Western Insurance Review. ST - L0UIS - MO., FROM JANUARY NUMBER, , 8 ;,. THE C°-° PERAT1VE DELUSIONS. Opinions of Aug. F. Harvey, Esq. Opinion of Flon. Wm. Barnes. The Valuation of Cooperative Certificates. The Status of a Cooperative Company. The Companies to be excluded from Missouri. In the following opinions addressed to Hon. Wyllys King, Superintendent of the Insurance Department, by Aug. F. Har¬ vey, the Department Actuary, and Hon. Wm. Barnes, late Superintendent of the New York Insurance Department, there is some diversity of opinion ; the first regarding a cooperative certificate as of no lower grade than that of an ordinary life policy, and the other regarding it as of the status of a paid-up life policy, for at least $1,000. Each, however, shows that no continuous reserve can possibly be maintained, upon either grade, under the company’s system of premium pay¬ ments. In his second paper, Mr. Harvey having proposed the mode of valuation, only in view of a cooperative company actually doing business here, gives reasons for excluding all such com¬ panies from the State; and we are informed that his views, corroborated by other testimony, will, doubtless be adopted by the superintendent, and that henceforth cooperative companies will be denied participation in the insurance business of the State. Mr. Harvey shows that the foundation of cooperative busi¬ ness is, like the latest definition of a novel, a something “founded upon facts invented for the purpose;” and in this view coincides with Hon. Elizur Wright, who declines to “solve a problem in which all the quantities are unknown and variable. ” St. Louis, December, 1870. Hon. Wyllys King, Superintendent : Sir : In the matter of the mode of valuation of the certifi¬ cates of membership in the National Life Insurance Company of Chicago, I have the honor of saying that I have given the subject the fullest consideration that the papers and points presented me permit. The law of Missouri, regulating the business of life insuranc e companies within the State, prescribes that whenever a com¬ pany shall file certain statements, pay certain fees, and pro¬ duce evidence that it has $roo,ooo deposited with State authorities for the benefit of its policyholders, it shall be per- ; mitted to do business in the State. These requirements have have been complied with by the National of Chicago. The law further provides, for the purpose of verification of the statement of assets and liabilities, for an examination of the items composing the one; and a calculation of the company’s reinsurance reserve., or computation of the .present liability of the company upon each of its policies— in detail or by groups— which should appear as an item on the other side. For the purpose of valuation, the law adopts, for the department stand¬ ard, the American Experience Rate of Mortality, with 4 1 / 2 per cent, interest, and directs that in all cases computations shall be made upon net premiums only. The question first to be decided is, to what class of assurance policies—whether term, life, endowment or other—can the certificates of the National be properly assigned ? That answer¬ ed, the proper tables of net rates is made apparent. The par¬ ticular policies—or certificates of membership—issued by the National of Chicago are upon what is popularly called the cooperative plan, and are held by the company to be merely policies of temporary insurance for one year, in the sum of not less than $1,000, with permissive clauses under which the insured can convert them at the end of the year into regular life or endowment policies, or extend their temporary tenure indefinitely year by year. Let us see if this view is eorrect. First, as to the inducements held out by the company to ob¬ tain applications. It says “insurance, divested of actuarial mysteries is furnished each year at its naked cost,” and then follows its TERMS OF MEMBERSHIP. One membership.$9.00 Annual dues, two dollars on each $1,000, in advance.... 5.00 Which on the death of a member in a full series, will secure to the person named in the certificate the sum of.2,500.00 Two memberships, on one certificate,. 23.00 Annual dues, in advance,. 10.00 Which on the death, See., secures, &c.,.5,000.00 Three memberships. ’ ^ OQ Annual dues, &c.,. 15.00 Which secures as above.7,500.00 2 January , 1871 WESTERN INSURANCE REVIEW. Four memberships. $45.00 Annual dues. 20.00 Which secures as above.10,000.00 Assessments, in the event of the death of a member, on each membership held by you, on each membership held by the deceased member in your series, $1.10. GUARANTEE. “This company guarantees to the insured in the event of death, on each membership held by him or her, as many dol¬ lars as there are memberships in his or her series at time of death ; and that the said amounts shall exceed all the moneys which shall have been paid to the company on his or her cer¬ tificate. And it further agrees, for the space of one year from the date of the certificate, that the number ot memberships shall not be less than one thousand, thereby securing the in¬ sured, in case of death within one year, the sum ot one thou¬ sand dollars, and such further amount as the number of mem¬ berships exceed one thousand. “You are, by the company, placed in a class limited to twenty-five hundred memberships, near your own age, in order that the deaths may be justly apportioned. “Said divisions (classes) are divided off as follows : Division A comprises persons in good health, of both sexes, between the ages of 10 and 25 years. Division B***, those between 25 and 35 years. Division C***, those between 35 and 45 years. Division D***, those between 45 and 60 years. “In each division there are series, each series limited to 2,500 memberships. “When one series is full, another will be commenced, to be known as series No. 2, in same division. “The divisions only designate the age of the persons. “Should a vacancy occur by death or otherwise, it will be immediately filled by a new applicant of the proper age, so that a series once full will be kept full. “Whenever a member insured in your series dies, and satis¬ factory proof of lbss has been received at the home office at Chicago, you are notified by the company of such death, and the number of memberships held by said member. You are to pay, or cause to be paid, at the home office at Chicago, on each membership held by you, within thirty days after the mailing of said notice, the sum of $1.10 on each membership held by the deceased member; one dollar collected on each membership will be paid over to the person named in the cer¬ tificate of membership, and the ten cents will be used to cover postage and other expenses of collecting.” The probable (or possible) number during the year of these death assessments is variously stated, from none at all to six per thousand of