between wealth and the right to the use of wealth.
Suppose a man owns a farm worth $10,000. The farm is
wealth and as such it is subject to taxation. The deed
which he possesses is an evidence of the right of ownership
in that wealth. No state taxes deeds to real estate. Let
us assume further that there is another man in the com-
munity who has no wealth. The assessor on making his
annual inspection finds that these two men together pos-
sess wealth valued at $10,000. During the year the first
man sells his farm to the other for $10,000, taking a mort-
gage upon the farm for the full amount. This year the
assessor finds one man the legal owner of land valued at
$10,000 and the other the owner of a mortgage for the
same amount. Instead of finding $10,000 worth of tax-
able value, he finds $20,000. Has the wealth of the two
men increased? Is the ability of the two increased doubly?
If it has, what an easy thing it would be for a community
to grow rich. But no new wealth has been created. No
greater ability to pay exists than existed before. Yet
practically all our sovereign states act on the assumption
that there has been a change, and tax the mortgage as
well as the real estate. Two taxes are paid where one
was paid before. This is wrong. It is double taxation and
as such is unjust.
The same condition exists in the taxation of corporations
and corporation securities. If a man lives in one state
and owns an unincorporated enterprise in an adjoining
state, he is taxed only in the state where the factory or
mine or other enterprise is located. Let him incorporate it,
and issue the shares of stock to himself in place of the old
deed to the wealth, and he will not only pay the same or
LIFE INSURANCE TAXATION 377
a larger tax upon the wealth of the corporation in the state
where it is located, but he will also now pay a tax upon the
same value in the state where he lives, because shares of
capital stock are subject to taxation. Has his ability to
bear the burden of taxation increased? Is he wealthier
than before? Not at all. He is simply the victim of
double taxation.
What is the remedy? Let the states give up the plan
of taxing wealth and at the same time evidences of owner-
ship in that wealth. It is seriously unjust and has the
baneful immoral effect of making men dishonest in their
relations with the government. Give up taxing one thing
or the other. From the theoretical standpoint it makes
little difference which one, wealth or evidences of owner-
ship in wealth. From the practical standpoint, wealth
as the concrete, physical thing should be taken as the basis.
Since it is physical, and therefore can be seen and found,
it would simplify the problem to take wealth, meaning by
that term the material objects, as the basis of taxation.
In no other way can the injustices of the present methods
as easily be abolished.
What would be the effect of this upon insurance taxa-
tion? It would mean that an insurance company would
be taxed upon its real estate and that alone. The bonds,
stocks, mortgages, notes, all these are evidences of owner-
ship and hence would not be taxed. Why should they?
The corporation which issues them is already taxed, and
they should not be taxed twice. Neither under this sys-
tem would the policy-holders be taxed in the way they
are now. Their equity in the assets is a right to bonds
and stocks and mortgages, and these, as we have seen,
would not be taxed.
To levy all taxes on wealth exempting property rights
would be a real solution of the problem of taxation. But
like most good solutions it may be difficult to accomplish.
How about compromise measures? Cannot a system be
devised for taxing life insurance which can be grafted on
378 YALE READINGS IN INSURANCE
to present systems of taxation, and thus not involve such
a wide-spread change? Such a method of taxation can be
devised. What I have to suggest is that the states give
up their taxes on assets and taxes on premiums, and make
the policy-holder liable for taxation upon the reserve
value of his policy. This method would fit in well with
a general property tax. With the modern policy, the re-
serve upon a policy is always at the disposal of the policy-
holder. He can borrow from it and he can withdraw it
if he cares to do so. In what essential way does the
reserve upon a policy nowadays vary from the deposit
placed in a trust company? That the insurance com-
pany so far as it is the holder of assets has always been
considered simply as the trustee of the policy-holders'
funds is amply demonstrated by a study of insurance litera-
ture. Most states do not tax trust companies upon their
deposits, but they do tax the depositor upon the amount
of his deposit. If the states are going to levy a general
property tax and under this tax life insurance, the tax
which they should impose is a tax upon the individual
policy-holder according to the value of his deposit or
reserve with the company.
Why should not the tax, if it is to be imposed at all, be
imposed in this way? Any unprejudiced man can be shown
hi a few minutes' time that it is the policy-holder who pays
the tax under the present system. This is so easy of
demonstration that it would be a waste of time to make
the assertion if it were not the fact that many legislators
have not realized it as the true situation. The policy-
holder pays the tax but he pays it indirectly, and thus
does not know how much he is paying. If the truth were
known, it would probably show that the policy-holder is
in general paying a heavier tax than is the average holder
of personal property. Furthermore, the tax is grossly
ill-proportioned, amounting to from 10 to 15 per cent,
upon the value of the equity which the policy-holder pos-
sesses in the early years of the policy. This is wrong. We
LIFE INSURANCE TAXATION 379
may not believe that the investor in life insurance should
receive any special consideration, but we should insist
with all our power that no extra burden shall be placed
upon him.
How should such a general property tax as has been
suggested be levied upon life insurance? That is a prac-
tical question for the practical statesman to solve. Two
methods may be suggested. First, make the reserve value
subject to local assessment just as is an investment out-
right in securities, or a deposit in a trust company is made
subject to local taxation. The objection to this plan is
that it would result in much evasion. Of course it would.
But if the states are going to hold on to the general prop-
erty tax system with all its evasions and its glaring irregu-
larities, it is perhaps but fair that the man who invests in
life insurance should have the same privilege of evading
the tax upon his insurance reserve. This would be taking
a step in the wrong direction for tax reform, but if justice
cannot be done in any other way, it is justice that all shall
have an equal chance.
The other method would be to retain the insurance tax
as a state tax, and have the companies hand in to the
state board of tax commissioners a list of all policy-holders
in the state, with the values of their reserves. Upon these
values the state could impose a fair tax to be collected
directly from the individual policy-holders. This would
do away with the evasion resulting from local taxation.
