Addresses and papers on life insurance and other subjects

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Contents

Chapter Page

Introduction i

I. The Inception and Early Problems of Industrial Insurance 19

Chapter I THE INCEPTION

AND EARLY PROBLEMS OF

INDUSTRIAL INSURANCE

PUBLISHED IN THE INSURANCE MONITOR

THE

INCEPTION AND EARLY PROBLEMS

OF INDUSTRIAL INSURANCE

he semi-centenary of the Insurance Monitor [suggests a brief review of the inception and early problemsof Industrial insurance, which may be said to have come into existence in England in 1853, as the result of a pointed ■reference in a parliamentary report on assurance associations.* This report, dealing with the difficulties and shortcomings of the life insurance companies of the period, had called attention to the great need of the industrial population for a more adequate and secure method of life insurance than had hitherto been furnished by the burial clubs and friendly societies. These societies had gradually increased in number, and their membership in 1850 was estimated at three millions, but, however useful and sound as social institutions, making for social betterment and promoting human intercourse, from an insurance point of view they were indeed in a most unfortunate predicament. Social in their origin, these societies had in the course of years assumed the character of mutual assurance societies, which, in addition to their philanthropic objects, assured to their members a sum certain, payable in case of sickness, incapacity in old age, or death. Organized almost exclusively by workingmen not familiar with mathematics or vital statistics, the benefits offered to members were invariably out of proportion to the periodical payments exacted in return, and less than a generation was usually sufficient to bring a society into bankruptcy, with resulting untold misery and unhappiness to the surviving membership. Yet so despotic is custom and so ready is the average man to

* Report from the Select Committee on Assurance Associations, London, 1853, p. 6.

pay for his own experience, that, regardless of the failure of the old, new societies, with but slightly improved tables, would be formed to take their place; a common indifference to the fact that "There is no rule in moral mathematics that can convert three times three shillings into fifteen."

The management of the Prudential Mutual Assurance, Investment and Loan Association, a company organized in 1848 for the transaction of Ordinary business, took notice of the recommendation of the Parliamentary Commission, and in the year following, that is, 1854, commenced the issue of Industrial policies, or of contracts for small amounts of insurance with premiums payable weekly and collected from the houses of the insured.* The necessary tables of premiums were framed with exceptional actuarial skill, every phase of the subject was carefully inquired into, and so well was the preliminary work done that even now, after fifty years, Industrial insurance principles and practice in all essentials conform to the original conception of the managers of the Prudential in 1854. If want of security had been the chief defect of the old system of workingmen's insurance, the new system was developed in accordance with established laws of mortality and finance; and while failure had been the rule in the old, security for the payment of the contractual obligations was made the cornerstone of the new.

The first ten years of the history of the Prudential Assurance Company (this title having been adopted in 1861) form a most interesting chapter in the wonderful story of life insurance. In the face of much opposition and open hostility, the company carried forward its plan of extending real life insurance to the masses, in active competition with a primitive but slowly passing type of organization. By January 1, 1864, it was evident to the careful observer that Industrial insurance in England had come to stay. The income of the company was about sixty thousand pounds, which for the time

* History of the Prudential Assurance Company, London, 1880, p. 3.

was a very considerable sum, and it required no special insight or discernment to anticipate a time when the new form of thrift would become general and include the larger part of the whole population. The secret of success was simple enough — the company made no promise which it could not keep, and when policies became claims they were promptly paid.

Only occasional references to the epoch-making experience of the English Prudential are met with in American insurance periodicals of this period. The Insurance Monitor, in i860, had called attention to the need of life insurance protection for the poor, but without advancing a definite plan by which this much-to-be-desired end could be attained. Two events, however, occurred, which brought the name and success of the London company quite prominently to the notice of the American insurance managers and others interested in the development of life insurance in this country. A prominent London company, the International, which for some years had been transacting business in Massachusetts, found itself in difficulties with the Insurance Commissioner, Mr. Elizur Wright, who insisted on determining its solvency by means of a net valuation of its liabilities. By this method the company was found insolvent, and after a very animated controversy, in which some of the ablest actuaries of both countries participated, it retired from business, the English portion of its outstanding policies being reinsured with the Prudential of London.

