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UNITED STATES D EPARTM ENT OF LABO R Frances Perkins, S e c re ta ry B U R E A U OF L A B O R ST A T IS T IC S Isador Lubin, C o m m is s io n e r (on leave) A . F. Hinrichs, A c t in g C o m m is s io n e r + Operation o f Savings-Bank Life Insurance in Massachusetts and N ew Y ork Revision of Bulletin No. 615: The Massachusetts System of Savings-Bank Life Insurance, by Edward Berman ♦ B u lletin 7s[o. 688 U N IT E D ST A T E S G O V E R N M E N T P R IN T IN G OFFICE W A S H IN G T O N : 1941 For sale by the Superintendent o f Documents, Washington, D . C. Price 20 cents UNITED STATES D EPARTM EN T OF LABOR F ran ces P e r k in s , S e c r e ta ry + BUREAU OF LABOR STATISTICS I s a d o r L tjb in , C o m m issio n er (o n le a v e ) A. F. H i n r i c h s , Donald Davenport, Chief, Employ ment and Occupational Outlook Branch Henry J. Fitzgerald, Chief, Business Management Branch Hugh S. Hanna, Chief, Editorial and Research A c tin g C o m m issio n er Aryness Joy, Chief, Prices and Cost of Living Branch N. Arnold Tolies, Chief, Working Con ditions and Industrial Relations Branch Sidney W . Wilcox, Chief Statistician CHIEFS OF DIVISIONS Herman B. Byer, Construction and Public Employment J. M. Cutts, Wholesale Prices W . Duane Evans, Productivity and Technological Developments Swen Kjaer, Industrial Accidents John J. Mahanev, Machine Tabula tion Robert J. Myers, Statistics Wage and Hour Florence Peterson, tions Charles F. Sharkey, Labor Law In formation Boris Stern, Labor Information Ser vice Stella Stewart, Retail Prices Lewis E. Talbert, Employment Sta tistics Industrial Rela ii Emmett H. Welch, Occupational Out look Faith M. Williams, Cost of Living CONTENTS Page Preface_____________________________________________________________________ Introduction_______________________________________________________________ Basis of life insurance_________________________________________________ Part I.— Savings-bank life insurance in Massachusetts____________________ Chapter 1.— Origin and growth of savings-banklife insurance________ Enactment of savings-bank insurance law________________________ Growth of savings-bank life insurance____________________________ Chapter 2.— Administration of the system____________________________ Policies available and their terms________________________________ Administrative organization______________________________________ Operation of insurance banks and their agencies_________________ Publicity and promotion features of the system__________________ Regulation________________________________________________________ Chapter 3.— Financial operations of the system______________________ Dividends________________________________________________________ Expenses_________________________________________________________ Taxation_________________________________________________________ Investments______________________________________________________ Chapter 4.— Savings-bank insurance and company insurance: Selling methods, policy terms, and policy maintenance____________________ Administrative organization______________________________________ Payment of insurance agents_____________________________________ Comparison of policy provisions__________________________________ Maintenance of insurance by policyholder_______________________ Chapter 5.— Savings-bank insurance and company insurance: Costs to policyholder______________________________________________________ Cost to the policyholder__________________________________________ Expenses of operation____________________________________________ Taxation^________________________________________________________ Earnings on invested assets______________________________________ Mortality experience_____________________________________________ Chapter 6.— Factors affecting growth of savings-bank life insurance. _ Public support___________________________________________________ Activities of employers and of Associated Industries of Mass achusetts_______________________________________________________ Attitude of the savings banks____________________________________ Chapter 7.— Criticism of savings-bank life insurance_________________ The original purpose_____________________________________________ Services to policyholders______________________ “ Subsidies’’_______________________________________________________ Chapter 8.— Summary and conclusions_______________________________ Part II.— Savings-bank life insurance in New York_______________________ Chapter 1.— Savings-bank life insurance in NewYork________________ Participation of banks____________________________________________ Cost of insurance_________________________________________________ Two years* experience____________________________________________ Conclusions_______________________________________________________ in ix 1 2 5 7 9 10 17 17 20 22 26 27 29 29 30 32 32 34 34 35 37 44 50 50 55 58 62 63 70 70 72 72 76 77 83 84 93 97 99 101 102 103 105 IV CONTENTS Page Part III.— Appendixes_______________________________________________________ Appendix A.— Group insurance in force in Massachusetts____________ Appendix B.— Insurance guaranty funds_____________________________ Appendix C.— Insurance reserves and surplus________________________ Appendix D.— Mortality ratios and unification of mortality_________ Appendix E.— Basic dividend scale___________________________________ Appendix F.— Comparison of surpluses of insurance companies and of insurance departments of banks__________________________________ Appendix G.— Costs to policyholder__________________________________ Appendix H .— Comparison of taxes paid to State by insurance com panies and savings-bank life-insurance system______________________ Appendix I.-— Amount of insurance held by individual policyholders._ Appendix J.— Illustration of method of classifying applicants for savings-bank life insurance_________________________________________ Appendix K .— Comparison of amounts of endowment insurance in force with insurance companies and with the banks________________ Appendix L.— Bibliography___________________________________________ 107 109 110 112 114 116 117 118 122 123 124 126 128 L ist o f T a b le s Table 1.— Order in which savings banks entered the insurance system and dates of beginning of operations___________________________________________ Table 2.— Growth of savings-bank life insurance, 1908 to 1940___________ Table 3.— Growth in number of policies and amount of insurance, 1908 to 1940_____________________________________________________________________ Table 4.— Amount of ordinary savings-bank insurance, ordinary company insurance, and industrial insurance in force in Massachusetts, 1926 to 1939_____________________________________________________________________ Table 5.— Average amount of insurance per policy, 1908 to 1940_________ Table 6.— Income and disbursements of the savings-bank life-insurance system, 1908 to 1940 (statement to Oct. 31, 1940)______________________ Table 7.— Number and types of establishments at which applications for savings-bank life insurance might be made in June 1939________________ Table 8.— Disbursements of Division of Savings Bank Life Insurance, 1907 to 1933___________________________________________________________________ Table 9.— Percentage of total admitted assets of the system invested in cer tain kinds of property, 1931 to 1940____________________________________ Table 10.— Terms of policies issued by the savings banks, 7 of the insur ance companies, and 3 industrial-insurance companies__________________ Table 11.-— Proportion of lapsed insurance to new insurance written, at 4-year intervals, 1911 to 1931___________________________________________ Table 12.— Ratio between number of policies lapsed and number of new policies written, 1931 to 1939___________________________________________ Table 13.— Proportion of cash surrender to new insurance written, at 4year intervals, 1911 to 1938_____________________________________________ Table 14.— Percentage of assets invested in policy loans, 1928 to 1939____ Table 15.— Annual net costs of a $1,000 straight life policy issued in 1930, at age 35, based on actual dividends paid during following 10 years, and assuming policy was surrendered in 1940___________________________ Table 16.— Annual net costs of a $1,000 ordinary 20-payment life policy issued in 1930, at age 35, based on actual dividends during following 10 years, and assuming policy was surrendered in 1940_________________ 11 12 12 13 14 16 25 31 33 42 45 46 47 48 51 52 CONTENTS V Page Table 17.— Annual net costs of a $1,000 ordinary 20-year endowment pol icy issued in 1930, at age 35, based on actual dividends during following 10 years, and assuming policy was surrendered in 1940_______________ Table 18.— Net costs of $276 of straight life insurance policies issued in form of industrial policy by 2 companies, and in form of ordinary policy by savings banks, based on dividends paid in 1940_____________________ Table 19.— Net costs of $200 of 20-year endowment insurance issued at age 35 in form of industrial policy by 2 companies, and in form of ordi nary policy by savings banks, based on dividends paid in 1940_________ Table 20.— Percentage total expenses are of premium income in savingsbank insurance, ordinary insurance, and industrial insurance, 1927 to 1938_____________________________________________________________________ Table 21.— Savings-bank insurance expenses and ratios to premium income, including net expenditures by State, 1925 to 1940______________________ Table 22.— Ratio of salaries and commissions to premium income of 4 insurance companies selling both ordinary and industrial insurance, compared with ratio of salaries to premium income of savings banks, 1929 to 1939_____________________________________________________________ Table 23.— Total taxes and fees, and premium income, of savings-bank insurance system, Massachusetts companies, and all companies, each year 1930 to 1939_______________________________________________________ Table 24.— Federal income taxes paid by Massachusetts life-insurance companies, their premium income, and ratio of Federal income taxes to premium income, 1933 to 1938__________________________________________ Table 25.— Net rate of income earned on investments by banks and by all insurance organizations including banks, 1927 to 1938__________________ Table 26.— Ratios of actual to expected mortality losses for savings-bank, all ordinary, and industrial insurance, 1917 to 1938____________________ Table 27.— Amount of savings-bank life insurance held by individual policyholders, August 31, 1938__________________________________________ Table 28.— Number of applicants for savings-bank life insurance in certain groups and their proportion to all applicants, November 1, 1927, to June 30, 1934____________________________________________________________ Table 29.— Premium income received, and salaries and rents paid, by insurance departments of savings banks from their establishment to and during 1940____________________________________________________________ Table 30.— Gross premiums on $1,000 policy in Massachusetts and New York_______________________________________________________________________ Table 31.— First- and second-year dividends on $1,000 policy in Massa chusetts and New York___________________________________________________ Table 32.— Amount of savings-bank life insurance outstanding Decem ber 31, 1940_______________________________________________________________ 53 54 55 56 57 57 60 61 62 64 80 81 91 102 103 104 Appendix Tables Table 1.— Amounts of group insurance in force in Massachusetts with insurance companies and with savings banks, 1929 to 1938_____________ Table 2.— Proportion of surplus to reserves in each insurance bank in Massachusetts, 1939 and 1940_____________________________________________ Table 3.— Ordinary insurance— unification of mortality— Massachusetts savings-bank life insurance, 1939__________________________________________ Table 4.— Mortality ratios, Massachusetts savings-bank life insurance, 1917 to 1940_______________________________________________________________ 109 113 115 115 VI CONTENTS Page Table 5.— Surplus and reserves, and proportion of surplus to reserves, in savings-bank insurance system and in insurance companies, 1930 to 1939_____________________________________________________________________ Table 6.— Comparative net costs in Massachusetts of a $1,000 policy issued.in 1930, at age 35, based on actual dividend history during follow ing 10 years_____________________________ Table 7.— Comparative net costs in Massachusetts of a $1,000 policy issued at age 35, based on dividends payable in 1940___________________ Table 8.— Comparative net costs in Massachusetts of $1,000 straight life policy, based on dividends payable in 1940_____________________________ Table 9.— Taxes on Massachusetts business paid to the State by insurance departments of banks and by insurance companies, 1930 to 1939_______ Table 10.-— Number of individuals insured by savings banks in Massachu setts for stated amounts, as of August 31, 1938_________________________ Table 11.