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age 30, as in covering another life just admitted at age 40. Indeed, taking into account the value of fresh selection, the hazard of the former may well be considered the greater. That a man was insured at age 30, constitutes no valid argument for allowing him when at age 40, to contribute to the fund for paying losses as if yet 30. If such be permitted, he will pay less than his insurance costs and is worth, and as the operation is mutual, some one else must pay more than insurance is worth to make it good. The question of the apportionment of losses has nothing whatever to do with that of level, irregular or rising premiums.
The method of assessing losses by an advancing or sliding scale is mostly used now-a-days, even in co-operative companies, which fact is a recognition of sound principles of life underwriting. In legal reserve companies this method is fundamental and universal. In its crudest form it appears in arbitrary advances of the rates of assessment at intervals, usually of one year, but often of longer periods. Sometimes this advance is made a less objectionable bolus by guarantees, or at least assurances, of a maximum rate beyond which no advances should be made, or that no advance will be made after a certain age or duration of membership is attained.
Usually, however, in the more progressive co-operative companies, and always in regular companies, the actual death-losses are taxed against the members in proportion to the cost of insurance at current ages, according to a standard mortality table. The three tables in use in this country were deduced from the actual experience of companies, the Actuaries, from the combined experience of several British offices, the American from the experience of the Mutual of New York, and Meech's, from the experience of thirty American companies. The first is in general use throughout the country, the second in the offices of several companies, and the last in the offices of two advanced co-operative companies at least. All of these tables provide for a
gradually, but irregularly increasing mortality, converging to one hundred per cent at age 95 or 100. The percentages of annual cost at the various ages form the natural premium table, and that is the basis of the assessment of losses among the members.
In order to illustrate these radically different modes of taxing losses, suppose a loss of $3 to be made good by three men now aged 20, 30 and 40. The first method described, that of equal assessment without regard to age, gives the following result:
Assuming that all of these have just been admitted and are therefore assessed at their present ages, the method next described would give this result:
The sum of all the ages is 20+30+40
A 20/90X$3 =
B 30/90X 3=
C 40/90X 3=
Assuming, on the contrary, that all were admitted at age 20, this method would give a result equivalent to that of the first, as each would be assessed equally.
Assuming that A had just entered, B entered five years before, and C ten years before, the computation would be as follows:
Any other method of fixed assessment according to age at entry would work in a similar manner.
The third and last method described takes into account the actual ratios, so far as science has ascertained them, which exist between the mortality at one age and at another. The age at entry has no bearing upon this method of calculation. The various tables mentioned differ but little. what follows, the American is employed. The amount to be taxed against each one is arrived at as follows: A, tabular risk per thousand at present age, 7.81
A 7.81/ 26.02 X$3 = $23.43/ 26.02
This division is approximately just and fair. It will be observed that in all this no account is taken as to whether the losses have exceeded the expected losses according to the table or not; the table is used merely as a gauge for the proper distribution of the actual losses among the contributors.
There are two methods of apportioning the outgo for maturities other than by death. The system in use in co-operative bond societies contemplates the taking from the accumulated funds of all the amount necessary to cover maturing obligations without regard to whether the beneficiary has contributed in principal and interest enough to pay his endowment or not. In theory some will reap a profit and others get less than they pay. In practice the lapse of time brings certain ruin. In all regular companies the amount of the endowment is accumulated from the premiums of the holder.
Three modes of assessing expenses have been in vogue. One method makes the expense-cost directly proportional to the mortality-cost. This is now uncommon except as a partial provision in societies which try to cover up the fact that they are spending more than the amount intended for that purpose. One great regular company also uses this method in part, and their actuary skillfully defends it on scientific principles. Another method, more common among the co-operative societies but in use by some regular companies, is to charge a level amount per thousand of insurance for expense purposes. This is evidently fair but in practice, owing to the well-nigh universal custom of remunerating agents by a percentage commission, it works invidiously so as to confine the business of such a company to risks at certain ages only when the commission offered chances to exceed the percentage commission allowed by other companies at the same age. This plan ought, however, to be thoroughly tested before abandonment as it is obviously the just plan.
Among regular companies and in many co-operative societies a different system prevails, the expenses being taxed according to the amount of the premium or more accurately according to the excess of the actual premium over the net premium required by the company's calculations to cover losses only. This excess is known as the loading and is considered to constitute the fund available for expenses. This mode of distributing the expense cost is only defensible on the ground of expediency and because of the exigencies of the business. It bears heavily upon those who have delayed taking insurance until old age; and it also renders endowment insurance with its large premiums and consequently large contributions to expenses less profitable than is desirable.
The words "net premium," employed in the foregoing, call for an explanation which carries us into the distinctions between co-operative and legal reserve insurance. Common sense, which has in most States expressed itself in legislation, demands that a society which undertakes to guarantee to pay
a definite amount upon the event of death and at a guaranteed cost to the insured, should so fix that price and so conduct its business as to make it probable that it can fulfill its engagements. In life insurance this means that a company must not count upon too low mortality nor too high interest. That is all that the expression, legal reserve, means. It is not considered safe in most States for a society to count on a mortuary experience lower than that of the Actuaries' or American tables or upon an interest exceeding four or four and one-half per cent. Such regulations seem reasonable when it is borne in mind that many a company has had a worse mortality experience and that no good trust company would consent to guarantee even four per cent for a man's lifetime. Similar regulations are enforced in other countries by the companies themselves in the absence of law. The only hardship is the sometimes forcing of a receivership when a company is really solvent. This could be avoided by enforcing a high standing as a prerequisite to receiving new business and a lower standard as a condition of continuance of business at all. In calculating the amount of premium which a company should charge, a net premium is reached which does not provide for extraordinary contingencies nor for any expenditure beyond maturities by death or expiry. The actual premium is of course larger in most cases and as has already been explained, the excess is called the loading.
It must be evident that previous to the expiration of the time for which it has been paid to carry the insurance, a company should have on hand sufficient of the premium to cover the probable mortality calls until the next premium is due and payable. It must also be evident that if a premium higher than is required to cover the risk of the one year has been collected on an agreement to furnish insurance at a level price, the company should have on hand more than enough to cover the losses for the remainder of the current year. This is true both because a sum in excess of current