Industrial And Assessment Insurance
( Originally Published 1911 )
Industrial insurance defined.—Industrial insurance is substantially life insurance, but owing to certain principles in connection with its sale it has come to enjoy the special definition, "Industrial Insurance." It has been well stated to be mass insurance as distinguished from class insurance; and when we consider that in Great Britain some seventeen million policies of this type are in force, we can appreciate its appeal to the great mass of the population.
The descriptive word "industrial" it took from the beginning. In 1849 the attempt to establish this type of insurance was made in England by a company called the Industrial and General, and because of its origin this term has remained. The solicitations of the Indus-trial and General were among the industrial wage earning classes.
Industrial insurance is not handled as the exclusive activity of any one company, but is sold by companies doing an ordinary life insurance business; it is, how-ever, by them separately handled and managed.
Early efforts in the United States.—In the United States as early as 1847 efforts were made to sell policies on the weekly and monthly payment plans. None of these efforts were successful, and as a matter of fact amounted to but very little up to the year 1874. Apparently, this period of educational work was necessary in order to prepare the public for this type of insurance. Possibly, too, the early efforts were not made by those who could carry the idea through on a large scale.
The first company.—To John F. Dryden of the Prudential Insurance Company belongs the credit for successfully establishing this form of insurance in the United States. Mr. Dryden came to Newark, New Jersey, in 1873, and a bill was passed by the legislature chartering the Widows' and Orphans' Benefit Society. Nothing came of this movement. In the Spring of 1875 the charter of this society was amended to the Prudential Friendly Society, and two years later it became the Prudential Insurance Company of America. Business operations on a true industrial insurance basis began on November 10, 1875, the first application being written on the life of Mr. W. K. Drake, cashier of the German Bank of Newark. The object of the society was set forth as follows: "It is the special aim of this society to enable people of small means to provide themselves with relief in sickness or accident; (2) for a pension in old age; (3) for an adult burial fund; (4) for an infant burial fund. The contributions charged for the above named benefits have been computed by eminent actuaries of America and England, and are such as careful study and close calculation have shown to be equitable and necessary. They are as low as the Society can afford, for the benefits granted, and are high 'enough to make it safe."
The first of the four features just set forth was discontinued after a few years of experience, and the second did not meet with much favor. On the third and fourth branches, however, a great business was built. The first is now coming into very active reconsideration, and insurance to cover sickness for the masses will doubtless be established in time.
Growth of the Prudential.—The growth of the Prudential Insurance Company of America was phenomenal, showing that there must have existed a real demand for this form of insurance. The first policy was issued November 10, 1875, and by May 22, 1876, the number of policies amounted to five thousand. There were financial problems connected with the growth of this company, which simple as they look in the light of present day achievements, were not simple in those times. For the year 1876 the total income was about $14,495 and the total expenses $16,253. The deficiency, together with the necessary reserve, had been paid in by the stockholders. This was at the end of fifteen months of operation, showing how difficult was the work of placing the society on a sound financial basis.
Conditions in 1885.-Three years later, in 1879, there were sixty thousand industrial policies in force in the United States, and some four companies were en-gaged in the business. In 1885 it commanded the notice of Mr. August F. Harvey, one of the leading actuaries of the time, who spoke of it as follows:
I also made inquiry into some matters connected with the industrial business. It is comparatively new here, but the results of the trial, so far, favor its excellence and its permanency. The great advantage to persons of very limited means of being able to carry a moderate insurance for a low weekly cost, collected at their homes, extends beyond the mere convenience of the matter to the individuals concerned. The system relieves such beneficiaries from their worst anxiety—the dread of burials at public expense—and has actually, in many of the more populous quarters of the large cities, where extreme poverty prevails, had a marked influence in the reduced number of calls for aid in the public press it promotes small savings in people of higher advantages and encourages a thrift among the better classes who patronize the Company, which has its effect in the increment of the public wealth. I inquired particularly with reference to the public assertion, that the plan of furnishing insurances on infant lives was to invite child-murder, or such neglect as to bring its fatal results within the category of crime. If the statement is true in any degree, the foundation for it is so limited that it has not been particularly noticed.
In an earlier paragraph the total insurance in force at the close of business, December 31, 1913, was stated to be $18,000,502,971. Of this sum, industrial business amounted to $3,656,000,000, and it is safe to say that there were from ten to twelve million policies in force.
Four basic principles.—Industrial insurance has four basic principles upon which its success is based. They are as follows : (a) the weekly payment principle ; (b) the principle of family insurance; (c) the necessity of a collector; and (d) the adjustment of the amounts of insurance to a premium having five cents or any multiples thereof as a unit.
Assessment insurance.—Assessment insurance is a form of life insurance based on the principle that it is unnecessary to carry any large reserves but that as the benefits become due the sums needed can be collected by means of an assessment. Probably the early conditions under which insurance was sold in the United States up to, say, the early 60's, suggested the assessment plan. At that time there were comparatively few clear or sound ideas as to the proper foundation for a life insurance company. The whole question of what should be regarded as the necessary reserve was none too well understood by those engaged in the business generally, and probably was not understood at all by the common people.
Origin.—Assessment insurance in this country appears to have originated in Meadville, Pa., in 1868, when a society was organized under the name "The Ancient Older of United Workmen." It was formed originally for other purposes, but as an insurance protection for the members, one dollar per member was paid to the beneficiary on the death of any other member. This type of insurance must have met the existing conditions of that time, as it spread rapidly throughout Pennsylvania and passed into other states.
Weak points.—The primary difficulty with assessment insurance is that if only the necessary collections are made to pay the expenses as the institution goes along, no reserve accumulates against the larger claims which are sure to be made in later years as the members grow older. Enough new blood cannot be brought in to keep down the increased cost. The result is that as the society grows older the increased assessments mean an increased cost; this, in turn, frequently results in the dropping out of the older members who, by so doing, lose their insurance.
Fraternal insurance.—On a strictly business basis, assessment insurance no longer exists in the United States. In the form of fraternal insurance, however, it does exist and is a very important factor in the business of life insurance. The last available report, that of December 31, 1913, shows that the fraternal orders reporting to the New York State Insurance Department had insurance in force of $6,193,259,000, and assets amounting to $134,000,000. The difference between fraternal insurance and regular life insurance, from the reserve standpoint, is forcibly illustrated by the fact that the assets of the former represent about 2 per cent of the policy liability, while in the ordinary insurance business, with policies in force aggregating $18,000,000,000 and assets of over $4,000,000,000, the proportion is about 22 1/2 per cent. Assessment and fraternal insurance companies, however, have done an extraordinarily successful work in arousing the public to a realization of the importance of insurance, not to mention the immense sums which they have collected and disbursed in the form of death benefits. It should be remembered by one planning to take out life insurance that there is a wide gulf between regular life insurance and fraternal. The impregnable law of mortality—that the deaths increase with increasing age—is one which may bring confusion even to the best laid plans of the fraternal type of organization.