— Amounts and percentages of whole-life and ordinary endow ment insurance in force in Massachusetts with the 7 largest insurance companies in 1939_______________________________________________________ Table 12.— Proportions of whole-life and endowment insurance to all insurance in force in Massachusetts with 3 largest industrial companies and with savings-banks, 1908 to 1939___________________________________ 117 118 120 121 122 123 126 127 Letter of Transmittal U n ited S tates D epar tm en t of L a b o r , B u r e a u of L abor S t a tist ic s , W a s h in g to n , D . C ., J u ly 1 5 , 1 9 4 1 - The S e c r e t a r y of L a b o r : I have the honor to transmit herewith a report on The Operations of Savings-Bank Life Insurance in Massachusetts and New York. This report brings up to date Bulletin No. 615 entitled “ The Massa chusetts System of Savings-Bank Life Insurance,” and also describes the operation of the New York system of savings-bank life insurance, which was established in 1939. A . F . H in r ic h s , A c tin g C o m m is sio n e r . Hon. F rances P e r k in s , S e c r e ta ry o f L a b o r. VII PREFACE A report dealing with the Massachusetts system of savings-bank life insurance was published by the Bureau of Labor Statistics in 1935 (Bulletin No. 615). It was the work of the late Edward Berman, then of the department of economics of the University of Illinois. The present report brings the earlier report on Massachusetts up to date and also describes the operations of the New York system of savings-bank life insurance, which was established in 1939. In 1941 Connecticut enacted legislation which will permit the establishment of a system similar to that of Massachusetts and New York, but sufficient time has not yet elapsed to determine what the develop ments in Connecticut will be. As pointed out in the preface to the Bureau’s earlier report on the Massachusetts system, although almost everyone has some familiarity with life insurance and is likely to possess or to have possessed some kind of insurance policy, this form of protection has seldom been related, in popular thinking, to the general problem of economic security such as is provided for in the Federal old-age retire ment system and the various State systems of unemployment insurance. The relationship, however, is quite close. Thus life insurance, in the form of endowment and annuity policies, is designed to pro vide an income during old age. Again, so-called industrial life insurance, purchased in great amounts by workers’ families, is usually bought for the purpose of providing money to meet the expenses incurred in the last illness of the insured and in burying the deceased. To the extent that workers carry industrial insurance more than sufficient for these purpose, it is to enable the family to establish some security against further economic stress. Until quite recently life insurance was entirely a matter of private enterprise. Now, that two very important industrial States have State-sponsored life-insurance systems in operation and a third State has authorized a similar system, the time seems appropriate for the report which is presented in this bulletin. IX B u lletin 7 n[ o . 688 o f the U n ited States B u rea u o f Labor Statistics O p e r a tio n o f S a v in g s -B a n k M a s s a c h u s e tts a n d L ife N e w In s u r a n c e in Y o r k Introduction The close relationship of the life-insurance business to the problem of economic security is such as to justify much greater concern on the part of those interested in social well-being than the subject has heretofore received. The companies authorized to carry on business in the single State of Massachusetts underwrite all but a very small proportion of the life insurance carried in the United States. On December 31, 1939, these companies had in force in all countries an amount of life insurance totaling $96,369,014,217. Of this sum, $66,527,582,332 was ordinary insurance, carried by 48 companies;1 $16,694,321,948 was industrial insurance, carried by 7 companies; and $13,147,109,937 was group life insurance, carried byl8 companies.2 This amount of insurance was represented by 29,244,663 ordinary policies, 65,827,778 industrial policies, and 19,182 group policies representing as many industrial establishments. In the year 1939, there were issued 3,134,667 new ordinary policies, covering $5,459,972,910 of insurance; 4,976,863 industrial policies, amounting to $1,643,409,509; and 1,591 group policies to the amount of $3,407,875,157.3 In the year 1939 these insurance companies (excluding the savings banks) received a total of $3,259,024,371 in premium income,4 and possessed a combined surplus of $1,107,186,467.5 The 1 The mutual savings banks in Massachusetts are here counted as a single company. 2 Ordinary insurance is that sold in amounts of $1,000 or above, on which the premiums are paid by the insured himself to the office of the insurance company at quarterly, semiannual, or annual intervals (in some instances, provision is made for monthly payments), the insurance usually being issued only after the appli cant passes a medical examination. Industrial insurance, on the other hand, is issued generally in amounts of less than $500, is paid for in the form of weekly premiums of 5 cents or a multiple thereof, is collected at the homes of the insured by insurance agents, and is usually issued without medical examination. Some companies sell so-called ‘ ‘intermediate” insurance in amounts from $500 to $2,000. Group insurance is usually carried on the workers in a business establishment as a group. It is generally introduced at the initiative of the employer, paid for either by the employer, the workers, or both, and its gross premiums depend upon the ages of all the workers in the group. The premiums change accordingly from year to year depending upon the ages of the individuals comprising the working group. 3 Annual Report of the Commissioner of Insurance of Massachusetts, for year ending Dec. 31, 1939, pt. 2, pp. 20-21. * Annual Report of the Commissioner of Insurance of Massachusetts, for year ending Dec. 31, 1939, pt. 2, pp. 8, 9. 8Idem, pp. 6, 7. 1 2 S A V I N G S - B A N K LIFE I N S U R A N C E importance of any business which, between the years 1930 and 1939, received from 6.7 to 11.6 percent of the total national income and which, even in 1932, the worst depression year to date, received a premium income of over $2,000,000,000 when the total national income produced was estimated to be $39,365,000,000,6 is so obvious as to need no emphasizing. It is not generally recognized that a considerable share of the indus trial worker’s income is spent for life insurance. One group of esti mates shows a variation from about 1 percent of the wage earner’s income for the decade 1910 to 1920 to about 6 percent in the depression year, 1932.7 President Stanley King, of Amherst College, who was chairman of the Massachusetts Employment Stabilization Commis sion, states that data uncovered by the commission show that an amount equal to 7.4 percent of the weekly pay rolls in manufacturing industries in Massachusetts was paid out by workers in industrialinsurance premiums in the year 1929. The proportion rose, partly because of the abrupt decline in pay rolls, to 9.5 percent in 1930, and to 12.3 percent in 1931.8 At a time when the incomes of wage earners are very low and very precarious, the fact that an increasing proportion of their wages is being spent on life insurance is a matter of social importance. When one learns further that three authoritative studies disclose that the proportion of the amount of relief received by dependent families which was spent on insurance varied from 11.0 to 17.39 percent, the fact becomes even more significant in its implications.9 Basis o f Life Insurance Life insurance is based on the fact that it is possible to estimate, with some degree of accuracy, the number of deaths that will occur among a large group of individuals of the same age in a given period. Mortality tables, based upon recorded experience, show the ratios of the number of persons of a given age dying or surviving to the number attaining that age. From these data and from the rate of interest assumed to be earned on the invested assets, an estimate may be made of the annual cost of any desired insurance benefit. This estimate is called the “ net premium.” Net premiums include 6 U. S. Congress (S. Doc. No. 124, 73d Cong., 2d sess.), National Income, 1929-32, Washington, 1934, p. 10; United States Temporary National Economic Committee, Hearings, pt. 4, Life Insurance, Washington, 1940, p. 1641. 7 Taylor, Maurice. Social Cost of Industrial Insurance. New York, 1933, pp. 194,195. The following are the proportions of workers’ income spent on insurance as described in a series of important investigations: United States Bureau of Labor Statistics, Federal employees, 1929, 5.0 percent for incomes under $1,500 per year; Lynd, Middletown, 1929, 4 percent. For more complete data on these and other investigations, see Taylor, Maurice, Social Cost of Industrial Insurance, New York, 1933, pp. 395-414. 8 Industry (a weekly publication of the Associated Industries of Massachusetts), Sept. 24,1932, p. 4. 8 Taylor, Maurice. Social Cost of Industrial Insurance. New York, 1933, pp. 249-253. See also U. S. Temporary National Economic Committee, Monograph No. 2: Families and Their Life Insurance, Wash ington. 1940; Hearings, pt. 12, Industrial Insurance, Washington, 1940. INTRODUCTION 3 allowance for current death losses and contributions to the insurance reserves. To the net premium is added a “ loading charge” to cover the expenses of the business, and the resulting total, or “ gross pre mium,” is the amount charged the insured. Since, in general, the probability of dying increases with age; since, on the average, a young man taking out a policy may be expected to pay a larger number of premiums than one who buys a policy at a more advanced age; and since, finally, the accumulated interest over the longer period will be greater— it follows that a young man is charged a much smaller annual premium than an old man. For example, the annual premium charged for $1,000 of straight life insurance in 1940 might be $16.72 for a person insuring at age 25, and $39.00 for one insuring at age 50.1 Because life-insurance premiums 0 for a given kind and amount of insurance usually vary in size with the age of the insured when the policy is taken out and remain unchanged throughout the premium-paying period, such insurance is often called “ level-premium” insurance. The charges set for ordinary insurance in the United States are for the most part based upon the American Experience Mortality Table, which was devised by Sheppard Homans in 1868.1 Until recently 1 industrial-insurance premiums were based on the Standard Industrial Mortality Table, calculated from the mortality experience of one company with respect to working-class insured persons for the years 1898-1906.1 It is important to point out that since 1868, when the 2 American table was calculated, and even since 1906, the last year of the period upon the experience of which the standard table was cal culated, there has been a great advance in the conquest of certain diseases, especially those of childhood. To this advance the progress of medical science and public health have both contributed. As a consequence, the tables used in calculating the size of insurance premiums lead to premium charges higher than those which would be required if the mortality experience of very recent years were used as a basis. Since the improvement in the conquest of diseases has been much more marked among diseases of children than among those of grown-ups, it is to be expected that in the premiums charged for the insurance of minors there is an even greater excess over what would be required if premiums were based on present mortality experience than in those paid by adults. The premiums charged for insurance do not, however, represent a net cost to the insured. Practically all mutual life insurance companies (and some stock companies on “ participating” policies) turn back to the insured what are called “ dividends” after a certain 1 These were the premiums charged by the savings banks in Massachusetts in that year. 0 1 Huebner, S. S. Principles of Life Insurance. New York, 1925, p. 149. 