BUSINESS--A PROFESSION Chapter 12

SUCCESSES OF SAVINGS BANK LIFE INSURANCE

The project of the Massachusetts system was first published in Collier's Weekly, September 15, 1906. Its main purpose was to eliminate or to mitigate so far as possible, the evils incident to the system of industrial life insurance as then practiced by private companies. The causes of these evils were investigated; and it was proposed to remove them by creating a competitive system upon a new plan.

In 1906 there were outstanding in the United States 17,841,396 industrial life insurance policies, representing $2,453,603,707 of insurance. Three companies, the Metropolitan, the Prudential and the John Hancock, did together 94.3 per cent of this business. The rates and terms to policy-holders of the three companies did not vary materially the one from the others.

Throughout the thirty years of American experience in industrial life insurance prior to September, 1906, there had been substantially no improvement in the position of the policy-holder. On the contrary, it had rather worsened. The insured suffered mainly from three evils:

(a) The high premium.

(b) Over-persuasion leading to taking out of insurance which was bound soon to lapse.

(c) Illiberal and oppressive provisions in the policies.

During these thirty years the cost of insurance to the policy-holder had gradually increased. In 1887 the rates were on the average nearly 12 per cent higher than the rates prevailing from 1879 to 1887. In 1896 they were again increased about 8 per cent on the average over the rates fixed in 1887; and they remained at that level until shortly after September, 1906. Vice-President Haley Fiske of the Metropolitan, testifying before the Armstrong Committee in 1905, declared that the high expense of industrial life insurance was unavoidable.

During these thirty years the lapse rate had not been materially reduced. Of the policies written in 1903 more than one-third lapsed within three months and more than one-half within twelve months from the date of issue.

During these thirty years the policies, instead of becoming more liberal in their provisions, had been modified from time to time, so that the chances of the insured receiving benefits from the insurance were small. For instance: Until shortly after September, 1906, the policies provided that if death occurred within three months from the date of the policy nothing would be payable under the contract; if death occurred after three months and within the first six months, only one-quarter of the face of the policy would be payable; if death occurred after six months and before the end of twelve months, one-half the face of the policy would be payable. These provisions were much less favorable than those prevailing during the earlier years of industrial life insurance in America.

Furthermore, in 1906 there was no opportunity of getting extended insurance or paid-up insurance until after the end of five years after the date of the policy, and none of getting a cash surrender value at any time. The policies had no loan value.

The Metropolitan Life Insurance Company had been quite fully investigated by the Armstrong Committee in 1905. The officials of the Metropolitan company in testifying before that committee could give no promise of any improvement in the position of the policy-holder; the report of the Armstrong Committee contained no recommendations for remedying the evils disclosed; and the New York remedial legislation of 1906 was so framed as not to apply to industrial insurance.

The discussions incident to the Massachusetts Savings Bank Insurance plan, beginning in September, 1906, the enactment of the legislation on June 26, 1907, and the practical introduction of the system in June, 1908, with the actual and potential competition resulting, have wrought important changes in the rates, methods and practices of the industrial companies which have mitigated in large measure the flagrant abuses at which the reform was aimed, namely:

THE CHANGES WROUGHT

1. The cost of industrial insurance furnished by the Metropolitan and other private companies (expressed in the amount purchased by a given weekly premium) has been repeatedly reduced since September, 1906; so that to-day it is (on the average) about 20 per cent lower than it was then.

2. The methods pursued by the private companies in soliciting industrial insurance have been improved since September, 1906, so that the lapse rate is materially reduced. Thus: Taking the three years 1904, 1905 and 1906 the percentage of lapse of outstanding policies to the number of policies issued during those years was 65. Taking the three years 1910, 1911 and 1912 the percentage of lapse was only 56. Or, making the comparison on the basis of the amount of insurance: In the three years 1904, 1905 and 1906 the amount of insurance lapsed was 68 per cent of the amount written; whereas in the three years 1910, 1911 and 1912 the percentage of lapses was only 58 per cent of the amount written.