What results would be obtained if these suggestions
were carried out? It would result in justice as between
the policy-holders of various states. It is absolutely
wrong that the policy-holders of one state should be taxed
to support the government of another state as is done at
the present time, and will continue to be done if the method
of taxing assets and premiums is continued. The plan
would secure justice as between individual policy-holders,
something equally to be desired. Lastly, it would result
in equalization of the rates of taxation between purchasers
380 YALE READINGS IN INSURANCE
of insurance and other taxpayers. The policy-holder
pays too much to-day. He does not object because he
does not know how much he is paying. Follow the plan
here suggested. Substitute a direct tax for an indirect
tax and we can safely leave it to the intelligent body of
policy-holders to look after their own interests.
Is it possible to secure this reform in life insurance, a
reform which would do away with discriminations between
policy-holders of different states, between different classes
of policy-holders in the same state, and between policy-
holders and non-insurers? Some say not. They urge
that for a legislator to substitute a direct tax for an in-
direct one would sound his political death knell. It is
to be hoped that it would not; that if such a measure
were carefully explained to the public, that public opinion
would be intelligent enough to appreciate the situation.
But if this compromise reform, a reform which means
simply the substitution of a direct tax for an indirect tax,
involves such a radical change in the existing system of
taxation that it stands no chance of being adopted, shall
we advocate no reform whatever in insurance taxation?
No, if we cannot get a reform which will eliminate all three
classes of discrimination resulting from the premium tax,
let us get a reform which will eliminate one of the discrimi-
nations. There is one class of discriminations which has
been discussed which the policy-holders have more than
the right to ask the states to eliminate. They have the
right to demand that it should be eliminated. Reference
is made to the discrimination between policy-holders of
different states caused by one state levying a tax rate of
2 or 3 per cent, upon premiums while other states impose
less than 1 per cent. Discrimination of this sort can be
eliminated by all the states levying as nearly as possible
a uniform rate of premium taxation upon all the com-
panies.
Uniformity among the states can be secured in two ways,
by the states with a low rate increasing their rates to the
LIFE INSURANCE TAXATION 381
level of the high-rate states, or by the high-rate states
lowering their rates. It is much to be desired that uni-
formity should be obtained through the decrease in rates
by the high states. It would be a move in the right
direction. Since some reform is better than none, and
since it does seem possible at this time to secure this
much, if nothing further can be secured, let us at least
secure uniformity of rates of taxation upon life insurance
in the various states.
A brief summary of this extended discussion may not
be out of place. It has been maintained:
1. That under the existing general property tax system
in force in most of the states, some tax ought to be levied
on life insurance.
2. That present methods of taxing insurance are unjust.
3. That the best remedy would be for the states to
abolish the general property tax, or at least to amend it
in such a way as to include only tangible wealth as sub-
ject to taxation.
4. That if the general property tax cannot be abolished,
substitute for the indirect tax upon the policy-holders a
direct tax upon them, making the reserve values of policies
subject to taxation, not to the company, but to the policy-
holders directly.
5. That if no other reform can be secured, the policy-
holders have a right to demand uniform rates of taxation
by the various states, uniformity being secured generally
by a reduction in the rates of the high-tax states.
CHAPTER XXVI
INDUSTRIAL INSURANCE l
INDUSTRIAL insurance is of comparatively modern
origin in this country. All forms of life insurance are the
result of slow development in theory and practice, but for
industrial insurance it may be claimed that it is the out-
growth of ages of experiments to provide, by an effective
and absolutely certain method, for the most simple needs
of the mass of the population at the hour of death. The
mass of the people are confronted by the fact that death
means a large expense, usually a burdensome debt, to meet
the cost of burial, or a heavy draft on slender savings, the
result of years of abstinence and foresight, or the alterna-
tive of state or private charity. However remote the
chance of death may appear at times, it is an ever-present
contingency, for which an effective provision has become
a necessity of civilized life.
Industrial insurance is so called because the system is
primarily designed to meet the needs of wage-earners
employed in manufacturing industries, and the weekly
premium payments coincide with the weekly payment
of wages and salaries. The premiums are from five cents
to seventy cents a week. The system provides for family
insurance on a comprehensive plan, and every member
of the family at ages one to seventy, if in good health, is
insurable. The weekly premiums for a family of five
average about thirty-five or forty cents, being respectively
1 By John F. Dryden, President of the Prudential Insurance Com-
pany, Newark. Reprinted from pages 184-199 of the " Yale Insurance
Lectures, Life."
382
INDUSTRIAL INSURANCE 383
ten cents each for the father and mother and five cents
each for the children. The amounts of insurance vary with
age, but average about one hundred and fifteen dollars.
For children under ten the average is thirty dollars,
and for persons over age ten one hundred and fifty
dollars. The system is sufficiently elastic to meet the
needs of the most humble laborer, even though advanced
in years, as well as the requirements of the more prosperous
mechanic or skilled workman, able to pay premiums for
enough insurance to provide for more than the immediate
needs of his family after his death. The premiums are
collected weekly from the houses of the insured by author-
ized agents, who also solicit for new insurance. While
the collection of weekly premiums necessarily increases the
cost of insurance, the difference is relatively small when
the convenience of this method is taken into account.
Attempts, especially by the British government, to trans-
act a weekly payment system of life insurance without
collectors have failed. Attempts to transact a life insur-
ance business on the monthly payment plan have not been
successful on any considerable scale. These are the
simple elements of a business which has grown to immense
proportions during the thirty-four years since The Pru-
dential Insurance Company of America was organized, in
1875, as the first American company to transact this form
of life insurance in this country.
Industrial insurance had its origin in England, and the
evolution of the business can be traced backwards by an
unbroken record through friendly societies and burial
clubs to the trade and craft guilds of the fifteenth cen-
tury. The development was the inevitable result of
economic laws making for a higher degree of efficiency and
security in social institutions. This is not the place, how-
ever, to go into the history of these interesting associations
for social betterment under different conditions of life.
They served their purpose at the time, but they would ill
meet the conditions of the present.
384 YALE READINGS IN INSURANCE
In 1853 a comprehensive investigation was made by a
parliamentary committee into the practice of life insurance
companies in England, and among other conclusions the
committee advanced the view that "the ground hitherto
occupied by these useful institutions (life insurance asso-
ciations) has been comparatively limited, and that their
application is capable of a great extension not only in the
higher and middle classes of society, but also among the
humbler classes, to whom it has recently been very con-
siderably applied."