1 1 Taylor, Maurice. Social Cost of Industrial Insurance. New York, 1933, pp. 161-162. In 1941, a new 2 and more modern table for industrial insurance was made legal in the State of New York. 4 SAVINGS-BANK LIFE INSURANCE short period has elapsed. These dividends should not be confused with the dividends to stockholders in business corporations, which are in the nature of interest returned on investment and profit in business enterprise. Insurance dividends are the return to policy holders of the excess in premiums charged over what has proved neces sary by the experience of the operation of the preceding period, minus a sum put into surplus to provide against unforeseen contingencies. As stated above, insurance premiums are made up of allowance for current death losses and contributions to the insurance reserves, i. e., net premiums, and the estimated expenses of carrying on the business, i. e., loading on premiums. The amount returned to policyholders in the form of dividends generally consists of three items: (1) The interest in excess of what was calculated to be earned by the invested reserves; (2) the amounts by which “ actual mortality losses” are less than “ expected mortality losses” ; and (3) the amount by which actual expenses of operation are less than those estimated in advance.1 3 The importance of the life-insurance business and of its relation to the problem of economic security justifies a study of any important phase of the insurance system. If a single State has on its statute books a law designed to reduce the costs of life insurance and to eliminate its principal shortcomings, such a law is worthy of careful scrutiny. Since 1907 the State of Massachusetts has permitted its mutual savings banks to write life insurance under conditions which are intended to reduce its cost. Although only a small proportion of the total amount of insurance in force in Massachusetts is carried by the savings banks, the system has grown very rapidly. In 1908, there was a total of $115,000 of life insurance in force in the banks. The amount had risen in 1913 to $3,151,000; in 1918, to $9,783,000; in 1923, to'$25,678,000; in 1928, to $57,837,000; in 1933, to $93,187,000; and on May 1, 1941, the amount of insurance in force with the savings banks was in excess of $200,000,000.1 4 In March 1938, New York became the second State to establish a savings-bank life-insurance system modeled substantially upon the Massachusetts plan. The first policy was issued in January 1939, and on July 1, 1941, there were 18,914 policies representing $15,334,500 insurance in force. Early in May 1941 the Connecticut Legislature passed a law per mitting savings banks to establish life-insurance departments. The provisions of this law, which became operative July 1, are very similar to those of the New York system as described in part II of this bulletin. 1 For extended discussion of the principles of life insurance see Huebner, S. S., The Principles of Life 3 Insurance, New York, 1925; Ackerman, S. B., Industrial Life Insurance, New York, 1926; Taylor, Maurice, Social Cost of Industrial Insurance, New York, 1933; Maclean, J. B., Life Insurance, New York, 1939. 1 Growth of Savings Bank Life Insurance (a leaflet published by the Division of Savings Bank Life 4 Insurance in 1940) and information from the Division. Part I Savings-Bank Life Insurance in Massachusetts 5 Chapter 1 Origin and Growth of Savings-Bank Life Insurance The idea of combining the functions of savings banking and life insurance was suggested in this country by Elizur Wright, an impor tant actuary who became the first insurance commissioner of Massa chusetts. Wright, in 1874, proposed the establishment of the “ Ameri can family bank” as a stock company which should receive savings deposits and sell life insurance without employing insurance agents. Nothing, however, came of this proposal. More than 30 years later the idea was again brought to public attention as a result of an investigation into the mismanagement of the life-insurance business. The waste of the funds of policyholders and the failure to protect their interests had become so great and so widespread by the turn of the century that the directors of the Equitable Life Assurance Society of New York considered it desirable, in April 1905, to appoint a committee to investigate the management and administration of the company. The situation in the Equitable and in other large insurance companies attracted so much attention that the Assembly of the State of New York appointed a committee, with Senator Armstrong as chairman, to investigate the affairs of the life-insurance companies operating in New York, and especially the operation of the “ Big Three,” i. e., the Equitable Life Assurance Society of New York, the Mutual Life Insurance Co. of New York, and the New York Life Insurance Co. The committee, which has come down in history as the Armstrong Committee, engaged Mr. Charles Evans Hughes, later Chief Justice of the United States Supreme Court, as its chief counsel. It began its hearings on Septem ber 5, 1905, concluded them on December 30, 1905, and 2 months later made a report to the assembly suggesting reforms designed to eliminate the evils which had grown up in the life-insurance business.1 During the same month in which the directors of the Equitable appointed their investigating committee, the New England policy holders of the company organized themselves into a “ Policyholders i New York State Assembly Document No. 41, 1906: Report of the “ Armstrong Committee” ; Graham, William, Romance of Life Insurance, Chicago, 1919; Noyes, Alexander H., Insurance Investigation, Forum, vol. 37, pp. 343-352, January 1906; Mason, Alpheus T., TheBrandeis Way, Princeton, Princeton Press, 1938; Casady, Clyde S., A Study of Savings Bank Life Insurance in Massachusetts (an unpublished thesis sub mitted for the M . A. degree in economics in Tufts College), 1932, pp. 1-18, and Massachusetts Savings Bank Life Insurance, Boston, 1938. See also Wright, Elizur: Politics and Mysteries of Life Insurance, Boston, 1873, and Elements of Life Insurance for the Use of Family Banks, Boston, 1876. 7 2 9 6 7 2 2 ° — 4 1 -------2 8 S A V I N G S - B A N K LIFE I N S U R A N C E — M A S S A C H U S E T T S Protective Committee.” The committee engaged as counsel Mr. Louis D. Brandeis, who began a study of the life-insurance business in general and that of the Equitable in particular. As a result of this study he called attention, in October 1905, to the abuses of life insurance, and suggested a series of remedies, many of which were similar to those offered later by the Armstrong Committee. In contrast to what he considered the wastefulness of the management of the insurance companies, he described the highly efficient and economical management of the mutual savings banks of Massachusetts.2 By the autumn of 1905 he had worked out tentative proposals for a system of life insurance to be sold by the mutual savings banks of Massachusetts. These proposals were submitted for criticism to an independent actuary, Mr. Walter C. Wright, who, interestingly enough, was the son of Elizur Wright. They were later incorporated in an article which was published under the title, “ Wage Earner’s Life Insurance,” in Collier’s Weekly of September 15, 1906. The philosophy behind the idea was expressed as follows: [The] sacrifice incident to the present industrial insurance system [could] be avoided only by providing an institution for insurance which [would] recognize that its function is not to induce working people to take insurance regardless of whether they really want it or can afford to carry it, but rather to supply insurance upon proper terms to those who do want it and can carry it— an insti tution which [would] recognize that the best method of increasing the demand for life insurance is not eloquent, persistent persuasion, but, as in the case of other necessaries of life, is to furnish a good article at a low price. It was pointed out that “ Massachusetts in its 189 savings banks and the other States with savings banks similarly conducted, have institutions which, with a slight enlargement of their powers, can at a minimum of expense fill the great need of life insurance for working men.” 3 3 See an address printed by the Policyholders Protective Committee entitled “ Life Insurance: The Abuses and the Remedies.” This also appeared in Brandeis, Louis D., Business—a Profession, Boston, 1914,1932. 3 The following reasons were given for the belief that savings banks could well perform the functions required: “ First. The insurance department of savings banks would be managed by experienced trustees and officers who had been trained to recognize that the business of investing the savings of persons of small means is a quasi-public trust which should be conducted as a beneficent and not as a selfish money-making institution. “ Second. The insurance department of savings banks would be managed by trustees and officers who in their administration of the savings of persons of small means had already been trained to the practice of the strictest economy. “ Third. The insurance business of the savings banks, although kept entirely distinct as a matter of investment and accounting, would be conducted with the same plant and the same officials, without any large increase of clerical force or incidental expense, except such as would be required if the bank’s deposits were increased. Until the insurance business attained considerable dimensions, probably the addition of even a single clerk might not be necessary. The business of life insurance could thus be established as an adjunct of a savings bank without incurring that heavy expense which has ordinarily proved such a burden in the establishment of a new insurance company. * * * “ Fourth. The insurance department of savings banks would open with an extensive and potent good will, and with the most favorable conditions for teaching, at slight expense, the value of life insurance. The safety of the institution would be unquestioned. For instance, in Massachusetts the holders of the ORIGIN AND GROWTH 9 Enactment o f Savings-Bank Insurance Law 4 A joint special committee on insurance was appointed by the Massachusetts Legislature in 1906 and the Brandeis proposals were presented to it in September of that year. The opinion of the com mittee was at first overwhelmingly against them. Realizing the need for educating the public and the legislature concerning the advantages of the proposed legislation, its supporters organized, on November 26, 1906, the Massachusetts Savings Insurance League, with former Gov. W. L. Douglas as president.5 The league’s first purpose was to win public support to the idea of savings-bank life insurance. It carried on a very active publicity campaign, which was doubtless partly responsible for the fact that the legislative committee, in its report to the legislature on January 9, 1907, heartily endorsed the plan.6 Six days earlier, Gov. Curtis Guild, Jr., in his address to the legislature, had urged the members to give the plan careful consideration.7 From then until June a bill incorporating these proposals was strenuously opposed by representa tives of the insurance companies as well as by a group of 34 treasurers of mutual savings banks. It was as strenuously supported by the 1,829,487 savings-bank accounts, a number equal to three-fifths of the whole population of the State, would at once become potential policyholders; and a small amount of advertising would soon suffice to secure a reasonably large business without solicitors. “ Fifth. With an insurance clientele composed largely of thrifty savings-bank depositors, house-to-house collection of premiums could be dispensed with. The more economical monthly payments of premiums could also probably be substituted for weekly payments. “ Sixth. A small initiation fee could be charged, as in assessment and fraternal associations, to cover necessary initial expenses of medical examination and issue of policy. This would serve both as a deterrent to the insured against allowing policies to lapse and a protection to persisting policyholders from unjust burdens which the lapse of policies casts upon them. “ Seventh. The safety of savings banks would, of course, be in no way imperilled by extending their functions to life insurance. Life insurance rests upon substantial certainty, differing in this respect radi cally from fire, accident, and other kinds of insurance. * * * “ The theoretical risk of a mortality loss in a single institution greater than that provided for in the insur ance reserve could be absolutely guarded against, however, by providing a general guaranty fund, to which all savings-insurance banks within a State would make small pro rata contributions—a provision similar to that prevailing in other countries, where all banks of issue contribute to a common fund which guarantees all outstanding bank notes. “ Eighth. In other respects, also, cooperation between the several savings-insurance banks within a State would doubtless, under appropriate legislation, be adopted; for instance, by providing that each institution could act as an agent for the others to receive and forward premium payments. “ Ninth. The law authorizing the establishment of an insurance department in connection with savings banks should, obviously, be permissive merely. No savings bank should be required to extend its functions to industrial insurance until a majority of its trustees are convinced of the wisdom of so doing.” (Brandeis, Louis D. Wage Earners’ Life Insurance, in Collier’s Weekly, September 15, 1906. Reprinted by the Massachusetts Savings Insurance League in a pamphlet entitled “ Massachusetts Savings Bank Insurance and Pension System,” 1910; also reprinted in Brandeis, Louis D., Business—a Profession, Boston, 1914, 1932.) 4 For the complete story, based upon original Brandeis records, see Mason, Alpheus T., The Brandeis Way, Princeton, Princeton Press, 1938. 5 Among the early officers of the league were former Gov. John L. Bates, Bishop William Lawrence, Judge F. C. Lowell, Archbishop W. H. O’ Connell, James J. Storrow, and Prof. F. W. Taussig. The com plete list is given in an article entitled, “ The Massachusetts Scheme of Savings Bank Insurance,” by Shelby M. Harrison, in the Survey, May 7, 1910. 