memberships; and in money, from no dollars to fourteen, and is based upon tables purporting to give the experienced rate of mortality of companies doing business in New York from i860 to 1869—the results of which are not assisted to credibility by even the facts there given. This much presents the salient points of the canvassing document of the company, to wit: That for a payment in hand of $12.00, a regular annual payment of $5.00—specified to be for annual expenses—and an irregular payment of $1.10 whenever death occurs in the class to which the certificate-holder belongs, he is promised an insurance of as many dollars as there are memberships in his class, up to 2,500, and for one year not less than 1,000. SECOND—OF THE APPLICATION. This is in the ordinary form. It requires answers by the ap¬ plicant to certain questions touching his or her physical con¬ dition, habits, &c., and provides for a regular medical examin¬ ation. At the foot of the personal interrogatories, there is a declaration stipulating that the preceding replies are all true, that no material fact has been kept from the knowledge of the company, and that “any omission or neglect to pay any of the dues or assessments on or before the days on which they shall fall due shall take place, that then, in either event, this contract shall become null and void, and all moneys which shall have been paid shall be forfeited to the said company, for its sole use and benefit.” Then follows date and applicant’s and witnesses’ signatures. There is no material difference, if any, between this form of of application and that in general use by life insurance companies. THIRD—OF THE CERTIFICATE OF MEMBERSHIP. This document is, in full, in the following words : This Certificate of Membership witnesseth that the National Life Insurance Company of Chicago , in considera¬ tion of the representations made to them in the application for this certificate, and of the sum of-dollars, to them duly paid by —-, and of the annual sum of five dollars on each membership held by-to be paid to said company on or before the first day of- in each and every year during the continuance of this certificate, have constituted - 1 -—, of-, county of-, State of-, a member, with-membership in the National Life Insurance Company of Chicago, subject to its charter and by-laws, and conditions, and agreements hereinafter mentioned. Within sixtv days after due notice and satisfactory proof of the death of the said-, has been received at the home office of the company at Chicago, the National Life Insurance Company hereby promises and agrees to pay to- or-legal representatives, at the office of the company in Chicago, Illinois, as many dollars on each membership held by-as there are memberships in division-, series-, of this company, at the time of death of the said-. And the company hereby guarantees that for the space of one year from the date of this certificate, the number of mem¬ berships, on said division and series, shall not be less than one thousand, thereby securing, in case of death, one thousand dollars on each membership, and such further amount as the number of memberships may exceed one thousand. The number of memberships in said division and series, after the death of a member, shall be ascertained according to the con¬ ditions hereinafter expressed. This certificate is issued and accepted by the above named member, upon the following express conditions and agree¬ ments : 1. The above named member hereby agrees to forward to this company, the annual sum of two dollars on each member¬ ship in-name, on or before the first day of——— in each and every year, during the continuance of this certificate, and the said member further agrees that if the said annual dues of two dollars on each membership held by-is not received by the company at the home office in Chicago at the date when due, or within thirty days thereafter, then—membership shall cease, and this certificate, with all its agreements and guarantees shall be null and void and of no effect. 2. The above named member further agrees to pay-to the company for each and every membership held by-the sum of one dollar and ten cents for each and every member¬ ship held by a deceased member in his or her division. Said payment to be made within thirty days from the date when the company shall mail-a notice of the death of a member and the number of memberships held by said deceased mem¬ ber. And the said member further agrees that if the said as¬ sessment or assessments shall not be received by the said com¬ pany at the home office in Chicago, within thirty days from the date of said notice, then-membership shall cease, and this certificate with all its agreements and guarantees shall be null and of no effect. 3. A printed or written notice from the secretary, directed to the address of each and every member, as it appears in the application or on the books of the company, and deposited in the post-office, shall be deemed a legal notice. In order to ascertain the number of memberships in any division or series on the death of any member belonging to such division and series, the memberships in the name of those members who shall have refused or neglected to pay their annual dues at the time above specified, without further notice and also assess¬ ments on previous death, after due notice given them accord¬ ing to the conditions of membership, shall first be stricken } I January , 1871 WESTERN INSURANCE REVIEW. from the list of memberships in each division and series, and shall not be counted. 4. Due notice must be given to the secretary of the company by each and every member of all changes of his or her residence, post-office address, occupation or name. 5. If the said assured shall, without the consent of this com¬ pany previously obtained in writing, engage as a mariner, engineer, fireman, conductor, or laborer in any capacity, on any sea, sound, inlet, river, lake or railroad, or in the manfac- ture of gun-powder, fireworks, or in sub-marine operations, or coal mining, or shall be personally engaged in the production or transportation of highly inflammable or explosive substance, or engaged in any extra-hazardous occupation, or enter any military or naval service whatever (except the militia when not in actual service,) or shall die in consequence of a duel, or of the violation of the laws (civil or military) of any nation, State or province, or shall become so far intemperate as to seriously or permanently impair his or her health or produce delerium tramuns, or in case the answers or declarations made in the application for this certificate ahall be found in any respect untrue, then his or her membership shall cease, and this cer¬ tificate, with all its agreements and guarantees, shall be null and void, and in every such case the company shall not be liable. 