Acting on this suggestion, The Prudential of London,
organized as an ordinary life insurance company in 1848,
made inquiries and ascertained that almost without
exception the then existing so-called friendly societies
and burial clubs were in an unsound financial condition,
while many indeed had failed with disastrous results to the
people they were supposed to benefit. A modest attempt
had been made to transact the business of life insurance
for wage-earners on a commercial basis, but the results
had not been very encouraging. The Prudential, however,
realized the immense opportunity to extend the principles
of life insurance to the broad field of workingmen's insur-
ance in general. On the recommendation of the best
available actuarial talent, required for the construction of
tables and plans, and after purchasing the existing business
of a few small companies, The Prudential, in 1854, com-
menced the business of industrial insurance, destined to
make it the foremost life insurance company in the world.
During the fifty years which have passed since the intro-
duction of industrial insurance the business has been ex-
tended to almost all civilized countries with more or less
success, but the development has been the greatest hi
English-speaking countries, and there are now more than
forty millions of industrial policies in force in the world.
Of this number over one-half are in force in the United
Kingdom, about four millions in Germany, and not far
from one-half a million in Australia.
INDUSTRIAL INSURANCE 385
There are now in force in this country almost fifteen
million industrial policies, or, with five persons to a family,
it would appear that about three million families in the
United States are insured with industrial companies for
sums which range from $15 to $1000. When we take
into consideration the fact that there are about fifteen
million families, we have it that at present about one
family out of every five is financially interested in the suc-
cess and future of this form of life insurance in the United
States. When we further consider the fact that the total
number of savings banks depositors is only about seven
millions, although we have had savings banks since the
beginning of the nineteenth century, and industrial insur-
ance for only a little more than one-fourth of that period,
you will agree that industrial insurance is a social institu-
tion of great magnitude.
The office practice of industrial insurance is in a general
way almost identical with the practice of an ordinary
company, using that term in a technical way, and nearly
all of the industrial companies transact, in fact, an or-
dinary business as a complement to their particular system
of family insurance on the weekly premium payment plan.
The essential points of difference arise out of the vast
number of necessary office transactions resulting from the
weekly collection of premiums from the houses of the
insured and the character of the class of risks assumed
under industrial policies. It would carry us too far to
discuss, even in a general way, the office and field admin-
istration of an industrial company, and my remarks are
limited to essential points.
First. The calculation of premium charges for both
infantile and adult risks is upon an actuarial basis derived
from trustworthy mortality tables. The premiums vary
with age, but there are practically no restrictions as to
occupations or residence, Careful inquiry is made as to
the moral character of the risks assumed.
Second. The collection of premiums from the houses
386 YALE READINGS IN INSURANCE
of the insured is made by authorized collectors, or agents,
who are under a most effective system of supervision, sup-
plemented by an audit system of weekly accounts and
debits and credits, by which defalcation, fraud, and in-
tentional errors are made difficult and, generally speaking,
impossible. Every policy-holder has a premium receipt
book in which the weekly payments must be entered by
the agent, while at the same time a corresponding entry
is required to be made in the agent's collection book.
The system has worked so well that during the half-century
since industrial insurance has been in operation no im-
portant alterations have been made in this branch of office
practice.
Third. To every person insured a policy is issued which
in all essentials conforms to the contract issued to ordinary
policy-holders. The language used is so plain and free
from confusing technicalities that it is seldom indeed that
there are controversies or misunderstandings between the
company and the insured. The contract provides for a
definite sum payable in the event of death in return for a
definite weekly premium, but in addition certain privi-
leges and options are granted to the insured, which provide
for a paid-up policy after three years, for additional bene-
fits after five years, for cash dividends after fifteen years,
and for cash surrender value after twenty years.
Fourth. Every policy contains a provision that all
premiums must be paid in advance on the Monday of the
week for which they are due. In the event of a policy
being more than four weeks in arrears for non-payment
of premiums, the agent is required to report the policy
for lapse. Most of the lapses of industrial policies occur
during the early weeks of policy duration, when only a few
premiums have been paid. Policies can be revived with-
out difficulty provided the arrears do not exceed one year,
but it is required that the applicant for revival pass a
medical examination, or furnish other evidence of being
in good health. There are no fines and every facility is
INDUSTRIAL INSURANCE 387
granted to keep the policy in force. If the arrears exceed
thirteen weeks the policy may be revived without the
payment of arrears, but in place thereof a non-interest-
bearing lien will be issued, the amount of which is deducted,
in the event of death, from the face value of the policy.
Fifth. In the event of death every effort is made to
pay the claim as soon as possible to carry into effect the
general intent of industrial insurance, to provide for
the burial expenses of the insured. The proof of death,
however, requires to be supplemented by documentary evi-
dence (a) claimant's certificate; (6) certificate of iden-
tity; (c) certificate of the superintendent or assistant
superintendent; (d) certificate of the undertaker; (e) cer-
tificate of the attending physician.
Sixth. The agency system of industrial companies is in
a measure unique and deserving of special mention. A
large number of agents are necessarily required to conduct
the office and field operations of a company insuring
millions of risks, for I may say in passing that 95 per cent,
of the entire industrial business is carried on by three
companies. The office organization consists of a large
number of departments, which cannot very well be dealt
with on this occasion. The field operations require a super-
intendent in charge of a district, who has the assistance of a
number of assistant superintendents, under whom is an
agency force that varies in number according to the size
of the territory. On an average an agent collects from
about five hundred to six hundred policy-holders, but his
compensation is so adjusted that it is necessary for him
in addition to solicit for new business. By this means it
is to his pecuniary interest to prevent the lapsing of
policies and to increase as far as possible the number of
policies in force. The amount of collectible premiums is
called the "debit," and the agent is held responsible for
the condition of his accounts. His books and papers are
periodically inspected by assistant superintendents, who
have a thorough knowledge of the business and are per-
388 YALE READINGS IN INSURANCE
sonally familiar with all the insured, so that in the event
of the resignation or death of the agent there is no inter-
ruption or intermission in the collection of the weekly
premiums.
