LIBRARY OF THE UNIVERSITY OF CALIFORNIA. Class ■^M^^. ^'-■-K i# Assessment Life Insurance A Treatise Showing the Origin, Development and Condition of the ASSESSMENT SYSTEM OF LIFE INSURANCE An Impartial Review of the System as it was and is By MILHS M. DAWSON :yERS|T or The Spectator Company 1896 (\%\^ .-p' H&-n3 lVa3N3S ^w Entered according to Act of Congress, in the Office of the Librarian of Congress, by Miles M. Dawson, 1894. PREFACE. Life insurance on the assessment plan has reached such proportions in the volume of business transacted and the benefits annually conferred that it well deserves the study of both insurance men and sociologists. The plans and problems presented by assessment societies are so various as to involve much greater complexity and consequently greater difficulties than the compara- tively uniform plans and practices of the regular com- panies. In the past this subject has been largely neglected by actuaries, though within a comparatively recent period some of them have taken it up and are now doing yeoman work in this field. But commonly the attitude of actuaries toward the systems has been more or less contemptuous ; they have ignored its merits and sometimes exaggerated its demerits. This is unfortunate both for the associations and for the actuaries ; for the associations, which have sorely needed actuarial guidance, and for the actuaries, since it has operated to narrow their field and their opportunities for earning a livelihood at useful labor. In fact, the scope of actuarial science needs to be extended in this country to correspond with its scope in other countries. The history of assessmentism in America is one of reaction and subsequent evolution — of reaction against the hard and fast lines of legal reserve insurance and its illiberal surrender charges, and of evolution from simple but exceedingly erroneous and dangerous plans to highly specialized and approximately accurate plans. J 1551 1 So far as I know, this history has never before been traced. The development of the Friendly Societies in Great Britain, which was somewhat similar, has been set forth by Rev. J. Frome Wilkinson and J. Baernreither and others, so that the student need not be ignorant of the advance which has there been made toward safer and better methods ; but nothing bearing on similar advances in America is yet to be had. The plans and systems have, to be sure, been set forth by an able advocate of assessment life insurance, Mr. George D. Eldridge ; and other leading friends of the system have at times pub- lished their views of some of its phases. But the purpose of this book is so widely different from that of any other that it may well be considered a complete and novel departure. Its distinguishing feature is that there is no axe to grind. It is not in advocacy of the systems of these societies nor is it in opposition to these systems. Its aim is merely to present as clearly as possible the actual trend of the systems and the reasons therefor, together with some hints how manifest defects may be remedied. The merits and demerits are, so far as possible, given equal prominence, and nothing important is slighted, though pains have been taken to condense as much as could be done, without impairing the value of the work. Two matters which have come to my attention since the book was written deserve notice in this place. One is the failure of the United Brethren Mutual Aid Associa- tion, of Pennsylvania, an institution which was unques- tionably honestly managed and which gave a persistent and thorough test to the possibilities of the level assess- ment system or uniform rates for all ages. What might have been done had there been a change of system promptly when it became evident that this was to be un- successful cannot be surely demonstrated, and is, more- over, beside the question. No vSuch change was made betimes and the system proved disastrous. In view of which it seems every candid inquirer must be convinced that no association is justified in experimenting with the plan or in continuing it if already in operation. A matter which has attracted considerable attention re- cently is the limitation which is now put by law on the rights of associations in the matter of prepaid premium policies and endowments ; and also the limitation which should be imposed upon them. As may be seen by reference to the Assessment Insurance Manual for 1896,* there is a growing tendency among the associations to issue such policies, and in many cases not to make clear and unequivocal provision for assessments in addition to the premiums named in the contracts. The Attorney General of Michigan and the Insurance Commissioner of Wisconsin have called in question the authority of assessment associations to do these things, and the latter has secured expressions of opinions from leading actu- aries on the subject. The Insurance Commissioner of Michigan has since admitted all the associations to that State, without finding that any were transgressing the law. This book sets forth fairly the view of its author as to the proper development of associations doing business on the assessment plan, and fairly indicates the trend which in his opinion legislation ought to take. The proper evolution of assessment societies is toward the tried methods of regular insurance, and no obstacle should be put in the way of their following that course. At the * Published by The Spectator Company. same time they should be held strictly accountable for the additional responsibilities which they assume when they thus depart from their original plans. Having demonstrated the perilous inaccuracy of the old plans by their own experience, they should not be permitted to make their operations under the new plans certain to be disastrous by disregarding the rules of safety which experience has proven to be