For two years public columns have contained much in criticism of life insurance management; much also in commendation of life insurance, the institution. Are we to conclude that in theory life insurance is a boon, but that its benefit, through mismanagement, must necessarily miscarry? Or shall we agree with Judge Francis C. Lowell, who declares in the January Atlantic that the defects inherent in the existing system demand sweeping reform; and that the elimination of the insurance agent is the greatest need? Unless acquainted with life insurance by close association, by study into its theory and its practice, no man is competent to judge it; not more than is the layman to instruct publicly as to the inefficacy of courts, or the miscarriage of justice.
A mutual life insurance company was described by Judge Lowell as “a very large aggregate of property.” It was defined as “a corporation for the management of property deposited with it, having characteristic but comparatively unimportant peculiarities related to insurance.” Is such conception true or false? When first it came to being, it was not an aggregate of property. It was a charter, making it lawful for a corporate body, through their responsible managers, to insure their respective lives; to make, execute, and deliver contracts appertaining to life risks; calling for contracts equitable as between members, but at cost not greater than the specified obligation; further providing that all persons insuring be taken as members of the corporation, and that the right to change the management shall reside with the members.
Since the law of life is the foundation scheme, the contract should be perfectly adjustable to the changing conditions affecting human life; perfect nonforfeiture of equity mathematically accrued must be secured to those forced to discontinue membership; the contract must be such that the individual cannot profit at the expense of the general body, nor vice versa; nor must one member be treated more favorably than another; based upon the law of mortality, which is the law of god, the contract must conform to statutes governing property, which is the law of man; maturity being certain as death, such sums as are mathematically necessary, when safeguarded and improved at a fixed minimum rate of interest, to discharge all contract obligations, must be determined in advance; to these net or mathematical rates, as part of the contract premium, must be added such sums as may be necessary for the safe conduct of the business. It follows that any diminution of the contract price or premium, possible through experience of mortality less than expected by the table, or through gaining an interest rate higher than assumed, or through the conduct of the business at expense less than provided by premium loadings, must be mathematically ascertained and regularly applied. In mutual life insurance then, the matter of first importance, and for all time thereafter of supreme importance, is, the mathematical principles involved. Life insurance is in its essence scientific. It is a business of contracts involving the finest mathematics, the nicest calculations. It acquires property under contract, and comes to have, in due course, characteristic but always relatively unimportant peculiarities respecting finance.
If we are to find better bread than is made of wheat, we must analyze wheaten bread, and compare with it all other kinds. If mutual life insurance is to be attacked, if its inherent weakness is to be discovered, we must not judge by weakness or wrong existing in organizations which are non-mutual, in theory, in practice, or in charter. Companies which treat one policy-holder more favorably than another are surely non-mutual. Yet tontine insurance can mean nothing else than the profit of a few at the expense of the many. And most American companies have had to do with tontine. Industrial insurance as such does not claim to be mutual. A stock company is non-mutual in charter, and will not serve as a criterion.
It is indisputable that correct mutual life insurance has had grafted upon it in many quarters various excrescences which have either subverted or destroyed the mutual idea.
Tontine is perhaps the most deadly, but there are others that are poisonous. “Special contract,” “advisory board,” “agency stock,” all are destructive of the equitable and economical, the mutual plan. Such schemes, veiled in mystery, offer or purport to offer something to the one not to be had by the many. They are productive of volume, for be it remembered that, “To surround anything, however monstrous or ridiculous, with an air of mystery is to invest it with a secret charm and power of attraction which to the crowd is irresistible. False priests, false prophets, false doctors, false patriots, false prodigies of every kind, veiling their proceedings in mystery, have always addressed themselves at an immense advantage to the popular credulity, and have been perhaps more indebted to that resource in gaining and keeping for a time the upper hand of Truth and Common-Sense than to any half-dozen items in the whole catalogue of imposture.”
But to go back. A mutual life insurance company transacts an insurance business, a business peculiarly mathematical and exact. It must, therefore, not depart from active control by its mathematical or actuarial heads. Very largely in proportion as it does so depart, does it leave behind its mutuality. The so-called mutual companies of New York furnish apt illustrations in the testimony before the Armstrong Committee. For the testimony itself is one long proof positive that the financial managers had usurped the functions of the mathematicians, except in so far as the latter might serve their selfish purposes. But why had the financial departments become predominant, you ask? Consider the nature of “tontine” for a moment. Under the tontine contract each member agrees that his share of interest gain, from year to year, over the assumed rate; his share in mortality gains, from year to year, through experience of death rate less than provided for in the premium charged him; his share of gain through expense less than the load section of the premiums; all, plus its accumulation by interest, shall be neither paid nor credited to him, but withheld for a period, and under a clause subjecting the entire sum to forfeiture, should he die or fail to make payments when due, at any time during the period. Further, the tontine contract binds each member to accept, if living at the end of the period, just what the company offers.