6 Massachusetts Legislature. House Document No. 1085: Report of the Joint Special Committee on Insurance, 1907. 7Idem, Senate Document No. 1, p. 14: Governor’s address to the legislature, January 3,1907. 10 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS league, by its author, and by many other well-known citizens and organizations, among whom were the presidents of the Massachusetts State Federation of Labor, the Boston Central Labor Union, and other labor organizations, and also the Boston Chamber of Commerce and the Massachusetts Civic League.8 In May the bill received the approval of the house committees on insurance and on ways and means, and in June it passed both houses. On June 26, 1907, it received the signature of Governor Guild. G row th o f Savings-Bank Life Insurance A month after the enactment of the law the governor appointed the board of seven unpaid trustees of the General Insurance Guaranty Fund, who were charged with the administration of the system.9 Although the law was on the statute books, there was much to be done before savings-bank life insurance was to become a reality. The savings banks, although now possessed of power to enter the life-insurance business, were very slow to take advantage of it. Due to the naturally conservative attitude of savings-bank trustees toward such an untried venture, and also perhaps to the influence of insurance agents and executives, often themselves members of the boards, it was fully a year before the pioneer institution, the small Whitman Savings Bank, opened its insurance department. The bank was enabled to do this because of the generosity of several important shoe manufacturers, with plants in Whitman, who advanced part of the guaranty funds necessary under the law before the bank could start selling insurance. In November 1908, with the aid of funds similarly advanced by ex-Governor Douglas, the People’s Savings Bank of Brockton opened its insurance department. In August 1911 the Berkshire County Savings Bank of Pittsfield began operations as a savings-insurance bank and it was followed by the City Savings Bank of the same city in July 1912.1 0 The order in which the 29 banks now underwriting life insurance entered the system and the dates upon which they started insurance 8 Harrison, Shelby M . The Massachusetts Scheme of Savings Bank Insurance, in the Survey, May 7, 1910. 9 The president of the board was Judge Warren A. Reed, vice president of the People’s Savings Bank of Brockton. The board appointed Mr. R. G. Hunter as the first State actuary. Dr. Horace D. Arnold was appointed the first State medical director. 1 For further information regarding the enactment of the savings-bank insurance law and the early history 0 of the system see Mason, Alpheus T., The Brandeis Way, Princeton, Princeton Press, 1938; Brandeis, Louis D., Business—a Profession (section on Successes of Savings Bank Insurance);Grady, Alice H.,The Romance and Development of Savings Bank Life Insurance in Massachusetts, an address delivered on Nov. 29,1932, published by the Savings Bank Life Insurance Division, Boston, and Savings Bank Life Insurance and Old Age Annuities, in Savings Banks and Savings Department Management, by W. G. Sutcliffe and L. A. Bond, New York, 1930; Massachusetts Savings Bank Life Insurance Division, Brief Survey of the Massa chusetts System of Savings Bank Life Insurance and Old Age Annuities, Boston, 1939; Powers, James H., Massachusetts’ Great Insurance War, in the New Republic, Jan. 8, 1930; Casady, Clyde S., A Study of Savings Bank Life Insurance in Massachusetts (an unpublished thesis submitted for M. A. degree in eco nomics in Tufts College), 1932, ch. 1. ORIGIN AND GROWTH 11 operations are given in table 1. References to the various banks hereafter in this report will usually be made by the numbers shown in the table. T a b l e 1 .-— Order No. 1 2 3 4 5 in which savings banks entered the insurance system and dates of beginning of operations Name of bank Location Date Whitman__ __ ____ Whitman Savings Bank.. ____________ ___ People’s Savings Bank _ _ _ Brockton _____ __ Berkshire County Savings Bank _ _ ___ Pittsfield. _ ______ _____ . _ ____ d o ______ _ __ . City Savings Bank. ____ _____ Lynn Five Cents Savings Bank ______ _ _____ __ Lynn__ _ ______ _ June Nov. Aug. July Nov. 22, 1908 2, 1908 1, 1911 15, 1912 1, 1922 Do. _ __ do_____ _ North Adams Feb. 29, 1924 Cambridge Nov. 1, 1924 Boston __ . . __ Nov. 1, 1925 W alth am _____ _ ._ Do. 6 7 8 9 10 Lynn Institution for Savings _______ __ _________ _ North Adams Savings Bank Cambridgeport Savings Bank __ _ _ _ _______ _ _ _ _ ___ Massachusetts Savings Bank 1 Waltham Savings Bank___ ______ _______ ________ _ 11 12 13 14 15 Lowell Institution for Savings. _ _ . . . . ______ _ Lowell__ _______ _ Boston Five Cents Savings Bank . _______ _ Boston________ _____ Grove Hall Savings Bank._______. . . . . . .. __________ ____do______________ Cambridge Savings Bank.__________ _____ _ _ ______ Cambridge__________ __________ New Bedford Institution for Savings New Bedford 16 17 18 19 20 Arlington Five Cents Savings Bank _____ _ Uxbridge Savings Bank ________ _ _ ____ Beverly Savings Bank_______ ___ ____ _ __ Wildey Savings Bank 2______ ________ _ _____ Leominster Savings Bank_______ _ _____________ . . . . Arlington __ _ Uxbridge ___ __ _ Beverly Boston Leominster________ 21 22 23 24 25 Fall River Five Cents Savings Bank_____ ______ ______ Canton Institution for Savings _______ Plymouth Five Cents Savings Bank ______ ___ _ Newton Savings B a n k .____________ . . . . . . . . ___ _ Boston Pennv Savings Bank_______ ______ _________ Fall River_______ Canton Plymouth N ew ton ______ B o ston .______ _ 26 27 28 29 Brockton Savings Bank____________ _________ __ _ Greenfield Savings Bank. ____________________ ____ ___ Institution for Savings in Roxbury_ . . . _ ____ __ Somerville Savings Bank_________ . . . ______ ... Brockton Do. Greenfield.. __ _ _ Nov. 1, 1939 Boston ___ Do. S o m e rv ille _ _ ___ Nov. 1, 1940 Nov. 1, 1929 Do. Do. Mar. 1, 1930 July 15, 1930 Nov. Mar. June Apr. June 1, 10, 1, 14, 1, 1930 1931 1931 1931 1931 . Nov. 1, Nov. 1, Do. Mar. 1, Nov. 1, 1931 1934 1937 1938 1 2 C a lle d t h e N o r t h E n d S a v in g s B a n k u n t i l 1928. A lt h o u g h th e W i l d e y S a v in g s B a n k c o m m e n c e d o p e r a tio n s b e fo re th e B e v e r l y b a n k , t h e y b o t h e s ta b is h e d th e d e p a r t m e n t s a t a b o u t th e s a m e tim e . It will be observed that the first 4 banks entered the system between 1908 and 1912; that 6 more were added between the years 1922 and 1928; that from November 1, 1929, to November 1, 1931, 11 addi tional banks opened insurance departments; and that since Novem ber 1, 1934, 8 other banks joined the system. During the early years, the amount of insurance sold by the banks grew very slowly, the total amount in force in 1918 being less than 10 million dollars. After that year the amount in force showed a marked increase, reaching the sum of approximately 20 million dollars in 1922 and over 67K million dollars in 1929. During the years of depression following, the growth of insurance in force was particularly great, rising to more than 109 million dollars in 1935 and to over 173 million dollars by the end of 1939. (See table 2.) At the end of April 1941 savings-bank life insurance in force in Massachusetts amounted to more than $200,000,000. S A V I N G S - B A N K LIFE I N S U R A N C E — M A S S A C H U S E T T S 12 T able 2,— Growth of savings-bank life insurance, 1908 to 1940 1 Premium income received Number of banks Year Matured Number Amount of endow of policies insurance ments and death in force in force claims paid Total paid to policy holders Admitted assets 1908____ ____ 1909............ . 1910__________ 1911__________ 1912__________ 1 2 2 3 4 $368. 21 25,377. 29 58,890.68 76, 348.92 102, 832.27 282 2,521 3, 318 5,063 6,662 $114,953 992,761 1, 367, 363 1,956,038 2, 528,809 $500.00 3,622.00 3,638.00 6,513.00 $878.06 8,879.86 12,149.74 21,877.67 $26,048.91 82,137.17 130, 516.97 223,130.83 331, 726. 51 1913.................. 1914__________ 1915__________ 1916__________ 1917__________ 4 4 4 4 4 124, 205.08 139, 757. 35 164,058. 96 212, 885. 24 261, 562. 27 8,054 9,439 10, 892 14,030 17, 680 3,150,806 3, 566, 778 4,341, 205 6,041, 754 8,139,269 10,679.00 9, 706. 36 12, 477.01 27,984. 75 24, 385.65 28, 796.99 35, 335.32 56, 790.27 73, 458.28 72,870.00 430, 428.89 542,900.68 666, 750.00 779,311.68 990, 844. 55 1918__________ 1919__.......... . 1920__________ 1921__________ 1922__________ 4 4 4 4 4 317, 475. 73 352,104.12 424,901. 24 463, 792.59 553,006.99 20, 707 28,148 30,834 31,705 35,492 9, 783,239 12, 373,090 15,050, 271 16,670,103 19,872, 634 58, 314.20 97,100.91 93, 710.99 57,712.00 82, 553.44 132, 243.51 176, 331.81 197, 214. 28 212,635. 56 281,080.16 1,202, 932. 52 1,418, 530. 52 1, 702,141. 84 2,000, 393.19 2, 348, 945. 70 1923.................. 1924__________ 1925__________ 1926__________ 1927__________ 6 7 8 10 10 714, 773. 56 898, 747.79 1,148, 267.07 1, 365, 726. 35 1, 583, 746.25 41,283 45,889 50,953 55,822 61,543 25,677, 730 31,758, 583 38,105, 250 43, 293, 286 49,171, 745 112, 385.40 141, 236.47 167, 672. 85 199, 964.94 238, 213.40 347, 569.98 437, 662.33 523,062.98 644, 507.63 770,873.45 2, 834,089.67 3,447, 486.36 4, 246, 820. 39 5,161, 388.06 6, 221, 049.09 1928.................. 1929__________ 1930__________ 1931__________ 1932__________ 10 10 15 20 21 1,899,176. 57 2, 369,176.34 2, 644, 733. 31 3,095,271.43 2,979, 581.14 70,212 81,440 90,239 101,002 101, 390 57,836, 763 67, 588, 398 77, 324,800 90,960, 522 90, 606, 283 223,990.37 495, 977.98 499,084. 87 626, 426.75 597, 745.76 849, 359. 70 1, 304, 982. 34 1, 458, 410. 69 1,756, 711.49 2,024,936.28 7, 579, 708. 72 9,074, 805.35 10, 566,034. 39 12, 313, 623.34 13, 681, 358.92 1933__________ 1934.......... . 1935.......... . 1936.................. 1937.................. 21 21 23 23 24 3, 256, 410.37 4,075, 775.32 4, 300, 823.47 4, 686, 718. 51 5,013, 694. 44 103, 763 93,186,980 112,294 99,960,943 122, 725 109, 645,965 137, 345 122, 374, 772 156,093 139, 706, 498 608, 277.85 584,882. 55 671,031.80 736,945. 38 718, 862. 71 2,057, 691.77 2,042, 616.29 2, 296, 888.40 2,438, 858.91 2, 546, 982.61 15,171, 273. 58 17, 634, 808. 89 20,181, 423. 34 23,096, 679.30 26,123, 367.12 1938.................. 1939.................. 1940__________ 24 26 28 4, 787,123. 50 5,150,026.46 5,408, 512.95 172,004 154, 788, 376 192,817 173,123, 657 211, 370 191,539,618 753, 972.90 883, 491. 57 950,025.39 2, 674, 570. 49 2, 801, 277. 96 2,898,261.95 28, 870,867.24 31, 822, 824. 94 34,928,996.57 1 From a leaflet entitled “ Growth of Savings Bank Life Insurance,” published by the Division of Savings Bank Life Insurance in 1941. The average number of policies in force for each year in the period 1933 to 1937 was more than 16 times as great as the average for the first 10 years of the system’s history. The amount of insurance increased to more than 35 times as much. By the year 1940 the increase over the average year of the first 10-year period was about 27 times the number of policies outstanding and about 59 times the amount of insurance in force. (See table 3.) T able 3 .— Growth in number of 'policies and amount of insurance, 1908 to 1940 Number of policies in force Amount of insurance in force Period Average number each year 1908-17......................................................................... 1918-22....... ................. ........................................ 1923-27....................................................................... 1928-32...................... .................................................. 1933-37........................... .............................................. 1938________________________ __________ ________ 1939___________________________________________ 1940___________________________________________ 7,810 29,460 51,099 88,857 126,443 172,004 192, 817 211,370 Index 100 377 654 1138 1619 2202 2469 2706 Average amount each year $3,222,161 14,785,003 37,601,579 76,863,353 112, 975,032 154, 788, 376 173,123, 657 191,539,618 Index 100 459 1167 2385 3506 4804 5373 5944 ORIGIN AND GROWTH 13 It is only in recent years, however, that savings-bank insurance has represented an important share of all the life insurance in force in the State of Massachusetts. Table 4 shows the amounts of ordinary savings-bank insurance, of ordinary company insurance, and of industrial insurance in force in the State in recent years.1 1 T a b l e 4.