necessary. Thus they should be held accountable for every dollar which they collect beyond the agreed quota for expenses and the actual mortality cost, which additional amount has been collected on an implied agreement to reserve the same for the use of the members in paying future mortality cost. At least that much, with its interest earnings, should be counted as a reserve liability ; and if, at the mortality and interest experience of the association, its rates are manifestly insufficient, together with this actual reserve, to be sustained as the association has expected them to be sustained, an immediate increase in rates should be enforced. By no other means can the ignorant and unscrupulous be prevented from promising the impossible and from concealing their inability to carry out these promises for many years. Assessment life insurance companies which wish to protect their reputation and shut out ruinous competition in rates should welcome such laws. M11.KS M. Dawson. Nkw York, April, 1896. Assessment Life Insurance. CHAPTER TITI.KS. Page. PREFACE ... iii THE ASSESSMENT PI.AN— WH AT IS IT ? 3 HOW AND WHY IT CAME TO BE 9 ASSESSMENT SOCIETIES— WHEN THEY CAME TO BE 15 A BRIEF HISTORICAL REVIEW. 23 THE EVOLUTION OF ASSESSMENT PLANS 32 THE PLAN OF LEVEL ASSESSMENT AT ALL AGES.. 38 ASSESSMENTS GRADUATED ACCORDING TO AGE... 45 ARE FIXED GRADED ASSESSMENTS FEASIBLE? 52 THE NATURAL PREMIUM, OR SLIDING SCALE AS- SESSMENT PLAN 57 LEVEL PRICE, BUT INCREASING COST ;. 63 ARE THE EQUATED RATES ADEQUATE ? 69 REINSURANCE RESERVES 75 VALUATIONS— COMMERCIAL SOLVENCY 79 —ULTIMATE " 84 LIMITED PREMIUM POLICIES 89 ENDOWMENTS 93 LATER FORMS OF ENDOWMENT INSURANCE 98 ESSENTIAL ELEMENTS OF THE CONTRACT 102 POLICY CONTRACTS— RESERVATIONS AND MODI- FYING CLAUSES 107 SURRENDER CONDITIONS 11 r MODES OF GOVERNMENT 116 THE SITUATION AND OUTLOOK 121 ASSESSMENT LIFE INSURANCE. THE ASSESSMENT PI.AN: WHAT IS IT? If one had defined assessment life insurance when it * was new, he would have said that it was a plan by which 1 the amount of a claim was collected after the death of the insured by levying an assessment upon the living mem- v bers. There is no doubt that this practice of post-mortem assessments gave the name to this plan of insurance, nor that the plan came into use because of men's unwilling- ness to part with their money until it is needed and as a result of suspicion of the accumulation of money in the hands of the regular companies. This sentiment caused the adoption of the following motto: The best place for a dollar — (that is, until required) — is the pocket of the man who made it. The idea was to call in money as needed and not a moment before; and the assessments were orig- inally a certain sum upon each living member at the death of a member. The benefit paid at the death of a member was limited to what was collected in this way by one assessment. This was not altogether satisfactory; it was not pleas- ant for a man to carry what he supposed to be a policy good for a thousand dollars and for his wife to realize but a few hundreds from the assessment. So the plan was varied by most societies so as to provide for the payment of the full amount and, where the laws did not prohibit, it became customary to guarantee full payment. This involved so far a surrender of the uniform assessment idea that it was easy also to make another important change by levying advance assessments; few companies, except moribund institutions dragging unpaid losses, now assess after the deaths occur. They, instead, carry on hand funds sufiScient to meet all demands until the usual date of the next assessment. This practice is not strictly in accord- ance with the original principle that no money should be collected until actually required; but the interval be- tween receipt and expenditure is so short in such cases that the principle is substantially conserved. Besides, it was always manifestly unfair to permit a member to dis- continue without paying for the protection already enjoyed; he now pays in advance. To suit the facts under these changed conditions, assessment life insurance must be defined as that plan which charges variable premiums, perhaps at fixed ratios as between individual members, aggregating only sufficient to cover current losses and fexpenses. It will be noted that in this as in the original and sim- pler form the fundamental idea is "pay as you go." There was no place for reserves other than sufficient to cover demands up to the receipt of the next assessment; and, as was ludicrously patent in the consternation caused by the Illinois Senate Bill No. loo, in 1893, ^^^ managers had no idea that such an advance collection was a reserve. Although many if not most societies have claimed to in- tend furnishing insurance at an approximately level cost, a reserve was considered, in the picturesque phraseology of the friends of the system, * 'the fifth wheel of a wagon. ' ' They might differ — in fact they do differ — about modes of distributing the losses in assessments; one assesses all equally, another at certain ratios fixed by ages at entry, and another at shifting ratios according to current ages; but for a long time they were all agreed that a reserve( was not merely unnecessary, but useless and dangerous. But after a time the simple science of the natural pre- mium tables made it clear that, whether a society regarded it or not, there is a gradual and inevitable advance in the cost of insurance with the increase of hazard because of the advancing ages of the insured. And, consequently, several co-operative companies gave up the principle of ''pay as you go," and collected such amounts in excess . of current expenses and losses as in the varying opinions \ of their managers would be likely to hold the premiums stable. The variety of views as to the cause of alterations in current cost and the mode