We may now consider the place of industrial insurance
in practical economics. President Hadley very properly
draws a distinction between public and private wealth,
and points out that "the growth of material wealth de-
pends upon causes far deeper and more profound than those
that the statesman can control." In life insurance we have
a species of material wealth representing more than two-
and-a-quarter billions of accumulated funds as security
for the faithful discharge of promises made and obliga-
tions incurred, and in addition a vast amount of economic
security resulting from the successful elimination of a
risk inherent in the uncertainty of life. May we not
properly speak of life insurance, and in particular of
industrial insurance, as "public wealth" in the true and
complete sense of President Hadley 's definition? He
insists upon the supreme importance of security and the
institution of property, to render possible the progress,
social, moral, and ecomonic, of the race, for it is only by
accumulated wealth that men are more or less removed
from the immediate and destructive pressure of poverty.
While, no doubt, much of human poverty is unavoidable
and inherent in the very constitution of society, a vast
amount of existing misery is preventable by the develop-
ment of right habits of saving and insurance by frugality
and intelligent industry. Abstinence from the immediate
use of money as soon as earned is of the utmost importance
in the economic development of the people. No other
means have yet been discovered to insure the economic
security of the masses as effectually as by insurance.
Hadley well says that "Great evils arise from trusting too
much to Providence and not making a distinct personal
effort to meet the contingencies of life," and no method
has yet been devised by which the contingency of death,
INDUSTRIAL INSURANCE 389
especially of premature death, can be better provided for
than by life insurance. While the sphere of industrial
insurance is limited to security against relatively small
losses, they are large indeed when considered from the
viewpoint of the masses who consume their weekly wages
almost as soon as earned.
The place of life insurance in social economics is most
important. The accumulation of capital, the struggle
of the masses for property and economic independence,
the possibility of a more equitable and general distribution
of wealth, are all problems which rest fundamentally upon
the power and habits of the people to save. But saving
habits are acquired only with great difficulty and the
ordinary savings bank is far from being the evidence of
workingman's thrift which it is often assumed to be. Mr.
Carroll D. Wright estimates that not more than one-half
of the sum on deposit with savings institutions represents
accumulations of wage-earners, the remainder being the
investments of the relatively well-to-do. Industrial in-
surance serves both an economic and a social purpose. It
is the most effective, even though perhaps the most ele-
mentary, education in thrift which has yet been developed.
The weekly premium payments develop systematic habits
of saving and lead to the accumulation of millions which,
but for this method of insurance, would be expended largely
for needless and often for vicious purposes. The usual
method of accumulating savings banks deposits is in
marked contrast to industrial insurance premium pay-
ments, in that as a rule deposits are made at irregular
intervals and not in the small sums which represent true
foresight, frugality, and abstinence from needless expendi-
tures.
The weekly premium payments soon become a habit
of life, even with the young, who in time learn to pay for
their own insurance the five or ten cents a week necessary
to meet the expense. The education in thrift, however,
does not end here. Systematic habits of saving are de-
390 YALE READINGS IN INSURANCE
veloped which have their effect in other directions, and
the conclusion is quite in accordance with our experience
that general saving habits, accumulations hi savings
banks, or payments for building loans, follow industrial
insurance rather than precede it, and are most widely
diffused among the people where industrial insurance is
most general as a mode or method of family protection.
For illustration, in this country, Philadelphia, and Dayton,
Ohio, are often referred to as cities in which building and
loan associations have made most progress, but they are
also cities in which industrial insurance is most general
as a method of family insurance. In England, it is claimed
on good authority that school savings banks and penny
provident funds have been most successful in Manchester,
Liverpool, and Birmingham, but these are also the cities
in which industrial insurance is almost universal, so much
so that at least four-fifths of the entire population hold
industrial policies.
Industrial insurance is not only of great value as an aid
to the development of general saving habits and the
accumulation of property, but it is a contributory agent
of great importance in the progress and public apprecia-
tion of other forms of insurance ordinary life, fraternal,
accident, fire, etc. Industrial insurance has enormously
extended the field of other forms of insurance by familiar-
izing the mass of the population with the elementary prin-
ciples and beneficial results of a method of life insurance
especially adapted to special needs. It came into existence
in the United States at a time when public faith in finan-
cial institutions, savings banks, ordinary life insurance
companies, and especially so-called workingmen's insur-
ance on the cooperative plan, was profoundly shaken by
panics and financial depressions and evidences of mis-
management and fraud. It has kept faith with the people
and every promise made has been faithfully performed.
Security, stability, permanency has been the watchword,
and no social institution of to-day is established on a more
INDUSTRIAL INSURANCE 391
scientific and trustworthy theory of mortality and finance
than the vast structure of industrial insurance with its
forty millions of policy-holders in different parts of the
world. It is not going too far to say that this method
of life insurance protection forms to-day one of the most
effective measures making directly or indirectly for accu-
mulation of property. However small the premium pay-
ments and however small in many cases the individual
returns, the fact remains that fifty-two times a year pay-
ments are made, and these lessons in thrift and accumula-
tion are taught and brought home to an element of the
population which is most in need thereof.
We often hear the old complaint that there is no real
progress, but only a shifting of wealth, by which the poor
are made poorer and the rich grow richer. Relatively this
is true, for, by contrasts, in a more advanced society the
condition of the very poor becomes more striking and
apparently less necessary. Actually, however, our progress
during the past half-century has been real and of vast
benefit to the mass of our population, who in an ever-
increasing proportion are attaining a relatively high degree
of economic security and social well-being. The object of
all thrift agencies is to aid persons to become savers in the
first instance and to accumulate a fund for future contin-
gencies, but, second, "that they may have the conscious-
ness of being removed (by their own efforts) from the
burden of relief receiving."
Industrial insurance provides a sum certain, from $15 to
$1000, at a time when in many households no ready money
is otherwise available for the expenses incident to death
and the last illness. The problem reduces itself to the
necessity that the burial of the father or the child must be
paid for, that it will cost at least from $15 to $100, and
that this sum must be provided for either by the convenient
method of industrial insurance or by a draft upon a pos-
sible sum accumulated during years of careful husbandry
of slender resources or by incurring a non-productive debt
392 YALE READINGS IN INSURANCE
with the undertaker and the doctor. With the last as
the alternative, it is an open question whether an under-
taker can be found who will take the risk, and there will
often be no escape from the necessity of an appeal to the
public poor fund, or private charitable relief. The poor
have their standard of life and customs as thoroughly
established as the well-to-do or the rich, and, however
humble their station, they prefer the burial of their dead
at their own expense in a manner which to them represents
the common decencies of life. Deep at the root of the
problem of life insurance for the poor lies their abhorrence
of a pauper burial and their willingness to provide out of
present savings for a future contingency, and the ever
present possibility of premature or unexpected death.