6. In case the above membership shall cease, this certificate with all its agreements and guarantees shall become null and void, and all previous payments made thereon shall be forfeited to the company. 7. All members are at liberty to travel by sea, lake, or river by first-class steamers or sailing vessels, and by land to any part of the United States, British Provinces, or in Europe. This certificate is not binding on the company until counter¬ signed by-, agent. In witness whereof, the said National Life Insurance Com¬ pany has hereunto affixed its corporate seal, and has caused this certificate to be signed by its president and secretary, in the city of Chicago, State of Illinois, this —- day of- A. I). 1870. Now it may be noted that the conditions precedent to the continuance of this certificate are two in chief. First, The payment of a sum certain in hand, and another annually in advance, and the payment of a third sum in ir¬ regular equal installments as called upon after the death of each member of the same series and division. The fact that these conditions are separate, the first in the promissory part, or that binding the company, and the other in that which refers only to the duties of the insured, is of no moment, because if this certificate were to be adjudicated upon by a court, its promises, provisos, guarantees, conditions and agreements would be taken as a whole ; the condition relative to assessments regarded as merely out of place (with the other conditions as to payments), the signatures of the officers, stamp and seal making it binding upon the company, and the accept¬ ance of the instrument by the insured, with his signature to the application making equally binding upon him or her the per- sonal conditions therein expressed. One of the conditions and agreements is that the insured A. will faithfully and promptly transmit or pay to the home office of the company in Chicago, within thirty days of the date of a notice of a death in his class, the amount of his assessment, cp one dollar and ten cents, or, if such payment is not made, the certificate is to be cancelled. The officers of the company say that when a member dies 7 the full amount of the assurance—in dollars equal to the num- < ber of memberships—is paid him at once after satisfactory- proof of loss, and that the reimbursement of the funds must come from the collection of the assessments. The contract or certificate does not, however, say any such thing. It provides that payment is not to be made until sixty days after the proof of death, and as the assessments are to be made (or the cer¬ tificates of non-paying members forfeited) within thirty days after the companys notice is dated, the true intent of the cer¬ tificate is only to pay after the assessment collections have been made. In fact the rate book of the company says, in these words: “One dollar collected on each membership will be paid over to the person named in the certificate of member¬ ship, and the ten cents reserved to cover postage and other ex¬ penses of collecting.” Suppose 84,000 members are in this company, their average age being 32 years, in 42 series of 2,000 each, 722 deaths* oc¬ cur during the year, every member pays promptly his assess¬ ments of $17.22 each, and the whole amount collected $1,444,000 has been as promptly paid to the heirs of the dead. The vacancies in the classess have been filled up. Now another death occurs and 100 members of one class decline paying the assessments. The beneficiary of the deceased insured, who has been prompt in paying the $17.22 assessed on him to se¬ cure $2,000 at his death, must be put off with $1,900—$100 short of his just dues—or the deficiency must be made up by the company. How ? I he company answers promptly, “out of the nine dollars membership fees paid in advance by these 100 delinquents. 1 have said (upon the authority of the rep¬ resentative of the company, at whose instance the present dis¬ cussion has been hastened,) that the company regards the cer¬ tificates under review as one year term policies. A policy of assurance, for the term of one year, is that which secures a stipulated amount if the insured dies within one year from its date, its premiums (excluding loading) is just that with interest which will pay the “naked cost;” and it does not carry any possible liability against the company after the expiration of the period of twelve months. On the basis of the American rate, suppose that the 84,000 persons, aged 32, (holding the cooperative certificates, as here¬ tofore supposed,) had, instead, taken onej-ear term policies in a legitimate life insurance company. They would have each paid in advance a net premium of $16,475, and this sum im¬ proved at 4)4 per cent, interest one year, makes the $17.22— the death assessment on the cooperative plan. The condition of things, however, at the end of the policy year differs in the two cases. In the regular plan a premium of $16,476 on each of eighty-four thousand $2,000 policies, makes up a total of $1,383,945.40. The deaths being the same—723—require $1,446,000, which is the amount of $1,383,945.40 improved at 4)4 per cent. The contract is closed. In the first case the heirs of 722 dead members have been paid in full, while one assurance is short $100, and the deficiency is to be met out of some other fund than the proceeds of the net term premiums. In the second, the 723 death losses have been paid in full, and there have been no payments made in advance or other¬ wise of more than the contract called for,—“the naked cost of insurance;” no deficiencies have had to be made up. The company has had no opportunity of putting down as “profit on lapsed policies” $1,090 out of the $1,200 advanced by the [The condition that if the money is not received at the home office, is useless ; for while the company binds itself to notify its members only by mail of death losses and never through an agent, if the insured can prove that he properly delivered his money to the post-office or handed it to a charter officer of the company, he can maintain his interest, whether the “home office” ever got it or not.] * These high figures are used for the purpose of a comparison of illustrations further on. The death rate is about one-half higher than the company admits. Note. —In the copy before me the annual dues are stated to be $2.00, but in the certificate now issued, I understand the amount is $2.00 per $1,000 of insurance, or $s oo on a full membership. 