of remedying them is indi- cated by various terms adopted to designate the reserve accumulations — emergency fund, guarantee fund, mortu- ary reserve fund, special reserve fund and the like. This is a very great change from the original basis and utterly invalidates the narrow and specific definition of assessment insurance which has been given. The new definition must cover practically all forms of insurance which do not make compliance with legal reserve laws fun- damental; in fact such compliance or non-compliance may be made the shibboleth to distinguish the two forms of insurance. But the definition would not be complete if left thus, although comprehensive enough for our pur- pose. In order to fully understand the distinctions, how- ever, we should first define what compliance with reserve laws means. The standard introduced in this country by Elizur Wright has now been almost everywhere adopted; it requires a company to be able to demonstrate its solv- ency, assuming mortality according to the actuaries' table and interest at four per cent, and counting as resources only such part of the actual premium as equals the net premiums derived from that mortality table and the assumed interest. In instance a company's premium on a certain policy maybe $20.50 per ^1,000 of insurance; but in this computation only $14.72 will be considered an asset available to pay claims. The difference, amounting in this case to I5.78 and known as the loading, is con- sidered a provision for expenses only. Should the actual premiums be less than $14.72, the laws of some States and the practices of all insurance departments would require a special reserve to make good the deficiency. In other words, the reserve laws prohibit in effect the guaranteeing of a rate below the net rate according to the standard tables and interest. This may properly be re- garded as something of a hardship. The sum of $14.72 is the net premium for a policy issued at age 25. There is in existence a policy, starting at about the time of the introduction of reserve laws upon a life then at 40, which has run 32 years at an average cost of less than this net premium of ^^14.72 and now costs but about $8.00 a year. It may be here said that it was by no means Elizur Wright's intention that the standard he introduced should be permanent and high rates compulsory in con- sequence. On the contrary, he favored devising a gen- uine American mortality experience and a very little in- vestigation proved to him that rates might be consid- erably reduced with safety. It is the mistake of the tyro in actuarial science to suppose that all wisdom is em- bodied in the prevailing tables, which are but scientific tools; just as it is the mistake of the assessment advocate to suppose that all mischiefs in regular insurance arise from the standard reserves. Had there been no standard reserves, there might have been no assessment insurance; had there been no inhibi- tion upon making such fixed rates as managers chose, there would have been no occasion for the adoption of variable rates. Even had there been a low legal standard, permitting all possible latitude consistent with safety, it is not probable that societies issuing policies without limiting their premiums would have flourished; but the logic of the situation demanded a revolt from what seemed an arbitrary regulation and, since companies could not experiment with fixed rates, they could and did experiment yet more wildly with variable ones. Many of them are now seeking to solve the reserve problem in a more or less scientific manner. They com- monly employ for this purpose mortality tables more in accord with their experience than the actuaries' , interest rates approximating current experience and often certain estimates of benefits from discontinuance, all of which will be considered in the proper place. They are doubt- less less particular about the absolute sufiiciency of these assumptions than they would be, were the rates they make permanent and unalterable; but, instead, they tacitly or expressly reserve the right to temporarily or permanently increase these rates. That reservation, then, constitutes the essential dis- equivalent, taking into account the actual experiences of the two companies. Another definition has been suggested by the adoption of the term "natural premium com- panies" by many assessment advocates; but the term has already a definite significance. It refers to a method of distributing losses, by collecting from year to year only the current costs of insurance; and, as we shall see, it may be used either by regular or assessment compariies. Indeed, it is now universally used by regular companies in taxing the costs of insurance against individual policies. As a principle the natural, premium idea has always been supported by regular companies and almost as invariably opposed by assessment companies which denied the necessity of increasing cost. The distinction, then, between regular and assessment insurance may be stated as follows: Regular insurance contemplates a fixed premium, or a fixed maximum premium, which thus limits the resources. Consequently, it recognizes the necessity of a reserve clearly ample to- gether with future receipts to in any event meet all con- tract demands. This logically follows from the use of a fixed premium. Assessment insurance contemplates a premium, ordinarily constant or variable as the case may require, but never fixed or limited. Consequently, while perhaps admitting the desirability of carrying a reserve such as in the opinion of the managers will probably be sufiicient together with a continuation of the ordinary premiums to meet all obligations, it does not recognize the necessity for reserves ample in any event to help out these ordinary premiums, for the reason that future premiums may themselves be increased. This