But what effect upon the financial department of the company has “tontine”? Simply this, — a constantly increasing sum comes to hand, which need not be husbanded or improved at any fixed minimum rate, because no definite contractual responsibility rests for the return of it. It is but natural to draw on the tontine fund to get more business, thereby to increase the fund itself. It is but a step farther to contemplate the fund with the eyes of proprietorship. And—the descent to Avernus is easy—but one step farther to intrench behind it, by prostituting the perfectly innocent and normally useful proxy system. A tontine life insurance company becomes naturally enough, by the simple process of involution, a corporation for the management of property deposited with it, having, thereafter, characteristic but comparatively unimportant peculiarities related to insurance. In a fashion exactly similar, the practice of “special contract,” “advisory board,” “agency stock,” etc., throws into ascendancy the agency department, and in the same degree destroys mutuality. It has been proved again and again, at home and abroad, that the mutual principle can be kept intact only when active control remains where it belongs, in the hands of trained, competent, and honest mathematical men, truly representative of the general body; but with the right to change the control residing in that body.
Mathematics is an exact science, and amongst all scientific men the mathematician is least ready to forsake principles that are fixed. In mutual life insurance the mathematical department supplies, by computation and tables, the entire framework upon which the business rests. The maintenance of this framework in its integrity, the daily adjustment of all the varied conditions involved, to its requirements, are duties most delicate and responsible. The financial, the medical, and the agency departments must remain in subservience. British companies have long been so conducted. It is a recognized principle in Germany. Likewise, it has ever been the rule of action in at least two very old and very successful American companies of national scope.
The idea has gone abroad that the life insurance agent is a burden to the premium-payer. It is undeniable that many companies have paid, and are paying, commissions that are too high. But the cause does not lie in in any inherent defect of the structure, mutual life insurance. It lies directly in an abandonment of its basic principles. Extravagant commissions can be paid only for the procurement of policies that are non-mutual in the proper sense, that have had grafted upon them some provisions or stipulations which will work a forfeiture of the holder’s equity, either in surplus, or reserve, or both. High commissions cannot be paid, and are not paid, for the procurement of business in a company which, mutual in its premium charges, writes its contracts guaranteeing to its members, all alike, automatic nonforfeiture of the mathematical reserve equity; which further agrees to distribute annually in equitable reduction of cost to each member that portion of surplus earnings which his own policy has mathematically contributed. Large commissions have not been paid in a company which insists upon having its policies valued, and its solvency tested, by the mathematics of the business, even though the laws of states permit of lower valuations and lower tests of solvency. Yet we have such companies in America.
But we are told by some that correct life insurance means annihilation of the agent and his commission entirely; that life insurance companies most resemble savings banks. And who ever heard of a savings bank paying commission to secure deposits? First, it may rightly be answered that the savings bank is not without expenditure for business-getting purposes. But wherein does a life insurance company differ from the savings bank? Right here: the savings bank has only one legitimate source of gain, interest upon investments. It deals in interest solely. An increase in deposits, beyond a certain point, will not increase the net interest rate per cent. Precisely so with the mutual life insurance company. But the life insurance company has another and most important source of gain: namely, from mortality. The life company deals then in mortality, plus interest. It is only by the constant addition of newly selected lives that a company may keep from realizing the full tabular death rate. Manifestly then the agent may lessen the burden of the premium-payer, but only provided that he receives in commission a sum consistent with the gain to be realized through his efforts. The Armstrong Committee, granted full recognition to this fact. And the Armstrong laws have attempted to fix for all companies doing business in New York the amount which may be expended for new business, advantageously to the general membership.1 But it is worthy of note that the amount allowed by this law is greater than the sums used by several mutual companies in America. There are certain companies which have ever preferred the lesser new business, unless the greater was to be had without sacrifice of the principle.