The controversy, as such, but in particular Mr. Wright's critical review of British life insurance methods, in his annual report for 1865 and subsequent years, did much, if not most, to draw attention to the wonderful success of the Prudential, and to the curious, but extremely interesting, opposition to the company by the Chancellor of the Exchequer, Mr. Gladstone. While as early as 1773 attempts had been made to induce the British government to undertake the business of life insurance, it was not until 1853 that an actual effort was made in this direction.* No practical results had followed, however, and during the eleven years ending with 1864 not a single proposal had been received. The almost instantaneous success of the post-office savings banks, however, which had been established in 1861 to take the place of private institutions in a more or less insolvent condition, led Mr. Gladstone to assume the possibility of a corresponding opening for government life insurance. Accordingly, after much thought and in the face of a strong opposition, a measure was carried and became a law in 1864, by which it was made possible to secure small policies through the post-office. In the parliamentary debates Mr. Gladstone made numerous and occasionally very bitter attacks on the Prudential, its managers and methods, going so far as to allege its insolvency. The Prudential, in its own defense, employed eminent actuaries to report on its actual condition, with the result that the charges of the great Chancellor were proven unfounded. Mr. Elizur Wright seems to have taken a keen interest in this controversy, for in his report for 1865 he comments at length upon the measure, giving Mr. Gladstone's plan his hearty endorsement. Himself a strong advocate of government supervision of insurance interests, he readily agreed with Mr. Gladstone, and suggested a corresponding system of life insurance by the government of the United States, f

With the highest respect for the ability of both Mr. Gladstone and Mr. Wright, the earnest and disinterested student of life insurance problems cannot very well rest content with a one-sided presentation of the facts in the case. The Industrial companies had gained the confidence of the public, and the new business of the Prudential during 1863 alone had reached sixty-eight thousand policies. It requires a

* On the Financial Statistics of British Government Life Annuities by Frederick Hendriks, London, 1856.

t Tenth Annual Report of the Insurance Commissioner of Massachusetts, Boston, 1865, part II, pp. 49-51.

careful reading of the parliamentary debates of the sessions of 1864 and 1865, and some knowledge of the dissertations and fugitive essays of writers of the period on government life insurance in its inception, to bring the proposed measure into clear relief as an uncalled-for interference with private enterprise and with the normal development of a social institution of great magnitude. It is now some thirty-seven years, and the results attained by the two different forms of thrift institutions can be brought in contrast with each other. By January 1, 1902, the Industrial companies of England had some twenty-one million policies in force, in contrast to about fifteen thousand policies in force with the government post-office. Or, in other words, to every one policy in force with the government, some fourteen hundred policies are in force with private companies. It is this fact which speaks and which makes further comment unnecessary.*

The attack on the London Prudential and its business methods, however, had been rather incidental to the general purpose of the government to enter the life insurance business on the largest possible scale. As pointed out by Mr. Gladstone, the field of life insurance for the masses was not occupied by sound institutions, nor yet by sound and unsound institutions, and such was the enormous breadth of the field that apparently the government alone could be expected to do justice to the vast interests involved. "j* The Monitor, in 1864, in commenting on the Gladstone measure, called attention to the grounds for such interference in the interest of the regular life companies by the statement that, "In no single department of business has there been so much jugglery and so much false pretension as in life insurance." Thus confronted by government opposition and competition on the one side and general public distrust in life insurance on the other, the Prudential of London continued to develop its business, and the reports for each succeeding year bear

* On December 31, 1908, the Prudential of London had 17,963,127 Industrial policies in force, t History of the Prudential Assurance Company, p. 22 et seq.

evidence of superior administration and an increasing public demand for Industrial insurance.