follows ^Iso logically from the use of a variable or flexible premium. THK ASSESSMENT PLAN : HOW AND WHY IT CAME TO BE. From the standpoint of its history in this country, it is( not inappropriate that the distinction between assess- ment and other plans should be found in the absence or\ presence of the legal reserves. In other countries where )[ there are no hard and fast reserve regulations, an assess- ment company might have been defined as a company which disregarded reserves or held preposterously inade- quate reserves. The distinction which is crucial in this country, namely: between companies which reserve the right of unlimited assessment to help out premiums and companies which guarantee their rates, would not serve ' everywhere. Many of the mutual companies abroad do not fix their premiums, though calculating them by the standard tables and sustaining big reserves; no one would think of calling such assessment companies. Yet it would be possible in this country for a company of that character to do business under the assessment laws, just as it would be possible for it to do business under the reserve laws; which further illustrates the fact that the essential distinction is compliance or non-compliance with the legal reserve laws. These laws presume that companies have engaged to pay fixed sums upon certain contingencies, conditioned on the payment to them of fixed or limited sums. All the factors being definitely known, excepting only the contingencies and the interest to be realized on invested funds, the computation of resources and liabilities on some reasonable mortality and interest assumption is clearly indicated. In the absence of definite promises 10 /or the presence of the right of indefinite assessment, ■> the necessity for such a computation is not apparent. But when level premiums are intended, whether promised or not, common sense suggests that they should be based on some reasonable hypothesis and that reserves should be held in accord with that hypothesis. Non-compliance with the more or less arbitrary conditions of the legal - reserve laws is not a valid excuse for non-compliance with what is requisite to good. business management. The adoption of a level premium plan divorces the current price of insurance from the current cost; for the level premium is the average of the annual costs for the [term of the policy, all things considered, and conse- quently higher than the cost in the earlier years and lower in the later years. This mere fact offers to unwise men an opportunity to furnish insurance at its temporary cost, unfairly contrasting that cost with the fair price for a long term or life policy. The fact might well be that insurance under the latter policy was really costing less, but the buyer does not always clearly distinguish price and cost, especially when the price is cost to him. It is not probable that any considerable part of the public would have been misled by this if the practice of level premium companies had been to recognize the assured's ownership of all unexpended funds, to account to him for their expenditure and to pay to him on withdrawal all remaining on hand. In so clear an atmosphere, it would have been impossible for men to misconceive the nature of the operations of their companies, and there would not have been an occasion for revolt. It is, however, a mat- ter of history — contemporaneous history, shame to say it, as well as of former years — that, on the contrary, care has been taken to. mystify the policyholder, to refuse to recog- nize his ownership of the assets of his policy, to heavily discount his funds upon premature surrender. So long as it could be done, companies hoodwinked their patrons into believing the systems of level premium life insurance and of fire insurance similar — that if one failed to pay a premium his insurance stopped and that was all. Such sophistry fostered and justified the "flat assessment" system; for if there was nothing left of course no more than current cost was collected, or at least, need have been collected. A very little experi- menting on the part of the people with the new plan developed the fact that the cost was far less than the price and convicted the disingenuous companies out of their own mouths of extortion or extravagance. Thus the assessment plan was born, as the result of the people's dissatisfaction with unfair treatment by the companies, and the result of the false doctrine those com panics themselves taught to conceal their unjust deeds.^ The advent of life policies to be paid for within a lim- ited term, and of endowment insurance, made it impossible for the pretense to longer continue that there was no in- vestment in life insurance. The injustice of forfeitures was at once apparent; it became evident that a policy- holder paid each year for more than he was concurrently benefited by insurance. Yet companies were so loath to do justice in the matter that but one company gave any surrender value before the passage of the non -forfeiture laws of Massachusetts; and little has been done since then in this direction except under the compulsion of law. What has been done, has ever been granted as a gracious privilege and not recognized as a right; and the public has grown to expect companies to be less liberal than they promise rather than more liberal. The effect upon 12 the growth of assessment insurance of such behavior on (the part of regular companies could not but be marked; for men said that if they could not resume their excess payments at will, it was certainly safer to pay current cost and retain the excess in their pockets. This might not have resulted in the foundation of as- sessment companies, that is, of companies which do not limit their premiums, had it not been for the legal reserve laws. These came hand in hand with the first non-forfeit- ure