-— Amount of ordinary savings-bank insurance, ordinary company insur ance, and industrial insurance in force in Massachusetts, 1926 to 1989 [Amounts in thousands] Year 1926____________ 1927____________ 1928____________ 1929____________ 1930____________ 1931____________ 1932____________ Ordinary Savings- insurance, bank or excluding savingsdinary insurance bank in surance $32,694 38,243 46,308 55,228 64,940 75, 354 80,173 $2, 392, 794 2, 587, 804 2, 789, 615 3,999, 360 3,143, 245 3, 230,105 3,142,200 Industrial insurance Year $943, 111 1,012,500 1,063,085 1,136,174 1,153, 724 1,171,951 1,109, 754 1933____________ 1934____ 1935____________ 1936____________ 1937____________ 1938____________ 1939____________ Ordinary Savings- insurance, bank or excluding Industrial savings- insurance dinary insurance bank in surance $83,017 89, 567 98,097 109, 984 125, 674 141, 703 162,253 $3,038, 566 $1,091,128 3,013,316 1,098,353 3,024, 201 1,114, 496 3,073, 575 1,155, 496 3,133, 704 1,190,481 3,152, 737 1,188, 338 3,213,953 1,168,828 The increasing importance of savings-bank life insurance is evident from the fact that whereas it ranked twenty-second in amount of insurance in force in Massachusetts among the 31 organizations selling life insurance in Massachusetts in 1923, it was sixth among 48 organi zations in 1940. The data for ordinary insurance issued and terminated in the State for 1940 show clearly how savings-bank insurance has grown in relative importance. The banks wrote only 7.8 percent of the total new issues ($22,253,726 out of $283,534,798), but they accounted for 25.1 percent of the total net increase in insurance in force ($17,733,880 out of $70,615,406). Twelve out of 48 of the private companies operating in Massachusetts actually had more business terminated than they wrote in that year. Only 3 of the 48 companies (the so-called “ industrial” companies) wrote more than the savings banks did, but only one gained as much net. Although the banks had in force at the end of October 1940 a total of all kinds of insurance equal to about $191,539,618, only $179,850,218 was ordinary insurance. Nearly all of the remainder, or over $11,689,000, was group insurance.1 2 The chart on page 15 shows at a glance the relative increase in the number of policies, the amount of all kinds of insurance in force, the 1 1 The table does not include group insurance. Fraternal insurance, with which this report is not con cerned, is also omitted. n See appendix A for a table showing the amounts of group insurance in force with the banks and the companies. Appendix K contains data on endowment insurance. Information for all years up to 1940 comes from the Annual Reports of the Massachusetts Commissioner of Insurance, part 2, table 1. It should be noted that while the fiscal year of the savings banks ends Oct. 31, that of the insurance companies ends Dec. 31. Official published data for the companies are not yet available for the year 1940. 14 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS premium income, and the total ledger assets of savings-bank insurance over a period of 32 years. It will be noted that while, especially in the later years, the last three items appear to increase in about the same proportions, the rate of increase in the number of policies in force is not so great, indicating that the average size of each policy has risen during the period. The rise in the average amount of each policy, which is secured by dividing the amount of insurance in force for each year by the number of policies, and the index numbers showing the proportionate increase in the size of each policy, using the first year as a base, are shown in table 5. Beginning with the year 1916, when the amount of insurance obtainable from each bank was increased from $500 to $1,000, there was a fairly steady increase until 1931, since which time the average size of each policy has remained about constant. T able 5 .— Average amount o f insurance per policy, 1908 to 1940 Year 1908......... ........................ ........ 1909.................................. ........ 1910..................................... . 1911..................................... . 1912.............. ........................ . 1913________ _______ ________ 1914______ ____ ____________ 1915______ ____ ____________ 1916____ ____ ______________ 1917. __________ ____________ 1918______ ______ ___________ 1919___ _______ ____________ 1920_______________________ 1921_______________________ 1922.................................... 1923_______________ ________ 1924_______________________ Average amount of insurance per policy $408 394 412 386 380 391 378 399 431 457 469 440 488 526 561 622 692 Index 100 97 101 95 93 96 93 98 106 112 115 108 120 129 137 152 170 Year 1925...... .................................. 1926.......................................... 1927.......................................... 1928 ..................................... . 1929......... ..................... ........... 1930 ............................. 1931.............. ........................ . 1932. 1933_______________________ 1934 _______ 1935 .............. 1936........... ................... ........... 1937...... .................................... 1938___________ 1939_______________________ 1940 Average amount of insurance per policy $748 776 799 824 830 857 901 894 898 890 893 891 895 900 898 906 Index 183 190 196 202 203 210 221 219 220 218 219 218 219 221 220 222 During the first 32 years of its existence the savings-bank life insurance system received in premiums from policyholders over 58 million dollars. Its total income for the period was about 69 million dollars. It paid out over 35 millions, more than 31 millions of which went to policyholders in the form of payments to settle claims, endow ments, annuities, cash surrender values, and dividends, and about 4 millions were paid out for the expenses of operating the system. ORIGIN AND GROWTH 15 16 T SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS able 6 .— Income and disbursements of the savings-bank life-insurance system, 1908 to 1940 [Statement to Oct. 31, 1940] Item Amount In com e Premiums from policyholders. Net income from investments. Special guaranty funds______ Total income.......... ............ Amount E xp en ses $58,655,851. 77 10, 502,934.18 220,000.00 69,378, 785.95 D is b u r s e m en ts d u rin g SI y ea rs Death and disability claims. Matured endowments_____ Payments to annuitants___ Cash surrender values_____ Dividends to policyholders.. 7,332, 657.82 2,093,116. 35 4, 770, 575. 68 4, 741,034. 78 12,248,382.13 Total paid policyholders. Special guaranty funds retired. Expenses (see details)_______ 31,185, 766. 76 200, 000.00 4, 286,151. 90 Total disbursements. Income over disbursements. 35, 671, 918. 66 33, 706,867. 29 Item Salaries__________________________ $1,577,090.29 Advertising, postage, printing, tele 499,697.06 phone, and express______________ 412,886.21 Medical fees_____________________ Taxes___________________________ 416,683.81 362,113. 58 Collection fees____________________ Rent____________________________ 276, 864.10 505, 755. 65 Reimbursement to State__________ Other expenses___________________ 235,061. 20 Total expenses (7.31 percent of premium income)_______ 4,286,151.90 C hapter 2 A d m in istra tio n o f th e System Savings-bank life insurance may be purchased by residents of Massachusetts or by persons who are regularly employed in the State.1 The amount of insurance available to any individual from any one bank is $1,000. Thus, since there are now 29 issuing banks, it would be legally possible to issue $29,000, but in 1938 the system adopted an arbitrary maximum of $25,000.2 The statutory limit on the annual amount which may be paid by any one bank on an annuity contract is $200. For the past several years, however, the amount of annuity income which may be purchased by a lump sum has been arbitrarily limited to $50 monthly, and in 1941 the amount of deferred annuity income purchased by installments was limited to $100 monthly. The banks do not sell industrial insurance as such, although the majority of their policies are issued to a similar class of buyers. Policies Available and T heir Terms The savings-bank insurance law provides for the following types of policies: Whole (or “ straight” ) life, limited-payment life, renew able term, and endowment policies; annuity contracts; a combination of life insurance policies and deferred annuity contracts; “ and such others as may from time to time in the opinion of the commissioner of insurance, be desirable.” 3 Group insurance is also written. Whole life policies provide for the payment of premiums until the death of the insured, when the beneficiary receives the face value of the policy. Policies for limited-payment life insurance protect the insured throughout his life, but the premiums are set at such a rate that after a certain period, for example, 20 years, no further premiums need be paid. Whether death occurs before or after the expiration of this period, the beneficiary is entitled to the face value of the policy. Insurance may also be purchased on a 5-year term basis renew able up to age 65. Such insurance has no cash or loan value, and the premiums increase every 5 years. The renewable-term policies 1 If policyholders leave the State permanently they may continue to carry their insurance in the savings banks, but not to buy additional insurance. 2 Acts of 1915, ch. 32; Mass. Gen. Laws, ch. 178, sec. 10. Prior to 1915 the limit available to a single person in any one bank was $500 of insurance and a $100 annuity. 2 Mass. Gen. Laws, ch. 178, sec. 15. 17 18 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS issued by the savings banks permit conversion at any time without medical examination to any form of insurance, except term, at the rate for the insured's then attained age. Recently an automatically decreasing term insurance policy especially designed to cover the lives of home owners who are amor tizing their mortgages has been introduced. The banks sell endowment policies. A $1,000 20-year endowment policy is one on which premiums are payable for 20 years, and which entitles the beneficiary to $1,000 in case the insured dies during the 20-year period, or entitles the insured to $1,000 in cash if he survives the 20 years. Children 6 months of age or over may be insured under any of the regular forms of insurance. Such policies are payable at face value only if death occurs at age 6 or later. If death occurs under age 6, the amount of insurance paid is on a graded scale, the amount de pending upon the age at which the policy was taken out and the length of time it has been in force. The banks also sell group insurance, which does not require medical examinations. Such insurance is available only to groups of workers in plants inspected by the State medical director. Premiums are payable monthly by the employer, or by the employer and employees jointly. The size of the premium varies in accordance with the ages of the employees. The insurance is for a 1-year term only, being renewable each year at premiums determined on the basis of the ages of the workers. The bank issues a separate certificate of insurance for delivery to each employee by the employer. If in any case employment is terminated, the worker affected is entitled, without medical examination and upon payment of premiums for his then attained age, to a life or endowment insurance policy of the type he desires and for an amount equal to that for which he was insured under the group policy. If he desires an amount of insurance in excess of his original policy he must undergo a medical examination. The insurance banks sell three kinds of annuity contracts. Single premium immediate annuity contracts provide an income for life, payable annually or at more frequent intervals, in return for a single lump-sum payment at the time the contract is made. These are intended especially for persons 50 years of age and over, though available to younger persons. The contracts provide that the pay ments of income cease in case of death of the annuitant. A second type of contract provides for a single-premium joint and survivorship annuity. This may be bought by two persons—man and wife, for example— by the payment of a single premium. The annuity, which is payable so long as both or either of the two survive, may become payable immediately or at a specified future date. The income ceases with the death of the last survivor. ADMINISTRATION OF THE SYSTEM 19 The third and probably the most common type of annuity pur chased is the annual premium deferred annuity. This may be paid for regularly, until the designated age at which an annuity for life commences; for example, age 65. If the purchaser dies or surrenders his contract before the annuity begins, a guaranteed cash surrender value is paid. Premium payments on all policies and contracts may be made monthly, quarterly, semiannually, or annually, as the applicant may prefer, except in the case of group insurance. A number of plans combining a life-insurance policy and a savingsbank account have proven quite popular. Under these plans, the policyholder arranges for his premiums to be deducted from his savings deposits as they fall due. Such balance as is left in his account remains at interest, subject to withdrawal at will by the insured. Policyholders may elect to have annual dividends due them paid in cash on the anniversary date of their policies, to use them to reduce premiums due or to purchase additional paid-up insurance, or to leave them with the insurance department of the bank at a guaranteed minimum rate of interest. On all savings-bank life-insurance policies (except term and group insurance) the insured is entitled to borrow money on his policy at 5 percent interest after premiums have been paid for 1 year. He is also entitled to a cash surrender value equal to the full American experience legal reserve on his policy at the end of 6 months or before if the reserve exceeds $2 per $1,000 insurance. Instead of taking the cash surrender value, the insured may take a paid-up policy for an amount less than the original face value, the amount depending upon the net value of his policy, minus loans, if any; or he may take a policy for the full original face value for whatever term the net value of his policy would purchase (i. e., “ paid-up term insurance” )-4 If the in sured, having failed to pay premiums and having been notified by the bank, does not exercise his option respecting cash surrender, term insurance, or paid-up insurance, under the present policies issued by the savings banks, he automatically receives extended term insurance. (Policies issued prior to December 15, 1939, provided for automatic paid-up insurance.) The policyholder has a right to choose the method to be used in paying the insurance to his beneficiary. Among the options available are a single payment; payments of a given amount at regular intervals as long as the beneficiary lives; payments for 10 years or for 20 years to the beneficiary or the contingent beneficiary if the former should die; and payments to the beneficiary or the contingent beneficiary * Mass. Qen. Laws, ch. 178, sec. 11. 