3. The provisions of the insurance policies issued by the private companies have been made more just and liberal. For instance, on January 1, 1907, the amount payable in case of death was increased from nothing, if occurring during the first three months, and one-fourth, if occurring during the second three months, to one-half the face value of the policy if death occurred at any time within the first six months. And the amount payable in case of death during any part of the second six months was increased from one-half to the full face of the policy. Under the changes made January 1, 1907, the premiums, which previously had been payable throughout life, were made to cease at age seventy-five.

4. Paid-up insurance is now granted by the private companies after three years, whereas before September, 1906, no paid-up insurance was granted until after the end of five years from the date of the policy. It is noteworthy that this change was effected as of January 1, 1907, although Vice-President Haley Fiske had declared before the Armstrong Committee in 1905 that "Any law requiring the issue of paid-up policies in industrial insurance after three years would be most unjust" to the persisting policy-holders.

5. Since September, 1906, the private companies have provided for cash surrender values after the end of ten years, although previously no cash surrender values had been granted.

6. Since September, 1906, the private companies have made their policies incontestable one year after date of issue, whereas theretofore the policies had been incontestable only after two years.

7. Since September, 1906, extended insurance is said to be granted after three years from the date of the policy, whereas none had been granted theretofore.

The improvements made by the private industrial insurance companies as the result of the Massachusetts plan, have of course been extended to their entire business throughout the United States. When it is remembered that the aggregate premium income of the industrial policies in the United States is now about $115,000,000 a year, it seems clear that the industrial policy-holders throughout the country are to-day buying their insurance for at least $20,000,000 a year less than they would have had to pay for the same amount of insurance had the rates prevailing prior to September, 1906, remained in force.

MASSACHUSETTS' GAIN

The weekly premiums collected by the industrial insurance companies from Massachusetts wage-earners each year exceed $10,000,000. The saving to the Massachusetts policy-holders in the private companies which has resulted from the competition of its State-aided system is nearly $2,000,000 a year: while the Commonwealth's contribution to the expenses of the system has averaged less than $15,000 a year. But residents of Massachusetts who availed themselves of the opportunity which savings bank insurance affords, have had these further advantages:

First. The gross rates on the monthly premium savings bank policies in Massachusetts are on the average about 17 per cent less than the now prevailing rates of the private industrial companies. The Metropolitan and Prudential companies, however, issue only non-participating policies, whereas the Massachusetts savings bank policies are participating. The dividends declared on these savings bank policies have been as follows:

 

Per Cent.

On policies completing their first anniversary

8 1/3

On policies completing their second anniversary

12 1/2

On policies completing their third anniversary

14

On policies completing their fourth anniversary

16 1/3

On policies completing their fifth anniversary

20

Therefore the net cost to the insured, for instance, in the fourth year is, on the average, about 32 per cent less, and in the fifth year 35 per cent less than the present rates of the private industrial companies.

The policies in one of the private companies, the John Hancock, are participating, but only after five years from the date of issue.

Second. The policies issued by the Massachusetts savings banks are far more liberal even than those now written by the private industrial companies. The full face of the policy is payable in case of death at any time after the issue of the policy. Cash surrender value, paid-up insurance and extended insurance are granted at any time after six months from the date of the issue of the policy. The policies have also a loan value after the end of the first year.

Third. A recent investigation of the business of the banks shows that of the policies issued and having twelve months' experience, 25.5 per cent of the number of policies and 26.2 per cent of the amount of insurance are cancelled within a year, whereas in the large industrial companies over 50 per cent of the policies written are cancelled within the first year.

Furthermore the so-called cancellations of the savings insurance banks include all policies surrendered within twelve months, whether by lapse, by death or by surrender for cash. On the bank policies surrendered after six months, $20,336.50 in cash was returned to the policy-holders, and other bank policy-holders also received by way of amounts applied to purchase paid-up insurance $3,924.23. This $24,260.73 would have been entirely lost to the policy-holders had they been insured in the industrial companies.

THE INSURANCE BANKS

On February 28, 1914, the insurance departments of the four savings banks had outstanding 8413 policies, representing $3,316,005 insurance and $29,482 annuities.