The publicity given to all of the more important facts connected with the early development of Industrial insurance in England, but in particular to the business of the Prudential, brought the subject more and more to the attention of the general public. With unusual frankness, the London company had from time to time published a statement of its affairs, and the annual reports of the directors contained much interesting information regarding the rapidly extending Industrial business. The progress of the company since 1865 had indeed been phenomenal, and the income by 1869 was more than double the income of 1864. The report for 1869 quite properly concludes with the statement that "The establishment of this branch has been attended with the happiest results to the classes for whom it was especially designed; the great uncertainty which prevailed with regard to the stability of local institutions and the defective averages which they afforded (leading to very disastrous consequences) have now been replaced by a wide-spread and almost unbounded confidence in the institution which has been the means of affording to the poor man the advantages hitherto only attainable by the comparatively well-to-do." But the company was as yet only in the infancy of its wonderful career.

Commenting on the astonishing results attained in England by so simple and yet effective a method of life insurance, the Exchange and Review of Philadelphia in 1868 had well said : "The adaptation of life insurance to the convenience of the working classes is an idea whose practical and true development in the United States is as yet in embryo, but without doubt the penny of the poor man is to have its place in life insurance accumulations, as well as the dollar of the capitalist." The times were peculiarly suggestive of ideas and plans for the amelioration of the condition of the poor by associated effort. The country was in a very prosperous condition after the close of the war, and labor as a distinct element in our national economy assumed more and more an independent position through the rapid development of trade unionism. The, for the time, enormous immigration had brought over a large number of Englishmen, who were in possession of considerable knowledge of friendly society methods and management. Local lodges and affiliated societies were formed by members loyal to their parent institution and with an abundant field for their rapid development. All over the country so-called co-operative societies for sick relief, support in old age, or a funeral benefit payable at death, were formed, almost without exception by the workingmen themselves, without the necessary skill or knowledge of the laws of mortality and finance. The unhappy experience of so many of the English societies had no influence on the organization of corresponding institutions in this country. Of the so-called fraternal societies, workingmen's insurance associations, etc., organized during the later sixties, distinctly for insurance purposes, practically none remains in existence at the present time. It is true of this class of institutions as Mr. John Fiske, the historian, says of all the achievements of mankind, that "It is only after much weary exertion and many a heartsickening failure that success is attained," and, in another place, that "You cannot invent an institution as you would invent a plow."* Workingmen's insurance on the basis of voluntary thrift was only in embryo in the later sixties, but it was certain to develop within a few years.

The efforts made during the fifties to place the English friendly societies on a sound foundation had not met with the success anticipated, and by 1870 the problem became once more acute and pressing, so that a special Royal Commission was appointed to inquire into and report upon the

* The Beginnings of New England, by John Fiske, Boston, 1898, p. 16.

subject in all its various aspects. The work of the Commission, which in its make-up was indeed a most able one, extended over a number of years; but reports were made during intervals, and of these the second, published in 1872, contained a considerable amount of very useful information relating to Industrial insurance. Among the witnesses examined by the Commission was Mr. (now Sir) Henry Harben, the then secretary of the Prudential, who, in answer to some three hundred questions, explained in great detail every important feature of the management and experience of his company. Already, in 1871, in a paper read before the Institute of Actuaries and discussed by eminent members of that body, Mr. Harben had given publicity to the elementary principles and practices of this new system of life insurance for the masses, so that, with the additional evidence presented before the Royal Commission, it was made possible for others interested in the subject to form a working idea of the problems involved in establishing a similar company in the United States. That such a purpose was being seriously considered is made evident by a statement of Mr. Harben's before the Royal Commission, that "In America they want to adopt the Industrial system of assurance, and I, myself, have framed an Act of Congress, with all the necessary schedules for them for the purpose." * The insurance periodicals of the United States from 1868 to 1872 contain occasional references to various efforts to establish Industrial insurance in this country, but not one of the attempts was carried into practical execution. The time, however, had come, and the opportunity was ripe for an experiment in this direction, but none of the large companies seemed inclined to take an interest in the subject. They were entering upon a period of disastrous and far-reaching financial disturbances, which paralyzed all efforts at material improvement and, for the time being at least, discouraged new ventures in

* Third Report of the Royal Commission on Friendly Societies, London, 1873, p. 83 (A. 26,125).

making life insurance more widely popular among the industrial population.