laws, both proppsed and supported by the veteran Elizur Wright. Previous to the adoption of these laws, American daring in the way of fixed premiums scarcely knew a limit and the occasion for the precaution of leav- ing the door open for assessment was not apparent. One company which was charging ridiculously inadequate rates, reported a certain small sum as its * 'reinsurance reserve" because another company had offered to rein- sure for that. When pressed, it claimed to have used 6 per cent interest in its calculations; wise old Blizur Wright, not to be tricked by such wild claims, upon ex- amination found the company insolvent on that basis. Had such companies been permitted to continue until they arrived at immediate insolvency, the state of inabil- ity to meet current demands, there would have been no need for "flexible" premium companies; but the situation would hardly have been better. Therefore, it may properly be said that the assessment plan arose primarily from the unjust practices and maliciously false teachings of the regular companies, and, secondarily, from the legal-reserve laws found necessary to restrain the reckless management of companies. There was need both of room for experiment by the people and of insurance of a temporary and cheap sort; both could 13 be supplied by the assessment plan. This view of the case is borne out by the experience of Australia in gen- eral and New South Wales in particular, where the people have become accustomed to different treatment and dif- ferent doctrines from what are common in our nation. The Australian Mutual Provident Society, now a giant com- pany with over $60,000,000 cash assets, has for many years accustomed the people in theory and practice to the idea that the insured had the ownership of all his moneys remaining unexpended, and that his rights should be modified no further than is requisite to preserve the gen- eral interests of the policyholders. In addition to this, there are no arbitrary reserve laws, each company being a law unto itself. Thus there is no occasion for assess- ment companies; they would be regular companies, any- how, the moment they began business. In fact, they are conspicuously absent. Rival companies, whether regarding standard tables or not, could not in their soliciting confuse price and cost in a company like the Australian Mutual Provident; the distinction is very clear when one can have an account- ing at any time and withdraw all that reason awards him. Yet even where this is true, there is something else needed before the uses for the assessment plan are ex- hausted, imperfect though it be. The regular companies j' have always been singularly unwilling to supply pure insurance from year to year at current cost or term poli- cies, renewable at pleasure, at a really low rate. This/ assertion may startle some regular insurance men. who are wont to consider the new term and natural premiums very low — and, indeed, they are a distinct advance toward supplying the popular demand. But they do not go far enough. The average rate demanded is not materially lower in most cases than the most favorable dividends paid make whole life policies in some companies after the second year. In other words, they are larger by nearly the amount of the deposit for reserve in a whole life premium than they need be. When one com- pares them with the actual current cost in some of the fraternities, or even in old assessment companies, he often finds the term or natural premiums twice or even three times as large, and he cannot wonder that assess- ment companies now transact almost one-half the business of the country in volume and nearly three-fourths in num- ber of lives, excluding industrial insurance from the account. It is not enough that the insured's title to the excess of his payments over current cost is recognized; it is not enough that an intelligible account is rendered him on demand, and a manifestly fair settlement given upon withdrawal. There are many who cannot afford to pay the excess for a future advantage, who at best carry inadequate protection now. Until these are provided for by regular companies, there will always be an office for assessment companies to perform. 15 ASSESSMENT SOCIETIES.— WHEN THEY CAME TO BE. Prior to the great war of the rebellion, assessment life insurance was unknown in the United States. There were already, to be sure, fraternal organizations for mutual relief such as the Odd Fellows, analogous in many re- spects to the friendly societies of Great Britain and often allied to them. But though these organizations furnished sick and burial benefits, they did not in this country as in England come to do so as a business matter instead of an act of brotherly charity. No definite amounts were pay- able, without regard to the financial position of the mem- ben/mstead. whatever was found absolutely requisite for the relief of an ill and destitute brother or the widow of a deceased brother was furnished from the common fund. The funeral benefits were at all times inconsiderable until about the time of the war. Yet it is arbitrary to fix the date of the birth of the as- sessment plan by an event so utterly disconnected as the war of the rebellion; it was but a chance that state regu- lation and inspection of insurance was inaugurated by Elizur Wright in Massachussets just before the election of Abraham I^incoln to the presidency. There is a causal instead of a casual connection between the date of the establishment of state supervision together with the system of arbitrary net valuation, and the inception of assessment plans of insurance. It is possible that the abolition movement which led to the war, was also a remote cause of this action; for not only was the first attempt at state control inaugurated in Massachussetts, the New England center of abolition, but Elizur Wright 