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Some thing about insurance in USA


ance. If we consider the objects of insurance legislation in the past we find that they may be grouped roughly under three geeral heads, namely: (1) publicity, (2) solvency of companies, (3) equity among individual members. Legislation looking toward publicity began with the Massachusetts law of 1807 which required insurance companies to make a report on their business to the general court. This law was amended in 1818, in 1827, and at various times thereafter, and other States followed the example set by Massachusetts until 1858 when Massachusetts again took the lead by establishing a standard of solvency. This was the direct result of the discovery that a large number of companies had continued to transact business and to take upon themselves additional obligations when they were hopelessly insolvent. This law gave the insurance commissioner a standard or "yard stick" by which it could be determined whether or not a company was in a position to meet its obligations. Similar laws were passed in other States and are now in force in practically every State in the Union. The third step in constructive legislation came in 1861 when Massachusetts again took the lead by enacting the first nonforfeiture law. This law had in view the equities of the policy-holders. The cruel practice theretofore prevailing, of compelling a policy holder to forfeit the entire value of his policy in case of lapse was now prohibited by law. Some of the New York companies had already issued policies containing surrender value provisions but the practice was by no means universal and it was argued that such innovations would be dangerous to the companies on account of adverse selection. This legislation has also been adopted in many other States in the Union. But since that time there has been very little, if any, constructive insurance legislation until the legislature of New York in NOTES ON CURRENT LEGISLATION 609 1906 enacted laws to cut down or limit the expenses of life insurance companies. The cause of the present agitation has no doubt been the extravagance into which the companies have fallen as a result of their mad rush for new business. The testimony of all the investigating committees and commissions has been practically unanimous to the effect that there has been too much money used for expenses. The specific charge has been made that premiums are too high and that the companies have piled up millions upon millions of unnecessary surplus which is not needed for the safety and perpetuation of the companies and that it has led to extravagance on account of failure to properly distribute back these overcharges in the form of dividends. The main thing sought therefore, in the present agitation is economy in matters of expense, and this marks the fourth great step in constructive insurance legislation. Summary of Present Laws. An examination of the statutes of the various States of the Union reveals such a variety of enact- ments that classification becomes almost hopeless. A very brief summary of the laws in force must suffice. With respect to domestic stock companies thirty-three States have special incorporation laws. Thirty-one States require capital stock as a guarantee of safety and good faith; the amount varying from $100,000 in twenty-three States, $200,000 in three States, $300,000 in one State, $50,000 in three States and from $50,000 to $1,000,000 in one State. The amount required to be paid up in cash before the company is allowed to commence business varies from 25 per cent to 100 per cent of the amount subscribed. Most States make the same requirement of foreign companies as a condition to entering and commencing business except that in some of them a larger proportion of the stock is required to be paid up in cash. In fifteen States mutual companies are required to have a guaranty capital varying from $100,000 to $200,000 and seventeen States require such companies to accumulate assets of from $100,000 to $300,000 before their contracts become valid for the full amount of insurance. Five States require a capital stock of domestic companies but do not require such capital from foreign companies for entering. It would seem that foreign companies should be held to fully as high a standard as domestic companies but this may be merely an accidental omission in the law. 610 THE AMERICAN POLITICAL SCIENCE REVIEW The amount of insurance required to be subscribed in a new company before the policies take effect varies from $100,000 to $500,000 and the number of applications required varies from 100 to 500. Forty-five States require the filing of a copy of the charter, and thirty States require the companies to file a copy of their by-laws. Thirtyeight States require the filing of a preliminary statement. Twentythree require the filing of certificates of deposit. Twenty-five require filing with the commissioner all policy forms and one State (Wisconsin) adds "all advertising literature." In five States the law requires the filing of a list of agents and the companies are probably required to do so by the commissioners in all other States although not specifically required by law. Forty States require the companies to obtain a "permit to do business." With respect to annual meetings, six States require notice by mail, or publication from two to three weeks before the meeting is held. Three States provide for notice on the policy. With respect to special meetings, thirteen States require notice by mail and seven of these require the purpose of such special meeting to be stated in the notice. Eleven States have laws relating to the voting at the meetings of stockholders and policy holders and three of these