The Eastern Underwriter, Vol. 13 & 14, May, 1905--April, 1906; Vol. 13, No.1-Vol. 14, No. 6,
Monthly Journal of Insurance Economics,
NATIONAL SUPERVISION AS VIEWED BY A LEGAL ADVOCATE, page 9
Hendricks' Remarkable Whitewash of the United States Life 18
Vice-President Tarbell and Insurance Press Critics . .* 20
Life Insurance Expenses of Management for the Year 1904 22
Salaries Paid by the New York Life to Its Officials 25
Two Recent Searching Company Examinations 27
Vice-President James H. Hyde and His $100,000 Salary 28
Our Insurance Senators: Will they Stand the Public Test? 30
SUPREME COURT WILL NEVER DECLARE INSURANCE COMMERCE.
LEGAL OBSTACLES NOT A PERMANENT BAR: COMMENT BY EDlTOR.
The Deferred Dividend Policy: Is It a Gambling Contract? ..... 49
NATIONAL SUPERVISION AS VIEWED BY A LEGAL ADVOCATE, page 9
Hendricks' Remarkable Whitewash of the United States Life 18
Vice-President Tarbell and Insurance Press Critics . .* 20
Life Insurance Expenses of Management for the Year 1904 22
Salaries Paid by the New York Life to Its Officials 25
Two Recent Searching Company Examinations 27
Vice-President James H. Hyde and His $100,000 Salary 28
Our Insurance Senators: Will they Stand the Public Test? 30
SUPREME COURT WILL NEVER DECLARE INSURANCE COMMERCE.
LEGAL OBSTACLES NOT A PERMANENT BAR: COMMENT BY EDlTOR.
The Deferred Dividend Policy: Is It a Gambling Contract? ..... 49
CAMPAIGN CONTRIBUTIONS.
BOSTON HERALD ON TRIAL.
Life Insurance Club of New York and Proposed Methods ..... 55
Life Insurance Club of New York and Proposed Methods ..... 55
LAXITY IN THE SUPERVISION OF INSURANCE DEPARTMENTS. page 55
Proxy Voting Change Made by the New York Life ....... 56
Present Situation in Equitable Life Affairs ......... 57
Legal Process of Mutualizing the Equitable Life ....... 61
The Frick Report: What It Means to Outside Observers ..... 62
The Deferred Dividend Policy: Is It a Gambling Contract? . . . . . 81
How One New Company Provides for Excess Expense 83
United States Life Adopts Preliminary Term Plan 84
Proxy Voting Change Made by the New York Life ....... 56
Present Situation in Equitable Life Affairs ......... 57
Legal Process of Mutualizing the Equitable Life ....... 61
The Frick Report: What It Means to Outside Observers ..... 62
The Deferred Dividend Policy: Is It a Gambling Contract? . . . . . 81
How One New Company Provides for Excess Expense 83
United States Life Adopts Preliminary Term Plan 84
COST OF MANAGEMENT VIEWED BY AN OUTSIDER.
AN ACUTE RATE SITUATION: INFLUENCE OF AGENTS.
CAMPAIGN AGAINST NON-RESIDENT CUT-RATE BROKERS.
By A Member Of The Equitable Policyholders' Committee.
Pennsylvania's New State Commissioner of Insurance . . . . . . 86
Is the Reign of "Personal" Journalism About To End? page 86
Grover Cleveland, the "Great Trustee" for the Equitable 87
Co-operation, Not Competition, the Life of Trade 89
Georgb W. Perkins.
Work of Protective Committee of Equitable Policyholders 90
Motives and Purposes of Financier Thomas F. Ryan 91
The Equitable Life and the Men Now in Command 93
President Roosevelt on Paul Morton's Qualifications 93
Vice-President Gage E. Tarbell as an Agency Manager 94
Lapses in Life Insurance —Why They Occur 95
Is the Reign of "Personal" Journalism About To End? page 86
Insurance Journals, Past, Present and Future .... page 109,
INSURANCE INVESTIGATORS CONDEMN PRELIMINARY TERM.
Insurance Investigators Condemn Preliminary Term Valuation, page 123,
Pennsylvania's New State Commissioner of Insurance . . . . . . 86
Is the Reign of "Personal" Journalism About To End? page 86
Grover Cleveland, the "Great Trustee" for the Equitable 87
Co-operation, Not Competition, the Life of Trade 89
Georgb W. Perkins.
Work of Protective Committee of Equitable Policyholders 90
Motives and Purposes of Financier Thomas F. Ryan 91
The Equitable Life and the Men Now in Command 93
President Roosevelt on Paul Morton's Qualifications 93
Vice-President Gage E. Tarbell as an Agency Manager 94
Lapses in Life Insurance —Why They Occur 95
Is the Reign of "Personal" Journalism About To End? page 86
Insurance Journals, Past, Present and Future .... page 109,
INSURANCE INVESTIGATORS CONDEMN PRELIMINARY TERM.
Insurance Investigators Condemn Preliminary Term Valuation, page 123,
Armstrong Committee's Report on Life Insurance Conditions,
page 124
SAN FRANCISCO CONFLAGRATION: EFFECT UPON INSURANCE. page 163,
WESTERN UNION'S ADVANCED STEP ON RATING METHODS. page 164,
EDITOR REPLIES TO COMMENT ON SEPARATION ARTICLES. page 165,
LIFE INSURANCE AS PRESENTED IN THE PUBLIC PRINTS. page 177,
Widespread Life Insurance Discussion: What Will Happen? . . . . 113
Some Outside Criticism of Life Insurance Plans 115
How Much Life Insurance Should a Young Man Carry? 116
Insurance Commissioner Cutting Issues His Life Report 118
No Similarity Between Endowment and Deferred Dividends ..... 121
Mutual Reserve Examination: New York Department's Report .... 123
Some Hot Weather Airy Persiflage .......... 124
A Fire Underwriter's Views Upon Equitable Affairs 125
Superiority of Mutual Control Over Stock or Mixed Plan 126
page 9
NATIONAL SUPERVISION AS VIEWED BY A LEGAL ADVOCATE,
by Ralph W. Breckenridge Before Yale University.
It appears that insurance in one form or another is interwoven with the fabric of our commercial and social life; and while the supervision of any business of a private character would be an impertinence, the people who carry insurance have a right to the protection given through that publicity which can only be had by the inquisitorial investigations of the government; and a system of state supervision has therefore grown up.
The original purpose of supervision was to expose the weakness and fraud of irresponsible companies, but latterly the great accumulalions by the companies, of money in sight, has proven too strong a temptation for the states to resist. Accordingly, whenever the need for funds has presented itself, as it almost constantly has, an onslaught has been made by the state legislature upon the money held in trust for the people by the insurance companies, until now the states receive from the companies doing business in the United States, under varying forms of exactions, a sum that has never been definitely caiculated, but which is estimated at from $20,000,000 to $25,000,000 annually.
From tables compiled upon reports furnished by twenty-eight states, it appears that those states received from insurance companies during the fiscal year 1902 over $5,000,000 more than the supervision of those companies cost them; and this sum does not include what they received in taxes.
The President of the United States advocates Federal supervision in these words quoted from his message of Dec. 6, 1904:
The business of insurance vitally affects the great mass of the people of the United States and is national and not local in its application. It involves a multitude of transactions among the people of the different states, and between American companies and foreign governments.
1 urge that the Congress carefully consider whether the power of the bureau of corporations cannot constitutionally be extended to cover interstate transactions in insurance.
The fear that the issue of state sovereignty is involved is not well founded, and the suggestion is irrelevant; for if interstate insurance is "commerce among the states," the business is national in character and subject to regulation by Congress under the commerce clause of the constitution.
It is too late to challenge either the power of Congress or the propriety of Federal regulation of any instrumentality of commerce; both of them are settled by the constitution as construed in repeated decisions of the supreme court.
It is estimated that the expense of Federal supervision would not exceed 10 per cent. of what the states now exact, and as the competition for business is keen, a reduction of expenses will force a reduction of the cost of insurance.
The apparent obstacle to Federal supervision of interstate insurance as commerce among the states is found in the noted case of Paul vs. Virginia, 8 Wall. 168, decided in 1868, and a series of decisions following it known as the "insurance cases."
In all these cases except one the principal issue was whether a corporation of one state may transact its business in another except by compliance with the terms prescribed by law in the latter; and state statutes imposing such terms were sustained as a legitimate exercise of the police power. In the excepted case, a statute of Missouri providing for the nonforfeiture of life insurance under certain conditions and which fixed the rights of the parties contrary to the provisions of the particular policy, was sustained and read into the contract.
In none of these cases was an act of Congress involved, and in none of them was there apparently before the court any aocnrate and detailed statement of facts with regard to the character and conduct of the business and the uses made of insurance. The decisions are, in this regard, based upon the misconception of the facts as they are recited in Paul vs. Virginia, and upon the theory that insurance involves only the making of a contract between a citizen of one state and a corporation of another.
Is insurance "commerce" within the meaning of that word in the Federal constitution?
The regulation of commerce was the motive for the Federal compact, and naturally the clause giving to Congress "power to regulate commerce with foreign nations and among the several states and with Indian tribes" has given rise to much discussion and an inconsistency more apparent than actual, growing out of the views of the different members of the court regarding the rival theories of the concurrent power of Congress and the states, and the exclusive power of the Federal government.
What, then, is commerce? Who shall decide? Does the answer to this question depend upon mere definitions, or does the constitutional classification of insurance depend on facts that show its intimate and verbal connection with commerce and its instrumentalities?
In a case decided long after Paul vs. Virginia, Mr. Justice Field said," What is an article of commerce is determinable by the usages of the commercial world."
The commerce of 1787 knew only sailing vessels, caual boats and stage coaches. There were no steamboats, no railroads, no electricity; and the telegraph, the telephone and supplied electric power have become utilities of commerce within a generation, and subject to Federal regulation, because, in the language of Marshall, "The Constitution was intended to endure for ages to come, and consequently to be adapted to the various crises of human affairs."
Chief Justice Waite said the powers granted by the commerce clause of the constitution are not confined to the instrumentalities of commerce known or in use where the constitution was adopted: "but they keep pace with the progress of the country and adapt themselves to the new developments of time and circumstances."
And the power of regulation under the commerce clause has been, and therefore may be applied to that method of intercourse which had no existence when the constitution was framed.
"Commerce," says Mr. Justice Johnson, "in its simplest signification means an exchange of goods. As society advances, however, labor, transportation, intelligence, care and various mediums of exchange become commodities and enter into commerce," and "the subject, the vehicle, the agent and their various operations become the objects of commercial regulation."
Tne courts have expanded the powers granted under the commerce clause of the constitution, "to keep pace with the progress of the country"; these powers have "been adapted" to the "new development of time and circumstance."
Congress has the power to determine the articles which may be the subjects of commerce. Congress is the exclusive judge of the expediency of the regulation of insurance and of the facts which render such regulation expedient; and one may count upon his fingers acts of Congress held unconstitutional for want of constitutional power.
If, therefore, Congress shall see fit to supplement its direction to the bureau of corporations by providing for complete supervision of insurance it will preform a great and needed public service. Such supervision will assure the maximum of corporate publicity which is demanded not only for the policyholders, but to preserve the corporations themselves against unjustifiable and malicious attacks, for the interests of the policyholders and the insurance companies are identical.
Interstate insurance is "commerce among the states" and the general good requires its regulation as such; the duty of Congress is plain, and no phantom of states' rights should intervene between that duty and its performance.
DEFERRED DIVIDENDS: IS IT GAMBLING OR IS IT INSURANCE?
This question will be discussed in the June number of the Journal of Insurance Economics by F. S. Elwell and Samuel Davis, both of Bolton, Mr. Elwell taking the position that the practice of deferred dividends is gambling, while Mr. Davis will analyze and reply to Mr. Elwell'i contentions.
We can promise our readers that both articlea will be interesting. They are published in accordance with the purpose on our part to give our readers all sides of all questions. The editor himself may have something to say upon the question, which is one of particular interest at this time. Public attention is focused upon the matter.
page 18,
HENDRICKS' REMARKABLE WHITEWASH OF UNITED STATES LIFE.
Examination Discloses lmpairment and lnefficiency of Management—Soothing Statement for Policyholders lssued by the New York Department.
The New York Insurance department has finished an examination of the United States Life Insurance Company conducted by Examiner Isaaac Vanderpoel, in which the following results are shown:
The impairment of $70,000 shown has since been made up by the sale of bonds of the "Virginia Passenger & Power Company," ($100,000 par value) for $85,000, Mr. Vanderpoel having allowed a valuation of these bonds of $10,000. The difference, $75,000, covers the impairment. The Virginia company is in the hands of a receiver and is in default of interest. Who bought the bonds for $85,000 is not made clear, the only evidence of the sale furnished by the company being a deposit credit in the Chemical National Bank of New York of $85,000. (See note.)
In his examination Mr. Vanderpoel decreased the value of the company's real estate from $870,250 to $768,500. He also recommended that the loans on bond and mortgages be reduced in twenty-two instances by $77,262. The examiner increased liabilities on account of reserve from $8,268,656 to $8,287,181, and also increased the liability, on account of claims resisted
Notr.—Curiously enongb, says the Journal of Commerce, some of tbe Virginia Passenger & Power Company of Bichmond's first consolidated mortgage 50-year gold bonds, due in 1952, were sold at auction last week Just afUr the State insurance Department's report on the United States Life bad been issued, in wbicb they were given a value of $100 per $1,000 bond. There have been no public sales of these bonds until the auction last week, at which $2,000 brought $190 and Sl.OOO brought (8. by the company, from $8,000 to $32,250.
Upon the general policies of the company Mr. Vanderpoel makes the following comment:
I am of the opinion that the company has gone too far beyond the average loading on its net premiums for expense of management. I do not think the extent to which it has done so is justified, having in mind the amount of Us present surplus as regards policyholders, being balance of impaired capital stock. Should the present ratio of expense continue indefinitely this surplus must necessarily be gradually reduced in view of the rather meagre results obtained in the past in the procuring of new business, which when procured is lacking in the element of fairly normal persistency. There is no gain from actual mortality over table assumption which in any measure might negative expenses over average loading. On the contrary, there is shown at present an excess of mortality over tabular assumption.
Mr. Vanderpoel's examination and report shows—what has become clear to those who have studied this company's record and progress—that excessive expenses and the payment of dividends in excess of actual earnings, is undermining its financial strength and security and leading the company steadily towards insolvency.
Notwithstanding these facts, Superintendent Hendricks, in an explanatory report upon Mr. Vanderpoel's
findings, has this to say:
Thus, the impairment of the capital stock has been made good. This act....taken into consideration with the fact that it has unreservedly complied with all suggestions and requirements of the department, indicates a conservative management and one which should havedepartmental approval....
Since the examination the management has made such changes and economies both in its methods of obtaining business and in its home office, that the department is satisfied that the company is now in an absolutely sound business condition; that it will be conducted along safe, economical and conservative lines, and believes that it merits the continued confidence and support of the public.
Thus does a complacent and pliable insurance supervisor gloss over the facts with the apparent intention of giving the polioyholders of the company a sense of security which they could not feel if the actual facts, as disclosed by Mr. Vanderpoel's report, were properly analyzed. Furthermore, as it seems to us, it gives the company officials what amounts to permission to continue the inefficiency of their management.
Turning back to the February, 1905, number of the Journal we find in an article discussing the "Value of State Insurance Supervision" the following paragraph:
The New York department employs examiners fully competent to ascertain actual facts. The fault lies not with those who "probe," but with those who, holding the anthorlty, suppress and disregard the actual results as they are shown. The distrust which the New York department has engendered as the result of Us quiescent attitude will not help life insurance, but on the contrary will injure it because the greatest companies in the country are supervised by that department.
The examination of the United States Life and the treatment accorded it by Superintendent Hendricks, is a practical and pertinent illustration of the truth of this statement. It does not make the United States Life stronger and better for the insurance superintendent of the New York department to excuse and palliate its shortcomings, and surely it does not help life insurance as a whole.
It is no time for soft words. Life insurance is going through the test fire of public opinion. There is need of strong men and strong measures. It is evident that the United States Life has not been and is not today competently managed. There are probably men in the agency department of that company who could put life and vigor and skill into its management, but they are not brought to the front under the enervating system of stock control which governs in this and other New York companies.
The United States Life cannot be saved by covering up. Its management needs the inject ion of new blood, the employment of men who can fearlessly face the situation and by intelligent honesty put this company on its feet. Unless this is done we feel very sure that it will continue upon the down grade over which it has been traveling.
* Surplus as shown Dec. 31, 1904, by company's own statement; since reduced to $444,742.85 (5.26 per cent, of liabilities) by examination of New York Insurance Department.
page 20
VICE-PRESIDENT TARBELL AND HIS INSURANCE PRESS CRITICS. UNIFORM INCREASED RATES ON NON-PARTICIPATING POLICIES.
Second Vice-President Tarbell of the Equitable Life is charged with being the instigator and prime mover in the present controversy in that company. How true this is we cannot determine. It wonld be natural and proper to expect that Mr. Tarbell would have ambitions for official preferment, likely to be interfered with by the retention of Mr. Hyde in control as vice-president of the society. But nothing has yet transpired to indicate that Mr. Alexander is not the real head of the revolt against the Hyde control or that Mr. Tarbell is acting only as his lieutenant.
Mr. Tarbell being on the firing line of competition is criticised more in insurance circles than either Mr. Hyde or Mr. Alexander, and several insurance papers, notorious for the complacency with which they allow their editorial columns to be subsidized by special interests, are bitterly attacking Mr. Tarbell. We find no specific charges of mismanagement but we do find this charge—that he is trying to supplant Mr. Hyde and eventually succeed Mr. Alexander to the presidency.
This of itself is not, as it seems to us, a sufficient ground for criticism, and when we note the character of some of the attacks upon Mr. Tarbell we are reminded of the fact that the less there is to criticise the more bitter and venomous the invective.
The impression has come to us from reading what has been said that Mr. Tarbell is not being fairly treated. All the comment of the insurance press seems to be upon one side. The past of his insurance career, as well as his life before he entered the business, has been reviewed and presented from the partisan viewpoint of those who evidently desire to injure his reputation. It appears, however, that there is another side and that is presented in the Cortland (N. Y.) "Standard" which has the following to say:
"The Equitable Contest."
The Standard has said nothing thus far concerning the contest which has been going on inilde the Equitable Life Assurance society, though one of the storm centers in it is an officer who in early manhood lived in Cortland county, and who still has many acquaintances and friends in this vicinity who know him and believe in him.
We have recently, however, received several telegrams from the city of New York containing inquiries about Mr. Tarbell, which have made us thoroughly indignant. These telegrams asked for information as to Mr. Tarbell's doings at Marathon, bis former home; as to his supposed manipulation of farmers with regard to patent fences and pumps; ai to whether be was ever indicted: and requested, in case he was, that full copy of the indictment be sent. They requested also that we interview Waters & Tuttle relative to charge that Tarbell collected more costs from defendants in driven well cases than were legal or were turned in to them by him as attorney.
Why the inquiries stopped here we don't know, unless it was due to the character of the telegrams which were sent in reply. It would have been just as pertinent to have asked, and there would have been just as much foundation for asking, whether Tarbell had not been arrested for beating or refusing to support his wife: for robbing the Marathon henroosts: for getting drunk and disorderly; for playing poker or dealing faro or cracking the Marathon bank. And if any oral! of these charges had been openly made, they would have been little, if any, worse, and little, if any, more lying, than many of the accusations against him with which certain metropolitan newspapers have recently been stuffed. Every one who was acquainted with Mr. Tarbell while a resident of the counties of Chenango and Cortland, where he lived until after he was twenty-eight years of age, knows that, as to good habits, good name and reputation, be was above reproach. In this locality be needs no defenders.
Any candid and fair minded man, contrasting simply the style of attack made uie of against James Hazen Hyde and that directed against Gage E. Tarbell in this controversy, would naturally have his sympathies enlisted for Mr. Tarbell, and especially if he knew of the services rendered by Mr. Tarbell to the Equitable society as compared with the record of Mr. Hyde in this same particular.
When Gage E. Tarbell, as a young man, lived in this county, he showed the same characteristics which have made him successful since. He was square, he had immense energy, an impressive personality, magnetism, force, enthusiasm and an infinite capacity for work and for details. When be took hold of anything it moved. When he set out to do anything he did it.
The only crime which Mr. Tarbell seems to have committed—and it is presumed that thti constitutes a crime in young Mr. Hyde's eyes—is that after Mr. Alexander hid inaugurated this movement, be, believing Mr. Alexander to be doing what wal for the best interest of the poli'-yl'old'-rs and agents, gave him his support.
Possibly the "Standard" baa a partisan interest in its defense of Mr. Tarbell, hut the Journal of Insurance Economics would very much regret, when this controversy is settled, to have it said that no insurance paper was willing to give Mr. Tarbell a fair show, and that there were none who recognized his great ability and his remarkable record as an insurance man.
Mr. Tarbell is a man of great power and force, but he makes enemies easily and he does not draw to himself many firm friends. Yet he has intense magnetic force, indeed he possesses qualities that are almost hypnotic. He has won his way to the front through his own standards of business sagacity and integrity, and there are those today in the business, even his competitors, who will testify as to his trust worthiness and to the value of his word once passed.
Yet Mr. Tarbell is not widely loved. He is not popular in the insurance business. We find the opinion almost unanimous that it would be better if Mr. Tarbell were thrown out of the Equitable and out of the business, for it is inferred that his fall from the Equitable would mean his extinction as a life insurance man.
We do not see how such a result could be. Mr. Tarbell is not a man easily suppressed. He has qualities which compel admiration and will contribute to his success wherever fate may place him. Out of the Equitable with him would not necessarily mean out of the business; on the contrary, we are of the opinion that he would be very much "in" the business.
If Mr. Tarbell is to be a part of the life insurance business we should prefer to have him just where he is. Wherein he is wrong and wherein he endangers the business we believe he is subject to control. He is sensitive to honest criticism and where he is wrong he will reform if properly approached and reasoned with.
But if Mr. Tarbell is fought unfairly, and we think he is being fought in that spirit, then he will certainly fight back, and the Journal of Insurance Economics will help him to a fair hearing It was the "Weekly Underwriter," we believe, which recently said: "The best way to create sympathy for any man is to overdo your censure of him in the press."
It is gratifying to note the increase in rates on non-participating policies by a number of representative companies. When the rates which are now superseded were first announced, a tendency was thereby noticeable very much in the wrong direction. About the last thing that the life business could bear up under would be a competition in lowering rates guaranteed in amount. The present increase is not great in amount but it is enough to mark a reconsideration of the former movement, hence it is most weicome.
But all the mutnals writing this class of business are not represented in the group which has made the advance. The in ut iiitls have much less excuse than the stock companies for naming a lower guaranteed rate on a given class of their policies.
It is always within the power of mutual companies to compete with each other in a legitimate way on the cost matter, by returning sizable dividends. This sort of competition in management results is always to be encouraged. It is the best argument for the mutual plan of organization.
On the other hand, the competition of purely stock companies would most naturally be strongest with a guaranteed rate as low as it could be made with safety.
Then if the mntuals show careless or ineffective management because the large initial rate seems to permit this, the sharp contrast shown by the rate of a well managed stock company will afford the needed corrective.
Sooner or later the relative merits of the two plans are apparent to the public, who are then in position to intelligently discriminate when purchasing. It would be rather disappointing to see a safe non-participating rate disappear altogether for this reason. The increase now made does much to secure its permanent retention.
page 22
LIFE INSURANCE EXPENSES OF MANAGEMENT FOR THE YEAR 1904
Mr. Brown's Statistics Show that Twenty-five Per Cent, of Gross Premiums is Consumed in Expenses—How this Outgo is Divided.
In the last number we presented a table by Benjamin F. Brown showing the economic results of new business in the case of twenty-five American life insurance companies. This month we are able to present a similar table showing the gross expenses of management on the entire business of the siune companies. We find that the gross premium receipts of these companies in 1904 was $331,441,307 and that the total expense oost was $83,252,959, or 25.11 per cent. of the gross premiums.
Of this total expense $52,782,324, or 15.92 per cent. was spent for commissions and agency expenses; $20,250,898, or 6.11 per cent., for administrative and clerical expenses, while $10,219,737, or 3.08 per cent., was spent for tuxes, fees and real estate expenses.
From the average expense rate of 25.11 per cent. we find considerable variation in the case of individual
companies, ranging from 18.26 per cent. to 44.52 per cent.
A closer examination of the different ratios discloses some interesting points, namely, that companies having a high ratio of commission and agency cost, when reduced to the final ratio of gross expenses, show up more favorably than other companies which have low commission and agency cost. For instance, the Connecticut Mutual, which has a commission and agency cost about balf that of the Equitable Life, has an administrative percentage about equal and a tax and real estate expense nearly three times that of the Equitable Life. Thus in the final ratio the Connecticut Mutual shows a total expense cost of 26.47 against a similar ratio of 25.04 for the Equitable Life.
Illustrating this point still further we quote the following ratios of three big New York companies:
page 30
OUR INSURANCE SENATORS: WILL THEY STAND THE PUBLIC TEST?
Two presidents of leading American life insurance companies have recently been honored by their state legislatures in being returned to the National Senate. Both stand high as business men—keen, shrewd, intelligent, forceful, possessed of attractive personalities, and regarded as having attained prominence by force of native ability and strength. The editor of the Journal has enjoyed a personal acquaintance with one of them, and aside from his ability as an insurance man, has found him a gentleman of great charm and scholarly attainments; one who, taken apart from the setting of corporate or political environment, might command, as it seems to us, the confidence and trust, of anyone.
And yet, in respeot to the public life which these men have chosen, we find in eminent magazines which command public approval, from the pens of responsible writers, articles which reflect upon the personal character, the loyalty and the patriotism of these men who now stand as representatives of the great business of life insurance in the United States Senate —John F. Dryden, president of the Prudential, and Morgan G. fiulkeley, president of the .Ktnu.
It is not a pleasure to the editor of the Journal to feel that the life insurance men who have secured this national eminence are in any respect vuluerable, so far as political careers are concerned, and yet he believes it his duty, as well as that of all others engaged in the business, to know and to understand how enlightened public opinion, as expressed in responsible magazines, takes its view of our insurance senators.
In the "Outlook" of New York we find this statement made relative to Mr. Bulkeley's political methods:
Dr. Newman Smyth of New Haven preached not long ago a vigorous sermon calling the attention of hla community to the tainted atmosphere with which ex-Governor Bulkeley's candidacy is surrounded. This sermon interested others, and out of it has grown a movement of protest which has spread throughout the state.
Unfortunately, for some reason perhaps not altogether unconnected with the power of advertising, the newspapers of the state have not paid very much editorial attention to Dr. Smyth's campaign, but they have been compelled to give it space in their news columns. Dr. Smyth has sent a circular-letter to every member of the legislature, stating two insurmountable objections to the elevation of Mr. Bulkeley to the senatorsblp.
One objection, says Dr. Smyth, is that in the management of the .Ktiia Life Insurance Company of Hartford, of which Mr. Bulkeley is president, large sums of money which were real ly due to the mutual policyholders were diverted to the benefit of the stockholders of the company. Dr. Smyth states that this is a matter of court record, and that in 1878 Governor Hubbard of Connecticut characterized this financiering as "scandalously unjust."
The other obstacle to Mr. Bulkeley's election, according to Dr. Smyth, consists in Mr. Bulkeley's opposition to the •' Corrupt Practices Act" in Connecticut. In a legislative hearing regarding this act, Mr. Bulkeley was asked by Senator Cleveland the following question: "Do I infer that it is lawful and right for you as a candidate for office to buy a vote which is for sale!"' Governor.Bulkeley replied as follows: "I think it is right for a candidate to secure that man's vote, if he is without principle and ignorant, by any means you can use."
In "McClure's" Lincolu Steffens, in his inimitable and convincing articles on municipal, state and national politics, defines New Jersey as "a traitor state" and its political machinery as comprised mainly of a band of "grafters" organized to betray the rest of the country by the passage and manipulation of liberal corporation laws, giving Senator Dryden a central place in this corrupt system, and among other things has this to say of Mr. Dryden and his "businesspolitical" affiliations.
Now the trolleys and other public utility businesses are still building up their business in Jersey; they are extending Mnei, buying and absorbing plants, making contracts all the time, so that they have, any way, to keep in touch with politics, and at the bottom, too, in the cities and counties. Senator Kean has some independent public utilities down his way. but most of the water, gas, electric light and power, and the trolleys of New Jersey are held by the Public Service Corporation, Thomas N. MeCarter, representative of the system. I say visible, because the Prudential has relations with the Equitable Life Id New York City; and since the Pennsylvania resides in Philadelphia, the real seat of the government of New Jersey, the most selfish and provincial of states, is outside its borders, and the state government, which so liberally has served national trusts, actually is governed by a syndicate representing national corporate interests. Is this good government?
president. This company was financed by the Fidelity Trust Company, Uzal H. McCarter, president. And back of the trust are the men tn the Prudential Insurance Company, John F. Dryden, president. Naturally, when General Sewell died, Mr. Dryden was elected to the Senate. He had never taken any part in politics before, and bia election caused some surprise and some difficulty; bis friends had to buy outrlgbt several votes for him—unbeknown to him, they say—but that will not happen again. The next time be runs for the United States Senate, be will probably go through as the chief visible
These statements taken by themselves do not establish the facts contained therein but they do show the attitude of the public mind and can but lead all in the insurance business to gravely and seriously ask if these suggestions and intimations can be true. One of these senators personally known to the editor has seemed to him a type and example of what a United States senator should be and yet our judgment looking at it from the standpoint of insurance affiliations and the natural and inevitable interest which is bound up in that affiliation, may not le the best. It may prevent us from exercising that clearness of vision which might come to an outsider probing for the facts and reaching his conclusions from the standpoint of a reading constituency whose confidence and patronage he is interested in maintaining. We are concerned with these outside criticisms because they represent honest judgment rendered by capable public writers. If they be not true it is still well that we should know these things are being said These men are no longer underwriters they are public servants and we have a right to test them by their public service and by their political careers. The work of a public writer even though it he in the special field of insurance is not always a pleasant one. His real force and power lies in always presenting without concern for the consequences, the thoughts, and conclusions, which honestly arise in his mind. In doing so he is often misunderstood, he often offends where no offense is intended, for the true publicist will say what he has to say fearlessly, even though it may most nearly affect adversely the interests or the feelings of those for whom he entertains the friendliest regard.
page 45,
page 57,
PRESENT SITUATION IN EQUITABLE LIFE AFFAIRS.
Does the Change in Stock Control Mean lmprovement? — Hendricks' Report and the Reforms which the Situation Seems to Demand.
It is not necessary for the Journal of Insurance Economics to detail the recent history of the Equitable Life investigation, for with it our readers are all familiar, but we will briefly outline it in order that we may properly come to the presentation of such conclusions as the situation seems to warrant.
Beginning with the time of the socalled "Frick" report presented to the directors, the situation in the Equitable Life has steadily improved. This report was searching and unsparing, so far as some of the officers were concerned. It showed fully the operations of the Hyde syndicate, the profits it had made, and in which Mr. Hyde, as well as President Alexander, had participated. It showed the personal extravagancies incident to Vice-President Hyde's office and control of Equitable finances and it criticised also the administration of the agency department under Vice-President Tarbell.
It pointed out the defects of the deferred dividend business and recommended that the new management of the company (the resignations of Messrs. Alexander, Hyde and Tarbell having been recommended) take up and consider a modification and im* provement of this phase of the business. It opposed the writing of insurance under high pressure and called for a change in the methods of making investments
It was an excellent report so far as it went. Unfortunately it stopped short of complete investigation and relieved from deserved criticism some of the members of the committee itself, as well as some of the directors and other officers of the company. For this reason it gave the impression to impartial observers that it was designed to accomplish purposes in which members of the Frick committee, and possibly others, had a more or less direct personal interest. So far as we can analyze the situation that self-interest lay in a desire to secure control of the Hyde stock.
The Frick committee therefore lost an opportunity and made a mistake in presenting a partisan report having back of it the promotion of certain well defined special interests. Nevertheless, the report has contributed to the final solution of the problem confronting the policyholders. The directors of the company made a mistake in attempting to suppress the Frick rrport. Their case would have been greatly strengthened had they, promptly accepted it and given it to the public press.
Following the rejection of the Friok report events moved rapidly. Many directors resigned. The reasons assigned for their withdrawal, together with the attitude of other directors made it clear to Mr. Hyde that he had lost sympathy and support. He thereupon accepted an offer of $2,500,000 for the shares left him by his father and thus passed on the stock control to Thomas F. Ryan. At a subsequent meeting of the directors Paul Morton, ex-secretary of the navy, was elected chairman of the board with plenary powers, and the resignations of President Alexander, Vioe-Presidents Hyde, Tarbell, Wilson and Mclntyre and Financial Manager Winthrop were placed in his hands for such action as deemrd best for the company.
Three of these resignations, those of Alexander, Hyde and Mclntyre, have since been accepted. Mr. Alexander's association with Mr. Hyde in the socalled Hyde syndicate and his acquiescence in if not responsibility for other acts rendered his retention impossible.
Following these changes camo t' ''preliminary" report from Superintendent of Insurance Hendricks covering his investigation into the company's mismanagement. Later on a more complete report will be made covering financial conditions. Mr. Hendricks' report deals with some of the larger features of "grafting" which have become fastened upon the company, particularly in its relation to other financial institutions—banks, trust and deposit companies. Briefly it is shown that this system of grafting was inaugurated by the founder of the company, Henry B. Hyde. The same skill and energy which he devoted to building up the Equitable Life was seemingly directed also to the promotion of his own personal fortunes. This system was continued and enlarged by his son, James H. Hyde, and acquiesced in by President Alexander.
Vioe-President Gage E. Tarbell is cleared by the superintendent from all charges against him on the score of extravagance, rebating, commutation of commissions and conspiracy against Mr. Hyde. Mr. Hendrioks says that the present plan of stock control, while relieving the' situation, does not go far towards restoring the confidence of policyholders. The entire elimination of stock control and what he deems of equal importance, "the elimination of Wall street control," is recommended, the stock, if purchased by the company, to be paid for at a price "only commensurate with its dividends."
The Equitable Life cannot immediately be mutualized but it is likely to become eventually a purely mutual company, either by purchase of the stock by policyholders, by legislative enactment, or by other legal methods which have been temporarily checked by injunction. In the meantime the sale of the stock to Mr. Ryan, the appointment of Paul Morton as chairman and of Grover Cleveland, Morgan J. O'Brien and George Westinghouse as trustees for the stock, authorized to install a majority of the board of directors representing the policyholders, insures a reorganization along improved lines. Mr. Morton is a man of unusual mental and moral caliber. The only blot upon his record has been the alleged charge of violating interstate commerce laws while acting as vice-president of the Santa Fe railroad. Of this charge he has been exonerated by President Roosevelt whose endorsement at this particular time is worth more than the unsupported charges and allegations of Mr. Morton's enemies and opponents.
In reorganizing the executive staff of the Equitable Life Mr. Morton will feel disposed, as it seems to us, to retain some of the officers familiar with its business and responsible for its success. Gage E. Tarbell is the strongest man on the executive staff and in the investigations which have resulted from the present situation, he has emerged with more to his credit than any other officer. He was criticised in the Frick report for excessive expenditures and advances to agents in connection with the agency department. In our opinion the high pressure business transacted by theEquitable Life causes an unnecessarily high agency expense just as it does in the case of the New York Life and the Mutual Life, and we may say also in the case of other companies which, even though they do not do a "high pressure" business, nevertheless think they must pay higher rates of commission on account of the standard set by the big companies.
But we hold the view that in any investigation of any life insurance company today there would be no official who could entirely escape criticism. Indeed, we would go further and say that in any investigation of the detail of any business or of any transaction, whether it be commercial or political, no individual, however honest and well intentioned, could escape criticism for some of his acts, especially if he were, like Mr. Tarbell, a man of force and originality capable of extraordinary accomplishments. Indeed, it would be impossible for any one man or any group of men, or the whole democratic group of people in the country to pick out any one man for any one position who would be entirely satisfactory to everybody or who in every act would precisely satisfy any one.
Therefore, the fact that Mr. Tarbell has been criticised does not render it inexpedient or improper for Mr. Morton to retain his services. If Mr. Tarbell is the strongest executive official in the company and has emerged from this investigation with clean hands, and it is important for Mr. Morton to have some one familiar with the insurance business and capable of holding together the agency plant of the company, he must, as it seems to us, by the logic of the situation and by the qualifications and experience which Mr. Tarbell possesses, retain him for the good that he can do to theEquitable and its policyholders.
In regard to the present ownership of the stock there exists a great deal of suspicion. But as we look at it the question is not so much who owns the stock, who bought it or how much was paid for it, as whether the defects existing under the former management will be changed and the affairs of the company honestly and efficiently administered.
So long as Mr. Hyde held the controlling interest in the stock there was no guarantee of honest and efficient management nor did he exhibit any evidence of a desire or determination to change this situation. Mr. Ryan purchased the stock and immediately put in effect a trustee proposition designed to give the policyholders the controlling voice in the management. In short, Mr. Ryan, as majority stockholder, has done what Mr. Hyde seemed incapable of doing or unwilling to do. Whether proper control has been substituted for control which was decidedly improper time alone must demonstrate, but there are guarantees of good management now existing which were entirely absent before.
The trustees named are not themselves to be the administators of the company's affairs. Their powers are limited by the charter powers of the stock to voting for the directors who shall be responsible for the administration. In short, the task of the trustees is to select fifty-two men properly qualified to act as directors, twentyfour of whom shall represent the stockholders and who may at the same time, of course, represent the policyholders, and twenty-eight who shall represent the policyholders and who might at the same time represent the stockholders.
The selection of the twenty-eight policyholders' directors will be made by the trustees after a canvass of the wishes and desires of all policyholders. In selecting directors nominated by the policyholders the trustees can exercise wide discretion and are not, by the terms of the deed of trust as we understand it, limited to the selection of directors securing the largest number of votes. Policyholders can express their preference by mail.
In conclusion, we think that the Equitable agitation has shown clearly that conditions demand of life insurance:
1. That administrative officers shall devote their entire attention to insurance and shall be so well paid for their time that they may be perfectly free to exercise their honest judgment upon insurance without consideration for the effect that it may have upon other interests.
2. That assets shall be invested solely as the interests of the companies may require and shall not be used in any way to promote other en terprises
3. That all companies shall at least afford applicants an opportunity to choose between deferred and annual dividend policies and that the compensation of agents shall be so adjusted as to make it equally advantageous for them to sell either contract.
4. That the transaction of high pressure business, with the excessive agency expense incident thereto, shall be discontinued. Reduced commissions will reduce the cost of insurance to the polioyholders and will improve the conditions of the business for the real professional life insurance agent.
5. Complete publicity and increased detail of accounting which will enable purchasers of life insurance to judge more accurately of actual conditions and insurance supervisors to more quickly detect discrepancies in accounts.
6. Complete restitution by policyholders' suits of all moneys illegally diverted from company assets.
page 61
LEGAL PROCESS OF MUTUALIZING THE EQUITABLE LIFE.
There is an abundance of legal power vested in the New York legislature and Superintendent Hendricks to deal summarily and successfully with theEquitable situation. If the charges of malfeasance made against the executive officers in the Friok report are found to be true by Superintendent Hendricks, he can remove said officers forthwith. The law says:
No director or officer of an insurance corporation doing business in this state shall receive any money or valuable thing for negotiating, procuring or recommending any loan from any corporation, or for selling or aiding in the sale of any stocks or securities to or by such corporation. Any person violating the provisions of this section shall forfeit his position as such director or officer, and be disqualified from holding such office in any insurance corporation.
It is quite evident, therefore, that those who retire under these circumstances are out of the insurance business for good.
Another matter has been brought to light by Mr. Justice Maddox's decision in the Lord injunction suit which most people have forgotten, if they ever knew of it. That is that the legislature of New York has the power to revoke the charters granted to insurance and other corporations under authority of the general laws. The power of revocation also carries with it authority to amend or alter or to suspend the operation of such charters.
This provision has been a part of the New York law since 1828; it was repealed in 1890 but re-enacted in 1895. This explains the great effort made to prevent the convening of the New York legislature in special session at this time. Massachusetts has had a similar law since 1830. It provides that every act of incorporation passed since March, 1831, shall be subject to amendment, alteration or repeal by the general oourt. The question of the constitutionality of the act arose in 1839 when the general court of Massachusetts passed an act which repealed the charter of the Chelsea Bank.
In 1855 the first insurance case to test the application of this law was that of the Massachusetts General Hospital against the State Mutual Life. The matter here in dispute was the payment of certain receipts of the insurance company to the hospital under a law long since repealed. The defense claimed that the law requiring such contributions was unconstitutional, as it interfered with the vested rights which bad been acquired under the act of incorporation. The court held that:
All acts of incorporation passed since 11 March, 1831, which contain no express provision limiting their duration, are, by the provisions of the statutes of the Commonwealth existing from that period to the present, subject to alteration, amendment or repeal. The act incorporating the defendants was pasied in the year 1844, long after the enactment of the revised statutes, and was of course accepted by the corporators subject to the provisions of those statutes. This seems to put at rest all further question as to the constitutionality of the statute.
In a later case it was held that a statute requiring a railroad corporation whose charter is subject to amendment, alteration or repeal at the pleasure of the legislature, to erect a station at a place on its road and cause trains to stop there, is not in violaiton of the constitution of the United States as impairing the obligation of a contract. It has also been decided that the right of the legislature to amend, alter or repeal the charter of a railroad corporation includes authority both to withdraw powers granted to the corporation and to confer new powers upon it and require their exercise, and is independent of the assent of the corporation.
It is to be presumed that there is a similar line of cases sustaining the New York law also. It is a fitting reminder that whatever abuses may be found in the present conduct of the life insurance business, they can l:e readily reached through existing means of remedy.
page 62,
PRESIDENT MORTON ON THE EQUITABLE'S HOUSE-CLEANING.
The new president of the Equitable Life, Paul Morton, has issued an address to polioyholders reporting to them what has been done in the line of reform and improvement since he took the office. He states in the first place that the accounts of the company have been thoroughly examined by independent expert accountants and the assets valued at $416,166,500, of which $67,142,865 is surplus above all liabilities. This includes, of course, deferred dividend surplus as well as general surplus. Both assets and surplus have been reduced by new valuation, the reductions occurring merely on real estate owned by the society or covered by mortgage, and in the stocks owned of some of the financial institutions in which the company has been interested.
Mr. Morton reports that economies resulting in a saving of over $600,000 per annum have already been inaugurated. This, he points out, is four per cent. interest on $15,000,000 and more than covers the marking down of assets.
Approximately one million dollars has been secured to the society through the disavowing of certain liabilities and the restitution of other sums illegally diverted. Advances to agents, amounting to $5,813,184 have been transferred from banks to the company's own accounts, thus increasing the society's interest income nearly $150,000 per annum.
President Morton says that the society hereafter will discontinue political contributions and rely entirely upon its policyholders to protect the company against unreasonable legislation. An effort will be made to confine the investment of reserves to "real estate mortgages or the securities of railroads or other well established corporations, serving those sections of the country which produce the premiums."
President Morton promises no reduction in the gross premium to be collected, but states that he is satisfied that economy of management will greatly increase the value of Equitable policies by producing greater dividends for those who hold them. In other words, that the company will be in a position to give its policyholders, through returned premiums, the "lowest cost consistent with safety." Mr. Morton states that the extraordinary expense to the company incident upon the present investgation is amply offset by the reforms which have been brought about. Moreover he says that the public agitation in regard to the whole question has only served'to attract attention to the impregnable financial strength of life insurance companies more effectually than could have been done by any other means. The utility of life insurance, he says, has been more fully demonstrated than ever before.
In Mr. Morton's closing promise we find the utmost satisfaction, for he says there will be no effort by the new administration to have the biggest company in the world. The effort will be to make it the best and safest. Conservative lines will be followed. It will be the policy not to solicit or secure new business at the expense of the present polioyholders, and in case it is determined that business in any section of the world is unprofitable that field will be abandoned.
page 62,
THE FRICK REPORT: WHAT IT MEANS TO OUTSIDE OBSERVERS.
From The Outlook of New York.
The Frick report, of which we give some aooonnt in another column, is more than an expose of unjustifiable methods which have been pursued by the Equitable Life Assurance Society. It is an indictment of business methods which have been pursued, apparently with little question, by men of eminent standing in the community, and permitted by other men, whose presence on the board of directors was regarded by the public as a guarantee of official and corporate integrity. The rejection of this report by a substantial majority can have no other effect than to make the general public perceive that this indictment, which was apparently against the two most pro'ninent officials, is really an indictment against methods and standards current in American business circles. For such rejection, accompanied as it is by the retention in their offices of both Mr. Hyde and Mr. Alexander, is tantamount to an approval, or at least a condonation, of their financial methods. It is perfectly certain that the Equitable Life Assurrance Society cannot have and will not deserve the confidence of the community until the business methods which this report condemns are repudiated by its board, and those who have pursued those methods are removed from the present control of the society. The report is a condemnation of specific acts and omissions by Mr. Hyde and Mr. Alexander, but it is no less a condemnation of methods of doing business too common in America, and of standards of morality which are wholly unjustifiable. For example:
Whether resulting from a misconception of the importance of growth in size from the competition of other companies, or from the human instinct to excel, there has existed a disposition to lose sight of the true purpose of life insurance and devote all energies to attaining bigness.
This ambition for bigness which has been the curse of the Equitable is the curse of many another American enterprise; for the habit of confounding greatness and bigness is distinctively an American habit. Again:
The committee has fully considered Mr. Hyde's explanations of these charges. In the main be seeks to exonerate himself by pleading the custom of the society, the participation of others, the return of money improperly acquired or used, and the beneficial result! to the society. As it is the function of this committee to determine what is wrong in the society's management, Mr. Hyde's arguments cannot avail. The practices he bas pursued are wrong. The fact that others have pursued them or acquiesced in them only convicts them of equal guilt.
This following of the multitude to do evil, this accepting a common custom as affording the true basis for a common law of morality, is another very common vice in a democratic society, which, for the motto, The king can do no wrong, substitutes—The people can do no wrong. Again:
So open, flagrant, obvious, persistent, and dangerous are the practices of which Mr. Hyde is accused, that the establishment of their truth convicts of equal guilt all who were cognizant of their existence and failed promptly to set about their correction.
We have not lately seen any more courageous and wholesome statement of the responsibility of boards of directors. Again:
It is elementary that a corporation is a trustee for its stockholders, the funds and other property held in the name of the corporation constituting the trust estate....With respect to the funds and other property of the society they [the chief executive officers] are, therefore. in the highest sense fiduciaries, and are governed by the principles of the law of trusts, which are not less strict—in some instances stricter—than the moral code itself. One of the most fundamental of these principles is that a trustee shall not profit at the expense of the trust estate. Another, closely connected with that just mentioned, is that a trustee shall not enter into any relation with the trust estate in which his interests and those of the estate may conflict, as, for example, the relation of buyer and seller.
This is sound morals, and we believe it to be sound law. Yet in repeated instances a syndicate formed of members of the board of directors, and headed by Mr. Hyde, purchased securities in their own name and sold them at a profit to the Equitable Life Assurance Society, voting as directors to make this purchase from themselves as a syndicate. In nine of these transactions, securities to the par value of $9,300,000 were handled, the total profit to the syndicate in the nine operations being $204,504.39, of which over $167,000 were divided among eight individuals who were directors, six of whom were members of the executive and finance committees whose special duty it was to conserve the interests of the society in all investment transactions.
The Equitable furnishes a gigantic illustration of the sad truth that graft is by no means confined to the police or to political magnates and public service corporations. The history which Miss Tarbell has given of the Standard Oil Company may be, as it has been, questioned. The stories which Mr. Lawson has told have produced no such impression on the community as they would produce if they were accepted without discount. But this report of the Frick committee is based largely upon the official statements of the very men whose transactions are condemned; and, notwithstanding the report, the men who conducted them are, at least for the time, continued in office. No severer indictment of business methods and business standards in American financial circles has ever been presented than this report, coupled with its rejection by the board of directors.
page 63
INCREASED STRINGENCY OF INSURANCE SUPERVISION LIKELY.
From The Chronicle Of New York.
The Chronicle is not in the least degree an alarmist. Its editors are optimists, and believe that the tendencies of things are toward better conditions instead of worse. But we should be recreant to our duty as we see it, were we to fail at this time to point out to life insurance managers that the indications are, that a period which will test all things in insurance, is near at hand. In performing this duty, we aim merely at that forewarning which means that companies may be forearmed.
There are many evidences of disturbed conditions near at hand, which will cause the public and state insurance officials, under the pressure of public opinion, to apply more and more severe tests of life insurance management. A short time ago, these tests were applied to one of the older, but smaller companies, and fortunate was that company, in our opinion, to be the first. This is now being followed by the exposures of menacing conditions in one of the largest organizations, which is even now undergoing drastic investigations. Other small companies, which were already undergoing examination, are for the moment nearly lost sight of.
The Chronicle is of the opinion that one of the things which must necessarily come out of these conditions, applying to the older companies, will be that there will be a stricter accounting in regard to surplus, and that this accounting will also ultimately take the form of holding companies responsible for confining their first commissions to what may be paid without exhausting the margin of profit to existing polioyholders realized from the new business.
The smaller an! newer companies, more than fifty of which have been organized within the past fifteen years and some of them with great success, are also certain to feel the consequences of the general disposition to supervise with greater vigor. The conditions winch obtain in a small New York company, now under fire for the second time within twelvemonths, do not exist in many companies, to be sure; but it behooves the managers of each one of these smaller companies to take account of stock and prepare for stricter supervision than has recently been known.
The Chronicle is of the opinion that this pressure upon these smaller companies is likely to take the form of condemnation of the preliminary term plan, so far as it is applied to limited payment and endowment policies, at least; and, while it is probable that what has happened may be permitted to remain in its present status, there is every reason to think that a change to a more scientific method will be required. This should be weicomed by the smaller companies, and will be, by those whose officers are more intelligent, and also more economical and efficient in the conduct of their business.
The lessons of the past should be conned in this matter. During the disturbed conditions in the '70s and early '80s, stricter supervision was caused by the pressure of public opinion; and the leniency which permitted companies to live and build up a large business, notwithstanding the limitations of net valuation, was suddenly withdrawn. The conditions are now better understood, and the history of the failures that then occurred should not be repeated; but in order that it may not be repeated, it will be necessary for each company to consider its own situation carefully, study the nature of the problems before it, plan to give to policyholders the best possible results, and to show that this is the case beyond a doubt, and see that its house is in order.
Fortunately, it is believed that there is a spirit of mutual helpfulness and support abroad in the land between the largest and strongest companies and the smallest and weakest of them, which means much for a successful passage through the waves of all the craft that deserve to live. It is not likely that it will be a case of scramble and riot, one company attacking another, until the greatest possible injury is inflicted upon all.
page 87,
GROVER CLEVELAND, "THE GREAT TRUSTEE" FOR THE EQUITABLE
From The Boston Herald.
Grover Cleveland is fortunate in his opportunities. It is one of the splendid illustrations of the value of democracy that the first citizen of the republic is a man in private life. Hardly any one will deny him great distinction, or the honor of being of great usefulness to his fellow-citizens, or due praise for high achievements, although there are many who, for the moment at least, always regard the passing show as of higher interest, perhaps importance, than the living and continuing and all pervasive institutions of lasting beneficence. To a good many, however, especially to those who think before they speak, there remains an abiding faith in character, in steady and sane judgment, and to these Mr. Cleveland ranks as the first citizen of the republic. He has won the confidence of his country. The people of whom he is modestly one are often inclined to regard him as their refuge and strength. They know his unselfish devotion to their interests. They are sure of the depth and genuineness of his patriotism. They are always confident that he will do his duty by them, and do it for them and not for his own profit or his own popularity. He does not seek the centre of the stage, but he takes it when he is convinced that he may render public service by doing so and when he is invited.
Mr. Cleveland has also the happy faculty of speaking the right word. He has accepted the trusteeship of the Equitable stock purchased by Mr. Ryan, or by his syndicate, for the protection of the policyholders, the beneficiaries of the trust. In his letter to Mr. Ryan, Mr. Cleveland writes: While the hope that I might aid Id improving the plight of the Equitable society baa led me to accept the trusteeship you tender, I cannot rid myself of the belief that what has overtaken this company it liable to happen to other insurance companies under fiduciary organizations, as long as lax ideas of responsibility in places of trust are tolerated by our people. The high pressure of speculation, the madness of inordinate business scheming and the chances taken in new and uncertain enterprises are constantly present temptations, too often successful, in leading managers and directors away from scrupulous loyalty and fidelity to the interests of others confided to their care.
We can better afford to slacken our pace than to abandon our old, simple, American standards of honesty, and we shall be safer if we regain our old habit of looking at the appropriation to personel uses of property and interests held in trust in the same light as other forms of stealing.
At this time, or crisis, these words cannot be too often published or too seriously pondered on. They are of those admirable statements which Mr.Cleveland has uttered more frequntly than any other public man of our generation, statements which instantaneously touch common beliefs or oommon sentiments which may have been long voiceless; the truth of such statements is often demonstrated by the universality of its recognition.
There is no honest-minded man who does not realize the sinfuluess of our financial world—that is, no honest mind which is not distorted by bad traditions or is not prejudiced by preoccupation in money getting. There are many good men whose unconscious sordidness has led them to unconscious participation in the evils of which Mr. Cleveland speaks. The point of view of the intense business man has given to him a false conception of the meaning of his own conduct, of the significance of the rules and of the practices of business. For many years we have been conscious that men will do in business what they could not do in other relations of life; that they will say in their offices and on the market place what they would not say at home or to-their friends or to their dependents.
Fundamentally, the great sin of the age in the business world is breach of trust, and this indicates that oharacter has ceased to play its part in the business community. Mr. Cleveland has put his finger on the sore spot, the spot that is sore in financial as well as in political life. The rule of honesty is that the man who accepts a trust— and he who seeks a trust is bound by the same rule—can only deserve his office and its compensation by thinking of and working for the beneficiaries of his trust. The moment a place of trust becomes a place of profit for him who administers it, that moment the trustee and his wards are in danger. He is in danger of corruption, and they are in danger of becoming the victims of corruption.
There is no reason to select one company, life insurance or other, for oastigation. One case may expose the evil, or it may so arouse the consciousness of the country to the great extent of the sin that not only will there be proper punishment meted out, but there will also be an elevation of the moral practice of trustees, and of other men of business, to cor respond more nearly to the real moral tone of the plain people. Mr.Cleveland employs strong lanpnnge. He never hesitates to give the Mow when the occasion calls for the low. He says that the personal use of trust property is one of the forms of stealing, and he is right. There is occasion for this strong speech, and it is an occasion which, as we have already said, comes happily to the ex-president. The occasion is happy for the country also, for Mr. Cleveland is the man of all men who is willing to utter that which his simple duty requires him to utter.
This trustee who knows what a trust is, what responsibility is, what his duty is, is the direct opposite of the men whom he condemns. The country rests content when he assumes a task in its behalf, or in behalf of any part of it, because of his character. Men, after all, when they come face to face with the hard crises of life, give testimony to their consciousness of the value of character. They confide in high purposes, in stability, in calm judgment, in unselfishness. This instantaneous feeling of relief which comes over all of us when we learn that Grover Cleveland will accept a trust because he deems it to be his duty to do so, is the highest tribute that has been paid to any man within the memory of our generation, and the knowledge that his and their countrymen thought thus of their father will be the most precious heritage of his children.
ACTUARIES IN LIFE INSURANCE.
No less remarkable than the growth of I1imifance itself, is the increasing attention directed to the scientific features of actuarial practice— which may be de6ued as the application of mathematical principles to life contingencies. Of all the alluring studies that science holds out in fascinating invitation, none appeal more for human interests than the study of human life— and of this engrossing study life insurance science is made.
It must not be thought that a proficiency in the applications of the mathematics makes up the requisites for a competent actuary. For life insurance is intimately connected with many branches of knowledge, and the actuary, as the sclentlst-in-chlef of the insurance company, must have a comprehensive grasp of many of the other fields of professional endeavor—particularly so, in the absence of specialists to represent these classes.
Even in the association with men equipped to care for certain special interests, such as legal counselors and medical directors, it becomes adTlsable to have in the actuary a man capable of appreciating and reconciling the somewhat conflicting opinions likely to be held at times among men who, as professionals, see from biased view points.
While the administrative officers of the companies have a well-grounded working knowledge of actuarial science, it is unusual here, in America, for executives to be endowed with the technical training of an actuary. Professional possibilities for the actuary are not, therefore, so large as in England, where it is the custom to advance into administrative office men considered to be qualified by actuarial service. Many well informed insurance men see within our country a drift in the same direction.—William J. Graham.
CO-OPERATION, NOT COMPETITION, THE LIFE OF TRADE,
by George W. Perkins, Vice-president Of The New York Life.
We of the New York Life have believed that competition is no longer the life of trade, but that with the dawn of the twentieth century cooperation is the life of trade.
Failure was predicted when we eradicated the old general agency system, by which thirty or forty general agents fought with one another and with their own company at the same time, and substitued a centralized system in which the youngest office boy in the newest office in the most remote corner of the globe is brought into direct relation with the president of the company in New York. Failure of the direst sort was predicted because this was eliminating competition and substituting co-operation; but in place of failure we have won complete success and have demonstrated beyond our fondest dreams that co-operation will produce more business and a better business, and at a lower cost to the policyholders than the old system of competition. In proof of this we need but make the statement that this company today has two billions of insurance on its books—the second billion having been secured within the last six years and at an expenditure of $20,000,000 less than it took to secure the first billion.
It is said that "beauty is its own excuse for being," but the same cannot be said of bigness, for mere size is, in itself, no justification for existence. The larger the life insurance company, the better and stronger it ought to be. Unless with its growth and development it can provide better and cheaper insurance, it has not met the duty that goes with growth.
Those to whom great opportunities come, bringing great power, should bring forth great benefits, not alone for themselves, but as well for the entire business fabric of the world. In society the laws of honor and of the state give individuals great freedom of action, but at the same time compel them to respect one another's rights; and so must it be in business. The greater the wealth and power of an individual, the more he should respect the property and rights of others; and the same duty lies upon powerful organizations.
The essence of life insurance is the forecasting of the future, and perhaps no quality is more necessary in the executive staff of a great life insurance company than the ability and willingness to look ahead, to analyze public thought and its movement, to anticipate changing conditions and to have the courage (for it takes courage) to act in the present for what one believes to be the best interests of the future.
Men in positions of trust and responsibility are too often prone to let wellenough alone; to think that they are responsible only for the current acts of their administration and that they may leave the future to those who succeed them. Such a course of action in the management of a great life insurance company is little short of criminal. No board of trustees or set of executive officers has a right to bring hundreds of thousands of policyholders into a given company without a clear well-defined policy as to what condition that company is going to be in, not today nor tomorrow, but ten, twenty, thirty years hence; for life insurance contracts are not made payable thirty days after date, but more nearly thirty years after date; and while no one can set himself up as an oracle of the future, and human brains and efforts cannot build against unforseen catastrophes, yet very much can be done by right-minded, farsighted management to secure the future.
WORK OF PROTECTIVE COMMITTEE OF EQUITABLE POLICYHOLDERS
A Movement Which Has Earned Public Confidence and Proved lts Capacity for Satisfactory Work.
Of all the movements started since the Equitable disclosures began, none have deserved greater public confidence than the "Protective Committee of Policy holders" organized in Boston April 18 and originally formed as a New England committee. Afterwards, owing to interest shown by policyholders of other states, the committee was reorganized Hs a "general protective committee." Still later the interest of foreign policyholders was recognized by the addition to its ranks of Sir William Mather, Member of Parliment from Manchester, England. The other members of the committee are William Whitman, Arthur Amory, George P. Field and Edwin H. Abbott, all large policyholders and well-known business men of Boston.
Louis D. Brandeis was selected as counsel. No better choice could have been made. Mr. Brandeis not only stands at the head of the Boston bur, but has on many occasions shown his disinterested concern for matters of public interest. He is a lawyer who can be trusted to do this work for the policyholders of the company without regard for the emoluments which may or may not come to him.
The protective committee has shown from the start a desire to proceed in its work with caution and conservatism.
Its influence, therefore, upon the company's affairs in this crisis has not only been felt but has been positively beneficial. One of its members, Mr. Whitman, has been elected a director and the committee, at the request of the trustees of the stock, has submitted for their consideration the committee's views as to the future conduct of the society.
They are worth reading and are published below in full:
At the conference held June 27, 1905, between yourselves and Messrs. Whitman, Field, and Amory of our committee, and our counsel, Louis D. Brandels, you requested that we submit to you in writing the substance of the views as to the future management of the Equitable Life Assurance Society which we had expressed to you orally on that day. This we now do.
First. The sole aim of the society should be to furnish insurance of absolute safety at the smallest possible cost. The ability to do this must be the test of success. Efforts to secure a large amount of new business or to increase the assets controlled by the society are justifiable only so far as they subserve that end.
Second. In order that insurance of absolute safety may be furnished at the smallest possible cost, radical changes in system must be introduced. The mere substitution of other officers, however scrupulous and efficient, or the discontinuance of particular extravagant or illegal practices, or the recovery of profits wrongfully diverted, will not suffice.
Third. In order to secure insurance at low cost the society must, in addition to other economies, discontinue the lavish payments for agents' commissions and for advertising — practices common among promoters of mining enterprises and of patents—and substitute therefor methods more nearly following those of the great savingsbanks and the mill mutual insurance companies. No benefit can result to policyholders from the mere increase in the volume of business. The conditions in a great life assurance company are wholly unlike those of railroad or manufacturing coneerns, where increase of business naturally tends to reduce the cost, because there are fixed charges to be distributed against the total earnings. The conditions in a mutual life insurance society, like the Equitable, are also wholly unlike those in ordinary private business,wbether incorporated or not, where the increase in volume may tend to reduce the cost to the public, because the owner of the business is content to accept a less per cent, of profit on the output in order to secure a greater aggregate profit, resulting from larger gross receipts. In a life insurance company already large, new business obtained at high cost must necesiarlly prove a burden to existing and future policyholders.
Fourth. A mutual life insurance society should, as to each policyholder, be conducted as a benevolent institution. No one should be induced to take out a policy unless it is advisable to do so in the interests of those whom he desires to protect by it. No one should be lured into becoming a policyholder. The fact that in Hun. a year of general prosperity, 33,354 policies lapsed, when the average number issued in the two preceding years was only 112,139, indicates H'''t a very large number of persons were at least ill-advised when they took out insurance in the society. The fact that 22,220 policies, aggregating 181,649,311 duly applied for, passed, written, and entered, were not taken by intending policyholders, indicates the high degree of persuasion which must have been exercised by the society's agents or solicitors. In addition to to the 33,354 lapsed policies, there were in 1904 also 9,691 policies, aggregating $34,309,929, surrendered, while only 11,279 policies, aggregating 933,866,917, came to a natural termination by death, maturity, or expiry.
The relation of the society to intending policyholders should obviously be not only free from active deception, but should be characterized by complete frankness. Unfortunately, this obligation has not been observed in the past, as is shown among other things by the advertisement of a surplus of over 380,000,000, without disclosing that the greater part represented deferred dividends.
• Fifth. The issuance of deferred dividend ; /policies should be discontinued or greatly llml'ted. The legitimate business of a life insurance \ company is to insure the life of the individual and to issue annuities. It should not be used as an investment company or as a means of gambling on the misfortunes of others. The issuance of policies on which dividends are deferred for long periods seems to be open to both these objections. It is clearly open to other objections. It tends to extravagance and inefficient management, because it removes the protection which flows from publicity and annual accounting. The annual declaration of dividends, the best practica-1 test of the efficiency of the management, is denied to the policyholders. It vests also in the management the control of huge funds not required as an insurance reserve, with the temptations incident thereto.
Sixth. To insure safety the investments of the society should be surrounded with the legal safeguards as to the character of investments now supplied in case of savings banks. The funds held by life insurance companies are held for purposes in the main similar to those for which savings banks exist, but the safeguards applied by law as to the character of savings-bank investments are lacking in the case of life insurance companies.
Seventh. Further to protect the funds of the society and to prevent their being used directly or indirectly to further the private or other interests of officers, provision should be made to prohibit the executive officers from engaging in any other business or holding office in any other corporations. Treasury safeguards should also be adopted to prevent payments without properly authorized warrants.
Eighth. Methods of accounting should be introduced by which the directors may be kept advised at all times in detail of the conditions and the operations of the business. The cost of every department of the business and every kind of business transacted must be clearly determined and disclosed, and likewise the condition, character, and result of each investment. Publicity as to the policyholder also is essential to secure the confidence of the public and to ensure the proper conduct of the business by officers and directors.
Ninth. In order that the above recommendations may be not only introduced, but properly carried out and maintained, the complete inuiualizatlon of the society is necessary. It should be brought under the absolute control of the policyholders.
Some of the views held by the committee relative to life insurance will no doubt be modified by subsequent investigation,but they are in the main sound and its work should be encouraged not only by policyholders but by insurance men as well.
The protective committee will be continned, as it should, and its work will no doubt receive increased support from policyholders whose interests it is so well equipped to serve.
FOUR MEN UPON WHOM THE PRESENT FORTUNES OF THE EQUITABLE LiFE ASSURANCE SOCIETY DEPEND.
Grover Cleveland, described by the Boston Herald as the "great trustee," vested by the owner of the majority of the stock with power to select and elect directors. Paul Morton, President of the Company, vested with powers of reorganization and administration in Equitable affairs. Gage E. Tarbell, Vice-President, upon whom the management depends for its underwriting and direction of agency forces. Thomas F. Ryan, who controls the majority of the company's stock and who has declared his willingness to sell this stock to the company at the price paid for it.
THE MOTIVES AND PURPOSES OF FINANCIER THOMAS F. RYAN.
From The Outlook, New York.
A careful study of all the facts justifies the belief that the reorganization plan is a sound one, and that Thomas F. Ryan, who devised it and who has carried it into effect, deserves the approval and support not only of policyholders of the Equitable, but of all men throughout the country who believe in the stability of the banking system. For upon the banking system, in the last analysis, rest the material prosperity and comfort of every thrifty citizen,be he mechanic,farmer, school teacher, clerk in the general store, country doctor, capitalist, newspaper editor, or laboring man. We shall here endeavor to state the grounds for our approval of Mr. Ryan's plan. For several months the Equitable Society has been torn with dissensions which have threatened to disrupt and ruin it. While it is primarily an insurance company, it is in reality a great savings corporation, with assets amounting to over four hundred millions of dollars, and with an annual income of about eighty millions of dollars. Several hundred thousand policyholders have been putting their savings into its treasury annually for many years. To have such a gigantic savings bank come to financial ruin not only would mean disaster to an army of policyholders, but might precipitate a panic which would affect banks and bank depositors—that is to say, every thrifty and industrious citizen—to the remotest parts of the country.