29667 4 WESTERN INSURANCE REVIEW. January, 187 r 100 members who, as cooperatives, happened not to pay their last assessment for the year. But, granting that in the form adopted by the National, there is a necessity for an advance payment to secure the company, in making good its deficiencies, the certificate itself shows that $1.10 is sufficient—indeed all that the company is entitled to, and $10.90 on each membership is yet unac- couted for. In real term assurance, as shown, no excess of advance pre¬ mium is required, nor is any excess in the advance premium required in any legitimate plan of life assurance. That which is apparent surplus in a net whole life premium, over the cost, during the early years of the policy is not an excess of pay¬ ment. It is a reserve: it is that sum which increased by the net premium annually, improved as compound interest, and charged annually with the cost, will at the probable end of life, equal the policy’s face; and is required to make good the deficiency of the annual premium in the later years of the life, and it belongs to that policy alone for which the pre¬ mium creating it was paid. It is not to make good any defi¬ ciency in any other policy of its own grade or class, or in any other. Nor ought it to be forfeited if the policy lapses from non payment of premium. No company doing business upon the true theory of life insurance can make a legitimate profit to its proprietors out of any other sources except excess of inter¬ est received over basis rate and what may be saved from the excess of loading over expenses and contingencies. Savings from mortality, [fewer than the anticipated number of death losses,] belong exclusively to the reserves and should be kept secure: for if rates of mortality are worth any thing at all, they show that any low death rate in one year or a series of years will be inevitably balanced by a high one afterwards. Hence such profits should accumulate to be called for, when the equili- brum in the death rate is restored. Nor is it out of my line of argument to say that profit on lapsed policies is illegitimate. The reserve is an accrued present liability to the policy holder: if he keeps his policy alive, it accumulates; if he drops it, the company dealing equitably with him, will, (charging him with a moderate percentage to pay for replacing the risk,) carry the amount of the reserve to expenditures account as a surrender value, paid, and charge-income with a premium for a paid up policy of less amount fhan the original, or the premi¬ um for a term assurance of the whole amount, for a length of time that will just exhaust the balance of the reserve in paying cost of insurance, the latter course being required by law in Massachusetts; and either, at the option of the insured, is held good by nine tenths of the companies now in existence. But, whatever course, sanctioned by custom, companies may take in this matter of the forfeiture of a reserve by the lapse of a policy, no one pretends that the reserve or any part of it be¬ longs to any other than its own. That it does not is shown in the fact that the dropping of a policy out of a company’s list affects no other, all of the reserves are maintained, and each policy, dead or alive, takes care of itself. The National has gone a great way out of the law of common sense, as well as the laws of mortality, compound interest, and common arith¬ metic, if it is issuing a line of policies for the term of one year for a greatly excessive rate above what it professes, the “naked eost.” And as its contract expressly contain a provision for an excess of payment over what is just for a term policy, we are forced to the conclusion that the company itself regards its cer- cificates as policies of a higher grade than term.* And being more than term policies, and an excess over a just premium having been paid for them, can such excess be treated as a re¬ serve and so be held to the exclusive use of the policy or cer¬ tificate for which it was paid. A gross premium for any plan of policy except Term policies of one year consists of three well defined parts: jst. The reserve—already described. 2nd. The loading—a percentage of the net premium, to pay necessary expenses of conducting the business and to pro¬ vide for extraordinary contingencies. 3rd. The “cost of insurance,” which is the probability of dying during the year multiplied by the amount at risk. It is this last part of the premium which is provided in com- m&n with the premiums on all the policies issued by a com¬ pany, to pay the current claims under the policies during the year; sometimes, however, an epidemic or other adverse con¬ tingency, requiringa draftupon the loading or second part. But the first part, the reserve, can never, if a company is managed with reasonable prudence be touched for any purpose except the final settlement of the policy to which it is credited. The Na¬ tional has the “cost of insurance” in its assessments of $1.10 at each death, although it assumes a falsely made up rate of mortality. It also has the “loading,” finasmuch as it charges an annual fee. of $5.00 “to cover necessary expenses,” and it has a sum paid in hand, viz : the $9.00 of the membership fee, very greatly in excess of the premium for a term policy. The company’s canvassing documents, declare this payment to be a part of a “fund accumulated for the purpose” of meeting di- hciencies in amounts of insurance arising from failures to pay death assessments, at the same time guaranteeing that the current cost shall be met by the current death assessments. Perhaps this would be an absurd contradiction of items, if there did not, underlying these guarantees, exist the expecta¬ tion of an event which by the own company’s own showing is a certainty. It is that in the course of years variously estimated by different computors at 17 to 34 or 42 years of the class exis¬ tence, [the last the company’s own estimate] a time will come when by reason of the advanced ages of the original or older members of a class, the death assessments will overrun the pre¬ miums ordinarily charged by the mutual companies, and that then, the deficiencies by forfeited and deceased memberships cannot be replaced by new ones, and the number of members in a class will become so reduced that the pa) ments which al¬ ready have been made by old surviving members, who are willing still to remain, will have paid for much more insurance than they can possibly get, if the amount is restricted by the terms of the contract to as many dollars as there are members in the class. This expectation accounting reasonably for the collection of $7.90 out of the $9.00 advance fee, and the company claiming plainly that the aggregate of these fees is a fund accumulated for such contingency, we must regard the fee as a reserve, precisely like the reserve in a regular company; something to provide for the claims of the policy when the cost part of other current premiums hasbecome insufficient to meet them. In legitimate life insurance that part of the pre¬ mium paid which is lawfully used to make up the amount of * That at least an innate belief of this sort exists in the company, was made mani¬ fest by the anxiety of the representative of the company, to obtain a