specify the number of votes to be cast for each $1000 of insurance. Two States forbid officers to cast votes by proxies and four States specify the number allowed to be cast by one person, the number varying from fifteen to fifty. Seven States specify the duration of proxies, the limit varying from one meeting to one year. Twenty-three States regulate in some way or other the number of directors. The highest number in any State is fifty-four. Nine States specify the number requisite for a quorum. Five States provide for " approved forms of policies." That is, they must issue policies that are subject to approval by the insurance commissioner. Twenty-one States provide for specialfeatures such as attaching a copy of application to policy, surrender values, suicide clause, etc. Eleven States regulate the size of type to be used in printing the policy. Four States require a copy of application to be attached to policy and three States require a copy of application to be furnished upon demand. Twenty States require a statement of organization, thirty-five States require the filing of a statement as a condition precedent to entry and forty-six require an annual statement. One State requires a semi-annual statement. Seventeen require a special statement and twenty-one require a tax statement. NOTES ON CURRENT LEGISLATION 611 Strange as it may seem no State requires a statement to be filed by companies that have ceased doing new business in the State although they may have a large amount of insurance in force in the State. Twenty-one States require periodic examinations by the commissioner, the period varying from one to five years. Forty-four States give the commissioner power to examine at his discretion. Nine States provide for an examination at the request of the companies and twenty-one provide for an examination at the request of others. Fifteen States provide for periodic valuation of policies, the period varying from one to three years. Twenty-four States require the use of the combined experience table of mortality; twenty-eight require the American. Eighteen States allow the use of either or both and thirteen States are silent on this point. Thirty-five States fix the rate of interest, the rate varying from 3 per cent to 4 per cent. One State limits the amount of risk that can be taken on a single life to $1000 until 1000 policyholders have subscribed for insurance amounting to $1,000,000. Five States limit the amount taken on a single risk to 10 per cent of the capital stock and one State, Massachusetts, forbids taking a single risk amounting to more than 10 per cent of the net assets. Thirty-one States forbid discrimination in rates and six States specify that no distinction shall be made on account of color. Twenty States specify an age limit, twelve require medical examination and three States require companies to give a certificate to a colored applicant, if rejected, showing that he was rejected on account of ill health and not on account of color. Nineteen States specify what part of a risk may be reinsured and in nine of these it is limited to 50 per cent of the risk. Seven States allow the whole risk to be reinsured, twenty-four allow the reinsurance of all risks, a two-thirds vote being required in most cases. Investments have been subject to a large amount of legislation. Thirty-six States mention government and State bonds, thirty-two mention municipal bonds, thirty-five mention real estate mortgages and twenty-eight of these limit the amount that can be loaned to 50 per cent of the value. One State allows loans up to 60 per cent of the value and one State allows only 35 per cent of the value. Eleven States allow corporate bonds, five allow investment in stocks, three allow notes, six mention national bank securities,twelve allow policy loans, four of which -allow the full reserve, one 95 per cent of the reserve and one 95 per cent of the cash value.612 THE AMERICAN POLITICAL SCIENCE REVIEW stated in the policy. Twelve States mention "approved bonds," sixteen allow "approved securities" and give the commissioner power to pass upon their value. Twenty-seven States provide for the permanent holding of real estate and twenty-six of these specify that it must be for the companies' own use. In one State it is limited to $300,000 and in one State it is limited to 25 per cent of the assets. These same States also provide for the acquisition of real estate in satisfaction of debts. Eighteen of the States require that it must be disposed of within a specified time, the limit varying from two to ten years. In two States provision is made for improvement of real estate so acquired. Four States specify what per cent of the capital stock may be invested in one loan the amount being in all cases 10 per cent. Three States allow 5 per cent of the assets to be invested in national bank stock, and forbid the investment of more than 25 per cent of the assets in real estate. Thirty-one States provide a time limit within which the companies must settle all valid claims, the time varying from twenty to sixty days. Nine States provide that contested claims shall constitute a breach of contract, twelve States provide that material misrepresentation shall be ground of contest if intentional, seven if not material, though intentional; eight States make it ground for contest if material though unintentional. Fourteen States require surrender values to be given in case of lapse and of these, twelve require such values after three years, one after two years and one does not specify any time. As to the form of such surrender values twelve States provide for paid-up insurance, seven for extended insurance and four provide for cash. Six States make the surrender values automatic. Ten States