Is it not a great puplio service to avert such a calamity as this? We assert that it is. We assert that a broad minded, publio spirited, and patriotic banker may take the same unselfish and altruistic interest in accomplishing such a splendid salvage that is taken by the statesman who by brilliant and able diplomacy averts war, by the expert surgeon who saves a valuable human life by a capital operation, by the physician who averts an epidemic by a strenuous campaign of hygiene,or by the newspaper editor who sacrifices his popularity to maintain a political principle which he believes to be for the public good. Of course the diplomat wishes to earn his salary, the physician to be paid his fee, the newspaper proprietor to receive his dividends, but that does not make the public spirit any the less commendable.
In our opinion, Mr. Ryan, vice-president of the Morton Trust Company, of this city, a successful railway promoter, at the present time powerful if not dominant in the affairs of the traction company which controls all the surface street railways of New York City, and the successful originator of the Equitable reorganization plan, has done his work in this reorganization from motives of public spirit and public service. This, of course, is merely our opinion. We do not profess to know the inner workings of his mind and spirit any more exactly than do those who ascribe to him motives of selfishness and money grabbing. But we think it is time to say plainly that poor men are not always necessarily, by virtue of their poverty, public-spirited, nor are rich men always necessarily, because of their riohes.mean and untrustworthy.
However difficult it may be to judge of a man's motives, his public acts are matters which his neighbors may discuss and define. In the present instance the facts are well known. Mr. Ryan, for the sum of $2,500,000, has purchased from Mr. Hyde a controlling interest in the stock of theEquitable Life Assurance Society. He has organized a "voting trust" consisting of three nninpeachable and publicspirited trustees, ex-PresidentGrover Cleveland, Judge Morgan J. O'Brien, and George Westinghouse. The stock which Mr. Ryan has purchased he has placed in the hands of these trustees for five years, the longest period that such a trust is permitted by the laws of the state of New York to exist without renewal. "The trustees are exclusively authorized"—we quote from the trust deed—"to exercise the voting power on the stock held under this agreement for the election of directors of the society, and shall at every annual election of directors of the society so vote on said stock. . . .that of the entire fifty-two directors twenty-eight shall be policyholders of the society, selected by or on behalf of the polioyholders, and twenty-four shall be lawfully eligible persons selected by the trustees in their sole discretion."
We have carefully read the trust deed from which this provision is taken, and it seems to us that it is framed for the express and exclusive purpose of putting the property and interests of the polioyholders of the society into the untrammeled and untied hands of a board of trustees distinguished not only for its high sense of personal and public honor, but for its executive ability.
THE EQUITABLE LIFE AND THE MEN NOW IN COMMAND.
The Company's Prospects, the Guarantee Offered by the Present Management and the Outlook for Agents.
The affairs of the Equitable Life have been deeply probed. Probably the bottom has been very nearly reached and the worst now known. With graft eliminated, deadwood cut away and investment values reduced to a conservative basis, the Equitable will be in splendid position to command the confidence of life insurance investors and serve the interests of its policyholders. When all is known and other companies are subjected to the same searching inquiry, we anticipate that the Equitable will stand as one of the greatest life insurance institutions built up in modern times; great, not only on account of size and results produced, but because of the greater economy and higher ethics which will now be applied to its administration by those who have assumed responsibility for its future success.
Of these, four figures stand out prominently: Grover Cleveland, Paul Morton, Gage E. Tarbell and Thomas F. Ryan. All of these men have been criticised and there are still some who affect to place little confidence in the sincerity of their declarations or the propriety of their purposes. But the same things would be said of any who might, by fate or circumstance, be brought into the same positions. No other men could be selected for these respective responsibilities who would be any less objectionable than Messrs. Cleveland, Morton, Tarbell and Ryan, and none, as it seems to us, who would collectively inspire greater confidence.
Mr. Cleveland has laid down a platform for his own guidance as trustee of the controlling stock which should satisfy the most exacting. Mr. Morton's acts thus far justify the confidence reposed in him by President Roosevelt. Mr. Ryan has shown that, as a financier, he is prepared to meet all legitimate requirements and do everything within reason to meet the wishes and demands of the policyholders. Mr. Tarbell has the support of the company's agents and approval of rival insurance men. With new ideals inspired by advancing public opinion, he has shown that he is capable of adapting himself to the modern requirements of production and business getting in life insurance.
Better than all else, the polioyholders of the company are now interested in its welfare as they never have been before. They appreciate the value of their franchise as members of the company and co-sharers in its future prosperity. With a clean administration, sound financial condition, and a demand for life insurance which has been increased by publicity, the loyal agents of the company should find themselves well equipped for the future.
PRESIDENT ROOSEVELT ON PAUL MORTON'S QUALIFICATIONS.
From A Letter To Mr. Morton.
"Since I acepted your resignation as a member of my cabinet you have undertaken, perhaps, the greatest and most important work now open to any business man, in assuming control of the Equitable Life Assurance Society. You do not need to be told again the confidence I have in you and my belief in your absolute sincerity of purpose and your unflinching courage. I know that the mere fact that you have consented thus to take control of the society means that there will be a genuine attempt to make a new, clean management, a control really and honestly in the interest of the policyholders and one which will make impossible the crooked and objectionable practices that have hitherto prevailed in the society. Ex-President Cleveland, in consenting to act as one of the three trustees to hold the stock of the society and to use voting power of such stock in the selection of directors, concludes his letter by saying:
'"We shall be safer if we regain our old habit of looking at the appropriation to personal uses of property and interests held in trust in the same light as other forms of stealing.'
"In other words, you and Mr. Cleveland intend to see that the affairs of the society are managed not merely with the honesty requisite in order to keep clear of criminal proceedings,but with the fine sense of honor which recognizes in the trustee—and that is what the man responsible for the management of any great business corporation is nowadays—the duty of managing his business affairs with a high sense of obligation not only to the stockholders and the policyholders, but to the general public. Mr. Cleveland has especially stipulated that he is to be absolutely free and undisturbed in the exercise of his judgment; you have especially stipulated that you are to be absolutely free and undisturbed in the exercise of your judgment.
"I have faith not only in your will to doright,but in the judgment which will enable you to do right. As I understand it, the majority of the stock is to be put in the hands of a board of trustees, of which Mr. Cleveland has accepted the chairmanship, and they will have absolute control, subject, as to the majority of the directors, to exercising their own judgment without control. Your own policy will be, I know, to give the policyholders a square deal and to clean house thoroughly. You would not take such a position if you did not have a perfectly free hand, and if you were not unhampered by commitments to any body.
"I do not congratulate you upon entering upon this work, for I do not wish to congratulate any man when he puts his harness on, but rather to wait until he takes it off. But I do wish to express to you not only my belief in you and your success, but my strong feeling that you have undertaken one of the most important public duties that can befall any man just at present."
VICE-PRESIDENT GAGE E. TARBELL AS AN AGENCY MANAGER.
From The Journal Of Insurance Economics, February, 1902.
Gage E. Tarbell is today probably the most interesting and striking personality actively engaged in the American life insurance agency field. As the head of the field force of the great Equitable Life Assurance Society, he wields an influence which has brought to him the reputation of being a great leader of men.
To those acquainted with Mr. Tarbell the source of his power and success with men is plain. One cannot come into contact with his dynamic energy, his abundant enthusiasm, his towering personality without being
filled with a consuming desire to work and to win. When asked,on one occasion, what he considered the chief elements in his success, Mr. Tarbell said: "A willingness to work coupled with a love for work; energy, determination, and patience—by patience I mean a willingness to keep on working, if necessary, for years to accomplish that which I set out to do, without ever giving up."
Mr. Tarbell leads men by virtue of his enthusing personality. Other men can lead, can plan, and execute, and manipulate large bodies of men by force of their mental capacity; but Mr. Tarbell possesses as well a kind of electryfying physical force which is all-pervading. He looms with his great height over the person to whom he is talking, literally enveloping him with his ceaseless energy. Men who come into his presence cannot help being inspired to work, whether they will or not.
Mr. Tarbell has been marvelously successful as a manager of agencies, and has built up a field force which is splendidly equipped for efficient work. He believes in the Equitable. He has never served any other company and is saturated with loyalty for the institution and unswerving devotion to its interests. This spirit of loyalty and devotion permeates the agency force as a whole, and makes it responsive to the changes necessary for the welfare of the company.
Mr. Tarbell has attained his present commanding position in life insurance without seeking it. He did not apply for the office he now holds. It came to him because he was fitted for the work by capacity and experience. He mastered every detail of agency work; he began at the bottom as a solicitor, worked through various departments, and in this way came to a knowledge of the business, as well as of himself, which fitted him to stand at the head of a great agency force.
LAPSES IN LIFE INSURANCE: WHY THEY OCCUR.
J. H. Jefferies Before The Pennsylvania University.
Lapses represent cases which have been nourished through infancy with the milk of new commissions, medical fees, agency expenses, and mortality risk, and their going out means actual loss to a company when the withdrawal occurs within two or three years after issue, or to keep up our simile, before the new members of the insurance family become contributing or self-supporting. In this connection it should be pointed out, however, that the gain from light mortality among selected lives during the first years of the risk offsets, to some extent, the initial expense.
Lapse ratios are caiculated on the relation which the amount thus terminated in any year bears to the mean insurance in force, and as lapses have been shown to be most frequent during the early years, it follows that a company producing a large new business will show a larger lapse ratio than one writing a comparatively small new business, but with a great number of old policies on its books. The managers of progressive companies, however, consider it their duty to extend the benefits of insurance to the largest possible number of insurants that a consistent regard for safety and reasonable cost to all will permit, and if in doing this pome are attracted who will later withdraw, their withdrawal is looked upon as one of the penalties of progress, but nevertheless a thing to be controlled or avoided as far a possible.
It was at one time generally held that lapsing members exercised an adverse selection against a company in that only those who were in good health would retire and the unhealthy or impaired remain, and that the eventual result of this selection would be an increased mortality experience. While there is no doubt that there is a certain degree of truth in this view, it is unquestionably the fact that the main cause of lapse is financial embarrassment. On the other hand, those who sustain their insurance are the prudent and prosperous, who are generally the most desirable risks, not only because of their ability to pay, but also for the reason that the same qualities of prudence and economy which engender thrift, work to promote their physical well-being also, and their continuance operates to maintain an average mortality as against the adverse selection to which we have referred.
In any honest inquiry into the causes of lapse, our eyes should not be closed to the effect of the improper methods employed by some solicitors to obtain new business. By improper methods, I mean misrepresentation of policy contracts, such as selling a limited payment life contract for an endowment, rebating, twisting a policyholder from one company to another, over-persuasion to assume an obligation which obviously cannot be fulfilled, extravagant estimates, and the like, and they are all prolific of lapse. I do not mean to infer that these methods are peculiar to or are encouraged by any particular company. They force their noxious and unweicome presence into every field.
It is an axiom of our business that prevention of future lapse should begin when the application is written. A company's reputation in any locality depends largely upon the character and methods of its solicitors. Its officers and field managers may be men of high standing and undoubted integrity, but it will be adjudged worthy or otherwise as it is reflected in the work of the solicitor. If the mirror be not true a distorted image will be presented. A solicitor who cheapens a policy he is trying to place by rebating a portion of the first year's premium destroys the confidence of insurers in his company.
We do not know where a recent writer, who is attracting considerable notoriety, obtained his data for the warning which he gives to policyholders not to lapse their insurance, claiming that that is just what the companies desire. Whether conceived in ignorance or mendacity the claim is absolutely false, for not only through the non-forfeiture provision of their policies do the companies preserve the equities of lapsing members, but they strive to prevent lapse by offering every possible aid to continuance, such as temporary notes, premium loans, cash loans and premium extensions. At the present time thousands of southern policyholders who cannot pay their premiums be
TWO RECENT SEARCHING COMPANY EXAMINATIONS.
lncreased Surplus Awarded Both the Northwestern and Penn Mutual — Some Comments Relating to Deferred Dividends.
For all interested in the institution of life insurance, company examinations have, at the present time, an unusual attraction. Ordinarily those actively engaged in the business have a fairly good idea as to how the various companies are prospering, and what individual peculiarities tend to produce in results.
At the close of the year 1904 preparations were made for conducting examinations of the Northwestern Mutual Life of Milwaukee and the Penn Mutual of Philadelphia. The work has been completed and the reports of the examiners afford a refreshing contrast to the undue amount of unpleasant disclosures beginning with the Washington Life overturn.
While everyone was prepared to hear of the splendid condition of the Northwestern, it is nevertheless gratifying to obtain an official statement to this effect as a result of a long and searching inquiry into the conduct of its business.
Condition of the Northwestern Life.
The report shows that the assets are conservatively valued, and on the item of real estate, the appraised value allowed by the examiners is $584,732 more than the company claims in its annual statement. Credit is also allowed for some items of interest which the company had not credited itself with, the result being that the company's surplus is $600,000 richer than claimed on its books.
The examiners praise the skillful conduct of the abstract department; attention is called to the fact that the Northwestern has no money invested in the stock of any corporation, and is therefore not interested in the success or failure of any subsidiary or auxiliary institutions.
Commissioner Host's position on deferred dividends is well known and it was to be expected that he would make some reference to the Northwestern's large semi-tontine fund, which now amounts to $25,780,689. He says:
The company is a mutual organization in the strictest and beat fense. It issues annual and semi-tontine policies. All policyholders of the same class whether they bold annual dividend contracts or seml-tontine contracts, receive the same dividend each year, i. <-., two policy holders aged 30. holding 20 payment life policies, one upon the annual dividend basis and the other upon the deferred dividend basis, will receive each year the same dividend apportionment. In the latter case, the unpaid dividends are accumulated and constitute the tontine fund.
The company permits the policyholder to choose the manner in which he will receive his dividends, and does not require him to make this election until he has had his policy two years and has had an opportunity to learn his own mind in the matter.
Mr. Host finds great satisfaction in the disposition of insurers to choose the annual dividend plan. He says:
"In 1903, of all the policy holders entitled to a first dividend, only 768 took the semi-tontine option; in 1904 only 529 took anything but the annual dividend method of settlement."
The commissioner might have enlightened us as to just how the entire volume of the company's business was divided in this regard
The Northwestern is a purely mutual organization, which permits proxy voting under certain limitations. The charter provision on this point is as follows:
Members of said company may vote by proxies dated and executed within 60 days next preceding and returned to the chief office of the said company for examination and registry upon the books of the company at least three days previous to the meeting of the members of tbe company at which the same, are to be used, but no person shall be allowed to cast by proxy more than 100 votes in addition to the votes to which be may be entitled ai a member of the company on bis own insurance; and no officer, trustee, accent or employe of said company shall act or be entitled to vote as proxy for an absent member.
There has been no examination of the Northwestern prior to this one since 1898. The growth and prosperity of the company are shown by the present inquiry to have fully kept pace with the expansion of the business as a whole, and a wholesome and successful effort to resist many of the demoralizing tendencies which have accompanied this expansion,
Penn Mutual Examination. Three states, Pennsylvania, Massachusetts and Wisconsin jointly conducted the examination of the Penn Mutual. S. H. Wolfe was the examiner in charge and the actuary as he had been in the case of the Northwestern. The work was along similar lines, and the results, except as to the difference in size, followed closely those of the former.
No proxy voting at all is allowed by the Penn's charter, and of course there is no stock. On this point the report says.
It will be seen from this that no proxies may be uied in an election for the trustees of this company, and in connection with this we have the honor to particularly direct your attention to that portion of Article III of the by-laws which provides that none of the officers either appointive or elective shall be the trustees of the company. It is apparent from the records of the meetings of the board of trustees and its various committees that the trustees take an active part in the administration and supervision of the affairs of the company.
The examiners report the result of their appraisals of the real estate owned by the company at $3,429,805, which is $38,700 more than the company valued the property in its annual statement. A special reserve of $1,062,679 has been carried by the company for the purpose of providing the additional amount necessary to place some of its policies upon a higher reserve basis. The Penn issues policies on both annual and deferred dividend plans. Concerning this, the report states:
The question of distribution of the company's surplui was carefully considered, and the examiners are of the opinion that the methods adopted by the company are equitable and based upon conservative premises. The actuary of the company states that :):!' per cent, of the total outstanding insurance is written upon the deferred dividend or accumulated surplus plan.
The Penn is one of the companies whose business has increased at a very rapid rate during the last ten years; the figures derived from a source independent of this examination, showing this to amount to 148 per cent. of the amount in force Jan. 1, 1904. On this subject the examiners simply say that the expense of obtaining new business has been kept at a normal figure. It is disappointing that they did not feel called upon to delve a little deeper here, as their findings would have been highly instructive just at this time.
It is very well known that the Penn is managed in an effective and capable manner and with the strictest regard to honorable discharge of its obligations. It does not resort to bonuses, free excursions or any of the customary devices accompanying largo volume so that whatever might be disclosed as bearing on the profit or otherwise of large volume, would not be complicated by any qualifications arising from matters just hinted at.
The report compliments the company upon its administration of the various departments, finding them well organized and in competent hands, and gives the company a net increase in surplus over the amount claimed of $259,237.
The examination was made in compliance with the request contained in a resolution adopted by the board of trustees on Dec. 7, 1904.
page 28
VICE-PRESIDENT JAMES H. HYDE AND HIS $100,000 SALARY.
The Journal of Insurance Economics has steadily maintained that whatever an investigation of the Equitable Life might show as regards the acts of its first vice-president—James H. Hyde—under no circumstances could evidence be produced demonstrating Mr. Hyde's fitness to occupy this position or to earn the annual salary of $100,000 which he is paid.
President Alexander of the Equitable Life is paid 1100,000 per annum. President John A. McCall of the New York Life receives the same sum. It certanly cannot be contended that Mr. Hyde's services as an underwriter are worth as much as those of these two men.
When George W. Perkins gave his entire time to the interests of the New York Life he was paid $75,000 per year; but this was after a service of 20 years with the company, in which he began as an office boy, working up through the field and into the executive department of the company, until he was rewarded by the position and the salary named. Certainly Mr. Hyde is not worth as much to the Equitable Life as Mr. Perkins was to the New York Life, nor does his experience and service fit him to occupy a position in the Equitable corresponding to that occupied by Mr. Perkins in the New York Life.
First Vioe-President Darwin P. Kinsley of the New York Life receives $35,000 and First Vice-President Thomas A, Buckner $40,000 per annum. Mr. Kinsley has been for 16 years with the New York Life, beginning as inspector of agencies,was promoted to superintendent of agencies, then became third vice-president and finally first vice-president. Mr. Buck ner began at the age of 15 in the field service of the New York Life. Within twenty-five years he has worked himself up to the position which he now occupies. Surely if the services of these men are properly measured at $35,000 and $40,000 a year, the service of Mr. Hyde to the Equitable Life are not worth $100,OCO.
Mr. Hyde does not occupy the position of vice-president through any merit of his own, nor does he earn $100,000 per annum through any service which he renders the company. He holds this office and is paid this salary solely because he owns the majority of the company's stock, controls the appointment of the company's directors who fix the official salaries and who, because of this control, have voted to pay Mr. Hyde the $100,000 per year.
Surely the control of the capital stock of the company by one man in this case, at least, is not a benefit to the Equitable Life, but is being used by the majority of stockholders for the purpose of obtaining from the company, under the guise of services rendered, a sum of money far in excess of anything he is legitimately entitled to receive for such services.
Mr. Hyde, a young man of twentyeight years of age, having served the company for a period of some five years, devoting during those years but a small portion of his time to the interests of the company, showing little concern with its insurance department, yet holds a position and is paid a salary as large as that commanded by the ablest underwriters in the business who have devoted years of their lives to the study and development of insurance problems.
No permanent settlement of the Equitable situation can be made which involves the continuance of this anomalous condition. If the Equitable Life is to hold its place in public esteem one thing, at least, should be done. Mr. Hyde should step down as first vice-president of the company and the salary of $100,000 paid him for his services should be discontinued.
If the payment of that sum is continued to him or his family it should be done openly in the form of a pension voluntarily paid by the company in recognition of the valuable services rendered by the late Henry B. Hyde. If Mr. Hyde continues in tho employ of the company it should be in an office which he is capable of filling and at a salary which properly represents the services he renders. The "divine right" of majority stock control to muict the policyholders under the guise of "services rendered" should not be tolerated.
PRESENT SITUATION IN EQUITABLE LIFE AFFAIRS.
Does the Change in Stock Control Mean lmprovement? — Hendricks' Report and the Reforms which the Situation Seems to Demand.
It is not necessary for the Journal of Insurance Economics to detail the recent history of the Equitable Life investigation, for with it our readers are all familiar, but we will briefly outline it in order that we may properly come to the presentation of such conclusions as the situation seems to warrant.
Beginning with the time of the socalled "Frick" report presented to the directors, the situation in the Equitable Life has steadily improved. This report was searching and unsparing, so far as some of the officers were concerned. It showed fully the operations of the Hyde syndicate, the profits it had made, and in which Mr. Hyde, as well as President Alexander, had participated. It showed the personal extravagancies incident to Vice-President Hyde's office and control of Equitable finances and it criticised also the administration of the agency department under Vice-President Tarbell.
It pointed out the defects of the deferred dividend business and recommended that the new management of the company (the resignations of Messrs. Alexander, Hyde and Tarbell having been recommended) take up and consider a modification and im* provement of this phase of the business. It opposed the writing of insurance under high pressure and called for a change in the methods of making investments
It was an excellent report so far as it went. Unfortunately it stopped short of complete investigation and relieved from deserved criticism some of the members of the committee itself, as well as some of the directors and other officers of the company. For this reason it gave the impression to impartial observers that it was designed to accomplish purposes in which members of the Frick committee, and possibly others, had a more or less direct personal interest. So far as we can analyze the situation that self-interest lay in a desire to secure control of the Hyde stock.
The Frick committee therefore lost an opportunity and made a mistake in presenting a partisan report having back of it the promotion of certain well defined special interests. Nevertheless, the report has contributed to the final solution of the problem confronting the policyholders. The directors of the company made a mistake in attempting to suppress the Frick rrport. Their case would have been greatly strengthened had they, promptly accepted it and given it to the public press.
Following the rejection of the Friok report events moved rapidly. Many directors resigned. The reasons assigned for their withdrawal, together with the attitude of other directors made it clear to Mr. Hyde that he had lost sympathy and support. He thereupon accepted an offer of $2,500,000 for the shares left him by his father and thus passed on the stock control to Thomas F. Ryan. At a subsequent meeting of the directors Paul Morton, ex-secretary of the navy, was elected chairman of the board with plenary powers, and the resignations of President Alexander, Vioe-Presidents Hyde, Tarbell, Wilson and Mclntyre and Financial Manager Winthrop were placed in his hands for such action as deemrd best for the company.
Three of these resignations, those of Alexander, Hyde and Mclntyre, have since been accepted. Mr. Alexander's association with Mr. Hyde in the socalled Hyde syndicate and his acquiescence in if not responsibility for other acts rendered his retention impossible.
Following these changes camo t' ''preliminary" report from Superintendent of Insurance Hendricks covering his investigation into the company's mismanagement. Later on a more complete report will be made covering financial conditions. Mr. Hendricks' report deals with some of the larger features of "grafting" which have become fastened upon the company, particularly in its relation to other financial institutions—banks, trust and deposit companies. Briefly it is shown that this system of grafting was inaugurated by the founder of the company, Henry B. Hyde. The same skill and energy which he devoted to building up the Equitable Life was seemingly directed also to the promotion of his own personal fortunes. This system was continued and enlarged by his son, James H. Hyde, and acquiesced in by President Alexander.
Vioe-President Gage E. Tarbell is cleared by the superintendent from all charges against him on the score of extravagance, rebating, commutation of commissions and conspiracy against Mr. Hyde. Mr. Hendrioks says that the present plan of stock control, while relieving the' situation, does not go far towards restoring the confidence of policyholders. The entire elimination of stock control and what he deems of equal importance, "the elimination of Wall street control," is recommended, the stock, if purchased by the company, to be paid for at a price "only commensurate with its dividends."
The Equitable Life cannot immediately be mutualized but it is likely to become eventually a purely mutual company, either by purchase of the stock by policyholders, by legislative enactment, or by other legal methods which have been temporarily checked by injunction. In the meantime the sale of the stock to Mr. Ryan, the appointment of Paul Morton as chairman and of Grover Cleveland, Morgan J. O'Brien and George Westinghouse as trustees for the stock, authorized to install a majority of the board of directors representing the policyholders, insures a reorganization along improved lines. Mr. Morton is a man of unusual mental and moral caliber. The only blot upon his record has been the alleged charge of violating interstate commerce laws while acting as vice-president of the Santa Fe railroad. Of this charge he has been exonerated by President Roosevelt whose endorsement at this particular time is worth more than the unsupported charges and allegations of Mr. Morton's enemies and opponents.
In reorganizing the executive staff of the Equitable Life Mr. Morton will feel disposed, as it seems to us, to retain some of the officers familiar with its business and responsible for its success. Gage E. Tarbell is the strongest man on the executive staff and in the investigations which have resulted from the present situation, he has emerged with more to his credit than any other officer. He was criticised in the Frick report for excessive expenditures and advances to agents in connection with the agency department. In our opinion the high pressure business transacted by theEquitable Life causes an unnecessarily high agency expense just as it does in the case of the New York Life and the Mutual Life, and we may say also in the case of other companies which, even though they do not do a "high pressure" business, nevertheless think they must pay higher rates of commission on account of the standard set by the big companies.
But we hold the view that in any investigation of any life insurance company today there would be no official who could entirely escape criticism. Indeed, we would go further and say that in any investigation of the detail of any business or of any transaction, whether it be commercial or political, no individual, however honest and well intentioned, could escape criticism for some of his acts, especially if he were, like Mr. Tarbell, a man of force and originality capable of extraordinary accomplishments. Indeed, it would be impossible for any one man or any group of men, or the whole democratic group of people in the country to pick out any one man for any one position who would be entirely satisfactory to everybody or who in every act would precisely satisfy any one.
Therefore, the fact that Mr. Tarbell has been criticised does not render it inexpedient or improper for Mr. Morton to retain his services. If Mr. Tarbell is the strongest executive official in the company and has emerged from this investigation with clean hands, and it is important for Mr. Morton to have some one familiar with the insurance business and capable of holding together the agency plant of the company, he must, as it seems to us, by the logic of the situation and by the qualifications and experience which Mr. Tarbell possesses, retain him for the good that he can do to theEquitable and its policyholders.
In regard to the present ownership of the stock there exists a great deal of suspicion. But as we look at it the question is not so much who owns the stock, who bought it or how much was paid for it, as whether the defects existing under the former management will be changed and the affairs of the company honestly and efficiently administered.
So long as Mr. Hyde held the controlling interest in the stock there was no guarantee of honest and efficient management nor did he exhibit any evidence of a desire or determination to change this situation. Mr. Ryan purchased the stock and immediately put in effect a trustee proposition designed to give the policyholders the controlling voice in the management. In short, Mr. Ryan, as majority stockholder, has done what Mr. Hyde seemed incapable of doing or unwilling to do. Whether proper control has been substituted for control which was decidedly improper time alone must demonstrate, but there are guarantees of good management now existing which were entirely absent before.
The trustees named are not themselves to be the administators of the company's affairs. Their powers are limited by the charter powers of the stock to voting for the directors who shall be responsible for the administration. In short, the task of the trustees is to select fifty-two men properly qualified to act as directors, twentyfour of whom shall represent the stockholders and who may at the same time, of course, represent the policyholders, and twenty-eight who shall represent the policyholders and who might at the same time represent the stockholders.
The selection of the twenty-eight policyholders' directors will be made by the trustees after a canvass of the wishes and desires of all policyholders. In selecting directors nominated by the policyholders the trustees can exercise wide discretion and are not, by the terms of the deed of trust as we understand it, limited to the selection of directors securing the largest number of votes. Policyholders can express their preference by mail.
In conclusion, we think that the Equitable agitation has shown clearly that conditions demand of life insurance:
1. That administrative officers shall devote their entire attention to insurance and shall be so well paid for their time that they may be perfectly free to exercise their honest judgment upon insurance without consideration for the effect that it may have upon other interests.
2. That assets shall be invested solely as the interests of the companies may require and shall not be used in any way to promote other en terprises
3. That all companies shall at least afford applicants an opportunity to choose between deferred and annual dividend policies and that the compensation of agents shall be so adjusted as to make it equally advantageous for them to sell either contract.
4. That the transaction of high
pressure business, with the excessive agency expense incident thereto, shall be discontinued. Reduced commissions will reduce the cost of insurance to the polioyholders and will improve the conditions of the business for the real professional life insurance agent.
5. Complete publicity and increased
detail of accounting which will enable purchasers of life insurance to judge more accurately of actual conditions and insurance supervisors to more quickly detect discrepancies in accounts.
6. Complete restitution by policyholders' suits of all moneys illegally diverted from company assets.
LEGAL PROCESS OF MUTUALIZING THE EQUITABLE LIFE.
There is an abundance of legal power vested in the New York legislature and Superintendent Hendricks to deal summarily and successfully with theEquitable situation. If the charges of malfeasance made against the executive officers in the Friok report are found to be true by Superintendent Hendricks, he can remove said officers forthwith. The law says:
No director or officer of an insurance corporation doing business in this state shall receive any money or valuable thing for negotiating, procuring or recommending any loan from any corporation, or for selling or aiding in the sale of any stocks or securities to or by such corporation. Any person violating the provisions of this section shall forfeit his position as such director or officer, and be disqualified from holding such office in any insurance corporation.
It is quite evident, therefore, that those who retire under these circumstances are out of the insurance business for good.
Another matter has been brought to light by Mr. Justice Maddox's decision in the Lord injunction suit which most people have forgotten, if they ever knew of it. That is that the legislature of New York has the power to revoke the charters granted to insurance and other corporations under authority of the general laws. The power of revocation also carries with it authority to amend or alter or to suspend the operation of such charters.
This provision has been a part of the New York law since 1828; it was repealed in 1890 but re-enacted in 1895. This explains the great effort made to prevent the convening of the New York legislature in special session at this time. Massachusetts has had a similar law since 1830. It provides that every act of incorporation passed since March, 1831, shall be subject to amendment, alteration or repeal by the general oourt. The question of the constitutionality of the act arose in 1839 when the general court of Massachusetts passed an act which repealed the charter of the Chelsea Bank.
In 1855 the first insurance case to test the application of this law was that of the Massachusetts General Hospital against the State Mutual Life. The matter here in dispute was the payment of certain receipts of the insurance company to the hospital under a law long since repealed. The defense claimed that the law requiring such contributions was unconstitutional, as it interfered with the vested rights which bad been acquired under the act of incorporation. The court held that:
All acts of incorporation passed since 11 March, 1831, which contain no express provision limiting their duration, are, by the provisions of the statutes of the Commonwealth existing from that period to the present, subject to alteration, amendment or repeal. The act incorporating the defendants was pasied in the year 1844, long after the enactment of the revised statutes, and was of course accepted by the corporators subject to the provisions of those statutes. This seems to put at rest all further question as to the constitutionality of the statute.
In a later case it was held that a statute requiring a railroad corporation whose charter is subject to amendment, alteration or repeal at the pleasure of the legislature, to erect a station at a place on its road and cause trains to stop there, is not in violaiton of the constitution of the United States as impairing the obligation of a contract. It has also been decided that the right of the legislature to amend, alter or repeal the charter of a railroad corporation includes authority both to withdraw powers granted to the corporation and to confer new powers upon it and require their exercise, and is independent of the assent of the corporation.
It is to be presumed that there is a similar line of cases sustaining the New York law also. It is a fitting reminder that whatever abuses may be found in the present conduct of the life insurance business, they can l:e readily reached through existing means of remedy.
COMMISSIONER HOST'S APPEAL TO THE GAIN AND LOSS EXHIBIT.
A Criticism of His Position as Reported in the Milwaukee Journal.
On another page we reproduce an interview prepared for the Milwaukee Journal by Zeno M. Host, stating his views on the subject of dividends in life insurance. Mr. Host's views have been so thoroughly disseminated since the beginning of his controversy with the Equitable that everyone is by this time thoroughly acquainted with them.
The extraordinary claims and assertions made in the article under review call for examination and comment. It appears at once Commissioner Host takes for granted many facts that are questioned ard debated by experts who have spent a life time in the study and practice of insurance. His reliance upon deductions from the figures given in the gain and loss exhibit as conclusive proof of the soundness of his conclusions, would in anyone less prominent as an insurance reformer be regarded as superficial.
It is a matter for regret that the Wisconsin report is not at hand so that the new items in the gain and loss exhibit might be examined and tbe citations therefrom verified. Enough has been said in the recent issues of this journal to show a disapproval of the claim made by Mr. Host and others that annual distribution of dividends is the one remedy for evils in life insurance, so that part of his argument will be passed over to consider the curious things that are obtained from the gain and loss exhibit.
He says that the reserves and dividends released by the thirty-seven companies operating in Wisconsin in 1905 amounted to $51,747,449; the actual amount given to the polioyholders who contributed these reserves was only $37,752,590, showing a confiscation of $14,000,000 on deferred dividend policies. But the figures
which have been furnished in advance sheets to the insurance journals do not warrant any such conclusion. In the first place, the concensus of opinion about the gain and loss exhibit is that as a whole and in particulars it is unreliable. The state which brought it forth has disowned it, and has discontinued the private compilation which was made for it after the publication in the annual report was discontinued.
Identical items in tbe exhibit are regarded differently in different companies and the information thus obtained is therefore of little value for purposes of comparison. Concerning the item of surrenders it is said that one or more companies throw maturing endowments in with the actual surrenders allowed in order to obtain a high percentage of values paid to reserves released.
When the provisions of the policy contracts are borne in mind, it is difficult to account for the showing which some companies make in the surrender values allowed, especially if the percentages are compared with those of companies which for years have paid large values. Another consideration destroys the strength of Mr. Host's claim. He says the $14,000,000 was confiscated from the holders of deferred dividend policies. Is this so? lu the total figures which make up this sum are included the returns from companies which have never paid deferred dividends, such as the Mutual Benefit, Massachusetts Mutual, Travelers and others. In the case of the Travelers the percentage of values allowed to reserves released is given as 48.04. It is likely that all of this represented stock rate business as the company only recently adopted participating plans.
Now in what possible way is the surrender charge of the Travelers to be connected with the bugaboo of deferred dividends?
Take some other examples of the incongruities revealed in the gain and loss exhibit. The Equitable, according to various utterances of Mr. Host, is the chiefest sinner in the deferred dividend camp, yet the gain and loss table shows that out of $9,529,000, reserves released by surrender and lapse, the company allowed surrender values of $8,353,730 or 87 per cent., while the Connecticut Mutual, which is cited in approval towards the close of the commissioner's interview, only allowed 3 per cent. more. That is if the gain and loss figures are correct the Connecticut Mutual confiscated 10 per cent. of the reserves released by surrender and lapse and the Equitable kept 13 per cent., apparently bringing these two quite close together. Again, the New York Life is credited with paying 83 per cent. of the reserve in surrenders and the Provident Life & Trust 84 per cent. In actual transactions these companies are very widely apart. Again, the annual dividend companies very properly make a surrender charge to the retiring member; in individual cases this may exceed the surrender charge made by a deferred dividend company. From what has been said, therefore, it appears that Mr. Host's claim that with annual distribution of surplus this confiscation of policyholders' equities could not be exercised is not borne out by the facts.
Again, when we analyze the showing of the various companies on expenses and loading we find Mr. Host equally wide of the mark, when he says that the excessive amount for expenses was taken out of the $14,000,000 of surplus confiscated from lapsed and surrendered contracts. Comparing the Equitable with the Union Central this time it is found that while the former company used only 90 per cent. of its loading, the Union Central's expenses exceeded the provision therefor by 14 per cent. The Equitble's saving on loading was $1,465,439; its profits on surrenders were $1,175,276, a smaller amount than the first. With the Union Central, an annual dividend company, the situation is exactly opposite. This company gained from lapsed and surrendered policies the sum of $115,112, while the loss from loading was $181,544. There is but little doubt that deferred dividends have encourged a tendency to extravagance, although even then allowance must, be made for difference of management and different degrees of success. The annual dividend companies differ greatly between themselves in results achieved for policyholders just as the deferred dividend companies do. The attempt by Mr. Host to divide all companies into two groups classified according to the method of dividend distribution and then to show from the gain and loss exhibit that all the excessive expenditures belong to the class he condemns is seen to be a flat failure. All the elaboration of his opening charge can be reduced to the single fact that he doesn't like deferred dividends and that he expects by the vehemence and persistence of his attacks to have his views prevail.
Mr. Host is particularly unfortunate in referring to the Connecticut Mutual. He points out that the company's disbursements have been greatly in excess of its receipts, and says that this has been accomplished by adhering strictly to the annual dividend plan and to the conservatism and economy which such a plan enforces. The real reason why the Connectioub Mutual has paid out more than its premium receipts is because the company does practically no new business; it has less business in force today than fifteen years ago. Consequently there has been no outlay for this purpose. There is also more than one opinion as to the economy of its management and the wisdom of giving over entirely the attempt to gain business. This is not meant in criticism of the company's methods, as time alone can show conclusively where the truly correct course lies, but to disprove Mr. Host's contention that the Connecticut Mutnal's position is due wholly to its dividend methods. How many states will follow his advice to compel annual dividend distribution is a matter for speculation.
In endeavoring to show the fallacy of the Wisconsin commissioner's appeal to the gain and loss exhibit, the weakness of that compilation itself ia developed. Comparison of individual companies drawn from it are wholly worthless and are responsible for much that is harmful and wrong. It is to be hoped that the three insurance departments which now collect and publish the tables which make up the exhibit will see the vicious possibilities contained therein and discontinue the publication.
WILL THE RESPONSIBILITY OF DIRECTORS BE INCREASED?
A Possible Outcome of the lnsurance lnvestigation.
Written For The Journal Of Insurance Economics By W. H. Lawton.
The recent suit brought by the attorney-general of New York against all the directors of the Equitable Life Assurance Society opens an inviting field for speculation. The questions involved interest not only those connected with the Equitable but the directing boards of all life insurance companies. Their solution will undoubtedly greatly affect the administration of every life insurance compiny in the land, stock or mutual.
The demand upon the Equitable directors, it will be noticed, is not only for [money alleged to have been wrongfully taken by certain directors and officers, but also any funds "lost or wasted." The complaint also touches on the question of salaries "improper, and largely in excess of the value of the services rendered by the individuals" receiving them. When the stockholders and directors of a corporation are practically the same individuals, it would seem that they are the only persons concerned in the matter of expenees. If they choose to vote themselves salaries of however great amount it is nobody's business b.it their own as long as the concern is solvent and carries out its contracts with its customers.
In this case the real question at issue is whether the Equitable does belong to its stockholders. If the courts decide in the affirmative, then apparently the suit must fall to the ground, for whatever right the attorney-general may have to intervene on behalf of the policyholders, he certainly has none as tetween the stockholders and directors if the former do not invoke his aid, save, of course and always, when he has reason to believe the laws are being violated. The Equitable as long as it is solvent and is carrying out to the letter its contracts with its policyholders cannot be compelled to submit
the questions of salaries, commissions, in fact its whole control to the attorney-general or any one else. To do so would practically take the company out of the hands of its directors entirely.
Suppose, however, the courts decide that the polioyholders are the real owners of the company, and that the directors are responsible not to the stockholders but the policy holders: that the money alleged to have been wrongfully taken, lost, and wasted must be repaid by the directors—also the excessive salaries. What then?
Passing by the important question who is to be the judge of the fairness of salaries paid, or the necessity of expenses incurred, let us consider the position of the directors. Out of some fifty-two gentlemen it is safe to say not more than ten are at all familiar with the life insurance business. The rest probably do not know the difference between a "loading" and a "surrender value," and would not know a "rebate" if they met one —unless it were presented to them!
These gentlemen have for years attended meetings of the board and heard reports more or less prosy and unintelligible to them on the business transactions of the period just closed. They are assured by the president that the company has made splendid progress and everything is going smoothly and well. The actuary tells them their surplus has increased so much and their mortality is very favorable. The vice-president states that so many millions have been invested in such and such securities, all approved by the financial and executive committees. The second vice assures them that the thousands of agents all over the world are working enthusiastically for the greatest company on earth and that business has been secured at a trifle lower cost than last year owing to his strict economy.
A committee is duly appointed, which counts the securities in the vaults, carefully inspects the balance sheet of the auditor, and reports approval.
As a matter of fact, these worthy gentlemen know absolutely nothing about the company's transactions. How can they? All they can do is to repose trust in their co-directors who actually transact the business and accept their statements. It is too much to expect of any man that he shall attend to his own business affairs for 364 days of the year and on the 365th day grasp the full extent and moaning of thousands of details involving millions of dollars of income and outgo of a business with which he is totally unacquainted.
Unfortunately.however.the law says that a director is supposed to direct. If he accepts the office he assumes the responsibilities attached to it. If some of his co-directors mismanage things he must share the blamo with the rest. This is law and justice. If he does not like the responsibility he need not accept the trust in the first place. But having accepted it he must do his duty and if he fails in that he must accept the consequences.
Very good. We will suppose then the learned courts decide that the thousands of dollars made by certain directors belong to the corporation and must he returned; that salaries paid to some officers have been excessive and the excess in each case must be refunded; that certain "printing, etc." items of expense were not justified and must be made good by those who authorized them. If the individuals responsible for the "lost, strayed or stolen" sums refuse, or are unable to refund them, then each director is individually liable. What effect would a sweeping decision like this have on the directing boards of all the other life insurance companies?
All are in the same boat more or less. Probably the majority of every life insurance directing board in the coun
try are men who are eminent in their various lines (or they would not be elected to the position) but who have absolutely no practical knowledge of the business they are supposed to direct. It would riot be a rash prophecy that within a reasonable time after such a decision had been thoroughly settled and digested by those most interested there will be resignations pouring in upon the various presidents to an extent that will leave most boards without a quorum.
Capital is proverbially timid—capitalists more so! The average man of large affairs has enough to do looking after his own interests. He will not hesitate long between the worry and drudgery of trying to understand all the details of a very complicated business from which he can derive nothing but the grumbling approval of suspicious policyholders, and getting out of it altogether. It will be equally difficult to get new men of high standing to accept the work and responsibility. What then are the insurance companies going to do?
Will there grow out of the situation a class of professional directors who for an adequate salary will devote their time and attention to supervising the insurance companies? Or will the legislatures be asked to permit the number of directors to be reduced so that the chief officers of the companies shall be the only directors? It is a pretty dilemma. On the one hand professional directors will increase the expenses of the companies. On the other it hardly seems just the proper thing to permit a board composed of officers only to fix their own salaries and allowances. In a stock or mixed company the latter difficulty might be overcome by the stockholders, but how could this be done in a mutual company whose policyholders could never even approximate a representative meeting?
POLITICAL CONTRIBUTIONS TO CAMPAIGN FUNDS.
FROM THE JOURNAL OF INSURANCE ECONOMICS, FEBUARY, 1905.
It probably la true that a very large sum of money is contributed by the "bl(? three" to political organizations, but that contribution would have to be f 750,000 in order to represent the same percentage to income as the contribution made to political organizations by the editor of Insurance Economics during the last campaign. We do not believe that such a sum was contributed by the three great companies.
If it was proper for the editor of this magazine to make this contribution, and he would not have made it bad he not thought that it was, and if the money which be contributed was spent in a just cause for proper purposes, as he believes it was, upon what grounds can he criticise these insurance companies for making a contribution to the same cause for the same purpose and with the same results?
Certainly not upon the size of the contribution, for relatively it was not so large as that made by the editor. Not because of the purposes for which it was used, for then the editor would be equally guilty with them. We know that our contribution did not represent a desire or a pur pose to corrupt or debauch legislative bodies, nor do we believe that it has been or will be used for this purpose.
We might criticise them on the ground that they had no right to use the money contributed by policyholders of many parties to advance and promote the success of a particular party. Bat reasoning again from analogy, did we have any more right to use the profits of this magazine gained from patrons of all parties for a contribution to a particular party? And yet we acted, as we think, wisely and well, according to our conviction that the best interests of the country would be advanced and consequently the interests of our patrons.
If the officials of the big three life insurance companies acted from the same motives, we know from self-analysis that they were actuated by a proper and sincere desire. The editor has always found it well, whenever he is assailed with a tendency to criticise big corporations for what they do, to indulge in this kind of self
analysis to determine if these corporations are really doing what be would scorn to do, or whether he is prompted to criticise because they are big and successful and seem to be fair marks for public attack. We feel that too often this latter is the prime motive in the criticism of corporate interests. The corporation being quasi public and exposed to public scrutiny excites attention when really what it does is no different from what is done day in and day out by private business firms.
A REMEDY FOR THE CONFISCATION OF POLICYHOLDERS' SURPLUS.
Interview With Zeno M. Host In The Milwaukee Journal.
In my opinion there is but one remedy for the existing evils in the institution of life insurance and that is: Every state should enact a law compelling life insurance companies to make actual apportionment and distribution of all surplus annually after the second policy year, crediting each policyholder with his equitable share of all such surplus.
The gain and loss exhibit, published in the life report of the Wisconsin insurance department for 1905, shows that the thirty-seven old-line life companies transacting business in this state during 1904 confiscated about $14,000,000 belonging to policyholders holding deferred dividend contracts; that the reserve released by surrender and lapse during 1904 was $51,747,449.85, while the actual amount given to policyholders on lapsed and surrendered deferred dividend contracts was only $37,752.59. With annual distribution of surplus this iniquitous confiscation of policyholders' equities could not be exercised. The gain and loss exhibit also shows that these same companies used during 1904 for expenses over $122,904,496.55, while the loading—that portion of the premium caiculated for expenses—was only $115,789,282.14. In other words, these companies nsed over $7,000,000 more for expenses than was caiculated by their actuaries when the premium rates were determined. This excessive amount for expenses did not come out of the pockets of the management, but was taken out of the $14,000,000 surplus confiscated from lapsed and surrendered deferred dividend contracts; and they might have nsed all of this sum for expenses, for under the laws of the several states—Wisconsin now excepted—surplus is a sum of money for which the officers are accountable to no one.
With a law compelling annual distribution of all profits, the same as is
done by a firm or partnership, the race for bigness, largest amount of assets and largest amount of insurance in force will be supplanted for economy in management and the merit of a company will be determined by its accounting to policyholders.
If the public only knew and realized that out of every fifteen life insurance policies written only one is terminated by death or maturity, and that the average duration of life insurance policies is only seven years, very few deferred dividend contracts would be written.
It certainly seems like folly to permit companies to defer for ten, fifteen or twenty years the return of overpayments and profits, when the average policyholder, taking a twentyyear deferred dividend contract, does not get within thirteen years of a dividend, and never sees a return of his overpayments and share of the profits.
After the supreme court rendered its decision that section 1925 of the Wisconsin statutes of 1898 was permissive and permitted confiscation of surplus accumulations as at present exercised by the officers—which is a breach of trust to the policyholders they represent and is responsible for the perversion of the fundamental principle of life insurance protection at actual cost—some relief was given to future Wisconsin policyholders when the surplus law was enacted during the last session of the legislature.
However, the law as it now reads is not satisfactory, for it permits the officers to defer distribution of surplus for five years. Wisconsin must have a law compelling annual distribution of all surplus; its citizens, as well as the citizens of every state, are entitled to such legislation, but had an attempt been made to pass such a law last winter what success would it have met with, when it is a. f act that the five-year distribution bill received a tie vote in the senate and but for the vote of Lieut.-Gov. Davidson would have been killed, and the officers of these companies wonld have been allowed, for two years at least, to continue an already outlined.
What an annual dividend company can do for its policyholders is shown by the experience of the Connecticut Mutual Life Insurance Company, which in forty-five years received from policyholders over $232,000,000 and returned to policyholders and beneficiaries over $234,000,000. All this has been accomplished by adhering strictly to the annual dividend plan and the conservatism and economy which such a plan enforces. Concluding, I will say again, that every real reform in the business of life insurance can be accomplished only by actual annual accounting, apportionment and distribution to policyholders, and that every state should enact a law compelling life insurance companies to make actual apportionment and distribution of all surplus annually after the second policy year, crediting each polioyholder with his equitable share of all such surplus.
FINANCIAL METHODS OF NEW YORK COMPANIES.
It is evident that the special committee on investigation appointed by the New York legislature intends to probe the life insurance situation deeply and impartially. Indeed, in the present state of public opinion, it could hardly do otherwise. The financial methods of the Equitable have quite passed into the background in view of the inside facts brought to light concerning the operations of the Mutual and the New York Life. The evidence thus far shows that both these companies are likewise influenced by what Superintendent Hendricks designated as the "Wall Street influence," that like the Equitable they both engage in underwriting syndicates, side-line banking and brokerage operations and carry large deposits in "favored" banks.
In short, it is not the Equitable Life which is now in the limelight, but practically life insurance financing as conducted in New York City under the shadow of Wall street.
This question naturally suggests itself: Are the channels of investment sought by the New York companies in what have been regarded as speculative securities, necessary for the proper and profitable investment of life insurance accumulations? In other words, are there enough mortgage, government, municipal and town bonds, railroad bonds, etc., which life insurance companies can procure, to make it unnecessary for them to invest in any other kind of securities.
The editor of the Journal is not a financial expert and cannot answer that question, but as a student of general conditions, he conceives it possible, nay even probable, that the socalled "conservative" investments named are not sufficient to absorb all the assets of all the life insurance companies of this country. That is to say, we take into consideration the fact that savings banks, national banks, trustees and private investors are all seeking the same securities. If it be necessary for life insurance companies to seek investments outside of these "conservative " limitations, the question then arises, Are there any so-called speculative industrial securities which may rank with the conservative securities designated, and become proper subjects of investment for life insurance companies?
We have for some time entertained the view that there were such securities and the idea has already been presented in these columns. Onr opinion is formed from a study of changes and progress in the organization of industry. The obligations of a properly organized industry, dealing with a commodity of general use, carefully managed so as to equalize waste and minimize loss, should present for life insurance companies as safe and profitable a form of investment as the obligations of railroads or mortgages upon real estate. Railroads fail and the value of their bonds depreciate. Real estate mortgages have sometimes to bo foreclosed at a loss. The percentage of loss in the case of the obligations of well established consolidated industries probably would not be any greater than in the case of railroad bonds and real estate mortgages. This investigation, bringing out the fact that life insurance companies, especially those possessing the largest amount of funds,are investing directly or indirectly in what have heretofore been classed as speculative securities, will result in a decided change of public opinion upon this question. In other words,when the atmosphere has cleared we are likely to find that the
conditions in New York life insurance companies, which now seem the subject of so much criticism have been brought about by perfectly natural causes and quite as much from a conviction on the part of those companies that customary channels of investment must be abandoned, as from a desire to speculate with company funds for personal advantage.
No doubt there is a "Wall street influence" in all the New York companies. We do not see how it can be otherwise, for the Wall street idea pervades New York City, indeed it extends its influence throughout the country, touching Congress and the governments of all states. New York is the great financial center of the country, almost of the world, and it is hardly strange that the people who live and work and do their business in that atmosphere should be subject to influences not so likely to apply to managers of life insurance companies at distant points. The fact that the latter are not engaged in the same lines of investment for their companies or for themselves, may not be due to lack of disposition but opportunity.
SUPREME COURT WILL NEVER DECLARE INSURANCE COMMERCE.
Thus Contends Frederick H. Nash, Assistant Attorney-General of Massachusetts.
[Nora— The subjoined address, delivered by Mr. Nash before the National Convention of insurance Commissioners, Sept. 27,1905, deserves careful reading by interested underwriters, both for the information it contains and the manner in which it is presented. At the end of this address will be found comment by the editor of the Journal.]
When the Civil War had demonstrated the power of the Union many intelligent people proclaimed with enthusiasm that, since we wero in truth one nation, state lines in all matters of business ought to he obliterated. Especially in the business of insurance was this sentiment manifest, for insurance, depending for success upon a wide basis of average, naturally spread its range abroad, in advance of trade. The first suggestion that Congress ought to give insurance companies the right to do business all over the country, without restriction from the states, appeared in the Wall Street Underwriter, Nov. 30, 1864, and was based upon the national banking act of that year. In 1865 some of the companies presented a memorial to Congress asking protection from the states. A legal opinion was secured from Charles Tracy, Esq., of New York, that insurance, being the grand protection of commerce as money is the grand agent of commerce, is an essential part of commerce itself, and ought to be regulated and made uniform by Congress. Agitation of the subject was continuous until 1868, when a decision of the supreme court, that insurance was a local not a national affair, seemed to block the way to the change.
Since then the sentiment has occasionally burst forth in somewhat irresponsible discussion by insurance periodicals at the spur of unweicome action by state insurance commissioners, at times incited by arbitrary acts of certain commissioners, who have notoriously held up companies,with the help of state laws giving them vast power, which companies may not easily prove or wisely allege to be exercised in bad faith. It has now sprung into new life, as a result of President Roosevelt's message to the Congress of 1904, in which he said:
The business of insurance vitally affects a great mass of the people of the United States, and Ib national and not local in its application. It involves a multitude of transactions among the people of the dlllerent states, and between American companies and foreign governments. I urge that the Congren carefully consider whether the power of the bureau of corporations cannot constitutionally be extended to cover interstate transactions in insurance.
There is no longer doubt of the advantage to the public and to the trustworthy companies from governmental supervision. The only question is, which government shall exercise the power.
Evils of Present System.
The evils of the present system are real, and are felt not only by the companies, which justly complain of too much government, but also by the fifty state governments themselves. The companies have suffered from unscientific and oppressive taxation and costly examinations, and from the minor burden of making reports to so many states. On the other hand, the people, who are citizens of the United States as well as of their several states, are handicapped in regulating this most important business by the territorial limitations of each state's power.
In most of the states, most of the insurance business is done by companies of other states. The business of insurance is peculiar, in that it does not consist of isolated transactions but of continuous contract relations running through long periods of time. If a foreign company indulges its financial tastes in ways that this state would check, all the preventive power of this state is limited to giving foreign company its choice either to follow our policy or to remove its agencies hence. But a commissioner, though he have all power, will hesitate, except for most cogent reasons, to drive away a company, because its policyholders will be so much inconvenienced if there are no agencies and no way of suing upon future obligations except in a foreign state.
If transactions of insurance by a company outside the state of its charter could be subject to license by federal authority, the menace of restricting the company's business to one state by taking away the license would probably be effectual to prevent future violations of law, and the inconvenience of leaving policyholders to transact business and sue in foreign states would in practice be inconsiderable.
Infractions of a federal law could be punished wherever committed, while infractions of state laws by a foreign corporation often cannot be suitably punished, if the corporation is content to leave the state and has no property within it. A judgment obtained by the state against a foreign corporation in a suit to recover penalties, though in form civil rather than criminal, cannot be the foundation of any proceeding beyond its own boundaries.
Again,under the present system the officers of a company are required to make oath to the truth of their reports to the several states. In the statutes of many states wilfully making a false oath is said to be perjury. How are the pains and penalties of such statute to be enforced? The few who do not shrink from the formality of taking a false oath cannot be punished in one state for a crime against the laws of another state, and the state whose laws are transgressed by the taking of a false oath beyond its jurisdiction cannot treat the transgressor as a fugitive from justice. Falsifying a statement required by federal law, on the other hand, co Id be readily punished anywhere in the United States.
I think it must be conceded that
from both points of view, from that of the companies and from that of the public, restriction of the powers of the fifty state departments each to the domestic insurance business of the companies of its own state, and the establishment for interstate business of one honest, perfectly managed, federal department, divorced from politics, would be a convenience. But such substitution is unattainable.
Why National Control Cannot Be.
It has been suggested from time to time that just as Congress established a system of national banks, outside the jurisdiction of the states, and has made a uniform bankruptcy law which supersedes the insolvent laws of the states, Congress may pass uniform laws for the regulation .of insurance. It is said that uniform insurance laws are as essential to the commercial interests of the country as national banks and uniform treatment of creditors. It may be so. There is, however, no analogy under the law between these matters and insurance. The constitution of the United States provides expressly for bankruptcy, and since it gives to Congress control over the currency and power to borrow money, there is necessarily implied the power to erect banking institutions and issue legal tender notes. The power of Congress in these respects is derived not at all from the power to regulate commerce.
It is beside the point, therefore, to reason from them to insurance, of which Congress can have no control, unless under the interstate commerce clause. Congress cannot establish an insurance company except by allowing one to be incorporated under the laws of the District of Columbia, such a one having no higher standing than a corporation created by the laxest state. The federal government does not need insurance in its business; indeed, it is against public policy for the government to insure its property, as a loss would be distributed among a smaller number of people than if it were allowed to remain upon the whole bcdy of contributors to the support of government. The argument seems to me farfetched, that because insurance companies may loan money to the government, therefore they may be created and controlled by the government, like a national bank.
Unless the business of insurance is commerce, Congress has no more power to regulate it than to regulate state banks, and each state may refuse to admit an insurance company of any other state, and hence may admit it upon any terms that it sees fit to impose.
Restricted Rights of Corporations.
A corporation, though a person, is not a citizen. Therefore it has not the guaranteed right to take up its residence where it chooses within the United States. It may be kept from establishing itself beyond the borders of the state which chartered it, if the other states so determine. This is the law as to corporations in general. But a corporation which is carrying on commerce among the states cannot be kept from transacting a business which is interstate commerce in any state. This is because the regulation of such commerce is left by the constitution to Congress. Congress, then, is the only power which can regulate interstate commerce. In those respects in which Congress has not dealt with it, the doctrine of the constitution is that it must not be prohibited. Short of prohibition, however, the states may in various ways interfere with interstate commerce very seriously, while Congress refrains from regulation. But when Congress constitutionally deals with the subjectmatter theretofore covered by the states, their action is displaced, if in conflict with the law of Congress.
I have spoken of this effect of action by Congress because of the statement sometimes made that the reason the states may now lawfully interfere with insurance between the states is that Congress has been silent regarding insurance. Let Congress speak and declare that the federal government is henceforth to regulate insurance as a branch of interstate commerce, the states must then take off their hands. Such is the argument. It is, however, untenable, for the state laws are chiefly of such a character that they amount to prohibitory regulation, and if interstate insurance is. interstate commerce, they are bad,, even while Congress is silent; and if interstate insurance is not now interstate commerce, Congress oannotmake it such. Whether it is or not is a purely judicial question, in regard to which the opinion of Congress has no more weight in the supreme court than an opinion of the executive. Congress may say perhaps that certain articles, like rum or cigarettes or lottery tickets, shall not be entitled to the advantages of the mails or of public interstate transportation, because the regulation of transportation, which is judicially declared to be commerce, is under its control. But Congress may not say effectually that an agreement to pay a person $100 if he will not drink, smoke or gamble, or an agreement to indemnify one, is commerce.
Position of Court Unchangeable.
The supreme court, the only power that can define interstate commerce with authority, has repeatedly held that insurance is not commerce, and that transactions of interstate insurance do not amount to interstate commerce.
[To support this claim Mr. Nash cites decisions of the United Statessupreme court dating from the first,. tbat of Paul vs. Virginia in 1868.. down to that of Nutting vs. Massachusetts in 1901. The oases cited include also the Philadelphia Fire Association vs. New York, Hooker vs. California, Ducat vs. Chicago, Doyle vs. Continental Insurance Company, Orient Insurance Company vs. Daggs, Allgeyer vs. Louisiana, and New York Life vs. Cravens, in each of which, according to the language quoted by Mr. Nash, the supreme court declared definitely that insurance is not commerce. These citations made by Mr. Nash are important and illuminating, because they show, as has not before been shown in recent discussions, the later conclusions of the supreme court upon insurance as commerce.—Ed.]
Not only iB the principle of the insnrace cases too well settled to be shaken, but, in my opinion, were the question now raiseil for the first time, the result must be the same, by all the analogies which can be brought to bear! Transportation of passengers, of goods, of lottery tickets, of insurance policies, of intelligence by telegraph or telephone, is commerce. The sale and delivery of goods is commerce. The delivery of goods to a resident of this state in pursuance of A contract made in another state is an act of interstate commerce.
But making a promissory note or •drawing a bill of exchange in payment -for the goods is not commerce. The business of dealing in notes and bills us a broker is not commerce. A promise to pay money if the goods are lost or destroyed is not commerce.
No one would contend that a promise of indemnity against unfaithful conduct by an officer is commerce, or that the federal government has any -concern with such a contract made between citizens of different states. 'The fact that a promise of indemnity relates, instead, to a subject of com,merce makes no difference. If it did, we should have to make a distinction between insurance of merchandise, on -the one hand, and real estate, lives and fidelity, which are not the subject of interstate commerce, on the other. The truth is, as I view it, that insurance, like banking and the system of exchange by bills and notes, has grown to be essential to the conduct •of modern commerce, but it is not commerce. The policy of insurance, like a lottery ticket, a bag of gold or a bill of exchange, is a subject of commerce, and its transportation from •one state to another is interstate commerce. Congress can supervise the transportation bat not the insurance company. But the business of making contracts of insurance is no more commerce than the business of loaning money. The loan of money by a New York bank, which is essential to the carrying on of commerce by a New Jersey corporation, would never be deemed interstate commerce by the most enthusiastic federalist. Yet that is the same in principle as the insurance of merchandise in a warehouse which is pledged to secure the loan.
If the contract of indemnity is not commerce, yet it has been suggested that the interchange of reciprocal pecuniary benefits between the insured and the company is commerce, that the transfer of money by the company from New York to the insured in Massachusetts, in exchange for his premiums, is interstate commerce just as the transfer of merchandise sold in New York to a buyer in Massachusetts is interstate commerce.
Broad interpretation Dangerous. Were this to be established as law, no limit to its effect upon the affairs of men can be foreseen. Any interchange of pecuniary benefits between the states must, then, be interstate commerce. A New York resident buys a farm in Connecticut. If the owner lives in Connecticut the purchase is a matter of interstate commerce, while if he lives in New York it is a matter of domestic concern. In the former case, a law of Congress requiring a particular form of conveyance and registry at Washington would be constitutional; in the latter case, the Connecticut law alone would govern.
Or, suppose a testator domiciled in New York gives personal estate to legatees living in various states. The duties of his executor must, then, be transactions of interstate commerce. Congress, then, might enact a probate law, and a law regulating succession in case of intestacy, to apply when property passes from one state to another. Public attention has been often stimulated to a recognition of the evils arising from the variety of state laws regulating marriage and divorce. Now and again a widow has been forced upon the estate of a wealthy decedent by reason of his course of conduct in a state where a common law marriage is valid, though matrimony was not in his thoughts, and persons given to divorce and remarriage are troubled to know in what states the children of a remarriage of persons divorced in certain states are legitimate. A uniform federal marriage and divorce law applicable to interstate relations would be helpful and available in the present migratory period of American life, by the expedient of acquiring a domicile across a state line.
Even if marriage is not commerce within the meaning of the constitution (and commerce was used in such a sense contemporaneously with the establishment of the constitution) the interchange of reciprocal pecuniary benefits and property rights between a citizen of New York and a citizen of Newport,who intermarry, would seem to be as much commerce as the exchange of credits through a bank, between insurance company and insured. Commerce, in a strict sense, depends upon population, which is the end of marriage, quite as much as upon1 irfsurancc.
Court Will Protect State Rights. These illustrations are but a few of many which in my opinion will influence the supreme court in fulfilling what it has declared to be one of its most important vocations, namely, to protect the rights of the states from encroachment by the far-removed central government.todeny the power of Congress to deal with the subject of interstate insurance. Indeed, if the power to regulate commerce extends so far as is claimed, then much might have been omitted from the constitution. This heading, which received only a page of discussion in the
"Federalist," then, becomes sufficient to cover banks, bankruptcy, currency and all kinds of business intercourse between states.
The purpose of the suggested federal action is regulation. To be effective, an act must prohibit transactions of insurance, that is, the interchange of pecuniary benefits of insurance among the states, except by companies which comply with all conditions which it may impose. At present a state may constitutionally prohibit itB citizens from making a contract within the state with any foreign insurance company. The only reason the citizen cannot be prohibited from making such contract without the state is that the laws of a state do not reach beyond its borders; but if interstate insurance is subject to the regulation of Congress, whose laws run throughout the country, it may prohibit the making of a contract with any company except with companies organized in the state where the insured lives.
If Congress may prohibit the interchange of these pecuniary benefits, so it may of many others of similar character. The point here is quite distinct /rum that raised in the suggestion that corporations engaged in the sale of merchandise in one state and its delivery to purchasers in another should be required to have a federal license. The contract for snob sale is a contract of interstate commerce, and its unauthorized consummation may conceivably be prohibited by the power which regulates interstate commerce. But the contract of indemnity to pay money upon the happening of an event cannot, under any circumstances, be interstate commerce, and it would be a curious situation if Congress could prohibit the payment of money between residents of different states in satisfaction of the terms of a contract with which Congress can have no concern. Congress may regulate the express company which carries the money, for the business of transportation is commerce; but, in spite of the decision in the Lottery Case, I venture to believe that it cannot prohibit the transportation of money or credits.
Centralized Control is Revolution.
It is not profitable to discuss what would be the effect of a constitutional amendment, or whether, if the people of all the states were spurred to create in their place one federal state for the purpose of insurance, they might not include within its sovereign and exclusive jurisdiction other matters of business between citizens of different states—abolishing all conflict of laws in matters of contract between parties of different states by authorizing Congress to enact a code of interstate contract law; providing for the service of legal process of any court throughout the United States; requiring national incorporation and visitation of companies whieh are to do business in other states or to manufacture goods for sale in other states; of companies which seek investments outside their own state; providing that the corporations of each state shall enjoy the privileges and immunities of citizens of the several states; regulating marriage and divorce. All these things might be done by constitutional amendment, perhaps by the simple process of substituting the word "intercourse" for the word "commerce" in the present language giving Congress power to regulate commerce among the states. The change which is suggested is in principle a revolution in our form of government, a change to centralization.
Let me consider now what would be the effect of a decision of the supreme court that interstate insurance transactions alone of these kindred matters now left to the states are commerce, and finally, whether there is not a more practicable and beneficial remedy for existing evils than either constitutional amendment or the reversal of a line of unanimous decisions of the supreme court which the champions of federal regulation so cheerfully anticipate.
State Control Should Not Be Restricted.
Suppose Congress regulates the business of insurance between a New York company and its policyholders in other states, and the regulation goes unchallenged or is held to be valid. What power would be left in the states other than New York, in Massachusetts, for example? We may assume that such act of Congress would provide for a license under which the company might enter all the states in the prosecution of its business, such license to be in force so long as the company should comply with the act, and be doomed solvent by the federal commissioner.
The company could establish its agencies in Massachusetts. These, and all brokers and agents acting exclusively for insurance companies of other states so licensed.would be exempt from the payment of license fees to the state because Massachusetts cannot charge for what Congress has given as a right. Massachusetts could not examine into the affairs or condition of such company, but would have to trust that the federal commissioner had done his full duty.
The reserve liability of such a life company might no longer be computed according to the Massachusetts standard. The company's financial condition would be published, based upon such estimate of its future liabilities as the federal commissioner might be authorized to make. Congreas'inight adopt some method of gross valuation, instead of the net valuation required in Massachusetts ever since St. 1856, o. 252, and adopted after most careful investigation by Elizur Wright.
The company might reinsure its Massachusetts risks in any company licensed by federal authority, and the state would have no responsibility in the matter. Massachusetts could no longer require its standard form of fire policy, limit its term or prohibit insurance under a "valued policy." A fidelity or surety company might execute bonds without restraint or supervision by Massachusetts.