16 had been one of the foremost among the pioneers in that great movement for human freedom. It is not improbable that the impending success of that movement, which was no longer despised, left him free to give his attention to other evils. The awakening of the public conscience in that great question of human rights, doubtless also assisted to bring about the reforms of life insurance enforced by Massachussetts from 1858 to 1865. There may thus be a remote connection between the causes of the war and the birth of assessment insurance, but the direct connection is between the adoption of state super- vision, and especially of compulsory net valuation, and the consequent revolt of the people which took the form of loose mutual organizations. Perhaps the term "net valuation" requires some explanation at this point. The short methods now used by actuaries under legal reserve regulations to compute the assets and liabilities of companies involve the whole subject in mystery to the uninitiated. Yet the subject is not difficult to comprehend, though it would be clearer to the average mind if the balance sheet appeared in full in reports, as is the custom in many other countries. To determine the financial condition of a company, which has agreed to pay certain endowments and insurances upon the receipt of certain premiums, first the future premium receipts are discounted to their present value, which, together with funds in hand, constitute the re- sources; then the present value of all future pay ments is similarly ascertained and added to the outstanding indebt- edness to make up the liabilities. Now it is evidently of the first importance in any such computation, what shall be the mortality and interest factors used in the discounting. For the mortality factor will determine how 17 long premiums are to be paid and also when claims must be met; the importance of selecting a table which is based upon an average experience can hardly be overestimated. At the time and for the time, Klizur Wright considered the actuaries' table, which combined the experience of seventeen leading British ofl&ces, the best. In selecting it, however, it was by no means his intention that a change should never be made; on the contrary, he him- selt at once began compiling material for the construction of tables which should more accurately express American experience. There is also no doubt that he would have favored the construction of several tables to be used in the classification of risks. The making of a "Shibboleth" out of the actuaries' tables, which have long ago been dis- carded in England for the later "Healthy Male" tables, was far from his intent. He considered that an interest in ex- cess of what was thought probable by other financial institutions should not be assumed in these calculations. His selection of 4 per cent was at the time by many con- sidered ultra conservative; events have proven his wisdom. But all of this might have been decided upon without resulting in net valuation; for in the discounts referred to in the foregoing nothing was said about net premiums or about expense of management. It is evident that on the assumption of mortality as per the table adopted and interest at 4 per cent, there would be a certain schedule of rates required to make the accounts balance. These were called "net rates" incounterdistinction to the office premiums which were called "gross rates." Few com- panies were found which were charging on any policies less premiums than were required according to this net schedule; in all such cases companies were required to have on hand funds sufficient to made good the deficit in 18 resources caused by inadequacy of premium. It might be thought proper on the other hand to allow to other companies an extra credit for the amount of premiums collected by them in excess of what the standard of valu- ation required; and this was actually the practice with many previous to the adoption of a state standard; but it might have even resulted in making a company appear to have a large surplus of resources because charging large premiums, when in fact its actual cash assets were nothing. In all this there would be no provision for ex- penses, which formed a vexatious and difficult problem. Elizur Wright hit upon the happy thought that what- ever the companies themselves collected above the net premium required must be what they purposed expend- ing; the excess is called in actuarial parlance the "load- ing." Thus by using the net premiums only as the basis of the discount to determine the resources, he eliminated the expense question entirely and introduced an uniformity which obtains to this day. This method of valuation is called "net." Similar reserve regulations were soon adopted in other States, and eventually in every important State of the Union. In some States the interest factor was made 4.% per cent, and the American mortality table, constructed by combining the experience of the Mutual Life of New York with that of the seventeen British companies repre- sented in the actuaries' table, was substituted for the latter. But at this writing the use of the actuaries' table is all but universal among insurance departments, New York itself having fallen into line, though by the recent Roche law all standards are admissible. It is at first blush singular that a measure which was so violently opposed should have received such support from its for- 19 mer opponents as to spread everywhere in a surprisingly short time. But the fact is that the larger companies found net valuation a Very good thing for them. It gave to them an official certificate of solvency, and in its prac- tical workings it discriminated against small and espe- cially against new companies. How it did this will be evident if one but consider the margin for expenses allowed by this system. For