Might be the be-all and the end-all here.
The object of the present writer is to suggest the spots upon the sun, to point out the fallacies, the faults, and the frauds which have been allowed to grow up around the system, and to make some suggestions for the cure of the evils and their prevention.
To begin with, the frauds in life insurance date from the period when companies were started for the purpose of making money, and with the appearance of being philanthropical institutions. Savings banks have gone through the same experience, and it is a sad one. Men who attempt to lead the public to believe that they are engaged in an enterprise based, not upon the selfish principle of profit, but upon the unselfish principle of doing good, and who then deliberately go to work to fill their own coffers by means of the business, are, to say the least, obtaining their money by false pretences.
The capital of the Continental Life Insurance Company was $100,000, and although, by the original charter, the stock-holders were entitled to share with the policy-holders in the profits of the business, yet some years ago an arrangement was made, upon the transfer of the risks of another company to the Continental, that only seven per cent. should be paid to stock-holders. Ever since the yearly statement to the State authorities set forth under oath that only seven per cent. had been paid to stock-holders, all the rest of the profits being presumably divided among the policy-holders. But now, when the light is let in upon this company, it appears that it always paid its stock-holders eighteen to twenty-eight per cent., and that while, of late years, only seven per cent. was charged on the books, yet the money was paid just the same. Then, too, lest the policy-holders should get too much profits to be divided among them, princely salaries were paid to the officers and agents, and upon these salaries annuities were predicated, which were also commuted, capitalized, and surrendered to the company each year. I hardly know how to characterize this scheme. It came out in the evidence of an officer, who said he had $2,000 per annum, with an annuity of five per cent. That sounds quite simple, and persons not fully informed on the subject of life insurance would hesitate to expose their ignorance by asking questions. The annuity turns out to be $100 per annum for life, which at the time it is granted the company capitalized and purchased back, paying about $1,000 therefor. But next year there is another annuity for life granted, of the same amount, which is again purchased, and so on continually. The effect is to add to the officers' salaries, yearly, about fifty per cent., and at the same time conceal it from the public, the State department, and the policy-holders. The president's $17,500 thus became over $26,000, without attracting attention. Besides, it helps demonstrate the scientific principles upon which life insurance and life annuities are based, and by practically illustrating to the managers themselves the potency of algebraic formula in figuring large sums out of small, convinced them of the truth of the arguments which they are to make to the agents, and the agents to the public, by which the money is to be brought in to keep this fine system going.
You will say that this is only one case, and that it is an exception, and that companies honestly managed will not permit such things. I grant you the latter part of your answer, but ask you to show me an honestly managed company; I know but very few. It will be found, on investigation, that these practices, or others quite as bad, flourish in every company, in this State at least, with few exceptions.
Commuted commissions is another item under the thin disguise of which the policy-holders are robbed, but I defer the consideration of that topic for that of changing policies, to which more pressing interest attaches.
When a life policy has run for a certain number of years, and the company has received upon the policy a large number of premiums, it is obliged, both by prudential reasons and by law, to hold against the liability upon it a certain sum of money. This sum is called the reserve. It is also called the reinsurance fund. It is in fact the sum which the company has been improving at compound interest against the day when the policy must be paid. If for any reason the policy lapses—say for non-payment of premium—this sum becomes the property of the company. No policy-holder knows what the reserve on his policy is, and the company will not tell him. It is one of those interesting facts which you are not expected to ask questions about. It requires a complicated calculation to arrive at it. The officers tell you so. The fact is that every company has a book of tables which will tell you the reserve at any moment, and the policy register should show the reserve returned to the department the previous January. It will be seen that if the company can induce the policy-holder to sell his policy to them for a sum less than the reserve, it makes the difference in profit. This is what is known as freezing out. This is open, notorious, bold robbery. But there is a secret method which accomplishes the same result. This is known as changing. If the company is not ready to incur the odium of attempting to purchase its policies, it sends accomplished agents to persuade its policy-holders that some new form of policy is more desirable than the old. Hence the numerous plans of insurance. In the change, it is safe to say that the reserve on the old policy is pretty well used up, and out of it the agent takes a slice, and a pretty good slice, and who takes the rest of it is no mystery. Every policy-holder in a life insurance company who is asked to surrender his policy and take money for it, or another policy, may rest assured that there is a fraud at the bottom of the transaction, and that whoever will make money by it, he will not. In the reinsurance of companies, and the consequent changes of policies from one company to another, this has been the method by which the promoters of the scheme have realized large amounts of money.