Assessment life insurance companies could not be forbidden from attracting the poor of Massachusetts with their cheap and delusive propositions, and foreign fraternal benefit orders,with rates so low that they are at the threshold of insolvency, must be admitted, if Congress should so decide.
The state could tax its domestic companies as usual, but could not impose an excise or franchise tax upon foreign companies. For example, at present all life companies pay an excise tax of one quarter of 1 per cent. upon the net value of all policies held by residents of Massachusetts. The result would be that a foreign corporation holding trust funds for Massachusetts policyholders would be exempt from taxation, while a domestic corporation would not be exempt. Of course, the state could tax directly to its citizens by a property tax their investments in insurance companies, whether domestic or foreign.
Foreign fire insurance companies oould not be taxed a percentage of their premiums.
Police Power Paramount. These are some of the results which must follow a constitutional law declaring insurance to he commerce. Would they be beneficial? Some of them are not of serious concern. For instance, the states can well afford to lose the license fees and privilege taxes, which, indeed, in many instances are oppressive, and rest upon an unscientific basis. The vital point is whether the states ought to yield up, what we have been taught to regard as peculiarly within their police power, the responsibility of determining by their own investigation and according to their own standards what insurance companies are worthy of the confidence of their citizens.
In dealing with these technical and difficult matters affecting the credit of such institutions, large powers of discretion have to be given to some official, whose acts in matters which call for prompt and decisive action and which it would be difficult to investigate in the courts. His duties are far more exacting than those of a national bank examiner. I aver, without hesitation, that the wisdom, discretion and honesty composite in fifty, chosen by fifty states, are more to be valued than the excellencies of one person appointed at Washington. State supervision is good according to the merits of the best of the commissioners. Federal supervision must be good or bad according to the qualities of one man, who is unchecked by the work of coordinate officials.
I believe that we should not look forward with either hope or apprehension to federal supervision. The proposed law of Congress is unconstitutional, and the people will not for this purpose amend the constitution; if the experience of one hundred years has taught us that union is inferior to a centralized government, we will create a federal commonwealth, not centralize insurance supervision alone. But instead of looking to revolution, we ought to hold fast that which is good in state supervision and make it better.
I am hopeful for the future of state supervision. I would not willingly see the responsibility thrown upon the federal government, even if that were possible. But the lull success of our system must depend upon your helpful co-operation with each other. It is the fashion of vituperative insurance journals to call you czars and tyrants. But you should not be independent sovereigns. You can help one another, and, by so doing, better serve your states.
LEGAL OBSTACLES NOT A PERMANENT BAR: COMMENT BY EDlTOR.
Mr. Nash says in substance that the supreme court will never reverse its decision declaring that insurance is
not commerce, that on the whole it is not desirable for state to be superseded by national supervision, and that the remedy for existing evils lies in improved state regulation.
His presentation of the legal phases of the question is the clearest and most comprehensive we have yet seen. Nevertheless we cannot agree with his conclusion that the supreme court will always hold the view that Congress cannot in any way regulate interstate transactions of insurance. Our belief that Federal regulation will in time be established is based upon the view that this form of control is a logical and rational development, growing out of social and economic requirements, and that objections or obstacles based upon legal phraseology or interpretations thereof, cannot permanently prevent the consummation of a project which is beneficial to the people.
Mr. Nash contends that national regulation would not be beneficial to the people because it would represent centralized government and practically break down the idea of a union of states established under the American constitution. We are not prepared to accept this statement of the situation, for in assuming the power to regulate interstate transactions of insurance the national government does not, nor cannot, take away from the states any right to regulate and supervise the transactions of insurance within their own borders. Congress oan deal only with insurance transactions when they cross state lines, just as it does in the case of merchandise, railroads, telegrams and telephones.
As a citizen of Massachusetts we believe that there is no better form of insurance supervision than that which is practiced in this commonwealth, and Massachusetts undoubtedly has an influence upon insurance transactions in other states which might be interfered with if Federal control of interstate insurance were established. Still, as a citizen of the United States, owing a higher allegiance than to the state, we believe that the welfare of the people as a whole would be promoted by Federal regulation of interstate insurance.
That regulation, when established, however, should be upon a plane at least as high as that in the state of Massachusetts (which is by no means perfect) and should not be dictated or controlled by the insurance corporations of New York state, whore supervision is much less rigid and satisfactory than it is in the state of Massachusetts. Federal regulation, established exclusively at the dictation of New York insurance companies, particularly of the great life insurance companies, would be most undesirable. In saying this we do not question or impugn the motives of the officers of those companies in desiring supervision on lines which are particularly beneficial to them, and which will of course relieve Ihem of much of the exacting oversight which, in our opinion, is proper and desirable.
With Mr. Nash's statement that the remedy for existing evils lies in improved state supervision we are glad to agree to the extent of saying that the better state supervision we have, the less strenuous will be the demand for national regulation. It goes without saying that if state departments can overcome the evils of state supervision which have led to the demand for national supervision, there will be no longer necessity for supervision from Washington. But we fear that those evils will not be overcome by the states. Nevertheless, if the agitation for national regulation shall lead to more honest and more intelligent supervision on the part of state officials, then the discussion of the question will have performed an incaiculable amount of good.
In his closing paragraph, Mr. Nash makes use of this phrase: "It is the fashion of vituperative insurance journals to call yon (the state insurance superintendents) czars and tyrants."
The phrase descriptive of insurance journals is unfortunately a truthful one. There is a class of journals which by their savage and unwarranted method of attacking the decisions and actions of state insurance officials have done great harm, and perhaps more than anything else accentuated and increased the evils of state supervision. At a time when intelligent, rational comment was demanded, when the insurance commissioners of the different states needed to be approached by clear-thinking and honest argument, the "yellow" insurance press, incapable apparently of rising to the requirements of the situation, have really put back the wheels of time and interfered with progress.
COST OF MANAGEMENT VIEWED BY AN OUTSIDER.
Walter Wellman in the "Review of Reviews" Contends That the Agency System ls Too Expensive — Comment by the Editor.
American life insurance needs reformation, and that speedily. It is not giving an adequate return for the money which insurants invest in it. This is due not so much to scandals of management like those which have recently come to light as to still more serious economic evils. Insurance costs much more in this country than it should cost—far more than it costs abroad. This is because management is too extravagant and wasteful, and because of certain methods which are fundamentally faulty. Last year the people of the United States paid in premiums amounting to $472,000,100, and the total income of all the companies—every dollar of it the property of the holders of policies, because the interest earnings are simply the increment upon the policyholders' accumulations—amounted to $580,000,000. What became of this golden stream? Into what channels was it diverted? What uses were made of it? Here is the answer in a few lines:
Here we see that of every $100 of income only $41 was paid back to the policyholders, while the actual expenses of management were nearly $22, and almost $24 including the taxes and necessary fees. Thirty-five dollars was carried over to assets or surplus. Inasmuch as the foregoing figures include all the companies in the country, it is only fair to say that the concerns which do a straight "old line" business on a fairly large scale and do not write any "industrial" policies show a somewhat smaller per oentage of expenses to income. Taking the twenty-five leading companies, 18 per cent. would be a fair statement of their expense ratio. This is just about double the cost of management in Great Britain,and it is almost three times the cost of carrying on the government industrial and mixed insurance in Germany.
How the Money Goes.
It is worth while to inquire why the expenses of American management^ should run about twice as great as the expenses of English management for the same line of business. The accompanying table, showing the expense cost of twenty-five leading American companies in 1904, with totals for the two preceding years, will tell the whole story. (See exhibit next page.) "Reckless and Wasteful."
The reader will at once perceive that there is a vast difference between companies. A few companies keep their expense down to about 20 per cent. of the premium receipts, while others run to figures more than twice as great. It must be obvious to any observer that in a life insurance concern which spends such enormous proportions of its income in the carrying on of the business (here is small chance for the insurant to get nn adequate return for his investment. That the business can be carried on at smaller cost is demonstrated by the experience of the British companies, whose expenses run only about 9 per cent. of their total income (against an average of about 18 for the leading American companies), and by the fact that some of our A-nerican companies spend only half as much in expense as others. There is but one phrase which properly characterizes the management which spends 35 or 40 per cent. of premium income in expense, and that is, "reckless and wasteful."
Forcing "New Business." It will be seen upon examination of the accompanying table that about three-fifths of all the expense of American companies is for commissions on new businsss and agency expenses. One of the greatest evils of management in this country is the craze for bigness, the insane rivalry among managers of the largest companies to outdo all competitors in the increase of the amount of insurance in force. To such an extent has this craze been carried that millions upon millions have been virtually thrown away. Agents are stimulated by large commissions and other rewards to go out and drum up business regardless of whether it is to prove profitable to the company or to the insurants, or not. The rule has been,"Get the business at any cost." It is a remarkable fact that for every thousand dollars of insurance in force last year these twenty-five leading companies spent nearly six dollars and fifty cents in their efforts to get more insurance. The average premium paid on all insurance is approximately forty dollars per thousand. Ten dollars of that is paid out for expenses, and of the ten dollars more than six is devoted to the effort to coax in new policyholders. If the commission and agency expenses were cut down to a reasonable figure, and then a vigorous effort were made to reduce the administrative and clerical expense from its present relatively high level, there is no reason why American management should not make a much better showing as to the ratio of expenses to total income when compared with foreign companies. They might not he able to get down to the British standard of about 9 per cent., but they should be able to drop far below their present figure of 18 per cent.
Our American managers, or most of them, are not content to grow slowly, to follow a conservative policy like that pursued by the old Equitable of London, and other conservative English companies. The London Equitable never spends any money for new business. Men who want policies must apply for them, and their applications are passed upon with a view to the desirability of the contract and to the ability of the applicant to carry out his part of it. • Of course, the Equitable has grown slowly, but it has grown solidly; and its income is not squandered in a mad scramble for more policyholders.
Some Significant Figures.
Last year, twenty-five leading companies of the United States wrote $1,250,000,000 of new insurance. The total of their new policies during the last three years is $3,500,000,000, or a billion more than all the insurance in force in the United States twenty years ago. The premiums paid on last year's new business of $1,250,000,000 (or supposed to be paid) amounted to about $50,000,000. How muoh did it cost to get the business? Nearly $43,000,000, or 86 per cent. of the premium receipts. About $32,000,000 went for commissions to solicitors, medical examiners, etc., and $11,000,000 more for established agencies, rents, advertising, printing, etc., after deducting 25 per cent. fairly chargeable to the handling of old business. These are startling figures. The cost of new business is steadily increasing. Two years ago it was only 79 per cent. of the premium receipts. Now it is 86 per cent. If it goes on increasing, in a short time all of the first year's income will have to go for getting the policy written. That is already the case with six of the twenty-five companies, and one company paid out for new business all the money that the new business brought in, and 31 per cent. besides. In other words, money belonging to a man already a policyholder was used to coax another man to take out a policy.
Mushroom insurance.
It is, obvious that life insurance companies, like other business and financial concerns, ought not to stand still. They must grow. In life insurance there is a peculiar reason why new business should be secured. If no new policyholders come in, in time the death claims will reach proprotions calculated to wind up the concern. But in securing growth company managers should stay within the boundaries of reason. There is no sense in expending huge sums for new business that does not "stick," and which therefore is not worth writing. Last year twenty-five leading companies wrote $1,250,000,000 new insurance. But they lost nearly one-half as much through other causes than death or maturity—that is, by surrenders and lapses. In short, thousands upon thousands of men are induced to take out more insurance than they can afford to carry—for the solicitors and agents are eager for commissions— and after one or two payments the policies are permitted to lapse The only gainer by such business is the solicitor, or agent. The company gains nothing, the insurant gains nothing, save that his risk is carried for a year or two years, a return to him worth about one-fifth what he pays for it. Another large class of policies are carried long enough to attain a surrender value, and here the holders get a little more in return when they drop out,though the difference is one of degree, not of principle. Every year, millions of dollars are taken in this way from the pockets of people who can ill afford the loss. Last year, the twenty-five companies actually expended an average of $100 to gain $1,259 of insurance in force; and that $1,259 of "good" business brings the company a net inoome of about $45 a year as long as it lasts. The amount of insurance actually gained per hundred dollars spent for new business is constantly diminishing. Only two years ago, it was $1,513 per hundred dollars; now it is only $1,259. Several companies, and important ones at that, actually show net losses of insurance in force,despite their enormous expenditures for new business. Such companies are on the way to ruin. Yet the state insurance officials scorn to be wholly unable to deal with them in an adequate manner. The mania for bigness, the craze for forcing the business beyond its safe and natural limits, is a tremendous evil in American life insurance; and if the managers will not reform of their own accord the law should interpose and compel them to do so.
The Evil of Rebates.
Another evil incident to this hothousing process is the premium rebate. In some states, rebates are illegal, and policies rebated may be declared void. Theoretically, all managers frown upon rebates. Actually, nearly all companies know that rebates are given by their agents, and they wink at the sin. In one respect the insurance rebate is more to be condemned than the railway rebate. It is given to men who "know the ropes," to smart business or professional'men who are aware that agents are so eager for business that they will cut the first year's premium 30 or 40 per cent., if necessary. Most of these insurants can afford to pay full premiums. But the poor fellows, the mechanics and farmers and others who are not in touch with affairs, usually pay the full premium, which they can ill afford to do. This discrimination in favor of well-to-do insurants and against men of small means seeking to provide protection for their families out of their slender salaries is unjust, indecent, and should be made criminal.
To such a pass has it come in this mad scramble for new business that in every city may be found many men who carry their life insurance simply from year to year. By inducing several companies to bid against one another they secure great reductions of the first-year premiums, and at the end of the year permit their policies to lapse and look about for other companies willing to take them on at the cut rate. In this way they carry their insurance at much less than it would cost to take out policies and maintain them year after year.
An Expensive Agency System.
It is true that most insurance agents and solicitors work hard, and only the more fortunate of them earn large incomes. But there are too many agents in the field; the soliciting business is overdone. Thousands of men who have been unfortunate in other lines go into life insurance soliciting, and most of them find it hard enough to get along. We need throw no stones at the industrious solicitors; just now they have troubles enough of their own. Our quarrel is with the managers who place such vast armies of agents in the field to drum for business, making it difficult for any to do well and rendering it necessary to bolster them up with large commissions on what business they are able to write. The really fortunate men in the soliciting line are the general agents who control certain territory and get a commission on every dollar of business that passes through their offices; who get, not only their first year's commission, but each year thereafter take out 5 to 7% per cent. commission on every renewal premium. There are general agents whose income rises above a hundred thousand dollars a year from renewals alone. Last year, one New York company paid out $750,000 buying np the equities of agents in such renewals. All this money—the first commissions of 50 per cent., usually, the renewal commissions of from 5 to 7% per cent., or the purchase of equities therein—comes out of the pockets of the policyholders. It is not with their own money, but with the money of their members, that the managers satiate their appetite for bigness.
Every one understands that the companies cannot abandon their agency system. They must solicit new business and have the machinery to look after old business. But there should be fewer agencies, with smaller original commissions, and with the renewal commissions wiped out entirely. Managers say that if they were to stop soliciting they would get no new business. They declare it is one of the peculiarities of human nature, at least in this country, that if a man builds a house or a store he will at once seek fire insurance upon it. But the most valuable thing in that store or domestic establishment, the heart and brain and moving force of it—his own life— he will never think of assuring or protecting unless some agent gets after him and beat it into his mind. There may be truth in this; and yet it is highly probable men do not voluntarily apply for life insurance because ;hey have been educated to the present system—the system in which all the initiative comes from the company side. Withdraw that, and it stands to reason that many prudent Americans, believers in life insurance, and a large share of them needing it for special family or business reasons, would apply on their own motion. At any rate, there is somwhere between the two extremes a happy mean of moderation and prudence which life insurance management should endeavor to find.
COMPETlTlON CAUSES HlGH EXPENSE: COMMENT BY THE EDlTOR.
The views prevailing am jng life insurance men relative to the cost of doing business are known to the readers of this journal, but it is well to have outside opinion, even though it may not be thoroughly digested, for after all it is the outside public view working upon and co-operating with the desires of those responsible for inside management which will produce effective reforms.
Mr. Wellman is perfectly correct in his conclusion that the conduct of life insurance is expensive, that the cost should be reduced and that the forcing of new business should be abandoned. All of these contentions have been repeatedly set forth by writers upon life insurance.
But there are difficulties in the pathway and the greatest of these is "competition." In fact, the evils of the competitive system were never so admirably illustrated as [in life insurance, for it has increased and not decreased cost to policyholders.
But competition in life insurance arose out of the repugnance originally shown to the life insurance idea, which created the necessity for education and solicitation. Thus the agent came into the field, and out of the results of this educational work and of evolution and progress, has grown up the heated competition which has compelled (economically not morally compelled) companies to maintain what seem to be extravagant rates of expenditure in the agency department.
Reform in life insurance cost depends primarily upon the elimination of competition in commissions. The way to eliminate competition is by agreement between those engaged in the business. This would apparently constitute a "trust" prohibited, as some contend, by laws enacted presumably in response to public demand. If the insurance companies felt perfectly free to agree among themselves upon uniform rates of commission and conditions of agency employment, the cost to polioyholders could be materially reduced. Would the public approve and supportsuch a step? Or would it ask for additional enactments preventing any agreement tending to reduce the "wages" paid soliciting agents.
It is an interesting fact, not commented upon by Mr. Wellman, that high cost to p'olioyholders results from a "low pressure" as well as high pressure business. In other words, there are normal conditions under which a company should operate—not too expensive or too restrictive— which produce the best results under the present competitive system. For instance, the Connecticut Mutual Life of Hartford has been set forth by some as an ideal polioyholders' company. Mr. Wellman, however, says that the standard of test is the percentage of the premium paid by the company and not utilized for the benefit of the policyholders. If this be true then it makes very little difference how this expenditure is made, so far as the polioyholders are concerned, if they do not receive the return.
The Connecticut Mutual Life is distinctively a "low pressure" company. Each year it transacts hardly enough business to keep its normal insurance in force. Diametrically opposed to this are the "giant" companies, the Equitable,Mutual and New York Life, and yet we find that the total expense cost—that is to say, the percentage of the premium used for other purposes than polioyholders—is greater in the Connecticut Mutual than in either the Equitable or the New York Life, and almost us much as the Mutual Life. Here are the comparative percentages:
Connecticut Mut..26.47 Equitable 25.04
Mutual 28.00 New York Life...24.00
It is true that the Connecticut Mutual spends much less "in commissions and agency expenses" than the three big companies, but its ratio of expense on account of "taxes, fees, etc.," is many times greater, whereas if the Connecticut Mutual, like the other companies, spent more money in its agency department, thus producing steady growth and development, its ratio of expense to policyholders on account of taxation would be materially less.
It is the old story of six of one and half a dozen of the other. A restrictive policy in regard to new business does not produce any better results than an abnormally high pressure business. The best results are secured by a medium course where the growth in new business is healthy and normal.
It goes without saying that the officers and managers of life insurance companies would very much like to reduce the cost of obtaining new business. The same is no doubt true in the main of the general agents throughout the various states and territories. Probably also a great many agents who understand the injurious competitive effects of high commissions upon their own business, would favor lower commissions and as an inevitable consequence, restriction in the number of men employed.
The objection to lower commissions would come from the men who could not earn a living if the present rates were cut in two. And of these there are many. Upon them would come the burden of reduced cost. If the companies should undertake to reduce agency expenses by co-operation, would the public stand with the corporation or would its sympathy be with the small producing agent who is barely able to make a living under the present rate of commission?
As we said, the difficulties are great and not easily overcome. Just as it is extremely difficult for one employer of labor—no matter how benevolently disposed—to increase wages unless his competitors do likewise, so it would be almost impossible for a single life insurance company to materially reduce its rates of commission without suffering a loss of its agency force to other companies willing to pay higher commissions.
There is another way in which reform misht possibly be Secured, namely, by state legislation, forbidding companies to pay a higher rate of commission than the expense loading in the premium will allow. Knowing the excesses to which state legislatures are likely to go when once started upon a wave of reform, we hesitate to suggest this remedy, first, because legislation does not always effect reform, but merely drives people to evasion and subterfuge not previously practiced, and second, because it would be very much better in any event, if this matter could be adjusted and settled without legislation, through the operation of unfettered economic law.
Nevertheless, the state nowadays assumes to do much for the policyholders (as a matter of fact it does very little) and if there is to be legislation designed to improve the expense cost of life insurance on the agency side, we can think of nothing better than a limitation of agency commissions the first year to the loading provided for that purpose, thus prohibiting encroachment for this purpose upon the reserve or the surplus.
One point advanced by Mr. Wellman—a very old and threadbare topic, but always of vital and immediate interest—is that of rebating. Now rebating, whether a cause or an effect of high expense, is inevitably interwoven with the subject and constitutes a form of "graft" participated in by those who are not engaged in insurance themselves, and who, for the favors they accept at the expense of other polioyholders, are just as guilty as company officials who may participate in other forms of graft.
Here again public influence comes in. Is the body politic ready to say that rebates shall not be made to favored polioyholders and that those receiving them shall be equally guilty with those who give them? There are laws today in many states against rebating, but they were put there through the influence of insurance men who desire to eliminate this evil, and were not primarily the outgrowth of any widespread public agitation.
These laws, while possibly helping in a measure to reduce rebating, nevertheless have not cured the evil, partly because it has been found impossible to hold the receiver of a rebate equally guilty with those who give it, for public sentiment does not seem to regard this form of "graft" as praticularly reprehensible. In this fact we find another argument against recommending any form of state legislation attempting to handle the question of agency expense.
There are many small things doubtless which individual companies can do to improve their own business, but no sweeping reform is possible unless all act towards the same end. A company which today undertook to announce a big horizontal out in agency commissions would be accused of playing to the public galleries, and in the public mind this would be confirmed if the management subsequently found that its hopes were ideal, and that it had to let down the bars a little in order to maintain and preserve its business.
Popular judgment is the most fickle and inconsistent factor with which we have to deal in human affairs, but there is a true public opinion, based upon sound common sense which governs largely in all matters and which tends towards steady, though possibly slow progress in all departments of life. And it is to this opinion—which is developed quite as much within the ranks of the life insurance business itself as without—that we must really depend for a final and effective solution of all these great quesions.
BUYING LEGISLATIVE IMMUNITY.
The habit too common with corporations of paying for immunity from adverse legislation has lueh a demoralizing effect upon public service and is so ineffective for the purpose it is designed to accomplish that on grounds of prudence and economy, if not of morals, the practice should be discontinued.
It would be better for insurance companies themselves, for all business interests, for the policyholders and the general public if. acting together or individually, they should no longer capitulate, but should fight the public servants who misrepresent the people who have elected them.
We believe, not from direct evidence or knowledge as to actual contributions, that insurance companies have felt and atill do feel obliged to use money in defending themselves against adverse legislation, but we are very much inclined to doubt if any considerable sum has been spent in trying to secure the passage of legislation inimical to the interests of policybolders.—Journal of Insurance Economics, February, 1905.
ANOTHER OUTSIDE CRITIC ON LIFE INSURANCE REFORM.
[The following address was delivered before the "Commercial Club" of Boston by Louis D. Brandels, counsel for the Equitable Policvbolders Protective Committee. We commend a careful reading to all life insurance men, whether they agree with his point of view or not.]
In spite of the large policies held by a few individuals, the life insurance of this country is in the main held by what we term "the people"—that large class which every system of business and of government should seek lo protect.
Such i.s the direct interest of our people in the proper conduct of the life insurance business—the interest primarily of the home. Indirectly the life insurance business affects our industrial and political life no less vitally and with perhaps even more far-reaching effects. That influence results from the control which the largest life insurance companies exercise over our business and our political institutions by means of the vast accumulation in a few hands of the assets held as insurance reserve, or for deferred dividends or surplus.
We have in the United States many other great aggregations of assets: in manufacturing,mining and commerce, the Steel Trust, the Oil Trust, the Beef Trust; in transportation, the Northern Pacific-Great Northern combination, the Pennsylvania system and the New York Central system. Even in combinations like these our people recognize a menace to our welfare and our institutions. But between the vast combinations of capital in manufacturing or transportation and the accumulation of capital by the insurance companies there is this marked difference—the capital of the manufacturing, of the mining, and of the railroad companies is in the main permanently invested in lands, in buildings, machinery, in rails, bridges or equipment, or is required for operating their properties. The capital of the life insurance companies, on the other hand, is mainly free capital. The great mam'facturing
and transportation companies, great and powerful as they are, are directly dependent for their prosperity upon the prosperity of the country and the service which they render from day to day to the people. Furthermore they are constant borrowers.
The situation of the life insurance companies is entirely different. Except in respect to the growth of their business, they are nof" dependent for their prosperity upon that of the country. Indeed they derive certain benefits in times of adversity. While the securities they already hold are not of a class to be imperilled, they can purchase new securities to better advantage. They are the creditors of our great industries, with all the power which that implies.
Influence of the Great Companies.
When such facts are considered, it becomes obvious why the financiers who control these great insurance companies with their huge quick capital exerise a preponderating influence upon the business of the country. The economic menace of past ages was the church—the dead hand, which gradually acquired a large part of all available lands. The greatest economic menace of today is a very live hand— these great insurance companies which are controlling so large a part of our quick capital.
Such is the power which the American people have entrusted to the managers of these large companies. How has it been exercised? Substantially like all irresponsible power since the beginning of the world; selfishly, dishonestly and in the long run inefficiently. The breaches of trust committed or permitted by men of high financial reputation, the disclosure of the payment of exorbitant salaries and commissions, as to illegal participation in syndicate profits, the persistent perversion of sacred trust funds to political purposes, the co-operation of the large New York companies to control the legislatures of the country, these disclosures are indeed distressing; but the practice of deliberate and persistent deception of the public which the testimony discloses, though less dramatic, is even more serious.
But the management of these companies has been not only selfish and dishonest j it has also been singularly inefficient; and it is by this inefficiency that the policyholders have actually suffered most. The losses of policyholders through exorbitant salaries and syndicate operations, though large in the aggregate, are small as compared with the loss from bad management. The test of success in the life insurance business is of course to furnish insurance of absolute safety at the minimum cost. The size of a life insurance company is no evidence of sucess. In life insurance success is proved by a small pro rata expense account, a large percentage of return upon absolutely safe investments, and a small per cent. of lapsed and surrendered policies.
Business Methods Subject to Criticism.
I have referred specifically to only five of the ninety principal American legal reserve companies, five of which are closely allied with Wall street, which on Jan. 1, 1905, held 56.89 per cent. of the aggregate assets, and which during the year 19C4 wrote 67.42 per cent. of all the life insurance written by the ninety companies. Of the remaining eighty-five some are doubtless managed far less efficiently and quite as dishonestly as any of the leaders; many are, no doubt, managed with scrupulous honesty, and some with reasonable and comparatively great economy; but the methods of conducting the business, particularly of soliciting new business, adopted by the leaders, is to a greater or lessextent,and perhaps necessarily,
followed by the others at the present time. The existing evils are not to be explained by the presence in office of dishonest or selfish men. The causes which produce these rank abuses are general in their operation. The flagrant dishonesty and selfishness of the managers of the three leading New York companies are the result, not the cause, of the abuses. Men of character may, for a time, protect other companies in large part from like abuses, but the main cause of the evils disclosed lies in the system, rather than in the men.
It is obvious that the American people whose atttention has once been directed to these abuses will not suffer them to continue without some attempt at remedy. What are the remedies proposed?
In order to get rid of the abuses, the measures to be applied must be radical and comprehensive. The changes must be fundamental. They are, in my opinion, these:
First. The recognition of the true nature of the life insurance business; namely, that its sole province is to manage temporarily with absolute safety and at a minimum cost the savings of the people deposited to make appropriate provision in case of death, and that since its province is mainly to aid persons of small means—it should be conducted as a beneficent— not as a money-making institution.
Second. The issuance of deferred dividend policies should be discontinued. The legitimate business of a life insurance company is to insure the life of the individual and to issue life annuities. It should not be used as an investment company or as a means of gambling on the misfortunes of others. The deferred dividend policy with its semi-tontine provision is open to these objections and to others. Agents' Commissions Excessive.
Third. Lavish payments for solicitors' and agents' commissions and for advertising devices should be discontinued. Such practices,common among the promoters of mining enterprises and of patents, have no place in the business of life insurance. Savings banks have no solicitors. The life insuring habit is well established. The three million people in Massachusetts hold in the thirty-three legal reserve companies doing business in the commonweatlh 1,337,795 life insurance policies and have only 1,766,614 deposit accounts in our savings banks. The people of the whole United States hold one such policy for every four persons. Undoubtedly many a man has been led by the solicitor's persistence and eloquence to make a thrifty provision for his family. No doubt also the savings bank deposits would be swelled by similar exhortation. But can snch missionary work be justified at an expense of 12 to 20 per cent, of all premiums paid, when the record of lapsed policies shows that the conversion to that thrift is but temporary? No one should be induced to take out a policy when the burden is greater than he can carry or if for other reasons it is not for his interest to do so. The intelligent agent with the knowledge and a recognition of the proper function of the life insurance business, and receiving a modest compensation, has still an economic justification. Many a man needs the impetus to thrift, since wisdom often lags far in the rear of intelligence but as the business is now conducted, money paid by the insured as a result of solicitation is in the main wasted.
Fourth. The forfeiture of policies should be prohibited. Under the level premium system everyone pays each year more than is required for the protection of the single year. He pays something on account of future years. That something ought in every case to be preserved for the insured. The excuse offered by the companies for lapsing is the great initial expense of writing insurance, and that arises mainly from the extravagant commissions paid to agents and for lavish advertising. With the suggested change of method in soliciting, no extraordinary expense would be involved in writing insurance except the fee for medical examination, and that should be paid by the applicant as an initiation fee. The insured should know when he enters upon the investment what the initial cost is.
Standard Policy Forms Demanded.
Fifth. Standard forms of policy should be prescribed by law. This would go far toward preventing deception. By simplifying and standardizing the contracts, in connection with compulsory annual dividends, the insured would be enabled to compare results in the several companies. Today such a comparison is practically impossible. The Equitable has outstanding at least 224 different forme of policy; the New York Life 316; the Mutual Life 220. Standardizing policies would also much reduce the work (and hence the expense) of the business.
Sixth. The investment of the company's funds should be surrounded by safeguards similar to those adopted in the case of savings banks. This would secure safety. This would also go far in preventing the use of funds in speculative enterprises, or to advance private interests, and greatly limit the possibility of the companies engaging in syndicate operations. Investment should not be made in the securities of corporations in which any executive officer or member of the investing committee of the insurance company is interested.
Seventh. Further, to protect the funds of the companies and to prevent their being used directly or indirectly to advance the private or other interests of officers, provision should be mode to prohibit the executive officers from engaging in any other business or holding office in any other corporations. Treasury safeguards should also be adopted to prevent payments without properly authorized warrants.
Eighth. Methods of accounting should be introduced which would compel the entry of all transactions in a single prescribed set of books, and the submission to the directors at all meetings of reports showing in detail the condition and the operations of the company. In such reports the cost of every department of the business and every -kind of business transacted should be clearly determined and disclosed, and likewise the condition, character, and result of each investment. Publicity as to the polioyholders also is essential to insure the proper conduct of the business by officers and directors.
Ninth. The board of dircetors must be composed of men who recognize the proper function of life insurance companies, and who, like the trustees of onr savings banks, recognize the sacred trust involved in their control; men who are willing to give to the companies the time and attention required for the proper performance of a director's duty; men who having the sole responsibility for the management of the society will not delegate to the executive officers or committees powers which the board alone should exercise.
Such comprehensive and fundamental changes must be made if existing abuses are to be eradicated; but even they will not prove effective to protect the insured and the community unless in addition:
Size of the Company Should Be Limited.
Tenth. A limit must be placed upon the size of the company. A company may of course be too small to be an efficient and economical unit, but it is clearly in the interest of the insured that the company be not allowed to expand beyond the point of greatest efficiency. It is clearly in the interest of the whole people that it be not allowed to expand beyond the point of danger arising from concentration of quick capital in the hands of a few individuals. The constitutional right to so limit the size of insuranoe companies is undisputed.
To eradicate abuses—to protect the community—it is essential that the insuring unit be kept relatively small.
You must limit the amount of premiums which it may receive, and the assets which it may hold—as well as the scope and methods of the business.
These in general are the remedies which in my opinion must be adopted to avoid the abuses incident to the life insurance business as now conducted.
What is the alternative? Not the discontinuance or substantial reduction of life insurance; for life insurance has become a prime necessity. Not the continuance of the present abuses; for the outraged and enlightened public opinion will no longer tolerate them. If our people cannot secure life insurance at a proper cost and through private agencies which deal fairly with them, and if they cannot procure it through private agencies except at the price of erecting financial monsters which dominate the business world and corrupt our political institutions, they will discard the private agency and resort to state insurance.
Danger of Government insurance.
Despite your or my protest, the extension of government activity into fields now occupied by private busiuess is urged on every side. Of all services which the community requires, there is none in which the state could more easily engage than that of insuring the lives of its citizens. Stripped of the mysteries with which it has been surrounded, and the misleading devices by which it has been permeated, the business of life insurance is one of extraordinary simplicity. To conduct it successfully requires neither energy nor initiative, and if pursued by the state does not even call for the exercise of any high degree of business judgment. The sole requisite would be honesty, accuracy and economy.
In my opinion the extension of the functions of the state to life insurance is at the present time highly undesirable. Our government does not yet grapple successfully with the duties which it has assumed, and should not extend its operations at least until it does. But whatever and however strong our conviction against the extension of governmental functions may he, we shall inevitably be swept farther towards socialism unless we can curb the excesses of our financial magnates. The talk of the agitator alone does not advance socialism a step; but the formation of great trusts—the huge railroad consolidations—the insured "racers'' with the attendant rapacity or the dishonesty of their potent managers, and the frequent corruption of councils and legislatures is hastening up almost irresistibly into socialistic measures. The great captains of industry and of finance, who profess the greatest horror of the extension of governmental functions, are the chief makers of socialism.
PROPHECY FULFILLED.
In an address to the Boston Association of Life Underwriters in 1890, the late C. C. Hire told an apt story about business getting merely forpurposes of show and with but little regard to perpetuity. He remarked that "human nature is a curious (hing. It is the same wherever you strike it, and the efforts of the companies to rake in this enormous volume of business, and then show such a forlorn and wonderful list of lapses and not taken business, reminds me of an experience of a cousin of mine in New York, who for many years was accustomed to give to an old darkey woman a Christmas turkey. And a year ago this Christmas, the carried around to her a turkey; a very pretty turkey it was; it was large, and the head was cut off, and the feet were cut off and legs tucked under nice and neat; but the old darkey lady looked at it and said, 'I wouldn't give a cent to have a turkey, unless 1 could have the head and feet to throw in the ash barrel, so that the neighbors could see that I had a turkey.'
"And between you and me and the gate post, gentlemen, I think that the ambition of the companies are nol much more worthy than that. They are on a large scale, to be sure, but are inspired by just about the same idea."
CRlTlClSM OF MR. BRANDEIS' FACTS AND CONCLUSlONS.
By Samuel Davis, Associate Editor Of The "journal Of Insurance Economics."
When the publisher of the Eatanswill Gazette desired an article upon the subject of Chinese metaphysics he had his handy man prepare it in an entirely original manner. That obliging writer read all the encyclopaedia had to say under China, then he absorbed all there was under the subject of metaphysics, and by combining what he drew from the two sources he produced the desired matter on Chinese metaphysics.
It would appear that this classic method is much used by current writers and speakers upon life insurance topics, if we may judge from the quality of the resulting product.
The latest effort of this kind is the speech of Louis D. Brandeis, printed in another part of the Journal. Mr. Brandeis is the counsel for the New England policyholders' committee of the Equitable Society. He is an able lawyer, a man of original thought upon economic problems and of the highest type in personal character.
But why should one that can make iron swim teach religion? In what manner do his legal skill and personal probity fit him to discuss the problems of life insurance administration?
The city in which Mr. Brandeis lives can furnish more than a score of citizens eminent in business, professional and private life who by the standing which their personal attainments lent to the business of assessment insurance in its early days, did incalculable harm in aiding the spread of the fallacious doctrines, which their ignorance of the technical side of life insurance led them to accept.
We could afford to pass by without notice the audacious attempts volunteered on every side to tinker the insurance business were it not that these efforts naturally tend to influence and initiate drastic measures by the legislatures. As a rule the members of a legislature need no spur when it comes to devising bills to regulate the insurance business. That is why we so strongly deprecate every act which tends to add fuel to the fire which the "strikers" never suffer to go out entirely.
Having thus relieved my mind of these general reflections I will refer specifically to some of Mr. Brandeis' statements. There is scarcely anything he says which is not wide of the mark and where he does happen to state a fact truly, the effect is destroyed by a wrong deduction therefrom. This is seen at the very outset. He says that the assets of a life company are mainly quick capital. Nothing as a matter of fact is farther from the truth. On the contrary the bulk of the assets must of necessity be invested in funds of a most permanent character, and nothing disconcerts the financial management of the company more than the necessity of reinvesting the assets from time to time as the obligations mature.
Because of the rapid extension of life insurance the income from new business is sufficient to meet the disbursements through claims and withdrawals and leave a balance for permanent investment. What then becomes of the ogre which our critic evolves and thus describes:
The greatest economic menace of today is a very live hand, the great insurance companies which are controlling so large a part of our quick capital?
Again, he says that even more reprehensible than exhorbitant salaries, legislative corruption and nepotism is the practice of deliberate and persistent deception of the public. It is pertinent to ask if there is any other business which has even a small part of the publicity attaching to its affairs and accounts as now obtained in the insurance* business? All other great corporations are practically above and beyond reach of our law and regulation.
For more than a generation we have had actual and successful control in the field of insurance of giant corporations. While the economists wholly ignoring this have been at their wits' end in trying to discover means of adequately controlling corporations in general, and particularly those which may be called natural monopolies, the insurance companies have been subject to the strictest control. This is equivalent to saying that the majority of educated men are densly ignorant of the history, principles and operation of life insurance, and the scope and nature of the states' participation in it.
Mr. Brandeis says that in the long run the conduct of the business has been inefficient. Who is hurt by this extraordinary statement, the business or Mr. Brandeis? Is it such a statement as 11 careful student accustomed to attach weight to his utterances would make, or does it sound like the irresponsible talk of a demagogue, endeavoring to arouse the ire of his auditors?
Take the record of Massachuetts, to which as part of the whole his reproach is directed. No company chartered by the state ever dishonored its obligations nor did any company ever fail while holding a Massachusetts license. Most of the companies antedate the Civil War, which means that they have successfully encountered every economic disturbance which the country has witnessed since that day. Thousands of banks have failed, lawyers without number have abused their trusts in the same period, and but the smallest minority of enterprises established in that day escaped failure—and yet we are told by our critic that the insurance companies have been on the whole inefficiently managed.
But a critic, no matter how flippant and eager, cannot alter the facts. Neither will the beneficiaries, who are legion in number, accept such statements from one who assumes, in the intervals of a busy law practice, to acquire over night, a knowledge of a scientific business to which able men have been willing to devote a lifetime, and from the fancied knowledge thus obtained discuss before a million newspaper readers profound and fundamental doctrines. The freshman nature of Mr. Brandeis' acquaintance with the subject is well shown in the extract which follows:
Lavish payments for solicitors' and agents' commissions and for advertising devices should be discontinued. Such practices, common among the promoters of mining enterprises and of patents, have no place in the business of life insurance.
Savings banks have no solicitors. The life-insuring habit is well established But can such missionary work be justified at an expense of twelve to twenty per cent, of all premiums paid, when the record of lapsed policies shows that this conversion to thrift is temporary?
Answering the question in the last lines, yes. If we were to be assured that the expense of life insurance would never decrease it would still be an economic necessity. And the man who saves his family from want by the purchase of life insurance has cooperated with his co-insurers in a deed of highest altruism, no matter what the cost. I believe the cost of insurmice will be lessened in a few companies which have charged an excessive price for it, but we have had all the while institutions managed with the highest degree of fidelity and skill which have given this protection at its absolute cost.
If Mr. Bandeis thinks the soliciting agent can be dispensed with let him remember the Equitable of London, which after a successful career of 142 years issued in 1903 just 213 policies.
Is his contention true that the lapses show that the greater part of insurance is issued through over-persuasion of the agent'? The record of a company established in 1847 shows that at the present day it still has on its books 46 per cent. of all the business it ever issued, notwithstanding 'the many policies which have matured by death and through termination of the endowment period in that time.
The suggestion is offered that the compulsory adoption of standard policy forms, by lessening the work, would decrease the expense, and we are afforded a chance to smile at the profundity of the discovery. Mr. Brandeis submits ten ways of reform, but why stop with ten? Surely such a facile hand could enumerate twenty methods with equal ease. In the alternative, we are threatened in the event that the business does not adopt these reforms, with government insurance, and are told that:
Stripped of the mysteries with which it h.<* been surrounded, and the misleading devices by which it has been permeated, the business of life insurance is one of extraordinary slmpltrlty. To conduct it successfully requires neliher energy nor inlatlve, and if pursued by the state doei not even call for the exercise of any high degree of business judgment.
Shades of the departed assessment companies! If they could only have been championed by such a valiant arm. The defunct assessment managers always looked out for the expense element, and as counsel of the policy holders' protective committee, Mr. Brandeis, per haps in remembrance of this, is said to have asked a modest contribution of $2 per $1,000 for the committee expenses.
The rapacity of the Equitable management, which was the originating cause of this outburst of protest from the counsel of the protective committee, only succeeded in spending $10.14 per $1,000 for their entire expenses. Which quickly prompts the unregenerate writer to warn President Morton against the extravagance of investigating committees.
The whole tenor of Mr. Brandeis' article is one of drastic condemnation, with a total failure to recognize anything of the beneficial, economic influence which the life companies exercise in distributing over the entire community losses which would fall with crushing effect on individuals.
WELCOME TO OPEN DEBATE A COMMENT BY EDlTOR.
The editor of the Journal does not agree with his associate, Mr. Davis, in his estimate of the value of Mr. Brandeis' contribution to current discussion. What Mr. Brandeis says represents the intelligent public opinion of today upon life insurance, and he presents it from the standpoint of one accustomed to study and mental analysis and to a fair presentation of his conclusions as the result of such study.
Upon his general propositions, as related to the larger economies of the business, he is in the main right. Most of the broader suggestions advanced by him, if adopted, would, as it seems to us, benefit and improve life insurance.
It is true that Mr. Brandeis, with comparatively little study, has undertaken to lead public thought as to the methods of life insurance. When he says that the "business of life insurance is one of extraordinary simplicity," he is certainly mistaken. True it is that the principles of insurance, like the principles of law, are simple, but Mr. Brandeis knows that a clear conception of the principles of law does not come to a man except by the closest study and most complete understanding of detailed cases.
Moreover, when he says that to conduct insurance successfully requires "neither energy nor initiative" he must surely be wrong, for life insurance is distinctly a businesss of energy and initiative, and if it were not required some one would have long since discovered the ease with which it could be transacted and would have brought the simple plan to the people with pronounced success.
Again we think he is wrong when he says that the doing of life insurance does not require "any high degree of business judgment." The whole trend of thought today and the whole development of investigation shows that the transaction of life insurance requires the highest degree of businesss judgment, and where it is not carefully exercised those who are responsible are severely criticised.
The editor of the journal is glad to see Mr. Brandeis and other mcu of reputation engaged in discussing life insurance economics, no matter how wrong they may be in some of their views, for in the long run this open debate will certainly tend to drive home to the minds of the people the very thoughts and ideas and practices for which many life insurance men have long stood and have long sought to impress upon the public mind. The more life insurance is discussed before the public the clearer will be the understanding in regard to the whole proposition. No honest life insurance official or agent will permanently suffer from this public discussion. Temporary injuries may result, probably will, which may possibly be as costly to the policyholders as any system of agency compensation or managerial expense now under criticism.
But life insurance is a democracy, and like a government democracy, the people who participate in it must learn what their responsibility is, where their own errors and lack of judgment contribute to the creation of excessive expense, and above all, to realize that with their own hands, acting in co-operation with those who make life insurance a profession, they may bring about reforms in this great business which will emphasize anew the remarkable contribution it makes to social progress.
FAILURE OF FRATERNALISM.
The Journal of Insurance Economics has for some years called attention to the gradual trend of fraternal associations toward business organizations. With growth comes always the inevitable difficulty of urging the fraternal idea as a reason for collecting the increased assessments necessary for the payment of the full benefit! demanded by the membership.
We find this confirmed by an official within the fraternal ranks. Arthur J. Bates, secretary of the "Royal Society of Good Fellows,"just debarred from Massachusetts by Commissioner Cutting, for insolvency, has this to say:
"The knell of fraternal insurance, as it was understood by those who originated it, has been sounded. The fraternal spirit is passing and the commercial spirit is, with swift strides, taking its place. Fraternal societies must hereafter charge higher rates to live and the only difference between fraternal and old line insurance of the future will be in that item called 'expenses.'"
"Three phrases explain, in brief, the present position of the society. Inadequate assessments, a steady diminution of membership, and a persistently high death rate. To these you might add inactivity and lack of interest on the part of the majority of members, and you have the whole thing in a nutshell.
"If assessments could have been raised early in our existence as a society, matters might have turned out differently. But raising assessments in fraternal organizations is a ticklish business, and one to be avoided if possible. We did levy extra charges, and of course we lost members. As it was, with all the odds against as, during the last year we restricted the growth of the general debt to a little more than $2,000 more than what it stood at the year previous.
"The original purpose of fraternal insurance has been lost to view, and whereas it was primarily an accommodation and protection for the families of members who could ill afford to pay the high premiums of the old-line companies, it has been so tainted by the commercialism of the age as to have usurped the place in our fraternal orders of fraternity and sociability, the very foundation principles of the first orders."
DEFERRED DIVIDENDS WITH PROPER ACCOUNTING ALL RIGHT.
by George E. Ide, President Home Life Insurance Company.
Business which renews is essential to success, and insurance mangers have devoted much thought to the formation of plans to accomplish the conservation of their business. If liberal surrenders are given in case of withdrawal, there must be some offsetting sacrifice by the policyholder who retires, for it must be borne in mind that the selection in matter of withdrawals is always against the company, and some special inducement must be offered to the policyholder to carry out in full his part of the contract.
Hence the deferred dividend plan— by whatever name it may be called. This is, in brief, a plan by which the insured elects, at the time he takes out his policy—and this must be rememlx-red—to allow his dividends to remain with the company until the end of a given period, and to forfeit them in the event of withdrawal or death during that period. He voluntarily chooses this plan; it is not compulsory for him to take it; there is no injustice in it; and he receives additional value in consequence of making the choice. From the stwndpoint of the company the plan is advantageous, as the forfeiture of dividends acts as a check upon withdrawals and promotes the continuity of its business. In the development of the system and in the method of distribution, however, I believe much may be fairly said against the plan as ordinarily practiced. If the applicant agrees when he takes out his insurance to postpone until the end of the period (say ten, fifteen or tweny years) any apportioning of his share of the profits, he submits himself to conditions which may prevail at that future date and to methods of distribution which are not pledged in advance, and he has no guarantee as to what treatment he will receive. New conditions may arise, new methods may prevail which no man can predict. Further, no matter when paid or alloted upon any policy, the dividends are the result of each year's business; and if no accounting is made a constantly growing fund is in the hands of the company, which need not under the terms of the policy contract be divided until the dividend period has expired.
This fund is called "surplus," and is properly surplus under this plan, for no policyholder has any legal claim to participation in or knowledge regarding it until he reaches the end of his particular dividend period. This plan is open to serious criticism; it leaves too large an unassigned fund in the hands of . managers and offers tremendous temptation to extravagant and lax business method—in fact, it is my personal belief that many, I am almost tempted to say most, of the abuses in our business have arisen from these large surplus funds which are the natural and necessary consequence of deferred dividends without any accounting during the dividend period.
EQUITABLE LIFE WILL NOT RETAIN REBATING AGENTS.
Many beneficent results will accrue to the life insurance business from the events of the present year, after the clamor has subsided and the routine once more assumes Ha unsensational course. Tha involuntary house Gleaning will afford opportunities for correcting lax practices and inaugurating new methods to supersede what has been found faulty.
Foremost among the conditions to be bettered, the rebate evil presents itself and its twin brother, twisting. It has been said times without number that twisting is the inevitable accompaniment of rebating, the natural response to it. If so, it should cease in direct ratio with the abandonment of rebates. While probably no company has been entirely guiltless of rebating, yet the largest number of rebates has been given by agents of the large companies.
It is, therefore, particularly gratifying to witness the positive and determined way in which Mr. Tarbell undertakes to purge the Equitable of the practice. It has been commonly supposed, in times past, that his strictures on rebating made in the course of various public speeches have been more or less in a Pickwickian sense. But the language of his recent bulletins to Equitable agents is caiculated to correct any wrong impressions which may exist as to the position of the Equitable's management on this question.
We have always believed that the companies could stamp out the practice whenever they permitted it to be known that sueh was the real intention. As long as one class of utterances are furnished for public eonsumption, while the agents are permitted to guess that they may act on an assumption quite opposed to the public utterance, it is of course farcical to expect any genuine reform. After referring to the Equitable's official rule on rebating, Mr. Tarb:'ll reminds the company's agents:
You are well aware that I have Id letters, circulars, addresses at our conventions, and at all limes and places, most strenuously urged our :'U'-MtM to live up to the letter and spirit of this rule; and I am glad to say that hundred-> of our agents have assured me that they have never given a rebate of any kind since the rule was established and that ibelr business was never before so profitable or so satisfactory.
We shall use every means at our command to see thai the rule is absolutely and rigidly enforced, to the end that Equitable policies shall be sold for one price through 'ut the world, and that price the full premium called for by the policy. We wish it to be plai ily understood that no conniving or winking at rebiting. directly or indirectly, will be permitted, and no agent will be s? important as to be retained in the society's service who violates this rule.
Vigorous words, the concluding sentence, and well adapted to secure the end desired. No agent should feel uncertain after reading them. The thought is still in Mr. Tarbell's mind when addressing his agents a few weeks later, and he means to leave no doubt whatever as to the society's position He wants business.of course, but notice the qualification:
We are now entering upon the best period of the year for life assurance—the last two months. We do not ask you to make a marvelous record in those two months. We ask you only to do the bed you can every day, lo pursue your work with courage and determination, to make the mom of the returning tide of corddencein the Equitable, and to get every dollar of good business that you can, every day, but not a dollar that is not full price.
Cling fast to vour principles in this respect and be vigilant in detecting and reporting to us any violation of the society',* rules in regard to the acceptance of business from brokers, or rebated business. The only way to do a thing is the right way, and the right way is always radical. Not one cent of rebate must be allowed on any policy sold by an Equitable agent. One hundred cents" on the dollar is our price, and we expect everybody to observe this rule, for two reasons: first, because it is right, and second, because we want you to remain with as, and the only way you can do that is by selling Equitable policies for one hundred cents on the dollar.
We believe that Mr. Tarbell can secure obedience to his instructions. We believe that other companies can take similar action with successful results, and we urge the present as a favorable time to do this. Let the executives of other companies inform the solicitors with the clearness and firmness used by Mr. Tarbell, of their intention to stop rebating and it will be stopped. Then they can come into the court of public opinion with clean hands to secure the abolition of twisting.
BOSTON HERALD ON TRIAL.
During the insurance investigation |n New York it transpired that special news despatches were being sent out by a subsidized news bureau in that city, containing matter relating to the investigation, presenting the life insurance companies' side of the case. These despatches were published in leading papers throughout the country as " reading matter," and, according to the testimony were paid for by the companies at an average rate of $1.00 per line. Among the papers which accepted this paid matter and published it as regular news despatches was the Boston Herald.
The Boston Herald had much to say in criticism of life insurance but neither in its news or editorial columns has there been any reference to the testimony above referred to. The Herald hai claimed and steadily sought to secure a reputation for eminent respectability, but of recent years there has been agrowingconvictlon among its readers that this claim was not based on real merit. This opinion is confirmed by the facts developed in the insurance investigation.
Is it possible that the life insurance companies of New York cannot secure the insertion of matter favorable to their interests in the Boston Herald without paying for it at so much per line? Is it possible that the Herald is willing to accept pay for publishing matter as a regular news despatch edited to suit the interests of those who pay for its insertion)1
The Herald cannot remain silent in the face of these disclosures without incurring more criticism than if it attempted an explanation of its extraordinary course.
page 54
NEEDED REFORM IN INSURANCE JOURNAL ADVERTISING.
The methods pursued by the Mutnal Life in the distribution of its advertising patronage to insurance journals is decidedly demoralizing and corrupting. At the life insurance hearing it was testified that in 1904 the company paid $30,000 for advertising in sixtythree insurance journals, the witness stating that it was the policy of the company to patronize them all.
Insurance journalists have long regarded the Mutual Life as one of the most indiscriminating advertisers with which they have had to deal. Such a policy is clearly injurious to the best interests of the journals. We have no doubt that if the details concerning the dispensation of this advertising patronage could be exhibited, it would be found that it was given quite largely to journals which have but small circulation. To these, this subsidy from the Mutual Life must have represented such a large proportion of ^ross income as to virtually and actually incapacitate them from unbiased comment upon the Mutnal's affairs.
The whole attitude of the Mutual Life toward insurance journals has been wrong and the change inaugurated as the outcome of the investigation comes none to soon. To the extent that other companies pursue similar methods they are justly subject to criticism. In this connection we are very glad to quote with approval what the "Spectator," in a recent issue, says of the pernicious influence of "write-ups":
In the course of the testimony before the legis. latlve investigating committee, it was shown that it in a common practice with many of the leading daily newspapers of the country to sell their reading space at a stipulated price per line. \ Special despatches and " write-ups" of all kinds and degrees are palmed otV upon their readers as news, when in fact they are paid for at so much a line, and should be classed under the bead of advertisements. This is a deliberate fraud, a species of special "graft," of which those journals are guilty, and should bring upon them the contempt and condemnation of their readers.
We heartily endorse these sentiments. If there are degrees of comparison to "graft," as the "Spectator" suggests when denominating "writeup" in the dailies as special "graft," then snrely if insurance journals should so far forget their high calling as to themselves submit to the "writeup" habit, the "graft" then can be nothing less than superlative.
CAMPAIGN CONTRIBUTIONS.
The Washington Post of last Sunday printed, under a New York date, what is declared to be an authoritative statement of the campaign fund raised by the Republican national committee during the last presidential canvass and the manner of its distribution. The statement says an approximate aggregate of $1,900,000 was raised and .expended as follows: Remittances to state committees, $100,000; for literature, $550,000; maintaining speakers' bureau, $175,000; for lithographs, advertising, etc., $150,000; salaries and expenses at headquarters, $150,000; miscellaneous expenditures, $50,000; balance on hand, 8100,000. The figures for the SlcKinley campaign of 1900 are given as $2,800,000, and that of 189(1 as §3,800,000. The sum expended by the Democratic national committee for the election of Mr. Cleveland in 18112 is placed at $4,100,000. The article says about 10,000 individuals contributed to the last Republican campaign, of which 40 per cent, disclosed their identity and GO per cent, were unknown. The largest individual contribution was $75,000 or $100,000, the funds being turned in by a member working on one of Treasurer Blisi? committees, who did not know who furnished the money.—Weekly Underwriter.
The editor of Economics was one of the 10,000 and is willing to publicly share the contumely of this association, whether it be with individuals or corporations. The number of contributions should have been at least 100,000, or better still, 200,000. Ten dollars each from this number of men in moderate circumstances would have furnished the $2,000,000 necessary to conduct the campaign. Had more of the critics of corporations contributed, it might not have been necessary for corporations to contribute.
We do not believe that corporations contribute to campaign funds because they want to. But somebody has to, and if it is neglected by the individual small contributor, then of course the big corporations will do it. A bill to forbid corporate contributions to campaign funds will be, or should be, weicomed with shouts of acclaim by every corporation, for it would compel the individual party voter to do his duty in prorlding educational funds. That li where the responsibility should rest.
page 55
LAXITY IN THE SUPERVISION OF INSURANCE DEPARTMENTS.
By Samuel Davis, Associate Editor Of- The Journal Of Insurance Economics.
It is quite apparent from the happenings of the year drawing to a close that much is still to be desired in the design and practical use of the annual statements furnished to the state departments. Manipulation of the items which go to make up these statements seem to have beeen fairly common. The precarious condition of the Washington Life, as an instance, early in the year was not disclosed by the makeup of its annual statement, or rather the method of handling the statement when it reached the insurance departments was defective in some vital particular. Otherwise what appeared to some as unmistakable signs of abnormality would have attracted the attention and analysis which is commonly supposed to attach to the business of auditing.
It matters not what particular variety of red tape induced the somnolence or indifference of the departments to the falsities of this statement, whether interstate comity, fear of reprisals or what not, the resulting inaction looks very much like a defect to the outsider, a defect which there is urgent need to correct. Concerning supervisory departments whose equipment is of the first class, it is not at all likely that the fault is with either the machinery of the department or the skill of those in charge. While the New York department when judged on the ground of its achievements is beneath contempt, such a fall from public respect and confidence was occasioned wholly by its prostitution to the needs of creating ambitious men who constituted a wicked alliance of politics and conscienceless business.
If it be said that this is strong language, it may in reply be averred that any combination of words is inadequate to fittingly characterize the series of revelations which have in cumulative fashion shown the utter inaptitude of the New York department. By the simple act of disclosure alone, these facts have been powerful enough to drive men into banishment, to reduce to confirmed invalidism a respected company president, to change the administration of companies whose executives were supposed to be intrenched beyond the hope of dislodgment, to cause companies to hastily change to annual distribution of dividends, and to precipitate the most violent upheaval of a generation.
For what purpose do insurance departments exist? For the very purpose, indeed, of preventing just the things which have taken place, by giving timely publicity to improper transactions in their inception. Certain departments have done the exact opposite of this; they have either deliberately suppressed damaging information, or connived at a company's evasion by means of a autement false upon the face of it. Given, then, a department controlled absolutely by politics and business greed, having jurisdiction over a number of important companies, tie the hands of honest commissioners of other states by the theory of interstate comity judiciously mixed with suggestions of reprisals, and a condition of all-round inaction is arrived at, which is well contrived to foster the growth of all that is bad.
The writer well remembers the almost open threats which were made to a committee of the Massachusetts legislature by Attorney-General McCarter of New Jersey when matters inimical to the Prudential were under consideration.
Nevertheless, the insurance commissioner succeeded in having the company reduce its deposits in the Fidelity Trust Company. And for this single instance of attempted pressure known to the writer there are probably hundreds of which he never heard. This failure to secure publicity for all the inner transactions of the companies, the lack of which has permitted the growth of existing evils, is directly chargeable to vicious control in some states exercised by politicians over the departments of law and insurance.
They have many times prevented the work of capable subordinates from ever seeing light. It is probably true that correct reports of examinations have been suppressed or altered by the head of a department under complusion of a political "boss," who had been "seen," as the phrase is, by an official of the company under condemnation. The Guarantors' Liability Indemnity Company of odorous memory and the yet un buried Mutual Reserve are cases in point where these things were done.
The effective remedies for all this, publicity and exposure, are now being applied, to the obvious discomfort of the patient. There is need for constructive criticism and comment at this juncture. We believe that the principle of interstate comity has received a shock from which it will not quickly recover, and no commissioner need now accept the certificate by a company's home department as conclusive evidence of its standing, unless it is backed up by other evidence more convincing.
A few prosecutions for perjury would aid in securing a more sorupulous fidelity to truth in making up the annual statements. Furthermore, if the departments were equipped with the office of traveling auditor, the disposition to force balances, when apparent, might be largely overcome. Such an official with his assistants, could be constantly on the road, employed in chocking up the items in the statements from the company's books and records. A publication in the succeeding issue of the department's report of any discrepancies thus found would surely tend to greater accuracy and also prevent deliberate and intentional fraud.
If the requirements of the uniform blank as now formulated are not sufficiently searching to disclose the actual condition of the company reporting through it, they should be made so. Having perfected a blank which will give absolute publicity for the business, the departments should be held to strict accountability for maintaining its accuracy and truth.
page 62
PRESIDENT MORTON ON THE EQUITABLE'S HOUSE-CLEANING.
The new president of the Equitable Life, Paul Morton, has issued an address to polioyholders reporting to them what has been done in the line of reform and improvement since he took the office. He states in the first place that the accounts of the company have been thoroughly examined by independent expert accountants and the assets valued at $416,166,500, of which $67,142,865 is surplus above all liabilities. This includes, of course, deferred dividend surplus as well as general surplus. Both assets and surplus have been reduced by new valuation, the reductions occurring merely on real estate owned by the society or covered by mortgage, and in the stocks owned of some of the financial institutions in which the company has been interested.
Mr. Morton reports that economies resulting in a saving of over $600,000 per annum have already been inaugurated. This, he points out, is four per cent. interest on $15,000,000 and more than covers the marking down of assets.
Approximately one million dollars has been secured to the society through the disavowing of certain liabilities and the restitution of other sums illegally diverted. Advances to agents, amounting to $5,813,184 have been transferred from banks to the company's own accounts, thus increasing the society's interest income nearly $150,000 per annum.
President Morton says that the society hereafter will discontinue political contributions and rely entirely upon its policyholders to protect the company against unreasonable legislation. An effort will be made to confine the investment of reserves to "real estate mortgages or the securities of railroads or other well established corporations, serving those sections of the country which produce the premiums."
President Morton promises no reduction in the gross premium to be collected, but states that he is satisfied that economy of management will greatly increase the value of Equitable policies by producing greater dividends for those who hold them. In other words, that the company will be in a position to give its policyholders, through returned premiums, the "lowest cost consistent with safety." Mr. Morton states that the extraordinary expense to the company incident upon the present investgation is amply offset by the reforms which have been brought about. Moreover he says that the public agitation in regard to the whole question has only served'to attract attention to the impregnable financial strength of life insurance companies more effectually than could have been done by any other means. The utility of life insurance, he says, has been more fully demonstrated than ever before.
In Mr. Morton's closing promise we find the utmost satisfaction, for he says there will be no effort by the new administration to have the biggest company in the world. The effort will be to make it the best and safest. Conservative lines will be followed. It will be the policy not to solicit or secure new business at the expense of the present polioyholders, and in case it is determined that business in any section of the world is unprofitable that field will be abandoned.
Vol. 14. JANUARY, 1906. No. 3.
AN ACUTE RATE SITUATION: INFLUENCE OF AGENTS.
What Might Be Accomplished by Standing Together.
ONCE more the fire insurance body is threatened with a congestion of prosperity Two years of profit have brought to the surface all the slumbering antagonisms. The war chests are being opened, and salaried managers, whose incomes will continue whether rates be high or low, are preparing plans of offence and defence. A prominent company official in a recent conversation said, " I have millions of surplus and can defend myself against any fight which my competitors may put up to me ".
In this high-tide of success the idea of "protecting what is my own" and getting a little more besides is a dominant thought. Excessive profit, oversupply of insurance capital, contests upon the commission question, all tend to make the fire insurance situation acute and critical.
In a time like this the companies and their organizations will have little influence. Local agents, who have everything to lose and nothing to gain by a rate war, general or local, can prevent demoralization if they will oppose it with a firm front. If the sensible agents in each locality will refuse to war with each other, acting only on the defensive against either agents or companies who seek to demoralize the business, they can in nine oases out of ten prevent a rate war, or at least reduce its effects to a minimum.
The moral sentiment of all agents throughout the country, generated through ten years of organized effort, is opposed to rate wars, and the agents in any locality, no matter how remote or small, can feel assured of the support of their fellow agents everywhere. Individual agents or agents in isolated localities do not make their fight alone today.
They have behind them the force of organization. If they will use this power wisely and well the war spirit can be discouraged. They will, moreover, have the support of sensible company officials whom competitive rivalry does not lead to practices injurious to the permanent welfare of fire insurance.
CAMPAIGN AGAINST NON-RESIDENT CUT-RATE BROKERS.
National Agency Association Now Polling Companies Inviting Co-operation and Assistance.
The National Association of Local Fire Insurance Agents has just undertaken the repolling of all fire instirance companies upon the question of overhead writing, and at the same time has made a new request upon the companies to assist agents in preventing the unfair competition of nonresident brokers.
Both requests have been made to the companies in the form of circulars issued by the executive officers of the National Association. The movement grew out of a conference with the companies, brought about by the National Association and resulting in the appointment of a joint conference committee consisting of six company officials and five local agents.
The first meeting of this joint conference committee occurred in New York Oct. 18. At that time the only question taken up was the matter of overhead writing and non-resident brokers. It was agreed that in view of the many changes in companies and company managements since the original poll upon overhead writing in 1898, a new list of those companies opposed to overhead writing should be made up.
Upon the question of non-resident brokers it was recognized that the interests of companies and agents lay in preventing the unfair competition of non-resident brokers who induced tariff agents and companies to accept a part of the line, placing the balance in Lloyds or mntuals at rates considerably less than those to which the risk was subject locally. The committee decided that it would be well for the National Association to secure from all companies an assurance that they would not write any part of the line for non-resident brokers unless satisfied that the entire insurance was placed under the same conditions. As a result of this conference the executive officers of the National Association prepared the circulars, one upon overhead writing and one npon non-resident brokers, and after securing the approval of all the members of the conference committee, company managers and agents alike, they were mailed to all companies. That upon overhead writing advises all companies that the association will publish an alphabetical list of companies which notify the National Association that they will not practice overhead writing, "either in the form of insurance written for property-owners direct, or through agents, or in the form of reinsurance," it being understood, however, that the writing of steam railroad schedules is not classed as overhead writing.
The circular relating to non-resident brokers reads as follows:
There exist conditions in the agency field today which concern both companies and agents and towards which we may properly invite your attention and ask your co-operation. It is found that local agents and the companies they repre -i'm! are frequently placed at an unfair disadvantage in competition with non-resldnt brokers who place a portion of the line with companies or their agents undpr proper conditions, but broker the balance in unauthorized or nonagency organizations under different rates and rules.
In this way, by the use of regular companies innocently induced to write the risk, many lines are being diverted from local channels, where they would naturally be controlled, to nonresident brokers whose competition agents are deterred from meeting by their obligations to the companies they represent.
We are certain that no agency company would knowingly allow its policies to be used by nonresident brokers for the purpose described. In order, however, that the intentions of all com panles in this respect may be properly recorded and appreciated by local agents, we ask an assurance from you that upon risks in the territory of your agents, offered by non-realden brokers, you will satisfy yourself that the whole insurance which they are placing li written or to be written under the rules and conditions to which the risk is subject locally.
This organization pledges itself lo use its bes endeavors to induce all local agents not to wrliu policies for non-rt sklent brokers unless satisfied that the whole insurance placed or to be placed, compiles with the rules and conditions to which the risk is subject locally.
This question of competition from non-resident cut-rate brokers is one which concerns very olosoly the interests of all companies and agents. It is certainly increasing and manifesting itself in new forms. Indeed, so far as the American brokers of some of the London Lloyds are concerned the matter has now become one of direct competition between said Lloyds and American companies and agents. Evidence collected tends to show that there has been formed a combination of London Lloyds, operating through certain American brokerage interests, whose direct purpose is, without requiring a warranty company, to solicit and write American risks at a cut in the tariff rate.