For their earnest efforts to provide by insurance for the uncertainties of the future, the workingmen of England and the United States are deserving of unstinted praise. While many societies were formed by persons seeking their own interests and abusing the confidence of their fellow laborers, far more numerous are the instances where such organizations were established with the very best of motives, by men unselfishly seeking to advance the interests of their class. Nor must it be overlooked, as pointed out by Hardwick in his "History of Friendly Societies,"* that "The now insolvent societies had been formed upon the models submitted to them by the very parties who were supposed at the time to be the very best to advise in such matters. But these facts are too often ignored or forgotten by a certain class of individuals, who idly denounce the efforts of the working class, instead of in a kindly spirit pointing out the most radical method for their eradication." The difficulty in fraternal insurance is fundamental. It is impossible for a purely social and semi-philanthropic institution like a fraternal society to enter into a distinct business arrangement, make promises of a sum certain depending upon life contingencies, and retain at the same time its earlier, perhaps more primitive, but certainly more useful, social character. The peculiar function which it fills in the social economy of the people cannot be replaced by any other institution yet developed, but the life insurance function is so successfully carried into effect by entirely responsible companies that even though there be a slight difference in the expense rate, under the very best conditions the possible gain is not compensated for by the risk of almost certain loss.

During the early seventies, however, no opportunity existed for workingmen to avail themselves of the advantages

* The History, Present Position and Social Importance of Friendly Societies, by Charles Hardwick, London, 1850.

of sound life insurance, except under conditions which were practically prohibitive. Not only were no efforts made by Ordinary companies to solicit risks on the lives of wage-earners, mechanics, laborers, etc., but the necessary habit of periodical saving had not been formed. Reliance was, therefore, placed upon institutions without intrinsic merit and which were almost certain to fail within less than another generation. Their number and rapid development, however, gave evidence of a growing interest in life insurance among the masses and a gradual recognition of the superior advantages of commercial institutions conducting the business in conformity to correct principles of insurance science. The history of this period records numerous instances of efforts on the part of trades unions to effect arrangements with large companies, but the matter was looked upon in too indifferent a light by the managers to assume a practical character. Of what, for the time being, was called the "Bund" system, mostly originating with German benefit societies, only traces now are found in a few existing policies, the liability for which was assumed by responsible companies. It was pointed out by the Exchange and Review in 1869, that "An end being honestly sought, impracticable ways to it, adopted in mistake, will give place to the practicable. With a way open these combinations will gravitate towards the proper life companies, and unions for effecting life insurance with the companies and under special arrangements may be part of the problem of the future, and which may make individual insurance certain and more available." This prediction, however, was not verified by subsequent experience.

Life insurance and savings banks in the United States were in 1873 in a most precarious condition, complicated by the panic and resulting business depression and the enormous depreciation in values. Every financial institution was tested to its foundations, and while a large number of the more recently organized companies went under, the gigantic structure of sound life insurance remained unshaken, a monument to the wisdom and prudent forethought of the founders, who, with prophetic insight, had guarded against the shock which sooner or later was certain to come. The wonderful prosperity of the country after the close of the civil war had not been without effect on life insurance transactions, and what for the time must have seemed remarkable results had been attained. A large number of new companies had been organized, and by January i, 1871, some seventy-one companies reported to the New York Insurance Department. Following the failure of the Great Western in 1870, a comparatively unimportant institution, one small company after another found itself in difficulties, terminating either in a receivership or the reinsurance of the business in some other, equally weak, institution. Failures in the banking world added largely to the increasing public distress, and what had been in a fair way to become a widely diffused thrift function was by 1875 rather the exception than the rule. Both savings and insurance by this time had practically come to a standstill, and the companies or institutions, instead of making progress, were in the majority of instances unable even to hold their own.