provide for dividends on capital stock six limiting it to 8 per cent, one to 10 per cent and two States to 12 per cent, the remainder being silent as to the rate allowed. "Service of process" has also received considerable attention. Thirty-six States make the commissioner of insurance the agent for services of process, twenty-four provide for some particular agent and of these all but seven allow service to be made on the commissioner. Eight States make service on "any agent" valid. Twentynine States make the duration of such attorneyship valid as long as there are liabilities in the State on account of contracts issued therein, and eighteen are silent as to duration. NOTES ON CURRENT LEGISLATION 613 stantive laws at present in force on the subject except the provisions relating to penalties. The penalties are also of a considerable variety though revocation of license to do business is the most common. In late years, however, there has been a tendency to make violation of these laws a misdemeanor punishable by fine or imprisonment or both. Faults of Present Laws. To return to the question of the shortcomings of these laws; it has been shown that the laws affecting publicity are inadequate, first because they have failed to disclose a great many importnt transactions of the companies, and second, because the policyholder is left largely in the dark as to the real nature of his contract, and, third, because they have failed to disclose the factors used in computing dividends. The laws establishing a standard of solvency have been too rigid in that they have failed to recognize the proper relation between the first year's expense and the total expense provision of the policy. The standard of solvency adopted by Massachusetts in 1858, and prac- tically copied in all the other States, requires a uniform expense pro- vision for each year of the policy. This allows too little the first year when the company has to pay the agent's commission, medical exami- nation and other incidental expenses incurred in issuing the policy, while it allows more than is necessary in the later years when the policy has become, so to speak, self-sustaining. This rigidity of the law has led to its direct violation in the form of special contract pro- visions, known as preliminary term contracts, in which it is "agreed" between the company and the policyholder that the entire premium of the first year shall be treated as a " term premium." The objection to this practice is that it results in levying a disproportionate amount of the expenses of the company upon endowment and limited pay- ment of life policies. Preliminary term as first used, however and still used by some companies is not open to this objection. It originally meant the issuing of a policy at "short term rates" so as to make the premiums upon the regular policy fall due at some particu- lar time of the year which might suit the convenience of the policy- holder. In late years this true and original meaning of the term has been superseded by the other. There has been considerable dis- cussion upon the question as to whether or not preliminary term con- tracts using that expression in its later meaning are legal in the absence of specific statuatory enactment, but the supreme court of 614 THE AMERICAN POLITICAL SCIENCE REVIEW Vermont has decided this question affirmatively. When Dr. Fricke was commissioner of insurance of Wisconsin he accepted the valua- tions of some companies reported on that basis and a number of other commissioners did likewise. It has thus received the sanction of State authority for a considerable number of years and this, it is claimed, has given it the force of law in the absence of specific statu- tary provisions to the contrary. Remedies Proposed by Actuaries. The solutions offered are in the nature of a compromise. Many authorities concede that the expense of securing new business can never be forced back into the narrow limits allowed by the level loading of the full regular reserve plan. It is likewise conceded that the unrestricted use of preliminary term contracts is unjust especially to holders of high priced contracts like endowments and limited payment life policies. The compro- mise methods offered are "modified preliminary term" and "select and ultimate." The modified preliminary term allows as an expense provision on all endowments and other high priced contracts the first policy year, an amount equal to the premium on an ordinary life policy (less current cost) issued at the same age. Lately there has been offered a variety of minor modifications of this plan. The select and ultimate method allows the company, as an expense allowance in addition to the level loading, an amount equal to the present value of the probable savings on mortality during the first five years of the policy, the assumption being that the company will use for actual mortality cost a percentage of the regular or tabular cost as follows: First policy year 50 per cent. Second policy year 65 per cent. Third policyyear 75 per cent. Fourth policy year 85 per cent. Fifth policy year 95 per cent. and 100 per cent each year thereafter, the reserves being computed accordingly. This is merely the legalization of the use of mortality gains, according to the above schedule, for expenses. The full regu- lar reserve plan contemplates that such gains shall be returned to the policy holders in the form of dividends. NOTES ON CURRENT LEGISLATION 615 As stated above the first non-forfeiture law was passed by Massa- chusetts in 1861. Most of the acts passed since that time have been amendments or supplements to this law. But the laws of most of the States are still weak and need to be amended and strengthened. This can be done, first, by extending