This determination to invade the general American market has been brought about by two causes: First, the diminution of surplus lines which local agents have taken away from resident brokers of London Lloyds which they believed were operating on the cut-rate plan, and second, by the desire of London Lloyds to secure more American business and the realization that they can not do so at equal rates.
The problem is one which cannot be easily or quickly handled on behalf of the authorized companies and American agents, but by patience it may be met. It requires, of course, complete co-operation between agency companies and their local men. It means also that local agents and companies must have a full understanding with large city brokers accustomed to place Lloyds insurance as to their intentions and practices. It may even involve a direct issue with Lloyds underwriters themselves.
If London Lloyds underwriters wish to write American business without warranty and at their own rates, there is no reason why they should not do so, if it can be done legally, openly and in a fair and straightforward manner. This is a kind of competition which, though troublesome at the start, will eventually cure itself, because London Lloyds cannot safely commit their underwriting in this country to brokerage interests concerned solely with commission income. But in the great majority'of cases American property-owners demand standard agency companies and it is to prevent the use of policies issued by these companies and their agents to non-resident brokers whose only object is to secnre a warranty which they may utilize in placing the balance of their line, that this campaign has been started.
By A Member Of The Equitable Policyholders' Committee.
Editor Insurance Economics:
I have been very much interetsed in Mr. Davis' reply to Mr. Brandeis' paper read before the Commercial Club, and your comments thereon. I quite agree with you, that the more the subject of life insurance is intelligently discussed, the more good is going to result from the present situation, and on that account I thank you heartily for publishing Mr. Brandeis' remarks.
I think our genial friend Davis misinterprets. For instance, I don't think that Mr. Brandeis or anybody else is advocating any "strike legislation." But does Mr. Davis contend that the recent developments in the three New York companies are not proof positive that the officials of those companies cannot safely be left to handle the fnnds at their own discretion, and that in their case at least restrictive legislation is necessary?
If Massachusetts companies, for instance, are handling, as I believe they are, their assets judiciously and economically, and not."kiting" on the "street," as our New York friends have, such restrictive legislation won't effect them in the slightest. The penalties that the law imposes against the ordinary, everyday form of stealing don't, affect you, or Mr. Davis or Brother Brandeis to any extent, except as it may insure your safety when you are out late nights.
Now a word as to the intricacy of the business. I understand Mr. Brandeis refers in this to the "underwriting" purely. Now after more than forty years' experience in the business, which has been principally devoted to fire, but incidentally the marine branch has come in, and also the life, I say unquestionably the most intricate branch of underwriting today is marine. No two risks are alike; no two voyages are alike, and the man who can intelligently "size up" the hazards of a certain passage, taking into account the seasons of the year, the character of the vessel, the character of the master and the nature of the cargo, and discriminatingly make his rates, is the best underwriter in the world. The proof of this is, there are very few of them. There is not one successful marine underwriter where there are a hundred fire.
Then next comes the fire. There is in the fire business a great opportunity for discrimination in the selection of business and room for the exercise of good judgment in making rates, but I fail to see where to any extent that comes in in the underwriting of a life company. The premium is determined by an absolutely mathematical process. The average death rate in a thousand lives is known. That makes the pure cost. The loading for expense is easy; there is your rate. In the selection of the risk in - medical examiner dops it all. The life is a good one or it is a poor one. Life companies like marine do not "shade" the rate according to the character of the risk. They either take it or reject it. That does not require vast talent.
Now when you come to the organization of a company and the building np of the business, I grant you that the life business requires a certain talent entirely different, and perhaps of a higher order than is required in building up either marine or fire companies, and that such talent when it is found is deserving of high pay. Note, for instance, the organization of the "Columbian Life" in this city. The ingenuity and brains,the personal magnetism and the hard work that have put that comj any where it is now is worth a McCurdy salary, but please note that the same brains that runs the company doesn't allow any such extravagant salary, and it probably won't until the company has long passed any possible experimental stage.
Again, on this question of agencies. Nobody wants to do away with the agent in life insurance. It cannot be done. A company cannot bring its wares to the door of every man even if no solicitation was necessary, but is it necessary to maintain such enormously profitable general agencies as have been disclosed in the New York investigations? Possibly the expenses of the "Equitable" have been only $10.14 per $1,000, but if any part of this, even only the odd fourteen cents, has been wasted, isn't that departing from "the beneficial, economic influence" which the life companies should exercise?
Again, why this incessant criticism of companies because they are small? Why is the old Equitable of England held up as a failure because its business is not as great as it was 130 years ago? Because it only issued 220 odd policies last year? I contend that if it issued 225 policies only, and had undoubted, absolute security behind these policies, and issued them at a lower cost to the assured than any other company, it is thereby the best company, and that the best company certainly is the company which furnishes absolute security at the least cost, not the company which by an extravagant expenditure does the largest business.
Unquestionably, size, to a certain extent, is an element of strength, in equalizing the average of the companies' business, and in providing a revenue large enough, so that the necessary office expenses do not make too large a per cent, but size may be carried to an extent where it becomes an element of weakness. A well-nurtured, robust frame is indicative of a good life insurance risk, but we all know that over-weight is recognized as a cause for rejection of the applicant in a great many cases. It is also true that over-weight is a bad feature in a company sometimes.
Yours very truly,
George P. Field.
page 86
Is the Reign of "Personal" Journalism About To End?
From The Chronicle, N. Y.
Many of the exhibits which were put in at the close of the life insurance investigation on Saturday last will prove, when they are made public, to be more interesting to life insurance men, than the matters contained in sensational headlines in the daily papers have been in many cases. One of these which is sure to create a sensation among underwriters and especially among insurance journalists, is the schedule of expenditures in the past five years by the Mutual Life, the Equitable and the New York Life for advertising, and otherwise, in connection with journalism.
Full schedules of these were supplied, many items being read aloud by Counsel Hughes. These items included payments to a political editor of the "New York Sun," and other journalists, and especially large sums for advertising, passing through the hands of favored individuals; and they also included the payments for advertising and otherwise, to insurance journalists and their editors. The record is not a pretty one in this regard.
For instance, the New York Life during 1904 paid the "Insurance Field" of Louisville but $156 for advertising and subscriptions; although that paper is recognized by observant insurance men as one of the best publications of its kind in the country, both from a news and an editorial standpoint; being fearless and fair in its presentation and treatment of current happenings. It is also known to have a very large paid circulation, and it is a paper which is opened and read by its subscribers. Both from the standpoint of the merit of the journal and of its value as an advertising medium, it should have been liberally patronized.
The other side of the picture is, that from ten to more than twenty times this amount was paid to favored journals—among which may be mentioned "Insurance," "The Vigilant," and the "Baltimore Underwriter"—which are not widely read—have been of little value of late, and in many cases are purely personal affairs. To be sure there are upon this list other papers, which have a good circulation, in part because of the subscription for a large number of copies by the New York Life and other companies; but the general record will not bear scrutinizing.
It is to be hoped that the new management of these offices will turn over a new leaf in this regard; that they will appreciate honest criticism, and fair though at times caustic treatment, and will refuse to encourage what may be called personal as distinguished from impersonal journalism. Especially should everything that looks like subsidization be exterminated and the advertising be placed with direct reference to the merit and honesty of the editorial and news management of the insurance papers, and to the value of the advertising itself.
"The Chronicle" under its present management has from the beginning refused to accept advertising on any other basis and, without intending any discourtesy, we may state that from the beginning of the legislative investigation we steadfastly declined to print paid replies or explanations concerning measures there disclosed.
WORK OF PROTECTIVE COMMITTEE OF EQUITABLE POLICYHOLDERS page 90
A Movement Which Has Earned Public Confidence and Proved lts Capacity for Satisfactory Work.
Of all the movements started since the Equitable disclosures began, none have deserved greater public confidence than the "Protective Committee of Policy holders" organized in Boston April 18 and originally formed as a New England committee. Afterwards, owing to interest shown by policyholders of other states, the committee was reorganized Hs a "general protective committee." Still later the interest of foreign policyholders was recognized by the addition to its ranks of Sir William Mather, Member of Parliment from Manchester, England. The other members of the committee are William Whitman, Arthur Amory, George P. Field and Edwin H. Abbott, all large policyholders and well-known business men of Boston.
Louis D. Brandeis was selected as counsel. No better choice could have been made. Mr. Brandeis not only stands at the head of the Boston bur, but has on many occasions shown his disinterested concern for matters of public interest. He is a lawyer who can be trusted to do this work for the policyholders of the company without regard for the emoluments which may or may not come to him.
The protective committee has shown from the start a desire to proceed in its work with caution and conservatism.
Its influence, therefore, upon the company's affairs in this crisis has not only been felt but has been positively beneficial. One of its members, Mr. Whitman, has been elected a director and the committee, at the request of the trustees of the stock, has submitted for their consideration the committee's views as to the future conduct of the society.
They are worth reading and are published below in full:
At the conference held June 27, 1905, between yourselves and Messrs. Whitman, Field, and Amory of our committee, and our counsel, Louis D. Brandels, you requested that we submit to you in writing the substance of the views as to the future management of the Equitable Life Assurance Society which we had expressed to you orally on that day. This we now do.
First. The sole aim of the society should be to furnish insurance of absolute safety at the smallest possible cost. The ability to do this must be the test of success. Efforts to secure a large amount of new business or to increase the assets controlled by the society are justifiable only so far as they subserve that end.
Second. In order that insurance of absolute safety may be furnished at the smallest possible cost, radical changes in system must be introduced. The mere substitution of other officers, however scrupulous and efficient, or the discontinuance of particular extravagant or illegal practices, or the recovery of profits wrongfully diverted, will not suffice.
Third. In order to secure insurance at low cost the society must, in addition to other economies, discontinue the lavish payments for agents' commissions and for advertising — practices common among promoters of mining enterprises and of patents—and substitute therefor methods more nearly following those of the great savingsbanks and the mill mutual insurance companies. No benefit can result to policyholders from the mere increase in the volume of business. The conditions in a great life assurance company are wholly unlike those of railroad or manufacturing coneerns, where increase of business naturally tends to reduce the cost, because there are fixed charges to be distributed against the total earnings. The conditions in a mutual life insurance society, like the Equitable, are also wholly unlike those in ordinary private business,wbether incorporated or not, where the increase in volume may tend to reduce the cost to the public, because the owner of the business is content to accept a less per cent, of profit on the output in order to secure a greater aggregate profit, resulting from larger gross receipts. In a life insurance company already large, new business obtained at high cost must necesiarlly prove a burden to existing and future policyholders.
Fourth. A mutual life insurance society should, as to each policyholder, be conducted as a benevolent institution. No one should be induced to take out a policy unless it is advisable to do so in the interests of those whom he desires to protect by it. No one should be lured into becoming a policyholder. The fact that in Hun. a year of general prosperity, 33,354 policies lapsed, when the average number issued in the two preceding years was only 112,139, indicates H'''t a very large number of persons were at least ill-advised when they took out insurance in the society. The fact that 22,220 policies, aggregating 181,649,311 duly applied for, passed, written, and entered, were not taken by intending policyholders, indicates the high degree of persuasion which must have been exercised by the society's agents or solicitors. In addition to to the 33,354 lapsed policies, there were in 1904 also 9,691 policies, aggregating $34,309,929, surrendered, while only 11,279 policies, aggregating 933,866,917, came to a natural termination by death, maturity, or expiry.
The relation of the society to intending policyholders should obviously be not only free from active deception, but should be characterized by complete frankness. Unfortunately, this obligation has not been observed in the past, as is shown among other things by the advertisement of a surplus of over 380,000,000, without disclosing that the greater part represented deferred dividends.
/• Fifth. The issuance of deferred dividend ; /policies should be discontinued or greatly llml'ted. The legitimate business of a life insurance \ company is to insure the life of the individual and to issue annuities. It should not be used as an investment company or as a means of gambling on the misfortunes of others. The issuance of policies on which dividends are deferred for long periods seems to be open to both these objections. It is clearly open to other objections. It tends to extravagance and inefficient management, because it removes the protection which flows from publicity and annual accounting. The annual declaration of dividends, the best practica-1 test of the efficiency of the management, is denied to the policyholders. It vests also in the management the control of huge funds not required as an insurance reserve, with the temptations incident thereto.
Sixth. To insure safety the investments of the society should be surrounded with the legal safeguards as to the character of investments now supplied in case of savings banks. The funds held by life insurance companies are held for purposes in the main similar to those for which savings banks exist, but the safeguards applied by law as to the character of savingsbank investments are lacking in the case of life insurance companies.
Seventh. Further to protect the funds of the society and to prevent their being used directly or indirectly to further the private or other interests of officers, provision should be made to prohibit the executive officers from engaging in any other business or holding office in any other corporations. Treasury safeguards should also be adopted to prevent payments without properly authorized warrants.
Eighth. Methods of accounting should be introduced by which the directors may be kept advised at all times in detail of the conditions and the operations of the business. The cost of every department of the business and every kind of business transacted must be clearly determined and disclosed, and likewise the condition, character, and result of each investment. Publicity as to the policyholder also is essential to secure the confidence of the public and to ensure the proper conduct of the business by officers and directors.
Ninth. In order that the above recommendations may be not only introduced, but properly carried out and maintained, the complete inuiualizatlon of the society is necessary. It should be brought under the absolute control of the policyholders.
Some of the views held by the committee relative to life insurance will no doubt be modified by subsequent investigation,but they are in the main sound and its work should be encouraged not only by policyholders but by insurance men as well.
The protective committee will be continned, as it should, and its work will no doubt receive increased support from policyholders whose interests it is so well equipped to serve.
C A L L I N G B U L L S H I T !
page 91,
THE MOTIVES AND PURPOSES OF FINANCIER THOMAS F. RYAN.
From The Outlook, New York.
A careful study of all the facts justifies the belief that the reorganization plan is a sound one, and that Thomas F. Ryan, who devised it and who has carried it into effect, deserves the approval and support not only of policyholders of the Equitable, but of all men throughout the country who believe in the stability of the banking system. For upon the banking system, in the last analysis, rest the material prosperity and comfort of every thrifty citizen,be he mechanic,farmer, school teacher, clerk in the general store, country doctor, capitalist, newspaper editor, or laboring man. We shall here endeavor to state the grounds for our approval of Mr. Ryan's plan. For several months the Equitable Society has been torn with dissensions which have threatened to disrupt and ruin it. While it is primarily an insurance company, it is in reality a great savings corporation, with assets amounting to over four hundred millions of dollars, and with an annual income of about eighty millions of dollars. Several hundred thousand policyholders have been putting their savings into its treasury annually for many years. To have such a gigantic savings bank come to financial ruin not only would mean disaster to an army of policyholders, but might precipitate a panic which would affect banks and bank depositors—that is to say, every thrifty and industrious citizen—to the remotest parts of the country.
Is it not a great public service to avert such a calamity as this? We assert that it is. We assert that a broad minded, public spirited, and patriotic banker may take the same unselfish and altruistic interest in accomplishing such a splendid salvage that is taken by the statesman who by brilliant and able diplomacy averts war, by the expert surgeon who saves a valuable human life by a capital operation, by the physician who averts an epidemic by a strenuous campaign of hygiene, or by the newspaper editor who sacrifices his popularity to maintain a political principle which he believes to be for the public good. Of course the diplomat wishes to earn his salary, the physician to be paid his fee, the newspaper proprietor to receive his dividends, but that does not make the public spirit any the less commendable.
In our opinion, Mr. Ryan, vice-president of the Morton Trust Company, of this city, a successful railway promoter, at the present time powerful if not dominant in the affairs of the traction company which controls all the surface street railways of New York City, and the successful originator of the Equitable reorganization plan, has done his work in this reorganization from motives of public spirit and public service. This, of course, is merely our opinion. We do not profess to know the inner workings of his mind and spirit any more exactly than do those who ascribe to him motives of selfishness and money grabbing. But we think it is time to say plainly that poor men are not always necessarily, by virtue of their poverty, public-spirited, nor are rich men always necessarily, because of their riohes.mean and untrustworthy.
However difficult it may be to judge of a man's motives, his public acts are matters which his neighbors may discuss and define. In the present instance the facts are well known. Mr. Ryan, for the sum of $2,500,000, has purchased from Mr. Hyde a controlling interest in the stock of the Equitable Life Assurance Society. He has organized a "voting trust" consisting of three unimpeachable and public-spirited trustees, ex-President Grover Cleveland, Judge Morgan J. O'Brien, and George Westinghouse. The stock which Mr. Ryan has purchased he has placed in the hands of these trustees for five years, the longest period that such a trust is permitted by the laws of the state of New York to exist without renewal. "The trustees are exclusively authorized"—we quote from the trust deed—"to exercise the voting power on the stock held under this agreement for the election of directors of the society, and shall at every annual election of directors of the society so vote on said stock. . . .that of the entire fifty-two directors twenty-eight shall be policyholders of the society, selected by or on behalf of the polioyholders, and twenty-four shall be lawfully eligible persons selected by the trustees in their sole discretion."
We have carefully read the trust deed from which this provision is taken, and it seems to us that it is framed for the express and exclusive purpose of putting the property and interests of the polioyholders of the society into the untrammeled and untied hands of a board of trustees distinguished not only for its high sense of personal and public honor, but for its executive ability.
February, 1906, page 109,
INSURANCE JOURNALS, PAST, PRESENT AND FUTURE.
by C. M. Cartwright In The "insurance Leader."
I do Dot exaggerate when I say that there are insurance journals that are as strong, influential and valuable as the best trade papers in any line of business. However, I am confident that no activity has so many colorless, mediocre, useless journals as are to be found in the underwriting field.
My first introduction to trade insurance journalism was a revelation. Out paper bought out one of the oldtime Chicago publications. It was typical of that class of journals, started by a man fairly well advanced in years who engaged in the business because it offered an easy opportunity to make a comfortable living If I recall correctly, this paper had about sixty or seventy-five paid subscribers. Yet its advertising patronage was amazing.
Some life companies, not those classed with the grafters, not those that have been under fire, but the good old rock-ribbed, annual-dividend type were lavish in their advertising. It was a monthly paper, and yet some companies were paying $50 or $60 an issue, which meant $1 per subscriber, and these subscribers with but few exceptions were companies and not agents.
When the paper with which I was then becoming connected, a vigorous, lively, newsy, widely circulated weekly, purchased the old plant and agreed to take over the advertising contracts giving about four and a half times as many insertions, several companies took to the woods entirely and others cut down their contracts materially. I recite this case because it so well reveals the false basis on which so many insurance papers are grounded.
To give value received is not intended by these publishers. Insurance companies show no discrimination in advertising. They spend the same amount on the paper with 100 subscribers as the one with 2,000 or 3,000. Influence, circulation, snap,enterprise, vigor, strength cut but small figure in the allotment of advertising. I know of no business where pure and unadulterated graft is so prevalent as the publishing of insurance papers. Three-fourths of the papers published could well be eliminated because of their utter uselessness to the trade.
Now, what of the future? I think ultimately a new day will dawn. It may be some years ahead, but there are indications now and then that are most hopeful. With graft exposed in the life insurance business,there must be less of it in its trade press.
The journal of the future will be conscientious, fearless, newsy, well circulated, influential, ably edited, helpful, both practical and idealistic. It will stand for the best in the business. Companies will not patronize it because the editor or business manager is a good fellow, or because they want the good graces of the paper, or because they are afraid of it, but solely because they expect results. Companies later on will discriminate. They will concentrate their advertising on those papers that are trying to give a square deal, papers that stand for something, those that are spending money for the benefit of subscribers, those that reach the men in the ranks. There is certain to be a period of selection and rejection, the survival of the fittest. Men of vision in our business can see the day ahead and the papers that will survive are preparing for the new conditions of the future.
Future insurance journalism will bo a greater credit to the great business it represents. With the best papers encouraged, more liberally patronized because they are worth it, publishers can afford to spend more money to improve their service.
I hope to see in each section of the country a few papers which will be recognized as the newspapers of the different fields. There must be a few journals more technical and educational than the newspapers. The newspapers will cover their particular territory carefully, even if it be but a single state or two. The technical papers will take up much of the work that now the companies have to do in training their men.
The paper of tomorrow will give full value for every dollar expended on it. Its readers will get the worth of their money and much more, likewise the advertisers. Advertising will be placed on strictly a business basis. Therefore, in the years to come, we will see less papers, but those surviving will be such as all men in the insurance business will point to with pride. The papers will be an important part of that business.
page 123,
INSURANCE INVESTIGATORS CONDEMN PRELIMINARY TERM.
Eight years ago the publisher of the Journal of Insurance Economics launched this venture in order that he might be free to express his convictions in regard to preliminary term valuation. Previous to that time there had been but one insurance paper, the "Field" of Louisville, then under editorial charge of Young E. Allison, which had spoken against this attempt to use the reserve for expenses. Since the Journal started it has continuously and with unabated zeal fought the preliminary term proposition. It is not necessary for us to review the facts. It is fitting, however, that we should record the results.
First: Preliminary term valuation has been effectually debarred from Massachusetts and the companies mainly responsible for the attempt to break down net valuation have retired from the state.
Second: The Armstrong committee appointed by the New York legislature to investigate life insurance has recommended to the legislature the prohibition of preliminary valuation on all policies issued after December 31, 1906. Upon this question the Armstrong committee says:
The third class of companies operate on what Is called the preliminary-term plan—that is to •ay, they charge a level premium, but treat the insurance for the first year as one-year term insurance with an option to renew for succeeding years, tlma escaping the statutory reserve the first year. The device of preliminary-term inlurance is resorted to, in order to provide a fund through the decrease of reserves for the acquisition of new business.
Under the present law it is said that this plan in some form is absolutely essential to enable a new company to ge.t under way. and by it alone it would seem that a number of companies have been enabled to meet the strain of competition. But it will be noted that in only one of the companies using this plan were the expensel within the margini of the first year's premiums, including mortality gains. Whatever it may do, therefore, in providing for the expecse of new business, it utterly fails to furnish a criterion for economy.
It is indefensible for other reasons. If the insurance for the first year is not in reality term insurance, the law as to valuation of policies is violated and the reserves in this state are caiculated upon a wrong basts. This is the position taken by the Massachusetts Insurance Department. On the other hand, if it be treated as oneyear-term insurance according to the form of the policy, then it would seem to be a clear case of a discrimination violating the intent of section 89 of the insurance law.
For the one-year-term rates charged are not the same for all forms of policies, but the same premium which is charged in subsequent years according to the character of the Insurance, whether life, limited payment life, or endowment, is charged in the first year. Otherwise there would be no advantage in the device, for it is precisely the difference between the cost of insurance and the full level premium rate that is sought to be gained in the first year to meet the expense of obtaining the business.
Under such contracts as much as $100 is sometimes paid for a single year insurance worth 97 net. It is said that this discriminating feature of the plan has been denounced by leading actuaries here and abroad, who favor some provision for the cost of new business. On the other hand, it is claimed that the evasion of the statute as to discrimination is permissible because the policy differs from an ordinary one-year term policy in giving an option, for its continuance upon another basis, but this distinction is purely formal, and, in the judgment of the committee, section 89 should be so amended as to leave no doubt that this kind of insurance falls within its prohibition.
Wo believe that the work which the Journal of Insurance Economics has performed upon this one point of life insurance principle has justified its existence. We feel that this magazine has contributed to the overthrow of a proposition which at one time threatened the entire structure of life insurance. There will be for some time preliminary term companies, but like assessment companies, they will be put in a class by themselves and will no longer sail under the flag of legal reserve life insurance. And like assessment companies, they will in due season begin to fail. Indeed some of them have already failed.
page 124
ARMSTRONG COMMITTEE'S REPORT ON INSURANCE CONDITIONS.
Revolutionary Recommendations lntended to Bring About Reform—Agency Expenses Chief
Object of Suggested Legislation.
The Armstrong investigating committee appointed by the New York legislature has made its report upon life insurance. It is an enormous document containing 319 pages of 120,000 words. The great bulk is comprised of a statement of the facts elicited by the investigation. The committee's comment upon the facts and conditions, together with its recommendations, are more compactly stated. For the information of our readers we set forth below concisely the recommendations made with brief comment by the editor where it seems to be called for.
Voting.—In person, by proxy or by mail. Proxies to be revocable at pleasure, to be given within two months of annual election and valid only for that election.
We regard this as a proper and satisfactory provision.
Lists of Policyholders.—All having policies of over $1000 to be filed with superintendent of insurance; similar lists to be open for inspection at the home office. Separate lists of policy holders to be open for inspection at general agencies of the company within said jurisdictions. No lists of industrial policyholders required.
Not enough gained of real value to polioyholders to warrant the expense it wouldjnecessitate. Policyholders' lists should be open at all times to those who, upon application to courts having jurisdiction, can show just cause why such lists should be furnished.
Nominations.—May be made by the board of directors or by 100 policyholders and filed with the superintendent of insurance four months before election.
A sensible provision.
Notices of meetings and Nomination.—To be made by mail to every policyholder two months prior to the election.
Would tend to cement the membership and solidify the company.
Meetings.—Special act recommended, by which terms of office of all existing directors shall expire on November 15, 1906, annual meetings being postponed to that time. Existing proxies to be declared void and only proxies used as provided above. One-half the directors to be elected thereafter annually.
An essentially democratic provision containing all the possible evils as well as the good of democracy.
Change of Stock Companies.—Law conferring power upon stock companies to grant to polioyholders the right to vote for directors with a concurrence of the majority of the stock.
A reasonable provision.
Suits.—Policyholders to be allowed to sue companies directly instead of through the attorney-general.
A just provision.
Investments.—Real estate investment restricted to absolute needs of company. Ownership or control of subsidiary corporations prohibited. Syndicate transactions and sale on joint account prohibited. Investments in all stocks prohibited.
This will limit the investments of life companies to mortgages and bonds, loans to policyholders and real estate necessary for the company's own purposes. The committee does not believe it wise to restrict life insurance investments to those in which savings banks are required to invest. We see no reason why life companies should be prohibited from holding good stock investments, but if the limitation will prevent speculation it may work more good than harm.
Directors Interest.—Directors will be prohibited from having any pecuniary interest in any loan or investment made by the company except a loan upon his own policy.
A good provision.
Deferred Dividends.—Further issue of the deferred dividend policies prohibited. Accounting to be made annually and policyholders to be allowed to say whether they will take their accumulations or permit them to remain to purchase additional insurance.
Prohibition of deferred dividends is not necessary to reform. Annual accountings and separation of deferred dividend accumulations are.
Non-participating Policies.—Mutual companies to be prohibited from issuing non-participating policies.
A wise provision.
Restriction of Business.—Writing of new business to be limited as follows; Companies having insurance in force of less than $50,000,000 no limit; between 50 and 100 millions, new insurance limited to 30 per cent. thereof; between 100 and 300 millions to 25 per cent.; between 300 and 600 millions, 20 per cent. thereof; between 600 millions and one billion 15 per cent. thereof.
A purely arbitrary limit not based upon clearly justifiable grounds.
Expenses.—Official salaries exceeding $5000 to be fixed by the board of directors. List of same to be reported annually to the superintendent of insurance. Pensions prohibited. Commissions to be uniform in percentage for all forms of insurance and based upon ordinary whole life policies. Bonuses, prizes, rewards and other special inducements to be prohibited. Renewal commissions should be limited to four years and fixed at 10 per cent. of the first year's commissions. Loans and advances to agents prohibited. Total expenses of the companies to be limited to the loading provided for expense. Loading to be uniform for all policies and based upon ordinary whole life policies.
Some of these provisions desirable, but any attempt to limit agents' compensation, except by confinement to the loading, is arbitrary and unwise.
Reserve.—Preliminary term valuation after December 31, 1906 to be prohibited, net values to be determined by Dawson's "Select and Ultimate" plan which allows the reserve during the first five years to be reduced by the saving in mortality between the actual and expected experience.
The prohibiton of preliminary term valuation is essentially proper. The substitution of the "Select and Ultimate" for the standard net value system should be carefully considered before adopted.
Standard Policies.—Pour standard forms recommended covering ordinary life, limited payment life, endowment and term policies. Other forms to be adopted by companies upon approval of the superintendent of insurance.
Some things to be said in favor of this proposition; many against it.
Rebating. — Present law to be changed to provide that a person receiving a rebate shall be equally guilty with the one who gives it.
An eminently just provision.
Campaign Payments. — Prohibited by law.
A wise provision.
Legislative Expenses.—Full publicity in regard to money expended. Complete detailed accounts to be kept.
A provision thoroughly sound.
Stipulated Premium Companies.— Law permitting should be repealed.
Fraternals.—No recommendations.
The report as a whole is extremely interesting. It is one which should not be idly set aside by insurance men because produced by outside critics; for on the whole it has been very intelligently prepared and some of the recommendations should be favored and urged by insurance men.
The mistakes in the report are due, as it seems to us, to the fact that the committee has considered only the conditions as revealed by an examination of the big three life insurance companies, and has not secured the broader view which would have come to it had the investigation extended to all life insurance companies. Nevertheless it may properly be said that New York state is dealing with its own problem of insurance, and that problem is essentially the big three companies.
We must accept the Armstrong report for what it is, namely, an expression of public opinion upon life insurance questions as disclosed by the investigation. Except in one or two points it cannot in any sense be said to represent expert life insurance opinion, and 'where technical questions are discussed, as in the matter of valuation, expense loadings, etc., such expert opinion as is therein expressed is limited and is not the outcome of any extended analysis or consultation with life insurance actuaries or underwriters.
We do not mean to say that Mr. Dawson has not consulted actuarial opinion other than his own, for we believe that he has, but the ideas set forth in the committee's report as the apparent result of his advice and cooperation, are largely, if not wholly, the outgrowth of his own thought and opinion upon these matters. And before these recommendations are adopted and incorporated in the law of New York state the insurance committee which considers the bills covering these questions, shoo Id summon before it life insurance experts from all parts of the country, even though the committee should conclude it to be unwise to allow such opinion to influence its legislation.
Better still would it be for the New York legislature to refer the recomendations relating to reserves, expenses and policy forms to a special committee to institute that careful investigation which the Armstrong committee, on acount of its attention to other details and the limitation in its time, was unable to give.
Of course the inference is that the Armstrong committee sets forth its various recommendations in the belief that each and all are necessary to reform and improve life insurance. For this reason we should like to see them all tried. There are some things recommended about which we cannot speak definitely until they are tried, like the limitation of business. No one can tell just how this would work. It may do good, it may do harm. The only way to find out perhaps is to try it. But to us the arbitrary limitation of output in life insurance is subject to the same argument pro and con as the arbitrary limitation of production or labor in any other industry.
April, 1906. Vol. 14., No. 6., page 163,
SAN FRANCISCO CONFLAGRATION: EFFECT UPON INSURANCE.
THE companies represented in San Francisco reported on December 31, 1905, surplus funds above capital of about $150,000,000. The conflagration will consume probably from $100,000,000 to $125,000,000 of this money. In addition to this surplus, American companies have an unimpaired capital of about $55,000,000, while the enormous assets of foreign companies are available to pay these losses. In our opinion the bulk of this liability will be liquidated within 60 days and almost every claim paid dollar for dollar.
The San Francisco disaster is the greatest which has ever visited the insurance companies anywhere, but their financial strength as a whole is greater proportionally than ever before.
There will be failures, but comparatively few. One company, a relic and survival of the Boston conflagration of 1872, has suspended business. One other Boston company involved may survive because it is backed by Western capital,—not a proud boast for us to make.
Insurance money will put San Francisco on its feet. The generosity of the American people will sustain the afflicted residents until industry and trade are resumed. Both funds come from the people; both represent a tax collected from the many to relieve the few. It may be our turn next.
This disaster will cause great changes in the economic structure of insurance. It will affect and shift the balance of every problem; some it may completely change, others merely modify. Some conditons it may tend to better; others it may make worse. All will depend upon the cooluess and wisdom with which the crisis is met.
The San Francisco losses should-be paid by every company without technical quibble. It is better to lose in dollars than in reputation. There will be insurance to write for those who survive; but the survival must not be at the expense of the "square deal." It is better to go down with honor.
page 164,
WESTERN UNION'S ADVANCED STEP ON RATING METHODS.
Important Change Planned in Handling Rates—Special Expert Committee of Rate-Makers to Supersede Work Now Done by Governing Committee.
As an outcome of its recent semiannual meeting at Atlanta the Western Union has decided to take an important forward step in the handling of rating conditions. The rate making of that body has heretofore been in charge of the governing committee, composed of executive managers whose time is largely occupied in the general policies of the business and who cannot devote to the rating question the attention demanded.
The increase of adverse legislation has emphasized the need of more systematic control and direction in the making of rates. Indeed the great criticism against the companies has been, not that they agreed upon a uniform rate, but that the rates on which they agreed were too frequently unequal and unjust,—discriminating between different classes of policyholders. In other words, it was the way in which rates were made and not the fact that they were made, which has brought about most of the antagonism to the companies.
This fact has been many times pointed out in this magazine. Indeed, so long ago as September, 1900, the editor, in an address delivered before the "Fire Underwriters'Association of the Northwest," set forth this proposition:
It was realized that present methods have been crude, that responsibility has been scattered, management ineffective and results contradictory. The governing committee, with its membership changing each half-year, haa been in general charge. Many of its members have bad little knowledge of schedule making and applying, and none of them have had much time to spare. The result bas been what might hare been expected. No consistent policy has been followed, rates on identical risks have varied widely in different cities and states, and the public has been given the impression that it wa> being worked. The Union decided to put control of all rating matters—employment and regulation of raters, the building, testing and application of schedules, and the development of an expert force and a definite and consistent policy. into the bands of an actuarial committee. Its members need not be members of the governing committee, assistant managers as well as managers are eligible—which means Dean, of course —and it will be a continuing body, with members elected for one, two and three yean at the start, and for three years thereafter. The selections are to be made because of special fitness and experience in the work, and the result will be the great improvement that always follows centralized management, the substitution of experts for amateurs, and the adoption of a definite and consistent policy.
For the proper handling of this work the Western Union is in part prepared . It has taken over and inaugurated a plan for classifying statistics. It has in its employ expert rate makers, and in many states rating bureaus having full charge. We understand the plan will be to develop the idea of expert state rate makers, the committee experts representing the Union having general charge and supervision over the whole for the purpose of bringing about consistency and uniformity of rules and schedules. The general statistical results no doubt will be placed in the hands of this supervising committee, and its recommendations will be made to the state bureaus with a view to having the rates in each state equalized and adjusted in accordance with the experience
The Western Union is certainly to be congratulated upon the step it his taken and the evidence thus given of its purpose to place emphasis upon the scientific value of rate making. The heart of the fire insurance business rests within the rate problem and the system of protection which stock companies have to offer to the public will stand or fall in the future upon the wisdom and justice with which its rating machinery is administered.
page 165,
EDITOR REPLIES TO COMMENT ON SEPARATION ARTICLES.
The recent articles in the Journal of Insurance Economics by the editor, touching the question of separation as applied in the Western field, have attracted so much attention and led to so much comment by word of mouth and by letter that the editor believes he is justified in devoting some space to the matter in this number. We know of no better way than to quote from the letter of a personal friend. As it was not written for publication we cannot give the name of its author, which would add weight to the views set forth. Here is the letter:
Editor Of Insurance Economics :—
As you know I have always been interested in your work, and have bad Bo many occasions to endorse and approve the admirable positions you bave taken on underwriting questioni. The Agency Commission question is one that, as you know, I bave been in touch with for a great many years; consequently, I have very decided opinions. If any position taken by the companies during the last few years has been based upon good, practical common sense and business prudence, it is, in my opinion, that of separation in agencies on the commission question.
I do not look at this question from any sentimental or visionary point of view, but I submit —and I never yet have found a business man who disputed it—that, under our present Agency System, the agent representing a number of companies and being compensated for bis services on a commission basis, the only sane proposition, honorable alike to the agent and the companies, is the same commission from all.
Agents will always have favored companies, even when receiving the same pecuniary payments,—a company writing liberal lines, having few, if any, prohibited classes, general absence of crltclsm or queries, personality of the Held representative—all of these are important factors and have an influence in business. But, when a Special Agent steps into an agent's office and offers him a compensation in excess of that paid by other companies,—companies which, by virtue of his position as an agent he is bound to bonorably represent—he is offered and is accepting a money bribe to represent one company as against the other companies he is also paid to represent. The company doei not say in auch a case—for example—" You give me just the same kind of business as you give the Fire Insurance Company, and I will pay you 10 per cent, extra commission". What it does say is —" If you will give me a better business than you give the Fire Insurance Company (and it is generally specifies as to the classification desired)—and I will give you a commission 10 per cent. in excess of that paid by the other company".
I do not mean to intimate that the agent in all cases realizes or appreciates just the position he is in, or the result of such an arrangement; but I believe that the effect generally has been to materially lower the standard of agents. Find me the agent who says that he will not accept from one company a compensation in excess of that paid by another (and there are a good many such) and you bave an agent of the hlgheiit standing, representing his companies with a loyalty producing the best results.
I de not and never have taken the position that we should go to an agent and say that he cannot represent a company paying more than 15 per cent., or any other figure, but we have a right to say and should say that we will not be represented in his agency, or any other agency, when representing companies paying a commission in excess of that we feel able to pay.
In the case of the Western Union, I believe it was a big stroke of policy when they coupled with the Separation Rule a permission allowing the companies to offer a compensation to the agent for giving up bis companies paying a higher commission, in the shape of graded commission."
This substantially covers the criticism which is made against the Journal from other sources, particularly from Chicago managers, who conversod with the editor during a recent visit to that city. It appears also that the editor's purpose in writing and publishing these recent articles, to check the drift towards disintegration upon rates, has caused some misunderstanding among local agents. Perhaps we cannot do better than to re-state categorically our beliefs upon the question involved:
1. The Journal of Insurance Economics believes in separation in agencies on the commission question. That is to say, uniform and excess commission companies should not be represented in the same office.
2. We do not believe that separation should be enforced against companies which are not members of the Western Union unless they are actually excess commission companies. We believe that the present agitation in the West which has caused so much trouble and criticism, might have been avoided if certain companies not members of the Union had not been excluded from all their agencies, but only those agencies where they were found to be paying excess commissions.
3. We believe that the Western Union has a right to adopt separation as a policy against excess commission companies, but not against non-union companies.
4. We favor low uniform commissions in the interests of real underwriting agents and believe that they must be established by co-operation between the companies. We hope some time that agency organizations will themselves assist the companies in maintaining a low uniform commission.
5. We believe the Western Union is primarily responsible for maintaining a condition which makes excess commissions possible, namely, ultraprofitable rates upon preferred classes. We are opposed to having the "ratecommission" question fought out by means of harsh and cruel rate wars,unjustified upon any economic grounds and an absolute injury to the local agency plant.
We have looked over past volumes of the Journal of Insurance Economics, particularly at the time the separation program was adopted by the Western Union, and find therein set forth, with almost perfect consistency, the views that are advocated today in the Journal, the only difference being that then there were but theoretical conditions to be discussed, because separation had not been tried. Today we have the actual conditions and the criticism must of necessity be more pointed. We refer in particular to an article in the November 1899 Journal, entitled "Economic Aspects of Differential Commissions." Every proposition therein set forth is as sound today as it was then, except that wo are satisfied that a reduction in preferred classes by the Western Union would not tend to a general rate war, inasmuch as the organized agency movement has crystallized in favor of reducing rates upon preferred classes and against rate wars, a condition which did not exist at the time separation was adopted.
What the Journal has bad to say at this time is not in criticism of uniform commissions or separation, but of the methods by which the Western Union during the past year has undertaken to enforce separation, causing the ejection from agencies of companies which were not excess commission payers and bringing ruinous rate wars upon the local agents.
Our idea, as set forth above, suggesting that separation be enforced against excess commission companies and not against non-union companies, calls forth the following from our friend the company manager:
As I understand your position you believe in separation in agencies on the commission question, but you do not believe that the separation should be enforced against companies not mernberi.of the Westen Union, but not paying excess commissions in certain agencies; that is, as I understand it, the separation should be made only in agencies where companies are paying the excess commission.
Now, that's all right as a theoretical proposition and I concur, but the trouble as t. practical proposition seems to be that it is almost impoottlble to determine where companies are paying an extra compensation. You and I know, as a matter of fact that, while there may be certain exceptions, practically all the companies not members'of the Western Union do not join because of the commission limitation; consequently, the companies that are not members are, generally, paying extra compensation, in various forms.
If we were going to adjust the separation on the basis of agencies where extra compensation was paid, we would have to determine that fact by inquiry through the agents. Of course, the excess commission companies would not help us on such a proposition. In the South, I believe they have tried a plan that provided for agents signing a statement or agreement that they would not accept from any company an extra commission or compensation. You know that if we adopted such a plan, the non-Unlon companies (I speak of them as a class would scheme to provide some way to compensate the agent, and yet allow him to say that he was only receiving 15 per with commission.
It does seem to me that the only practical course to take is the one adopted by the Western Union, and that is, to say that confpanies not willing to agree on the same agency commission basis should be considered as paying extra commission, and the separation should, consequently, be along that line.
It may be that it is practically necessary to draw the lino at membership, but we are not quite satisfied that it is. It has seemed to us that the arbitrary drawing of this line has been one cause of recent rate wars in western territory. For instance, to illustrate, if the fight had not been forced so strenuously against the Connecticut Fire upon its withdrawal from membership, and the matter had been handled with more deliberation and cure and judgment, much of the trouble might have been avoided.
Think of the confusion and chaos thrown into the agency ranks by instruction that the Connecticut Fire must be dropped from all Union agencies or graded commissions discontinued. In every such agency, as a Union company, the Connecticut was paying the same commissions, as other companies. Now as it seems to us this matter could have been much better handled by makiug a special rule to govern this extraordinary case which would have carried out gradually, automatically, and with due elasticity, the proper purposes of separation, would have obtained for the Union the friendship and co-operation of all agents, and would have made it impossible for the Connecticut Fire to criticise or attack that organization.
But of course it is always easier to see afterwards how the thing could have been better done. We believe that the Journal was justified in making a strong protest against rate wars which were caused by the extreme policy pursued by some Western Union companies. The editor gathers from his talk with insurance men while in Chicago that the policy of these companies has not been approved and their mistakes are recognized.
So long as the policy of the Western Union is dictated by a sincere and earnest desire to protect its members against excess commission paying companies, it seems to us there should be no trouble. It is only when the fighting is forced in a spirit of anger and retaliation that demoralization and injury occur.
page 177,
LIFE INSURANCE AS PRESENTED IN THE PUBLIC PRINTS.
One noteworthy outcome of the life insurance investigation is the great increase in the output of insurance literature in secular publications. There was a time not very long ago when it was almost impossible to interest magazines or newspapers in the insurance question, unless they were paid for taking this interest. But there has been a groat revolution and the mediums of public opinion and information find that they can no longer ignore insurance. Indeed, spurred on by the sensational developments, they are only too eager to take it up as philanthropists and friends of the public. Or, (ignorable thought) is their desire merely to increase their circulation?
However, let us not quibble about motives, but interest ourselves in the intelligence and spirit with which this outside discussion is conducted. The "World's Work," a magazine of great worth, devotes its April number to what it calls a "policyholder's manual, a complete guide for the 'policyholder of life insurance and how to purchase it." Fifty-eight pages are devoted to life insurance. The range of the discussion may be inferred from the following titles of the articles:
The Insurance Revolution.
Changes in the Big Three Companies.
Life Insurance as a profession.
The Meaning of Insurance Words.
The Cheapest Insurance.
The Kind of Policy to Buy.
The Deception of " Prize" Policies. •
Surrendering and Exchanging Bad Policies.
Personal Experience of Policyholders.
Rich Men's Insurance.
How the States Supervise Insurance.
What Companies to Insure in.
It will thus be seen that current day questions are pretty well covered. A reading of the articles indicates as a whole a purpose running throughout to deal with the insurance situation fairly. There are many crude thoughts and expressions which indicate a superficial study and knowledge.
On the other hand many illuminating facts are presented in forceful language. One article entitled "Life Insurance as a Profession," we reproduce in this number, because it deals with what is likely to be a vital outcome of the agitation, namely, the improvement in the field representation of life insurance, elevation in the character of the agent, the prof essionalization of life insurance soliciting.
The "professional" life insurance agent will more than ever play his part in the business, notwithstanding that some think life insurance agents are an incumbrance. This does not mean that a new typo of agent is coming into the field to represent the insurance companies. The type is already there, trained and ready to take the place of those who are not able to to meet the higher ethical standards which public opinion will demand. The writer of this article has a fairly wide acquaintance with business and professional men, and does not hestitate to say that life insurance men rank with the best in any business or prfession. Indeed the very difficulties of the business, the disagreeable features of competition, created by the kind of agent which has helped to bring discredit upon the business, has helped to make the men of real character and integrity.
Let us not, however, delude ourselves into the idea that we arc going to get rid entirely of the discreditable agent. There are always men who are willing to deceive and plenty who invite deception. But with a more effective prohibition of rebating, a cutting down of commissions and more public discrimination, there should be a marked improvement in agency representt'tion.
SAN FRANCISCO CONFLAGRATION: EFFECT UPON INSURANCE. page 163,
WESTERN UNION'S ADVANCED STEP ON RATING METHODS. page 164,
EDITOR REPLIES TO COMMENT ON SEPARATION ARTICLES. page 165,
LIFE INSURANCE AS PRESENTED IN THE PUBLIC PRINTS. page 177,
Widespread Life Insurance Discussion: What Will Happen? . . . . 113
Some Outside Criticism of Life Insurance Plans 115
How Much Life Insurance Should a Young Man Carry? 116
Insurance Commissioner Cutting Issues His Life Report 118
No Similarity Between Endowment and Deferred Dividends ..... 121
Mutual Reserve Examination: New York Department's Report .... 123
Some Hot Weather Airy Persiflage .......... 124
A Fire Underwriter's Views Upon Equitable Affairs 125
Superiority of Mutual Control Over Stock or Mixed Plan 126
page 9
NATIONAL SUPERVISION AS VIEWED BY A LEGAL ADVOCATE,
by Ralph W. Breckenridge Before Yale University.
It appears that insurance in one form or another is interwoven with the fabric of our commercial and social life; and while the supervision of any business of a private character would be an impertinence, the people who carry insurance have a right to the protection given through that publicity which can only be had by the inquisitorial investigations of the government; and a system of state supervision has therefore grown up.
The original purpose of supervision was to expose the weakness and fraud of irresponsible companies, but latterly the great accumulalions by the companies, of money in sight, has proven too strong a temptation for the states to resist. Accordingly, whenever the need for funds has presented itself, as it almost constantly has, an onslaught has been made by the state legislature upon the money held in trust for the people by the insurance companies, until now the states receive from the companies doing business in the United States, under varying forms of exactions, a sum that has never been definitely caiculated, but which is estimated at from $20,000,000 to $25,000,000 annually.
From tables compiled upon reports furnished by twenty-eight states, it appears that those states received from insurance companies during the fiscal year 1902 over $5,000,000 more than the supervision of those companies cost them; and this sum does not include what they received in taxes.
The President of the United States advocates Federal supervision in these words quoted from his message of Dec. 6, 1904:
The business of insurance vitally affects the great mass of the people of the United States and is national and not local in its application. It involves a multitude of transactions among the people of the different states, and between American companies and foreign governments.
1 urge that the Congress carefully consider whether the power of the bureau of corporations cannot constitutionally be extended to cover interstate transactions in insurance.
The fear that the issue of state sovereignty is involved is not well founded, and the suggestion is irrelevant; for if interstate insurance is "commerce among the states," the business is national in character and subject to regulation by Congress under the commerce clause of the constitution.
It is too late to challenge either the power of Congress or the propriety of Federal regulation of any instrumentality of commerce; both of them are settled by the constitution as construed in repeated decisions of the supreme court.
It is estimated that the expense of Federal supervision would not exceed 10 per cent. of what the states now exact, and as the competition for business is keen, a reduction of expenses will force a reduction of the cost of insurance.
The apparent obstacle to Federal supervision of interstate insurance as commerce among the states is found in the noted case of Paul vs. Virginia, 8 Wall. 168, decided in 1868, and a series of decisions following it known as the "insurance cases."
In all these cases except one the principal issue was whether a corporation of one state may transact its business in another except by compliance with the terms prescribed by law in the latter; and state statutes imposing such terms were sustained as a legitimate exercise of the police power. In the excepted case, a statute of Missouri providing for the nonforfeiture of life insurance under certain conditions and which fixed the rights of the parties contrary to the provisions of the particular policy, was sustained and read into the contract.
In none of these cases was an act of Congress involved, and in none of them was there apparently before the court any aocnrate and detailed statement of facts with regard to the character and conduct of the business and the uses made of insurance. The decisions are, in this regard, based upon the misconception of the facts as they are recited in Paul vs. Virginia, and upon the theory that insurance involves only the making of a contract between a citizen of one state and a corporation of another.
Is insurance "commerce" within the meaning of that word in the Federal constitution?
The regulation of commerce was the motive for the Federal compact, and naturally the clause giving to Congress "power to regulate commerce with foreign nations and among the several states and with Indian tribes" has given rise to much discussion and an inconsistency more apparent than actual, growing out of the views of the different members of the court regarding the rival theories of the concurrent power of Congress and the states, and the exclusive power of the Federal government.
What, then, is commerce? Who shall decide? Does the answer to this question depend upon mere definitions, or does the constitutional classification of insurance depend on facts that show its intimate and verbal connection with commerce and its instrumentalities?
In a case decided long after Paul vs. Virginia, Mr. Justice Field said," What is an article of commerce is determinable by the usages of the commercial world."
The commerce of 1787 knew only sailing vessels, caual boats and stage coaches. There were no steamboats, no railroads, no electricity; and the telegraph, the telephone and supplied electric power have become utilities of commerce within a generation, and subject to Federal regulation, because, in the language of Marshall, "The Constitution was intended to endure for ages to come, and consequently to be adapted to the various crises of human affairs."
Chief Justice Waite said the powers granted by the commerce clause of the constitution are not confined to the instrumentalities of commerce known or in use where the constitution was adopted: "but they keep pace with the progress of the country and adapt themselves to the new developments of time and circumstances."
And the power of regulation under the commerce clause has been, and therefore may be applied to that method of intercourse which had no existence when the constitution was framed.
"Commerce," says Mr. Justice Johnson, "in its simplest signification means an exchange of goods. As society advances, however, labor, transportation, intelligence, care and various mediums of exchange become commodities and enter into commerce," and "the subject, the vehicle, the agent and their various operations become the objects of commercial regulation."
Tne courts have expanded the powers granted under the commerce clause of the constitution, "to keep pace with the progress of the country"; these powers have "been adapted" to the "new development of time and circumstance."
Congress has the power to determine the articles which may be the subjects of commerce. Congress is the exclusive judge of the expediency of the regulation of insurance and of the facts which render such regulation expedient; and one may count upon his fingers acts of Congress held unconstitutional for want of constitutional power.
If, therefore, Congress shall see fit to supplement its direction to the bureau of corporations by providing for complete supervision of insurance it will preform a great and needed public service. Such supervision will assure the maximum of corporate publicity which is demanded not only for the policyholders, but to preserve the corporations themselves against unjustifiable and malicious attacks, for the interests of the policyholders and the insurance companies are identical.
Interstate insurance is "commerce among the states" and the general good requires its regulation as such; the duty of Congress is plain, and no phantom of states' rights should intervene between that duty and its performance.
DEFERRED DIVIDENDS: IS IT GAMBLING OR IS IT INSURANCE?
This question will be discussed in the June number of the Journal of Insurance Economics by F. S. Elwell and Samuel Davis, both of Bolton, Mr. Elwell taking the position that the practice of deferred dividends is gambling, while Mr. Davis will analyze and reply to Mr. Elwell'i contentions.
We can promise our readers that both articlea will be interesting. They are published in accordance with the purpose on our part to give our readers all sides of all questions. The editor himself may have something to say upon the question, which is one of particular interest at this time. Public attention is focused upon the matter.
page 18,
HENDRICKS' REMARKABLE WHITEWASH OF UNITED STATES LIFE.
Examination Discloses lmpairment and lnefficiency of Management—Soothing Statement for Policyholders lssued by the New York Department.
The New York Insurance department has finished an examination of the United States Life Insurance Company conducted by Examiner Isaaac Vanderpoel, in which the following results are shown:
The impairment of $70,000 shown has since been made up by the sale of bonds of the "Virginia Passenger & Power Company," ($100,000 par value) for $85,000, Mr. Vanderpoel having allowed a valuation of these bonds of $10,000. The difference, $75,000, covers the impairment. The Virginia company is in the hands of a receiver and is in default of interest. Who bought the bonds for $85,000 is not made clear, the only evidence of the sale furnished by the company being a deposit credit in the Chemical National Bank of New York of $85,000. (See note.)
In his examination Mr. Vanderpoel decreased the value of the company's real estate from $870,250 to $768,500. He also recommended that the loans on bond and mortgages be reduced in twenty-two instances by $77,262. The examiner increased liabilities on account of reserve from $8,268,656 to $8,287,181, and also increased the liability, on account of claims resisted
Notr.—Curiously enongb, says the Journal of Commerce, some of tbe Virginia Passenger & Power Company of Bichmond's first consolidated mortgage 50-year gold bonds, due in 1952, were sold at auction last week Just afUr the State insurance Department's report on the United States Life bad been issued, in wbicb they were given a value of $100 per $1,000 bond. There have been no public sales of these bonds until the auction last week, at which $2,000 brought $190 and Sl.OOO brought (8. by the company, from $8,000 to $32,250.
Upon the general policies of the company Mr. Vanderpoel makes the following comment:
I am of the opinion that the company has gone too far beyond the average loading on its net premiums for expense of management. I do not think the extent to which it has done so is justified, having in mind the amount of Us present surplus as regards policyholders, being balance of impaired capital stock. Should the present ratio of expense continue indefinitely this surplus must necessarily be gradually reduced in view of the rather meagre results obtained in the past in the procuring of new business, which when procured is lacking in the element of fairly normal persistency. There is no gain from actual mortality over table assumption which in any measure might negative expenses over average loading. On the contrary, there is shown at present an excess of mortality over tabular assumption.
Mr. Vanderpoel's examination and report shows—what has become clear to those who have studied this company's record and progress—that excessive expenses and the payment of dividends in excess of actual earnings, is undermining its financial strength and security and leading the company steadily towards insolvency.
Notwithstanding these facts, Superintendent Hendricks, in an explanatory report upon Mr. Vanderpoel's
findings, has this to say:
Thus, the impairment of the capital stock has been made good. This act....taken into consideration with the fact that it has unreservedly complied with all suggestions and requirements of the department, indicates a conservative management and one which should havedepartmental approval....
Since the examination the management has made such changes and economies both in its methods of obtaining business and in its home office, that the department is satisfied that the company is now in an absolutely sound business condition; that it will be conducted along safe, economical and conservative lines, and believes that it merits the continued confidence and support of the public.
Thus does a complacent and pliable insurance supervisor gloss over the facts with the apparent intention of giving the polioyholders of the company a sense of security which they could not feel if the actual facts, as disclosed by Mr. Vanderpoel's report, were properly analyzed. Furthermore, as it seems to us, it gives the company officials what amounts to permission to continue the inefficiency of their management.
Turning back to the February, 1905, number of the Journal we find in an article discussing the "Value of State Insurance Supervision" the following paragraph:
The New York department employs examiners fully competent to ascertain actual facts. The fault lies not with those who "probe," but with those who, holding the anthorlty, suppress and disregard the actual results as they are shown. The distrust which the New York department has engendered as the result of Us quiescent attitude will not help life insurance, but on the contrary will injure it because the greatest companies in the country are supervised by that department.
The examination of the United States Life and the treatment accorded it by Superintendent Hendricks, is a practical and pertinent illustration of the truth of this statement. It does not make the United States Life stronger and better for the insurance superintendent of the New York department to excuse and palliate its shortcomings, and surely it does not help life insurance as a whole.
It is no time for soft words. Life insurance is going through the test fire of public opinion. There is need of strong men and strong measures. It is evident that the United States Life has not been and is not today competently managed. There are probably men in the agency department of that company who could put life and vigor and skill into its management, but they are not brought to the front under the enervating system of stock control which governs in this and other New York companies.
The United States Life cannot be saved by covering up. Its management needs the inject ion of new blood, the employment of men who can fearlessly face the situation and by intelligent honesty put this company on its feet. Unless this is done we feel very sure that it will continue upon the down grade over which it has been traveling.
TEN YEARS' EXPERIENCE OF THE UNITED STATES LIFE.
Prepared for the Journal Of Insurance Economics by Benj. F. Brown.
* Surplus as shown Dec. 31, 1904, by company's own statement; since reduced to $444,742.85 (5.26 per cent, of liabilities) by examination of New York Insurance Department.
page 20
VICE-PRESIDENT TARBELL AND HIS INSURANCE PRESS CRITICS. UNIFORM INCREASED RATES ON NON-PARTICIPATING POLICIES.
Second Vice-President Tarbell of the Equitable Life is charged with being the instigator and prime mover in the present controversy in that company. How true this is we cannot determine. It wonld be natural and proper to expect that Mr. Tarbell would have ambitions for official preferment, likely to be interfered with by the retention of Mr. Hyde in control as vice-president of the society. But nothing has yet transpired to indicate that Mr. Alexander is not the real head of the revolt against the Hyde control or that Mr. Tarbell is acting only as his lieutenant.
Mr. Tarbell being on the firing line of competition is criticised more in insurance circles than either Mr. Hyde or Mr. Alexander, and several insurance papers, notorious for the complacency with which they allow their editorial columns to be subsidized by special interests, are bitterly attacking Mr. Tarbell. We find no specific charges of mismanagement but we do find this charge—that he is trying to supplant Mr. Hyde and eventually succeed Mr. Alexander to the presidency.
This of itself is not, as it seems to us, a sufficient ground for criticism, and when we note the character of some of the attacks upon Mr. Tarbell we are reminded of the fact that the less there is to criticise the more bitter and venomous the invective.
The impression has come to us from reading what has been said that Mr. Tarbell is not being fairly treated. All the comment of the insurance press seems to be upon one side. The past of his insurance career, as well as his life before he entered the business, has been reviewed and presented from the partisan viewpoint of those who evidently desire to injure his reputation. It appears, however, that there is another side and that is presented in the Cortland (N. Y.) "Standard" which has the following to say:
"The Equitable Contest."
The Standard has said nothing thus far concerning the contest which has been going on inilde the Equitable Life Assurance society, though one of the storm centers in it is an officer who in early manhood lived in Cortland county, and who still has many acquaintances and friends in this vicinity who know him and believe in him.
We have recently, however, received several telegrams from the city of New York containing inquiries about Mr. Tarbell, which have made us thoroughly indignant. These telegrams asked for information as to Mr. Tarbell's doings at Marathon, bis former home; as to his supposed manipulation of farmers with regard to patent fences and pumps; ai to whether be was ever indicted: and requested, in case he was, that full copy of the indictment be sent. They requested also that we interview Waters & Tuttle relative to charge that Tarbell collected more costs from defendants in driven well cases than were legal or were turned in to them by him as attorney.
Why the inquiries stopped here we don't know, unless it was due to the character of the telegrams which were sent in reply. It would have been just as pertinent to have asked, and there would have been just as much foundation for asking, whether Tarbell had not been arrested for beating or refusing to support his wife: for robbing the Marathon henroosts: for getting drunk and disorderly; for playing poker or dealing faro or cracking the Marathon bank. And if any oral! of these charges had been openly made, they would have been little, if any, worse, and little, if any, more lying, than many of the accusations against him with which certain metropolitan newspapers have recently been stuffed. Every one who was acquainted with Mr. Tarbell while a resident of the counties of Chenango and Cortland, where he lived until after he was twenty-eight years of age, knows that, as to good habits, good name and reputation, be was above reproach. In this locality be needs no defenders.
Any candid and fair minded man, contrasting simply the style of attack made uie of against James Hazen Hyde and that directed against Gage E. Tarbell in this controversy, would naturally have his sympathies enlisted for Mr. Tarbell, and especially if he knew of the services rendered by Mr. Tarbell to the Equitable society as compared with the record of Mr. Hyde in this same particular.
When Gage E. Tarbell, as a young man, lived in this county, he showed the same characteristics which have made him successful since. He was square, he had immense energy, an impressive personality, magnetism, force, enthusiasm and an infinite capacity for work and for details. When be took hold of anything it moved. When he set out to do anything he did it.
The only crime which Mr. Tarbell seems to have committed—and it is presumed that thti constitutes a crime in young Mr. Hyde's eyes—is that after Mr. Alexander hid inaugurated this movement, be, believing Mr. Alexander to be doing what wal for the best interest of the poli'-yl'old'-rs and agents, gave him his support.
Possibly the "Standard" baa a partisan interest in its defense of Mr. Tarbell, hut the Journal of Insurance Economics would very much regret, when this controversy is settled, to have it said that no insurance paper was willing to give Mr. Tarbell a fair show, and that there were none who recognized his great ability and his remarkable record as an insurance man.
Mr. Tarbell is a man of great power and force, but he makes enemies easily and he does not draw to himself many firm friends. Yet he has intense magnetic force, indeed he possesses qualities that are almost hypnotic. He has won his way to the front through his own standards of business sagacity and integrity, and there are those today in the business, even his competitors, who will testify as to his trust worthiness and to the value of his word once passed.
Yet Mr. Tarbell is not widely loved. He is not popular in the insurance business. We find the opinion almost unanimous that it would be better if Mr. Tarbell were thrown out of the Equitable and out of the business, for it is inferred that his fall from the Equitable would mean his extinction as a life insurance man.
We do not see how such a result could be. Mr. Tarbell is not a man easily suppressed. He has qualities which compel admiration and will contribute to his success wherever fate may place him. Out of the Equitable with him would not necessarily mean out of the business; on the contrary, we are of the opinion that he would be very much "in" the business.
If Mr. Tarbell is to be a part of the life insurance business we should prefer to have him just where he is. Wherein he is wrong and wherein he endangers the business we believe he is subject to control. He is sensitive to honest criticism and where he is wrong he will reform if properly approached and reasoned with.
But if Mr. Tarbell is fought unfairly, and we think he is being fought in that spirit, then he will certainly fight back, and the Journal of Insurance Economics will help him to a fair hearing It was the "Weekly Underwriter," we believe, which recently said: "The best way to create sympathy for any man is to overdo your censure of him in the press."
It is gratifying to note the increase in rates on non-participating policies by a number of representative companies. When the rates which are now superseded were first announced, a tendency was thereby noticeable very much in the wrong direction. About the last thing that the life business could bear up under would be a competition in lowering rates guaranteed in amount. The present increase is not great in amount but it is enough to mark a reconsideration of the former movement, hence it is most weicome.
But all the mutnals writing this class of business are not represented in the group which has made the advance. The in ut iiitls have much less excuse than the stock companies for naming a lower guaranteed rate on a given class of their policies.
It is always within the power of mutual companies to compete with each other in a legitimate way on the cost matter, by returning sizable dividends. This sort of competition in management results is always to be encouraged. It is the best argument for the mutual plan of organization.
On the other hand, the competition of purely stock companies would most naturally be strongest with a guaranteed rate as low as it could be made with safety.
Then if the mntuals show careless or ineffective management because the large initial rate seems to permit this, the sharp contrast shown by the rate of a well managed stock company will afford the needed corrective.
Sooner or later the relative merits of the two plans are apparent to the public, who are then in position to intelligently discriminate when purchasing. It would be rather disappointing to see a safe non-participating rate disappear altogether for this reason. The increase now made does much to secure its permanent retention.
page 22
LIFE INSURANCE EXPENSES OF MANAGEMENT FOR THE YEAR 1904
Mr. Brown's Statistics Show that Twenty-five Per Cent, of Gross Premiums is Consumed in Expenses—How this Outgo is Divided.
In the last number we presented a table by Benjamin F. Brown showing the economic results of new business in the case of twenty-five American life insurance companies. This month we are able to present a similar table showing the gross expenses of management on the entire business of the siune companies. We find that the gross premium receipts of these companies in 1904 was $331,441,307 and that the total expense oost was $83,252,959, or 25.11 per cent. of the gross premiums.
Of this total expense $52,782,324, or 15.92 per cent. was spent for commissions and agency expenses; $20,250,898, or 6.11 per cent., for administrative and clerical expenses, while $10,219,737, or 3.08 per cent., was spent for tuxes, fees and real estate expenses.
From the average expense rate of 25.11 per cent. we find considerable variation in the case of individual
companies, ranging from 18.26 per cent. to 44.52 per cent.
A closer examination of the different ratios discloses some interesting points, namely, that companies having a high ratio of commission and agency cost, when reduced to the final ratio of gross expenses, show up more favorably than other companies which have low commission and agency cost. For instance, the Connecticut Mutual, which has a commission and agency cost about balf that of the Equitable Life, has an administrative percentage about equal and a tax and real estate expense nearly three times that of the Equitable Life. Thus in the final ratio the Connecticut Mutual shows a total expense cost of 26.47 against a similar ratio of 25.04 for the Equitable Life.
Illustrating this point still further we quote the following ratios of three big New York companies:
page 30
OUR INSURANCE SENATORS: WILL THEY STAND THE PUBLIC TEST?
Two presidents of leading American life insurance companies have recently been honored by their state legislatures in being returned to the National Senate. Both stand high as business men—keen, shrewd, intelligent, forceful, possessed of attractive personalities, and regarded as having attained prominence by force of native ability and strength. The editor of the Journal has enjoyed a personal acquaintance with one of them, and aside from his ability as an insurance man, has found him a gentleman of great charm and scholarly attainments; one who, taken apart from the setting of corporate or political environment, might command, as it seems to us, the confidence and trust, of anyone.
And yet, in respeot to the public life which these men have chosen, we find in eminent magazines which command public approval, from the pens of responsible writers, articles which reflect upon the personal character, the loyalty and the patriotism of these men who now stand as representatives of the great business of life insurance in the United States Senate —John F. Dryden, president of the Prudential, and Morgan G. fiulkeley, president of the .Ktnu.
It is not a pleasure to the editor of the Journal to feel that the life insurance men who have secured this national eminence are in any respect vuluerable, so far as political careers are concerned, and yet he believes it his duty, as well as that of all others engaged in the business, to know and to understand how enlightened public opinion, as expressed in responsible magazines, takes its view of our insurance senators.
In the "Outlook" of New York we find this statement made relative to Mr. Bulkeley's political methods:
Dr. Newman Smyth of New Haven preached not long ago a vigorous sermon calling the attention of hla community to the tainted atmosphere with which ex-Governor Bulkeley's candidacy is surrounded. This sermon interested others, and out of it has grown a movement of protest which has spread throughout the state.
Unfortunately, for some reason perhaps not altogether unconnected with the power of advertising, the newspapers of the state have not paid very much editorial attention to Dr. Smyth's campaign, but they have been compelled to give it space in their news columns. Dr. Smyth has sent a circular-letter to every member of the legislature, stating two insurmountable objections to the elevation of Mr. Bulkeley to the senatorsblp.
One objection, says Dr. Smyth, is that in the management of the .Ktiia Life Insurance Company of Hartford, of which Mr. Bulkeley is president, large sums of money which were real ly due to the mutual policyholders were diverted to the benefit of the stockholders of the company. Dr. Smyth states that this is a matter of court record, and that in 1878 Governor Hubbard of Connecticut characterized this financiering as "scandalously unjust."