instance, assume that of a gross premium of $25, $20 is the net premium required by the actuaries' table and 4 per cent; this leaves an uni- form margin of $5 for expenses each year. But in prac- tice, even before the present brokerage and bonus system, it cost much more to secure a policyholder than to retain one. In other words, roughly speaking, it would have been much fairer as a basis for net valuation to have con- sidered the first year's premium as consisting only of mortality and expense — an one-year term insurance — and let the regular net premium begin the next year at the advanced age. For instance, instead of treating a life premium of $19.63 at age 25 as composed of a net premium at age 25 of $14.72 and a margin of $4.91, let it be considered the first year as consisting merely of cur- rent mortality and expense contributions and thereafter of the net life premium, at age 26, $15.13 and a margin of $4. 50. This distinction may not seem important, but the disregarding the actual facts concerning expenditure had the effect of making it very difficult to embark new companies, which in turn resulted in leaving the field clear for the operations of the established ones. Really, it had been very embarrassing to them at times to have some upstart of a new concern cut rates or extend supe- rior advantages. Now, when such companies entered the field, conformity to legal reserve regulations pre- 20 vented their offering better terms than the old, and, since the margin on the first year's premium did not equal the cost of obtaining that premium, the volume of business they could acquire was limited. But to make assurance doubly .sure the companies obtained in almost every State, besides legal reserve legislation, the passage of acts pro- hibiting the organization of regular mutual companies. Then they rubbed their hands and prepared to monop- olize the field; but not for long. In addition to all their other shortcomings, which were not few, the regular companies steadfastly refused to furnish the people insur- ance at its current cost. In this they followed the cus- tom of English companies, obhvious to the fact that no such gulf separated the well-to-do and laboring classes here as there. The lowest priced policy offered was the whole life. It was a sign of what the people wished in insurance that the so-called "note plan" was so popular. This consisted merely in giving notes for a considerable part of the premiums, payable only out of proceeds of the policy and expected to be taken care of by dividends. The sole attraction was the cheapness, the amount of pro- tection furnished. This desire for cheapness was also fostered by the harsh surrender conditions which for- feited so large a part of what was paid beyond the cur- rent cost. All in all, a very large part of the public could afford to buy nothing but protection, and a yet larger part preferred to make their own investments where the lapse of an insurance policy would not affect them. But how was this to be done? The prototype of the American assessment company already existed in the English friendly societies. To be sure, these societies dealt with much smaller amounts than would answer in America, amounts suitable to the 21 small incomes and modest ambitions of their clientage, but they already had all the phases both of plans of insurance and of governmental systems which now mark American assessment organizations. Friendly societies of the same sort had already become strong in America, as we have seen, but insurance was discarded. With the exception of the Knights of Pythias, which have incorporated their insurance feature into the fraternity itself as an "endowment rank," none of the old lodge organizations has adopted an insurance feature directly. But not only do swarms of insurance organizations thrive under the aegis of their names, but the whole system of co-operative insurance is the result of just such brotherly organization for mutual protection. It was at first the simplest of crude forms, the mere paying of a dollar every time a brother died; but it furnished protection which was needed and it cost very much less than regu- lar insurance. Thus it started out in the sixties, after the war, when the success of abolition, but lately deemed so chimerical, made any folly appear practical. Men were drawn together as never before; they felt that these were indeed great days. The country after its bloody baptism was prosperous; the presence of widows and orphans on every hand was a constant object lesson on the possibilities of every household. When the Ancient Order of United Workmen was launched in 1868 as a labor union, giving to its members also the advantages of a weekly allowance during illness and a small life insurance, it found the people hungrier for the insurance than for the labor union. It thrived, but not in the way which its blacksmith founder in the little city of Mead- ville. Pa., anticipated. It levied equal assessments at all ages and continues to do so today. It is divided into 22 thirty-one jurisdictions, each standing on its own bottom in insurance responsibilities. On January i, 1893, there were 308,575 members, carrying over $617,000,000 insur- ance. During the previous year $6,015,020 was paid out in death losses, which called for an average assessment of but $9.84 on each member. The expenses were but $462,514, equal to $1.50 a member, or about 75 cents per $1,000 insurance. Yet the regular companies find it nec- essary to use over $10 per $1,000, the larger part of which goes to the agent for the arduous labor — and it is arduous — of convincing the people, not that they want in- surance, but that they want the kind he has to sell. The policy of the earlier assessment companies at least seems to have been to furnish what the people wanted to buy. To recapitulate, then, the assessment