decision from this Department upon the grade of these policies, upon the cx-parte evidence laid be¬ fore us by him. t 1 may observe here that if these certificates are term policies, and the death assess¬ ments of an average of $10.00 per annum make the net premium $5.00 for expenses is a most monstrous loading. January , 1871 WESTERN INSURANCE REVIEW,. current death losses during the year has been explained to be that which is called the “cost of insurance,” so the co-opera¬ tive company provides that the “naked cost” to wit, the as¬ sessments of $i.io upon each death shall pay the current death claims. In the one, the “loading” pays the expenses, in the other, the $5.00 annual dues is declared to be enough, and intended only for the expense account. In the first the re¬ serve is known to belong exclusively to the policy to which 't belongs, and in the last (if the company has not positively provided that its reserve is only to be applied to the claims of its certificate,) the law would probably take cognizance of the rights of the policy-holder in all the moneys to his credit, and determine that the reserve is his exclusive property and must be maintained as such. Again, the certificate provides that it shall remain in force not one year, but as long as the regular annual dues and the death assessments are paid, ex¬ cept it terminate by the death of the member. It nowhere provides for a limited number of payments, nor for a settle¬ ment of the policy claim at the end of a specified number of years, if the insured is then alive; consequently it is not a lim¬ ited payment policy of any kind, nor an endowment assurance of any kind. Its further provision is that if kept alive by the payments prescribed, an assurance is guaranteed, whenever the member shall die, not within one, two, three , five or any specified number of years, but whenever that event shall oc¬ cur. A term policy always specifies the time within which the assured must die, to make the policy a claim. The net pres¬ ent value of an ordinary life policy whose face value is one dol¬ lar is R in the equation R = i ~p ~~• -r being the age of the insured at the issue of the policy and «, the number of years which have elapsed since; and the value of A is determined by the number of premiums to be paid to make good the as¬ surance. In the case before us, the contract prescribes no limit to the number of the premiums, except as they terminate by death, and as that event must happen and so stop the payments, they are life premiums; and A is the present value of a life annu¬ ity of $1, Ajr is the present value of a life annuity at age _ r and A* + n is the value of a life annuity at an age x + „ years. These annuity values are to be taken from tables made up from the standard mortality and interest, provided in the Mis¬ souri law; and have no reference whatever to the actual or probable amount of the annual dues and assessments paid to or required by the company. The formula provides the re¬ serve for a policy of $1.00, that multiplied by the amount of a policy in question gives the full reserve required to be held to its credit. If this argument is clear, it has been shown : That the certificates of the National Life Insurance Com¬ pany of Chicago are of a higher grade than term policies for one year, or any specific number of years. That the payments demanded, and agreed upon, to keep a certificate of membership in force, make virtually a regular premium composed of the three clearly defined parts; reserve, loading and cost. That the certificates are not limited payment life or endow¬ ment assurance, but that, by the conditions as to the continu¬ ous payment of premium and the time of death, they are of the nature of whole or ordinary life policies. That the amount of each, justly to be considered is, under the legal obligation resting upon the company not to permit forfeitures, and its declaration that a series once full must be 5 kept full, as many dollars as the number of memberships not less than 1,000 contained in the respective classes to which the certificates belong. I therefore recommend that all the certificates issued by the co-operative branch of the National Life Insurance Company of Chicago, or by any other company which makes assurances upon a similar plan, be valued in this Department as of no lower grade than ordinary, or whole life policies; and that the amount of each be taken for as many dollars as there are memberships in the class, at the time of valuation, not less than one thousand during the first policy year. The age at issue should be, unless reported for each certifi¬ cate in the detailed list, taken as the highest in the class to which the certificate belongs. Against a reserve so determined, it will be proper to allow the company as an asset, a “deferred premium” viz: the differ¬ ence between the cost of insurance for the year and the expir¬ ed portion thereof This to be determined by the Depart¬ ment. All regular policies issued by the company, should be valued according to their expressed tenor. As this is a question of the very first importance in view of the welfare of the people of this State who might be induced to insure where abundant security may be wanting, and feelfng that in a multitude of counsel there is wisdom, I will, with your consent, invite Hon. William Barnes, late Superintendent of the Insurance Department of New York State, who has had a greater experience than I have, in all matters pertaining to life insurance, to consider the matters in review, and lay before you his opinion upon the status of co-operative policies. Very Respectfully &c., Aug. F. Harvey. Actuary. -■ IWI m - HON. WILLIAM BARNES’ OPINION. Before the Hon. IVyllys King Superbitendent Insurance De¬ partment, State of Missouri. In the matter of the application of the National Life Insurance Company of Chicago Illinois. First. The legal obligations created against the corpora¬ tion by the policies issued on the “co-operative plan” are of course to be considered on the debit side oftbe account, or un¬ der the heading of liabilities. What are the liabilities which arise on the issue of the so- called “co-operative policy?” After a critical analysis of its various provisions, it appears that the following obligations are assumed on the part of the corporation. 1. The company agrees to constitute the policy-holder “a member,” with one or more memberships in the company sub¬ ject to its charter and by-laws, and the conditions and agree¬ ments contained in the poligy. 2. The company also “promises and agrees” to pay to the beneficiary, within sixty days after satisfactory proof of the death of the member, “as many dollars on each membership held by him as there are memberships in his division and series at the time of his death, not exceeding 2,500.” 