surrender values to the first year of the policy; second, by abolishing deferred dividends; third, by pro- viding for a more equitable system of loading for expenses and con- tingencies, and fourth, by enforcing equitable accounting in the mat- ter of dividends. That is, the gains of one class should not be used in any way to benefit other classes of policyholders to the detri- ment of those to whom they properly belong. Fifth, by prohibiting the use of harsh and arbitrary provisions either in the policy, in the application, in matter of policy loans, assignments, etc., which would result in gains to some policyholders at the expense or forfeiture of others. The one great need at present, however, is to curb expenses. The expenses of life insurance companies have grown out of all proportion to what they were fifty years ago, and this is due to this one fact, more than anything else, that the companies have grown too large and unwieldy to make it practical for the policyholders to exercise any effective control over the management. Boards of trustees have become self-perpetuating and these in turn have become subservient to a coterie of officers who form a sort of clique which manages the elections by a system of voting by proxy. Voting by mail seems to be the only method by which the policyholders can regain and exer- cise an active voice in the management and bring pressure to bear upon the officers if they are unfaithful to their trust. If they are faithful and efficient in the discharge of their duties they would, no doubt, be as frequently reelected under that system as under any other system. Proposed Laws. In the agitation in the press it seems that undue attention has been given to the question of annual versus deferred dividends The deferred dividend system has been held up as the the "root, source and cause" of all the ills that have prevailed in the business. A little reflection together with a critical examination of statistics will show, however, that this is not quite true. It is not intended to enter here upon a statistical analysis of the life insurance business, nor to argue at length the merits and demerits of all the laws proposed in the different States, nor even to mention every bill 616 THE AMERICAN POLITICAL SCIENCE REVIEW that has been introduced into the State legislatures, as a result of the recommendation of the various investigating committees. An arti- cle of this kind, however, would fail in its purpose if it did not point out what seems to the writer to be the most flagrant evils as well as the roots of those evils in connection with a discussion of proposed legislation. Practically all the investigation committees have recommended that deferred dividends be abolished, and it is not the intention here to defend deferred dividends, but when our statistics prove con- clusively that companies that have never issued deferred dividend contracts show salaries and other expenses quite equal to those of dividend companies, we must conclude that the real cause of extrava- gance lies deeper than the mere question of annual versus deferred dividends. And again, when it is found that the factors used in com- puting the annual dividends are so grossly at variance with the actual earnings of the companies that the contribution formula becomes a farce and a figure-head it is difficult to see how the mere requirement that dividends shall be distributed annually can cure all the evils in the life insurance business. Nevertheless, deferred dividends have received the most of the criticism, and every committee except one has recommended that they be abolished. I agree that they should be abolished and that dividends should be computed and distributed annually, but it seems self-evident that annual accounting will be useless, unless it is supplemented by a requirement that the factors be substantially in accord with the actual earnings of the com- panies. The matter of control in the election of officers and directors is undoubtedly the most important question at issue, and until the policyholders are given some method or machinery by which the management can be made to feel that they are directly responsible to the policyholders and that they will be held strictly to account to them there can be no lasting reform. With an effective system of electing directors the question of expense would very largely take care of itself. Most of the committees have recognized this fact, but they have scarcely given it the prominence that it deserves. The New York committee recognized the evils growing out of deferred dividends but failed to make any provision for even a pro- visional accounting of present deferred dividend funds on hand. The Wisconsin committee has recommended that a provisional account- NOTES ON CURRENT LEGISLATION 617 ing be made to each policyholder and that the amount so credited be treated as a liability to the deferred dividend policyholders as a class. The New York committee also recognized the evils of voting by proxy but allowed the system to remain with certain restrictions. The Wisconsin committee recommended that proxies be abolished entirely. The Wisconsin committee recommended twenty-four bills as fol- lows. 1. A bill to define certain terms used in the statutes. 2. A bill to regulate the election of directors, abolishing the voting by proxy and providing for a system of voting by mail instead. This bill also provides for cumulative voting so that policyholders can "mass" their votes for any candidate whom they may desire particularly to have elected. The bill also gives each policyholder one vote regardless of the amount of insurance carried by him. 3. A bill to authorize the governor to appoint one director or trustee for each domestic mutual life insurance company. 