ASSESSMENT LIFE INSURANCE.
By Sheppard Romans.
Life insurance, by whatever system, plan or method, has, for its fundamental basis, the laws governing the rates of mortality at the different ages. These fundamental laws have been developed and made clear by a vast amount of statistical data obtained from observations among persons insured in life insurance companies among annuitants, among inhabitants of various towns and cities, and among the whole population in certain countries, notably in England and in Belgium. One uniform, unvarying, certain law has been thus established, which is that the rate of mortality, or in other words the cost of insurance, increases as a man grows older. From this law there is no escape. We must accept the inevitable. Hence any system of insurance which is not in accordance with this first principle, this unalterable law of nature, is unsound, and any company, whether charging level premiums or natural premiums, which does not recognize and conform to this fundamental law of nature, is doomed to disaster and wreck, sooner or later.
There are two methods of life insurance worthy of the name, and two only. The one is by payments accurately adjusted to the cost of insurance at each actual age, and which inevitably, unavoidably and inexorably, must increase with the age of the person insured, and the other is by level, or uniform payments extending over the whole duration of life or for a stated number of years. The first is the natural system and has been adopted in part, and imperfectly, by assessment companies; the second is the artificial system, and is the one which has been offered exclusively until lately, by all the regular life insurance companies. Properly carried out, the one is as sound in theory and as safe in practice as the other. In fact, the artificial premiums are the exact mathematical or commuted equivalents of the natural premiums.
Until within the last decade, the level premium system was practically the only one in use. Since then there have come into existence hundreds of co-operative or assessment companies. These institutions have had a wonderful growth. It is claimed that the number of members and the amounts insured, double those, respectively, in the old or regular companies.
Assessment companies do not, strictly speaking, grant insurance. They are rather agencies, or trust companies, and their functions or covenants are to make assessments upon survivors when deaths occur, and to pay over the proceeds of such assessments to the beneficiaries of the deceased members. There is no definite promise to pay in full, and no obligation to pay more than the assessments yield. There is no capital, no risk, no insurance! It is a voluntary association of individuals. There is usually but little if any penalty for discontinuance of membership, and the permanence of such institutions depends mainly upon the volition of their members. They spring into existence suddenly by the voluntary association of a few individuals without capital or personal risk, and as suddenly they may go out of existence by the voluntary act or withdrawal of their members. A breath may create, a breath destroy.
It must be evident then to the merest tyro, that the permanence and success of assessment companies depend upon the most rigid observance of those principles which science and sound business experience have demonstrated to be fundamental. Among these principles may be mentioned the following.
1. Rates of assessments or payments adjusted to the cost of insurance at the actual age of each person. These rates must inevitably and inexorably increase with the age of the individual.
2. The creation of a guaranty, or emergency fund, available not only to meet extra mortality, but as a cement to secure cohesion among the members, and prevent the exodus of the sound lives.
3. An assessment in advance at issue of certificate, otherwise some persons will be insured for nothing and the cost will fall on the persistent members.
As was well said by a contributor in your last number, assessment insurance has its defects, and these are well known to the managers of these institutions, and that great improvements have been made by the National Convention of assessment companies, which is composed of representatives from the best companies organized in almost every state. They recognize existing defects, they point out the remedies, and yet, but few seem to have the courage of their convictions. It is a fact beyond dispute, that with perhaps a half-dozen exceptions, the rates of assessment in every assessment company in the country remain constant as at the age of entry. That is to say, a man entering at the age of forty, pays the rate at forty only, as long as he remains a member. This is a direct violation of the inexorable law of nature which says, that as a man grows older the risk of dying, or in other words the cost of insurance, increases. It is all nonsense to urge that the average age and the average cost will be kept down by the influx of new members. The contract is made with the individual, and unless each person pays enough to compensate the company for the indemnity or insurance furnished to him, it follows of necessity, that others will be overcharged in order to meet the deficiency so occasioned. And this evil is intensified each year as the company grows older. When younger and fresher men find that they are overcharged in order to meet deficiencies arising from the act that older and inferior risks pay less than cost, they will either not enter, or, if members, will speedily desert and join an institution which is on a sounder and more equitable basis. No institution can be permanently successful which does not observe equity. I have no hesitation in saying that every assessment or corporation company which violates this fundamental law of nature by not making its rates of assessment increase with the age of the individuals insured, is doomed, and that disaster and wreck is only a question of time. This is not a new opinion. It's truth is attested by more than one wreck in this country already.
In every level, or uniform premium, there is a provision for the payment to the company of the rate of insurance at the actual present age, (no matter at what age the insurance was affected) on the net amount at risk.
The great danger for co-oporative or assessment companies lies in the facility with which such institutions may be organized, and by men without capital, character, experience or financial ability, who may thus be ushered into corporate existence by the indulgent laws of different states.
The members of the National Association of assessment companies should see to it that the laws of the different states should be so amended as to require at least a small capital, say $25,000, as a guaranty of good faith and ability on the part of the promoters, and that no company should be admitted to membership unless its system was founded on sound principles as demonstrated by science and business experience.
The managers of assessment companies should be careful lest their claims should prove to be unfounded. For instance, the writer of the article in your last number boldly asserts that it "is susceptible of mathematical demonstration that one or two million of dollars of reserve is adequate to perpetuate any well-conducted assessment company for all time, however large or small it may be, while the spectacle is presented to us of level premium companies holding fifty to one hundred millions of accumulations belonging to their policy holders, from which no possible benefit, in most cases, will ever accrue to them." On reflection he must see the absurdity of such statements.
The level premium system is a combination of insurance and investments. The hundred millions are investments, and are necessary for the integrity of the level premium contracts. Any assessment company in which the rates do not increase as the members grow older should be compelled to have the full premium reserve required by state law and actuarial science to be held on level premium contracts. This is capable of mathematical demonstration.
It must be borne in mind that the cost of insurance proper, that is, the provision to meet current death claims alone, is quite as high in the best assessment company as in a regular life insurance company, for this cost depends on the careful selection of lives. The difference in the two institutions is that the former dispenses with the investment element, while the latter exacts it in connection with all their contracts. Hence the price to be paid is greater. But is not the guarantee also greater?
The beneficiary under a death claim in an assessment company has for her security the hope, or promise if you please, that one thousand men will pay ten dollars each for her account. The beneficiary under a death claim in a regular life insurance company has for her security not only the actual payments of ten dollars each by one thousand men, but the definite promise to pay in full by an institution which has ample capital, assets, and surplus to back its contracts.
Assessment insurance is yet on trial, and its only hope of permanent business lies in a rigid compliance with the laws of mortality and of sound business experience.