Again, it is claimed that people should spontaneously insure their lives in numbers sufficient to gain in mortality without the agency medium. The answer is, experience. It has taught that an abstract proposal, to gain public favor and hold its interest, must be constantly put in concrete form to the individual. It has taught that public press advertisement is more expensive because less productive. Especially has experience taught that people generally will not voluntarily seek out life insurance. It will be mainly those in imminent need of its service. Adverse medical selection directly results. The records of British offices employing no agents do not show more favorable mortality or lower net cost. They do show higher premium charges than are employed by the best American mutual life insurance companies. The elimination of the agent in life insurance is unscientific. It is non-economical. It is opposed to growth. Certainly, it is un-American. No man has a more proper place in his community than the true representative and exponent of correct life insurance. In a hundred different ways he is of constant and unremunerated service to his present policy-holders. But in getting new, and keeping old insurance, he is a positive economical force. For he helps to solve one of the world’s greatest problems, the elimination of pauperism, ignorance, degeneracy, and crime, that so often follow in the wake of insolvency.
Does life insurance cost too much? Companies differ widely in premium charges because of differing reserves; and still more because of different expense loadings; more widely still do they differ in point of net cost to members, due to the foregoing, plus the method and amount of dividend payments. But life insurance of the strictly mutual variety does not cost too much. For there are mutual life insurance companies in America holding for each policy the maximum reserve, and employing, moreover, the minimum scale for expense loading, which, by means of annual dividends arising from favorable mortality, favorable interest, and low expense, are rendering to-day perfect non-forfeitable and non-discriminatory protection to members, at a cost less than is theoretically possible; that is, at a cost less than the net or mathematical rates fixed by the bare table of mortality and interest. Surely such is a fair test.
Does correct mutual life insurance compare favorably in results with the savings bank? An examination of the records of two mutual life insurance companies, one domiciled in New Jersey, and one in Connecticut, shows that the rate of interest earned and annually credited to policyholders’ funds, by accretion to reserve and by overplus as a dividend, exceeds the savings-bank rate. Examination shows that beneficiaries under matured policies are leaving their funds in the company’s keeping, subject to withdrawal by them, and are enjoying net interest greater than the savings-bank rate. But as a total since organization, what is a fair comparison? One of the greatest savings banks of New York has through seventy-two years received from depositors five hundred and thirty million dollars. The sums paid back to depositors, or their representatives, plus the sums now in keeping for their future use, exceed the total deposited by nearly eighty-one millions. This sum, eighty-one millions, represents depositors’ gain. Two strictly mutual life insurance companies have through sixty-two years received in premium payments by members, five hundred and thirty-eight million dollars. The sums that have been returned to members, or their beneficiaries, plus the sums now in keeping for their future use, exceed the total payments of members, by more than one hundred and twenty million dollars. This sum, one hundred and twenty millions, represents the gain to members and their beneficiaries. Or it might be viewed in this light: two mutual life insurance companies have, through more than sixty years, so administered their sacred trust, that interest earned has not only paid the entire cost of management, but added to the policyholders’ funds one hundred and twenty million dollars.
Close scrutiny of the history of these same companies reveals no high commissions to agents, or bonuses; no high salaried executives; no syndicate participation, or speculation with policy-holders’ funds; no breach of trust by directors; and no abuse of the proxy system; on the contrary, plentiful demonstration of its usefulness.
Is then mutual life insurance on trial? Or is it life insurance that, purporting to be mutual, has grafted upon itself foreign and destructive excrescences? Plainly the latter. And what is the remedy? Not the elimination of agent, president, or director. No. Positively, No. Does it lie in legislation? To a degree, yes. The law must not interfere with the right of contract; but it must not license fraudulent contract. And so far as mutual life insurance is concerned, the remedy lies in compelling, by law if need be, the observance of those mathematical and certain principles which are the structural foundation of mutual life insurance. The policy contract is the embodiment of those principles. Let the law then properly define mutual life insurance, and let there be no masquerading in its name. Let the law secure unconditionally to the mutual member his full equity in the contract. The law at best should act as a deterrent. If there be a definite contractual obligation to safeguard and return funds in keeping, in that case responsibility is fixed, and becomes straightway the dominating impulse of management. Full publicity will do the rest.
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- The wisdom of fixing so delicate a point, by law, alike for all companies with their differing premiums, differing loadings, differing reserves, and varying amounts of life, endowment, and term, is doubtful indeed. It tends toward the shifting of responsibility from company managers to the state itself. It is as though the state, having licensed the physician to practice within its borders, yet should prescribe by law the maximum dose—of quinine, for example, in cases of malaria. ↩