3. And the company further “guarantees” that for the space of one year from the date of the certificate, the number of memberships in the division and series shall not be less than one thousand, thereby securing in case of death one thousand 6 WESTERN INSURANCE REVIEW. January, 1871 dollars on each membership, and such further amount as the number of memberships may exceed one thousand. What obligations are thereby created on the part of the company? The first one assumed, that of membership, may or may not originate a debit, on the part of the corporation, and for present purposes may be passed or considered as noth¬ ing. The second clause of the agreement on the part of the com¬ pany plainly creates an obligation which is called a life policy, or policy of whole life insurance on the life of the member des¬ cribed in the certificate. The promise is to pay a certain sum on the death of John Doe, or within sixty days after due proof of death. This agreement is the distinctive substance and es¬ sence of a policy for the whole term of life, and indubitably creates an obligation against the company in the nature of a whole life policy. It should be valued (by a gross valuation) as an assurance or reversion, payable at the death of the member or policy-holder. The particular amount of this reversion or the exact sum pay¬ able at death, is the only element of uncertainty in the con¬ tract. If the death occurs in one year, the third clause in the policy as above set forth, provides that the sum assured or re¬ version shall amount at least to one thousand dollars. After the members in a division and series reach one thous¬ and, this clause becomes in-operative, unless the members should, during the year diminish below one thousand member¬ ships. In valuing policies for the first year if there are less than one thousand members, the values of the reversions for the exist¬ ing number should first be computed, and to this should be added the probable loss or single premium for the year, on the difference between the actual number of members and one thousand. In other words, during the first year until the mem¬ bers and memberships number over one thousand, the policies should be valued on the assumed or guaranteed basis of one thousand memberships for the first year; and thereafter on the actual number, then the query is— What is the present value of the several existing life rever¬ sions, according to the actual number of members, and of a temporary insurance for one year, of a number of dollars equal to the difference between the actual number of members and one thousand? After the first year, the only question as to old policies would be, What is the present value of reversions on the lives of the different members amounting to as many dollars as there are existing members under, twenty-five hundred and one in num¬ ber? The valuation tables on inspection give these values or single premiums at the different ages. In valuing the company’s lia¬ bilities on this plan at any time the computer of course only values the existing policies, without any reference to new mem¬ bers who may afterwards come in, or who afterward may cease to be members. Thus far the debit side; In orper to meet these enormous obligations what has the company provided on the credit or asset side of its contract, or otherwise. Second. The company has, as I understand a paid up cap¬ ital of one hundred thousand dollars deposited with the auditor of the State of Illinois for the security of its policy-holders. This capital is of course liable for losses, and early losses would thereby be abundantly secured. But capital, of whatever amount, is under an obligation to remain intact and full with only a reasonable margin of impairment. It cannot therefore be considered otherwise than as a pledge of good faith in or¬ ganization and as a temporary protection and security against unusual or adverse contingences. Capital being obliged in the long run to maintain its own existence, thereby exhausts its permanent power. It is in the nature of an army reserve, and should be used only in such a way as forever to preserve its potentiality. When it is credited as an asset and charged as a liability, the items balance each other. We are therefore ex-necessitate sooner or later remitted to the policy itself for the pabulum to support its own existence. What do we find there? The company receives twelve or fourteen dollars in cash for each membership, on the initiation or issue of each policy. This amount having been actually received and not being return¬ able to a member on withdrawal, it becomes the absolute prop¬ erty and a portion of the assets of the company, and enters unquestionably upon the assets side of the company’s state¬ ment. 2. The sum of five dollars is payable annually on each membership -“during the continuance of the certificate. 3. The sum of one dollar and ten cents is payable by the surviving members on each and every membership held by a deceased member in the division at the time of his death. It will be noticed above that in speaking of the values of the assurances or reversions, I have uniformly refered to gross values. This of necessity, for there is no adequate net premium or annuity to offset the value of the reversion and there¬ fore, of necessity, the policy must be disintegrated and the two sides analyzed and valued separately If the obligation on the part of the assured or member, to pay an annual prem¬ ium of five dollars, and the sum of $1.10 on each death in his division and series, was an absolute one running concurrently with the policy then I see no good reason why the company would not be entitled to be credited with the present value (after deducting a reasonable loading) of such annuities and contingent paymenti pro tanto, as an off-set against the pres¬ ent valuesgof the assurance or reversion. The present value of an agreement to pay $1.10 on each death in a certain num¬ ber of members of specified ages could be calculated on the legal standard of mortality and interest, and would of course be an increasing premium or annuity for several years, until death by diminishing the numbers would counteract the mortality incident to increased ages. I do not, however, see how an optional obligation on the part of the member or policy-holder, can be properly offset against an absolute and unconditional contract or obligation on the part of the company. By the “conditions and agreements” incorporated in the body of the policy, it is stipulated and agreed between the parties that if the annual dues of five dollars, and the assessment of $1,10 on each death are not “received” at the home office in Chicago when due, or within thirty days thereafter, then the “membership shall cease and this certificate with all its agreements and guarantees shall be null and void and of no effect." All previous payments to be forfeited to the company. In my opinion, these provisions in effect, amount to an agree¬ ment for liberty of withdrawal to members ad libitum, and no action at law could be maintained for the collection of the yearly dues or assessments on the decease of members. It is reasonable to assume that this right of option on the part of the members, will be exercised in their own interest, and that when-mortality is heavy the number of members will diminish, or that the assessments will be least available when most need- January , 1871 WESTERN INSURANCE REVIEW. 