companies came into existence after the war in response to a general de- mand on the part of the people for life insurance on cheap, current-cost plans. That demand largely arose from the general sentiment that to pay companies more than current cost was to part with the title to your money, but partly from the fact that many people had to have insurance at current cost or go without. The reg- ular companies, secure in the protection of the new legal reserve requirements, refused to accommodate the people. By reason of these same legal reserve requirements and of statutory prohibition of the organization of new com- panies, the demand for cheap insurance called into being mutual organizations of a popular character into which the people flocked. The movement was spontaneous and self- directed; and, by their foolish scoffing, the actuaries, who should have guided such movements aright, es- tranged the people from themselves and the companies, of which they came to be considered the hireling advocates. 23 A BRIEF HISTORICAL REVIEW. The organization of the Ancient Order of United Work- men in 1867, and its success during the following years, caused a large number of similar organizations to spring up, first in Pennsylvania and then wherever the new and flourishing order penetrated. The form and plans of the society were modeled after those of the two great Affili- ated Friendly Societies of Great Britain, the Foresters and Manchester Unity of Odd Fellows. From these the sys- tem of collecting funds to meet death-claim obligations was also adopted. It was not the new and improved j^ystem, that of scientifically constructed rates, which the two societies were endeavoring to put into effect in lieu of the old. The American society instead adopted the sys- tem of "levies" or assessments equal at all ages, which was at that time being generally discarded by the old societies which the new order was copying. In this connection it is proper to say again, however, that in the mind of the founder insurance was secondary and a labor union the most important thing to be accomplished. He was a lit- tle ahead of the times in that regard; the Knights of Labor and the Federation were not to come until later. But the times were ripe for a great popular insurance society. The people had been educated to a due appre- ciation of the benefits of insurance; their confidence in both the stability and good intention of the regular com- panies was about to be severely shaken; they already knew something about the hardships of forfeiture, and 24 about the wide difference between current cost and cur- rent price. The operations of the new order, and its very low death-rate during early years, gave an exaggerated object lesson in this regard. And so it flourished. For death benefits, the order adopted the new, modified regu- lation of the Manchester Unity, grouping each grand jurisdiction by itself; commonly each jurisdiction com- prises a State. This practice results in the general com- pany for mortality purposes being split up into a number of small companies with widely different experiences. For instance, the mortality in Pennsylvania, where organ- ization was first effected, was in 1892 but 12.65 P^r 1,000, and in Tennessee, which was organized in 1877, 21.07. In Kentucky, which was organized in 1873, the mortality was 17-95 per 1,000, and in Iowa, organized in the same year, only 6.27. As we have seen, the order was organized really as a society for other purposes, to which, conformable with a common English practice, insurance was added as an at- tractive incident. The form of organization, the absence of fixed premiums, and the fact of not forming a reserv^e at all, together with the comparatively obscure begin- ning of the fraternity, sufficed to place it outside the terms of regulative statutes. Its success as an insurance organization, however, soon attracted attention to it and its methods, and a flood of small, and often wholly unre- liable organizations, which had nothing in common with the order except its assessment system of insurance, soon overran Pennsylvania and other States. Their methods were lax and often fraudulent, and, great as was the mor- tality among their members, the mortality of the societies themselves almost exceeded it. The infamous practice of insuring old, infirm or even dying persons as a specula- OF 25 ^•"^^FQRMVh. tion, often by persons not even remotely interested in their lives, grew to scandalous proportions. At this agents and even ofl&cials connived until the arm of the law had to be called in to put an end to practices so criminal and dangerous. Meanwhile, however, despite these unfortunate excres- cences the progress of the beneficary orders continued to be phenomenal. They were accepted with favor in all parts of the country, not only by persons of limited means or of the wage -earning classes, but by well-to-do persons also, who considered the treatment accorded them by regular companies unreasonable, and the premiums charged as exactions not to be borne. Among larger so- cieties the Knights of Honor in 1873 followed next in or- der of organization, with headquarters at St. lyouis. Their plan, which now calls for an assessment graded according to age at entry, was at first analogous to that of the Work- men. In 1877 the Royal Arcanum was organized at Bos- ton, and adopted the idea of graded assessments accord- ing to age at entry. Both of these societies have grown to great size, and have been and continue to be popular. The Knights of Honor on January i, 1893, had a mem- bership of 127,073, and $241,045,000 insurance in force. The Royal Arcanum at the same time had a membershid of 137,189 and $401,085,500 insurance in force. Two fraternities of more recent date, and operating along very similar lines, have achieved considerable success. These are the Royal L