The other obstacle to Mr. Bulkeley's election, according to Dr. Smyth, consists in Mr. Bulkeley's opposition to the •' Corrupt Practices Act" in Connecticut. In a legislative hearing regarding this act, Mr. Bulkeley was asked by Senator Cleveland the following question: "Do I infer that it is lawful and right for you as a candidate for office to buy a vote which is for sale!"' Governor.Bulkeley replied as follows: "I think it is right for a candidate to secure that man's vote, if he is without principle and ignorant, by any means you can use."
In "McClure's" Lincolu Steffens, in his inimitable and convincing articles on municipal, state and national politics, defines New Jersey as "a traitor state" and its political machinery as comprised mainly of a band of "grafters" organized to betray the rest of the country by the passage and manipulation of liberal corporation laws, giving Senator Dryden a central place in this corrupt system, and among other things has this to say of Mr. Dryden and his "businesspolitical" affiliations.
Now the trolleys and other public utility businesses are still building up their business in Jersey; they are extending Mnei, buying and absorbing plants, making contracts all the time, so that they have, any way, to keep in touch with politics, and at the bottom, too, in the cities and counties. Senator Kean has some independent public utilities down his way. but most of the water, gas, electric light and power, and the trolleys of New Jersey are held by the Public Service Corporation, Thomas N. MeCarter, representative of the system. I say visible, because the Prudential has relations with the Equitable Life Id New York City; and since the Pennsylvania resides in Philadelphia, the real seat of the government of New Jersey, the most selfish and provincial of states, is outside its borders, and the state government, which so liberally has served national trusts, actually is governed by a syndicate representing national corporate interests. Is this good government?
president. This company was financed by the Fidelity Trust Company, Uzal H. McCarter, president. And back of the trust are the men tn the Prudential Insurance Company, John F. Dryden, president. Naturally, when General Sewell died, Mr. Dryden was elected to the Senate. He had never taken any part in politics before, and bia election caused some surprise and some difficulty; bis friends had to buy outrlgbt several votes for him—unbeknown to him, they say—but that will not happen again. The next time be runs for the United States Senate, be will probably go through as the chief visible
These statements taken by themselves do not establish the facts contained therein but they do show the attitude of the public mind and can but lead all in the insurance business to gravely and seriously ask if these suggestions and intimations can be true. One of these senators personally known to the editor has seemed to him a type and example of what a United States senator should be and yet our judgment looking at it from the standpoint of insurance affiliations and the natural and inevitable interest which is bound up in that affiliation, may not le the best. It may prevent us from exercising that clearness of vision which might come to an outsider probing for the facts and reaching his conclusions from the standpoint of a reading constituency whose confidence and patronage he is interested in maintaining. We are concerned with these outside criticisms because they represent honest judgment rendered by capable public writers. If they be not true it is still well that we should know these things are being said These men are no longer underwriters they are public servants and we have a right to test them by their public service and by their political careers. The work of a public writer even though it he in the special field of insurance is not always a pleasant one. His real force and power lies in always presenting without concern for the consequences, the thoughts, and conclusions, which honestly arise in his mind. In doing so he is often misunderstood, he often offends where no offense is intended, for the true publicist will say what he has to say fearlessly, even though it may most nearly affect adversely the interests or the feelings of those for whom he entertains the friendliest regard.
page 45,
CONFLAGRATION RESERVES: HOW THEY SHOULD BE PROVIDED.
From The Chronicle Of New York.
Several of our exchanges have paid The Chronicle the compliment of quoting our views upon the necessities of conflagration reserves, with or without comments of their own.
Our suggestion is this. Since conflagrations recur often at intervals of several years and present no reliable annual averages, reserves to provide against them should accumulate until needed; and the mere expiration of the period covered by a policy should not release its contribution to that reserve, unless an ample aggregate reserve is in hand.
If the fire insurance reserves required by law at the present time were precisely what is really necessary to cover the nnexpired risk, it would follow that the conflagration reserve would need to be accumulated in addition and, of course, from additional premiums. But the fire insurance reserves now required are not a pro rata portion of the net risk premium but instead, of the gross premium, which averages almost twothirds higher than the net premium. That is, out of reserves of $500 for premiums of $1,000 not more than $300 is really needed to cover the current, ordinary risk. The other $200 is in reality an emergency reserve and should be available in event of conflagration. Then permit this, when depleted by conflagration losses, to be restored gradually, for instance, in four or five years.
It is doubtless true, also, that additions should be made to fire insurance premiums for certain localities on account of the conflagration hazard; fairer distribution of the cost of fire insurance is called for. But these additions will be of little avail if treated as fully earned as soon as the year is passed. When the cycle to secure an average loss by conflagration is longer than one year, mere expiration and renewal will not excuse failure to accumulate the reserve until a safe maximum amount is held.
It is not enough to let the surplus which a company voluntarily carries, answer as a conflagration reserve. Only the most prudent companies— and the most prosperous—accumulate surplus funds sufficient to answer the purpose. Reserves are necessary and should be required, not permitted.
But the character of the conflagration hazard calls for complete or partial depletion of this reserve when these great fires take place; and, by • the same token, for gradual replacement.
The fact that fire insurance reserves are now too high by 40 per cent. of themselves or there about, for reserves against the ordinary fire hazard, indicates that already on the whole sufficient reserves are probably in hand, to cover conflagrations also. What should be done in order to perfect the system, is to treat that portion of the reserve as a conflagration reserve, to be used upon occasion and then to be made good within a reasonable time.
page 49,
THE DEFERRED DIVIDEND POLICY: IS IT A GAMBLING CONTRACT?
Caustic Arraignment of Long-Term Distribution by Fred S. Elwell—Analysis of His Contentions by Samuel Davis.
Boston, May 16, 1905. Editor Insurance Economics:
Right at this time, while the public is interested in the discussion of life insurance, I invite J. W. Alexander, president of the Equitable Life Assurance Society of New York; John A. McCall, president of the New York Life Insurance Company of New York, and Richard A. McCurdy, president of the Mutual Life Insurance Company of New York—they boing the presidents of the three companies which are the leading exponents of the deferred dividend system—to state (over their own signatures) in a simple, concise and straightforward way, why it is better for any one seeking insurance to take an accumulation, semitontine or deferred dividend in connection with a life insurance policy, rather than an annual dividend, that I in the same . simple, concise and straightforward way, may answer them for the benefit of all the people.
Several years ago I appeared before the insurance committee at the State House of the Commonwealth of Massachusetts for the purpose of trying to make it obligatory through legislation for all life insurance companies to make an annual payment of dividends to holders of life insurance policies, knowing that the semi-tontine, or deferred dividend contract was both nefarious and shameful. I believed then, and I know now, that the vast sums accumulated, and the practical immunity of the management, under its artfully designed contracts, from all liability of accounting even to surviving polioyholders, is mainly, if not wholly, responsible, for the extravagant increase of commissions, with all the attendant evils, whereby the cost of life insurance has been largely, unnecessarily, wickedly and injuriously increased.
At that time all of the great companies that did not pay annual dividends were represented by men,who took in charge their interests (not the interests of the people) and the bill, needless to say, was heard from only as a corpse.
The system of holding dividends to be accounted for only at the end of a given number of years, called an accumulation, semi-tontine, or deferred dividend period, is the worst form of high-licensed gambling known to the world, which in iniquity equals, and in magnitude puts to shame, the notorious gambling resort known as the bank of Monte Carlo.
Today the deferred dividend companies hold as so-called surplus accumulations on the various forms of deferred dividend contracts, a sum exceeding $300,000,000, all of it subject to forfeiture, not only in case of lapse, but also in case of the death of the insured before the termination of the period fixed in the contracts or policies of insurance.
All money paid by a policyholder in excess of the amount necessary to provide for his relative proportion of the insurance cost, properly belongs to him. Any contract which provides for its confiscation is unrighteous, is opposed to public policy, and should be prohibited by law, as it is an iniquity and a rank and crying injustice.
The agents of these companies are given the inducement of largely increased commissions and bonuses to sell semi-tontine or deferred dividend policies, and they use all the powers of their vocabulary to induce the persons intending to insure (who know little of the principles of insurance, and wherein their true interests lie) to take these iniquitous contracts for the sake of the greater commissions paid by the companies for them, when,if fairly stated, the forfeiture proposition of the deferred dividend contract would defeat itself.
It is time that honest men connected with the life insurance business (offloials and agents) should sound the warning to all the people, that the noblest and the most sublime of all great enterprises should have removed from it this stain of injustice, this iniquity of forfeitures, the crime of robing the unfortunate living and the widows and orphans of the dead, and shame the cowards who prostitute the mutuality of life insurance, rob it of its lofty spirit and sublime principles.
When the first simple form of life insurance was broadened by the issuance of limited payment life, endowment, and instalment contracts, with the addition of cash and loan values, and the extended insurance feature, it seemed as if all was accomplished that made it possible to adhere to the principles of equity and mutuality; but when accumulated, semi-tontine and deferred dividends (which are all the same thing) were injected into life insurance, then came increased expense to the insured, and the officials (quick to see poss'bilities with their vulture eyes of avarice) said, "What shall we do with the spoils?" And as if with one voice rang out loud and clear, "We don't have to make an accounting; they have got to take what we give them, and they have no recourse; let us use it to pay running expenses."
If a bunco man should sell you a gold brick you would try to have him arrested; the life insurance agent sells you the same thing (in the form of a deferred dividend policy) and you praise him for it, until you wake up.
Thousands who are insured today have policies entirely different from what they really think they have, and hundreds who solicit it as agents are themselves ignorant on the subject of life insurance.
Thousands are carrying life insurance today who think that they have twenty-year endowment policies, but if they will look them over, or have find that they either have a life policy with the dividends deferred for twenty years, and on which they will have to pay premiums for the rest of their lives if they wish to keep their insurance in force, or that they have life policies which when twenty payments have been made causes them to become a full life policy on which no more payments are required (called twenty-payment life policies) the full value of the policy being payable only on the death of the insured, but on which the dividends have been deferred for twenty years; and this misleading state of affairs is chargeable to the deferred dividend contract, because the agent who keeps dinging twenty years to you (and you not knowing much, if anything, about insurance) causes yon to he mislead.
There are many good life insurance companies; all the people want to do is to separate the wheat from the chaff, but they must be taught intelligently which is wheat and which is chaff.
The thoroughness with which the mutual principle should be incorporated in a life insurance company, and the fairness with which every member's interest should be protected, should place a life insurance compnny beyond the reach of fear or suspicion, thereby furnishing its members the best guarantee of their own and their family's future safety.
The following form letter to widows whose husbands have died shortly before the distribution period of their policies is recommended for the use of companies doing a deferred dividend business:
The annual dividend paying contract today as proved by results is not only giving more, for less money, during the deferred dividend period, but at the end of the same period is giving greater cash results,without the attendant chance of loss to the insured, at any time during the whole period.
The following illustrates the working of the deferred dividend, the illustration as used being the dividend end of the premium. One dollar— one hundred dollars—one thousand dollars or ten thousand dollars could be used in this illustration, as the dividend would depend entirely upon the amount of the insurance carried.
In this case I have used five hundred dollars.
Would yon go to the president of a bank and say, "Mr. President, I have in my pocket five hundred dollars, which I wish to deposit with you now, and at the same time make this contract: I agree to deposit every year for twenty years, five hundred dollars, further agreeing that should I die at any time during twenty years, even on the ninteenth year and three hundred and sixty-fourth day, that all the money I have paid into the bank shall go to the bank; my family or my heirs shall be without recourse to recover it; further agreeing that although I may have paid in to the bank nineteen times and failed from any cause to pay the twentieth time, all that I have paid in shall go to the bank, and I shall be without recourse to collect it." And your answer would be, "You don't think I am a fool?" Then I should say to you, "No, I don't think you are; I know you are, because you are doing it by having a policy on which you have made just that agreement; and there are thousands all over this country, including our best merchants, bank presidents, college presidents, and our brightest and most brainy men in every walk in life, who have been hoodwinked by this system, and whose names are being used persistently (like molasses for flies) to catch others. And perhaps you are one of those whose name is being used."
If there is a set of men who deserve the just condemnation of the people, they are those who today, as officials of life insurance companies uphold now and try to continue this nefarious system. The poor but honest man working for two dollars a day is a far better citizen and neighbor. If the use of the United States mail was denied to the Louisiana Lottery Company it would be a much greater blessing to all mankind to deny its use to this still greater octopus, which was conceived to rob the many to benefit the few; and the time also lutely certain to come (by legislative enactment) will not be long deferred, when companies will cease to be the stakeholders of these gigantic gambling pools, and not until then will the interests of the insured be honestly subserved. This monstrosity in life insurance must die—if not a natural death it must be killed by the people.
And here I would suggest to the people (and they should see to it that it is enacted into law in every state of the United States) that a bill be presented to the legislature of each state, the character of which is and shall be that—
"No company shall write a policy of life insurance other than an annual dividend contract, no matter how great or small the premium may be, and such annual dividend may be taken annually to decrease the cost of the insurance or left with the company to add annually to its value by purchasing extra insurance, or said dividends may be left with the company to be compounded at some stated rate of interest. The cash value of such addition or additions to be at any time at the disposal of the insured for the purpose of paying the premiums, or be a cash asset which can be drawn on at any time by the insured. This bill to take effect immediately upon its passage."
Now the first way to accompish these results is to absolutely refuse to take a poiicy in any company unless the dividend is declared annually and so stated in the policy, as described in the above bill. Secondly, to accomplish these results, there will be needed bold and fearless men, like the Hon. Frederick L. Cutting, insurance commissioner of Massachusetts, and the Hon. Zeno M. Host, insurance commissioner of Wisconsin, for they today are the watchdogs of all that is best for the people in the affairs of life insurance, and anxious to do right in the cause of justice (but conditions that now exist are of such a nature that they simply enforce the law without being able to control the conditions) and they must be backed by the people, as the system against which this would militate will try to turn heaven and earth to cause its defeat.
And at this point I wish to say that the present unhappy condition of the Equitable Life Assurance Society's trouble, comes largely from the deferring of its dividends; and the deferring of dividends is a constant menace to the insured and to all companies that engage in it.—Fred S. Elwell.
page 52
From The Chronicle Of New York.
Several of our exchanges have paid The Chronicle the compliment of quoting our views upon the necessities of conflagration reserves, with or without comments of their own.
Our suggestion is this. Since conflagrations recur often at intervals of several years and present no reliable annual averages, reserves to provide against them should accumulate until needed; and the mere expiration of the period covered by a policy should not release its contribution to that reserve, unless an ample aggregate reserve is in hand.
If the fire insurance reserves required by law at the present time were precisely what is really necessary to cover the nnexpired risk, it would follow that the conflagration reserve would need to be accumulated in addition and, of course, from additional premiums. But the fire insurance reserves now required are not a pro rata portion of the net risk premium but instead, of the gross premium, which averages almost twothirds higher than the net premium. That is, out of reserves of $500 for premiums of $1,000 not more than $300 is really needed to cover the current, ordinary risk. The other $200 is in reality an emergency reserve and should be available in event of conflagration. Then permit this, when depleted by conflagration losses, to be restored gradually, for instance, in four or five years.
It is doubtless true, also, that additions should be made to fire insurance premiums for certain localities on account of the conflagration hazard; fairer distribution of the cost of fire insurance is called for. But these additions will be of little avail if treated as fully earned as soon as the year is passed. When the cycle to secure an average loss by conflagration is longer than one year, mere expiration and renewal will not excuse failure to accumulate the reserve until a safe maximum amount is held.
It is not enough to let the surplus which a company voluntarily carries, answer as a conflagration reserve. Only the most prudent companies— and the most prosperous—accumulate surplus funds sufficient to answer the purpose. Reserves are necessary and should be required, not permitted.
But the character of the conflagration hazard calls for complete or partial depletion of this reserve when these great fires take place; and, by • the same token, for gradual replacement.
The fact that fire insurance reserves are now too high by 40 per cent. of themselves or there about, for reserves against the ordinary fire hazard, indicates that already on the whole sufficient reserves are probably in hand, to cover conflagrations also. What should be done in order to perfect the system, is to treat that portion of the reserve as a conflagration reserve, to be used upon occasion and then to be made good within a reasonable time.
page 49,
THE DEFERRED DIVIDEND POLICY: IS IT A GAMBLING CONTRACT?
Caustic Arraignment of Long-Term Distribution by Fred S. Elwell—Analysis of His Contentions by Samuel Davis.
Boston, May 16, 1905. Editor Insurance Economics:
Right at this time, while the public is interested in the discussion of life insurance, I invite J. W. Alexander, president of the Equitable Life Assurance Society of New York; John A. McCall, president of the New York Life Insurance Company of New York, and Richard A. McCurdy, president of the Mutual Life Insurance Company of New York—they boing the presidents of the three companies which are the leading exponents of the deferred dividend system—to state (over their own signatures) in a simple, concise and straightforward way, why it is better for any one seeking insurance to take an accumulation, semitontine or deferred dividend in connection with a life insurance policy, rather than an annual dividend, that I in the same . simple, concise and straightforward way, may answer them for the benefit of all the people.
Several years ago I appeared before the insurance committee at the State House of the Commonwealth of Massachusetts for the purpose of trying to make it obligatory through legislation for all life insurance companies to make an annual payment of dividends to holders of life insurance policies, knowing that the semi-tontine, or deferred dividend contract was both nefarious and shameful. I believed then, and I know now, that the vast sums accumulated, and the practical immunity of the management, under its artfully designed contracts, from all liability of accounting even to surviving polioyholders, is mainly, if not wholly, responsible, for the extravagant increase of commissions, with all the attendant evils, whereby the cost of life insurance has been largely, unnecessarily, wickedly and injuriously increased.
At that time all of the great companies that did not pay annual dividends were represented by men,who took in charge their interests (not the interests of the people) and the bill, needless to say, was heard from only as a corpse.
The system of holding dividends to be accounted for only at the end of a given number of years, called an accumulation, semi-tontine, or deferred dividend period, is the worst form of high-licensed gambling known to the world, which in iniquity equals, and in magnitude puts to shame, the notorious gambling resort known as the bank of Monte Carlo.
Today the deferred dividend companies hold as so-called surplus accumulations on the various forms of deferred dividend contracts, a sum exceeding $300,000,000, all of it subject to forfeiture, not only in case of lapse, but also in case of the death of the insured before the termination of the period fixed in the contracts or policies of insurance.
All money paid by a policyholder in excess of the amount necessary to provide for his relative proportion of the insurance cost, properly belongs to him. Any contract which provides for its confiscation is unrighteous, is opposed to public policy, and should be prohibited by law, as it is an iniquity and a rank and crying injustice.
The agents of these companies are given the inducement of largely increased commissions and bonuses to sell semi-tontine or deferred dividend policies, and they use all the powers of their vocabulary to induce the persons intending to insure (who know little of the principles of insurance, and wherein their true interests lie) to take these iniquitous contracts for the sake of the greater commissions paid by the companies for them, when,if fairly stated, the forfeiture proposition of the deferred dividend contract would defeat itself.
It is time that honest men connected with the life insurance business (offloials and agents) should sound the warning to all the people, that the noblest and the most sublime of all great enterprises should have removed from it this stain of injustice, this iniquity of forfeitures, the crime of robing the unfortunate living and the widows and orphans of the dead, and shame the cowards who prostitute the mutuality of life insurance, rob it of its lofty spirit and sublime principles.
When the first simple form of life insurance was broadened by the issuance of limited payment life, endowment, and instalment contracts, with the addition of cash and loan values, and the extended insurance feature, it seemed as if all was accomplished that made it possible to adhere to the principles of equity and mutuality; but when accumulated, semi-tontine and deferred dividends (which are all the same thing) were injected into life insurance, then came increased expense to the insured, and the officials (quick to see poss'bilities with their vulture eyes of avarice) said, "What shall we do with the spoils?" And as if with one voice rang out loud and clear, "We don't have to make an accounting; they have got to take what we give them, and they have no recourse; let us use it to pay running expenses."
If a bunco man should sell you a gold brick you would try to have him arrested; the life insurance agent sells you the same thing (in the form of a deferred dividend policy) and you praise him for it, until you wake up.
Thousands who are insured today have policies entirely different from what they really think they have, and hundreds who solicit it as agents are themselves ignorant on the subject of life insurance.
Thousands are carrying life insurance today who think that they have twenty-year endowment policies, but if they will look them over, or have find that they either have a life policy with the dividends deferred for twenty years, and on which they will have to pay premiums for the rest of their lives if they wish to keep their insurance in force, or that they have life policies which when twenty payments have been made causes them to become a full life policy on which no more payments are required (called twenty-payment life policies) the full value of the policy being payable only on the death of the insured, but on which the dividends have been deferred for twenty years; and this misleading state of affairs is chargeable to the deferred dividend contract, because the agent who keeps dinging twenty years to you (and you not knowing much, if anything, about insurance) causes yon to he mislead.
There are many good life insurance companies; all the people want to do is to separate the wheat from the chaff, but they must be taught intelligently which is wheat and which is chaff.
The thoroughness with which the mutual principle should be incorporated in a life insurance company, and the fairness with which every member's interest should be protected, should place a life insurance compnny beyond the reach of fear or suspicion, thereby furnishing its members the best guarantee of their own and their family's future safety.
The following form letter to widows whose husbands have died shortly before the distribution period of their policies is recommended for the use of companies doing a deferred dividend business:
Dear Madam:The following form letter to the unfortunate ones, who took policies with the best of intentions, but from whom fickle fortune withdrew her smile and caused the policy to lapse or to be surrendered, is also recommended for the use of companies doing a deferred dividend business:
We beg to enclose draft for #25,000, in settlement of the claim under our Policy No on the death of your late busband. We regret that he did not live ten years longer, that he might have drawn his accumulated dividends, amounting to $4,696. It will be, no doubt, a source of great consolation to you in this hour of your overwhelming grief, to know that this sum will be equitably divided among the remaining members of your husband's class.
The delicate consideration for his fellow policyholders shown by your husband, in thus providing for the forfeiture of bis dividends in the event of his early death, will, we doubt not, be held in loving remembrance by you as a beautiful example of his nobility of character.
Assuring you of our profound sympathy in your great loss, we beg to remain
Yours very respectfully,
Western Underwriter.
Dear Sir:All that is vicious in the conduct of the business of life insurance, extravagant competition, and dishonest handling of sacred funds, is chargeable to the deferred dividend contract. All that is good in life insurance, justice, economy and lowest cost, is due to the annual dividend contract.
We beg to enclose draft for $7,500 in settlement of the cash value as allowed by us, under Policy No. ... on your life.
We regret that you are in such pressing need of this money, because if you bad continued and paid two more premiums, your share of the surplus would have been about 85,000. It will, however, be of consolation to you to know thai thii sum, or part of it, will be divided among a lot of fellows that you never knew, and we are very positive that you will be a long time forgetting it.
Thanking you in their behalf, we are
Yours sincerely,
The annual dividend paying contract today as proved by results is not only giving more, for less money, during the deferred dividend period, but at the end of the same period is giving greater cash results,without the attendant chance of loss to the insured, at any time during the whole period.
The following illustrates the working of the deferred dividend, the illustration as used being the dividend end of the premium. One dollar— one hundred dollars—one thousand dollars or ten thousand dollars could be used in this illustration, as the dividend would depend entirely upon the amount of the insurance carried.
In this case I have used five hundred dollars.
Would yon go to the president of a bank and say, "Mr. President, I have in my pocket five hundred dollars, which I wish to deposit with you now, and at the same time make this contract: I agree to deposit every year for twenty years, five hundred dollars, further agreeing that should I die at any time during twenty years, even on the ninteenth year and three hundred and sixty-fourth day, that all the money I have paid into the bank shall go to the bank; my family or my heirs shall be without recourse to recover it; further agreeing that although I may have paid in to the bank nineteen times and failed from any cause to pay the twentieth time, all that I have paid in shall go to the bank, and I shall be without recourse to collect it." And your answer would be, "You don't think I am a fool?" Then I should say to you, "No, I don't think you are; I know you are, because you are doing it by having a policy on which you have made just that agreement; and there are thousands all over this country, including our best merchants, bank presidents, college presidents, and our brightest and most brainy men in every walk in life, who have been hoodwinked by this system, and whose names are being used persistently (like molasses for flies) to catch others. And perhaps you are one of those whose name is being used."
If there is a set of men who deserve the just condemnation of the people, they are those who today, as officials of life insurance companies uphold now and try to continue this nefarious system. The poor but honest man working for two dollars a day is a far better citizen and neighbor. If the use of the United States mail was denied to the Louisiana Lottery Company it would be a much greater blessing to all mankind to deny its use to this still greater octopus, which was conceived to rob the many to benefit the few; and the time also lutely certain to come (by legislative enactment) will not be long deferred, when companies will cease to be the stakeholders of these gigantic gambling pools, and not until then will the interests of the insured be honestly subserved. This monstrosity in life insurance must die—if not a natural death it must be killed by the people.
And here I would suggest to the people (and they should see to it that it is enacted into law in every state of the United States) that a bill be presented to the legislature of each state, the character of which is and shall be that—
"No company shall write a policy of life insurance other than an annual dividend contract, no matter how great or small the premium may be, and such annual dividend may be taken annually to decrease the cost of the insurance or left with the company to add annually to its value by purchasing extra insurance, or said dividends may be left with the company to be compounded at some stated rate of interest. The cash value of such addition or additions to be at any time at the disposal of the insured for the purpose of paying the premiums, or be a cash asset which can be drawn on at any time by the insured. This bill to take effect immediately upon its passage."
Now the first way to accompish these results is to absolutely refuse to take a poiicy in any company unless the dividend is declared annually and so stated in the policy, as described in the above bill. Secondly, to accomplish these results, there will be needed bold and fearless men, like the Hon. Frederick L. Cutting, insurance commissioner of Massachusetts, and the Hon. Zeno M. Host, insurance commissioner of Wisconsin, for they today are the watchdogs of all that is best for the people in the affairs of life insurance, and anxious to do right in the cause of justice (but conditions that now exist are of such a nature that they simply enforce the law without being able to control the conditions) and they must be backed by the people, as the system against which this would militate will try to turn heaven and earth to cause its defeat.
And at this point I wish to say that the present unhappy condition of the Equitable Life Assurance Society's trouble, comes largely from the deferring of its dividends; and the deferring of dividends is a constant menace to the insured and to all companies that engage in it.—Fred S. Elwell.
page 52
By Samuel Davis.
In another part of this magazine appears a communication from Fred S. Elwell. Similar articles have appeared in some of the newspapers lately and have served to give their author considerable advertising. I have read the letter several times in the attempt to find some statement which should be supported by argument or reasoning or example. But I can discover nothing more substantial than a tirade, not much removed from the level of billingsgate, against a method of declaring dividends practiced by a number of companies entirely above reproach.
Mr. Elwell makes no effort to discuss the question; he is abundantly satisfied with making all sorts of allegations without the slightest effort to support them. He has a perfect right to his opinion about dividends, but it doesn't follow that opposing views are necessarily wrong.
There never was a time when a greater variety of plans and methods were offered to the insurer than at present, and the purchaser should have freedom of choice to select the plan best adapted to his circumstances and needs. The choice .might range from a ten-year endowment policy with annual dividends to an ordinary life contract with dividends deferred for twenty years.
Perhaps the burden of Mr. Elwell's plaint is that agents should be honest and tell the truth abont all dividends annual and deferred, and the other and more numerous features of the contract as well. This is desirable and necessary.
But Mr. Elwell is not always honest in his communication, nor is he even truthful on several points. He is not honest for example, when he makes his statement in such a way as to lead the uninformed to suppose that the deferred dividend contracts are alike in all companies writing this class of business; and he is not frank when he fails to state that there are companies which freely offer the insured the election as to the method he would have employed in applying his dividends. Mr. Elwell's inability to fairly state the subject is as well shown in the following paragraph as in any:
All that is vicious in the conduct of the business of life insurance, extravagant competition, and dishonest handling of sacred funds is chargeable to the deferred dividend contract. All that ii good in life insurance, justice, economy and lowest cost is due to the annual dividend contract. I have taken the trouble to examine somewhat the expense records of the Massachusetts companies,as they have always clung to the method of annual dividend distribution, to see if there was any well marked showing in lower cost on this account. In two cases the expense rate is higher than it is in two other companies which write deferred dividends as well as annual. I also have examples of specific instances where the actual dividends for a series of years are higher in the two companies than in the exclusive annual dividend companies. Not only is this so, but when the general Massachusetts insurance law was revised in the winter of 1900 and 1901, a practical change was made in the section relating to dividends of surplus. The old law required three hundred an sixty words for its statement. The provisions of the Section made it mandatory on the companies to distribute all the surplus earnings above 10 per cent. of the legal reserve and to do this at least as often as once in five years. The revision of this part of the law makes the distribution of any dividend whatever at any time dependent wholly upon the judgment of the directors. The entire section relating- to dividends is very brief. It is as follows:
Sec. 75. The directors of any domestic life insurance company out of the funds remaining after providing for the reserve required under sec. 11, and for all other liabilities, may from time to time, make to policyholders not in arrears, distributions of surplus not inconsistent with the terms of their policies. Such distributions to policyholders shall be made upon the contribution to surplus plan.
From Mr. Elwell's point of view it must have been a step backward to add to the numbers of companies which are permitted to write deferred dividends, six or seven companies hitherto forbidden to accumulate surplus for more than five years.
This does not seem so to me, however. In my view the companies and their patrons should be left free to select such particular form as best suits the need or fancy of the purchaser. Mr. Elwell's general statement that the annual dividend contract gives cheaper insurance than the deferred dividend policy as a general statement is unqualifiedly false. His further statement that it also gives larger cash results at the end of the period than the deferred dividend contract would be malicious as well as false if really intended as written, for the merest tyro knows better.
However, I do not think these misstatements are intentional. It is more likely that Mr. Elwell here naturally falls into the common error of those who think to add strength to theii views by means of sweeping accusations or unqualified general statements. Mr. Elwell's communication as a whole, with its reckless and unsubstantiated assertions, its epithets and general tone, have a mild flavor of Lawson in his cruder articles. It seems a pity that one more should be added to the number now finding expression in public print who seem to desire to discredit the life insurance institution itself in the eyes of the public.
I do not wish to be understood as advocating either deferred or annual dividend contracts exclusively. Both methods have their proper place and certain circumstances and conditions are best met by one plan, while other requirements demand the other method. It seems to me that the same intelligence which leads a man of small earnings and large family to buy straight life insurance instead of endowment can be trusted to make an equally safe election in the matter of dividends.
In any event, dividends are very far from being the most important element of a life insurance contract. If the present high rate of expense continues and policies are made still more liberal in their provisions, there will be very little in the way of dividends to quarrel over. In all companies dividends at the present day are much smaller than a dozen years ago, when most companies earned more interest, gained more on surrenders, resisted more claims and had smaller expense ratios
I have not attempted here to set forth the arguments usually held to favor the deferred dividend contract, as the character of Mr. Elwell's letter did not seem to require this. I have merely attempted to refute his claim that they are necessarily dishonest and that insurers should not be allowed to buy such contracts. He makes one statement, however,that I wish to refute. He speaks of artfully designed contracts. One of my own policies is an ordinary life contract with dividends deferred twenty years. The language of the contract is as follows:
No distribution of surplus sball be made on this policy unless the person whose life is hereby insured shall survive the completion of the deferred dividend period, and unless this policy sball then be in force. All surplus intermediately awarded to this policy shall belong to aud be retained by the company until the completion of the deferred dividend period, whereupon the aggregate of such dividends of surplus shall become the property of the insured.
It would be a difficult matter for anyone to show that this language is artful or equivocal or anything else than straightforward, direct and comprehensive. No, the trouble with small dividends, whether annual or deferred, is not due to the method of distribution, but to the honesty and skill of the executive officers of the company.
On this point as in other matters, companies differ, and if deferred dividends have been taken advantage of in some quarters, and Mr. El well has a grievance against this abuse, his criticisms should be directed to the actual offenders. He should not make an indiscriminate attack on a method of applying dividends that has much in its favor when honestly adminisered and judiciously applied.
IS DURHAM'S RULE AT AN END?
Israel W. Durham, the insurance commissioner of Pennsylvania, is familiarly known in politics as " Iz " Durham. He is said to be the "visible dictator" of the state,'' performing no official service whatever in return for his large annual income." Durham was at the head of the political cabal which attempted to sell out Philadelphia on the famous gas lease. His power has been temporarily, if not permanently, broken by Mayor Weaver, upheld by the people of the city.
Insurance supervision in Pennsylvania has long been a "stench, etc." This, however, has not prevented Philadelphia from having two of the cleanest and best managed life insurance companies in the country, which only goes to show that supervision does not make good insurance companies, but it does indicate that it is possible for insurance companies to be good even though supervision be '' rotten."
PATRICK J. HANWAY.
Died Monday, June i, after a short iliness at the age of 58. A notable insurance journalist and newspaper writer. A man of many admirable qualities, with a host of friends among insurance journalists and insurance men; true to the instincts of his race, a hard and persistent fighter. He fought the Journal of Insurance Economics from the day it was started; be fought the American Agency Bulletin from the day it was started. He fought the National Association of Local Fire Insurance Agents, in which the publisher of both publications was interested, and for which he (the publisher) with equal persistence fought according to hie convictions.
PUBLICATiONS RECEiVED.
The third edition of the "Investment Directory of Insurance Companies." Compiled by S. H. Wolfe and published by the "Insurance Press " has been received. A complete schedule of the investments of insurance companies of all classes having over $100,000 par value of stocks and bonds listed in their assets. Double classification by names of securities and by companies. Valuable publication for investors and those desiring ready reference to insurance company investments.
LIFE INSURANCE CLUB OF NEW YORK AND PROPOSED METHODS.
Contributed To The Journal 01-- Insurance Economics.
The "Life Insurance Club of New York" is a corporation with an authorized capital of $100,000, organized nnder the laws of New York state. Richard Wightinan is president and Miles M. Dawson consulting actuary. The new organization is the outcome of the various insurance clubs of recent years, of which the Outlook, Success and Century life insurance clubs are examples. The idea, at least in its present form, is that of Mr. Wightman, who prior to his connection with these clubs was a successful business-getter for the New York Life.
Through the courtesy of a friend who was solicited to purchase stock in the Life ' Insurance Club of New York, we are able to set before the readers of the Journal itw plans, so far as they have been disclosed.
The club purposes to dispense entirely with agents, and procure its business wholly by advertising and correspondence. The statement is made that this method is less than half as expensive as where business is obtained in the customary way by means of agents. For this reason it is promised that the premiums will be lower than those in the regular companies.
The prospectus further says that the club is not a fraternal or assessment organization but a strong oldline or legal reserve insurance company, which will do business in every state in the union in accord with law. The club has not yet begun to write insurance but is placing its stock as the $100,000 must all be paid in to meet the requirements of the New York law. Business prudence demands a surplus as well. The stock with a par value of $10 is being offered at $33, which will provide an ample surplus if sold at this figure.
The correspondence method of disposing of all sorts of commodities is very popular. A large furniture house began business six'or seven years ago with a monthly appropriation for advertising of $10. In six years the business had prospered and grown until it amounted to about $500,000 per annum. The great success in placing educational books by advertising and correspondence will at once occur to the reader.
However, in these commercial enterprises, the' cost of marketing the product by the means under consideration is about the same as in the timehonored way through jobber and salesman. The advertising must be in mediums of the highest grade and sizable enough to attract attention. When the inquiries are received, the necessary "follow up" system required to make business out of them is ordinarily quite expensive.
If then the commerical experience is any fair criterion to judge the insurance scheme by it would seem that there needs to be a provision for expenses about the same as with well administered companies which follow the usual methods.
The fact that the premiums are to be smaller than usual suggests that some way is contemplated to meet the expense of advertising, follow up correspondence, medical examination, inspection and sundry items. Having for its actuary Mr. Dawson, an advocate of first year preliminary term, it was natural to look for this in the club's designs. On this point the secretary, William R. Malone, recently said in a letter:
We are advised by actuarial experts to adopt the preliminary term plan with reference to the first year's reserve, putting up, of course, the second year the full two year's reserve, the idea being to furnish the institution during this year when expenses must encroach with comparative heaviness upon the surplus, a larger margin from the flrst year's premium than coukl be furnished if the full reserve were set aside. We are inclined to consider favorably the parttal reserve plan for the first year, though it has not been definitely decided upon.
In another place Mr. Malone says that the plans which the club adopts will be such as to permit it to operate in every state. It will be under the authority of the insurance departments and subject to the statutory regulations. In Massachusetts these statutes do not permit any encroachment on the first year's reserve, so
that the club must abandon this design if it desires to get business here.
The general idea of the Insurance Club of New York appears to be a good one; it will appeal to people of moderate means who take small policies and who have become accustomed to buying many things on the monthly payment basis. The projectors should not make the mistake of laying out its lines on any other plan than what is known to be safe, scientific and genuine.
PROXY VOTING CHANGE MADE BY THE NEW YORK LIFE.
Quick to read the signs of the times, the New York Life never hesitates to seize an opportune moment to adopt a course calculated to bring it nearer the public and attract its patronage.
The details of the controlling force and the method of its application in various companies are inviting close scrutiny just now. On the recommendation of President McCall, new regulations have been adopted by the New York Life governing the voting for trustees. No employee or officer or agent may act as proxy at the annual election. All proxies are to be in writing, revocable at the pleasure of the 'party granting it and invalid anyhow eleven months after lUte, unless a longer term is specified in the proxy.
This is an improvement on former methods, but it falls disappointingly short of what might be done. Under these rules proxies may still be given for five or ten years, and even eleven months is a long time for automatic expiration in the absence of definite term. Sixty days would seem to be sufficient to cover the purpose of an aunual election.
If the by-laws should provide that three months, say, should be the longest time that any proxy should run what are said to be the evils of proxy voting would be largely eliminated. Some system of direct voting by mail, where policyholders are too far distant to attend in person, would come nearer to eliciting a fresh expression of their choice for trustees at each annual election.
So far in the history of American life insurance, very little restraint has been exercised over the acts of company trustees and directors by their (theoretically at least) principals. This is not peculiar to the insurance business but is part of the carelessness with which the average business man is willing to permit others to manage his political interests and financial investments.
But signs are not wanting that such a condition will not last much longer. The mutual life insurance companies have not had any difficulty in protecting the current administration from disturbance in ordinary times. If occasion should arise whereby it might appear desirable to affect a change in the makeup of the board of trustees, then the regulations surrounding the procedure and conduct of the election become of immense importance.
The present is an excellent housecleaning time. The number of company examinations recently completed or now in process, shows a recognition of this. What an opportunity, then, to inaugurate courageously reforms that have long been discussed.
The New York Life has made many changes in its methods of administration in the last few years, and has greatly profited by substituting modern system methods for those less effective. We believe it can easily go farther in evolving a practical means of obtaining the untramelled opinion of its policyholders, touching such matters as they have a right to be heard upon.
In another part of this magazine appears a communication from Fred S. Elwell. Similar articles have appeared in some of the newspapers lately and have served to give their author considerable advertising. I have read the letter several times in the attempt to find some statement which should be supported by argument or reasoning or example. But I can discover nothing more substantial than a tirade, not much removed from the level of billingsgate, against a method of declaring dividends practiced by a number of companies entirely above reproach.
Mr. Elwell makes no effort to discuss the question; he is abundantly satisfied with making all sorts of allegations without the slightest effort to support them. He has a perfect right to his opinion about dividends, but it doesn't follow that opposing views are necessarily wrong.
There never was a time when a greater variety of plans and methods were offered to the insurer than at present, and the purchaser should have freedom of choice to select the plan best adapted to his circumstances and needs. The choice .might range from a ten-year endowment policy with annual dividends to an ordinary life contract with dividends deferred for twenty years.
Perhaps the burden of Mr. Elwell's plaint is that agents should be honest and tell the truth abont all dividends annual and deferred, and the other and more numerous features of the contract as well. This is desirable and necessary.
But Mr. Elwell is not always honest in his communication, nor is he even truthful on several points. He is not honest for example, when he makes his statement in such a way as to lead the uninformed to suppose that the deferred dividend contracts are alike in all companies writing this class of business; and he is not frank when he fails to state that there are companies which freely offer the insured the election as to the method he would have employed in applying his dividends. Mr. Elwell's inability to fairly state the subject is as well shown in the following paragraph as in any:
All that is vicious in the conduct of the business of life insurance, extravagant competition, and dishonest handling of sacred funds is chargeable to the deferred dividend contract. All that ii good in life insurance, justice, economy and lowest cost is due to the annual dividend contract. I have taken the trouble to examine somewhat the expense records of the Massachusetts companies,as they have always clung to the method of annual dividend distribution, to see if there was any well marked showing in lower cost on this account. In two cases the expense rate is higher than it is in two other companies which write deferred dividends as well as annual. I also have examples of specific instances where the actual dividends for a series of years are higher in the two companies than in the exclusive annual dividend companies. Not only is this so, but when the general Massachusetts insurance law was revised in the winter of 1900 and 1901, a practical change was made in the section relating to dividends of surplus. The old law required three hundred an sixty words for its statement. The provisions of the Section made it mandatory on the companies to distribute all the surplus earnings above 10 per cent. of the legal reserve and to do this at least as often as once in five years. The revision of this part of the law makes the distribution of any dividend whatever at any time dependent wholly upon the judgment of the directors. The entire section relating- to dividends is very brief. It is as follows:
Sec. 75. The directors of any domestic life insurance company out of the funds remaining after providing for the reserve required under sec. 11, and for all other liabilities, may from time to time, make to policyholders not in arrears, distributions of surplus not inconsistent with the terms of their policies. Such distributions to policyholders shall be made upon the contribution to surplus plan.
From Mr. Elwell's point of view it must have been a step backward to add to the numbers of companies which are permitted to write deferred dividends, six or seven companies hitherto forbidden to accumulate surplus for more than five years.
This does not seem so to me, however. In my view the companies and their patrons should be left free to select such particular form as best suits the need or fancy of the purchaser. Mr. Elwell's general statement that the annual dividend contract gives cheaper insurance than the deferred dividend policy as a general statement is unqualifiedly false. His further statement that it also gives larger cash results at the end of the period than the deferred dividend contract would be malicious as well as false if really intended as written, for the merest tyro knows better.
However, I do not think these misstatements are intentional. It is more likely that Mr. Elwell here naturally falls into the common error of those who think to add strength to theii views by means of sweeping accusations or unqualified general statements. Mr. Elwell's communication as a whole, with its reckless and unsubstantiated assertions, its epithets and general tone, have a mild flavor of Lawson in his cruder articles. It seems a pity that one more should be added to the number now finding expression in public print who seem to desire to discredit the life insurance institution itself in the eyes of the public.
I do not wish to be understood as advocating either deferred or annual dividend contracts exclusively. Both methods have their proper place and certain circumstances and conditions are best met by one plan, while other requirements demand the other method. It seems to me that the same intelligence which leads a man of small earnings and large family to buy straight life insurance instead of endowment can be trusted to make an equally safe election in the matter of dividends.
In any event, dividends are very far from being the most important element of a life insurance contract. If the present high rate of expense continues and policies are made still more liberal in their provisions, there will be very little in the way of dividends to quarrel over. In all companies dividends at the present day are much smaller than a dozen years ago, when most companies earned more interest, gained more on surrenders, resisted more claims and had smaller expense ratios
I have not attempted here to set forth the arguments usually held to favor the deferred dividend contract, as the character of Mr. Elwell's letter did not seem to require this. I have merely attempted to refute his claim that they are necessarily dishonest and that insurers should not be allowed to buy such contracts. He makes one statement, however,that I wish to refute. He speaks of artfully designed contracts. One of my own policies is an ordinary life contract with dividends deferred twenty years. The language of the contract is as follows:
No distribution of surplus sball be made on this policy unless the person whose life is hereby insured shall survive the completion of the deferred dividend period, and unless this policy sball then be in force. All surplus intermediately awarded to this policy shall belong to aud be retained by the company until the completion of the deferred dividend period, whereupon the aggregate of such dividends of surplus shall become the property of the insured.
It would be a difficult matter for anyone to show that this language is artful or equivocal or anything else than straightforward, direct and comprehensive. No, the trouble with small dividends, whether annual or deferred, is not due to the method of distribution, but to the honesty and skill of the executive officers of the company.
On this point as in other matters, companies differ, and if deferred dividends have been taken advantage of in some quarters, and Mr. El well has a grievance against this abuse, his criticisms should be directed to the actual offenders. He should not make an indiscriminate attack on a method of applying dividends that has much in its favor when honestly adminisered and judiciously applied.
IS DURHAM'S RULE AT AN END?
Israel W. Durham, the insurance commissioner of Pennsylvania, is familiarly known in politics as " Iz " Durham. He is said to be the "visible dictator" of the state,'' performing no official service whatever in return for his large annual income." Durham was at the head of the political cabal which attempted to sell out Philadelphia on the famous gas lease. His power has been temporarily, if not permanently, broken by Mayor Weaver, upheld by the people of the city.
Insurance supervision in Pennsylvania has long been a "stench, etc." This, however, has not prevented Philadelphia from having two of the cleanest and best managed life insurance companies in the country, which only goes to show that supervision does not make good insurance companies, but it does indicate that it is possible for insurance companies to be good even though supervision be '' rotten."
PATRICK J. HANWAY.
Died Monday, June i, after a short iliness at the age of 58. A notable insurance journalist and newspaper writer. A man of many admirable qualities, with a host of friends among insurance journalists and insurance men; true to the instincts of his race, a hard and persistent fighter. He fought the Journal of Insurance Economics from the day it was started; be fought the American Agency Bulletin from the day it was started. He fought the National Association of Local Fire Insurance Agents, in which the publisher of both publications was interested, and for which he (the publisher) with equal persistence fought according to hie convictions.
PUBLICATiONS RECEiVED.
The third edition of the "Investment Directory of Insurance Companies." Compiled by S. H. Wolfe and published by the "Insurance Press " has been received. A complete schedule of the investments of insurance companies of all classes having over $100,000 par value of stocks and bonds listed in their assets. Double classification by names of securities and by companies. Valuable publication for investors and those desiring ready reference to insurance company investments.
LIFE INSURANCE CLUB OF NEW YORK AND PROPOSED METHODS.
Contributed To The Journal 01-- Insurance Economics.
The "Life Insurance Club of New York" is a corporation with an authorized capital of $100,000, organized nnder the laws of New York state. Richard Wightinan is president and Miles M. Dawson consulting actuary. The new organization is the outcome of the various insurance clubs of recent years, of which the Outlook, Success and Century life insurance clubs are examples. The idea, at least in its present form, is that of Mr. Wightman, who prior to his connection with these clubs was a successful business-getter for the New York Life.
Through the courtesy of a friend who was solicited to purchase stock in the Life ' Insurance Club of New York, we are able to set before the readers of the Journal itw plans, so far as they have been disclosed.
The club purposes to dispense entirely with agents, and procure its business wholly by advertising and correspondence. The statement is made that this method is less than half as expensive as where business is obtained in the customary way by means of agents. For this reason it is promised that the premiums will be lower than those in the regular companies.
The prospectus further says that the club is not a fraternal or assessment organization but a strong oldline or legal reserve insurance company, which will do business in every state in the union in accord with law. The club has not yet begun to write insurance but is placing its stock as the $100,000 must all be paid in to meet the requirements of the New York law. Business prudence demands a surplus as well. The stock with a par value of $10 is being offered at $33, which will provide an ample surplus if sold at this figure.
The correspondence method of disposing of all sorts of commodities is very popular. A large furniture house began business six'or seven years ago with a monthly appropriation for advertising of $10. In six years the business had prospered and grown until it amounted to about $500,000 per annum. The great success in placing educational books by advertising and correspondence will at once occur to the reader.
However, in these commercial enterprises, the' cost of marketing the product by the means under consideration is about the same as in the timehonored way through jobber and salesman. The advertising must be in mediums of the highest grade and sizable enough to attract attention. When the inquiries are received, the necessary "follow up" system required to make business out of them is ordinarily quite expensive.
If then the commerical experience is any fair criterion to judge the insurance scheme by it would seem that there needs to be a provision for expenses about the same as with well administered companies which follow the usual methods.
The fact that the premiums are to be smaller than usual suggests that some way is contemplated to meet the expense of advertising, follow up correspondence, medical examination, inspection and sundry items. Having for its actuary Mr. Dawson, an advocate of first year preliminary term, it was natural to look for this in the club's designs. On this point the secretary, William R. Malone, recently said in a letter:
We are advised by actuarial experts to adopt the preliminary term plan with reference to the first year's reserve, putting up, of course, the second year the full two year's reserve, the idea being to furnish the institution during this year when expenses must encroach with comparative heaviness upon the surplus, a larger margin from the flrst year's premium than coukl be furnished if the full reserve were set aside. We are inclined to consider favorably the parttal reserve plan for the first year, though it has not been definitely decided upon.
In another place Mr. Malone says that the plans which the club adopts will be such as to permit it to operate in every state. It will be under the authority of the insurance departments and subject to the statutory regulations. In Massachusetts these statutes do not permit any encroachment on the first year's reserve, so
that the club must abandon this design if it desires to get business here.
The general idea of the Insurance Club of New York appears to be a good one; it will appeal to people of moderate means who take small policies and who have become accustomed to buying many things on the monthly payment basis. The projectors should not make the mistake of laying out its lines on any other plan than what is known to be safe, scientific and genuine.
PROXY VOTING CHANGE MADE BY THE NEW YORK LIFE.
Quick to read the signs of the times, the New York Life never hesitates to seize an opportune moment to adopt a course calculated to bring it nearer the public and attract its patronage.
The details of the controlling force and the method of its application in various companies are inviting close scrutiny just now. On the recommendation of President McCall, new regulations have been adopted by the New York Life governing the voting for trustees. No employee or officer or agent may act as proxy at the annual election. All proxies are to be in writing, revocable at the pleasure of the 'party granting it and invalid anyhow eleven months after lUte, unless a longer term is specified in the proxy.
This is an improvement on former methods, but it falls disappointingly short of what might be done. Under these rules proxies may still be given for five or ten years, and even eleven months is a long time for automatic expiration in the absence of definite term. Sixty days would seem to be sufficient to cover the purpose of an aunual election.
If the by-laws should provide that three months, say, should be the longest time that any proxy should run what are said to be the evils of proxy voting would be largely eliminated. Some system of direct voting by mail, where policyholders are too far distant to attend in person, would come nearer to eliciting a fresh expression of their choice for trustees at each annual election.
So far in the history of American life insurance, very little restraint has been exercised over the acts of company trustees and directors by their (theoretically at least) principals. This is not peculiar to the insurance business but is part of the carelessness with which the average business man is willing to permit others to manage his political interests and financial investments.
But signs are not wanting that such a condition will not last much longer. The mutual life insurance companies have not had any difficulty in protecting the current administration from disturbance in ordinary times. If occasion should arise whereby it might appear desirable to affect a change in the makeup of the board of trustees, then the regulations surrounding the procedure and conduct of the election become of immense importance.
The present is an excellent housecleaning time. The number of company examinations recently completed or now in process, shows a recognition of this. What an opportunity, then, to inaugurate courageously reforms that have long been discussed.
The New York Life has made many changes in its methods of administration in the last few years, and has greatly profited by substituting modern system methods for those less effective. We believe it can easily go farther in evolving a practical means of obtaining the untramelled opinion of its policyholders, touching such matters as they have a right to be heard upon.
page 57,
PRESENT SITUATION IN EQUITABLE LIFE AFFAIRS.
Does the Change in Stock Control Mean lmprovement? — Hendricks' Report and the Reforms which the Situation Seems to Demand.
It is not necessary for the Journal of Insurance Economics to detail the recent history of the Equitable Life investigation, for with it our readers are all familiar, but we will briefly outline it in order that we may properly come to the presentation of such conclusions as the situation seems to warrant.
Beginning with the time of the socalled "Frick" report presented to the directors, the situation in the Equitable Life has steadily improved. This report was searching and unsparing, so far as some of the officers were concerned. It showed fully the operations of the Hyde syndicate, the profits it had made, and in which Mr. Hyde, as well as President Alexander, had participated. It showed the personal extravagancies incident to Vice-President Hyde's office and control of Equitable finances and it criticised also the administration of the agency department under Vice-President Tarbell.
It pointed out the defects of the deferred dividend business and recommended that the new management of the company (the resignations of Messrs. Alexander, Hyde and Tarbell having been recommended) take up and consider a modification and im* provement of this phase of the business. It opposed the writing of insurance under high pressure and called for a change in the methods of making investments
It was an excellent report so far as it went. Unfortunately it stopped short of complete investigation and relieved from deserved criticism some of the members of the committee itself, as well as some of the directors and other officers of the company. For this reason it gave the impression to impartial observers that it was designed to accomplish purposes in which members of the Frick committee, and possibly others, had a more or less direct personal interest. So far as we can analyze the situation that self-interest lay in a desire to secure control of the Hyde stock.
The Frick committee therefore lost an opportunity and made a mistake in presenting a partisan report having back of it the promotion of certain well defined special interests. Nevertheless, the report has contributed to the final solution of the problem confronting the policyholders. The directors of the company made a mistake in attempting to suppress the Frick rrport. Their case would have been greatly strengthened had they, promptly accepted it and given it to the public press.
Following the rejection of the Friok report events moved rapidly. Many directors resigned. The reasons assigned for their withdrawal, together with the attitude of other directors made it clear to Mr. Hyde that he had lost sympathy and support. He thereupon accepted an offer of $2,500,000 for the shares left him by his father and thus passed on the stock control to Thomas F. Ryan. At a subsequent meeting of the directors Paul Morton, ex-secretary of the navy, was elected chairman of the board with plenary powers, and the resignations of President Alexander, Vioe-Presidents Hyde, Tarbell, Wilson and Mclntyre and Financial Manager Winthrop were placed in his hands for such action as deemrd best for the company.
Three of these resignations, those of Alexander, Hyde and Mclntyre, have since been accepted. Mr. Alexander's association with Mr. Hyde in the socalled Hyde syndicate and his acquiescence in if not responsibility for other acts rendered his retention impossible.
Following these changes camo t' ''preliminary" report from Superintendent of Insurance Hendricks covering his investigation into the company's mismanagement. Later on a more complete report will be made covering financial conditions. Mr. Hendricks' report deals with some of the larger features of "grafting" which have become fastened upon the company, particularly in its relation to other financial institutions—banks, trust and deposit companies. Briefly it is shown that this system of grafting was inaugurated by the founder of the company, Henry B. Hyde. The same skill and energy which he devoted to building up the Equitable Life was seemingly directed also to the promotion of his own personal fortunes. This system was continued and enlarged by his son, James H. Hyde, and acquiesced in by President Alexander.
Vioe-President Gage E. Tarbell is cleared by the superintendent from all charges against him on the score of extravagance, rebating, commutation of commissions and conspiracy against Mr. Hyde. Mr. Hendrioks says that the present plan of stock control, while relieving the' situation, does not go far towards restoring the confidence of policyholders. The entire elimination of stock control and what he deems of equal importance, "the elimination of Wall street control," is recommended, the stock, if purchased by the company, to be paid for at a price "only commensurate with its dividends."
The Equitable Life cannot immediately be mutualized but it is likely to become eventually a purely mutual company, either by purchase of the stock by policyholders, by legislative enactment, or by other legal methods which have been temporarily checked by injunction. In the meantime the sale of the stock to Mr. Ryan, the appointment of Paul Morton as chairman and of Grover Cleveland, Morgan J. O'Brien and George Westinghouse as trustees for the stock, authorized to install a majority of the board of directors representing the policyholders, insures a reorganization along improved lines. Mr. Morton is a man of unusual mental and moral caliber. The only blot upon his record has been the alleged charge of violating interstate commerce laws while acting as vice-president of the Santa Fe railroad. Of this charge he has been exonerated by President Roosevelt whose endorsement at this particular time is worth more than the unsupported charges and allegations of Mr. Morton's enemies and opponents.
In reorganizing the executive staff of the Equitable Life Mr. Morton will feel disposed, as it seems to us, to retain some of the officers familiar with its business and responsible for its success. Gage E. Tarbell is the strongest man on the executive staff and in the investigations which have resulted from the present situation, he has emerged with more to his credit than any other officer. He was criticised in the Frick report for excessive expenditures and advances to agents in connection with the agency department. In our opinion the high pressure business transacted by theEquitable Life causes an unnecessarily high agency expense just as it does in the case of the New York Life and the Mutual Life, and we may say also in the case of other companies which, even though they do not do a "high pressure" business, nevertheless think they must pay higher rates of commission on account of the standard set by the big companies.
But we hold the view that in any investigation of any life insurance company today there would be no official who could entirely escape criticism. Indeed, we would go further and say that in any investigation of the detail of any business or of any transaction, whether it be commercial or political, no individual, however honest and well intentioned, could escape criticism for some of his acts, especially if he were, like Mr. Tarbell, a man of force and originality capable of extraordinary accomplishments. Indeed, it would be impossible for any one man or any group of men, or the whole democratic group of people in the country to pick out any one man for any one position who would be entirely satisfactory to everybody or who in every act would precisely satisfy any one.
Therefore, the fact that Mr. Tarbell has been criticised does not render it inexpedient or improper for Mr. Morton to retain his services. If Mr. Tarbell is the strongest executive official in the company and has emerged from this investigation with clean hands, and it is important for Mr. Morton to have some one familiar with the insurance business and capable of holding together the agency plant of the company, he must, as it seems to us, by the logic of the situation and by the qualifications and experience which Mr. Tarbell possesses, retain him for the good that he can do to theEquitable and its policyholders.
In regard to the present ownership of the stock there exists a great deal of suspicion. But as we look at it the question is not so much who owns the stock, who bought it or how much was paid for it, as whether the defects existing under the former management will be changed and the affairs of the company honestly and efficiently administered.
So long as Mr. Hyde held the controlling interest in the stock there was no guarantee of honest and efficient management nor did he exhibit any evidence of a desire or determination to change this situation. Mr. Ryan purchased the stock and immediately put in effect a trustee proposition designed to give the policyholders the controlling voice in the management. In short, Mr. Ryan, as majority stockholder, has done what Mr. Hyde seemed incapable of doing or unwilling to do. Whether proper control has been substituted for control which was decidedly improper time alone must demonstrate, but there are guarantees of good management now existing which were entirely absent before.
The trustees named are not themselves to be the administators of the company's affairs. Their powers are limited by the charter powers of the stock to voting for the directors who shall be responsible for the administration. In short, the task of the trustees is to select fifty-two men properly qualified to act as directors, twentyfour of whom shall represent the stockholders and who may at the same time, of course, represent the policyholders, and twenty-eight who shall represent the policyholders and who might at the same time represent the stockholders.
The selection of the twenty-eight policyholders' directors will be made by the trustees after a canvass of the wishes and desires of all policyholders. In selecting directors nominated by the policyholders the trustees can exercise wide discretion and are not, by the terms of the deed of trust as we understand it, limited to the selection of directors securing the largest number of votes. Policyholders can express their preference by mail.
In conclusion, we think that the Equitable agitation has shown clearly that conditions demand of life insurance:
1. That administrative officers shall devote their entire attention to insurance and shall be so well paid for their time that they may be perfectly free to exercise their honest judgment upon insurance without consideration for the effect that it may have upon other interests.
2. That assets shall be invested solely as the interests of the companies may require and shall not be used in any way to promote other en terprises
3. That all companies shall at least afford applicants an opportunity to choose between deferred and annual dividend policies and that the compensation of agents shall be so adjusted as to make it equally advantageous for them to sell either contract.
4. That the transaction of high pressure business, with the excessive agency expense incident thereto, shall be discontinued. Reduced commissions will reduce the cost of insurance to the polioyholders and will improve the conditions of the business for the real professional life insurance agent.
5. Complete publicity and increased detail of accounting which will enable purchasers of life insurance to judge more accurately of actual conditions and insurance supervisors to more quickly detect discrepancies in accounts.
6. Complete restitution by policyholders' suits of all moneys illegally diverted from company assets.
page 61
LEGAL PROCESS OF MUTUALIZING THE EQUITABLE LIFE.
There is an abundance of legal power vested in the New York legislature and Superintendent Hendricks to deal summarily and successfully with theEquitable situation. If the charges of malfeasance made against the executive officers in the Friok report are found to be true by Superintendent Hendricks, he can remove said officers forthwith. The law says:
No director or officer of an insurance corporation doing business in this state shall receive any money or valuable thing for negotiating, procuring or recommending any loan from any corporation, or for selling or aiding in the sale of any stocks or securities to or by such corporation. Any person violating the provisions of this section shall forfeit his position as such director or officer, and be disqualified from holding such office in any insurance corporation.
It is quite evident, therefore, that those who retire under these circumstances are out of the insurance business for good.
Another matter has been brought to light by Mr. Justice Maddox's decision in the Lord injunction suit which most people have forgotten, if they ever knew of it. That is that the legislature of New York has the power to revoke the charters granted to insurance and other corporations under authority of the general laws. The power of revocation also carries with it authority to amend or alter or to suspend the operation of such charters.
This provision has been a part of the New York law since 1828; it was repealed in 1890 but re-enacted in 1895. This explains the great effort made to prevent the convening of the New York legislature in special session at this time. Massachusetts has had a similar law since 1830. It provides that every act of incorporation passed since March, 1831, shall be subject to amendment, alteration or repeal by the general oourt. The question of the constitutionality of the act arose in 1839 when the general court of Massachusetts passed an act which repealed the charter of the Chelsea Bank.
In 1855 the first insurance case to test the application of this law was that of the Massachusetts General Hospital against the State Mutual Life. The matter here in dispute was the payment of certain receipts of the insurance company to the hospital under a law long since repealed. The defense claimed that the law requiring such contributions was unconstitutional, as it interfered with the vested rights which bad been acquired under the act of incorporation. The court held that:
All acts of incorporation passed since 11 March, 1831, which contain no express provision limiting their duration, are, by the provisions of the statutes of the Commonwealth existing from that period to the present, subject to alteration, amendment or repeal. The act incorporating the defendants was pasied in the year 1844, long after the enactment of the revised statutes, and was of course accepted by the corporators subject to the provisions of those statutes. This seems to put at rest all further question as to the constitutionality of the statute.
In a later case it was held that a statute requiring a railroad corporation whose charter is subject to amendment, alteration or repeal at the pleasure of the legislature, to erect a station at a place on its road and cause trains to stop there, is not in violaiton of the constitution of the United States as impairing the obligation of a contract. It has also been decided that the right of the legislature to amend, alter or repeal the charter of a railroad corporation includes authority both to withdraw powers granted to the corporation and to confer new powers upon it and require their exercise, and is independent of the assent of the corporation.
It is to be presumed that there is a similar line of cases sustaining the New York law also. It is a fitting reminder that whatever abuses may be found in the present conduct of the life insurance business, they can l:e readily reached through existing means of remedy.
page 62,
PRESIDENT MORTON ON THE EQUITABLE'S HOUSE-CLEANING.
The new president of the Equitable Life, Paul Morton, has issued an address to polioyholders reporting to them what has been done in the line of reform and improvement since he took the office. He states in the first place that the accounts of the company have been thoroughly examined by independent expert accountants and the assets valued at $416,166,500, of which $67,142,865 is surplus above all liabilities. This includes, of course, deferred dividend surplus as well as general surplus. Both assets and surplus have been reduced by new valuation, the reductions occurring merely on real estate owned by the society or covered by mortgage, and in the stocks owned of some of the financial institutions in which the company has been interested.
Mr. Morton reports that economies resulting in a saving of over $600,000 per annum have already been inaugurated. This, he points out, is four per cent. interest on $15,000,000 and more than covers the marking down of assets.
Approximately one million dollars has been secured to the society through the disavowing of certain liabilities and the restitution of other sums illegally diverted. Advances to agents, amounting to $5,813,184 have been transferred from banks to the company's own accounts, thus increasing the society's interest income nearly $150,000 per annum.
President Morton says that the society hereafter will discontinue political contributions and rely entirely upon its policyholders to protect the company against unreasonable legislation. An effort will be made to confine the investment of reserves to "real estate mortgages or the securities of railroads or other well established corporations, serving those sections of the country which produce the premiums."
President Morton promises no reduction in the gross premium to be collected, but states that he is satisfied that economy of management will greatly increase the value of Equitable policies by producing greater dividends for those who hold them. In other words, that the company will be in a position to give its policyholders, through returned premiums, the "lowest cost consistent with safety." Mr. Morton states that the extraordinary expense to the company incident upon the present investgation is amply offset by the reforms which have been brought about. Moreover he says that the public agitation in regard to the whole question has only served'to attract attention to the impregnable financial strength of life insurance companies more effectually than could have been done by any other means. The utility of life insurance, he says, has been more fully demonstrated than ever before.
In Mr. Morton's closing promise we find the utmost satisfaction, for he says there will be no effort by the new administration to have the biggest company in the world. The effort will be to make it the best and safest. Conservative lines will be followed. It will be the policy not to solicit or secure new business at the expense of the present polioyholders, and in case it is determined that business in any section of the world is unprofitable that field will be abandoned.
page 62,
THE FRICK REPORT: WHAT IT MEANS TO OUTSIDE OBSERVERS.
From The Outlook of New York.
The Frick report, of which we give some aooonnt in another column, is more than an expose of unjustifiable methods which have been pursued by the Equitable Life Assurance Society. It is an indictment of business methods which have been pursued, apparently with little question, by men of eminent standing in the community, and permitted by other men, whose presence on the board of directors was regarded by the public as a guarantee of official and corporate integrity. The rejection of this report by a substantial majority can have no other effect than to make the general public perceive that this indictment, which was apparently against the two most pro'ninent officials, is really an indictment against methods and standards current in American business circles. For such rejection, accompanied as it is by the retention in their offices of both Mr. Hyde and Mr. Alexander, is tantamount to an approval, or at least a condonation, of their financial methods. It is perfectly certain that the Equitable Life Assurrance Society cannot have and will not deserve the confidence of the community until the business methods which this report condemns are repudiated by its board, and those who have pursued those methods are removed from the present control of the society. The report is a condemnation of specific acts and omissions by Mr. Hyde and Mr. Alexander, but it is no less a condemnation of methods of doing business too common in America, and of standards of morality which are wholly unjustifiable. For example:
Whether resulting from a misconception of the importance of growth in size from the competition of other companies, or from the human instinct to excel, there has existed a disposition to lose sight of the true purpose of life insurance and devote all energies to attaining bigness.
This ambition for bigness which has been the curse of the Equitable is the curse of many another American enterprise; for the habit of confounding greatness and bigness is distinctively an American habit. Again:
The committee has fully considered Mr. Hyde's explanations of these charges. In the main be seeks to exonerate himself by pleading the custom of the society, the participation of others, the return of money improperly acquired or used, and the beneficial result! to the society. As it is the function of this committee to determine what is wrong in the society's management, Mr. Hyde's arguments cannot avail. The practices he bas pursued are wrong. The fact that others have pursued them or acquiesced in them only convicts them of equal guilt.