The American student of the workingmen's insurance problems of this period found himself confronted by a truly astonishing mass of evidence and data pertaining to the theory and practice of friendly societies and related associations, with a few fragmentary essays and reports on commercial insurance undertakings, such as the Prudential Assurance Company of London. The published evidence, and in a still larger measure public opinion, strongly favored the mutual assurance societies for workingmen, however inherently defective; primarily, no doubt, because in their professed aims they attempted to deal with a large number of wants and needs for which private and public charity would otherwise have to provide. Insurance against sickness and against incapacity in old age had so much of intrinsic merit to commend it, that, naturally, in any new undertaking these facts would have to be seriously considered, in that a policy provision to this effect would form a very strong attraction and contribute to gain popular support. Nor was the statistical evidence wanting to place such an institution on a reasonably secure basis. The earlier calculations of the amount of sickness among wage-earners, as reported by the Select Committee of the House of Commons in 1825, had been followed by the investigation and reports of the Southwell Society, and later by the works of Mr. John Finlaison. The Southwell Society tables were published in detail by the Rev. John Thomas Becher in 1829, and in 1830 Mr.

Henry Gregson published his suggestions for establishing friendly societies and savings banks. The well-known treatise on friendly societies by Mr. Charles Ansell, published under the auspices of the Society for the Diffusion of Useful Knowledge, appeared in 1835, but already, in 1833, Mr. John Finlaison had given publicity to a series of tables of monthly contributions which had the endorsement of Mr. John Tidd Pratt, later the Chief Registrar of Friendly Societies. It was not until 1845, however, that Mr. F. G. P. Neison read his celebrated "Contributions to Vital Statistics" before the London Statistical Society, which was subsequently reprinted, in a more elaborate form and in different editions, as a standard work of reference on friendly society theory and practice. In 1850, under the direction of Mr. Henry Ratcliffe, a very important report was published on "Observation of the Rate of Mortality and Sickness Existing among Friendly Societies," calculated from the experience of the Manchester Unity of the Independent Order of Odd Fellows. This report was followed in 1852 by an appendix containing additional data and observations. The work of Mr. Ratcliffe, next to the earlier work of Mr. Neison, forms one of the foundationstones of modern workingmen's insurance on the basis of voluntary thrift. In 1851 Mr. James Henry James published a "Guide to the Formation and Management of Friendly Societies," containing among other tables several in which the contributions from age ten upwards were calculated on a weekly basis. In 1852 a "Return" was published by Parliament, under the supervision of Mr. John Tidd Pratt, containing a mass of data regarding the sickness experience of the registered friendly societies during the five years ending with 1850. An elaborate analysis of the "Return" was published in 1853, prepared by Mr. John Glenn Finlaison, the well-known actuary of the National Debt Office. A further report was published the year following by the same authority, supplementary to the earlier observations. In 1859, Mr. Charles Hardwick, the Past Grand Master of the Independent Order of Odd Fellows, published an admirable treatise on the history of friendly societies, including a very suggestive chapter on the practical development of the science of vital statistics. During the same year Mr. Arthur Scratchley issued, as the third division of his comprehensive work on life insurance, a treatise on friendly societies, containing "An Exposition of the True Law of Sickness," with remarks on the extension of Industrial life insurance. Two years later Mr. Ratcliffe issued a supplementary paper on the rate of mortality and sickness amongst friendly societies, and this was followed in 1867 by a history of the Odd Fellows, Manchester Unity, by Mr. James Spry, and in 1871 by a pamphlet on "The Manchester Unity," by Mr. F. G. P. Neison.