As the result of the introduction of industrial insurance
into the United States, which now returns to policy-holders
about $25,000,000 per annum in the payment of claims
alone, the relative number of pauper burials has been
materially reduced during the past twenty years. On the
basis of a conservative estimate there would be 25,000
more pauper burials per annum in American cities if this
system were not in almost universal operation. From a
moral and sentimental point of view, therefore, the value
of industrial insurance as making for a higher standard
of family life cannot be overestimated. It certainly
is a matter of considerable importance in the life and
struggle of many who are on the very verge of pau-
perism and dependency to know that, at the end of their
earthly difficulties, they will not be cast away in a potter's
field.
But the good effect of industrial insurance as a direct
means of reducing pauperism does not end here. In many
instances a sufficient sum remains, after the payment of
funeral and doctor's bills, to establish the widow in some
kind of business, on a small scale, but sufficient to provide
the necessary means for herself and children. As a rule
there will be other savings available, for, as I have already
INDUSTRIAL INSURANCE 393
said, industrial insurance suggests the advantage and
importance of other forms of investment and encourages
economy in family expenditures. How far the burden of
poor relief, indoor and out, is diminished cannot be stated
with even approximate accuracy, but we have some very
significant data for certain states and cities which indicate
that, regardless of a large immigration, there has, during
recent years, been a relative and substantial decrease in
the number of paupers and the amount paid for poor
relief.
The indirect results of industrial insurance are, therefore,
of very considerable importance. Just as the vast accu-
mulations in savings banks are to a considerable extent
the aggregate of a large number of small deposits, so in
industrial insurance the assets of about one hundred and
fifty million dollars held as reserve and surplus represent
a vast amount of capital as the result of small weekly
payments which average about ten cents. These accu-
mulations do not stand for idle capital but for public
wealth in the complete sense of the term. It is wealth
made available for the conduct of general business, of
active enterprise, and other social and economic ends.
Of the three billions of assets held by American life insur-
ance companies, 75 per cent, are invested in stocks, bonds,
and mortgages, 8 per cent, in real estate, 6 per cent, in loans
on policies, and the remainder in other forms of invest-
ment and as cash in bank. The absolute necessity for
life insurance companies to earn a certain rate of interest
on their investments makes it of the highest importance
that the assets should be constantly employed in profitable
enterprises, thus increasing materially the national pros-
perity and social security of the people.
I do not go too far, then, when I hold that the indirect
results of this form of insurance with its habits of sys-
tematic savings are at least equally as important as the
direct results represented by the annual payment of over
$25,000,000 in claims, etc., to industrial beneficiaries.
394 YALE READINGS IN INSURANCE
The creation of capital by this method of insurance is
indeed of far-reaching importance, even to the laborer or
wage-earner whose economic security and opportunity
for employment is enhanced by the real amount of capital
thus made available for increased production. There is
no more generally accepted postulate in economics than
that "in proportion to the increase in capital the share
of the annual product falling to capital is augmented
absolutely but diminished relatively, while the share
falling to labor is increased both absolutely and rela-
tively." Considered from this point of view alone, indus-
trial insurance makes for a more general and equitable
distribution of wealth.
The success of industrial insurance may be summed up
in a remark made by Abraham Lincoln that "with public
sentiment on its side everything succeeds with public
sentiment against it nothing succeeds." This system of
family insurance forms an integral part of the domestic
economy of the American people. Organized in the State
of New Jersey, the progress in local development has been
most complete in that State and in the adjoining states
of New York and Pennsylvania. In New Jersey there are
now about 1,500,000 industrial policies in force, repre-
senting about 65 per cent, insured population. In certain
sections of Newark, of New York City, of Philadelphia,
and other large cities, the system is so general that from
75 per cent, to 95 per cent, of all insurable persons hold
industrial policies.
We have made a number of investigations to ascertain
the actual extent of industrial insurance in various cities
and there is one significant fact which we have learned,
especially in and around Newark, that the proportion
of population insured on the industrial plan is somewhat
higher among those who own their own homes than among
those who do not. Whether as cause or effect, the fact
remains that the progress and development of the business
has been most satisfactory among the thrifty and stable
INDUSTRIAL INSURANCE 395
element of our industrial population. We can go further
and say that policy-holders are in other respects a superior
class. For illustration, we find by our mortality statistics
that the death rate of insured children is less than the
normal mortality in the general population as determined
by the census. Our percentage of deaths from intem-
perance and alcoholism is less than the expected by the
general standard of mortality, and finally, we find that
our ratio of deaths from homicide and suicide is below
the average for the country at large. I mention these facts,
which are supported by irrefutable evidence, to show that
there is a close relation between industrial insurance and
the progress and well-being of the industrial population,
and that the policy-holders represent a more thrifty, more
temperate, and more law-abiding element than the un-
insured.
It remains for me to speak of the evolution of industrial
insurance and the adaptation of the business to new
conditions. When established in 1875, the financial and
industrial conditions were such as to call for an elementary
form of life insurance with absolute security as the first
consideration. By slow degrees public confidence in
insurance and financial institutions was restored, and as
early as 1881 it become necessary to issue a special policy
for the round sum of $500 to meet a distinct and increas-
ing demand from the superior element of our industrial
population. By 1886 the insurance education of the
masses had gone far enough to make it seem advisable,
and in fact necessary, to establish an ordinary depart-
ment. That was less than twenty years ago, but during
the intervening period the three industrial companies
which transact 95 per cent, of the business in this country
have built up a vast ordinary business, with about 720,000
policies and $800,000,000 of insurance in force. At least
one-half of this sum, and perhaps three-fifths, represents
ordinary insurance on the lives of wage-earners, or persons
in positions or situations practically outside of the field
396 YALE READINGS IN INSURANCE
of the solicitor for exclusively ordinary companies. The
number of persons insured with industrial companies for
both industrial and ordinary is indeed quite large and
constantly increasing. The industrial policies are held
for the payment of expenses incident to death, the ordinary
for family protection, child education, and other purposes
of social and economic importance. Coincident with the
progress and evolution of industrial insurance there has
been a material improvement in the industrial policy
contract, which to-day contains all the essential and
important provisions and privileges of the regular ordinary
policy. Thus we see how close the relation is between the
two forms of insurance and how important industrial
insurance is as an education in general insurance theory
and practice, making gradually but with certainty for
the social and economic security of the people.