7 ed. This leaves the first cash payment and any other which may have been actually received, as the only legal and sure source of income. Any other payment is not an exigent ne¬ cessity or legal obligation on the member, and is only tanta¬ mount to a voluntary contribution or charitable donation, and therefore, not entitled to any weight or value according either to the legal, scientific, or business promises which test the sol¬ vency and status of corporate institutions. You will readily perceive that the proposed so-called “cooperative policies,” inevitably lead to utter and irreparable insolvency in conse¬ quence of assuming absolutely, the obligations of a life insur¬ ance company, without any adequate or certain future premi¬ ums receivable. As such, this class of business falls more properly within the sphere and province of friendly, and benev¬ olent, benefit or burial societies, where voluntary contributions can betaken up or assessments made for the benefit of deceased members and their families. No monetary, provident or life insurance corporation, should be allowed to issue life policies in any form or under any pretence whatever, without being able to maintain its proper reinsurance fund or reserve, (according to the legal standards of interest and mortality), invested in sound legal securities, as provided by the insurance laws of the State of Missouri. (Signed) William Barnes, Southern Hotel, St. Louis, Jan. 2d, 1871. P. S.— I have not considered it necessary to enter into any discussion regarding the agreement endorsed on the back of the policy or certificate of membership, by which in considera¬ tion of a certain additional sum for assurance, the company agree to extenn meir guaranty for a policy of one thousand dollars, throughout the whole term of life. W. B. A. F. HARVEY ON EXCLUSION. St. Louis, Jan. 7th, 1871. Hon. Wyllys King, Supt. Insurance Department: The opinion hitherto given as to a mode of valuation of co- operative certificates, was based upon the assumption that hav¬ ing complied with the laws of the State, preliminary to a per¬ mission to do business here, a cooperative as well as any other company was entitled to a rule under which to determine a minimum for its assurance liabilities; and a reason was there¬ fore given for fixing the lowest possible grade to its contracts of assurance, to wit: ordinary life policies. Permit me further, however, to suggest the inquiry, whether the character of com¬ panies of this kind in review, is not in the language of the Missouri laws, “such as to render their further proceedings hazardous to the public,” and if so, whether, even, after a valu¬ ation of the certificates upon an ordinary life grade, they shall exhibit assets enough to secure present solvency, they should not be excluded from doing business in the State, upon the general ground that the future as well as the present welfare of the citizens of Missouri, should be taken cognizance of by the department. The testimony of such distinguished State superintendents as the Hon. Messrs. Barnes, Miller, Sanford and Clark, and of Hon. Elizur Wright, D. P. Fackler and E. W. Bryant, Esqs., and other eminent (and honest as well as eminent) actuaries, is a unit in their opinion that all cooperative companies, conduct¬ ed upon the plan common in the United States, must sooner or l^ter come to grief. Indeed, every one is born of a diseased parentage, and is brought into the world covering the ineradi¬ cable seeds of sure and early dissolution. One of the fundamental principles of safety (to assurer and insured) in life insurance, was the equalization of periodic pre¬ mium payments between the ages at entry and possible termi¬ nation. At the very beginning of the science of life contin¬ gencies, it became evident that no matter how cheaply insur¬ ance could be guaranteed, and how well able, desirous and wil¬ ling, men might be to secure it by paying, say annually, only the cost, by a premium increasing but slightly during the early years of life, it would be practically impossible to retain mem¬ bers in the companies, when by reason of advancing years this “slight” increase had changed to an almost geometrical ratio, and made the premium a burden. And there is no truth in life insurance more positively demonstrated than that the expe¬ rience of all the companies—towards a thousand—which have operated within a century, has only proven the justice and wis¬ dom of the principle of specific, equal, periodic premiums, in which the current cost of insurance at least, is invariably provided by cash in advance—the only equitable modification thereof being an annually decreasing rate, as adopted by some companies. It is upon the reversal of this principle that the cooperatives base their claims to business. While a regular company offers an assurance of $1,000 for a premiun of $25, to be paid annually during life—that is, $25 at the age of entry, say twenty-five, and then only $25 ayearat the ages thirty, thirty- five, forty, &c.,when the policy-holder is active and in the pro¬ ducing years of life, and not a cent more when he reaches eighty, eighty-five or ninety years ; the cooperative insurer says it is eas¬ ier to pay $5 at the age of thirty, $6 at the age of thirty-five, $7 at the age of forty, and so on up to $80 at the age of eighty, $150 at the age of eighty-five, or $300 at the age of ninety, when the insured is enfeebled by old age and dependent upon friends for his means of payment. The impossibility of realizing the ease of such payments is apparent. And the assumption that assur¬ ances will be maintained (by the payment of an increasing premium) through life, is utopian if nothing worse; I confess I think it worse. The cooperatives charge the regular compa¬ nies with pocketing the profits on lapsed policies. Perhaps some do. The cooperative provides for no surrender value to his certificates, for no extension of a policy, for no dividends, no return premiums; but knowing, if he knows anything about f the matter at all, that a policy upon a continuous premium o constant increase, never was kept alive any considerable num¬ ber of years, and that it is practically impossible that one should be; he not only indirectly in theory, but does in as many words, in his practice, provide for an absolute forfeiture of all payments to