Out of this mass of reports, data and observations, it appeared entirely feasible and practicable to reconstruct on a business basis a plan of life insurance for the masses combining the three elements of friendly society theory, namely, the assurance of a sum certain payable at death, the payment of a sum certain during sickness, and the payment of a sum certain during incapacity or old age. Subsequent experience proved that under present conditions the operations of an Industrial company must of necessity be limited to the assurance of a sum certain payable at death, while the assurance of a stipulated sum during sickness can only with safety be transacted, and then only in a limited way, by fraternal organizations having a perfect knowledge of and complete supervision over the individual members. During the early seventies, however, this result could not be foreseen, and in the light of the then available information it seemed better to follow the general principles of friendly society management and practice than to limit the operations of workingmen's insurance to the more simple, but certainly more effective, provision of a sum certain payable at death.

Our economic history for the decade 1 870-1 879 is one of panic, disaster and distress. From 1862 the currency had been on a paper basis, and, all assurances to the contrary notwithstanding, specie payments had not been resumed. The value of a dollar might have been anywhere from forty cents to ninety-nine, and it was not until 1875 that the resumption act was passed, to take effect on January 1, 1879. Hardly had the act of 1875 become a law when efforts were made to have the same repealed, and but for the strenuous efforts of Senator Sherman this might readily have been the case. In his own words in the Senate, on March 6, 1876, "It is the turning point in our financial history, which will seriously affect the life of individuals and the fate of parties, but, more than all, the honor and good faith of our country." * With the panic of 1873 the wheels of industry had come to a standstill and unemployment had become general. The mass of the people were entirely unprepared for a long period of enforced idleness, and tens of thousands from comparative comfort drifted rapidly into debt, and from debt into poverty and pauperism. The relations of employer and employee became more and more strained, ending in the great strikes and labor disturbances of 1877. The condition of the people

* Speeches and Reports on Finance and Taxation, by John Sherman, New York, 1879, p. 493.

was indeed "calculated to awaken the deepest sympathy in the minds of those who had the well-being of the state at heart."

With increasing poverty, the health of the people had seriously declined during the early seventies, and while ordinarily a very healthful country, the United States at this period suffered from widely-extending epidemics, first of small-pox, then of cholera, and finally of yellow fever. The large foreign immigration had materially increased the population of cities without providing the means for the corresponding sanitary requirements, and the average city death rate by 1872 had reached the extraordinary figure of 29.9 per 1,000. The mortality of children under fifteen had increased to 43.7 per 1,000 during 1871-1875, which contrasts with 28.6 as the prevailing rate during 1896-1900. In Newark, N. J., according to a special investigation* made by Dr. Holden, the general death rate increased from 20.0 per 1,000 during 1869 1033.0 during 1872. In many of the large cities special inquiries were made into the sanitary state of the people, and the medical investigations disclosed an immense amount of preventable sickness and resulting premature mortality. In Boston the demand on the medical charities had more than doubled during the period 1 869-1 874, and a similar condition existed in most of the other large centers of population.

In New Jersey an investigation was made by the Labor Bureau in 1879, when the health conditions were somewhat improved, but even then the average number of days lost by wage-earners on account of sickness was returned as 14.5, which is more than twice the normal, as determined by the experience of the friendly societies. The natural and immediate result of this unfortunate condition affecting the large majority of our population was a demand for organizations corresponding to the English friendly societies, covering broadly the field of insurance protection against sickness,

* Mortality and Sanitary Record of Newark, N. J., by Edgar Holden, M. D., Ph. D., Newark, N. J., 1880.

incapacity during old age, and the payment of a definite, if small, amount at death.

Provident habits were, however, only imperfectly developed among the large mass of our wage-earners during the early seventies. As is usual during long-continued periods of adversity and national distress, moral deterioration followed, and the evidence of this we find in the then prevailing amount of intemperance. By the official statistics of the city of Newark, the ratio of arrests for drunkenness was one to every forty-five of the population during 1 873-1 875 against one to every one hundred and forty-five during 1899- 1901. In other words, drunkenness was more than three times as common thirty years ago as it is to-day. Thus poverty and sickness, combined with intemperance, increased the prevailing amount of pauperism and made dependence upon public and private charities in sickness and distress rather the rule than the exception.