If there is any one thing that "social classes owe to each
other, " it is that all shall aim and work to diminish the
needless suffering and unnecessary burdens of those for
whose well-being and future protection we are individually
or socially responsible. The mass of our population is
engaged in a heroic struggle to escape from poverty to
relative economic and social freedom, and whatever con-
tributes toward this much-to-be-desired end is deserving
of sympathetic consideration. I believe that in industrial
insurance we have a most valuable aid in this determina-
tion for social betterment on a large scale, and the evidence
is conclusive that a vast amount of direct and indirect
good is accomplished by this elementary but effective
form of thrift. During the almost thirty years since
industrial insurance has been in active operation in this
country, gradual but constant progress has been made
toward a higher degree of social efficiency, so that we may
hopefully look forward and anticipate a time when this
form of insurance will be indeed a social institution of
universal utility, in every respect a far-reaching power for
good, directly to the people and indirectly to the nation.
INDUSTRIAL INSURANCE 397
I believe that the evidence warrants the conclusion that
industrial insurance makes first for private wealth and
second for public wealth, as well as directly and indirectly
for the all-important aim and end of a higher degree of
security for the industrial population of this land.
INDEX
Actuaries table of mortality, for-
mation of, 110-111.
Age, insurable, limits of, 217; rea-
sons for limiting, 221.
Agents, necessity of, 256-259; ex-
perience of English companies
without agents, 254-256; ex-
penses of, 254-259; agency
system in industrial insurance,
387-388.
Alabama, regulation by law of pol-
icy conditions in, 317-318.
Alcohol, effect on longevity, 26.
American experience table of mor-
tality, formation of, 111-112,
given in detail, 157.
American Life Insurance Company
of Philadelphia, wrecking of,
301.
Amicable Society, origin of, 67;
plans of, 68-69, 127.
Ancient Order of United Workmen,
organization of, 94; plans of,
125-126; growth of, 128-129.
Annuities, effect on origin of life
insurance, 44.
Application, details required in,
212-213; as part of policy,
222.
Armstrong laws, provisions of in
regard to policy-holders' vot-
ing, 308.
Assessment life insurance com-
panies, origin of, 93; general
description of plans, 122-131 ;
reasons for origin, 122-123;
methods of, 216; organized for
purely business purposes, 145;
decline of, 130-131.
Assessments, plan of in fraternal
societies, 141-144.
Assets, taxation of, 369-370.
Australian Mutual Provident Soci-
ety, method of voting by pol-
icy-holders adopted by, 311.
Baines, quoted in regard to increas-
ing longevity, 288.
Barnes, William, quoted in regard
to deferred dividend plans, 275.
Beneficiary, lack of investment
knowledge possessed by, 235;
methods of providing for, 236.
Bills of mortality, origin of, 49; use
of, 50.
Blood-spitting, mortality among
those with a history of, 115.
Bubble Act of 1720 and its effect on
English life insurance, 72.
Business, amount of new, regulated
by Armstrong law, 319.
C
Carlisle mortality table, formation
of, 109.
Champion v. Ames, case cited in re-
lation to federal supervision of
insurance, 355.
Chance, meaning of, 98; effect of an
economic activity, 99.
Civil War, effect on growth of life
insurance, 87.
Colonies, insurance in American,
77-80.
Comity, meaning of state, 330;
results of on state supervision
of insurance, 330-331.
Commissioners of insurance, state,
political character of, 322-323.
Companies, various kinds of, 299;
methods of controlling mixed,
399
400
INDEX
303-304; theory of government
in mutual companies, 304-305.
Connecticut Mutual Life Insurance
Company, organization of, 86-
87.
Cost of insurance, definition of, 181 ;
calculated, 160; given for vari-
ous ages, 161; as a basis for
distributing expenses, 262-263;
effect of increasing cost on
fraternal associations, 144-
146.
Cost of living in relation to life
insurance, 20.
Crusades, effect of on insurance, 42.
D
Dawson, M. M., selection from on
assessment insurance, 122-131;
author of modified preliminary
term system of reserves, 203;
author of select and ultimate
system of valuation, 204.
Deferred dividends, arguments in
favor of, 280-286.
De Moivre, contribution of, 74.
De Witt, contribution of, 47.
Diphtheria, amount of which is pre-
ventable, 291.
Disease, prevention of, 291-292.
District of Columbia, reasons for
poor insurance laws, 331-332.
Dividends, early methods of declar-
ing, 89-90; various plans of
distributing, 220; system of
deferred dividends explained,
273-286 ; arguments in favor of,
276-286; over-emphasis of sub-
ject of, 241-242. '
Dryden, John F., selection from on
industrial insurance, 382-397.
Dueling, policy clauses regarding,
225.
E
"Educational Leaflets," issued by
Mutual Life of New York, selec-
tion from, 192-206.
Elections, expense of annual elec-
tions, 309.
Emery, H. C., quoted in foot-note,
12.
Endowment policies, definition of,
215.
Episcopal Corporation, origin and
plans of, 81-82.
Equitable Assurance Society of
London, origin of, 128; effect
on American life insurance de-
velopment, 88-89.
Expenses, loading for, 175-182;
various lands of, 176-177; plans
of providing for, 175-176;
plans of providing for expenses
of new business, 177-178; of
providing for agents, 254-259;
of first year of insurance, 199,
264266; laws regulating ex-
penses for new business, 318-
319; methods of providing for
investment expenses, 180, 261 ;
general expenses, 180-181, 190-
201, 262-264; of settlement,
179-180; of renewals, 179;
expense element in fraternals,
147-148.
F
Failures of life insurance companies,
causes of, 90-92; effect on
growth of assessment com-
panies, 126.