This following of the multitude to do evil, this accepting a common custom as affording the true basis for a common law of morality, is another very common vice in a democratic society, which, for the motto, The king can do no wrong, substitutes—The people can do no wrong. Again:
So open, flagrant, obvious, persistent, and dangerous are the practices of which Mr. Hyde is accused, that the establishment of their truth convicts of equal guilt all who were cognizant of their existence and failed promptly to set about their correction.
We have not lately seen any more courageous and wholesome statement of the responsibility of boards of directors. Again:
It is elementary that a corporation is a trustee for its stockholders, the funds and other property held in the name of the corporation constituting the trust estate....With respect to the funds and other property of the society they [the chief executive officers] are, therefore. in the highest sense fiduciaries, and are governed by the principles of the law of trusts, which are not less strict—in some instances stricter—than the moral code itself. One of the most fundamental of these principles is that a trustee shall not profit at the expense of the trust estate. Another, closely connected with that just mentioned, is that a trustee shall not enter into any relation with the trust estate in which his interests and those of the estate may conflict, as, for example, the relation of buyer and seller.
This is sound morals, and we believe it to be sound law. Yet in repeated instances a syndicate formed of members of the board of directors, and headed by Mr. Hyde, purchased securities in their own name and sold them at a profit to the Equitable Life Assurance Society, voting as directors to make this purchase from themselves as a syndicate. In nine of these transactions, securities to the par value of $9,300,000 were handled, the total profit to the syndicate in the nine operations being $204,504.39, of which over $167,000 were divided among eight individuals who were directors, six of whom were members of the executive and finance committees whose special duty it was to conserve the interests of the society in all investment transactions.
The Equitable furnishes a gigantic illustration of the sad truth that graft is by no means confined to the police or to political magnates and public service corporations. The history which Miss Tarbell has given of the Standard Oil Company may be, as it has been, questioned. The stories which Mr. Lawson has told have produced no such impression on the community as they would produce if they were accepted without discount. But this report of the Frick committee is based largely upon the official statements of the very men whose transactions are condemned; and, notwithstanding the report, the men who conducted them are, at least for the time, continued in office. No severer indictment of business methods and business standards in American financial circles has ever been presented than this report, coupled with its rejection by the board of directors.
page 63
INCREASED STRINGENCY OF INSURANCE SUPERVISION LIKELY.
From The Chronicle Of New York.
The Chronicle is not in the least degree an alarmist. Its editors are optimists, and believe that the tendencies of things are toward better conditions instead of worse. But we should be recreant to our duty as we see it, were we to fail at this time to point out to life insurance managers that the indications are, that a period which will test all things in insurance, is near at hand. In performing this duty, we aim merely at that forewarning which means that companies may be forearmed.
There are many evidences of disturbed conditions near at hand, which will cause the public and state insurance officials, under the pressure of public opinion, to apply more and more severe tests of life insurance management. A short time ago, these tests were applied to one of the older, but smaller companies, and fortunate was that company, in our opinion, to be the first. This is now being followed by the exposures of menacing conditions in one of the largest organizations, which is even now undergoing drastic investigations. Other small companies, which were already undergoing examination, are for the moment nearly lost sight of.
The Chronicle is of the opinion that one of the things which must necessarily come out of these conditions, applying to the older companies, will be that there will be a stricter accounting in regard to surplus, and that this accounting will also ultimately take the form of holding companies responsible for confining their first commissions to what may be paid without exhausting the margin of profit to existing polioyholders realized from the new business.
The smaller an! newer companies, more than fifty of which have been organized within the past fifteen years and some of them with great success, are also certain to feel the consequences of the general disposition to supervise with greater vigor. The conditions winch obtain in a small New York company, now under fire for the second time within twelvemonths, do not exist in many companies, to be sure; but it behooves the managers of each one of these smaller companies to take account of stock and prepare for stricter supervision than has recently been known.
The Chronicle is of the opinion that this pressure upon these smaller companies is likely to take the form of condemnation of the preliminary term plan, so far as it is applied to limited payment and endowment policies, at least; and, while it is probable that what has happened may be permitted to remain in its present status, there is every reason to think that a change to a more scientific method will be required. This should be weicomed by the smaller companies, and will be, by those whose officers are more intelligent, and also more economical and efficient in the conduct of their business.
The lessons of the past should be conned in this matter. During the disturbed conditions in the '70s and early '80s, stricter supervision was caused by the pressure of public opinion; and the leniency which permitted companies to live and build up a large business, notwithstanding the limitations of net valuation, was suddenly withdrawn. The conditions are now better understood, and the history of the failures that then occurred should not be repeated; but in order that it may not be repeated, it will be necessary for each company to consider its own situation carefully, study the nature of the problems before it, plan to give to policyholders the best possible results, and to show that this is the case beyond a doubt, and see that its house is in order.
Fortunately, it is believed that there is a spirit of mutual helpfulness and support abroad in the land between the largest and strongest companies and the smallest and weakest of them, which means much for a successful passage through the waves of all the craft that deserve to live. It is not likely that it will be a case of scramble and riot, one company attacking another, until the greatest possible injury is inflicted upon all.
page 87,
GROVER CLEVELAND, "THE GREAT TRUSTEE" FOR THE EQUITABLE
From The Boston Herald.
Grover Cleveland is fortunate in his opportunities. It is one of the splendid illustrations of the value of democracy that the first citizen of the republic is a man in private life. Hardly any one will deny him great distinction, or the honor of being of great usefulness to his fellow-citizens, or due praise for high achievements, although there are many who, for the moment at least, always regard the passing show as of higher interest, perhaps importance, than the living and continuing and all pervasive institutions of lasting beneficence. To a good many, however, especially to those who think before they speak, there remains an abiding faith in character, in steady and sane judgment, and to these Mr. Cleveland ranks as the first citizen of the republic. He has won the confidence of his country. The people of whom he is modestly one are often inclined to regard him as their refuge and strength. They know his unselfish devotion to their interests. They are sure of the depth and genuineness of his patriotism. They are always confident that he will do his duty by them, and do it for them and not for his own profit or his own popularity. He does not seek the centre of the stage, but he takes it when he is convinced that he may render public service by doing so and when he is invited.
Mr. Cleveland has also the happy faculty of speaking the right word. He has accepted the trusteeship of the Equitable stock purchased by Mr. Ryan, or by his syndicate, for the protection of the policyholders, the beneficiaries of the trust. In his letter to Mr. Ryan, Mr. Cleveland writes: While the hope that I might aid Id improving the plight of the Equitable society baa led me to accept the trusteeship you tender, I cannot rid myself of the belief that what has overtaken this company it liable to happen to other insurance companies under fiduciary organizations, as long as lax ideas of responsibility in places of trust are tolerated by our people. The high pressure of speculation, the madness of inordinate business scheming and the chances taken in new and uncertain enterprises are constantly present temptations, too often successful, in leading managers and directors away from scrupulous loyalty and fidelity to the interests of others confided to their care.
We can better afford to slacken our pace than to abandon our old, simple, American standards of honesty, and we shall be safer if we regain our old habit of looking at the appropriation to personel uses of property and interests held in trust in the same light as other forms of stealing.
At this time, or crisis, these words cannot be too often published or too seriously pondered on. They are of those admirable statements which Mr.Cleveland has uttered more frequntly than any other public man of our generation, statements which instantaneously touch common beliefs or oommon sentiments which may have been long voiceless; the truth of such statements is often demonstrated by the universality of its recognition.
There is no honest-minded man who does not realize the sinfuluess of our financial world—that is, no honest mind which is not distorted by bad traditions or is not prejudiced by preoccupation in money getting. There are many good men whose unconscious sordidness has led them to unconscious participation in the evils of which Mr. Cleveland speaks. The point of view of the intense business man has given to him a false conception of the meaning of his own conduct, of the significance of the rules and of the practices of business. For many years we have been conscious that men will do in business what they could not do in other relations of life; that they will say in their offices and on the market place what they would not say at home or to-their friends or to their dependents.
Fundamentally, the great sin of the age in the business world is breach of trust, and this indicates that oharacter has ceased to play its part in the business community. Mr. Cleveland has put his finger on the sore spot, the spot that is sore in financial as well as in political life. The rule of honesty is that the man who accepts a trust— and he who seeks a trust is bound by the same rule—can only deserve his office and its compensation by thinking of and working for the beneficiaries of his trust. The moment a place of trust becomes a place of profit for him who administers it, that moment the trustee and his wards are in danger. He is in danger of corruption, and they are in danger of becoming the victims of corruption.
There is no reason to select one company, life insurance or other, for oastigation. One case may expose the evil, or it may so arouse the consciousness of the country to the great extent of the sin that not only will there be proper punishment meted out, but there will also be an elevation of the moral practice of trustees, and of other men of business, to cor respond more nearly to the real moral tone of the plain people. Mr.Cleveland employs strong lanpnnge. He never hesitates to give the Mow when the occasion calls for the low. He says that the personal use of trust property is one of the forms of stealing, and he is right. There is occasion for this strong speech, and it is an occasion which, as we have already said, comes happily to the ex-president. The occasion is happy for the country also, for Mr. Cleveland is the man of all men who is willing to utter that which his simple duty requires him to utter.
This trustee who knows what a trust is, what responsibility is, what his duty is, is the direct opposite of the men whom he condemns. The country rests content when he assumes a task in its behalf, or in behalf of any part of it, because of his character. Men, after all, when they come face to face with the hard crises of life, give testimony to their consciousness of the value of character. They confide in high purposes, in stability, in calm judgment, in unselfishness. This instantaneous feeling of relief which comes over all of us when we learn that Grover Cleveland will accept a trust because he deems it to be his duty to do so, is the highest tribute that has been paid to any man within the memory of our generation, and the knowledge that his and their countrymen thought thus of their father will be the most precious heritage of his children.
ACTUARIES IN LIFE INSURANCE.
No less remarkable than the growth of I1imifance itself, is the increasing attention directed to the scientific features of actuarial practice— which may be de6ued as the application of mathematical principles to life contingencies. Of all the alluring studies that science holds out in fascinating invitation, none appeal more for human interests than the study of human life— and of this engrossing study life insurance science is made.
It must not be thought that a proficiency in the applications of the mathematics makes up the requisites for a competent actuary. For life insurance is intimately connected with many branches of knowledge, and the actuary, as the sclentlst-in-chlef of the insurance company, must have a comprehensive grasp of many of the other fields of professional endeavor—particularly so, in the absence of specialists to represent these classes.
Even in the association with men equipped to care for certain special interests, such as legal counselors and medical directors, it becomes adTlsable to have in the actuary a man capable of appreciating and reconciling the somewhat conflicting opinions likely to be held at times among men who, as professionals, see from biased view points.
While the administrative officers of the companies have a well-grounded working knowledge of actuarial science, it is unusual here, in America, for executives to be endowed with the technical training of an actuary. Professional possibilities for the actuary are not, therefore, so large as in England, where it is the custom to advance into administrative office men considered to be qualified by actuarial service. Many well informed insurance men see within our country a drift in the same direction.—William J. Graham.
CO-OPERATION, NOT COMPETITION, THE LIFE OF TRADE,
by George W. Perkins, Vice-president Of The New York Life.
We of the New York Life have believed that competition is no longer the life of trade, but that with the dawn of the twentieth century cooperation is the life of trade.
Failure was predicted when we eradicated the old general agency system, by which thirty or forty general agents fought with one another and with their own company at the same time, and substitued a centralized system in which the youngest office boy in the newest office in the most remote corner of the globe is brought into direct relation with the president of the company in New York. Failure of the direst sort was predicted because this was eliminating competition and substituting co-operation; but in place of failure we have won complete success and have demonstrated beyond our fondest dreams that co-operation will produce more business and a better business, and at a lower cost to the policyholders than the old system of competition. In proof of this we need but make the statement that this company today has two billions of insurance on its books—the second billion having been secured within the last six years and at an expenditure of $20,000,000 less than it took to secure the first billion.
It is said that "beauty is its own excuse for being," but the same cannot be said of bigness, for mere size is, in itself, no justification for existence. The larger the life insurance company, the better and stronger it ought to be. Unless with its growth and development it can provide better and cheaper insurance, it has not met the duty that goes with growth.
Those to whom great opportunities come, bringing great power, should bring forth great benefits, not alone for themselves, but as well for the entire business fabric of the world. In society the laws of honor and of the state give individuals great freedom of action, but at the same time compel them to respect one another's rights; and so must it be in business. The greater the wealth and power of an individual, the more he should respect the property and rights of others; and the same duty lies upon powerful organizations.
The essence of life insurance is the forecasting of the future, and perhaps no quality is more necessary in the executive staff of a great life insurance company than the ability and willingness to look ahead, to analyze public thought and its movement, to anticipate changing conditions and to have the courage (for it takes courage) to act in the present for what one believes to be the best interests of the future.
Men in positions of trust and responsibility are too often prone to let wellenough alone; to think that they are responsible only for the current acts of their administration and that they may leave the future to those who succeed them. Such a course of action in the management of a great life insurance company is little short of criminal. No board of trustees or set of executive officers has a right to bring hundreds of thousands of policyholders into a given company without a clear well-defined policy as to what condition that company is going to be in, not today nor tomorrow, but ten, twenty, thirty years hence; for life insurance contracts are not made payable thirty days after date, but more nearly thirty years after date; and while no one can set himself up as an oracle of the future, and human brains and efforts cannot build against unforseen catastrophes, yet very much can be done by right-minded, farsighted management to secure the future.
WORK OF PROTECTIVE COMMITTEE OF EQUITABLE POLICYHOLDERS
A Movement Which Has Earned Public Confidence and Proved lts Capacity for Satisfactory Work.
Of all the movements started since the Equitable disclosures began, none have deserved greater public confidence than the "Protective Committee of Policy holders" organized in Boston April 18 and originally formed as a New England committee. Afterwards, owing to interest shown by policyholders of other states, the committee was reorganized Hs a "general protective committee." Still later the interest of foreign policyholders was recognized by the addition to its ranks of Sir William Mather, Member of Parliment from Manchester, England. The other members of the committee are William Whitman, Arthur Amory, George P. Field and Edwin H. Abbott, all large policyholders and well-known business men of Boston.
Louis D. Brandeis was selected as counsel. No better choice could have been made. Mr. Brandeis not only stands at the head of the Boston bur, but has on many occasions shown his disinterested concern for matters of public interest. He is a lawyer who can be trusted to do this work for the policyholders of the company without regard for the emoluments which may or may not come to him.
The protective committee has shown from the start a desire to proceed in its work with caution and conservatism.
Its influence, therefore, upon the company's affairs in this crisis has not only been felt but has been positively beneficial. One of its members, Mr. Whitman, has been elected a director and the committee, at the request of the trustees of the stock, has submitted for their consideration the committee's views as to the future conduct of the society.
They are worth reading and are published below in full:
At the conference held June 27, 1905, between yourselves and Messrs. Whitman, Field, and Amory of our committee, and our counsel, Louis D. Brandels, you requested that we submit to you in writing the substance of the views as to the future management of the Equitable Life Assurance Society which we had expressed to you orally on that day. This we now do.
First. The sole aim of the society should be to furnish insurance of absolute safety at the smallest possible cost. The ability to do this must be the test of success. Efforts to secure a large amount of new business or to increase the assets controlled by the society are justifiable only so far as they subserve that end.
Second. In order that insurance of absolute safety may be furnished at the smallest possible cost, radical changes in system must be introduced. The mere substitution of other officers, however scrupulous and efficient, or the discontinuance of particular extravagant or illegal practices, or the recovery of profits wrongfully diverted, will not suffice.
Third. In order to secure insurance at low cost the society must, in addition to other economies, discontinue the lavish payments for agents' commissions and for advertising — practices common among promoters of mining enterprises and of patents—and substitute therefor methods more nearly following those of the great savingsbanks and the mill mutual insurance companies. No benefit can result to policyholders from the mere increase in the volume of business. The conditions in a great life assurance company are wholly unlike those of railroad or manufacturing coneerns, where increase of business naturally tends to reduce the cost, because there are fixed charges to be distributed against the total earnings. The conditions in a mutual life insurance society, like the Equitable, are also wholly unlike those in ordinary private business,wbether incorporated or not, where the increase in volume may tend to reduce the cost to the public, because the owner of the business is content to accept a less per cent, of profit on the output in order to secure a greater aggregate profit, resulting from larger gross receipts. In a life insurance company already large, new business obtained at high cost must necesiarlly prove a burden to existing and future policyholders.
Fourth. A mutual life insurance society should, as to each policyholder, be conducted as a benevolent institution. No one should be induced to take out a policy unless it is advisable to do so in the interests of those whom he desires to protect by it. No one should be lured into becoming a policyholder. The fact that in Hun. a year of general prosperity, 33,354 policies lapsed, when the average number issued in the two preceding years was only 112,139, indicates H'''t a very large number of persons were at least ill-advised when they took out insurance in the society. The fact that 22,220 policies, aggregating 181,649,311 duly applied for, passed, written, and entered, were not taken by intending policyholders, indicates the high degree of persuasion which must have been exercised by the society's agents or solicitors. In addition to to the 33,354 lapsed policies, there were in 1904 also 9,691 policies, aggregating $34,309,929, surrendered, while only 11,279 policies, aggregating 933,866,917, came to a natural termination by death, maturity, or expiry.
The relation of the society to intending policyholders should obviously be not only free from active deception, but should be characterized by complete frankness. Unfortunately, this obligation has not been observed in the past, as is shown among other things by the advertisement of a surplus of over 380,000,000, without disclosing that the greater part represented deferred dividends.
• Fifth. The issuance of deferred dividend ; /policies should be discontinued or greatly llml'ted. The legitimate business of a life insurance \ company is to insure the life of the individual and to issue annuities. It should not be used as an investment company or as a means of gambling on the misfortunes of others. The issuance of policies on which dividends are deferred for long periods seems to be open to both these objections. It is clearly open to other objections. It tends to extravagance and inefficient management, because it removes the protection which flows from publicity and annual accounting. The annual declaration of dividends, the best practica-1 test of the efficiency of the management, is denied to the policyholders. It vests also in the management the control of huge funds not required as an insurance reserve, with the temptations incident thereto.
Sixth. To insure safety the investments of the society should be surrounded with the legal safeguards as to the character of investments now supplied in case of savings banks. The funds held by life insurance companies are held for purposes in the main similar to those for which savings banks exist, but the safeguards applied by law as to the character of savings-bank investments are lacking in the case of life insurance companies.
Seventh. Further to protect the funds of the society and to prevent their being used directly or indirectly to further the private or other interests of officers, provision should be made to prohibit the executive officers from engaging in any other business or holding office in any other corporations. Treasury safeguards should also be adopted to prevent payments without properly authorized warrants.
Eighth. Methods of accounting should be introduced by which the directors may be kept advised at all times in detail of the conditions and the operations of the business. The cost of every department of the business and every kind of business transacted must be clearly determined and disclosed, and likewise the condition, character, and result of each investment. Publicity as to the policyholder also is essential to secure the confidence of the public and to ensure the proper conduct of the business by officers and directors.
Ninth. In order that the above recommendations may be not only introduced, but properly carried out and maintained, the complete inuiualizatlon of the society is necessary. It should be brought under the absolute control of the policyholders.
Some of the views held by the committee relative to life insurance will no doubt be modified by subsequent investigation,but they are in the main sound and its work should be encouraged not only by policyholders but by insurance men as well.
The protective committee will be continned, as it should, and its work will no doubt receive increased support from policyholders whose interests it is so well equipped to serve.
FOUR MEN UPON WHOM THE PRESENT FORTUNES OF THE EQUITABLE LiFE ASSURANCE SOCIETY DEPEND.
Grover Cleveland, described by the Boston Herald as the "great trustee," vested by the owner of the majority of the stock with power to select and elect directors. Paul Morton, President of the Company, vested with powers of reorganization and administration in Equitable affairs. Gage E. Tarbell, Vice-President, upon whom the management depends for its underwriting and direction of agency forces. Thomas F. Ryan, who controls the majority of the company's stock and who has declared his willingness to sell this stock to the company at the price paid for it.
THE MOTIVES AND PURPOSES OF FINANCIER THOMAS F. RYAN.
From The Outlook, New York.
A careful study of all the facts justifies the belief that the reorganization plan is a sound one, and that Thomas F. Ryan, who devised it and who has carried it into effect, deserves the approval and support not only of policyholders of the Equitable, but of all men throughout the country who believe in the stability of the banking system. For upon the banking system, in the last analysis, rest the material prosperity and comfort of every thrifty citizen,be he mechanic,farmer, school teacher, clerk in the general store, country doctor, capitalist, newspaper editor, or laboring man. We shall here endeavor to state the grounds for our approval of Mr. Ryan's plan. For several months the Equitable Society has been torn with dissensions which have threatened to disrupt and ruin it. While it is primarily an insurance company, it is in reality a great savings corporation, with assets amounting to over four hundred millions of dollars, and with an annual income of about eighty millions of dollars. Several hundred thousand policyholders have been putting their savings into its treasury annually for many years. To have such a gigantic savings bank come to financial ruin not only would mean disaster to an army of policyholders, but might precipitate a panic which would affect banks and bank depositors—that is to say, every thrifty and industrious citizen—to the remotest parts of the country.
Is it not a great puplio service to avert such a calamity as this? We assert that it is. We assert that a broad minded, publio spirited, and patriotic banker may take the same unselfish and altruistic interest in accomplishing such a splendid salvage that is taken by the statesman who by brilliant and able diplomacy averts war, by the expert surgeon who saves a valuable human life by a capital operation, by the physician who averts an epidemic by a strenuous campaign of hygiene,or by the newspaper editor who sacrifices his popularity to maintain a political principle which he believes to be for the public good. Of course the diplomat wishes to earn his salary, the physician to be paid his fee, the newspaper proprietor to receive his dividends, but that does not make the public spirit any the less commendable.
In our opinion, Mr. Ryan, vice-president of the Morton Trust Company, of this city, a successful railway promoter, at the present time powerful if not dominant in the affairs of the traction company which controls all the surface street railways of New York City, and the successful originator of the Equitable reorganization plan, has done his work in this reorganization from motives of public spirit and public service. This, of course, is merely our opinion. We do not profess to know the inner workings of his mind and spirit any more exactly than do those who ascribe to him motives of selfishness and money grabbing. But we think it is time to say plainly that poor men are not always necessarily, by virtue of their poverty, public-spirited, nor are rich men always necessarily, because of their riohes.mean and untrustworthy.
However difficult it may be to judge of a man's motives, his public acts are matters which his neighbors may discuss and define. In the present instance the facts are well known. Mr. Ryan, for the sum of $2,500,000, has purchased from Mr. Hyde a controlling interest in the stock of theEquitable Life Assurance Society. He has organized a "voting trust" consisting of three nninpeachable and publicspirited trustees, ex-PresidentGrover Cleveland, Judge Morgan J. O'Brien, and George Westinghouse. The stock which Mr. Ryan has purchased he has placed in the hands of these trustees for five years, the longest period that such a trust is permitted by the laws of the state of New York to exist without renewal. "The trustees are exclusively authorized"—we quote from the trust deed—"to exercise the voting power on the stock held under this agreement for the election of directors of the society, and shall at every annual election of directors of the society so vote on said stock. . . .that of the entire fifty-two directors twenty-eight shall be policyholders of the society, selected by or on behalf of the polioyholders, and twenty-four shall be lawfully eligible persons selected by the trustees in their sole discretion."
We have carefully read the trust deed from which this provision is taken, and it seems to us that it is framed for the express and exclusive purpose of putting the property and interests of the polioyholders of the society into the untrammeled and untied hands of a board of trustees distinguished not only for its high sense of personal and public honor, but for its executive ability.
THE EQUITABLE LIFE AND THE MEN NOW IN COMMAND.
The Company's Prospects, the Guarantee Offered by the Present Management and the Outlook for Agents.
The affairs of the Equitable Life have been deeply probed. Probably the bottom has been very nearly reached and the worst now known. With graft eliminated, deadwood cut away and investment values reduced to a conservative basis, the Equitable will be in splendid position to command the confidence of life insurance investors and serve the interests of its policyholders. When all is known and other companies are subjected to the same searching inquiry, we anticipate that the Equitable will stand as one of the greatest life insurance institutions built up in modern times; great, not only on account of size and results produced, but because of the greater economy and higher ethics which will now be applied to its administration by those who have assumed responsibility for its future success.
Of these, four figures stand out prominently: Grover Cleveland, Paul Morton, Gage E. Tarbell and Thomas F. Ryan. All of these men have been criticised and there are still some who affect to place little confidence in the sincerity of their declarations or the propriety of their purposes. But the same things would be said of any who might, by fate or circumstance, be brought into the same positions. No other men could be selected for these respective responsibilities who would be any less objectionable than Messrs. Cleveland, Morton, Tarbell and Ryan, and none, as it seems to us, who would collectively inspire greater confidence.
Mr. Cleveland has laid down a platform for his own guidance as trustee of the controlling stock which should satisfy the most exacting. Mr. Morton's acts thus far justify the confidence reposed in him by President Roosevelt. Mr. Ryan has shown that, as a financier, he is prepared to meet all legitimate requirements and do everything within reason to meet the wishes and demands of the policyholders. Mr. Tarbell has the support of the company's agents and approval of rival insurance men. With new ideals inspired by advancing public opinion, he has shown that he is capable of adapting himself to the modern requirements of production and business getting in life insurance.
Better than all else, the polioyholders of the company are now interested in its welfare as they never have been before. They appreciate the value of their franchise as members of the company and co-sharers in its future prosperity. With a clean administration, sound financial condition, and a demand for life insurance which has been increased by publicity, the loyal agents of the company should find themselves well equipped for the future.
PRESIDENT ROOSEVELT ON PAUL MORTON'S QUALIFICATIONS.
From A Letter To Mr. Morton.
"Since I acepted your resignation as a member of my cabinet you have undertaken, perhaps, the greatest and most important work now open to any business man, in assuming control of the Equitable Life Assurance Society. You do not need to be told again the confidence I have in you and my belief in your absolute sincerity of purpose and your unflinching courage. I know that the mere fact that you have consented thus to take control of the society means that there will be a genuine attempt to make a new, clean management, a control really and honestly in the interest of the policyholders and one which will make impossible the crooked and objectionable practices that have hitherto prevailed in the society. Ex-President Cleveland, in consenting to act as one of the three trustees to hold the stock of the society and to use voting power of such stock in the selection of directors, concludes his letter by saying:
'"We shall be safer if we regain our old habit of looking at the appropriation to personal uses of property and interests held in trust in the same light as other forms of stealing.'
"In other words, you and Mr. Cleveland intend to see that the affairs of the society are managed not merely with the honesty requisite in order to keep clear of criminal proceedings,but with the fine sense of honor which recognizes in the trustee—and that is what the man responsible for the management of any great business corporation is nowadays—the duty of managing his business affairs with a high sense of obligation not only to the stockholders and the policyholders, but to the general public. Mr. Cleveland has especially stipulated that he is to be absolutely free and undisturbed in the exercise of his judgment; you have especially stipulated that you are to be absolutely free and undisturbed in the exercise of your judgment.
"I have faith not only in your will to doright,but in the judgment which will enable you to do right. As I understand it, the majority of the stock is to be put in the hands of a board of trustees, of which Mr. Cleveland has accepted the chairmanship, and they will have absolute control, subject, as to the majority of the directors, to exercising their own judgment without control. Your own policy will be, I know, to give the policyholders a square deal and to clean house thoroughly. You would not take such a position if you did not have a perfectly free hand, and if you were not unhampered by commitments to any body.
"I do not congratulate you upon entering upon this work, for I do not wish to congratulate any man when he puts his harness on, but rather to wait until he takes it off. But I do wish to express to you not only my belief in you and your success, but my strong feeling that you have undertaken one of the most important public duties that can befall any man just at present."
VICE-PRESIDENT GAGE E. TARBELL AS AN AGENCY MANAGER.
From The Journal Of Insurance Economics, February, 1902.
Gage E. Tarbell is today probably the most interesting and striking personality actively engaged in the American life insurance agency field. As the head of the field force of the great Equitable Life Assurance Society, he wields an influence which has brought to him the reputation of being a great leader of men.
To those acquainted with Mr. Tarbell the source of his power and success with men is plain. One cannot come into contact with his dynamic energy, his abundant enthusiasm, his towering personality without being
filled with a consuming desire to work and to win. When asked,on one occasion, what he considered the chief elements in his success, Mr. Tarbell said: "A willingness to work coupled with a love for work; energy, determination, and patience—by patience I mean a willingness to keep on working, if necessary, for years to accomplish that which I set out to do, without ever giving up."
Mr. Tarbell leads men by virtue of his enthusing personality. Other men can lead, can plan, and execute, and manipulate large bodies of men by force of their mental capacity; but Mr. Tarbell possesses as well a kind of electryfying physical force which is all-pervading. He looms with his great height over the person to whom he is talking, literally enveloping him with his ceaseless energy. Men who come into his presence cannot help being inspired to work, whether they will or not.
Mr. Tarbell has been marvelously successful as a manager of agencies, and has built up a field force which is splendidly equipped for efficient work. He believes in the Equitable. He has never served any other company and is saturated with loyalty for the institution and unswerving devotion to its interests. This spirit of loyalty and devotion permeates the agency force as a whole, and makes it responsive to the changes necessary for the welfare of the company.
Mr. Tarbell has attained his present commanding position in life insurance without seeking it. He did not apply for the office he now holds. It came to him because he was fitted for the work by capacity and experience. He mastered every detail of agency work; he began at the bottom as a solicitor, worked through various departments, and in this way came to a knowledge of the business, as well as of himself, which fitted him to stand at the head of a great agency force.
LAPSES IN LIFE INSURANCE: WHY THEY OCCUR.
J. H. Jefferies Before The Pennsylvania University.
Lapses represent cases which have been nourished through infancy with the milk of new commissions, medical fees, agency expenses, and mortality risk, and their going out means actual loss to a company when the withdrawal occurs within two or three years after issue, or to keep up our simile, before the new members of the insurance family become contributing or self-supporting. In this connection it should be pointed out, however, that the gain from light mortality among selected lives during the first years of the risk offsets, to some extent, the initial expense.
Lapse ratios are caiculated on the relation which the amount thus terminated in any year bears to the mean insurance in force, and as lapses have been shown to be most frequent during the early years, it follows that a company producing a large new business will show a larger lapse ratio than one writing a comparatively small new business, but with a great number of old policies on its books. The managers of progressive companies, however, consider it their duty to extend the benefits of insurance to the largest possible number of insurants that a consistent regard for safety and reasonable cost to all will permit, and if in doing this pome are attracted who will later withdraw, their withdrawal is looked upon as one of the penalties of progress, but nevertheless a thing to be controlled or avoided as far a possible.
It was at one time generally held that lapsing members exercised an adverse selection against a company in that only those who were in good health would retire and the unhealthy or impaired remain, and that the eventual result of this selection would be an increased mortality experience. While there is no doubt that there is a certain degree of truth in this view, it is unquestionably the fact that the main cause of lapse is financial embarrassment. On the other hand, those who sustain their insurance are the prudent and prosperous, who are generally the most desirable risks, not only because of their ability to pay, but also for the reason that the same qualities of prudence and economy which engender thrift, work to promote their physical well-being also, and their continuance operates to maintain an average mortality as against the adverse selection to which we have referred.
In any honest inquiry into the causes of lapse, our eyes should not be closed to the effect of the improper methods employed by some solicitors to obtain new business. By improper methods, I mean misrepresentation of policy contracts, such as selling a limited payment life contract for an endowment, rebating, twisting a policyholder from one company to another, over-persuasion to assume an obligation which obviously cannot be fulfilled, extravagant estimates, and the like, and they are all prolific of lapse. I do not mean to infer that these methods are peculiar to or are encouraged by any particular company. They force their noxious and unweicome presence into every field.
It is an axiom of our business that prevention of future lapse should begin when the application is written. A company's reputation in any locality depends largely upon the character and methods of its solicitors. Its officers and field managers may be men of high standing and undoubted integrity, but it will be adjudged worthy or otherwise as it is reflected in the work of the solicitor. If the mirror be not true a distorted image will be presented. A solicitor who cheapens a policy he is trying to place by rebating a portion of the first year's premium destroys the confidence of insurers in his company.
We do not know where a recent writer, who is attracting considerable notoriety, obtained his data for the warning which he gives to policyholders not to lapse their insurance, claiming that that is just what the companies desire. Whether conceived in ignorance or mendacity the claim is absolutely false, for not only through the non-forfeiture provision of their policies do the companies preserve the equities of lapsing members, but they strive to prevent lapse by offering every possible aid to continuance, such as temporary notes, premium loans, cash loans and premium extensions. At the present time thousands of southern policyholders who cannot pay their premiums be
TWO RECENT SEARCHING COMPANY EXAMINATIONS.
lncreased Surplus Awarded Both the Northwestern and Penn Mutual — Some Comments Relating to Deferred Dividends.
For all interested in the institution of life insurance, company examinations have, at the present time, an unusual attraction. Ordinarily those actively engaged in the business have a fairly good idea as to how the various companies are prospering, and what individual peculiarities tend to produce in results.
At the close of the year 1904 preparations were made for conducting examinations of the Northwestern Mutual Life of Milwaukee and the Penn Mutual of Philadelphia. The work has been completed and the reports of the examiners afford a refreshing contrast to the undue amount of unpleasant disclosures beginning with the Washington Life overturn.
While everyone was prepared to hear of the splendid condition of the Northwestern, it is nevertheless gratifying to obtain an official statement to this effect as a result of a long and searching inquiry into the conduct of its business.
Condition of the Northwestern Life.
The report shows that the assets are conservatively valued, and on the item of real estate, the appraised value allowed by the examiners is $584,732 more than the company claims in its annual statement. Credit is also allowed for some items of interest which the company had not credited itself with, the result being that the company's surplus is $600,000 richer than claimed on its books.
The examiners praise the skillful conduct of the abstract department; attention is called to the fact that the Northwestern has no money invested in the stock of any corporation, and is therefore not interested in the success or failure of any subsidiary or auxiliary institutions.
Commissioner Host's position on deferred dividends is well known and it was to be expected that he would make some reference to the Northwestern's large semi-tontine fund, which now amounts to $25,780,689. He says:
The company is a mutual organization in the strictest and beat fense. It issues annual and semi-tontine policies. All policyholders of the same class whether they bold annual dividend contracts or seml-tontine contracts, receive the same dividend each year, i. <-., two policy holders aged 30. holding 20 payment life policies, one upon the annual dividend basis and the other upon the deferred dividend basis, will receive each year the same dividend apportionment. In the latter case, the unpaid dividends are accumulated and constitute the tontine fund.
The company permits the policyholder to choose the manner in which he will receive his dividends, and does not require him to make this election until he has had his policy two years and has had an opportunity to learn his own mind in the matter.
Mr. Host finds great satisfaction in the disposition of insurers to choose the annual dividend plan. He says:
"In 1903, of all the policy holders entitled to a first dividend, only 768 took the semi-tontine option; in 1904 only 529 took anything but the annual dividend method of settlement."
The commissioner might have enlightened us as to just how the entire volume of the company's business was divided in this regard
The Northwestern is a purely mutual organization, which permits proxy voting under certain limitations. The charter provision on this point is as follows:
Members of said company may vote by proxies dated and executed within 60 days next preceding and returned to the chief office of the said company for examination and registry upon the books of the company at least three days previous to the meeting of the members of tbe company at which the same, are to be used, but no person shall be allowed to cast by proxy more than 100 votes in addition to the votes to which be may be entitled ai a member of the company on bis own insurance; and no officer, trustee, accent or employe of said company shall act or be entitled to vote as proxy for an absent member.
There has been no examination of the Northwestern prior to this one since 1898. The growth and prosperity of the company are shown by the present inquiry to have fully kept pace with the expansion of the business as a whole, and a wholesome and successful effort to resist many of the demoralizing tendencies which have accompanied this expansion,
Penn Mutual Examination. Three states, Pennsylvania, Massachusetts and Wisconsin jointly conducted the examination of the Penn Mutual. S. H. Wolfe was the examiner in charge and the actuary as he had been in the case of the Northwestern. The work was along similar lines, and the results, except as to the difference in size, followed closely those of the former.
No proxy voting at all is allowed by the Penn's charter, and of course there is no stock. On this point the report says.
It will be seen from this that no proxies may be uied in an election for the trustees of this company, and in connection with this we have the honor to particularly direct your attention to that portion of Article III of the by-laws which provides that none of the officers either appointive or elective shall be the trustees of the company. It is apparent from the records of the meetings of the board of trustees and its various committees that the trustees take an active part in the administration and supervision of the affairs of the company.
The examiners report the result of their appraisals of the real estate owned by the company at $3,429,805, which is $38,700 more than the company valued the property in its annual statement. A special reserve of $1,062,679 has been carried by the company for the purpose of providing the additional amount necessary to place some of its policies upon a higher reserve basis. The Penn issues policies on both annual and deferred dividend plans. Concerning this, the report states:
The question of distribution of the company's surplui was carefully considered, and the examiners are of the opinion that the methods adopted by the company are equitable and based upon conservative premises. The actuary of the company states that :):!' per cent, of the total outstanding insurance is written upon the deferred dividend or accumulated surplus plan.
The Penn is one of the companies whose business has increased at a very rapid rate during the last ten years; the figures derived from a source independent of this examination, showing this to amount to 148 per cent. of the amount in force Jan. 1, 1904. On this subject the examiners simply say that the expense of obtaining new business has been kept at a normal figure. It is disappointing that they did not feel called upon to delve a little deeper here, as their findings would have been highly instructive just at this time.
It is very well known that the Penn is managed in an effective and capable manner and with the strictest regard to honorable discharge of its obligations. It does not resort to bonuses, free excursions or any of the customary devices accompanying largo volume so that whatever might be disclosed as bearing on the profit or otherwise of large volume, would not be complicated by any qualifications arising from matters just hinted at.
The report compliments the company upon its administration of the various departments, finding them well organized and in competent hands, and gives the company a net increase in surplus over the amount claimed of $259,237.
The examination was made in compliance with the request contained in a resolution adopted by the board of trustees on Dec. 7, 1904.
page 28
VICE-PRESIDENT JAMES H. HYDE AND HIS $100,000 SALARY.
The Journal of Insurance Economics has steadily maintained that whatever an investigation of the Equitable Life might show as regards the acts of its first vice-president—James H. Hyde—under no circumstances could evidence be produced demonstrating Mr. Hyde's fitness to occupy this position or to earn the annual salary of $100,000 which he is paid.
President Alexander of the Equitable Life is paid 1100,000 per annum. President John A. McCall of the New York Life receives the same sum. It certanly cannot be contended that Mr. Hyde's services as an underwriter are worth as much as those of these two men.
When George W. Perkins gave his entire time to the interests of the New York Life he was paid $75,000 per year; but this was after a service of 20 years with the company, in which he began as an office boy, working up through the field and into the executive department of the company, until he was rewarded by the position and the salary named. Certainly Mr. Hyde is not worth as much to the Equitable Life as Mr. Perkins was to the New York Life, nor does his experience and service fit him to occupy a position in the Equitable corresponding to that occupied by Mr. Perkins in the New York Life.
First Vioe-President Darwin P. Kinsley of the New York Life receives $35,000 and First Vice-President Thomas A, Buckner $40,000 per annum. Mr. Kinsley has been for 16 years with the New York Life, beginning as inspector of agencies,was promoted to superintendent of agencies, then became third vice-president and finally first vice-president. Mr. Buck ner began at the age of 15 in the field service of the New York Life. Within twenty-five years he has worked himself up to the position which he now occupies. Surely if the services of these men are properly measured at $35,000 and $40,000 a year, the service of Mr. Hyde to the Equitable Life are not worth $100,OCO.
Mr. Hyde does not occupy the position of vice-president through any merit of his own, nor does he earn $100,000 per annum through any service which he renders the company. He holds this office and is paid this salary solely because he owns the majority of the company's stock, controls the appointment of the company's directors who fix the official salaries and who, because of this control, have voted to pay Mr. Hyde the $100,000 per year.
Surely the control of the capital stock of the company by one man in this case, at least, is not a benefit to the Equitable Life, but is being used by the majority of stockholders for the purpose of obtaining from the company, under the guise of services rendered, a sum of money far in excess of anything he is legitimately entitled to receive for such services.
Mr. Hyde, a young man of twentyeight years of age, having served the company for a period of some five years, devoting during those years but a small portion of his time to the interests of the company, showing little concern with its insurance department, yet holds a position and is paid a salary as large as that commanded by the ablest underwriters in the business who have devoted years of their lives to the study and development of insurance problems.
No permanent settlement of the Equitable situation can be made which involves the continuance of this anomalous condition. If the Equitable Life is to hold its place in public esteem one thing, at least, should be done. Mr. Hyde should step down as first vice-president of the company and the salary of $100,000 paid him for his services should be discontinued.
If the payment of that sum is continued to him or his family it should be done openly in the form of a pension voluntarily paid by the company in recognition of the valuable services rendered by the late Henry B. Hyde. If Mr. Hyde continues in tho employ of the company it should be in an office which he is capable of filling and at a salary which properly represents the services he renders. The "divine right" of majority stock control to muict the policyholders under the guise of "services rendered" should not be tolerated.
PRESENT SITUATION IN EQUITABLE LIFE AFFAIRS.
Does the Change in Stock Control Mean lmprovement? — Hendricks' Report and the Reforms which the Situation Seems to Demand.
It is not necessary for the Journal of Insurance Economics to detail the recent history of the Equitable Life investigation, for with it our readers are all familiar, but we will briefly outline it in order that we may properly come to the presentation of such conclusions as the situation seems to warrant.
Beginning with the time of the socalled "Frick" report presented to the directors, the situation in the Equitable Life has steadily improved. This report was searching and unsparing, so far as some of the officers were concerned. It showed fully the operations of the Hyde syndicate, the profits it had made, and in which Mr. Hyde, as well as President Alexander, had participated. It showed the personal extravagancies incident to Vice-President Hyde's office and control of Equitable finances and it criticised also the administration of the agency department under Vice-President Tarbell.
It pointed out the defects of the deferred dividend business and recommended that the new management of the company (the resignations of Messrs. Alexander, Hyde and Tarbell having been recommended) take up and consider a modification and im* provement of this phase of the business. It opposed the writing of insurance under high pressure and called for a change in the methods of making investments
It was an excellent report so far as it went. Unfortunately it stopped short of complete investigation and relieved from deserved criticism some of the members of the committee itself, as well as some of the directors and other officers of the company. For this reason it gave the impression to impartial observers that it was designed to accomplish purposes in which members of the Frick committee, and possibly others, had a more or less direct personal interest. So far as we can analyze the situation that self-interest lay in a desire to secure control of the Hyde stock.
The Frick committee therefore lost an opportunity and made a mistake in presenting a partisan report having back of it the promotion of certain well defined special interests. Nevertheless, the report has contributed to the final solution of the problem confronting the policyholders. The directors of the company made a mistake in attempting to suppress the Frick rrport. Their case would have been greatly strengthened had they, promptly accepted it and given it to the public press.
Following the rejection of the Friok report events moved rapidly. Many directors resigned. The reasons assigned for their withdrawal, together with the attitude of other directors made it clear to Mr. Hyde that he had lost sympathy and support. He thereupon accepted an offer of $2,500,000 for the shares left him by his father and thus passed on the stock control to Thomas F. Ryan. At a subsequent meeting of the directors Paul Morton, ex-secretary of the navy, was elected chairman of the board with plenary powers, and the resignations of President Alexander, Vioe-Presidents Hyde, Tarbell, Wilson and Mclntyre and Financial Manager Winthrop were placed in his hands for such action as deemrd best for the company.
Three of these resignations, those of Alexander, Hyde and Mclntyre, have since been accepted. Mr. Alexander's association with Mr. Hyde in the socalled Hyde syndicate and his acquiescence in if not responsibility for other acts rendered his retention impossible.
Following these changes camo t' ''preliminary" report from Superintendent of Insurance Hendricks covering his investigation into the company's mismanagement. Later on a more complete report will be made covering financial conditions. Mr. Hendricks' report deals with some of the larger features of "grafting" which have become fastened upon the company, particularly in its relation to other financial institutions—banks, trust and deposit companies. Briefly it is shown that this system of grafting was inaugurated by the founder of the company, Henry B. Hyde. The same skill and energy which he devoted to building up the Equitable Life was seemingly directed also to the promotion of his own personal fortunes. This system was continued and enlarged by his son, James H. Hyde, and acquiesced in by President Alexander.
Vioe-President Gage E. Tarbell is cleared by the superintendent from all charges against him on the score of extravagance, rebating, commutation of commissions and conspiracy against Mr. Hyde. Mr. Hendrioks says that the present plan of stock control, while relieving the' situation, does not go far towards restoring the confidence of policyholders. The entire elimination of stock control and what he deems of equal importance, "the elimination of Wall street control," is recommended, the stock, if purchased by the company, to be paid for at a price "only commensurate with its dividends."
The Equitable Life cannot immediately be mutualized but it is likely to become eventually a purely mutual company, either by purchase of the stock by policyholders, by legislative enactment, or by other legal methods which have been temporarily checked by injunction. In the meantime the sale of the stock to Mr. Ryan, the appointment of Paul Morton as chairman and of Grover Cleveland, Morgan J. O'Brien and George Westinghouse as trustees for the stock, authorized to install a majority of the board of directors representing the policyholders, insures a reorganization along improved lines. Mr. Morton is a man of unusual mental and moral caliber. The only blot upon his record has been the alleged charge of violating interstate commerce laws while acting as vice-president of the Santa Fe railroad. Of this charge he has been exonerated by President Roosevelt whose endorsement at this particular time is worth more than the unsupported charges and allegations of Mr. Morton's enemies and opponents.
In reorganizing the executive staff of the Equitable Life Mr. Morton will feel disposed, as it seems to us, to retain some of the officers familiar with its business and responsible for its success. Gage E. Tarbell is the strongest man on the executive staff and in the investigations which have resulted from the present situation, he has emerged with more to his credit than any other officer. He was criticised in the Frick report for excessive expenditures and advances to agents in connection with the agency department. In our opinion the high pressure business transacted by theEquitable Life causes an unnecessarily high agency expense just as it does in the case of the New York Life and the Mutual Life, and we may say also in the case of other companies which, even though they do not do a "high pressure" business, nevertheless think they must pay higher rates of commission on account of the standard set by the big companies.
But we hold the view that in any investigation of any life insurance company today there would be no official who could entirely escape criticism. Indeed, we would go further and say that in any investigation of the detail of any business or of any transaction, whether it be commercial or political, no individual, however honest and well intentioned, could escape criticism for some of his acts, especially if he were, like Mr. Tarbell, a man of force and originality capable of extraordinary accomplishments. Indeed, it would be impossible for any one man or any group of men, or the whole democratic group of people in the country to pick out any one man for any one position who would be entirely satisfactory to everybody or who in every act would precisely satisfy any one.
Therefore, the fact that Mr. Tarbell has been criticised does not render it inexpedient or improper for Mr. Morton to retain his services. If Mr. Tarbell is the strongest executive official in the company and has emerged from this investigation with clean hands, and it is important for Mr. Morton to have some one familiar with the insurance business and capable of holding together the agency plant of the company, he must, as it seems to us, by the logic of the situation and by the qualifications and experience which Mr. Tarbell possesses, retain him for the good that he can do to theEquitable and its policyholders.
In regard to the present ownership of the stock there exists a great deal of suspicion. But as we look at it the question is not so much who owns the stock, who bought it or how much was paid for it, as whether the defects existing under the former management will be changed and the affairs of the company honestly and efficiently administered.
So long as Mr. Hyde held the controlling interest in the stock there was no guarantee of honest and efficient management nor did he exhibit any evidence of a desire or determination to change this situation. Mr. Ryan purchased the stock and immediately put in effect a trustee proposition designed to give the policyholders the controlling voice in the management. In short, Mr. Ryan, as majority stockholder, has done what Mr. Hyde seemed incapable of doing or unwilling to do. Whether proper control has been substituted for control which was decidedly improper time alone must demonstrate, but there are guarantees of good management now existing which were entirely absent before.
The trustees named are not themselves to be the administators of the company's affairs. Their powers are limited by the charter powers of the stock to voting for the directors who shall be responsible for the administration. In short, the task of the trustees is to select fifty-two men properly qualified to act as directors, twentyfour of whom shall represent the stockholders and who may at the same time, of course, represent the policyholders, and twenty-eight who shall represent the policyholders and who might at the same time represent the stockholders.
The selection of the twenty-eight policyholders' directors will be made by the trustees after a canvass of the wishes and desires of all policyholders. In selecting directors nominated by the policyholders the trustees can exercise wide discretion and are not, by the terms of the deed of trust as we understand it, limited to the selection of directors securing the largest number of votes. Policyholders can express their preference by mail.
In conclusion, we think that the Equitable agitation has shown clearly that conditions demand of life insurance:
1. That administrative officers shall devote their entire attention to insurance and shall be so well paid for their time that they may be perfectly free to exercise their honest judgment upon insurance without consideration for the effect that it may have upon other interests.
2. That assets shall be invested solely as the interests of the companies may require and shall not be used in any way to promote other en terprises
3. That all companies shall at least afford applicants an opportunity to choose between deferred and annual dividend policies and that the compensation of agents shall be so adjusted as to make it equally advantageous for them to sell either contract.
4. That the transaction of high
pressure business, with the excessive agency expense incident thereto, shall be discontinued. Reduced commissions will reduce the cost of insurance to the polioyholders and will improve the conditions of the business for the real professional life insurance agent.
5. Complete publicity and increased
detail of accounting which will enable purchasers of life insurance to judge more accurately of actual conditions and insurance supervisors to more quickly detect discrepancies in accounts.
6. Complete restitution by policyholders' suits of all moneys illegally diverted from company assets.
LEGAL PROCESS OF MUTUALIZING THE EQUITABLE LIFE.
There is an abundance of legal power vested in the New York legislature and Superintendent Hendricks to deal summarily and successfully with theEquitable situation. If the charges of malfeasance made against the executive officers in the Friok report are found to be true by Superintendent Hendricks, he can remove said officers forthwith. The law says:
No director or officer of an insurance corporation doing business in this state shall receive any money or valuable thing for negotiating, procuring or recommending any loan from any corporation, or for selling or aiding in the sale of any stocks or securities to or by such corporation. Any person violating the provisions of this section shall forfeit his position as such director or officer, and be disqualified from holding such office in any insurance corporation.
It is quite evident, therefore, that those who retire under these circumstances are out of the insurance business for good.
Another matter has been brought to light by Mr. Justice Maddox's decision in the Lord injunction suit which most people have forgotten, if they ever knew of it. That is that the legislature of New York has the power to revoke the charters granted to insurance and other corporations under authority of the general laws. The power of revocation also carries with it authority to amend or alter or to suspend the operation of such charters.
This provision has been a part of the New York law since 1828; it was repealed in 1890 but re-enacted in 1895. This explains the great effort made to prevent the convening of the New York legislature in special session at this time. Massachusetts has had a similar law since 1830. It provides that every act of incorporation passed since March, 1831, shall be subject to amendment, alteration or repeal by the general oourt. The question of the constitutionality of the act arose in 1839 when the general court of Massachusetts passed an act which repealed the charter of the Chelsea Bank.
In 1855 the first insurance case to test the application of this law was that of the Massachusetts General Hospital against the State Mutual Life. The matter here in dispute was the payment of certain receipts of the insurance company to the hospital under a law long since repealed. The defense claimed that the law requiring such contributions was unconstitutional, as it interfered with the vested rights which bad been acquired under the act of incorporation. The court held that:
All acts of incorporation passed since 11 March, 1831, which contain no express provision limiting their duration, are, by the provisions of the statutes of the Commonwealth existing from that period to the present, subject to alteration, amendment or repeal. The act incorporating the defendants was pasied in the year 1844, long after the enactment of the revised statutes, and was of course accepted by the corporators subject to the provisions of those statutes. This seems to put at rest all further question as to the constitutionality of the statute.
In a later case it was held that a statute requiring a railroad corporation whose charter is subject to amendment, alteration or repeal at the pleasure of the legislature, to erect a station at a place on its road and cause trains to stop there, is not in violaiton of the constitution of the United States as impairing the obligation of a contract. It has also been decided that the right of the legislature to amend, alter or repeal the charter of a railroad corporation includes authority both to withdraw powers granted to the corporation and to confer new powers upon it and require their exercise, and is independent of the assent of the corporation.
It is to be presumed that there is a similar line of cases sustaining the New York law also. It is a fitting reminder that whatever abuses may be found in the present conduct of the life insurance business, they can l:e readily reached through existing means of remedy.
COMMISSIONER HOST'S APPEAL TO THE GAIN AND LOSS EXHIBIT.
A Criticism of His Position as Reported in the Milwaukee Journal.
On another page we reproduce an interview prepared for the Milwaukee Journal by Zeno M. Host, stating his views on the subject of dividends in life insurance. Mr. Host's views have been so thoroughly disseminated since the beginning of his controversy with the Equitable that everyone is by this time thoroughly acquainted with them.
The extraordinary claims and assertions made in the article under review call for examination and comment. It appears at once Commissioner Host takes for granted many facts that are questioned ard debated by experts who have spent a life time in the study and practice of insurance. His reliance upon deductions from the figures given in the gain and loss exhibit as conclusive proof of the soundness of his conclusions, would in anyone less prominent as an insurance reformer be regarded as superficial.
It is a matter for regret that the Wisconsin report is not at hand so that the new items in the gain and loss exhibit might be examined and tbe citations therefrom verified. Enough has been said in the recent issues of this journal to show a disapproval of the claim made by Mr. Host and others that annual distribution of dividends is the one remedy for evils in life insurance, so that part of his argument will be passed over to consider the curious things that are obtained from the gain and loss exhibit.
He says that the reserves and dividends released by the thirty-seven companies operating in Wisconsin in 1905 amounted to $51,747,449; the actual amount given to the polioyholders who contributed these reserves was only $37,752,590, showing a confiscation of $14,000,000 on deferred dividend policies. But the figures
which have been furnished in advance sheets to the insurance journals do not warrant any such conclusion. In the first place, the concensus of opinion about the gain and loss exhibit is that as a whole and in particulars it is unreliable. The state which brought it forth has disowned it, and has discontinued the private compilation which was made for it after the publication in the annual report was discontinued.
Identical items in tbe exhibit are regarded differently in different companies and the information thus obtained is therefore of little value for purposes of comparison. Concerning the item of surrenders it is said that one or more companies throw maturing endowments in with the actual surrenders allowed in order to obtain a high percentage of values paid to reserves released.
When the provisions of the policy contracts are borne in mind, it is difficult to account for the showing which some companies make in the surrender values allowed, especially if the percentages are compared with those of companies which for years have paid large values. Another consideration destroys the strength of Mr. Host's claim. He says the $14,000,000 was confiscated from the holders of deferred dividend policies. Is this so? lu the total figures which make up this sum are included the returns from companies which have never paid deferred dividends, such as the Mutual Benefit, Massachusetts Mutual, Travelers and others. In the case of the Travelers the percentage of values allowed to reserves released is given as 48.04. It is likely that all of this represented stock rate business as the company only recently adopted participating plans.
Now in what possible way is the surrender charge of the Travelers to be connected with the bugaboo of deferred dividends?
Take some other examples of the incongruities revealed in the gain and loss exhibit. The Equitable, according to various utterances of Mr. Host, is the chiefest sinner in the deferred dividend camp, yet the gain and loss table shows that out of $9,529,000, reserves released by surrender and lapse, the company allowed surrender values of $8,353,730 or 87 per cent., while the Connecticut Mutual, which is cited in approval towards the close of the commissioner's interview, only allowed 3 per cent. more. That is if the gain and loss figures are correct the Connecticut Mutual confiscated 10 per cent. of the reserves released by surrender and lapse and the Equitable kept 13 per cent., apparently bringing these two quite close together. Again, the New York Life is credited with paying 83 per cent. of the reserve in surrenders and the Provident Life & Trust 84 per cent. In actual transactions these companies are very widely apart. Again, the annual dividend companies very properly make a surrender charge to the retiring member; in individual cases this may exceed the surrender charge made by a deferred dividend company. From what has been said, therefore, it appears that Mr. Host's claim that with annual distribution of surplus this confiscation of policyholders' equities could not be exercised is not borne out by the facts.
Again, when we analyze the showing of the various companies on expenses and loading we find Mr. Host equally wide of the mark, when he says that the excessive amount for expenses was taken out of the $14,000,000 of surplus confiscated from lapsed and surrendered contracts. Comparing the Equitable with the Union Central this time it is found that while the former company used only 90 per cent. of its loading, the Union Central's expenses exceeded the provision therefor by 14 per cent. The Equitble's saving on loading was $1,465,439; its profits on surrenders were $1,175,276, a smaller amount than the first. With the Union Central, an annual dividend company, the situation is exactly opposite. This company gained from lapsed and surrendered policies the sum of $115,112, while the loss from loading was $181,544. There is but little doubt that deferred dividends have encourged a tendency to extravagance, although even then allowance must, be made for difference of management and different degrees of success. The annual dividend companies differ greatly between themselves in results achieved for policyholders just as the deferred dividend companies do. The attempt by Mr. Host to divide all companies into two groups classified according to the method of dividend distribution and then to show from the gain and loss exhibit that all the excessive expenditures belong to the class he condemns is seen to be a flat failure. All the elaboration of his opening charge can be reduced to the single fact that he doesn't like deferred dividends and that he expects by the vehemence and persistence of his attacks to have his views prevail.
Mr. Host is particularly unfortunate in referring to the Connecticut Mutual. He points out that the company's disbursements have been greatly in excess of its receipts, and says that this has been accomplished by adhering strictly to the annual dividend plan and to the conservatism and economy which such a plan enforces. The real reason why the Connectioub Mutual has paid out more than its premium receipts is because the company does practically no new business; it has less business in force today than fifteen years ago. Consequently there has been no outlay for this purpose. There is also more than one opinion as to the economy of its management and the wisdom of giving over entirely the attempt to gain business. This is not meant in criticism of the company's methods, as time alone can show conclusively where the truly correct course lies, but to disprove Mr. Host's contention that the Connecticut Mutnal's position is due wholly to its dividend methods. How many states will follow his advice to compel annual dividend distribution is a matter for speculation.
In endeavoring to show the fallacy of the Wisconsin commissioner's appeal to the gain and loss exhibit, the weakness of that compilation itself ia developed. Comparison of individual companies drawn from it are wholly worthless and are responsible for much that is harmful and wrong. It is to be hoped that the three insurance departments which now collect and publish the tables which make up the exhibit will see the vicious possibilities contained therein and discontinue the publication.
WILL THE RESPONSIBILITY OF DIRECTORS BE INCREASED?
A Possible Outcome of the lnsurance lnvestigation.
Written For The Journal Of Insurance Economics By W. H. Lawton.
The recent suit brought by the attorney-general of New York against all the directors of the Equitable Life Assurance Society opens an inviting field for speculation. The questions involved interest not only those connected with the Equitable but the directing boards of all life insurance companies. Their solution will undoubtedly greatly affect the administration of every life insurance compiny in the land, stock or mutual.
The demand upon the Equitable directors, it will be noticed, is not only for [money alleged to have been wrongfully taken by certain directors and officers, but also any funds "lost or wasted." The complaint also touches on the question of salaries "improper, and largely in excess of the value of the services rendered by the individuals" receiving them. When the stockholders and directors of a corporation are practically the same individuals, it would seem that they are the only persons concerned in the matter of expenees. If they choose to vote themselves salaries of however great amount it is nobody's business b.it their own as long as the concern is solvent and carries out its contracts with its customers.
In this case the real question at issue is whether the Equitable does belong to its stockholders. If the courts decide in the affirmative, then apparently the suit must fall to the ground, for whatever right the attorney-general may have to intervene on behalf of the policyholders, he certainly has none as tetween the stockholders and directors if the former do not invoke his aid, save, of course and always, when he has reason to believe the laws are being violated. The Equitable as long as it is solvent and is carrying out to the letter its contracts with its policyholders cannot be compelled to submit
the questions of salaries, commissions, in fact its whole control to the attorney-general or any one else. To do so would practically take the company out of the hands of its directors entirely.
Suppose, however, the courts decide that the polioyholders are the real owners of the company, and that the directors are responsible not to the stockholders but the policy holders: that the money alleged to have been wrongfully taken, lost, and wasted must be repaid by the directors—also the excessive salaries. What then?
Passing by the important question who is to be the judge of the fairness of salaries paid, or the necessity of expenses incurred, let us consider the position of the directors. Out of some fifty-two gentlemen it is safe to say not more than ten are at all familiar with the life insurance business. The rest probably do not know the difference between a "loading" and a "surrender value," and would not know a "rebate" if they met one —unless it were presented to them!
These gentlemen have for years attended meetings of the board and heard reports more or less prosy and unintelligible to them on the business transactions of the period just closed. They are assured by the president that the company has made splendid progress and everything is going smoothly and well. The actuary tells them their surplus has increased so much and their mortality is very favorable. The vice-president states that so many millions have been invested in such and such securities, all approved by the financial and executive committees. The second vice assures them that the thousands of agents all over the world are working enthusiastically for the greatest company on earth and that business has been secured at a trifle lower cost than last year owing to his strict economy.
A committee is duly appointed, which counts the securities in the vaults, carefully inspects the balance sheet of the auditor, and reports approval.
As a matter of fact, these worthy gentlemen know absolutely nothing about the company's transactions. How can they? All they can do is to repose trust in their co-directors who actually transact the business and accept their statements. It is too much to expect of any man that he shall attend to his own business affairs for 364 days of the year and on the 365th day grasp the full extent and moaning of thousands of details involving millions of dollars of income and outgo of a business with which he is totally unacquainted.
Unfortunately.however.the law says that a director is supposed to direct. If he accepts the office he assumes the responsibilities attached to it. If some of his co-directors mismanage things he must share the blamo with the rest. This is law and justice. If he does not like the responsibility he need not accept the trust in the first place. But having accepted it he must do his duty and if he fails in that he must accept the consequences.
Very good. We will suppose then the learned courts decide that the thousands of dollars made by certain directors belong to the corporation and must he returned; that salaries paid to some officers have been excessive and the excess in each case must be refunded; that certain "printing, etc." items of expense were not justified and must be made good by those who authorized them. If the individuals responsible for the "lost, strayed or stolen" sums refuse, or are unable to refund them, then each director is individually liable. What effect would a sweeping decision like this have on the directing boards of all the other life insurance companies?
All are in the same boat more or less. Probably the majority of every life insurance directing board in the coun
try are men who are eminent in their various lines (or they would not be elected to the position) but who have absolutely no practical knowledge of the business they are supposed to direct. It would riot be a rash prophecy that within a reasonable time after such a decision had been thoroughly settled and digested by those most interested there will be resignations pouring in upon the various presidents to an extent that will leave most boards without a quorum.
Capital is proverbially timid—capitalists more so! The average man of large affairs has enough to do looking after his own interests. He will not hesitate long between the worry and drudgery of trying to understand all the details of a very complicated business from which he can derive nothing but the grumbling approval of suspicious policyholders, and getting out of it altogether. It will be equally difficult to get new men of high standing to accept the work and responsibility. What then are the insurance companies going to do?
Will there grow out of the situation a class of professional directors who for an adequate salary will devote their time and attention to supervising the insurance companies? Or will the legislatures be asked to permit the number of directors to be reduced so that the chief officers of the companies shall be the only directors? It is a pretty dilemma. On the one hand professional directors will increase the expenses of the companies. On the other it hardly seems just the proper thing to permit a board composed of officers only to fix their own salaries and allowances. In a stock or mixed company the latter difficulty might be overcome by the stockholders, but how could this be done in a mutual company whose policyholders could never even approximate a representative meeting?
POLITICAL CONTRIBUTIONS TO CAMPAIGN FUNDS.
FROM THE JOURNAL OF INSURANCE ECONOMICS, FEBUARY, 1905.
It probably la true that a very large sum of money is contributed by the "bl(? three" to political organizations, but that contribution would have to be f 750,000 in order to represent the same percentage to income as the contribution made to political organizations by the editor of Insurance Economics during the last campaign. We do not believe that such a sum was contributed by the three great companies.
If it was proper for the editor of this magazine to make this contribution, and he would not have made it bad he not thought that it was, and if the money which be contributed was spent in a just cause for proper purposes, as he believes it was, upon what grounds can he criticise these insurance companies for making a contribution to the same cause for the same purpose and with the same results?
Certainly not upon the size of the contribution, for relatively it was not so large as that made by the editor. Not because of the purposes for which it was used, for then the editor would be equally guilty with them. We know that our contribution did not represent a desire or a pur pose to corrupt or debauch legislative bodies, nor do we believe that it has been or will be used for this purpose.
We might criticise them on the ground that they had no right to use the money contributed by policyholders of many parties to advance and promote the success of a particular party. Bat reasoning again from analogy, did we have any more right to use the profits of this magazine gained from patrons of all parties for a contribution to a particular party? And yet we acted, as we think, wisely and well, according to our conviction that the best interests of the country would be advanced and consequently the interests of our patrons.
If the officials of the big three life insurance companies acted from the same motives, we know from self-analysis that they were actuated by a proper and sincere desire. The editor has always found it well, whenever he is assailed with a tendency to criticise big corporations for what they do, to indulge in this kind of self
analysis to determine if these corporations are really doing what be would scorn to do, or whether he is prompted to criticise because they are big and successful and seem to be fair marks for public attack. We feel that too often this latter is the prime motive in the criticism of corporate interests. The corporation being quasi public and exposed to public scrutiny excites attention when really what it does is no different from what is done day in and day out by private business firms.
A REMEDY FOR THE CONFISCATION OF POLICYHOLDERS' SURPLUS.
Interview With Zeno M. Host In The Milwaukee Journal.
In my opinion there is but one remedy for the existing evils in the institution of life insurance and that is: Every state should enact a law compelling life insurance companies to make actual apportionment and distribution of all surplus annually after the second policy year, crediting each policyholder with his equitable share of all such surplus.
The gain and loss exhibit, published in the life report of the Wisconsin insurance department for 1905, shows that the thirty-seven old-line life companies transacting business in this state during 1904 confiscated about $14,000,000 belonging to policyholders holding deferred dividend contracts; that the reserve released by surrender and lapse during 1904 was $51,747,449.85, while the actual amount given to policyholders on lapsed and surrendered deferred dividend contracts was only $37,752.59. With annual distribution of surplus this iniquitous confiscation of policyholders' equities could not be exercised. The gain and loss exhibit also shows that these same companies used during 1904 for expenses over $122,904,496.55, while the loading—that portion of the premium caiculated for expenses—was only $115,789,282.14. In other words, these companies nsed over $7,000,000 more for expenses than was caiculated by their actuaries when the premium rates were determined. This excessive amount for expenses did not come out of the pockets of the management, but was taken out of the $14,000,000 surplus confiscated from lapsed and surrendered deferred dividend contracts; and they might have nsed all of this sum for expenses, for under the laws of the several states—Wisconsin now excepted—surplus is a sum of money for which the officers are accountable to no one.
With a law compelling annual distribution of all profits, the same as is
done by a firm or partnership, the race for bigness, largest amount of assets and largest amount of insurance in force will be supplanted for economy in management and the merit of a company will be determined by its accounting to policyholders.