Five years after the Massachusetts system was introduced, the banks held an accumulated surplus equal to nearly 10 per cent of the aggregate premium income for the five years, and equal to 14.8 per cent of the aggregate legal policy reserve.

The aggregate premiums collected during these five years were as follows:

Premium income for the first year..........$25,377.29

Premium income for the second year......58,890.68

Premium income for the third year..........76,348.92

Premium income for the fourth year......102,832.27

Premium income for the fifth year.........124,205.08

THE EFFECT ON THE BANKS

Four banks have established insurance departments, the third not until August, 1911, and the fourth on July 5, 1912. Fifteen other savings banks and four trust companies have become public agencies for these four banks, and there are also twenty-three other public agencies and about two hundred private agencies. In two banks, the People's Savings Bank of Brockton and the Whitman Savings Bank, the insurance department has been conducted for more than five years. The effect has been to increase markedly the number of their depositors. Massachusetts had, in 1911, 192 savings banks, of which 144 had deposits exceeding $1,000,000. Both the People's Savings Bank of Brockton and the Whitman Savings Bank were among the smaller banks of that class. The Whitman bank is located in a town of 7,639 inhabitants.

The rate of increase of deposits in these two banks, as compared with the other savings banks in the State, shows the marked effect which the establishment of an insurance department has in stimulating the business of the deposit department. Of the 144 Massachusetts savings banks whose deposits exceeded $1,000,000, these two banks stood among the first five in the rate of increase in deposits for the year ending October 31, 1910, over the previous year; the People's Savings Bank of Brockton standing first and the Whitman Savings Bank, fifth. In the year ending October 31, 1911, these two banks headed this list of Massachusetts savings banks in the rate of increase; the Whitman Savings Bank standing first and the People's Savings Bank second. That the leading position taken in these two years by the Brockton and Whitman banks is due to the insurance department is made more clear by the fact that the other three banks which stood with them among the first five in the year 1910 lost their rank as leaders in the year 1911.

The treasurer of the Whitman bank states:

"I have been unable to find that the Insurance Department has been an injury to the bank in any particular. On the other hand, this department has brought the attention of the public to this institution, with the result that for the past four years our gains have been greater than any savings bank in any other town in Plymouth County.

"As savings banks are organized for the purpose of encouraging thrift and economy, it would seem to me that we have not departed from the original purpose in establishing a life insurance department, which bears a close relationship to savings bank business."

And the treasurer of the People's Savings Bank of Brockton states as follows:

"The writer has been of the opinion from the start that it was a good thing both for the banks and the public, and after observing the practical working of the plan for a period of a little over three years I can say that I am more impressed now than at the beginning.

"Many criticisms were made, as is always the case with anything new, but none of them were well founded and none of the disastrous results predicted have materialized.

"The banks are bigger, better and busier than they were when the insurance departments were opened, and pages could be written setting forth the benefits derived by the policy-holders and beneficiaries.

"Now that there is no longer any doubt of the success of the movement, the banks and the public are voluntarily interesting themselves in the plan.

"The public now come to the bank and apply for insurance and I am sure this will increase as time goes on and will force all critics back to the tall timber."

The establishment of an insurance department is also serving to develop the habit of saving in policy-holders. As to this we have striking evidence in connection with the opening of new deposit accounts at the times when dividends are declared on the policies, and at the times when policies are taken out.

HOW BANK INSURANCE IS DEVELOPED

The business of the savings insurance banks has been developed in large measure through the educational work conducted by the Massachusetts Savings Insurance League. This league was organized on November 26, 1906, by public-spirited citizens of Massachusetts to promote the enactment of the savings bank insurance law. Its work was educational. It undertook to familiarize the people of Massachusetts with the evils incident to the then existing system of industrial life insurance, and to point out the advantages of the Massachusetts plan of savings bank insurance. After the law was enacted the league exerted itself to secure the establishment of insurance departments by the People's Savings Bank of Brockton, and by the Whitman Savings Bank, and also the establishment of agencies. Since that time it has been engaged in active educational work throughout the Commonwealth. It is largely through the medium of the League that the advantages of the system have been made known to the people.