4. A bill to require life insurance companies to make a deposit of approved securities with the State treasurer equal to the full legal reserve of the policies in case of withdrawal from the State. 5. A bill to prohibit the writing of both participating and non- participating business by the same company. 6. A bill to require stock life companies to determine and report the amount of surplus apportionable, respectively, to stockholders and policyholders. 7. A bill to amend the valuation laws so as to permit the use of other standards than net level premium valuation. 8. A bill to provide for standard provisions to be contained in life insurance policies. This bill provides among other things that there shall be a table in the policy showing the amount assumed to be neces- sary, as a loading for expenses and contingencies; (2) for mortality, and (3) the amount to be set aside each year as a reserve. This bill has met with the most strenuous opposition from the companies on the following grounds: first, that it would involve a considerable expense to the companies; second, that it would be misleading on account of the impossibility of determining beforehand what the actual charges would be, and third, that the policyholders do not care for the information. 618 THE AMERICAN POLITICAL SCIENCE REVIEW 9. A bill to limit the premium which may be charged by life insurance companies. 10. A bill to limit the expenses of life insurance companies. 11. A bill to limit the amount of compensation to be paid to officers and agents in the absence of specific authorization by the policyholders. 12. A bill to amend the anti-discrimination laws, so as to prohibit the sale or insurance of so called board contracts or stock or other securities in connection with the sale of insurance policies. 13. A bill to prohibit misrepresentation by life insurance com- panies and their agents. 14. A bill to provide for the ascertainment and apportionment of deferred dividends and requiring reports to show the method of computing them. 15. A bill to provide for the annual apportionment and distribu- tion of surplus and requiring reports similar to those provided for in bill No. 14. 16. A bill to repeal the so called stipulated premium law. 17. A bill to require life insurance companies to furnish a copy of the application for a policy. 18. A bill to require life insurance companies to report all moneys paid and other disbursements made in opposing or promoting legis- lation. 19. A bill to repeal the retaliatory laws of the State. 20. A bill to require life insurance companies to report all con- tributions made for political purposes. 21. A bill to limit the amount of insurance to be written on any single risk. 22. A bill to amend the law relating to licenses. 23. A bill relating to the discontinuance of business by life in- surance companies. 24. A bill to require life insurance companies to furnish a gain and loss exhibit in connection with their annual statement. It wes believed that these bills would provide a remedy for practi- cally everything that has been complained of in life insurance, and it is only just to say that the Wisconsin committee has gone deeper into the question of insurance, from an economic and social point of view, than any other committee and their recommendations should be heeded by those who are endeavoring to institute reforms in the life insurance business. NOTES ON CURRENT LEGISLATION 619 Mention is due, however, to certain measures that have been passed in some of the other States, notably in the south and west. There is some objection raised to sending the premiums to the east to be in- vested in low interest bearing securities, when better rates of interest can be secured in the west on good security. This has led to the enactment of laws to compel insurance companies to invest, in some States a certain per cent of their premiums, and in others a certain per cent of the reserve within the State. The question of State insurance has been brought prominently to the front in a number of States, principally Florida and Wisconsin. Hon. N. B. Broward, governor of Florida has twice recommended it in his message but it has failed to meet with legislative approval. In 1905 the upper house of the legislature of Wisconsin adopted a resolution providing for the appointment of a committee to investigate the subject of State insurance. A committee was ac- cordingly appointed which made an examination into all the State and governmental systems of insurance then known and reported two to one against recommending State insurance. This committee of the senate also became a part of the joint investigation committee of the two houses which was appointed in accordance with the reso- lution and law passed at the special session held in the fall of the same year. At least one of the two senators who reported against State insurance, however, has expressed himself as being in favor of State insurance in case the reform measures recommended by the joint committee fail to pass. Another somewhat radical proposition is that of compulsory indus- trial insurance recommended by a commission appointed by the State of Illinois and sent abroad to study the question of insurance for laboring classes. The commission reported in favor of such com- pulsory insurance, but its recommendations have failed to meet with the approval of the legislature. Lewis A. Anderson. Lobbying. Among the States of the west and northwest, which have passed laws this year regulating legislative lobbying, are Missouri Nebraska, Idaho and South Dakota. The law of South Dakota ('07, c. 182) is fairly typical of present day legislation on the subject of lobbying. 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