Fair, quoted in regard to vital
statistics, 290.
Federal supervision of insurance,
general considerations, 334
362; arguments in favor of,
331; absence of, 359; necessity
of, 360-362; probabilities of
securing, 336-354 ; decisions
of Supreme Court affecting,
354-355; relation of "lottery
cases" to, 355-358.
Fees, system of levying by states,
366.
Finkelnburg, quoted in relation to
longevity, 288.
Fire insurance, first company hi
America, 79.
Fisher, Irving, selection from on
methods of eliminating risk,
1-13; on the problem of length-
ening human life, 287-298.
Fouse, L. G., selection from on
policy contracts, 207-233.
INDEX
401
Francis, John, selection from on
early beginnings of life insur-
ance, 36-45; on the origin of
insurance theory, 46-56.
Fraternal life insurance, general
consideration of, 132-154; ori-
gin of, 132-134; growth of,
95-96 ; technical organization
of, 136-141; methods of, 216;
contracts issued by fraternal
societies, 139-140; strength of,
135-136, 152; causes of fail-
ure, 143-144; failures of, 153.
Friendly societies of England, rules
of ancient, 38-39; prevalence
of, 134-135.
Function of life insurance, 14-35.
G
Girard Life Insurance and Trust
Company, early plans of, 84.
Gorgas, Col., results of sanitary
measures in Havana, 289.
Graduation, meaning of as applied
to mortality tables, 120;
methods employed, 120-121.
Graunt, John, contribution of to
insurance theory, 51.
"Graveyard insurance," evil results
of, 7.
Greene, Jacob H., selection from on
surrenders and loans, 246-253.
"Guarantees" as a method of
eliminating risk, 2.
Guilds, as insurance institutions,
37; elements of life insurance in
guild system, 134-135.
II
Hadley, Pres., quoted, 2, 12, 21,
388.
Halley, contribution to theory of
life insurance, 54-55.
Healthv English mortality table,
110.
Hedging, practice of, explained, 12.
History of life insurance, early be-
ginnnings, 36-45; origin of
theory, 46-56; in Great Brit-
ain, 57-76; in the United States,
77-96.
Holcombe, John M., selection from
on function of life insurance,
14-35; on agency expenses, 254-
259.
Homans, Sheppard, author of ton-
tine dividend plan, 275; author
American mortality table, 111.
Home Life Insurance Company of
New York, control by stock,
303.
Incontestability, extent of clause,
220; treatment of by various
companies, 226-228.
Industrial insurance, general con-
sideration of, 382-397; origin
of, 135-136, 383-384; purpose
of, 382; practice of, 385-387;
methods of, 216; extent of,
384-385 ; benefits accruing from,
388-94.
Insurable interest, deferred, 208.
Insurance, moral effects of, 7; as a
means of eliminating risk, 4.
Insurance company of North Amer-
ica, life plans of, 82.
Insurance departments, inefficiency
of, 321-322.
Intemperance, effect of, 220; care
exercised in selecting against,
226.
Interest, use of in insurance calcu-
lations, 155-156; effect of dif-
ferent rates of on reserve, 193.
Investments, social effect of, 30;
regulation of, 313; evil effects
of state restrictions on, 315-
316.
K
Kingsley, Darwin P., selection from
on federal supervision of insur-
ance, 334-362.
Lankester, Ray, quoted in regard to
lengthening human life, 289.
Lapse, clauses respecting, 220.
Legal regulation of annual elec-
tions, 307-310; of policies,
402
INDEX
232-233; of fraternal societies,
148; necessity of for fraternal
societies, 149-150.
Life, valuation of human life, 18-20.
Limited payment policies, defini-
tion of, 215.
Litigation, absence of in life insur-
ance, 214.
Loading, various methods of, 175-
176; inadequacy of for first
year's expenses, 199; methods
of adding to net premiums, 268.
Loans, policy, general considera-
tions regarding, 246-253 ; value
of in keeping policies in force,
238-245; arguments against
allowing, 252-253.
Longevity, amount of increase
that has taken place, 288-289;
amount of possible increase,
287-298; reasons for not at-
tempting to increase, 287-288;
ways of increasing, 294-295;
result on premium rates, 293.
Lunger, John B., selection from on
policy conditions, 234245.
M
Management of companies, 299-
311.
Marine insurance, effect on life
insurance, 41; in the United
States, 77.
Married woman's right in policy,
28.
Massachusetts Hospital Life Insur-
ance Company, organization
of, 83.
Medical examination, necessity for,
118; methods of dispensing
with, 119-120.
Metchnikoff, quoted as to longev-
ity, 289.
Metropolitan Life Insurance Com-
pany, proposed plans of as to
health campaign, 296.
Michigan Mutual Life Insurance
Company, control by stock,
303.
Military service, treatment of by
various companies, 219.
Mismanagement, exposure of in
1905, 92-93.
Misrepresentation, Alabama law
concerning, 317-318.
Mutual Benefit, organized, 86.
Mutuak=tife insurance, origin of,
aSrgrowtVof, 87-88.
Mutual fcife Insurance Company
of New York, organization of,
86; fight for control of, 304-
305; selections from "Educa-
tional Leaflets," 192-206.
Moir, Henry, selection from on
mortality tables, 107-121.
Mortality, results on of various
influences, 112-113; investiga-
tion into, by Actuarial Soci-
ety of America, 114-116; among
poor and rich, 289; relative
male and female, 111-113.
Mortality tables, general considera-
tion of, 107-121; sources of
material for, 107; manner of
using, 158-160; American ex-
perience table an ultimate
table, 205; American experi-
ence table given, 157-158; Fra-
ternal Congress table, 151.
N
National Fraternal Congress, work
of, 150-151.
New England Mutual Life Insurance
Company, organization of, 84.
New York Life Insurance and
Trust Company, organization
of, 84.
Nichols, Walter S., selection from
on fraternal insurance, 132-
154.
Non-participating insurance, defi-
nition of, 215.
Northampton mortality table, ori-
gin of, 108.
Occupation, treatment of by vari-
ous companies, 219; restric-
tions on, 223.
Ordinary life policies, definition of,
215.
Origin of insurance theory, 46-54;
of insurance, 62.