If the public only knew and realized that out of every fifteen life insurance policies written only one is terminated by death or maturity, and that the average duration of life insurance policies is only seven years, very few deferred dividend contracts would be written.
It certainly seems like folly to permit companies to defer for ten, fifteen or twenty years the return of overpayments and profits, when the average policyholder, taking a twentyyear deferred dividend contract, does not get within thirteen years of a dividend, and never sees a return of his overpayments and share of the profits.
After the supreme court rendered its decision that section 1925 of the Wisconsin statutes of 1898 was permissive and permitted confiscation of surplus accumulations as at present exercised by the officers—which is a breach of trust to the policyholders they represent and is responsible for the perversion of the fundamental principle of life insurance protection at actual cost—some relief was given to future Wisconsin policyholders when the surplus law was enacted during the last session of the legislature.
However, the law as it now reads is not satisfactory, for it permits the officers to defer distribution of surplus for five years. Wisconsin must have a law compelling annual distribution of all surplus; its citizens, as well as the citizens of every state, are entitled to such legislation, but had an attempt been made to pass such a law last winter what success would it have met with, when it is a. f act that the five-year distribution bill received a tie vote in the senate and but for the vote of Lieut.-Gov. Davidson would have been killed, and the officers of these companies wonld have been allowed, for two years at least, to continue an already outlined.
What an annual dividend company can do for its policyholders is shown by the experience of the Connecticut Mutual Life Insurance Company, which in forty-five years received from policyholders over $232,000,000 and returned to policyholders and beneficiaries over $234,000,000. All this has been accomplished by adhering strictly to the annual dividend plan and the conservatism and economy which such a plan enforces. Concluding, I will say again, that every real reform in the business of life insurance can be accomplished only by actual annual accounting, apportionment and distribution to policyholders, and that every state should enact a law compelling life insurance companies to make actual apportionment and distribution of all surplus annually after the second policy year, crediting each polioyholder with his equitable share of all such surplus.
FINANCIAL METHODS OF NEW YORK COMPANIES.
It is evident that the special committee on investigation appointed by the New York legislature intends to probe the life insurance situation deeply and impartially. Indeed, in the present state of public opinion, it could hardly do otherwise. The financial methods of the Equitable have quite passed into the background in view of the inside facts brought to light concerning the operations of the Mutual and the New York Life. The evidence thus far shows that both these companies are likewise influenced by what Superintendent Hendricks designated as the "Wall Street influence," that like the Equitable they both engage in underwriting syndicates, side-line banking and brokerage operations and carry large deposits in "favored" banks.
In short, it is not the Equitable Life which is now in the limelight, but practically life insurance financing as conducted in New York City under the shadow of Wall street.
This question naturally suggests itself: Are the channels of investment sought by the New York companies in what have been regarded as speculative securities, necessary for the proper and profitable investment of life insurance accumulations? In other words, are there enough mortgage, government, municipal and town bonds, railroad bonds, etc., which life insurance companies can procure, to make it unnecessary for them to invest in any other kind of securities.
The editor of the Journal is not a financial expert and cannot answer that question, but as a student of general conditions, he conceives it possible, nay even probable, that the socalled "conservative" investments named are not sufficient to absorb all the assets of all the life insurance companies of this country. That is to say, we take into consideration the fact that savings banks, national banks, trustees and private investors are all seeking the same securities. If it be necessary for life insurance companies to seek investments outside of these "conservative " limitations, the question then arises, Are there any so-called speculative industrial securities which may rank with the conservative securities designated, and become proper subjects of investment for life insurance companies?
We have for some time entertained the view that there were such securities and the idea has already been presented in these columns. Onr opinion is formed from a study of changes and progress in the organization of industry. The obligations of a properly organized industry, dealing with a commodity of general use, carefully managed so as to equalize waste and minimize loss, should present for life insurance companies as safe and profitable a form of investment as the obligations of railroads or mortgages upon real estate. Railroads fail and the value of their bonds depreciate. Real estate mortgages have sometimes to bo foreclosed at a loss. The percentage of loss in the case of the obligations of well established consolidated industries probably would not be any greater than in the case of railroad bonds and real estate mortgages. This investigation, bringing out the fact that life insurance companies, especially those possessing the largest amount of funds,are investing directly or indirectly in what have heretofore been classed as speculative securities, will result in a decided change of public opinion upon this question. In other words,when the atmosphere has cleared we are likely to find that the
conditions in New York life insurance companies, which now seem the subject of so much criticism have been brought about by perfectly natural causes and quite as much from a conviction on the part of those companies that customary channels of investment must be abandoned, as from a desire to speculate with company funds for personal advantage.
No doubt there is a "Wall street influence" in all the New York companies. We do not see how it can be otherwise, for the Wall street idea pervades New York City, indeed it extends its influence throughout the country, touching Congress and the governments of all states. New York is the great financial center of the country, almost of the world, and it is hardly strange that the people who live and work and do their business in that atmosphere should be subject to influences not so likely to apply to managers of life insurance companies at distant points. The fact that the latter are not engaged in the same lines of investment for their companies or for themselves, may not be due to lack of disposition but opportunity.
SUPREME COURT WILL NEVER DECLARE INSURANCE COMMERCE.
Thus Contends Frederick H. Nash, Assistant Attorney-General of Massachusetts.
[Nora— The subjoined address, delivered by Mr. Nash before the National Convention of insurance Commissioners, Sept. 27,1905, deserves careful reading by interested underwriters, both for the information it contains and the manner in which it is presented. At the end of this address will be found comment by the editor of the Journal.]
When the Civil War had demonstrated the power of the Union many intelligent people proclaimed with enthusiasm that, since we wero in truth one nation, state lines in all matters of business ought to he obliterated. Especially in the business of insurance was this sentiment manifest, for insurance, depending for success upon a wide basis of average, naturally spread its range abroad, in advance of trade. The first suggestion that Congress ought to give insurance companies the right to do business all over the country, without restriction from the states, appeared in the Wall Street Underwriter, Nov. 30, 1864, and was based upon the national banking act of that year. In 1865 some of the companies presented a memorial to Congress asking protection from the states. A legal opinion was secured from Charles Tracy, Esq., of New York, that insurance, being the grand protection of commerce as money is the grand agent of commerce, is an essential part of commerce itself, and ought to be regulated and made uniform by Congress. Agitation of the subject was continuous until 1868, when a decision of the supreme court, that insurance was a local not a national affair, seemed to block the way to the change.
Since then the sentiment has occasionally burst forth in somewhat irresponsible discussion by insurance periodicals at the spur of unweicome action by state insurance commissioners, at times incited by arbitrary acts of certain commissioners, who have notoriously held up companies,with the help of state laws giving them vast power, which companies may not easily prove or wisely allege to be exercised in bad faith. It has now sprung into new life, as a result of President Roosevelt's message to the Congress of 1904, in which he said:
The business of insurance vitally affects a great mass of the people of the United States, and Ib national and not local in its application. It involves a multitude of transactions among the people of the dlllerent states, and between American companies and foreign governments. I urge that the Congren carefully consider whether the power of the bureau of corporations cannot constitutionally be extended to cover interstate transactions in insurance.
There is no longer doubt of the advantage to the public and to the trustworthy companies from governmental supervision. The only question is, which government shall exercise the power.
Evils of Present System.
The evils of the present system are real, and are felt not only by the companies, which justly complain of too much government, but also by the fifty state governments themselves. The companies have suffered from unscientific and oppressive taxation and costly examinations, and from the minor burden of making reports to so many states. On the other hand, the people, who are citizens of the United States as well as of their several states, are handicapped in regulating this most important business by the territorial limitations of each state's power.
In most of the states, most of the insurance business is done by companies of other states. The business of insurance is peculiar, in that it does not consist of isolated transactions but of continuous contract relations running through long periods of time. If a foreign company indulges its financial tastes in ways that this state would check, all the preventive power of this state is limited to giving foreign company its choice either to follow our policy or to remove its agencies hence. But a commissioner, though he have all power, will hesitate, except for most cogent reasons, to drive away a company, because its policyholders will be so much inconvenienced if there are no agencies and no way of suing upon future obligations except in a foreign state.
If transactions of insurance by a company outside the state of its charter could be subject to license by federal authority, the menace of restricting the company's business to one state by taking away the license would probably be effectual to prevent future violations of law, and the inconvenience of leaving policyholders to transact business and sue in foreign states would in practice be inconsiderable.
Infractions of a federal law could be punished wherever committed, while infractions of state laws by a foreign corporation often cannot be suitably punished, if the corporation is content to leave the state and has no property within it. A judgment obtained by the state against a foreign corporation in a suit to recover penalties, though in form civil rather than criminal, cannot be the foundation of any proceeding beyond its own boundaries.
Again,under the present system the officers of a company are required to make oath to the truth of their reports to the several states. In the statutes of many states wilfully making a false oath is said to be perjury. How are the pains and penalties of such statute to be enforced? The few who do not shrink from the formality of taking a false oath cannot be punished in one state for a crime against the laws of another state, and the state whose laws are transgressed by the taking of a false oath beyond its jurisdiction cannot treat the transgressor as a fugitive from justice. Falsifying a statement required by federal law, on the other hand, co Id be readily punished anywhere in the United States.
I think it must be conceded that
from both points of view, from that of the companies and from that of the public, restriction of the powers of the fifty state departments each to the domestic insurance business of the companies of its own state, and the establishment for interstate business of one honest, perfectly managed, federal department, divorced from politics, would be a convenience. But such substitution is unattainable.
Why National Control Cannot Be.
It has been suggested from time to time that just as Congress established a system of national banks, outside the jurisdiction of the states, and has made a uniform bankruptcy law which supersedes the insolvent laws of the states, Congress may pass uniform laws for the regulation .of insurance. It is said that uniform insurance laws are as essential to the commercial interests of the country as national banks and uniform treatment of creditors. It may be so. There is, however, no analogy under the law between these matters and insurance. The constitution of the United States provides expressly for bankruptcy, and since it gives to Congress control over the currency and power to borrow money, there is necessarily implied the power to erect banking institutions and issue legal tender notes. The power of Congress in these respects is derived not at all from the power to regulate commerce.
It is beside the point, therefore, to reason from them to insurance, of which Congress can have no control, unless under the interstate commerce clause. Congress cannot establish an insurance company except by allowing one to be incorporated under the laws of the District of Columbia, such a one having no higher standing than a corporation created by the laxest state. The federal government does not need insurance in its business; indeed, it is against public policy for the government to insure its property, as a loss would be distributed among a smaller number of people than if it were allowed to remain upon the whole bcdy of contributors to the support of government. The argument seems to me farfetched, that because insurance companies may loan money to the government, therefore they may be created and controlled by the government, like a national bank.
Unless the business of insurance is commerce, Congress has no more power to regulate it than to regulate state banks, and each state may refuse to admit an insurance company of any other state, and hence may admit it upon any terms that it sees fit to impose.
Restricted Rights of Corporations.
A corporation, though a person, is not a citizen. Therefore it has not the guaranteed right to take up its residence where it chooses within the United States. It may be kept from establishing itself beyond the borders of the state which chartered it, if the other states so determine. This is the law as to corporations in general. But a corporation which is carrying on commerce among the states cannot be kept from transacting a business which is interstate commerce in any state. This is because the regulation of such commerce is left by the constitution to Congress. Congress, then, is the only power which can regulate interstate commerce. In those respects in which Congress has not dealt with it, the doctrine of the constitution is that it must not be prohibited. Short of prohibition, however, the states may in various ways interfere with interstate commerce very seriously, while Congress refrains from regulation. But when Congress constitutionally deals with the subjectmatter theretofore covered by the states, their action is displaced, if in conflict with the law of Congress.
I have spoken of this effect of action by Congress because of the statement sometimes made that the reason the states may now lawfully interfere with insurance between the states is that Congress has been silent regarding insurance. Let Congress speak and declare that the federal government is henceforth to regulate insurance as a branch of interstate commerce, the states must then take off their hands. Such is the argument. It is, however, untenable, for the state laws are chiefly of such a character that they amount to prohibitory regulation, and if interstate insurance is. interstate commerce, they are bad,, even while Congress is silent; and if interstate insurance is not now interstate commerce, Congress oannotmake it such. Whether it is or not is a purely judicial question, in regard to which the opinion of Congress has no more weight in the supreme court than an opinion of the executive. Congress may say perhaps that certain articles, like rum or cigarettes or lottery tickets, shall not be entitled to the advantages of the mails or of public interstate transportation, because the regulation of transportation, which is judicially declared to be commerce, is under its control. But Congress may not say effectually that an agreement to pay a person $100 if he will not drink, smoke or gamble, or an agreement to indemnify one, is commerce.
Position of Court Unchangeable.
The supreme court, the only power that can define interstate commerce with authority, has repeatedly held that insurance is not commerce, and that transactions of interstate insurance do not amount to interstate commerce.
[To support this claim Mr. Nash cites decisions of the United Statessupreme court dating from the first,. tbat of Paul vs. Virginia in 1868.. down to that of Nutting vs. Massachusetts in 1901. The oases cited include also the Philadelphia Fire Association vs. New York, Hooker vs. California, Ducat vs. Chicago, Doyle vs. Continental Insurance Company, Orient Insurance Company vs. Daggs, Allgeyer vs. Louisiana, and New York Life vs. Cravens, in each of which, according to the language quoted by Mr. Nash, the supreme court declared definitely that insurance is not commerce. These citations made by Mr. Nash are important and illuminating, because they show, as has not before been shown in recent discussions, the later conclusions of the supreme court upon insurance as commerce.—Ed.]
Not only iB the principle of the insnrace cases too well settled to be shaken, but, in my opinion, were the question now raiseil for the first time, the result must be the same, by all the analogies which can be brought to bear! Transportation of passengers, of goods, of lottery tickets, of insurance policies, of intelligence by telegraph or telephone, is commerce. The sale and delivery of goods is commerce. The delivery of goods to a resident of this state in pursuance of A contract made in another state is an act of interstate commerce.
But making a promissory note or •drawing a bill of exchange in payment -for the goods is not commerce. The business of dealing in notes and bills us a broker is not commerce. A promise to pay money if the goods are lost or destroyed is not commerce.
No one would contend that a promise of indemnity against unfaithful conduct by an officer is commerce, or that the federal government has any -concern with such a contract made between citizens of different states. 'The fact that a promise of indemnity relates, instead, to a subject of com,merce makes no difference. If it did, we should have to make a distinction between insurance of merchandise, on -the one hand, and real estate, lives and fidelity, which are not the subject of interstate commerce, on the other. The truth is, as I view it, that insurance, like banking and the system of exchange by bills and notes, has grown to be essential to the conduct •of modern commerce, but it is not commerce. The policy of insurance, like a lottery ticket, a bag of gold or a bill of exchange, is a subject of commerce, and its transportation from •one state to another is interstate commerce. Congress can supervise the transportation bat not the insurance company. But the business of making contracts of insurance is no more commerce than the business of loaning money. The loan of money by a New York bank, which is essential to the carrying on of commerce by a New Jersey corporation, would never be deemed interstate commerce by the most enthusiastic federalist. Yet that is the same in principle as the insurance of merchandise in a warehouse which is pledged to secure the loan.
If the contract of indemnity is not commerce, yet it has been suggested that the interchange of reciprocal pecuniary benefits between the insured and the company is commerce, that the transfer of money by the company from New York to the insured in Massachusetts, in exchange for his premiums, is interstate commerce just as the transfer of merchandise sold in New York to a buyer in Massachusetts is interstate commerce.
Broad interpretation Dangerous. Were this to be established as law, no limit to its effect upon the affairs of men can be foreseen. Any interchange of pecuniary benefits between the states must, then, be interstate commerce. A New York resident buys a farm in Connecticut. If the owner lives in Connecticut the purchase is a matter of interstate commerce, while if he lives in New York it is a matter of domestic concern. In the former case, a law of Congress requiring a particular form of conveyance and registry at Washington would be constitutional; in the latter case, the Connecticut law alone would govern.
Or, suppose a testator domiciled in New York gives personal estate to legatees living in various states. The duties of his executor must, then, be transactions of interstate commerce. Congress, then, might enact a probate law, and a law regulating succession in case of intestacy, to apply when property passes from one state to another. Public attention has been often stimulated to a recognition of the evils arising from the variety of state laws regulating marriage and divorce. Now and again a widow has been forced upon the estate of a wealthy decedent by reason of his course of conduct in a state where a common law marriage is valid, though matrimony was not in his thoughts, and persons given to divorce and remarriage are troubled to know in what states the children of a remarriage of persons divorced in certain states are legitimate. A uniform federal marriage and divorce law applicable to interstate relations would be helpful and available in the present migratory period of American life, by the expedient of acquiring a domicile across a state line.
Even if marriage is not commerce within the meaning of the constitution (and commerce was used in such a sense contemporaneously with the establishment of the constitution) the interchange of reciprocal pecuniary benefits and property rights between a citizen of New York and a citizen of Newport,who intermarry, would seem to be as much commerce as the exchange of credits through a bank, between insurance company and insured. Commerce, in a strict sense, depends upon population, which is the end of marriage, quite as much as upon1 irfsurancc.
Court Will Protect State Rights. These illustrations are but a few of many which in my opinion will influence the supreme court in fulfilling what it has declared to be one of its most important vocations, namely, to protect the rights of the states from encroachment by the far-removed central government.todeny the power of Congress to deal with the subject of interstate insurance. Indeed, if the power to regulate commerce extends so far as is claimed, then much might have been omitted from the constitution. This heading, which received only a page of discussion in the
"Federalist," then, becomes sufficient to cover banks, bankruptcy, currency and all kinds of business intercourse between states.
The purpose of the suggested federal action is regulation. To be effective, an act must prohibit transactions of insurance, that is, the interchange of pecuniary benefits of insurance among the states, except by companies which comply with all conditions which it may impose. At present a state may constitutionally prohibit itB citizens from making a contract within the state with any foreign insurance company. The only reason the citizen cannot be prohibited from making such contract without the state is that the laws of a state do not reach beyond its borders; but if interstate insurance is subject to the regulation of Congress, whose laws run throughout the country, it may prohibit the making of a contract with any company except with companies organized in the state where the insured lives.
If Congress may prohibit the interchange of these pecuniary benefits, so it may of many others of similar character. The point here is quite distinct /rum that raised in the suggestion that corporations engaged in the sale of merchandise in one state and its delivery to purchasers in another should be required to have a federal license. The contract for snob sale is a contract of interstate commerce, and its unauthorized consummation may conceivably be prohibited by the power which regulates interstate commerce. But the contract of indemnity to pay money upon the happening of an event cannot, under any circumstances, be interstate commerce, and it would be a curious situation if Congress could prohibit the payment of money between residents of different states in satisfaction of the terms of a contract with which Congress can have no concern. Congress may regulate the express company which carries the money, for the business of transportation is commerce; but, in spite of the decision in the Lottery Case, I venture to believe that it cannot prohibit the transportation of money or credits.
Centralized Control is Revolution.
It is not profitable to discuss what would be the effect of a constitutional amendment, or whether, if the people of all the states were spurred to create in their place one federal state for the purpose of insurance, they might not include within its sovereign and exclusive jurisdiction other matters of business between citizens of different states—abolishing all conflict of laws in matters of contract between parties of different states by authorizing Congress to enact a code of interstate contract law; providing for the service of legal process of any court throughout the United States; requiring national incorporation and visitation of companies whieh are to do business in other states or to manufacture goods for sale in other states; of companies which seek investments outside their own state; providing that the corporations of each state shall enjoy the privileges and immunities of citizens of the several states; regulating marriage and divorce. All these things might be done by constitutional amendment, perhaps by the simple process of substituting the word "intercourse" for the word "commerce" in the present language giving Congress power to regulate commerce among the states. The change which is suggested is in principle a revolution in our form of government, a change to centralization.
Let me consider now what would be the effect of a decision of the supreme court that interstate insurance transactions alone of these kindred matters now left to the states are commerce, and finally, whether there is not a more practicable and beneficial remedy for existing evils than either constitutional amendment or the reversal of a line of unanimous decisions of the supreme court which the champions of federal regulation so cheerfully anticipate.
State Control Should Not Be Restricted.
Suppose Congress regulates the business of insurance between a New York company and its policyholders in other states, and the regulation goes unchallenged or is held to be valid. What power would be left in the states other than New York, in Massachusetts, for example? We may assume that such act of Congress would provide for a license under which the company might enter all the states in the prosecution of its business, such license to be in force so long as the company should comply with the act, and be doomed solvent by the federal commissioner.
The company could establish its agencies in Massachusetts. These, and all brokers and agents acting exclusively for insurance companies of other states so licensed.would be exempt from the payment of license fees to the state because Massachusetts cannot charge for what Congress has given as a right. Massachusetts could not examine into the affairs or condition of such company, but would have to trust that the federal commissioner had done his full duty.
The reserve liability of such a life company might no longer be computed according to the Massachusetts standard. The company's financial condition would be published, based upon such estimate of its future liabilities as the federal commissioner might be authorized to make. Congreas'inight adopt some method of gross valuation, instead of the net valuation required in Massachusetts ever since St. 1856, o. 252, and adopted after most careful investigation by Elizur Wright.
The company might reinsure its Massachusetts risks in any company licensed by federal authority, and the state would have no responsibility in the matter. Massachusetts could no longer require its standard form of fire policy, limit its term or prohibit insurance under a "valued policy." A fidelity or surety company might execute bonds without restraint or supervision by Massachusetts.
Assessment life insurance companies could not be forbidden from attracting the poor of Massachusetts with their cheap and delusive propositions, and foreign fraternal benefit orders,with rates so low that they are at the threshold of insolvency, must be admitted, if Congress should so decide.
The state could tax its domestic companies as usual, but could not impose an excise or franchise tax upon foreign companies. For example, at present all life companies pay an excise tax of one quarter of 1 per cent. upon the net value of all policies held by residents of Massachusetts. The result would be that a foreign corporation holding trust funds for Massachusetts policyholders would be exempt from taxation, while a domestic corporation would not be exempt. Of course, the state could tax directly to its citizens by a property tax their investments in insurance companies, whether domestic or foreign.
Foreign fire insurance companies oould not be taxed a percentage of their premiums.
Police Power Paramount. These are some of the results which must follow a constitutional law declaring insurance to he commerce. Would they be beneficial? Some of them are not of serious concern. For instance, the states can well afford to lose the license fees and privilege taxes, which, indeed, in many instances are oppressive, and rest upon an unscientific basis. The vital point is whether the states ought to yield up, what we have been taught to regard as peculiarly within their police power, the responsibility of determining by their own investigation and according to their own standards what insurance companies are worthy of the confidence of their citizens.
In dealing with these technical and difficult matters affecting the credit of such institutions, large powers of discretion have to be given to some official, whose acts in matters which call for prompt and decisive action and which it would be difficult to investigate in the courts. His duties are far more exacting than those of a national bank examiner. I aver, without hesitation, that the wisdom, discretion and honesty composite in fifty, chosen by fifty states, are more to be valued than the excellencies of one person appointed at Washington. State supervision is good according to the merits of the best of the commissioners. Federal supervision must be good or bad according to the qualities of one man, who is unchecked by the work of coordinate officials.
I believe that we should not look forward with either hope or apprehension to federal supervision. The proposed law of Congress is unconstitutional, and the people will not for this purpose amend the constitution; if the experience of one hundred years has taught us that union is inferior to a centralized government, we will create a federal commonwealth, not centralize insurance supervision alone. But instead of looking to revolution, we ought to hold fast that which is good in state supervision and make it better.
I am hopeful for the future of state supervision. I would not willingly see the responsibility thrown upon the federal government, even if that were possible. But the lull success of our system must depend upon your helpful co-operation with each other. It is the fashion of vituperative insurance journals to call you czars and tyrants. But you should not be independent sovereigns. You can help one another, and, by so doing, better serve your states.
LEGAL OBSTACLES NOT A PERMANENT BAR: COMMENT BY EDlTOR.
Mr. Nash says in substance that the supreme court will never reverse its decision declaring that insurance is
not commerce, that on the whole it is not desirable for state to be superseded by national supervision, and that the remedy for existing evils lies in improved state regulation.
His presentation of the legal phases of the question is the clearest and most comprehensive we have yet seen. Nevertheless we cannot agree with his conclusion that the supreme court will always hold the view that Congress cannot in any way regulate interstate transactions of insurance. Our belief that Federal regulation will in time be established is based upon the view that this form of control is a logical and rational development, growing out of social and economic requirements, and that objections or obstacles based upon legal phraseology or interpretations thereof, cannot permanently prevent the consummation of a project which is beneficial to the people.
Mr. Nash contends that national regulation would not be beneficial to the people because it would represent centralized government and practically break down the idea of a union of states established under the American constitution. We are not prepared to accept this statement of the situation, for in assuming the power to regulate interstate transactions of insurance the national government does not, nor cannot, take away from the states any right to regulate and supervise the transactions of insurance within their own borders. Congress oan deal only with insurance transactions when they cross state lines, just as it does in the case of merchandise, railroads, telegrams and telephones.
As a citizen of Massachusetts we believe that there is no better form of insurance supervision than that which is practiced in this commonwealth, and Massachusetts undoubtedly has an influence upon insurance transactions in other states which might be interfered with if Federal control of interstate insurance were established. Still, as a citizen of the United States, owing a higher allegiance than to the state, we believe that the welfare of the people as a whole would be promoted by Federal regulation of interstate insurance.
That regulation, when established, however, should be upon a plane at least as high as that in the state of Massachusetts (which is by no means perfect) and should not be dictated or controlled by the insurance corporations of New York state, whore supervision is much less rigid and satisfactory than it is in the state of Massachusetts. Federal regulation, established exclusively at the dictation of New York insurance companies, particularly of the great life insurance companies, would be most undesirable. In saying this we do not question or impugn the motives of the officers of those companies in desiring supervision on lines which are particularly beneficial to them, and which will of course relieve Ihem of much of the exacting oversight which, in our opinion, is proper and desirable.
With Mr. Nash's statement that the remedy for existing evils lies in improved state supervision we are glad to agree to the extent of saying that the better state supervision we have, the less strenuous will be the demand for national regulation. It goes without saying that if state departments can overcome the evils of state supervision which have led to the demand for national supervision, there will be no longer necessity for supervision from Washington. But we fear that those evils will not be overcome by the states. Nevertheless, if the agitation for national regulation shall lead to more honest and more intelligent supervision on the part of state officials, then the discussion of the question will have performed an incaiculable amount of good.
In his closing paragraph, Mr. Nash makes use of this phrase: "It is the fashion of vituperative insurance journals to call yon (the state insurance superintendents) czars and tyrants."
The phrase descriptive of insurance journals is unfortunately a truthful one. There is a class of journals which by their savage and unwarranted method of attacking the decisions and actions of state insurance officials have done great harm, and perhaps more than anything else accentuated and increased the evils of state supervision. At a time when intelligent, rational comment was demanded, when the insurance commissioners of the different states needed to be approached by clear-thinking and honest argument, the "yellow" insurance press, incapable apparently of rising to the requirements of the situation, have really put back the wheels of time and interfered with progress.
COST OF MANAGEMENT VIEWED BY AN OUTSIDER.
Walter Wellman in the "Review of Reviews" Contends That the Agency System ls Too Expensive — Comment by the Editor.
American life insurance needs reformation, and that speedily. It is not giving an adequate return for the money which insurants invest in it. This is due not so much to scandals of management like those which have recently come to light as to still more serious economic evils. Insurance costs much more in this country than it should cost—far more than it costs abroad. This is because management is too extravagant and wasteful, and because of certain methods which are fundamentally faulty. Last year the people of the United States paid in premiums amounting to $472,000,100, and the total income of all the companies—every dollar of it the property of the holders of policies, because the interest earnings are simply the increment upon the policyholders' accumulations—amounted to $580,000,000. What became of this golden stream? Into what channels was it diverted? What uses were made of it? Here is the answer in a few lines:
Here we see that of every $100 of income only $41 was paid back to the policyholders, while the actual expenses of management were nearly $22, and almost $24 including the taxes and necessary fees. Thirty-five dollars was carried over to assets or surplus. Inasmuch as the foregoing figures include all the companies in the country, it is only fair to say that the concerns which do a straight "old line" business on a fairly large scale and do not write any "industrial" policies show a somewhat smaller per oentage of expenses to income. Taking the twenty-five leading companies, 18 per cent. would be a fair statement of their expense ratio. This is just about double the cost of management in Great Britain,and it is almost three times the cost of carrying on the government industrial and mixed insurance in Germany.
How the Money Goes.
It is worth while to inquire why the expenses of American management^ should run about twice as great as the expenses of English management for the same line of business. The accompanying table, showing the expense cost of twenty-five leading American companies in 1904, with totals for the two preceding years, will tell the whole story. (See exhibit next page.) "Reckless and Wasteful."
The reader will at once perceive that there is a vast difference between companies. A few companies keep their expense down to about 20 per cent. of the premium receipts, while others run to figures more than twice as great. It must be obvious to any observer that in a life insurance concern which spends such enormous proportions of its income in the carrying on of the business (here is small chance for the insurant to get nn adequate return for his investment. That the business can be carried on at smaller cost is demonstrated by the experience of the British companies, whose expenses run only about 9 per cent. of their total income (against an average of about 18 for the leading American companies), and by the fact that some of our A-nerican companies spend only half as much in expense as others. There is but one phrase which properly characterizes the management which spends 35 or 40 per cent. of premium income in expense, and that is, "reckless and wasteful."
Forcing "New Business." It will be seen upon examination of the accompanying table that about three-fifths of all the expense of American companies is for commissions on new businsss and agency expenses. One of the greatest evils of management in this country is the craze for bigness, the insane rivalry among managers of the largest companies to outdo all competitors in the increase of the amount of insurance in force. To such an extent has this craze been carried that millions upon millions have been virtually thrown away. Agents are stimulated by large commissions and other rewards to go out and drum up business regardless of whether it is to prove profitable to the company or to the insurants, or not. The rule has been,"Get the business at any cost." It is a remarkable fact that for every thousand dollars of insurance in force last year these twenty-five leading companies spent nearly six dollars and fifty cents in their efforts to get more insurance. The average premium paid on all insurance is approximately forty dollars per thousand. Ten dollars of that is paid out for expenses, and of the ten dollars more than six is devoted to the effort to coax in new policyholders. If the commission and agency expenses were cut down to a reasonable figure, and then a vigorous effort were made to reduce the administrative and clerical expense from its present relatively high level, there is no reason why American management should not make a much better showing as to the ratio of expenses to total income when compared with foreign companies. They might not he able to get down to the British standard of about 9 per cent., but they should be able to drop far below their present figure of 18 per cent.
Our American managers, or most of them, are not content to grow slowly, to follow a conservative policy like that pursued by the old Equitable of London, and other conservative English companies. The London Equitable never spends any money for new business. Men who want policies must apply for them, and their applications are passed upon with a view to the desirability of the contract and to the ability of the applicant to carry out his part of it. • Of course, the Equitable has grown slowly, but it has grown solidly; and its income is not squandered in a mad scramble for more policyholders.
Some Significant Figures.
Last year, twenty-five leading companies of the United States wrote $1,250,000,000 of new insurance. The total of their new policies during the last three years is $3,500,000,000, or a billion more than all the insurance in force in the United States twenty years ago. The premiums paid on last year's new business of $1,250,000,000 (or supposed to be paid) amounted to about $50,000,000. How muoh did it cost to get the business? Nearly $43,000,000, or 86 per cent. of the premium receipts. About $32,000,000 went for commissions to solicitors, medical examiners, etc., and $11,000,000 more for established agencies, rents, advertising, printing, etc., after deducting 25 per cent. fairly chargeable to the handling of old business. These are startling figures. The cost of new business is steadily increasing. Two years ago it was only 79 per cent. of the premium receipts. Now it is 86 per cent. If it goes on increasing, in a short time all of the first year's income will have to go for getting the policy written. That is already the case with six of the twenty-five companies, and one company paid out for new business all the money that the new business brought in, and 31 per cent. besides. In other words, money belonging to a man already a policyholder was used to coax another man to take out a policy.
Mushroom insurance.
It is, obvious that life insurance companies, like other business and financial concerns, ought not to stand still. They must grow. In life insurance there is a peculiar reason why new business should be secured. If no new policyholders come in, in time the death claims will reach proprotions calculated to wind up the concern. But in securing growth company managers should stay within the boundaries of reason. There is no sense in expending huge sums for new business that does not "stick," and which therefore is not worth writing. Last year twenty-five leading companies wrote $1,250,000,000 new insurance. But they lost nearly one-half as much through other causes than death or maturity—that is, by surrenders and lapses. In short, thousands upon thousands of men are induced to take out more insurance than they can afford to carry—for the solicitors and agents are eager for commissions— and after one or two payments the policies are permitted to lapse The only gainer by such business is the solicitor, or agent. The company gains nothing, the insurant gains nothing, save that his risk is carried for a year or two years, a return to him worth about one-fifth what he pays for it. Another large class of policies are carried long enough to attain a surrender value, and here the holders get a little more in return when they drop out,though the difference is one of degree, not of principle. Every year, millions of dollars are taken in this way from the pockets of people who can ill afford the loss. Last year, the twenty-five companies actually expended an average of $100 to gain $1,259 of insurance in force; and that $1,259 of "good" business brings the company a net inoome of about $45 a year as long as it lasts. The amount of insurance actually gained per hundred dollars spent for new business is constantly diminishing. Only two years ago, it was $1,513 per hundred dollars; now it is only $1,259. Several companies, and important ones at that, actually show net losses of insurance in force,despite their enormous expenditures for new business. Such companies are on the way to ruin. Yet the state insurance officials scorn to be wholly unable to deal with them in an adequate manner. The mania for bigness, the craze for forcing the business beyond its safe and natural limits, is a tremendous evil in American life insurance; and if the managers will not reform of their own accord the law should interpose and compel them to do so.
The Evil of Rebates.
Another evil incident to this hothousing process is the premium rebate. In some states, rebates are illegal, and policies rebated may be declared void. Theoretically, all managers frown upon rebates. Actually, nearly all companies know that rebates are given by their agents, and they wink at the sin. In one respect the insurance rebate is more to be condemned than the railway rebate. It is given to men who "know the ropes," to smart business or professional'men who are aware that agents are so eager for business that they will cut the first year's premium 30 or 40 per cent., if necessary. Most of these insurants can afford to pay full premiums. But the poor fellows, the mechanics and farmers and others who are not in touch with affairs, usually pay the full premium, which they can ill afford to do. This discrimination in favor of well-to-do insurants and against men of small means seeking to provide protection for their families out of their slender salaries is unjust, indecent, and should be made criminal.
To such a pass has it come in this mad scramble for new business that in every city may be found many men who carry their life insurance simply from year to year. By inducing several companies to bid against one another they secure great reductions of the first-year premiums, and at the end of the year permit their policies to lapse and look about for other companies willing to take them on at the cut rate. In this way they carry their insurance at much less than it would cost to take out policies and maintain them year after year.
An Expensive Agency System.
It is true that most insurance agents and solicitors work hard, and only the more fortunate of them earn large incomes. But there are too many agents in the field; the soliciting business is overdone. Thousands of men who have been unfortunate in other lines go into life insurance soliciting, and most of them find it hard enough to get along. We need throw no stones at the industrious solicitors; just now they have troubles enough of their own. Our quarrel is with the managers who place such vast armies of agents in the field to drum for business, making it difficult for any to do well and rendering it necessary to bolster them up with large commissions on what business they are able to write. The really fortunate men in the soliciting line are the general agents who control certain territory and get a commission on every dollar of business that passes through their offices; who get, not only their first year's commission, but each year thereafter take out 5 to 7% per cent. commission on every renewal premium. There are general agents whose income rises above a hundred thousand dollars a year from renewals alone. Last year, one New York company paid out $750,000 buying np the equities of agents in such renewals. All this money—the first commissions of 50 per cent., usually, the renewal commissions of from 5 to 7% per cent., or the purchase of equities therein—comes out of the pockets of the policyholders. It is not with their own money, but with the money of their members, that the managers satiate their appetite for bigness.
Every one understands that the companies cannot abandon their agency system. They must solicit new business and have the machinery to look after old business. But there should be fewer agencies, with smaller original commissions, and with the renewal commissions wiped out entirely. Managers say that if they were to stop soliciting they would get no new business. They declare it is one of the peculiarities of human nature, at least in this country, that if a man builds a house or a store he will at once seek fire insurance upon it. But the most valuable thing in that store or domestic establishment, the heart and brain and moving force of it—his own life— he will never think of assuring or protecting unless some agent gets after him and beat it into his mind. There may be truth in this; and yet it is highly probable men do not voluntarily apply for life insurance because ;hey have been educated to the present system—the system in which all the initiative comes from the company side. Withdraw that, and it stands to reason that many prudent Americans, believers in life insurance, and a large share of them needing it for special family or business reasons, would apply on their own motion. At any rate, there is somwhere between the two extremes a happy mean of moderation and prudence which life insurance management should endeavor to find.
COMPETlTlON CAUSES HlGH EXPENSE: COMMENT BY THE EDlTOR.
The views prevailing am jng life insurance men relative to the cost of doing business are known to the readers of this journal, but it is well to have outside opinion, even though it may not be thoroughly digested, for after all it is the outside public view working upon and co-operating with the desires of those responsible for inside management which will produce effective reforms.
Mr. Wellman is perfectly correct in his conclusion that the conduct of life insurance is expensive, that the cost should be reduced and that the forcing of new business should be abandoned. All of these contentions have been repeatedly set forth by writers upon life insurance.
But there are difficulties in the pathway and the greatest of these is "competition." In fact, the evils of the competitive system were never so admirably illustrated as [in life insurance, for it has increased and not decreased cost to policyholders.
But competition in life insurance arose out of the repugnance originally shown to the life insurance idea, which created the necessity for education and solicitation. Thus the agent came into the field, and out of the results of this educational work and of evolution and progress, has grown up the heated competition which has compelled (economically not morally compelled) companies to maintain what seem to be extravagant rates of expenditure in the agency department.
Reform in life insurance cost depends primarily upon the elimination of competition in commissions. The way to eliminate competition is by agreement between those engaged in the business. This would apparently constitute a "trust" prohibited, as some contend, by laws enacted presumably in response to public demand. If the insurance companies felt perfectly free to agree among themselves upon uniform rates of commission and conditions of agency employment, the cost to polioyholders could be materially reduced. Would the public approve and supportsuch a step? Or would it ask for additional enactments preventing any agreement tending to reduce the "wages" paid soliciting agents.
It is an interesting fact, not commented upon by Mr. Wellman, that high cost to p'olioyholders results from a "low pressure" as well as high pressure business. In other words, there are normal conditions under which a company should operate—not too expensive or too restrictive— which produce the best results under the present competitive system. For instance, the Connecticut Mutual Life of Hartford has been set forth by some as an ideal polioyholders' company. Mr. Wellman, however, says that the standard of test is the percentage of the premium paid by the company and not utilized for the benefit of the policyholders. If this be true then it makes very little difference how this expenditure is made, so far as the polioyholders are concerned, if they do not receive the return.
The Connecticut Mutual Life is distinctively a "low pressure" company. Each year it transacts hardly enough business to keep its normal insurance in force. Diametrically opposed to this are the "giant" companies, the Equitable,Mutual and New York Life, and yet we find that the total expense cost—that is to say, the percentage of the premium used for other purposes than polioyholders—is greater in the Connecticut Mutual than in either the Equitable or the New York Life, and almost us much as the Mutual Life. Here are the comparative percentages:
Connecticut Mut..26.47 Equitable 25.04
Mutual 28.00 New York Life...24.00
It is true that the Connecticut Mutual spends much less "in commissions and agency expenses" than the three big companies, but its ratio of expense on account of "taxes, fees, etc.," is many times greater, whereas if the Connecticut Mutual, like the other companies, spent more money in its agency department, thus producing steady growth and development, its ratio of expense to policyholders on account of taxation would be materially less.
It is the old story of six of one and half a dozen of the other. A restrictive policy in regard to new business does not produce any better results than an abnormally high pressure business. The best results are secured by a medium course where the growth in new business is healthy and normal.
It goes without saying that the officers and managers of life insurance companies would very much like to reduce the cost of obtaining new business. The same is no doubt true in the main of the general agents throughout the various states and territories. Probably also a great many agents who understand the injurious competitive effects of high commissions upon their own business, would favor lower commissions and as an inevitable consequence, restriction in the number of men employed.
The objection to lower commissions would come from the men who could not earn a living if the present rates were cut in two. And of these there are many. Upon them would come the burden of reduced cost. If the companies should undertake to reduce agency expenses by co-operation, would the public stand with the corporation or would its sympathy be with the small producing agent who is barely able to make a living under the present rate of commission?
As we said, the difficulties are great and not easily overcome. Just as it is extremely difficult for one employer of labor—no matter how benevolently disposed—to increase wages unless his competitors do likewise, so it would be almost impossible for a single life insurance company to materially reduce its rates of commission without suffering a loss of its agency force to other companies willing to pay higher commissions.
There is another way in which reform misht possibly be Secured, namely, by state legislation, forbidding companies to pay a higher rate of commission than the expense loading in the premium will allow. Knowing the excesses to which state legislatures are likely to go when once started upon a wave of reform, we hesitate to suggest this remedy, first, because legislation does not always effect reform, but merely drives people to evasion and subterfuge not previously practiced, and second, because it would be very much better in any event, if this matter could be adjusted and settled without legislation, through the operation of unfettered economic law.
Nevertheless, the state nowadays assumes to do much for the policyholders (as a matter of fact it does very little) and if there is to be legislation designed to improve the expense cost of life insurance on the agency side, we can think of nothing better than a limitation of agency commissions the first year to the loading provided for that purpose, thus prohibiting encroachment for this purpose upon the reserve or the surplus.
One point advanced by Mr. Wellman—a very old and threadbare topic, but always of vital and immediate interest—is that of rebating. Now rebating, whether a cause or an effect of high expense, is inevitably interwoven with the subject and constitutes a form of "graft" participated in by those who are not engaged in insurance themselves, and who, for the favors they accept at the expense of other polioyholders, are just as guilty as company officials who may participate in other forms of graft.
Here again public influence comes in. Is the body politic ready to say that rebates shall not be made to favored polioyholders and that those receiving them shall be equally guilty with those who give them? There are laws today in many states against rebating, but they were put there through the influence of insurance men who desire to eliminate this evil, and were not primarily the outgrowth of any widespread public agitation.
These laws, while possibly helping in a measure to reduce rebating, nevertheless have not cured the evil, partly because it has been found impossible to hold the receiver of a rebate equally guilty with those who give it, for public sentiment does not seem to regard this form of "graft" as praticularly reprehensible. In this fact we find another argument against recommending any form of state legislation attempting to handle the question of agency expense.
There are many small things doubtless which individual companies can do to improve their own business, but no sweeping reform is possible unless all act towards the same end. A company which today undertook to announce a big horizontal out in agency commissions would be accused of playing to the public galleries, and in the public mind this would be confirmed if the management subsequently found that its hopes were ideal, and that it had to let down the bars a little in order to maintain and preserve its business.
Popular judgment is the most fickle and inconsistent factor with which we have to deal in human affairs, but there is a true public opinion, based upon sound common sense which governs largely in all matters and which tends towards steady, though possibly slow progress in all departments of life. And it is to this opinion—which is developed quite as much within the ranks of the life insurance business itself as without—that we must really depend for a final and effective solution of all these great quesions.
BUYING LEGISLATIVE IMMUNITY.
The habit too common with corporations of paying for immunity from adverse legislation has lueh a demoralizing effect upon public service and is so ineffective for the purpose it is designed to accomplish that on grounds of prudence and economy, if not of morals, the practice should be discontinued.
It would be better for insurance companies themselves, for all business interests, for the policyholders and the general public if. acting together or individually, they should no longer capitulate, but should fight the public servants who misrepresent the people who have elected them.
We believe, not from direct evidence or knowledge as to actual contributions, that insurance companies have felt and atill do feel obliged to use money in defending themselves against adverse legislation, but we are very much inclined to doubt if any considerable sum has been spent in trying to secure the passage of legislation inimical to the interests of policybolders.—Journal of Insurance Economics, February, 1905.
ANOTHER OUTSIDE CRITIC ON LIFE INSURANCE REFORM.
[The following address was delivered before the "Commercial Club" of Boston by Louis D. Brandels, counsel for the Equitable Policvbolders Protective Committee. We commend a careful reading to all life insurance men, whether they agree with his point of view or not.]
In spite of the large policies held by a few individuals, the life insurance of this country is in the main held by what we term "the people"—that large class which every system of business and of government should seek lo protect.
Such i.s the direct interest of our people in the proper conduct of the life insurance business—the interest primarily of the home. Indirectly the life insurance business affects our industrial and political life no less vitally and with perhaps even more far-reaching effects. That influence results from the control which the largest life insurance companies exercise over our business and our political institutions by means of the vast accumulation in a few hands of the assets held as insurance reserve, or for deferred dividends or surplus.
We have in the United States many other great aggregations of assets: in manufacturing,mining and commerce, the Steel Trust, the Oil Trust, the Beef Trust; in transportation, the Northern Pacific-Great Northern combination, the Pennsylvania system and the New York Central system. Even in combinations like these our people recognize a menace to our welfare and our institutions. But between the vast combinations of capital in manufacturing or transportation and the accumulation of capital by the insurance companies there is this marked difference—the capital of the manufacturing, of the mining, and of the railroad companies is in the main permanently invested in lands, in buildings, machinery, in rails, bridges or equipment, or is required for operating their properties. The capital of the life insurance companies, on the other hand, is mainly free capital. The great mam'facturing
and transportation companies, great and powerful as they are, are directly dependent for their prosperity upon the prosperity of the country and the service which they render from day to day to the people. Furthermore they are constant borrowers.
The situation of the life insurance companies is entirely different. Except in respect to the growth of their business, they are nof" dependent for their prosperity upon that of the country. Indeed they derive certain benefits in times of adversity. While the securities they already hold are not of a class to be imperilled, they can purchase new securities to better advantage. They are the creditors of our great industries, with all the power which that implies.
Influence of the Great Companies.
When such facts are considered, it becomes obvious why the financiers who control these great insurance companies with their huge quick capital exerise a preponderating influence upon the business of the country. The economic menace of past ages was the church—the dead hand, which gradually acquired a large part of all available lands. The greatest economic menace of today is a very live hand— these great insurance companies which are controlling so large a part of our quick capital.
Such is the power which the American people have entrusted to the managers of these large companies. How has it been exercised? Substantially like all irresponsible power since the beginning of the world; selfishly, dishonestly and in the long run inefficiently. The breaches of trust committed or permitted by men of high financial reputation, the disclosure of the payment of exorbitant salaries and commissions, as to illegal participation in syndicate profits, the persistent perversion of sacred trust funds to political purposes, the co-operation of the large New York companies to control the legislatures of the country, these disclosures are indeed distressing; but the practice of deliberate and persistent deception of the public which the testimony discloses, though less dramatic, is even more serious.
But the management of these companies has been not only selfish and dishonest j it has also been singularly inefficient; and it is by this inefficiency that the policyholders have actually suffered most. The losses of policyholders through exorbitant salaries and syndicate operations, though large in the aggregate, are small as compared with the loss from bad management. The test of success in the life insurance business is of course to furnish insurance of absolute safety at the minimum cost. The size of a life insurance company is no evidence of sucess. In life insurance success is proved by a small pro rata expense account, a large percentage of return upon absolutely safe investments, and a small per cent. of lapsed and surrendered policies.
Business Methods Subject to Criticism.
I have referred specifically to only five of the ninety principal American legal reserve companies, five of which are closely allied with Wall street, which on Jan. 1, 1905, held 56.89 per cent. of the aggregate assets, and which during the year 19C4 wrote 67.42 per cent. of all the life insurance written by the ninety companies. Of the remaining eighty-five some are doubtless managed far less efficiently and quite as dishonestly as any of the leaders; many are, no doubt, managed with scrupulous honesty, and some with reasonable and comparatively great economy; but the methods of conducting the business, particularly of soliciting new business, adopted by the leaders, is to a greater or lessextent,and perhaps necessarily,
followed by the others at the present time. The existing evils are not to be explained by the presence in office of dishonest or selfish men. The causes which produce these rank abuses are general in their operation. The flagrant dishonesty and selfishness of the managers of the three leading New York companies are the result, not the cause, of the abuses. Men of character may, for a time, protect other companies in large part from like abuses, but the main cause of the evils disclosed lies in the system, rather than in the men.
It is obvious that the American people whose atttention has once been directed to these abuses will not suffer them to continue without some attempt at remedy. What are the remedies proposed?
In order to get rid of the abuses, the measures to be applied must be radical and comprehensive. The changes must be fundamental. They are, in my opinion, these:
First. The recognition of the true nature of the life insurance business; namely, that its sole province is to manage temporarily with absolute safety and at a minimum cost the savings of the people deposited to make appropriate provision in case of death, and that since its province is mainly to aid persons of small means—it should be conducted as a beneficent— not as a money-making institution.
Second. The issuance of deferred dividend policies should be discontinued. The legitimate business of a life insurance company is to insure the life of the individual and to issue life annuities. It should not be used as an investment company or as a means of gambling on the misfortunes of others. The deferred dividend policy with its semi-tontine provision is open to these objections and to others. Agents' Commissions Excessive.
Third. Lavish payments for solicitors' and agents' commissions and for advertising devices should be discontinued. Such practices,common among the promoters of mining enterprises and of patents, have no place in the business of life insurance. Savings banks have no solicitors. The life insuring habit is well established. The three million people in Massachusetts hold in the thirty-three legal reserve companies doing business in the commonweatlh 1,337,795 life insurance policies and have only 1,766,614 deposit accounts in our savings banks. The people of the whole United States hold one such policy for every four persons. Undoubtedly many a man has been led by the solicitor's persistence and eloquence to make a thrifty provision for his family. No doubt also the savings bank deposits would be swelled by similar exhortation. But can snch missionary work be justified at an expense of 12 to 20 per cent, of all premiums paid, when the record of lapsed policies shows that the conversion to that thrift is but temporary? No one should be induced to take out a policy when the burden is greater than he can carry or if for other reasons it is not for his interest to do so. The intelligent agent with the knowledge and a recognition of the proper function of the life insurance business, and receiving a modest compensation, has still an economic justification. Many a man needs the impetus to thrift, since wisdom often lags far in the rear of intelligence but as the business is now conducted, money paid by the insured as a result of solicitation is in the main wasted.
Fourth. The forfeiture of policies should be prohibited. Under the level premium system everyone pays each year more than is required for the protection of the single year. He pays something on account of future years. That something ought in every case to be preserved for the insured. The excuse offered by the companies for lapsing is the great initial expense of writing insurance, and that arises mainly from the extravagant commissions paid to agents and for lavish advertising. With the suggested change of method in soliciting, no extraordinary expense would be involved in writing insurance except the fee for medical examination, and that should be paid by the applicant as an initiation fee. The insured should know when he enters upon the investment what the initial cost is.
Standard Policy Forms Demanded.
Fifth. Standard forms of policy should be prescribed by law. This would go far toward preventing deception. By simplifying and standardizing the contracts, in connection with compulsory annual dividends, the insured would be enabled to compare results in the several companies. Today such a comparison is practically impossible. The Equitable has outstanding at least 224 different forme of policy; the New York Life 316; the Mutual Life 220. Standardizing policies would also much reduce the work (and hence the expense) of the business.
Sixth. The investment of the company's funds should be surrounded by safeguards similar to those adopted in the case of savings banks. This would secure safety. This would also go far in preventing the use of funds in speculative enterprises, or to advance private interests, and greatly limit the possibility of the companies engaging in syndicate operations. Investment should not be made in the securities of corporations in which any executive officer or member of the investing committee of the insurance company is interested.
Seventh. Further, to protect the funds of the companies and to prevent their being used directly or indirectly to advance the private or other interests of officers, provision should be mode to prohibit the executive officers from engaging in any other business or holding office in any other corporations. Treasury safeguards should also be adopted to prevent payments without properly authorized warrants.
Eighth. Methods of accounting should be introduced which would compel the entry of all transactions in a single prescribed set of books, and the submission to the directors at all meetings of reports showing in detail the condition and the operations of the company. In such reports the cost of every department of the business and every -kind of business transacted should be clearly determined and disclosed, and likewise the condition, character, and result of each investment. Publicity as to the polioyholders also is essential to insure the proper conduct of the business by officers and directors.
Ninth. The board of dircetors must be composed of men who recognize the proper function of life insurance companies, and who, like the trustees of onr savings banks, recognize the sacred trust involved in their control; men who are willing to give to the companies the time and attention required for the proper performance of a director's duty; men who having the sole responsibility for the management of the society will not delegate to the executive officers or committees powers which the board alone should exercise.
Such comprehensive and fundamental changes must be made if existing abuses are to be eradicated; but even they will not prove effective to protect the insured and the community unless in addition:
Size of the Company Should Be Limited.
Tenth. A limit must be placed upon the size of the company. A company may of course be too small to be an efficient and economical unit, but it is clearly in the interest of the insured that the company be not allowed to expand beyond the point of greatest efficiency. It is clearly in the interest of the whole people that it be not allowed to expand beyond the point of danger arising from concentration of quick capital in the hands of a few individuals. The constitutional right to so limit the size of insuranoe companies is undisputed.
To eradicate abuses—to protect the community—it is essential that the insuring unit be kept relatively small.
You must limit the amount of premiums which it may receive, and the assets which it may hold—as well as the scope and methods of the business.
These in general are the remedies which in my opinion must be adopted to avoid the abuses incident to the life insurance business as now conducted.
What is the alternative? Not the discontinuance or substantial reduction of life insurance; for life insurance has become a prime necessity. Not the continuance of the present abuses; for the outraged and enlightened public opinion will no longer tolerate them. If our people cannot secure life insurance at a proper cost and through private agencies which deal fairly with them, and if they cannot procure it through private agencies except at the price of erecting financial monsters which dominate the business world and corrupt our political institutions, they will discard the private agency and resort to state insurance.
Danger of Government insurance.
Despite your or my protest, the extension of government activity into fields now occupied by private busiuess is urged on every side. Of all services which the community requires, there is none in which the state could more easily engage than that of insuring the lives of its citizens. Stripped of the mysteries with which it has been surrounded, and the misleading devices by which it has been permeated, the business of life insurance is one of extraordinary simplicity. To conduct it successfully requires neither energy nor initiative, and if pursued by the state does not even call for the exercise of any high degree of business judgment. The sole requisite would be honesty, accuracy and economy.
In my opinion the extension of the functions of the state to life insurance is at the present time highly undesirable. Our government does not yet grapple successfully with the duties which it has assumed, and should not extend its operations at least until it does. But whatever and however strong our conviction against the extension of governmental functions may he, we shall inevitably be swept farther towards socialism unless we can curb the excesses of our financial magnates. The talk of the agitator alone does not advance socialism a step; but the formation of great trusts—the huge railroad consolidations—the insured "racers'' with the attendant rapacity or the dishonesty of their potent managers, and the frequent corruption of councils and legislatures is hastening up almost irresistibly into socialistic measures. The great captains of industry and of finance, who profess the greatest horror of the extension of governmental functions, are the chief makers of socialism.
PROPHECY FULFILLED.
In an address to the Boston Association of Life Underwriters in 1890, the late C. C. Hire told an apt story about business getting merely forpurposes of show and with but little regard to perpetuity. He remarked that "human nature is a curious (hing. It is the same wherever you strike it, and the efforts of the companies to rake in this enormous volume of business, and then show such a forlorn and wonderful list of lapses and not taken business, reminds me of an experience of a cousin of mine in New York, who for many years was accustomed to give to an old darkey woman a Christmas turkey. And a year ago this Christmas, the carried around to her a turkey; a very pretty turkey it was; it was large, and the head was cut off, and the feet were cut off and legs tucked under nice and neat; but the old darkey lady looked at it and said, 'I wouldn't give a cent to have a turkey, unless 1 could have the head and feet to throw in the ash barrel, so that the neighbors could see that I had a turkey.'
"And between you and me and the gate post, gentlemen, I think that the ambition of the companies are nol much more worthy than that. They are on a large scale, to be sure, but are inspired by just about the same idea."
CRlTlClSM OF MR. BRANDEIS' FACTS AND CONCLUSlONS.
By Samuel Davis, Associate Editor Of The "journal Of Insurance Economics."
When the publisher of the Eatanswill Gazette desired an article upon the subject of Chinese metaphysics he had his handy man prepare it in an entirely original manner. That obliging writer read all the encyclopaedia had to say under China, then he absorbed all there was under the subject of metaphysics, and by combining what he drew from the two sources he produced the desired matter on Chinese metaphysics.
It would appear that this classic method is much used by current writers and speakers upon life insurance topics, if we may judge from the quality of the resulting product.
The latest effort of this kind is the speech of Louis D. Brandeis, printed in another part of the Journal. Mr. Brandeis is the counsel for the New England policyholders' committee of the Equitable Society. He is an able lawyer, a man of original thought upon economic problems and of the highest type in personal character.
But why should one that can make iron swim teach religion? In what manner do his legal skill and personal probity fit him to discuss the problems of life insurance administration?
The city in which Mr. Brandeis lives can furnish more than a score of citizens eminent in business, professional and private life who by the standing which their personal attainments lent to the business of assessment insurance in its early days, did incalculable harm in aiding the spread of the fallacious doctrines, which their ignorance of the technical side of life insurance led them to accept.
We could afford to pass by without notice the audacious attempts volunteered on every side to tinker the insurance business were it not that these efforts naturally tend to influence and initiate drastic measures by the legislatures. As a rule the members of a legislature need no spur when it comes to devising bills to regulate the insurance business. That is why we so strongly deprecate every act which tends to add fuel to the fire which the "strikers" never suffer to go out entirely.
Having thus relieved my mind of these general reflections I will refer specifically to some of Mr. Brandeis' statements. There is scarcely anything he says which is not wide of the mark and where he does happen to state a fact truly, the effect is destroyed by a wrong deduction therefrom. This is seen at the very outset. He says that the assets of a life company are mainly quick capital. Nothing as a matter of fact is farther from the truth. On the contrary the bulk of the assets must of necessity be invested in funds of a most permanent character, and nothing disconcerts the financial management of the company more than the necessity of reinvesting the assets from time to time as the obligations mature.
Because of the rapid extension of life insurance the income from new business is sufficient to meet the disbursements through claims and withdrawals and leave a balance for permanent investment. What then becomes of the ogre which our critic evolves and thus describes:
The greatest economic menace of today is a very live hand, the great insurance companies which are controlling so large a part of our quick capital?
Again, he says that even more reprehensible than exhorbitant salaries, legislative corruption and nepotism is the practice of deliberate and persistent deception of the public. It is pertinent to ask if there is any other business which has even a small part of the publicity attaching to its affairs and accounts as now obtained in the insurance* business? All other great corporations are practically above and beyond reach of our law and regulation.
For more than a generation we have had actual and successful control in the field of insurance of giant corporations. While the economists wholly ignoring this have been at their wits' end in trying to discover means of adequately controlling corporations in general, and particularly those which may be called natural monopolies, the insurance companies have been subject to the strictest control. This is equivalent to saying that the majority of educated men are densly ignorant of the history, principles and operation of life insurance, and the scope and nature of the states' participation in it.
Mr. Brandeis says that in the long run the conduct of the business has been inefficient. Who is hurt by this extraordinary statement, the business or Mr. Brandeis? Is it such a statement as 11 careful student accustomed to attach weight to his utterances would make, or does it sound like the irresponsible talk of a demagogue, endeavoring to arouse the ire of his auditors?
Take the record of Massachuetts, to which as part of the whole his reproach is directed. No company chartered by the state ever dishonored its obligations nor did any company ever fail while holding a Massachusetts license. Most of the companies antedate the Civil War, which means that they have successfully encountered every economic disturbance which the country has witnessed since that day. Thousands of banks have failed, lawyers without number have abused their trusts in the same period, and but the smallest minority of enterprises established in that day escaped failure—and yet we are told by our critic that the insurance companies have been on the whole inefficiently managed.
But a critic, no matter how flippant and eager, cannot alter the facts. Neither will the beneficiaries, who are legion in number, accept such statements from one who assumes, in the intervals of a busy law practice, to acquire over night, a knowledge of a scientific business to which able men have been willing to devote a lifetime, and from the fancied knowledge thus obtained discuss before a million newspaper readers profound and fundamental doctrines. The freshman nature of Mr. Brandeis' acquaintance with the subject is well shown in the extract which follows:
Lavish payments for solicitors' and agents' commissions and for advertising devices should be discontinued. Such practices, common among the promoters of mining enterprises and of patents, have no place in the business of life insurance.
Savings banks have no solicitors. The life-insuring habit is well established But can such missionary work be justified at an expense of twelve to twenty per cent, of all premiums paid, when the record of lapsed policies shows that this conversion to thrift is temporary?
Answering the question in the last lines, yes. If we were to be assured that the expense of life insurance would never decrease it would still be an economic necessity. And the man who saves his family from want by the purchase of life insurance has cooperated with his co-insurers in a deed of highest altruism, no matter what the cost. I believe the cost of insurmice will be lessened in a few companies which have charged an excessive price for it, but we have had all the while institutions managed with the highest degree of fidelity and skill which have given this protection at its absolute cost.
If Mr. Bandeis thinks the soliciting agent can be dispensed with let him remember the Equitable of London, which after a successful career of 142 years issued in 1903 just 213 policies.
Is his contention true that the lapses show that the greater part of insurance is issued through over-persuasion of the agent'? The record of a company established in 1847 shows that at the present day it still has on its books 46 per cent. of all the business it ever issued, notwithstanding 'the many policies which have matured by death and through termination of the endowment period in that time.
The suggestion is offered that the compulsory adoption of standard policy forms, by lessening the work, would decrease the expense, and we are afforded a chance to smile at the profundity of the discovery. Mr. Brandeis submits ten ways of reform, but why stop with ten? Surely such a facile hand could enumerate twenty methods with equal ease. In the alternative, we are threatened in the event that the business does not adopt these reforms, with government insurance, and are told that:
Stripped of the mysteries with which it h.<* been surrounded, and the misleading devices by which it has been permeated, the business of life insurance is one of extraordinary slmpltrlty. To conduct it successfully requires neliher energy nor inlatlve, and if pursued by the state doei not even call for the exercise of any high degree of business judgment.
Shades of the departed assessment companies! If they could only have been championed by such a valiant arm. The defunct assessment managers always looked out for the expense element, and as counsel of the policy holders' protective committee, Mr. Brandeis, per haps in remembrance of this, is said to have asked a modest contribution of $2 per $1,000 for the committee expenses.
The rapacity of the Equitable management, which was the originating cause of this outburst of protest from the counsel of the protective committee, only succeeded in spending $10.14 per $1,000 for their entire expenses. Which quickly prompts the unregenerate writer to warn President Morton against the extravagance of investigating committees.
The whole tenor of Mr. Brandeis' article is one of drastic condemnation, with a total failure to recognize anything of the beneficial, economic influence which the life companies exercise in distributing over the entire community losses which would fall with crushing effect on individuals.
WELCOME TO OPEN DEBATE A COMMENT BY EDlTOR.
The editor of the Journal does not agree with his associate, Mr. Davis, in his estimate of the value of Mr. Brandeis' contribution to current discussion. What Mr. Brandeis says represents the intelligent public opinion of today upon life insurance, and he presents it from the standpoint of one accustomed to study and mental analysis and to a fair presentation of his conclusions as the result of such study.
Upon his general propositions, as related to the larger economies of the business, he is in the main right. Most of the broader suggestions advanced by him, if adopted, would, as it seems to us, benefit and improve life insurance.
It is true that Mr. Brandeis, with comparatively little study, has undertaken to lead public thought as to the methods of life insurance. When he says that the "business of life insurance is one of extraordinary simplicity," he is certainly mistaken. True it is that the principles of insurance, like the principles of law, are simple, but Mr. Brandeis knows that a clear conception of the principles of law does not come to a man except by the closest study and most complete understanding of detailed cases.
Moreover, when he says that to conduct insurance successfully requires "neither energy nor initiative" he must surely be wrong, for life insurance is distinctly a businesss of energy and initiative, and if it were not required some one would have long since discovered the ease with which it could be transacted and would have brought the simple plan to the people with pronounced success.
Again we think he is wrong when he says that the doing of life insurance does not require "any high degree of business judgment." The whole trend of thought today and the whole development of investigation shows that the transaction of life insurance requires the highest degree of businesss judgment, and where it is not carefully exercised those who are responsible are severely criticised.
The editor of the journal is glad to see Mr. Brandeis and other mcu of reputation engaged in discussing life insurance economics, no matter how wrong they may be in some of their views, for in the long run this open debate will certainly tend to drive home to the minds of the people the very thoughts and ideas and practices for which many life insurance men have long stood and have long sought to impress upon the public mind. The more life insurance is discussed before the public the clearer will be the understanding in regard to the whole proposition. No honest life insurance official or agent will permanently suffer from this public discussion. Temporary injuries may result, probably will, which may possibly be as costly to the policyholders as any system of agency compensation or managerial expense now under criticism.
But life insurance is a democracy, and like a government democracy, the people who participate in it must learn what their responsibility is, where their own errors and lack of judgment contribute to the creation of excessive expense, and above all, to realize that with their own hands, acting in co-operation with those who make life insurance a profession, they may bring about reforms in this great business which will emphasize anew the remarkable contribution it makes to social progress.
FAILURE OF FRATERNALISM.
The Journal of Insurance Economics has for some years called attention to the gradual trend of fraternal associations toward business organizations. With growth comes always the inevitable difficulty of urging the fraternal idea as a reason for collecting the increased assessments necessary for the payment of the full benefit! demanded by the membership.
We find this confirmed by an official within the fraternal ranks. Arthur J. Bates, secretary of the "Royal Society of Good Fellows,"just debarred from Massachusetts by Commissioner Cutting, for insolvency, has this to say:
"The knell of fraternal insurance, as it was understood by those who originated it, has been sounded. The fraternal spirit is passing and the commercial spirit is, with swift strides, taking its place. Fraternal societies must hereafter charge higher rates to live and the only difference between fraternal and old line insurance of the future will be in that item called 'expenses.'"
"Three phrases explain, in brief, the present position of the society. Inadequate assessments, a steady diminution of membership, and a persistently high death rate. To these you might add inactivity and lack of interest on the part of the majority of members, and you have the whole thing in a nutshell.
"If assessments could have been raised early in our existence as a society, matters might have turned out differently. But raising assessments in fraternal organizations is a ticklish business, and one to be avoided if possible. We did levy extra charges, and of course we lost members. As it was, with all the odds against as, during the last year we restricted the growth of the general debt to a little more than $2,000 more than what it stood at the year previous.
"The original purpose of fraternal insurance has been lost to view, and whereas it was primarily an accommodation and protection for the families of members who could ill afford to pay the high premiums of the old-line companies, it has been so tainted by the commercialism of the age as to have usurped the place in our fraternal orders of fraternity and sociability, the very foundation principles of the first orders."
DEFERRED DIVIDENDS WITH PROPER ACCOUNTING ALL RIGHT.
by George E. Ide, President Home Life Insurance Company.