20 SAVINGS-BANK LIFE INSURANCE----MASSACHUSETTS spread over a chosen number of years. Any other mode of settle ment desired by the insured can usually be arranged. The premiums charged by all the insurance banks are required by law to be uniform.6 The dividends differ according to the experience of the various banks. In accordance with the insurance laws of the State, policies contain a statement of the amount which may be borrowed, of the cash values, of the amount of paid-up insurance, and of the duration of extended term insurance, which become available at the end of stated periods after the policies have come into force. They also contain a statement of the options respecting payments to beneficiaries.6 Administrative Organisation Ultimate responsibility for the administration of savings-bank life insurance is lodged in an incorporated body known as the General Insurance Guaranty Fund. This body consists of seven trustees, one of whom is appointed each year for a term of 7 years by the Governor of the State, acting with the advice and consent of the Governor’s Council. The trustees must serve without compensation and must be chosen from persons who are trustees of mutual savings banks. The Governor designates one of the trustees of the General Insurance Guaranty Fund as the commissioner of savings-bank life insurance for the length of his term as trustee. His appointment as commissioner (in which capacity he serves without pay) carries with it the duty of acting as president of the board of trustees, and of generally supervising and controlling the work of the Division of Savings Bank Life Insurance.7 The division is one of three sections of the Massachusetts Department of Banking and Insurance, the other two being the Division of Banks and the Division of Insurance. The administration of the Division of Savings Bank Life Insurance is more immediately in charge of the deputy commissioner, a salaried official appointed by the trustees of the General Insurance Guaranty Fund, subject to the approval of the Governor and his council. Although the law does not specifically extend jurisdiction of the division over the insurance departments of the banks, the latter operate along with the Division of Savings Bank Life Insurance and the General Insurance Guaranty Fund as a unified insurance system, 5 Mass. Gen. Laws, ch. 178, sec. 15. « Information respecting the nature of policies was obtained from leaflets published b y the State Division of Savings Bank Life Insurance. 7 Mass. Gen. Laws, ch. 178, sec. 14; Acts of 1919, ch. 26, sec. 9,10. The trustees are authorized to elect, from among their number, a vice president of the board, a treasurer, and a clerk, for terms of 1 year. ADMINISTRATION OF THE SYSTEM 21 and the deputy commissioner of savings-bank life insurance may properly be said to exercise actual supervision over this system,8 The trustees of the guaranty fund are authorized to appoint, with the approval of the Governor and council, a State actuary. Such clerks and assistants to the State actuary as may be required are also appointed, under civil-service rules.9 A State medical director, appointed by the trustees of the General Insurance Guaranty Fund with the consent of the Governor and council, is charged, subject to the supervision and control of the commissioner of insurance, with the duty of prescribing the rules relating to the “ health or acceptability of the applicant for insurance.” He acts as the supervising and advising physician of the savings-bank insurance system. The medical director is empowered to appoint such assistants as may be required.1 0 Every application for savings-bank life insurance goes to the office of the State medical director, where it is scrutinized by him or by the physician who assists him. In March 1941 there were 374 phy sicians, all graduates of class A medical schools, empowered by the State medical director to make the medical examination required of 8 The administration of the division was under the direction of Judge Warren A. Reed, of Brockton, who was appointed president of the guaranty fund b y Governor Guild in July 1907, for a period of 13 years. Thereafter, M r. George L. Barnes, of South W eymouth, was appointed president. He served in that capacity and as commissioner up to December 1934, when he resigned as commissioner, but continued as a trustee. Another trustee of the fund, Mr. Richard Bullock of Fitchburg, was then designated as com missioner. Miss Alice H. Grady, who had served as financial secretary of the Massachusetts Savings Insurance League since its origin, was appointed deputy commissioner in 1920 and acted in that capacity until her death on Apr. 17,1934. Mr. Judd Dewey, who had acted without pay as counsel for the division for many years, was appointed to succeed her on Apr. 25,1934. (Brief Survey of the Massachusetts System of Savings Bank Insurance and Old Age Annuities, 1940, pp. 3, 4. See an article on Miss Grady b y Eliza beth Glendower Evans, one of a series entitled, “ Interesting People I have K now n,” in Boston Jewish Advocate, June 15, 1934.) 9 The present State actuary is Eugene F. Caldwell. His duties m ay be summarized as follows: (1) T o prepare standard forms of life-insurance policies and life-annuity contracts, which “ shall be used as the uniform and exclusive forms of policies b y all savings and insurance banks” (the term “ savings and insur ance banks” is the official designation of the banks authorized to underwrite insurance); (2) to prepare the forms or blanks for application for life-insurance policies and life-annuity contracts, for proof of loss, “ and all other forms necessary for the efficient prosecution of the business, also books of record and of account, and all schedules and all reports, not otherwise provided for, required in the conduct of the business, all such forms to be used uniformly and exclusively b y the savings and insurance banks” ; (3) to furnish all blanks prepared b y him to the banks and the General Insurance Guaranty Fund; (4) to determine and pre pare, consistently with the law governing domestic legal reserve life-insurance companies, the table of premium rates for all kinds of life-insurance policies, the membership fees, the purchase rate for annuities, the surrender value and any proof of death charges, “ and the premium rates for reinsurance, all such rates, fees, and charges to be uniformly and exclusively used in the system” ; (5) to determine and prepare tables showing the amounts which m ay be loaned on insurance policies, and the guaranty charges to be made by the General Insurance Guaranty Fund; (6) to prepare or procure tables for computing the legal reserve to be held under insurance and annuity contracts; (7) to direct an annual valuation of all the policies of the banks, and of the condition of the General Insurance Guaranty Fund; (8) to determine for each year the ratio of actual to expected mortality claims for all the savings-insurance banks combined and for each one sepa rately; (9) to determine how much each bank shall pay to or shall be paid from the General Insurance Guaranty Fund as the amounts due to or from it on account of the unification of mortality. (Acts of 1919, ch. 26, sec. 11; Mass. Gen. Laws, ch. 178, sec. 15.) 1 Acts of 1919, ch. 26, sec. 12; Mass. Gen. Laws, ch. 178, sec. 16. The present State medical director is 0 D r. Joseph H. Burnett. 22 SAVINGS-BANK LIFE INSURANCE----MASSACHUSETTS applicants for savings-bank life insurance. The office of the State medical director must approve every death claim before it is paid.1 1 Although the law requires that the savings banks may not employ insurance “ solicitors,” the legislature in 1915 appropriated funds to enable the trustees of the General Insurance Guaranty Fund to make known “ to those in need of industrial insurance, the advantages offered by the life-insurance departments of savings banks.” As a consequence the Division of Savings Bank Life Insurance engaged two “ instructors,” whose efforts were directed to the purpose of educating workers in the State as to the advantages of savings-bank life insur ance.1 They confine their activities to visiting industrial establish 2 ments for the purpose of encouraging employees to buy savings-bank life insurance. They are salaried, civil-service employees trained to advise and not to sell. It is important to note that these instructors are employed by and are responsible to the Division of Savings Bank Life Insurance, and that they have no direct connection with any of the savings-insurance banks.1 3 Operation of Insurance Banks and Their Agencies Any mutual savings bank, upon complying with the provisions of the savings-bank life-insurance law, may establish an insurance department if two-thirds of its board of trustees and a majority of its incorporators so decide. It must first secure, however, the approval of the commissioner of insurance and of the commissioner of banks. These officials are empowered to issue a joint certificate declaring an insurance department established when they are satisfied that a special expense guaranty fund and a special insurance guaranty fund, or a guaranty contract, have been provided.1 4 The special expense guaranty fund consists of not less than $5,000 in cash, advanced to and placed at the risk of a bank’s insurance department and earning interest, if profits are sufficient, at the rate paid depositors, for the purpose of meeting such expenses as the department may not be able to meet from its income in the early years. The original amount of the expense guaranty fund is fixed by the trustees of the bank, with the approval of the State actuary.1 6 1 Interview with D r. Joseph H . Burnett, March 1,1941. 1 12 Acts of 1915, ch. 168. is In addition to the persons already mentioned, the office of the Division of Savings Bank Life Insurance in the Statehouse employed in March 1941, 2 principal actuarial clerks, 3 senior actuarial clerks, 1 senior clerk, 4 senior clerks and stenographers, and 3 junior clerks and stenographers. In the office of the State medical director there are em ployed an assistant medical director, 1 senior clerk and stenographer, and 3 junior clerks and stenographers. K Mass. Gen. Laws, ch. 178, secs. 2, 3. I8 Mass. Gen. Laws, ch. 178, sec. 4. In exchange for the amounts advanced to the expense guaranty fund the lenders (generally the b a n k ’ s trustees) receive certificates with a par value of $100 each. T he fund is retired when the net profits permit and when, in the opinion of the commissioner of banks and the com missioner of insurance, it is no longer needed. Interest on the advances is paid when and if the condition of the insurance department permits. B y 1919 the first 4 banks entering the system had retired their expense ADMINISTRATION OF THE SYSTEM 23 In order that a bank newly entering the insurance system may be able to meet any death losses which may arise before it has had time to accumulate sufficient reserves, a special insurance guaranty fund is required. This consists of not less than $20,000 in cash, “ advanced to and placed at the risk of the insurance department, which [is] applicable to the payment and satisfaction of all losses or other obli gations arising out of policies or annuity contracts if and whenever the liabilities of said department, including the insurance reserve, are in excess of its assets.” The original amount of this fund is fixed by the trustees of the bank, with the approval of the State actuary.1 6 The advances to the special insurance guaranty fund are exchanged for certificates of the par value of $100, which, if profits are sufficient, yield interest at a rate equal to that paid the savings bank’s depositors. The repayment of these advances may not be made until (1) the special expense guaranty fund has been retired; (2) the insurance department has