INDEX
403
Paul v. Virginia, case cited in rela-
tion to Federal supervision,
352; and "lottery cases," 356-
358.
Pauper burials, decrease in as result
of industrial insurance, 392.
Pelican Life Insurance Company,
establishment of office in United
States, 83.
Pennsylvania Company for the In-
surance on Lives, organization
of, 83.
Pensions, old age, 21-22.
Petty, Sir William, contribution of
to theory of insurance, 54.
Philadelphia Contributionship for
the Insurance of Houses from
Loss by Fire, organization of,
79-80.
Phillips, George W., author of ton-
tine dividend scheme, 275.
Physical examinations, effect on
men, 27.
Plagues, prevalence of in Eng-
land, 45; causes of, 48-50; in
the United States, 82.
Policies, contracts in general, 207-
233; definition of 210; methods
of constructing new, 234-235;
examples of early, 78-79; 207-
208; privileges of, 219-220;
variety of, 215-216; motives in
framing, 211; methods of pro-
viding for settlement of, 235-
236; coupon, 235; conditions
of, 234-245; interference of
state in making, 209; state
regulation of policy contracts,
317-318; arguments in favor
of legal regulation of, 232-233 ;
objections to legal regulation,
232; effect of investigation of
1905 on, 229-233; contracts in
industrial insurance, 386.
Poverty and life insurance, 27.
Preliminary term method of valu-
ation, explanation of, 178
179; use of by new companies,
199201; arguments in favor
of use, 202; objections to use,
203; modified form of, ex-
plained, 203-204.
Premium notes, effect on early
growth of insurance, 90; func-
tion of, 239.
Premiums, early rates, 89; detailed
calculation of, 155-174; net
single premiums for whole life,
method of calculating, 163-
167; single premiums for vari-
ous ages, 168; computation of
to provide for expenses, 268;
method of calculating annual
premiums, 169-173; given for
various ages, 174; collection of
by industrial companies, 385-
386; amount of in industrial
insurance, 383; taxation of,
371-375.
Presbyterian Corporation, plans of,
80-81.
Probability, nature of, 99.
Prudential Insurance Company of
London, origin of, 136, 384.
Prudential Insurance Company of
New Jersey, origin of, 136;
control of, 301-302; losses due
to tuberculosis, 297.
Publicity, annual reports provided
for, 313; as a remedy for mis-
management, 321 ; reasons for
failure of, 323-324.
R
Ransom insurance, as an origin of
life insurance, 4243.
Reports, value of annual, 325.
Reserve, method of calculation,
183-191; amount needed at
various ages, 191; preliminary
term method of calculation,
178-179; lack of in fraternals,
140-148; popular ignorance
concerning, 89, 124, 364; tax-
ation of, 379; contingency re-
serve, 198.
Responsibility, necessity of secur-
ing, 325-327.
Retaliatory laws, 353.
Return-premium plan, introduction
of, 239-240.
Risk, definition of, 105; theory of,
97-106; elimination of, 1-13;
reduction of by employers' lia-
bility companies, 296; by fire
insurance companies, 295 ;
404
INDEX
treatment of substandard risks,
240-241.
Roberston law regulating invest-
ments in Texas, 316.
Romans, life insurance among, 36.
S
Salaries, legal regulation of, 318;
Missouri law concerning, 353.
Sanitation, results of better, 290.
Selection, meaning of, 116; ad-
verse, 117-118; effect of sur-
renders on, 117.
Smith, Adam, quoted, 15.
Smith, Gustavus, W., selection from
on net premiums, 155-172;
on reserve, 183-191.
Society for Assurance for Widows
and Orphans, plans of, 63.
Speculation as a method of elim-
inating risk, 8.
State regulation, general considera-
tions, 312-333; origin of, 327;
various lines of, 313; character
of since 1906, 314; chaotic con-
ditions in, 352-353; reasons for
failure of, 328-330; conclu-
sions concerning, 320.
Stock companies, control of, 299-
302.
Suicide, extent of clauses against,
219; necessity of policy clause
against, 224.
Surplus, definition of, 197-198; dis-
tribution of, 260-272; state
regulation of amount of, 319-
320.
Surrenders, general considerations,
246-253; methods of allowing,
242-243; arguments in favor
of granting, 244; effect of
withdrawals, 247 ; arguments
against, 248-252; proper charge
for, 252; importance of writing
in values, 237-238.
Taxation, general considerations
concerning, 363-381 ; amount
of, 363; arguments against,
365-366; in favor of, 364;
necessity for reform of, 363-
381; relation to general prop-
erty tax, 368-370; of assets,
369-370; discriminations result-
ing from taxes on premiums,
371; burden of on policy-
holders, 372 ; suggested reforms,
375-381.
Theory, origin of insurance, 46-
56.
Tontine dividends, plans and re-
sults of, 273-276; arguments in
favor of, 280-286; various
classes of, 277-280.
Travel, restrictions on 226.
Trustees, "dummy," 325-326.
Tuberculosis, amount preventable,
291 ; losses on account of, 297.
Typhoid, amount preventable, 291.
U
Usury laws, effect on origin of life
insurance, 58.
Valuation, of liabilities, definition
of, 192; general consideration
of, 192-206; legal standard of,
193-194; method of calculat-
ing, 194-198; necessity of val-
uation laws, 314-315; results
of net, f. n., 302; select and
ultimate, 204-206; preliminary
term system of, 199-201 ; modi-
fied preliminary term system,
203-204.
Valuation of human life, 18-20.
Valuation of property, 14-16.
Variation, average, 103.
Voting, by proxies, 304-305; ex-
penses of policy-holders voting,
306; methods of voting, 307-
310; substitute for proxy vot-
ing, 310.
W
Walford, Cornelius, selection from
on history of insurance in
Great Britain, 57-76.
War risks, treatment of, 223-224.
INDEX
405
Wells, Daniel H., selection from on
distribution of surplus, 200-
272.
Whiting, William D., selection from
on provision for expenses,
175-182.
Willett, Allan H., selection from on
the nature of risk, 97-106.
Women, conditions of acceptance
as insurance risks, 219; as
risks compared with men, 221-
222.
Workingmen's insurance, possibil-
ities of fraternal societies, 151.
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