Business which renews is essential to success, and insurance mangers have devoted much thought to the formation of plans to accomplish the conservation of their business. If liberal surrenders are given in case of withdrawal, there must be some offsetting sacrifice by the policyholder who retires, for it must be borne in mind that the selection in matter of withdrawals is always against the company, and some special inducement must be offered to the policyholder to carry out in full his part of the contract.
Hence the deferred dividend plan— by whatever name it may be called. This is, in brief, a plan by which the insured elects, at the time he takes out his policy—and this must be rememlx-red—to allow his dividends to remain with the company until the end of a given period, and to forfeit them in the event of withdrawal or death during that period. He voluntarily chooses this plan; it is not compulsory for him to take it; there is no injustice in it; and he receives additional value in consequence of making the choice. From the stwndpoint of the company the plan is advantageous, as the forfeiture of dividends acts as a check upon withdrawals and promotes the continuity of its business. In the development of the system and in the method of distribution, however, I believe much may be fairly said against the plan as ordinarily practiced. If the applicant agrees when he takes out his insurance to postpone until the end of the period (say ten, fifteen or tweny years) any apportioning of his share of the profits, he submits himself to conditions which may prevail at that future date and to methods of distribution which are not pledged in advance, and he has no guarantee as to what treatment he will receive. New conditions may arise, new methods may prevail which no man can predict. Further, no matter when paid or alloted upon any policy, the dividends are the result of each year's business; and if no accounting is made a constantly growing fund is in the hands of the company, which need not under the terms of the policy contract be divided until the dividend period has expired.
This fund is called "surplus," and is properly surplus under this plan, for no policyholder has any legal claim to participation in or knowledge regarding it until he reaches the end of his particular dividend period. This plan is open to serious criticism; it leaves too large an unassigned fund in the hands of . managers and offers tremendous temptation to extravagant and lax business method—in fact, it is my personal belief that many, I am almost tempted to say most, of the abuses in our business have arisen from these large surplus funds which are the natural and necessary consequence of deferred dividends without any accounting during the dividend period.
EQUITABLE LIFE WILL NOT RETAIN REBATING AGENTS.
Many beneficent results will accrue to the life insurance business from the events of the present year, after the clamor has subsided and the routine once more assumes Ha unsensational course. Tha involuntary house Gleaning will afford opportunities for correcting lax practices and inaugurating new methods to supersede what has been found faulty.
Foremost among the conditions to be bettered, the rebate evil presents itself and its twin brother, twisting. It has been said times without number that twisting is the inevitable accompaniment of rebating, the natural response to it. If so, it should cease in direct ratio with the abandonment of rebates. While probably no company has been entirely guiltless of rebating, yet the largest number of rebates has been given by agents of the large companies.
It is, therefore, particularly gratifying to witness the positive and determined way in which Mr. Tarbell undertakes to purge the Equitable of the practice. It has been commonly supposed, in times past, that his strictures on rebating made in the course of various public speeches have been more or less in a Pickwickian sense. But the language of his recent bulletins to Equitable agents is caiculated to correct any wrong impressions which may exist as to the position of the Equitable's management on this question.
We have always believed that the companies could stamp out the practice whenever they permitted it to be known that sueh was the real intention. As long as one class of utterances are furnished for public eonsumption, while the agents are permitted to guess that they may act on an assumption quite opposed to the public utterance, it is of course farcical to expect any genuine reform. After referring to the Equitable's official rule on rebating, Mr. Tarb:'ll reminds the company's agents:
You are well aware that I have Id letters, circulars, addresses at our conventions, and at all limes and places, most strenuously urged our :'U'-MtM to live up to the letter and spirit of this rule; and I am glad to say that hundred-> of our agents have assured me that they have never given a rebate of any kind since the rule was established and that ibelr business was never before so profitable or so satisfactory.
We shall use every means at our command to see thai the rule is absolutely and rigidly enforced, to the end that Equitable policies shall be sold for one price through 'ut the world, and that price the full premium called for by the policy. We wish it to be plai ily understood that no conniving or winking at rebiting. directly or indirectly, will be permitted, and no agent will be s? important as to be retained in the society's service who violates this rule.
Vigorous words, the concluding sentence, and well adapted to secure the end desired. No agent should feel uncertain after reading them. The thought is still in Mr. Tarbell's mind when addressing his agents a few weeks later, and he means to leave no doubt whatever as to the society's position He wants business.of course, but notice the qualification:
We are now entering upon the best period of the year for life assurance—the last two months. We do not ask you to make a marvelous record in those two months. We ask you only to do the bed you can every day, lo pursue your work with courage and determination, to make the mom of the returning tide of corddencein the Equitable, and to get every dollar of good business that you can, every day, but not a dollar that is not full price.
Cling fast to vour principles in this respect and be vigilant in detecting and reporting to us any violation of the society',* rules in regard to the acceptance of business from brokers, or rebated business. The only way to do a thing is the right way, and the right way is always radical. Not one cent of rebate must be allowed on any policy sold by an Equitable agent. One hundred cents" on the dollar is our price, and we expect everybody to observe this rule, for two reasons: first, because it is right, and second, because we want you to remain with as, and the only way you can do that is by selling Equitable policies for one hundred cents on the dollar.
We believe that Mr. Tarbell can secure obedience to his instructions. We believe that other companies can take similar action with successful results, and we urge the present as a favorable time to do this. Let the executives of other companies inform the solicitors with the clearness and firmness used by Mr. Tarbell, of their intention to stop rebating and it will be stopped. Then they can come into the court of public opinion with clean hands to secure the abolition of twisting.
BOSTON HERALD ON TRIAL.
During the insurance investigation |n New York it transpired that special news despatches were being sent out by a subsidized news bureau in that city, containing matter relating to the investigation, presenting the life insurance companies' side of the case. These despatches were published in leading papers throughout the country as " reading matter," and, according to the testimony were paid for by the companies at an average rate of $1.00 per line. Among the papers which accepted this paid matter and published it as regular news despatches was the Boston Herald.
The Boston Herald had much to say in criticism of life insurance but neither in its news or editorial columns has there been any reference to the testimony above referred to. The Herald hai claimed and steadily sought to secure a reputation for eminent respectability, but of recent years there has been agrowingconvictlon among its readers that this claim was not based on real merit. This opinion is confirmed by the facts developed in the insurance investigation.
Is it possible that the life insurance companies of New York cannot secure the insertion of matter favorable to their interests in the Boston Herald without paying for it at so much per line? Is it possible that the Herald is willing to accept pay for publishing matter as a regular news despatch edited to suit the interests of those who pay for its insertion)1
The Herald cannot remain silent in the face of these disclosures without incurring more criticism than if it attempted an explanation of its extraordinary course.
page 54
NEEDED REFORM IN INSURANCE JOURNAL ADVERTISING.
The methods pursued by the Mutnal Life in the distribution of its advertising patronage to insurance journals is decidedly demoralizing and corrupting. At the life insurance hearing it was testified that in 1904 the company paid $30,000 for advertising in sixtythree insurance journals, the witness stating that it was the policy of the company to patronize them all.
Insurance journalists have long regarded the Mutual Life as one of the most indiscriminating advertisers with which they have had to deal. Such a policy is clearly injurious to the best interests of the journals. We have no doubt that if the details concerning the dispensation of this advertising patronage could be exhibited, it would be found that it was given quite largely to journals which have but small circulation. To these, this subsidy from the Mutual Life must have represented such a large proportion of ^ross income as to virtually and actually incapacitate them from unbiased comment upon the Mutnal's affairs.
The whole attitude of the Mutual Life toward insurance journals has been wrong and the change inaugurated as the outcome of the investigation comes none to soon. To the extent that other companies pursue similar methods they are justly subject to criticism. In this connection we are very glad to quote with approval what the "Spectator," in a recent issue, says of the pernicious influence of "write-ups":
In the course of the testimony before the legis. latlve investigating committee, it was shown that it in a common practice with many of the leading daily newspapers of the country to sell their reading space at a stipulated price per line. \ Special despatches and " write-ups" of all kinds and degrees are palmed otV upon their readers as news, when in fact they are paid for at so much a line, and should be classed under the bead of advertisements. This is a deliberate fraud, a species of special "graft," of which those journals are guilty, and should bring upon them the contempt and condemnation of their readers.
We heartily endorse these sentiments. If there are degrees of comparison to "graft," as the "Spectator" suggests when denominating "writeup" in the dailies as special "graft," then snrely if insurance journals should so far forget their high calling as to themselves submit to the "writeup" habit, the "graft" then can be nothing less than superlative.
CAMPAIGN CONTRIBUTIONS.
The Washington Post of last Sunday printed, under a New York date, what is declared to be an authoritative statement of the campaign fund raised by the Republican national committee during the last presidential canvass and the manner of its distribution. The statement says an approximate aggregate of $1,900,000 was raised and .expended as follows: Remittances to state committees, $100,000; for literature, $550,000; maintaining speakers' bureau, $175,000; for lithographs, advertising, etc., $150,000; salaries and expenses at headquarters, $150,000; miscellaneous expenditures, $50,000; balance on hand, 8100,000. The figures for the SlcKinley campaign of 1900 are given as $2,800,000, and that of 189(1 as §3,800,000. The sum expended by the Democratic national committee for the election of Mr. Cleveland in 18112 is placed at $4,100,000. The article says about 10,000 individuals contributed to the last Republican campaign, of which 40 per cent, disclosed their identity and GO per cent, were unknown. The largest individual contribution was $75,000 or $100,000, the funds being turned in by a member working on one of Treasurer Blisi? committees, who did not know who furnished the money.—Weekly Underwriter.
The editor of Economics was one of the 10,000 and is willing to publicly share the contumely of this association, whether it be with individuals or corporations. The number of contributions should have been at least 100,000, or better still, 200,000. Ten dollars each from this number of men in moderate circumstances would have furnished the $2,000,000 necessary to conduct the campaign. Had more of the critics of corporations contributed, it might not have been necessary for corporations to contribute.
We do not believe that corporations contribute to campaign funds because they want to. But somebody has to, and if it is neglected by the individual small contributor, then of course the big corporations will do it. A bill to forbid corporate contributions to campaign funds will be, or should be, weicomed with shouts of acclaim by every corporation, for it would compel the individual party voter to do his duty in prorlding educational funds. That li where the responsibility should rest.
page 55
LAXITY IN THE SUPERVISION OF INSURANCE DEPARTMENTS.
By Samuel Davis, Associate Editor Of- The Journal Of Insurance Economics.
It is quite apparent from the happenings of the year drawing to a close that much is still to be desired in the design and practical use of the annual statements furnished to the state departments. Manipulation of the items which go to make up these statements seem to have beeen fairly common. The precarious condition of the Washington Life, as an instance, early in the year was not disclosed by the makeup of its annual statement, or rather the method of handling the statement when it reached the insurance departments was defective in some vital particular. Otherwise what appeared to some as unmistakable signs of abnormality would have attracted the attention and analysis which is commonly supposed to attach to the business of auditing.
It matters not what particular variety of red tape induced the somnolence or indifference of the departments to the falsities of this statement, whether interstate comity, fear of reprisals or what not, the resulting inaction looks very much like a defect to the outsider, a defect which there is urgent need to correct. Concerning supervisory departments whose equipment is of the first class, it is not at all likely that the fault is with either the machinery of the department or the skill of those in charge. While the New York department when judged on the ground of its achievements is beneath contempt, such a fall from public respect and confidence was occasioned wholly by its prostitution to the needs of creating ambitious men who constituted a wicked alliance of politics and conscienceless business.
If it be said that this is strong language, it may in reply be averred that any combination of words is inadequate to fittingly characterize the series of revelations which have in cumulative fashion shown the utter inaptitude of the New York department. By the simple act of disclosure alone, these facts have been powerful enough to drive men into banishment, to reduce to confirmed invalidism a respected company president, to change the administration of companies whose executives were supposed to be intrenched beyond the hope of dislodgment, to cause companies to hastily change to annual distribution of dividends, and to precipitate the most violent upheaval of a generation.
For what purpose do insurance departments exist? For the very purpose, indeed, of preventing just the things which have taken place, by giving timely publicity to improper transactions in their inception. Certain departments have done the exact opposite of this; they have either deliberately suppressed damaging information, or connived at a company's evasion by means of a autement false upon the face of it. Given, then, a department controlled absolutely by politics and business greed, having jurisdiction over a number of important companies, tie the hands of honest commissioners of other states by the theory of interstate comity judiciously mixed with suggestions of reprisals, and a condition of all-round inaction is arrived at, which is well contrived to foster the growth of all that is bad.
The writer well remembers the almost open threats which were made to a committee of the Massachusetts legislature by Attorney-General McCarter of New Jersey when matters inimical to the Prudential were under consideration.
Nevertheless, the insurance commissioner succeeded in having the company reduce its deposits in the Fidelity Trust Company. And for this single instance of attempted pressure known to the writer there are probably hundreds of which he never heard. This failure to secure publicity for all the inner transactions of the companies, the lack of which has permitted the growth of existing evils, is directly chargeable to vicious control in some states exercised by politicians over the departments of law and insurance.
They have many times prevented the work of capable subordinates from ever seeing light. It is probably true that correct reports of examinations have been suppressed or altered by the head of a department under complusion of a political "boss," who had been "seen," as the phrase is, by an official of the company under condemnation. The Guarantors' Liability Indemnity Company of odorous memory and the yet un buried Mutual Reserve are cases in point where these things were done.
The effective remedies for all this, publicity and exposure, are now being applied, to the obvious discomfort of the patient. There is need for constructive criticism and comment at this juncture. We believe that the principle of interstate comity has received a shock from which it will not quickly recover, and no commissioner need now accept the certificate by a company's home department as conclusive evidence of its standing, unless it is backed up by other evidence more convincing.
A few prosecutions for perjury would aid in securing a more sorupulous fidelity to truth in making up the annual statements. Furthermore, if the departments were equipped with the office of traveling auditor, the disposition to force balances, when apparent, might be largely overcome. Such an official with his assistants, could be constantly on the road, employed in chocking up the items in the statements from the company's books and records. A publication in the succeeding issue of the department's report of any discrepancies thus found would surely tend to greater accuracy and also prevent deliberate and intentional fraud.
If the requirements of the uniform blank as now formulated are not sufficiently searching to disclose the actual condition of the company reporting through it, they should be made so. Having perfected a blank which will give absolute publicity for the business, the departments should be held to strict accountability for maintaining its accuracy and truth.
page 62
PRESIDENT MORTON ON THE EQUITABLE'S HOUSE-CLEANING.
The new president of the Equitable Life, Paul Morton, has issued an address to polioyholders reporting to them what has been done in the line of reform and improvement since he took the office. He states in the first place that the accounts of the company have been thoroughly examined by independent expert accountants and the assets valued at $416,166,500, of which $67,142,865 is surplus above all liabilities. This includes, of course, deferred dividend surplus as well as general surplus. Both assets and surplus have been reduced by new valuation, the reductions occurring merely on real estate owned by the society or covered by mortgage, and in the stocks owned of some of the financial institutions in which the company has been interested.
Mr. Morton reports that economies resulting in a saving of over $600,000 per annum have already been inaugurated. This, he points out, is four per cent. interest on $15,000,000 and more than covers the marking down of assets.
Approximately one million dollars has been secured to the society through the disavowing of certain liabilities and the restitution of other sums illegally diverted. Advances to agents, amounting to $5,813,184 have been transferred from banks to the company's own accounts, thus increasing the society's interest income nearly $150,000 per annum.
President Morton says that the society hereafter will discontinue political contributions and rely entirely upon its policyholders to protect the company against unreasonable legislation. An effort will be made to confine the investment of reserves to "real estate mortgages or the securities of railroads or other well established corporations, serving those sections of the country which produce the premiums."
President Morton promises no reduction in the gross premium to be collected, but states that he is satisfied that economy of management will greatly increase the value of Equitable policies by producing greater dividends for those who hold them. In other words, that the company will be in a position to give its policyholders, through returned premiums, the "lowest cost consistent with safety." Mr. Morton states that the extraordinary expense to the company incident upon the present investgation is amply offset by the reforms which have been brought about. Moreover he says that the public agitation in regard to the whole question has only served'to attract attention to the impregnable financial strength of life insurance companies more effectually than could have been done by any other means. The utility of life insurance, he says, has been more fully demonstrated than ever before.
In Mr. Morton's closing promise we find the utmost satisfaction, for he says there will be no effort by the new administration to have the biggest company in the world. The effort will be to make it the best and safest. Conservative lines will be followed. It will be the policy not to solicit or secure new business at the expense of the present polioyholders, and in case it is determined that business in any section of the world is unprofitable that field will be abandoned.
Vol. 14. JANUARY, 1906. No. 3.
AN ACUTE RATE SITUATION: INFLUENCE OF AGENTS.
What Might Be Accomplished by Standing Together.
ONCE more the fire insurance body is threatened with a congestion of prosperity Two years of profit have brought to the surface all the slumbering antagonisms. The war chests are being opened, and salaried managers, whose incomes will continue whether rates be high or low, are preparing plans of offence and defence. A prominent company official in a recent conversation said, " I have millions of surplus and can defend myself against any fight which my competitors may put up to me ".
In this high-tide of success the idea of "protecting what is my own" and getting a little more besides is a dominant thought. Excessive profit, oversupply of insurance capital, contests upon the commission question, all tend to make the fire insurance situation acute and critical.
In a time like this the companies and their organizations will have little influence. Local agents, who have everything to lose and nothing to gain by a rate war, general or local, can prevent demoralization if they will oppose it with a firm front. If the sensible agents in each locality will refuse to war with each other, acting only on the defensive against either agents or companies who seek to demoralize the business, they can in nine oases out of ten prevent a rate war, or at least reduce its effects to a minimum.
The moral sentiment of all agents throughout the country, generated through ten years of organized effort, is opposed to rate wars, and the agents in any locality, no matter how remote or small, can feel assured of the support of their fellow agents everywhere. Individual agents or agents in isolated localities do not make their fight alone today.
They have behind them the force of organization. If they will use this power wisely and well the war spirit can be discouraged. They will, moreover, have the support of sensible company officials whom competitive rivalry does not lead to practices injurious to the permanent welfare of fire insurance.
CAMPAIGN AGAINST NON-RESIDENT CUT-RATE BROKERS.
National Agency Association Now Polling Companies Inviting Co-operation and Assistance.
The National Association of Local Fire Insurance Agents has just undertaken the repolling of all fire instirance companies upon the question of overhead writing, and at the same time has made a new request upon the companies to assist agents in preventing the unfair competition of nonresident brokers.
Both requests have been made to the companies in the form of circulars issued by the executive officers of the National Association. The movement grew out of a conference with the companies, brought about by the National Association and resulting in the appointment of a joint conference committee consisting of six company officials and five local agents.
The first meeting of this joint conference committee occurred in New York Oct. 18. At that time the only question taken up was the matter of overhead writing and non-resident brokers. It was agreed that in view of the many changes in companies and company managements since the original poll upon overhead writing in 1898, a new list of those companies opposed to overhead writing should be made up.
Upon the question of non-resident brokers it was recognized that the interests of companies and agents lay in preventing the unfair competition of non-resident brokers who induced tariff agents and companies to accept a part of the line, placing the balance in Lloyds or mntuals at rates considerably less than those to which the risk was subject locally. The committee decided that it would be well for the National Association to secure from all companies an assurance that they would not write any part of the line for non-resident brokers unless satisfied that the entire insurance was placed under the same conditions. As a result of this conference the executive officers of the National Association prepared the circulars, one upon overhead writing and one npon non-resident brokers, and after securing the approval of all the members of the conference committee, company managers and agents alike, they were mailed to all companies. That upon overhead writing advises all companies that the association will publish an alphabetical list of companies which notify the National Association that they will not practice overhead writing, "either in the form of insurance written for property-owners direct, or through agents, or in the form of reinsurance," it being understood, however, that the writing of steam railroad schedules is not classed as overhead writing.
The circular relating to non-resident brokers reads as follows:
There exist conditions in the agency field today which concern both companies and agents and towards which we may properly invite your attention and ask your co-operation. It is found that local agents and the companies they repre -i'm! are frequently placed at an unfair disadvantage in competition with non-resldnt brokers who place a portion of the line with companies or their agents undpr proper conditions, but broker the balance in unauthorized or nonagency organizations under different rates and rules.
In this way, by the use of regular companies innocently induced to write the risk, many lines are being diverted from local channels, where they would naturally be controlled, to nonresident brokers whose competition agents are deterred from meeting by their obligations to the companies they represent.
We are certain that no agency company would knowingly allow its policies to be used by nonresident brokers for the purpose described. In order, however, that the intentions of all com panles in this respect may be properly recorded and appreciated by local agents, we ask an assurance from you that upon risks in the territory of your agents, offered by non-realden brokers, you will satisfy yourself that the whole insurance which they are placing li written or to be written under the rules and conditions to which the risk is subject locally.
This organization pledges itself lo use its bes endeavors to induce all local agents not to wrliu policies for non-rt sklent brokers unless satisfied that the whole insurance placed or to be placed, compiles with the rules and conditions to which the risk is subject locally.
This question of competition from non-resident cut-rate brokers is one which concerns very olosoly the interests of all companies and agents. It is certainly increasing and manifesting itself in new forms. Indeed, so far as the American brokers of some of the London Lloyds are concerned the matter has now become one of direct competition between said Lloyds and American companies and agents. Evidence collected tends to show that there has been formed a combination of London Lloyds, operating through certain American brokerage interests, whose direct purpose is, without requiring a warranty company, to solicit and write American risks at a cut in the tariff rate.
This determination to invade the general American market has been brought about by two causes: First, the diminution of surplus lines which local agents have taken away from resident brokers of London Lloyds which they believed were operating on the cut-rate plan, and second, by the desire of London Lloyds to secure more American business and the realization that they can not do so at equal rates.
The problem is one which cannot be easily or quickly handled on behalf of the authorized companies and American agents, but by patience it may be met. It requires, of course, complete co-operation between agency companies and their local men. It means also that local agents and companies must have a full understanding with large city brokers accustomed to place Lloyds insurance as to their intentions and practices. It may even involve a direct issue with Lloyds underwriters themselves.
If London Lloyds underwriters wish to write American business without warranty and at their own rates, there is no reason why they should not do so, if it can be done legally, openly and in a fair and straightforward manner. This is a kind of competition which, though troublesome at the start, will eventually cure itself, because London Lloyds cannot safely commit their underwriting in this country to brokerage interests concerned solely with commission income. But in the great majority'of cases American property-owners demand standard agency companies and it is to prevent the use of policies issued by these companies and their agents to non-resident brokers whose only object is to secnre a warranty which they may utilize in placing the balance of their line, that this campaign has been started.
By A Member Of The Equitable Policyholders' Committee.
Editor Insurance Economics:
I have been very much interetsed in Mr. Davis' reply to Mr. Brandeis' paper read before the Commercial Club, and your comments thereon. I quite agree with you, that the more the subject of life insurance is intelligently discussed, the more good is going to result from the present situation, and on that account I thank you heartily for publishing Mr. Brandeis' remarks.
I think our genial friend Davis misinterprets. For instance, I don't think that Mr. Brandeis or anybody else is advocating any "strike legislation." But does Mr. Davis contend that the recent developments in the three New York companies are not proof positive that the officials of those companies cannot safely be left to handle the fnnds at their own discretion, and that in their case at least restrictive legislation is necessary?
If Massachusetts companies, for instance, are handling, as I believe they are, their assets judiciously and economically, and not."kiting" on the "street," as our New York friends have, such restrictive legislation won't effect them in the slightest. The penalties that the law imposes against the ordinary, everyday form of stealing don't, affect you, or Mr. Davis or Brother Brandeis to any extent, except as it may insure your safety when you are out late nights.
Now a word as to the intricacy of the business. I understand Mr. Brandeis refers in this to the "underwriting" purely. Now after more than forty years' experience in the business, which has been principally devoted to fire, but incidentally the marine branch has come in, and also the life, I say unquestionably the most intricate branch of underwriting today is marine. No two risks are alike; no two voyages are alike, and the man who can intelligently "size up" the hazards of a certain passage, taking into account the seasons of the year, the character of the vessel, the character of the master and the nature of the cargo, and discriminatingly make his rates, is the best underwriter in the world. The proof of this is, there are very few of them. There is not one successful marine underwriter where there are a hundred fire.
Then next comes the fire. There is in the fire business a great opportunity for discrimination in the selection of business and room for the exercise of good judgment in making rates, but I fail to see where to any extent that comes in in the underwriting of a life company. The premium is determined by an absolutely mathematical process. The average death rate in a thousand lives is known. That makes the pure cost. The loading for expense is easy; there is your rate. In the selection of the risk in - medical examiner dops it all. The life is a good one or it is a poor one. Life companies like marine do not "shade" the rate according to the character of the risk. They either take it or reject it. That does not require vast talent.
Now when you come to the organization of a company and the building np of the business, I grant you that the life business requires a certain talent entirely different, and perhaps of a higher order than is required in building up either marine or fire companies, and that such talent when it is found is deserving of high pay. Note, for instance, the organization of the "Columbian Life" in this city. The ingenuity and brains,the personal magnetism and the hard work that have put that comj any where it is now is worth a McCurdy salary, but please note that the same brains that runs the company doesn't allow any such extravagant salary, and it probably won't until the company has long passed any possible experimental stage.
Again, on this question of agencies. Nobody wants to do away with the agent in life insurance. It cannot be done. A company cannot bring its wares to the door of every man even if no solicitation was necessary, but is it necessary to maintain such enormously profitable general agencies as have been disclosed in the New York investigations? Possibly the expenses of the "Equitable" have been only $10.14 per $1,000, but if any part of this, even only the odd fourteen cents, has been wasted, isn't that departing from "the beneficial, economic influence" which the life companies should exercise?
Again, why this incessant criticism of companies because they are small? Why is the old Equitable of England held up as a failure because its business is not as great as it was 130 years ago? Because it only issued 220 odd policies last year? I contend that if it issued 225 policies only, and had undoubted, absolute security behind these policies, and issued them at a lower cost to the assured than any other company, it is thereby the best company, and that the best company certainly is the company which furnishes absolute security at the least cost, not the company which by an extravagant expenditure does the largest business.
Unquestionably, size, to a certain extent, is an element of strength, in equalizing the average of the companies' business, and in providing a revenue large enough, so that the necessary office expenses do not make too large a per cent, but size may be carried to an extent where it becomes an element of weakness. A well-nurtured, robust frame is indicative of a good life insurance risk, but we all know that over-weight is recognized as a cause for rejection of the applicant in a great many cases. It is also true that over-weight is a bad feature in a company sometimes.
Yours very truly,
George P. Field.
page 86
Is the Reign of "Personal" Journalism About To End?
From The Chronicle, N. Y.
Many of the exhibits which were put in at the close of the life insurance investigation on Saturday last will prove, when they are made public, to be more interesting to life insurance men, than the matters contained in sensational headlines in the daily papers have been in many cases. One of these which is sure to create a sensation among underwriters and especially among insurance journalists, is the schedule of expenditures in the past five years by the Mutual Life, the Equitable and the New York Life for advertising, and otherwise, in connection with journalism.
Full schedules of these were supplied, many items being read aloud by Counsel Hughes. These items included payments to a political editor of the "New York Sun," and other journalists, and especially large sums for advertising, passing through the hands of favored individuals; and they also included the payments for advertising and otherwise, to insurance journalists and their editors. The record is not a pretty one in this regard.
For instance, the New York Life during 1904 paid the "Insurance Field" of Louisville but $156 for advertising and subscriptions; although that paper is recognized by observant insurance men as one of the best publications of its kind in the country, both from a news and an editorial standpoint; being fearless and fair in its presentation and treatment of current happenings. It is also known to have a very large paid circulation, and it is a paper which is opened and read by its subscribers. Both from the standpoint of the merit of the journal and of its value as an advertising medium, it should have been liberally patronized.
The other side of the picture is, that from ten to more than twenty times this amount was paid to favored journals—among which may be mentioned "Insurance," "The Vigilant," and the "Baltimore Underwriter"—which are not widely read—have been of little value of late, and in many cases are purely personal affairs. To be sure there are upon this list other papers, which have a good circulation, in part because of the subscription for a large number of copies by the New York Life and other companies; but the general record will not bear scrutinizing.
It is to be hoped that the new management of these offices will turn over a new leaf in this regard; that they will appreciate honest criticism, and fair though at times caustic treatment, and will refuse to encourage what may be called personal as distinguished from impersonal journalism. Especially should everything that looks like subsidization be exterminated and the advertising be placed with direct reference to the merit and honesty of the editorial and news management of the insurance papers, and to the value of the advertising itself.
"The Chronicle" under its present management has from the beginning refused to accept advertising on any other basis and, without intending any discourtesy, we may state that from the beginning of the legislative investigation we steadfastly declined to print paid replies or explanations concerning measures there disclosed.
WORK OF PROTECTIVE COMMITTEE OF EQUITABLE POLICYHOLDERS page 90
A Movement Which Has Earned Public Confidence and Proved lts Capacity for Satisfactory Work.
Of all the movements started since the Equitable disclosures began, none have deserved greater public confidence than the "Protective Committee of Policy holders" organized in Boston April 18 and originally formed as a New England committee. Afterwards, owing to interest shown by policyholders of other states, the committee was reorganized Hs a "general protective committee." Still later the interest of foreign policyholders was recognized by the addition to its ranks of Sir William Mather, Member of Parliment from Manchester, England. The other members of the committee are William Whitman, Arthur Amory, George P. Field and Edwin H. Abbott, all large policyholders and well-known business men of Boston.
Louis D. Brandeis was selected as counsel. No better choice could have been made. Mr. Brandeis not only stands at the head of the Boston bur, but has on many occasions shown his disinterested concern for matters of public interest. He is a lawyer who can be trusted to do this work for the policyholders of the company without regard for the emoluments which may or may not come to him.
The protective committee has shown from the start a desire to proceed in its work with caution and conservatism.
Its influence, therefore, upon the company's affairs in this crisis has not only been felt but has been positively beneficial. One of its members, Mr. Whitman, has been elected a director and the committee, at the request of the trustees of the stock, has submitted for their consideration the committee's views as to the future conduct of the society.
They are worth reading and are published below in full:
At the conference held June 27, 1905, between yourselves and Messrs. Whitman, Field, and Amory of our committee, and our counsel, Louis D. Brandels, you requested that we submit to you in writing the substance of the views as to the future management of the Equitable Life Assurance Society which we had expressed to you orally on that day. This we now do.
First. The sole aim of the society should be to furnish insurance of absolute safety at the smallest possible cost. The ability to do this must be the test of success. Efforts to secure a large amount of new business or to increase the assets controlled by the society are justifiable only so far as they subserve that end.
Second. In order that insurance of absolute safety may be furnished at the smallest possible cost, radical changes in system must be introduced. The mere substitution of other officers, however scrupulous and efficient, or the discontinuance of particular extravagant or illegal practices, or the recovery of profits wrongfully diverted, will not suffice.
Third. In order to secure insurance at low cost the society must, in addition to other economies, discontinue the lavish payments for agents' commissions and for advertising — practices common among promoters of mining enterprises and of patents—and substitute therefor methods more nearly following those of the great savingsbanks and the mill mutual insurance companies. No benefit can result to policyholders from the mere increase in the volume of business. The conditions in a great life assurance company are wholly unlike those of railroad or manufacturing coneerns, where increase of business naturally tends to reduce the cost, because there are fixed charges to be distributed against the total earnings. The conditions in a mutual life insurance society, like the Equitable, are also wholly unlike those in ordinary private business,wbether incorporated or not, where the increase in volume may tend to reduce the cost to the public, because the owner of the business is content to accept a less per cent, of profit on the output in order to secure a greater aggregate profit, resulting from larger gross receipts. In a life insurance company already large, new business obtained at high cost must necesiarlly prove a burden to existing and future policyholders.
Fourth. A mutual life insurance society should, as to each policyholder, be conducted as a benevolent institution. No one should be induced to take out a policy unless it is advisable to do so in the interests of those whom he desires to protect by it. No one should be lured into becoming a policyholder. The fact that in Hun. a year of general prosperity, 33,354 policies lapsed, when the average number issued in the two preceding years was only 112,139, indicates H'''t a very large number of persons were at least ill-advised when they took out insurance in the society. The fact that 22,220 policies, aggregating 181,649,311 duly applied for, passed, written, and entered, were not taken by intending policyholders, indicates the high degree of persuasion which must have been exercised by the society's agents or solicitors. In addition to to the 33,354 lapsed policies, there were in 1904 also 9,691 policies, aggregating $34,309,929, surrendered, while only 11,279 policies, aggregating 933,866,917, came to a natural termination by death, maturity, or expiry.
The relation of the society to intending policyholders should obviously be not only free from active deception, but should be characterized by complete frankness. Unfortunately, this obligation has not been observed in the past, as is shown among other things by the advertisement of a surplus of over 380,000,000, without disclosing that the greater part represented deferred dividends.
/• Fifth. The issuance of deferred dividend ; /policies should be discontinued or greatly llml'ted. The legitimate business of a life insurance \ company is to insure the life of the individual and to issue annuities. It should not be used as an investment company or as a means of gambling on the misfortunes of others. The issuance of policies on which dividends are deferred for long periods seems to be open to both these objections. It is clearly open to other objections. It tends to extravagance and inefficient management, because it removes the protection which flows from publicity and annual accounting. The annual declaration of dividends, the best practica-1 test of the efficiency of the management, is denied to the policyholders. It vests also in the management the control of huge funds not required as an insurance reserve, with the temptations incident thereto.
Sixth. To insure safety the investments of the society should be surrounded with the legal safeguards as to the character of investments now supplied in case of savings banks. The funds held by life insurance companies are held for purposes in the main similar to those for which savings banks exist, but the safeguards applied by law as to the character of savingsbank investments are lacking in the case of life insurance companies.
Seventh. Further to protect the funds of the society and to prevent their being used directly or indirectly to further the private or other interests of officers, provision should be made to prohibit the executive officers from engaging in any other business or holding office in any other corporations. Treasury safeguards should also be adopted to prevent payments without properly authorized warrants.
Eighth. Methods of accounting should be introduced by which the directors may be kept advised at all times in detail of the conditions and the operations of the business. The cost of every department of the business and every kind of business transacted must be clearly determined and disclosed, and likewise the condition, character, and result of each investment. Publicity as to the policyholder also is essential to secure the confidence of the public and to ensure the proper conduct of the business by officers and directors.
Ninth. In order that the above recommendations may be not only introduced, but properly carried out and maintained, the complete inuiualizatlon of the society is necessary. It should be brought under the absolute control of the policyholders.
Some of the views held by the committee relative to life insurance will no doubt be modified by subsequent investigation,but they are in the main sound and its work should be encouraged not only by policyholders but by insurance men as well.
The protective committee will be continned, as it should, and its work will no doubt receive increased support from policyholders whose interests it is so well equipped to serve.
C A L L I N G B U L L S H I T !
page 91,
THE MOTIVES AND PURPOSES OF FINANCIER THOMAS F. RYAN.
From The Outlook, New York.
A careful study of all the facts justifies the belief that the reorganization plan is a sound one, and that Thomas F. Ryan, who devised it and who has carried it into effect, deserves the approval and support not only of policyholders of the Equitable, but of all men throughout the country who believe in the stability of the banking system. For upon the banking system, in the last analysis, rest the material prosperity and comfort of every thrifty citizen,be he mechanic,farmer, school teacher, clerk in the general store, country doctor, capitalist, newspaper editor, or laboring man. We shall here endeavor to state the grounds for our approval of Mr. Ryan's plan. For several months the Equitable Society has been torn with dissensions which have threatened to disrupt and ruin it. While it is primarily an insurance company, it is in reality a great savings corporation, with assets amounting to over four hundred millions of dollars, and with an annual income of about eighty millions of dollars. Several hundred thousand policyholders have been putting their savings into its treasury annually for many years. To have such a gigantic savings bank come to financial ruin not only would mean disaster to an army of policyholders, but might precipitate a panic which would affect banks and bank depositors—that is to say, every thrifty and industrious citizen—to the remotest parts of the country.
Is it not a great public service to avert such a calamity as this? We assert that it is. We assert that a broad minded, public spirited, and patriotic banker may take the same unselfish and altruistic interest in accomplishing such a splendid salvage that is taken by the statesman who by brilliant and able diplomacy averts war, by the expert surgeon who saves a valuable human life by a capital operation, by the physician who averts an epidemic by a strenuous campaign of hygiene, or by the newspaper editor who sacrifices his popularity to maintain a political principle which he believes to be for the public good. Of course the diplomat wishes to earn his salary, the physician to be paid his fee, the newspaper proprietor to receive his dividends, but that does not make the public spirit any the less commendable.
In our opinion, Mr. Ryan, vice-president of the Morton Trust Company, of this city, a successful railway promoter, at the present time powerful if not dominant in the affairs of the traction company which controls all the surface street railways of New York City, and the successful originator of the Equitable reorganization plan, has done his work in this reorganization from motives of public spirit and public service. This, of course, is merely our opinion. We do not profess to know the inner workings of his mind and spirit any more exactly than do those who ascribe to him motives of selfishness and money grabbing. But we think it is time to say plainly that poor men are not always necessarily, by virtue of their poverty, public-spirited, nor are rich men always necessarily, because of their riohes.mean and untrustworthy.
However difficult it may be to judge of a man's motives, his public acts are matters which his neighbors may discuss and define. In the present instance the facts are well known. Mr. Ryan, for the sum of $2,500,000, has purchased from Mr. Hyde a controlling interest in the stock of the Equitable Life Assurance Society. He has organized a "voting trust" consisting of three unimpeachable and public-spirited trustees, ex-President Grover Cleveland, Judge Morgan J. O'Brien, and George Westinghouse. The stock which Mr. Ryan has purchased he has placed in the hands of these trustees for five years, the longest period that such a trust is permitted by the laws of the state of New York to exist without renewal. "The trustees are exclusively authorized"—we quote from the trust deed—"to exercise the voting power on the stock held under this agreement for the election of directors of the society, and shall at every annual election of directors of the society so vote on said stock. . . .that of the entire fifty-two directors twenty-eight shall be policyholders of the society, selected by or on behalf of the polioyholders, and twenty-four shall be lawfully eligible persons selected by the trustees in their sole discretion."
We have carefully read the trust deed from which this provision is taken, and it seems to us that it is framed for the express and exclusive purpose of putting the property and interests of the polioyholders of the society into the untrammeled and untied hands of a board of trustees distinguished not only for its high sense of personal and public honor, but for its executive ability.
February, 1906, page 109,
INSURANCE JOURNALS, PAST, PRESENT AND FUTURE.
by C. M. Cartwright In The "insurance Leader."
I do Dot exaggerate when I say that there are insurance journals that are as strong, influential and valuable as the best trade papers in any line of business. However, I am confident that no activity has so many colorless, mediocre, useless journals as are to be found in the underwriting field.
My first introduction to trade insurance journalism was a revelation. Out paper bought out one of the oldtime Chicago publications. It was typical of that class of journals, started by a man fairly well advanced in years who engaged in the business because it offered an easy opportunity to make a comfortable living If I recall correctly, this paper had about sixty or seventy-five paid subscribers. Yet its advertising patronage was amazing.
Some life companies, not those classed with the grafters, not those that have been under fire, but the good old rock-ribbed, annual-dividend type were lavish in their advertising. It was a monthly paper, and yet some companies were paying $50 or $60 an issue, which meant $1 per subscriber, and these subscribers with but few exceptions were companies and not agents.
When the paper with which I was then becoming connected, a vigorous, lively, newsy, widely circulated weekly, purchased the old plant and agreed to take over the advertising contracts giving about four and a half times as many insertions, several companies took to the woods entirely and others cut down their contracts materially. I recite this case because it so well reveals the false basis on which so many insurance papers are grounded.
To give value received is not intended by these publishers. Insurance companies show no discrimination in advertising. They spend the same amount on the paper with 100 subscribers as the one with 2,000 or 3,000. Influence, circulation, snap,enterprise, vigor, strength cut but small figure in the allotment of advertising. I know of no business where pure and unadulterated graft is so prevalent as the publishing of insurance papers. Three-fourths of the papers published could well be eliminated because of their utter uselessness to the trade.
Now, what of the future? I think ultimately a new day will dawn. It may be some years ahead, but there are indications now and then that are most hopeful. With graft exposed in the life insurance business,there must be less of it in its trade press.
The journal of the future will be conscientious, fearless, newsy, well circulated, influential, ably edited, helpful, both practical and idealistic. It will stand for the best in the business. Companies will not patronize it because the editor or business manager is a good fellow, or because they want the good graces of the paper, or because they are afraid of it, but solely because they expect results. Companies later on will discriminate. They will concentrate their advertising on those papers that are trying to give a square deal, papers that stand for something, those that are spending money for the benefit of subscribers, those that reach the men in the ranks. There is certain to be a period of selection and rejection, the survival of the fittest. Men of vision in our business can see the day ahead and the papers that will survive are preparing for the new conditions of the future.
Future insurance journalism will bo a greater credit to the great business it represents. With the best papers encouraged, more liberally patronized because they are worth it, publishers can afford to spend more money to improve their service.
I hope to see in each section of the country a few papers which will be recognized as the newspapers of the different fields. There must be a few journals more technical and educational than the newspapers. The newspapers will cover their particular territory carefully, even if it be but a single state or two. The technical papers will take up much of the work that now the companies have to do in training their men.
The paper of tomorrow will give full value for every dollar expended on it. Its readers will get the worth of their money and much more, likewise the advertisers. Advertising will be placed on strictly a business basis. Therefore, in the years to come, we will see less papers, but those surviving will be such as all men in the insurance business will point to with pride. The papers will be an important part of that business.
page 123,
INSURANCE INVESTIGATORS CONDEMN PRELIMINARY TERM.
Eight years ago the publisher of the Journal of Insurance Economics launched this venture in order that he might be free to express his convictions in regard to preliminary term valuation. Previous to that time there had been but one insurance paper, the "Field" of Louisville, then under editorial charge of Young E. Allison, which had spoken against this attempt to use the reserve for expenses. Since the Journal started it has continuously and with unabated zeal fought the preliminary term proposition. It is not necessary for us to review the facts. It is fitting, however, that we should record the results.
First: Preliminary term valuation has been effectually debarred from Massachusetts and the companies mainly responsible for the attempt to break down net valuation have retired from the state.
Second: The Armstrong committee appointed by the New York legislature to investigate life insurance has recommended to the legislature the prohibition of preliminary valuation on all policies issued after December 31, 1906. Upon this question the Armstrong committee says:
The third class of companies operate on what Is called the preliminary-term plan—that is to •ay, they charge a level premium, but treat the insurance for the first year as one-year term insurance with an option to renew for succeeding years, tlma escaping the statutory reserve the first year. The device of preliminary-term inlurance is resorted to, in order to provide a fund through the decrease of reserves for the acquisition of new business.
Under the present law it is said that this plan in some form is absolutely essential to enable a new company to ge.t under way. and by it alone it would seem that a number of companies have been enabled to meet the strain of competition. But it will be noted that in only one of the companies using this plan were the expensel within the margini of the first year's premiums, including mortality gains. Whatever it may do, therefore, in providing for the expecse of new business, it utterly fails to furnish a criterion for economy.
It is indefensible for other reasons. If the insurance for the first year is not in reality term insurance, the law as to valuation of policies is violated and the reserves in this state are caiculated upon a wrong basts. This is the position taken by the Massachusetts Insurance Department. On the other hand, if it be treated as oneyear-term insurance according to the form of the policy, then it would seem to be a clear case of a discrimination violating the intent of section 89 of the insurance law.
For the one-year-term rates charged are not the same for all forms of policies, but the same premium which is charged in subsequent years according to the character of the Insurance, whether life, limited payment life, or endowment, is charged in the first year. Otherwise there would be no advantage in the device, for it is precisely the difference between the cost of insurance and the full level premium rate that is sought to be gained in the first year to meet the expense of obtaining the business.
Under such contracts as much as $100 is sometimes paid for a single year insurance worth 97 net. It is said that this discriminating feature of the plan has been denounced by leading actuaries here and abroad, who favor some provision for the cost of new business. On the other hand, it is claimed that the evasion of the statute as to discrimination is permissible because the policy differs from an ordinary one-year term policy in giving an option, for its continuance upon another basis, but this distinction is purely formal, and, in the judgment of the committee, section 89 should be so amended as to leave no doubt that this kind of insurance falls within its prohibition.
Wo believe that the work which the Journal of Insurance Economics has performed upon this one point of life insurance principle has justified its existence. We feel that this magazine has contributed to the overthrow of a proposition which at one time threatened the entire structure of life insurance. There will be for some time preliminary term companies, but like assessment companies, they will be put in a class by themselves and will no longer sail under the flag of legal reserve life insurance. And like assessment companies, they will in due season begin to fail. Indeed some of them have already failed.
page 124
ARMSTRONG COMMITTEE'S REPORT ON INSURANCE CONDITIONS.
Revolutionary Recommendations lntended to Bring About Reform—Agency Expenses Chief
Object of Suggested Legislation.
The Armstrong investigating committee appointed by the New York legislature has made its report upon life insurance. It is an enormous document containing 319 pages of 120,000 words. The great bulk is comprised of a statement of the facts elicited by the investigation. The committee's comment upon the facts and conditions, together with its recommendations, are more compactly stated. For the information of our readers we set forth below concisely the recommendations made with brief comment by the editor where it seems to be called for.
Voting.—In person, by proxy or by mail. Proxies to be revocable at pleasure, to be given within two months of annual election and valid only for that election.
We regard this as a proper and satisfactory provision.
Lists of Policyholders.—All having policies of over $1000 to be filed with superintendent of insurance; similar lists to be open for inspection at the home office. Separate lists of policy holders to be open for inspection at general agencies of the company within said jurisdictions. No lists of industrial policyholders required.
Not enough gained of real value to polioyholders to warrant the expense it wouldjnecessitate. Policyholders' lists should be open at all times to those who, upon application to courts having jurisdiction, can show just cause why such lists should be furnished.
Nominations.—May be made by the board of directors or by 100 policyholders and filed with the superintendent of insurance four months before election.
A sensible provision.
Notices of meetings and Nomination.—To be made by mail to every policyholder two months prior to the election.
Would tend to cement the membership and solidify the company.
Meetings.—Special act recommended, by which terms of office of all existing directors shall expire on November 15, 1906, annual meetings being postponed to that time. Existing proxies to be declared void and only proxies used as provided above. One-half the directors to be elected thereafter annually.
An essentially democratic provision containing all the possible evils as well as the good of democracy.
Change of Stock Companies.—Law conferring power upon stock companies to grant to polioyholders the right to vote for directors with a concurrence of the majority of the stock.
A reasonable provision.
Suits.—Policyholders to be allowed to sue companies directly instead of through the attorney-general.
A just provision.
Investments.—Real estate investment restricted to absolute needs of company. Ownership or control of subsidiary corporations prohibited. Syndicate transactions and sale on joint account prohibited. Investments in all stocks prohibited.
This will limit the investments of life companies to mortgages and bonds, loans to policyholders and real estate necessary for the company's own purposes. The committee does not believe it wise to restrict life insurance investments to those in which savings banks are required to invest. We see no reason why life companies should be prohibited from holding good stock investments, but if the limitation will prevent speculation it may work more good than harm.
Directors Interest.—Directors will be prohibited from having any pecuniary interest in any loan or investment made by the company except a loan upon his own policy.
A good provision.
Deferred Dividends.—Further issue of the deferred dividend policies prohibited. Accounting to be made annually and policyholders to be allowed to say whether they will take their accumulations or permit them to remain to purchase additional insurance.
Prohibition of deferred dividends is not necessary to reform. Annual accountings and separation of deferred dividend accumulations are.
Non-participating Policies.—Mutual companies to be prohibited from issuing non-participating policies.
A wise provision.
Restriction of Business.—Writing of new business to be limited as follows; Companies having insurance in force of less than $50,000,000 no limit; between 50 and 100 millions, new insurance limited to 30 per cent. thereof; between 100 and 300 millions to 25 per cent.; between 300 and 600 millions, 20 per cent. thereof; between 600 millions and one billion 15 per cent. thereof.
A purely arbitrary limit not based upon clearly justifiable grounds.
Expenses.—Official salaries exceeding $5000 to be fixed by the board of directors. List of same to be reported annually to the superintendent of insurance. Pensions prohibited. Commissions to be uniform in percentage for all forms of insurance and based upon ordinary whole life policies. Bonuses, prizes, rewards and other special inducements to be prohibited. Renewal commissions should be limited to four years and fixed at 10 per cent. of the first year's commissions. Loans and advances to agents prohibited. Total expenses of the companies to be limited to the loading provided for expense. Loading to be uniform for all policies and based upon ordinary whole life policies.
Some of these provisions desirable, but any attempt to limit agents' compensation, except by confinement to the loading, is arbitrary and unwise.
Reserve.—Preliminary term valuation after December 31, 1906 to be prohibited, net values to be determined by Dawson's "Select and Ultimate" plan which allows the reserve during the first five years to be reduced by the saving in mortality between the actual and expected experience.
The prohibiton of preliminary term valuation is essentially proper. The substitution of the "Select and Ultimate" for the standard net value system should be carefully considered before adopted.
Standard Policies.—Pour standard forms recommended covering ordinary life, limited payment life, endowment and term policies. Other forms to be adopted by companies upon approval of the superintendent of insurance.
Some things to be said in favor of this proposition; many against it.
Rebating. — Present law to be changed to provide that a person receiving a rebate shall be equally guilty with the one who gives it.
An eminently just provision.
Campaign Payments. — Prohibited by law.
A wise provision.
Legislative Expenses.—Full publicity in regard to money expended. Complete detailed accounts to be kept.
A provision thoroughly sound.
Stipulated Premium Companies.— Law permitting should be repealed.
Fraternals.—No recommendations.
The report as a whole is extremely interesting. It is one which should not be idly set aside by insurance men because produced by outside critics; for on the whole it has been very intelligently prepared and some of the recommendations should be favored and urged by insurance men.
The mistakes in the report are due, as it seems to us, to the fact that the committee has considered only the conditions as revealed by an examination of the big three life insurance companies, and has not secured the broader view which would have come to it had the investigation extended to all life insurance companies. Nevertheless it may properly be said that New York state is dealing with its own problem of insurance, and that problem is essentially the big three companies.
We must accept the Armstrong report for what it is, namely, an expression of public opinion upon life insurance questions as disclosed by the investigation. Except in one or two points it cannot in any sense be said to represent expert life insurance opinion, and 'where technical questions are discussed, as in the matter of valuation, expense loadings, etc., such expert opinion as is therein expressed is limited and is not the outcome of any extended analysis or consultation with life insurance actuaries or underwriters.
We do not mean to say that Mr. Dawson has not consulted actuarial opinion other than his own, for we believe that he has, but the ideas set forth in the committee's report as the apparent result of his advice and cooperation, are largely, if not wholly, the outgrowth of his own thought and opinion upon these matters. And before these recommendations are adopted and incorporated in the law of New York state the insurance committee which considers the bills covering these questions, shoo Id summon before it life insurance experts from all parts of the country, even though the committee should conclude it to be unwise to allow such opinion to influence its legislation.
Better still would it be for the New York legislature to refer the recomendations relating to reserves, expenses and policy forms to a special committee to institute that careful investigation which the Armstrong committee, on acount of its attention to other details and the limitation in its time, was unable to give.
Of course the inference is that the Armstrong committee sets forth its various recommendations in the belief that each and all are necessary to reform and improve life insurance. For this reason we should like to see them all tried. There are some things recommended about which we cannot speak definitely until they are tried, like the limitation of business. No one can tell just how this would work. It may do good, it may do harm. The only way to find out perhaps is to try it. But to us the arbitrary limitation of output in life insurance is subject to the same argument pro and con as the arbitrary limitation of production or labor in any other industry.
April, 1906. Vol. 14., No. 6., page 163,
SAN FRANCISCO CONFLAGRATION: EFFECT UPON INSURANCE.
THE companies represented in San Francisco reported on December 31, 1905, surplus funds above capital of about $150,000,000. The conflagration will consume probably from $100,000,000 to $125,000,000 of this money. In addition to this surplus, American companies have an unimpaired capital of about $55,000,000, while the enormous assets of foreign companies are available to pay these losses. In our opinion the bulk of this liability will be liquidated within 60 days and almost every claim paid dollar for dollar.
The San Francisco disaster is the greatest which has ever visited the insurance companies anywhere, but their financial strength as a whole is greater proportionally than ever before.
There will be failures, but comparatively few. One company, a relic and survival of the Boston conflagration of 1872, has suspended business. One other Boston company involved may survive because it is backed by Western capital,—not a proud boast for us to make.
Insurance money will put San Francisco on its feet. The generosity of the American people will sustain the afflicted residents until industry and trade are resumed. Both funds come from the people; both represent a tax collected from the many to relieve the few. It may be our turn next.
This disaster will cause great changes in the economic structure of insurance. It will affect and shift the balance of every problem; some it may completely change, others merely modify. Some conditons it may tend to better; others it may make worse. All will depend upon the cooluess and wisdom with which the crisis is met.
The San Francisco losses should-be paid by every company without technical quibble. It is better to lose in dollars than in reputation. There will be insurance to write for those who survive; but the survival must not be at the expense of the "square deal." It is better to go down with honor.
page 164,
WESTERN UNION'S ADVANCED STEP ON RATING METHODS.
Important Change Planned in Handling Rates—Special Expert Committee of Rate-Makers to Supersede Work Now Done by Governing Committee.
As an outcome of its recent semiannual meeting at Atlanta the Western Union has decided to take an important forward step in the handling of rating conditions. The rate making of that body has heretofore been in charge of the governing committee, composed of executive managers whose time is largely occupied in the general policies of the business and who cannot devote to the rating question the attention demanded.
The increase of adverse legislation has emphasized the need of more systematic control and direction in the making of rates. Indeed the great criticism against the companies has been, not that they agreed upon a uniform rate, but that the rates on which they agreed were too frequently unequal and unjust,—discriminating between different classes of policyholders. In other words, it was the way in which rates were made and not the fact that they were made, which has brought about most of the antagonism to the companies.
This fact has been many times pointed out in this magazine. Indeed, so long ago as September, 1900, the editor, in an address delivered before the "Fire Underwriters'Association of the Northwest," set forth this proposition:
"The enmity of the states is directed solely against agreements to itop competition, and then only so far as they appear to be unjust or arbl. trary in their attitude toward the insured. Are there any grounds for this enmity? We are compelled to admit that there are. The knowledge, common to us all, that rates are unequally apportioned, and that some classes are paying more than their actual cost and otheri less; that rates upon identical hazards are often inexplicably at variance, and that we cannot demonstrate to the public, the basis upon which our rates are made, is also knowledge not uncommonly known to the insured. And to this fact (coupled with natural prejudice against corporate interests, particularly when in combination) we may ascribe the opposition to rate agreements. The ordinary man will not object to a combination to regulate competition, for the chances are ten to one that he himself is engaged in such a combination, but he will object—and who can blame him?—to an agreement which tacitly permits and maintains the inequalities referred to. Anti-insurance legislation will continue until the cause of this public opposition is removed."Upon the recommendation of President J. W. Q. Cofran, supported by the governing committee, the Union decided to place its rating machinery in the future in the hands of qualified experts or actuaries. The "Insurance Post" of Chicago thus describes the cause and the scope of the action:
It was realized that present methods have been crude, that responsibility has been scattered, management ineffective and results contradictory. The governing committee, with its membership changing each half-year, haa been in general charge. Many of its members have bad little knowledge of schedule making and applying, and none of them have had much time to spare. The result bas been what might hare been expected. No consistent policy has been followed, rates on identical risks have varied widely in different cities and states, and the public has been given the impression that it wa> being worked. The Union decided to put control of all rating matters—employment and regulation of raters, the building, testing and application of schedules, and the development of an expert force and a definite and consistent policy. into the bands of an actuarial committee. Its members need not be members of the governing committee, assistant managers as well as managers are eligible—which means Dean, of course —and it will be a continuing body, with members elected for one, two and three yean at the start, and for three years thereafter. The selections are to be made because of special fitness and experience in the work, and the result will be the great improvement that always follows centralized management, the substitution of experts for amateurs, and the adoption of a definite and consistent policy.
For the proper handling of this work the Western Union is in part prepared . It has taken over and inaugurated a plan for classifying statistics. It has in its employ expert rate makers, and in many states rating bureaus having full charge. We understand the plan will be to develop the idea of expert state rate makers, the committee experts representing the Union having general charge and supervision over the whole for the purpose of bringing about consistency and uniformity of rules and schedules. The general statistical results no doubt will be placed in the hands of this supervising committee, and its recommendations will be made to the state bureaus with a view to having the rates in each state equalized and adjusted in accordance with the experience
The Western Union is certainly to be congratulated upon the step it his taken and the evidence thus given of its purpose to place emphasis upon the scientific value of rate making. The heart of the fire insurance business rests within the rate problem and the system of protection which stock companies have to offer to the public will stand or fall in the future upon the wisdom and justice with which its rating machinery is administered.
page 165,
EDITOR REPLIES TO COMMENT ON SEPARATION ARTICLES.
The recent articles in the Journal of Insurance Economics by the editor, touching the question of separation as applied in the Western field, have attracted so much attention and led to so much comment by word of mouth and by letter that the editor believes he is justified in devoting some space to the matter in this number. We know of no better way than to quote from the letter of a personal friend. As it was not written for publication we cannot give the name of its author, which would add weight to the views set forth. Here is the letter:
Editor Of Insurance Economics :—
As you know I have always been interested in your work, and have bad Bo many occasions to endorse and approve the admirable positions you bave taken on underwriting questioni. The Agency Commission question is one that, as you know, I bave been in touch with for a great many years; consequently, I have very decided opinions. If any position taken by the companies during the last few years has been based upon good, practical common sense and business prudence, it is, in my opinion, that of separation in agencies on the commission question.
I do not look at this question from any sentimental or visionary point of view, but I submit —and I never yet have found a business man who disputed it—that, under our present Agency System, the agent representing a number of companies and being compensated for bis services on a commission basis, the only sane proposition, honorable alike to the agent and the companies, is the same commission from all.
Agents will always have favored companies, even when receiving the same pecuniary payments,—a company writing liberal lines, having few, if any, prohibited classes, general absence of crltclsm or queries, personality of the Held representative—all of these are important factors and have an influence in business. But, when a Special Agent steps into an agent's office and offers him a compensation in excess of that paid by other companies,—companies which, by virtue of his position as an agent he is bound to bonorably represent—he is offered and is accepting a money bribe to represent one company as against the other companies he is also paid to represent. The company doei not say in auch a case—for example—" You give me just the same kind of business as you give the Fire Insurance Company, and I will pay you 10 per cent, extra commission". What it does say is —" If you will give me a better business than you give the Fire Insurance Company (and it is generally specifies as to the classification desired)—and I will give you a commission 10 per cent. in excess of that paid by the other company".
I do not mean to intimate that the agent in all cases realizes or appreciates just the position he is in, or the result of such an arrangement; but I believe that the effect generally has been to materially lower the standard of agents. Find me the agent who says that he will not accept from one company a compensation in excess of that paid by another (and there are a good many such) and you bave an agent of the hlgheiit standing, representing his companies with a loyalty producing the best results.
I de not and never have taken the position that we should go to an agent and say that he cannot represent a company paying more than 15 per cent., or any other figure, but we have a right to say and should say that we will not be represented in his agency, or any other agency, when representing companies paying a commission in excess of that we feel able to pay.
In the case of the Western Union, I believe it was a big stroke of policy when they coupled with the Separation Rule a permission allowing the companies to offer a compensation to the agent for giving up bis companies paying a higher commission, in the shape of graded commission."
This substantially covers the criticism which is made against the Journal from other sources, particularly from Chicago managers, who conversod with the editor during a recent visit to that city. It appears also that the editor's purpose in writing and publishing these recent articles, to check the drift towards disintegration upon rates, has caused some misunderstanding among local agents. Perhaps we cannot do better than to re-state categorically our beliefs upon the question involved:
1. The Journal of Insurance Economics believes in separation in agencies on the commission question. That is to say, uniform and excess commission companies should not be represented in the same office.
2. We do not believe that separation should be enforced against companies which are not members of the Western Union unless they are actually excess commission companies. We believe that the present agitation in the West which has caused so much trouble and criticism, might have been avoided if certain companies not members of the Union had not been excluded from all their agencies, but only those agencies where they were found to be paying excess commissions.
3. We believe that the Western Union has a right to adopt separation as a policy against excess commission companies, but not against non-union companies.
4. We favor low uniform commissions in the interests of real underwriting agents and believe that they must be established by co-operation between the companies. We hope some time that agency organizations will themselves assist the companies in maintaining a low uniform commission.
5. We believe the Western Union is primarily responsible for maintaining a condition which makes excess commissions possible, namely, ultraprofitable rates upon preferred classes. We are opposed to having the "ratecommission" question fought out by means of harsh and cruel rate wars,unjustified upon any economic grounds and an absolute injury to the local agency plant.
We have looked over past volumes of the Journal of Insurance Economics, particularly at the time the separation program was adopted by the Western Union, and find therein set forth, with almost perfect consistency, the views that are advocated today in the Journal, the only difference being that then there were but theoretical conditions to be discussed, because separation had not been tried. Today we have the actual conditions and the criticism must of necessity be more pointed. We refer in particular to an article in the November 1899 Journal, entitled "Economic Aspects of Differential Commissions." Every proposition therein set forth is as sound today as it was then, except that wo are satisfied that a reduction in preferred classes by the Western Union would not tend to a general rate war, inasmuch as the organized agency movement has crystallized in favor of reducing rates upon preferred classes and against rate wars, a condition which did not exist at the time separation was adopted.
What the Journal has bad to say at this time is not in criticism of uniform commissions or separation, but of the methods by which the Western Union during the past year has undertaken to enforce separation, causing the ejection from agencies of companies which were not excess commission payers and bringing ruinous rate wars upon the local agents.
Our idea, as set forth above, suggesting that separation be enforced against excess commission companies and not against non-union companies, calls forth the following from our friend the company manager:
As I understand your position you believe in separation in agencies on the commission question, but you do not believe that the separation should be enforced against companies not mernberi.of the Westen Union, but not paying excess commissions in certain agencies; that is, as I understand it, the separation should be made only in agencies where companies are paying the excess commission.
Now, that's all right as a theoretical proposition and I concur, but the trouble as t. practical proposition seems to be that it is almost impoottlble to determine where companies are paying an extra compensation. You and I know, as a matter of fact that, while there may be certain exceptions, practically all the companies not members'of the Western Union do not join because of the commission limitation; consequently, the companies that are not members are, generally, paying extra compensation, in various forms.
If we were going to adjust the separation on the basis of agencies where extra compensation was paid, we would have to determine that fact by inquiry through the agents. Of course, the excess commission companies would not help us on such a proposition. In the South, I believe they have tried a plan that provided for agents signing a statement or agreement that they would not accept from any company an extra commission or compensation. You know that if we adopted such a plan, the non-Unlon companies (I speak of them as a class would scheme to provide some way to compensate the agent, and yet allow him to say that he was only receiving 15 per with commission.
It does seem to me that the only practical course to take is the one adopted by the Western Union, and that is, to say that confpanies not willing to agree on the same agency commission basis should be considered as paying extra commission, and the separation should, consequently, be along that line.
It may be that it is practically necessary to draw the lino at membership, but we are not quite satisfied that it is. It has seemed to us that the arbitrary drawing of this line has been one cause of recent rate wars in western territory. For instance, to illustrate, if the fight had not been forced so strenuously against the Connecticut Fire upon its withdrawal from membership, and the matter had been handled with more deliberation and cure and judgment, much of the trouble might have been avoided.
Think of the confusion and chaos thrown into the agency ranks by instruction that the Connecticut Fire must be dropped from all Union agencies or graded commissions discontinued. In every such agency, as a Union company, the Connecticut was paying the same commissions, as other companies. Now as it seems to us this matter could have been much better handled by makiug a special rule to govern this extraordinary case which would have carried out gradually, automatically, and with due elasticity, the proper purposes of separation, would have obtained for the Union the friendship and co-operation of all agents, and would have made it impossible for the Connecticut Fire to criticise or attack that organization.
But of course it is always easier to see afterwards how the thing could have been better done. We believe that the Journal was justified in making a strong protest against rate wars which were caused by the extreme policy pursued by some Western Union companies. The editor gathers from his talk with insurance men while in Chicago that the policy of these companies has not been approved and their mistakes are recognized.
So long as the policy of the Western Union is dictated by a sincere and earnest desire to protect its members against excess commission paying companies, it seems to us there should be no trouble. It is only when the fighting is forced in a spirit of anger and retaliation that demoralization and injury occur.
page 177,
LIFE INSURANCE AS PRESENTED IN THE PUBLIC PRINTS.
One noteworthy outcome of the life insurance investigation is the great increase in the output of insurance literature in secular publications. There was a time not very long ago when it was almost impossible to interest magazines or newspapers in the insurance question, unless they were paid for taking this interest. But there has been a groat revolution and the mediums of public opinion and information find that they can no longer ignore insurance. Indeed, spurred on by the sensational developments, they are only too eager to take it up as philanthropists and friends of the public. Or, (ignorable thought) is their desire merely to increase their circulation?
However, let us not quibble about motives, but interest ourselves in the intelligence and spirit with which this outside discussion is conducted. The "World's Work," a magazine of great worth, devotes its April number to what it calls a "policyholder's manual, a complete guide for the 'policyholder of life insurance and how to purchase it." Fifty-eight pages are devoted to life insurance. The range of the discussion may be inferred from the following titles of the articles:
The Insurance Revolution.
Changes in the Big Three Companies.
Life Insurance as a profession.
The Meaning of Insurance Words.
The Cheapest Insurance.
The Kind of Policy to Buy.
The Deception of " Prize" Policies. •
Surrendering and Exchanging Bad Policies.
Personal Experience of Policyholders.
Rich Men's Insurance.
How the States Supervise Insurance.
What Companies to Insure in.
It will thus be seen that current day questions are pretty well covered. A reading of the articles indicates as a whole a purpose running throughout to deal with the insurance situation fairly. There are many crude thoughts and expressions which indicate a superficial study and knowledge.
On the other hand many illuminating facts are presented in forceful language. One article entitled "Life Insurance as a Profession," we reproduce in this number, because it deals with what is likely to be a vital outcome of the agitation, namely, the improvement in the field representation of life insurance, elevation in the character of the agent, the prof essionalization of life insurance soliciting.
The "professional" life insurance agent will more than ever play his part in the business, notwithstanding that some think life insurance agents are an incumbrance. This does not mean that a new typo of agent is coming into the field to represent the insurance companies. The type is already there, trained and ready to take the place of those who are not able to to meet the higher ethical standards which public opinion will demand. The writer of this article has a fairly wide acquaintance with business and professional men, and does not hestitate to say that life insurance men rank with the best in any business or prfession. Indeed the very difficulties of the business, the disagreeable features of competition, created by the kind of agent which has helped to bring discredit upon the business, has helped to make the men of real character and integrity.
Let us not, however, delude ourselves into the idea that we arc going to get rid entirely of the discreditable agent. There are always men who are willing to deceive and plenty who invite deception. But with a more effective prohibition of rebating, a cutting down of commissions and more public discrimination, there should be a marked improvement in agency representt'tion.
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