accumulated a surplus in excess of all its liabilities equal to the amount of the special insurance guaranty fund; (3) the balance of the latter fund, including unpaid interest and surplus on hand, is not less than the amount of the original insurance guaranty fund; and (4) the commissioner of insurance approves the retirement. In addition to this obligation, every insurance department in the system may be required to pay monthly to the General Insurance Guaranty Fund an amount equal to 4 percent of all premiums and deposits for annuities received in the preceding month. These sums are held as a guaranty for the combined insurance and annuity obli gations of all the banks. In the event that losses incurred by the insurance department of any bank are in excess of the reserve available for the purpose, such a bank may receive from the fund the amount necessary to meet its obligations. Amounts so received, with interest at 5 percent, must be repaid by the bank to the fund out of its insur ance surplus as soon and so far as an adequate surplus exists. The trustees of the fund must invest it in the same classes of securities and in the same manner as the savings deposits of the banks are invested, but they may deposit in any savings bank whatever funds they cannot otherwise invest.1 7 guaranty funds. The 6 banks entering between 1922 and 1925 had retired theirs b y 1929. Nine of the 11 banks entering the system between 1929 and 1931 had retired their expense funds b y 1933. The 2 banks established in 1931 retired their expense funds during the fiscal year 1934. The 2 banks whose insurance departments were established on Novem ber 1,1934, retired their funds the latter part of 1937, and the bank whose insurance department was established on March 1, 1937, retired its fund on its second anni versary, February 28, 1939. All the banks have paid interest regularly to those advancing the funds up to the time of retirement. (Reports of Commissioner of Insurance and Commissioner of Banks Relating to the Savings and Insurance Banks and General Insurance Guaranty Fund, 1914 to 1940.) Mass. Gen. Laws, ch. 178, sec. 5. The special guaranty funds are not to be considered liabilities in determining solvency. See appendix B for a further discussion of the insurance guaranty funds. Appendix C is devoted to a discussion of insur ance reserves and surplus. 296722°— 41------3 24 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS For the purpose of sharing, among the banks as a whole, the espe cially favorable or unfavorable mortality losses of a particular bank, the law provides for the equalization of the ratio of mortality claims among all the banks. Thus the high death losses of a single insurance department, caused by the temporary fluctuations of chance, would not impose a heavy burden and a possible consequent discontinuance of dividend payments to the policyholders of that department.1 8 Under the system of “ unification of mortality” in use, the heavy losses of one bank are distributed proportionately among all the banks. Those banks with mortality experience more favorable than the average experience of all the banks pay to the General Insurance Guaranty Fund sums which, in the aggregate, are then distributed among those banks which have had less favorable mortality experience than the average. Under the law unification is not extended to matters other than mortality experience, because the other items are within the control of a particular bank, while the mortality experience is not.1 9 The law requires that the savings departments and the insurance departments of the savings and insurance banks shall be operated separately. The assets of one department of the bank are not liable for or applicable to the payment and satisfaction of the liabilities, obligations, and expenses of the other. The two departments must also keep their accounts and their investments separate. The law declares: “ Expenses pertaining to the conduct of both the savings department and the insurance department, such as office rent and the salaries of general officers, shall be apportioned by the trustees equi tably between the two departments.” 2 0 Though only 29 savings and insurance banks have the power to underwrite insurance at present, the law authorizes the establishment of agencies and means for the receipt of applications for insurance and of premium payments upon such terms as the commissioner of banks and the commissioner of insurance may approve. Any savings bank in the State may be authorized to receive payments due on 1 Sec. 15 of the act provides that the State actuary shall “ for each year ending Oct. 31 determine the ratio 8 of actual to expected mortality claims for all of the savings and insurance banks combined, and shall deter mine a similar ratio for each of the savings and insurance banks separately. Both calculations shall be based upon the mortality tables and the rate of interest used b y the banks in the calculation of the premiums or upon such other bases as shall be approved b y the commissioner of insurance. If the calculation of the ratio pertaining to any savings and insurance bank shows that the actual mortality experience is less than the mortality expected to be experienced b y all of the banks combined, the State actuary shall send to such bank a certificate setting forth the amount of such difference, and thereupon such bank shall send to the General Insurance Guaranty Fund in cash the amount of such certificate. The State actuary shall also fur nish to the trustees of the General Insurance Guaranty Fund a certificate in respect to any savings and insurance bank in which the ratio of the actual to the expected mortality has exceeded the ratio of the actual to the expected mortality for all of the banks combined, and thereupon the trustees of the General Insurance Guaranty Fund shall pay to such bank the amount of such excess as evidenced b y such certificate.” For an explanation of the ratio of actual to expected mortality claims (or losses) see the latter part of ch. l. 1 S ap d D fo an exten d ssion of m 9 ee pen ix r ded iscu ortality ratios an the un d ification of m ortality. 2 Mass. Gen. Laws, ch. 178, sec. 8. The controversy as to the proper allocation of expenses between 0 the 2 departments is dealt with in full in ch. 7. 25 ADMINISTRATION OF THE SYSTEM policies and annuity contracts, and savings and insurance banks may act as agents for each other.2 All except employers7 agencies are 1 permitted to deduct a collection fee of 3 percent from the premiums which they forward to the underwriting banks. In June 1939, there were 517 agencies from which insurance could be secured. Of these, 267 were employers’ agencies, which dealt primarily with the workers employed in their particular establish ments. Fifty were agencies operated by credit unions for the bene fit of their members. The remaining 200 dealt with the general public. These agencies were widely scattered throughout the State. Table 7 shows the number of each kind of agency and the counties in which they were located. T 7 a . — N um ber and types of eestablishments at which applications for savingsb l bank life insurance might be made in June 1939 Total in each county County Issuing Agency banks or banks or their their branches branches Berkshire______ _____________________ ___ Franklin.- . ____________________________ Hampshire_________________________ _____ H am pden__________________ ____________ Worcester ______________________________ 29 11 13 48 71 3 M iddlesex.......... ............................... .............. Norfolk_____ ________ _________ _________ P lym outh_______________________________ Bristol............................................................... E s s e x . .......................................................... 125 36 33 23 50 8 1 4 Suffolk ............................................................. Barnstable______________________________ D uke’s ________________________________ N antucket_______________________________ 72 6 517 T otal________________ _____ _. _ 3 E m ploy Public agencies * ers’ agen cies Credit unions 24 7 5 25 49 2 4 8 12 12 11 7 7 3 3 6 3 48 20 9 2 16 1 1 1 61 12 17 9 25 7 20 6 2 33 10 36 159 5 267 50 5 5 i The so-called “ public agencies” include settlement houses, b oys’ clubs, schools, and private individuals A person applying for insurance at an underwriting bank is generally sold a policy carried by the bank in question. In case he wishes more insurance than the bank is permitted to sell him, he is asked to name the bank or banks from which he wishes to buy the additional amounts. If he has no preference, the bank official with whom he talks is likely to make suggestions. When application is made through other agencies and no preference as to bank is shown, the common practice is to refer the applicant to the nearest issuing bank. Since dividends have been fairly uniform over a period of years, sug gestions to applicants might often be made for reasons of policy. Among such reasons might be the desire to build up a newly estab lished insurance department, or to favor a bank with which the agency has some connection. The important fact, however, is that every applicant has the right to choose his insurance bank. 2 1 Mass. Gen. Laws, ch. 178, sec. 13. 26 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS Publicity and Promotion Features of the System At the present time, the general advertising program for savingsbank life insurance is carried on by the Savings Bank Life Insurance Council— an association of the 29 issuing banks formed in 1938. In addition to the publication of numerous pamphlets and leaflets for distribution by banks, credit unions, and employer agencies in Massachusetts, it sponsors a limited amount of advertising over certain radio stations and in numerous newspapers throughout the State. The extent of this advertising has increased with the growth of the system. Until 1938 the Division of Savings Bank Life Insurance carried on an active publicity program along the above lines. It still carries on an active correspondence with persons who write in for informa tion about the system, publishes and distributes some pamphlets, and sends speakers to organizations when invited. It employs two “ instructors” whose purpose it is to promote the sale of savingsbank insurance among industrial workers. The fact that its corre spondence is written on stationery bearing the name of the State and of a department of the State government, and that there is general knowledge that its offices are in the Statehouse on Beacon Hill, has helped to advance the growth of savings-bank insurance. The savings and insurance banks carry on various activities to promote the sale of insurance. As a rule they employ one or more clerks to whom a person seeking information is referred. Some of them have set up tables in the lobbies of the banks, at which attendants are ready to furnish such information. The banks make considerable use of material published by the Savings Bank Life Insurance Council and by the Division of Savings Bank Life Insurance. In some cases one bank or a group of banks has published pamphlets dealing with insurance. Placards are displayed frequently in prominent places. On occasion one bank or several acting together have published advertisements in the newspapers to promote the sale of insurance. The various agencies described above have used similar methods in promoting the sale of savings-bank insurance. The activities of the Massachusetts Savings Bank Life Insurance League and of the Associated Industries, as they relate to savingsbank insurance, are discussed fully in chapter 6. It is sufficient to say, at this point, that the league has been active since 1907; that in recent years it has published and distributed a number of pamphlets and leaflets; and that since 1930 the Associated Industries has employed a full-time secretary whose activities are devoted exclusively to promoting the sale of savings-bank insurance in the industrial establishments of the State. ADMINISTRATION OF THE SYSTEM 27 Regulation Savings-bank life insurance is subject to supervision by the com missioner of banks and the commissioner of insurance. The latter has authority to enforce the insurance laws of the State. This involves the enforcement of such laws, as they apply to the insurance departments of the savings banks. If, in his opinion, the insurance departments are violating those sections of the insurance laws which apply to them, he has authority to report the facts to the law enforce ment officers of the Commonwealth. He is authorized to require the books and records to be kept in such a way that the annual state ments may be verified and so that it may be ascertained whether there is compliance with the laws. He is authorized to investigate charges that unwarranted and misleading statements and promises are being made with respect to insurance, and he may also investigate any complaint of a policyholder with respect to any claim under an insurance or annuity contract.2 2 The commissioner of insurance also has certain regulatory duties imposed upon him by the savings-bank insurance law: 1. He issues licenses to write policies and make annuity contracts which are required before an insurance department may begin operations, and these licenses may be revoked by him at his discretion under certain conditions. 