The League has been instrumental in interesting the large number of manufacturers and others who have established unpaid agencies through which the insurance is written. Its purpose is to bring to the attention of the wage-earners of Massachusetts the importance of making wise provision for the future out of current earnings, either through life insurance or old-age pensions; to endeavor by way of suggestion to encourage them to habits of thrift and foresight; and to acquaint them with the value of savings bank insurance as a means to this end.

THE COMPANIES' CONTENTION

Officials of the private industrial insurance companies point to the relatively small number of policies issued by the Massachusetts insurance banks as evidence that the system has not succeeded. The contrary is true. The initiation of the competitive system was so effective in reforming the most flagrant of the abuses of the industrial companies, that competition with them is necessarily much more difficult than it would have been had the old conditions persisted. And the benefit of these reforms is now enjoyed by nearly every industrial policy-holder in the United States.

It has also been asserted by the Metropolitan Company that while the great improvements in the position of the industrial policy-holder followed the initiation of the Massachusetts plan, they were not the result of the prospective and actual competition of the new system. It is believed that no basis exists for this contention of the company. There was no indication of effort or intention on the part of the industrial insurance companies to improve the situation of the policy-holder until after the Massachusetts campaign was commenced by the article in Collier's. On the contrary, the testimony of the Metropolitan's officials before the Armstrong Committee indicated that improvement was believed to be impossible. Furthermore the improvement suddenly made after the discussion incident to the presentation of the Massachusetts plan, and its potential and actual competition are not the only evidence that the Massachusetts plan produced the improvements. More will be found by comparing the changes made by the industrial insurance companies in the provisions of their policies enumerated above, with the provisions of the policies issued under the Massachusetts system. The reforms introduced by the industrial companies since September, 1906, are clearly due, in the main, to the actual and potential competition of Savings Bank Insurance.

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Boston, MASS., April 1, 1914.

During the ten years which have elapsed since the foregoing article was prepared, the amount of insurance in force under the Massachusetts Savings Bank Life Insurance system has increased from $3,316,005 to $31,973,302.

The growth in new business since 1920 has been particularly rapid:

1920 (year ended October 31) $ 2,677,161
1921 (year ended October 31) 1,619,832
1922 (year ended October 31) 3,350,191
1923 (year ended October 31) 5,657,436
1924 (year ended October 31) 6,295,572
Total net increase during five years $19,600,192

Four additional savings banks have established insurance departments, and sixty-three other savings banks and twenty-one trust companies have established public agencies for the receipt of premiums, besides eleven such agencies in national banks, Morris Plan Companies, etc., so that the opportunities offered by the system are made easily available to the people in all parts of the Commonwealth. The savings insurance banks may now write policies in $1000 units, thus making it possible to obtain a maximum of $8000 insurance on an individual life. The net cost of the insurance has steadily grown less, so that today (Nov. 1, 1924) it appears to be the lowest cost level premium life insurance issued in the United States.

"Lapsed" policies are practically unknown, due largely to the fact that the policyholder is entitled to a surrender value if his premiums have been paid for six months. An analysis of the business written during the three years 1920, 1921, and 1922 shows that only 4.27 per cent of the policies lapsed within six months from date of issue.

Within the past two years the public has manifested a constantly increasing interest in combining a savings bank account and a life insurance policy on a so-called ten-year savings-insurance plan, under which by means of small monthly deposits $1000 saving is acquired in ten years, the depositor being insured meanwhile for $1000.

The insurance premiums received from policyholders since the system was inaugurated have amounted to $4,848,865.06. The death claims paid amount to $745,559; the dividends to $1,061,565. The sums returned to policy-holders in the form of surrender values amount to $283,245. The amount held in reserve and surplus for the benefit of policy-holders exceeds three million dollars. Premiums are now being received at the rate of $856,524 a year.

The Savings Bank Insurance Law as enacted by the Massachusetts Legislature in 1907 appears to have been so carefully drafted as to anticipate with extraordinary foresight the situations to be met as the institution grew in size. The law has remained unchanged in all essential particulars.

ALICE H. GRADY,

Deputy Commissioner for Savings Bank Life Insurance.

STATE HOUSE, BOSTON, November 1, 1924.

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