and interest in the company, so soon as the insured makes default in one death assessment of $1,10. Utopian is hardly the name for the idea at the root of the matter; called by another and better name, it might involve an idea of a jury impaneled to convict. The member may pay his $45 for four memberships, $20 for first annual dues, and $23 for death losses during eleven months; yet under the contract issued to him, if in the twelfth month he should fail to see that his as¬ sessment for a loss occurring then, reaches the “home office of the company,” and should then die, his widow will be without the $2,500 he supposed he had provided, and his $88 will have “gone where the woodbine twineth." But if he shall live and continue a member over one year, pay his annual dues at the beginning of, and his death assessments of $24 during the sec¬ ond year and then die, the accruing benefit to his heirs may be just what the contract calls for, —four dollars from each other member who pays—and there may be a thousand, a hundred, a dozen, or none. If the last, the widow has no remedy what- 8 WESTERN INSURANCE REVIEW. ever. Indeed, a case in point recently occurred, where a ben¬ eficiary of over a year’s standing in a cooperative company, re¬ ceived as full payment—where $2,500 was expected, the sum of $86. Again, in regular companies, their solvency at present, and ability to meet existing obligations maturing hereafter, depends wholly upon the money which has been paid in. In the co-op¬ eratives, present solvency depends upon the amount of paid up capital held intact, while their ability to meet future liabilities upon existing obligations, depends wholly upon money which may or may not be paid them after their liabilities accrue. These are conditions of extreme difference. The St. Louis Mutual with 16,000 policy-holders, could lose half of them by declination to pay; and yet the company could carry the insur¬ ance on the lapsed policies until the cost exhausted their respec' tive surrender values, and its ability to pay accruing obligations on the remaining 8,000, would scarcely be disturbed. But if a co-operative company with 5,000 members were to lose half of them by default of payment, its ability to pay what the re¬ maining 2,500 had paid their money to secure, would be im¬ paired precisely fifty per cent; and the heirs of the last mem¬ ber filling a class, who had invested in good faith his money for the purpose of receiving $2,500, (as many dollars as there were members in the class when he entered) must be deprived of $1,250 of what they are honestly entitled to, if he delays his dying until after the 2,500 have defaulted. That such a condition of things may happen, is not a violent pre¬ sumption ; it would be a fact in a cholera season. The co-operatives anticipating the assumption of extreme pos. sibilities by those who inquire into their character, triumphant¬ ly point to the fact that there are no data upon which to base them. Doubtless this is true, and it is also quite as true, that no company of the kind has ever lived long enough to demon¬ strate its own theory. They are like balloon-framed buildings erected in a bog; adverse winds destroy the superstructure be- iore the weakness of the foundation is proved. But the cooperatives rest their claims to recognition in the United States, in a great measure, upon the ground that simi¬ lar associations exist, do successful business, and are protected by law in England. This is true only in part. All lodges and societies having charter or by-law provisions for post mortem benefits in bonusses or burial fees, or which provide for relief in cases of sickness or accident—co-operative educational, clo¬ thing, provision and coal companies, all mutual aid societies; some 30,000 in number, are regulated by what is called “The Friendly Societies Act,” a copy of which I have before me. I n it are several wholesome provisions : January, 1871 First. No post mortem benefit or bonus (assurance) is per¬ mitted to exceed £30, and no burial fees, f\o. Second. Every member can by legal process be compelled to pay his dues —generally specific sums at regular periods. Third. No compensation, (beyond a stipend to a chairman, secretary or treasurer), is allowed for carrying on the business, and none whatever for soliciting or procuring memberships. Fourth. No part of the funds go to the stockholders as profits,,but all accumulations belong to the general body, share and share alike; and no dissolution of a society and distribu¬ tion of its funds among the members can take place, without the consent over the written signature of nine-tenths of those interested. And Last, (but first in importance). No such association can be permitted to do any business, until copies of its charter and rules are filed with a government office), and its tables of rates, fees, assessments or premiums, are certified to as sufficient for the purposes proposed, by the actuary to the commissioners for the reduction of the public debt; or by an actuary to a life insurance company of five years respectable standing. Any one of these provisions would be fatal even to the par¬ turition of a co-operative company here; and it appears to me that the legislature now in session, might wisely add to our present laws a section or two embodying some of the above fea¬ tures, or others which would better protect the people from the blandishments of a cheap insurance system ; in which as in a ready-made clothing shop, the cheaper the goods, the more likely they are to be shoddy. Upon * Ire whole, permit me 10 sajgcot -o F .-n 111c grounds that the mathematical or scientific principles (if any) upon which these companies base their plans of premium payments, have not been demonstrated by any competent authority to be sufficient, (if not conclusively proved by the failures of a score of similar companies to be unsound), and that the probable as well as possible result of such unproven principles in practice, will be “such as to render their further proceedings hazardous to the public,” that all co-operative insurance companies which seek to do a public business by general advertisement, or by employing persons compensated by salaries or commissions to solicit memberships, ought to be excluded from the State, at least until laws are enacted which will more effectually protect those who are willing to insure in them. Very Respectfully, &c., Aug. F. Harvey, Actuary. THE NATIONAL LIFE INSURANCE COMPANY OF CHICAGO applied to the Insurance De¬ partment of New York to do business in that State, and the Superintendent DECLINED the application, upon the ground of the CHARACTER of their business, and the forms of their policies being such as render it PRACTICALLY IMPOSSIBLE for that Department to estimate, with any reasonable degree of certainty, its liabilities. — [EDITOR OF VV. I. R.