Leaving the fertile subject of changing policies, and the frauds of which that operation has been made the vehicle, let me examine the subject of supervision by the State over the companies, and the effect which such supervision has had upon the business. Of course the theory of a State department is that of supervision. It is based upon the power of visitation, as exercised by the founders of hospitals and colleges, for the purpose of seeing that the corporation is carrying out the will of the founder. Here the State, having conferred a corporate franchise, has the right to see that the franchise is properly exercised. To that end an officer is appointed, to whom each corporation is to make annual, detailed reports of its operations, and who is vested with the power of examining the companies, to ascertain if their reports be correct, and if the laws have been complied with. There is no doubt but that if the power were properly exercised, the action of the Superintendent of Insurance would have a beneficial effect. The great difficulty in carrying out the supervision effectively has been, however, the imperfect character of the legislation on the subject. The laws fix an arbitrary standard of solvency, which binds the Superintendent hand and foot.
Insurance experts differ very widely as to the correctness of this standard. It obliges the companies to have on hand invested a sum of money, being a certain arithmetical proportion to the amount of outstanding insurance. A company may not have this amount and yet be solvent, and have before it a long and prosperous career of usefulness. Another company may have the technical amount of assets and yet be rotten to the core. It is said that the very largest and best managed companies have passed through periods when if this criterion were to have been applied to their condition, they would have been weighed and found wanting. The mere amount of assets at any given time cannot be a positive test of the condition of the business. The expense of doing business in one company may be small, and all of it taken out of the premium for the first year, in which case the technical reserve at the end of the year may be very much impaired; yet the company may be in a most promising and flourishing condition, with a good business on its books, and a large future income secure without further cost. On the other hand, a company may have the full technical reserve and yet have acquired its business at ruinous application, out of its future premiums, of large commissions. With laws so imperfect, with no provision for examining the commercial condition of a company, it is not strange that State supervision should gradually fade into an empty form. It is true the department has been for some years kept in full apparent efficiency. There has been a respectable head, and a very full body of clerks duly appointed at the suggestion of members of the Senate. These clerks have been agreeably employed in receiving, folding, and filing the reports of the various companies; in receiving applications for licenses from agents of foreign companies; in issuing such licenses; in furnishing printed copies of the charters of companies to all who apply for the same, and also copies of the reports of the companies. These duties are supplemented by that of collecting the fees for the various services, and by the composition of answers to letters of policy-holders of the most Delphic character. The head of the department, I suppose, is meantime fully employed in digesting the statements of the companies and preparing his annual report of their condition, to be presented to the Legislature, and afterward printed and bound in gilt covers, for distribution among his constituents. These reports are quite pleasant reading. You will find year after year faint and delicate suggestions as to amendatory laws, opinions that there is doubt of the legality of amalgamations, and other twaddle. Not a word, however, denunciatory of the frauds being perpetrated under the very nose of the department, and which every man in the State can see quite plainly but himself. Of the epistolary productions of the Superintendent, it is hard to speak. If language be given to conceal thought, how well it is used by the Department of Insurance. Complaints, charges, requests to examine—all are met so politely, so evasively, that while you feel you are being put off, and that your request will not be granted, you know not why you are refused.
Thus the Department of Insurance ran its natural course. It became a storehouse of heaps of meaningless figures. The companies soon found that their mistakes were not corrected, and it became convenient to make mistakes. Gradually false statements grew out of exaggerated ones. Cash in bank would continue to represent money which had been lost by a bank failure. In one sense it was cash in bank—cash that would never again come out. Then money in the hands of agents is an item which could rise and sink with great facility. In some companies it grew to such proportions as to warrant the suspicion that pretty soon all the money of the company would be in the hands of agents, and very bad hands to be in they have generally proven, have these agents' hands. The books of the Continental Company show about a million of dollars in the hands of those gentlemen, with very little chance of any considerable portion of it ever getting into the hands of the receiver.