2. He must approve the retirement of the special insurance guaranty fund. 3. He has authority to ask the State actuary to prepare new forms of insurance policies and annuity contracts. 4. He is authorized to enforce the insurance laws with respect to the rates charged for insurance and annuities, etc. 5. He must approve the use by the State actuary of tables of mortality which may be thought more suitable than the American Experience Table for the business of the insurance departments of the banks. 6. He has authority to supervise and control the operation of the rules in use by the State medical director regarding the health and acceptability of the applicants. The commissioner of banks, through his power to supervise and regulate the affairs of the savings banks, comes in contact with the insurance departments of those banks. He may take steps to have bank officers removed if they persist in carrying on improper prac tices. He may prescribe the manner and form in which the books and accounts shall be kept, the extent to which they shall be audited, and the manner of safeguarding their money and securities. He has power to take control of a savings bank which is conducting its busi ness in an unsafe and unauthorized manner.2 3 2 Mass. Gen. Laws, ch. 175, secs. 3A, 4. 2 2 Mass. Gen. Laws, ch. 167, secs. 5, 6, 22. 3 28 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS Further regulatory duties are imposed jointly upon both the commissioner of insurance and the commissioner of banks: 1. The decision of the trustees of a savings bank to establish an insurance department must be filed with both commissioners, and if they find the decision to be in conformity with law and are of the opinion that the special expense guaranty fund and either the special insurance guaranty fund or the guaranty contract has been provided, they may issue a joint certificate declaring the insurance department established. 2. The expense guaranty fund may not be retired without the approval of both commissioners. 3. They enforce the laws regulating the nature and the extent of the investments of the insurance departments. 4. They must approve the reinsurance of all outstanding policies and annuity contracts of such banks if the reinsurance is effected with any private life-insurance company. 5. They must examine, either personally or through their agents, the insurance department of each bank and the General Insurance Guaranty Fund, at least once every 3 years. 6. Reports of the financial condition of the insurance departments and of the General Insurance Guaranty Fund must be made annually to both commis sioners. Other reports also may be required whenever the commissioners think it desirable. 7. The commissioners themselves are required to prepare annually a joint report on the condition of the insurance departments and the General Insurance Guaranty Fund and to submit this report to the General Court of Massachusetts (i. e., the legislature). 8. A vote to discontinue the insurance department of a bank must be filed with them. 9. If they believe the insurance department of a bank to be insolvent or if they think its continuance in business hazardous to the public or the policyholders, they may apply jointly to the Supreme Judicial Court of Massachusetts for an injunction to prevent the department from carrying on business.2 4 2 Mass. Gen. Laws, ch. 178. 4 Chapter 3 Financial Operations of the System The financial operations of the savings-bank life-insurance system differ in some essential characteristics from those of private life insur ance companies. Thus the dividends distributed depend partly upon the experience of the entire system and partly upon that of the insurance departments of the individual bank. Similarly, the ex penses of operation of the system involve not only the expenses of the banks themselves but also those of the Division of Savings Bank Life Insurance and of the Savings Bank Life Insurance Council. Further more, between 1908 and 1939 the insurance departments of the banks were taxed on a different basis than the insurance companies. And, finally, the control over the investments of the insurance departments, instead of being the same as that over insurance-company investments, is similar to the control exercised over the investment of the deposits of the savings banks. Dividends After contributions to surplus have been set aside by the insurance departments of the banks, the balance of net profits which remains must be distributed equitably each year among the holders of policies and annuity contracts. The sums so distributed are called “ divi dends” and their size, as has been pointed out, is determined in general by four factors: (1) Ratio of actual to anticipated expenses (or “ load ing” ); (2) ratio of actual to expected mortality losses; (3) the excess of actual over required earnings on funds invested; and (4) gains or losses from investments. For example, in 1940 there were available total gains of $1,201,576.86, which arose from the following sources: The anticipated ratio of expense to premium income, that is, the ratio of “ loading,” was 11.2 percent, while the ratio of actual expense to premium income was only 9.35 percent. This gave rise to a gain of $97,398. The fact that the actual mortality losses of the system were only 33.67 percent of the expected losses resulted in a gain of $1,244,513.44. The funds earned 3.36 percent in interest, resulting in a gain of $36,698.13 above the amount required to maintain reserves. Of the total gain of $1,201,576.86, part was put aside to surplus, and $958,792 was apportioned for dividends. The 1939 experience was as follows: Gain from loading, $135,884; gain from mortality, 29 30 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS $1,127,512; gain from interest, $77,165; total gains, $1,272,354; apportioned for dividends, $1,062,109.1 Organizations selling insurance do not generally make frequent changes in their scale of dividends. It is customary to construct dividend scales, as stable as possible, upon a consideration of past experience with respect to mortality ratios, rates earned on invested assets, and expense ratios. The dividend scale thus arrived at by the State actuary for savings-bank life insurance is called “ the basic scale.” If the particular experience of any single insurance depart ment is such that it can afford to pay dividends on this scale, it is said to be paying 100 percent of the basic scale. If its experience is not sufficiently favorable, it may be compelled to reduce its dividends to less than 100 percent of the scale. Mortality experience, as has been shown, is shared by all the banks through the operation of the system of unification of mortality. The principle underlying this sharing is that, since the acceptance of applicants for insurance is the responsibility of the State medical director in the Division of Savings Bank Life Insurance and not of any particular insurance department, the latter should not bear the entire burden of a heavy mortality loss among its own policyholders. Each bank, however, does have control within broad limits over its investments and expenses, and its efficiency of operation. When a particular bank is unable to pay dividends at the 100-percent level, it is clear that its experience with investments and expenses of oper ation alone, and not with mortality, is the cause. The mortality experience of the system as a whole, however, enters into the establish ment of the basic scale when it is formulated by the State actuary in the Division of Savings Bank Life Insurance.2 Expenses The expenses of operating the savings-bank life-insurance system may be considered under two heads: (1) The expenses of operating the State Division of Savings Bank Life Insurance and (2) the expenses of operating the insurance departments of the various banks. From the beginning, in 1907, through the year 1926, the expenses of operating the State division were met from appropriations made annually by the legislature. In 1907 the sum of $1,202 was spent for this purpose. From 1910 on, the expenses increased with consider able regularity until, in 1926, the operation of the division cost the State $31,112. In 1927, the legislature, acting on the recommenda tion of the governing officials of the division, passed a measure pro viding that the insurance banks should reimburse the State for the i Annual Keport of the Commissioner of Insurance of Massachusetts, 1939, pt. 2, table M . 1940 were obtained from the Division of Savings Bank Life Insurance. 3 For further discussion of the basic dividend scale see ch. 7 and appendix E. Data for 31 FINANCIAL OPERATIONS OF THE SYSTEM costs of the stationery furnished the banks by the division.3 In 1927 the State spent a total of $32,818.50 on operating expenses of the division and, under the new law, $2,313 of that amount was reimbursed to the State by the banks. Again at the request of the governing officials of the division, the legislature, in 1929, passed a measure providing for progressive reimbursement, year by year, until by 1934 all operating expenses of the division would be met by the banks. The law required that 25 percent of the State’s expenditures should be reimbursed in 1929, 40 percent in 1930, 55 percent in 1931, 70 percent in 1932, 85 percent in 1933, and 100 percent in each year thereafter.4 Table 8 shows the actual expenditures of the Division of Savings Bank Life Insurance from 1907 to 1933 inclusive, the reimburse ments to the State, and the net expenditures met by the State. Since 1934 the entire expenditures have been reimbursed by the banks to the State. T able 8 . — Disbursements o f Division o f Savings Bank L ife Insurance , 1 907 to 1 988 Year Actual expendi tures 1907_____________ 1908................. ....... 1909_____________ 1910_____________ 1911_____________ 1912 ___ __ 1913 ................... 1914_____________ 1915..............— 1916-................... 1917. .................... 1918--_.......... _ _ 1919 _____ 1920 _____ 1921 _____ $1, 202.13 7,132.53 15, 733.40 11, 438.09 14, 222. 57 14, 997. 33 15,805. 33 16,873. 35 19,153. 92 18, 335. 98 20, 366.45 19, 271. 35 21, 640. 32 23, 295. 55 26, 527.12 Reim burse ment to State Net ex pendi tures of State $1, 202.13 7,132. 53 15, 733. 40 11, 438.09 14, 222. 57 14,997. 33 15, 805. 33 16, 873. 35 19,153. 92 18, 335. 98 20, 366. 45 19, 271. 35 21,640. 32 23, 295. 55 26, 527.12 Year Actual expendi tures 1922_________ $28,082. 42 1923____________ 32,128. 89 1924____________ 32, 615. 97 1925____________ 32, 475.24 1926____________ 31, 111. 93 1927____ 32,818. 50 1928____ ___ 35,122. 61 1929____________ 37, 359. 98 1930___________ 38, 290. 41 1931____________ 42, 316. 98 1932____________ 41,189. 69 1933___________ 40, 740. 39 Reim burse ment to State Net ex pendi tures of State $2,312.80 3, 722. 32 9, 339. 54 15, 279. 94 23, 317. 75 28, 412. 20 36, 717. 66 $28,082. 42 32,128. 89 32, 615. 97 32, 475. 24 31, 111. 93 30, 505. 70 31, 400.29 28,020. 44 23,010. 47 18,999. 23 12, 777. 49 4,022. 73 T otal____ 670, 248. 43 119,102. 21 551,146. 22 The total expenses of $670,248 of the division for the period 1907-33 is 2.66 percent of the total premium income of $25,233,177 for the period. The actual cost of $551,146 to the State was 2.18 percent of the total premium income.6 In the year 1940 the division expended approximately $61,000, all of which was paid by the banks. Under a law passed by the 1939 legislature, beginning July 1, 1939, the banks now advance the appropriation for the expenses of the State division rather than repaying the actual expenditures at the end of the year as was formerly the case. 3 Acts of 1927, ch. 188. 4See sec. 17 of the savings-bank insurance law. 6 The measure providing for gradual reimbursement to the State prohibits the levying upon any insur ance department of its share of the total reimbursement until the department shall have amassed a surplus of not less than $20,000, or until it has been established 5 years, whichever event takes place first. Until such time the share of the exempted bank is to be paid to the State b y the trustees of the General Insurance Guaranty Fund from interest income on the fund. In 1940, only 5 of the 28 banks were paying nothing in reimbursement. None of them were as much as 5 years old and at the end of the preceding year none of them had acquired a surplus of $20,000 or more. (Annual Reports of the Commissioner of Insurance and Commissioner of Banks, pt. 2, table M .) 32 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS The expenses common to the operation of both departments of the insurance and savings banks, as has been pointed out, must be appor tioned equitably between the two departments. So much discussion has arisen as to whether such an equitable allocation has in fact been made that the matter will be dealt with fully in chapter 7.6 Taxation Prior to November 1, 1939, the savings-bank life-insurance funds and the General Insurance Guaranty Fund were taxed at the same rate, in the same manner, and to the same extent as were deposits in the savings banks. From November 1, 1939, the funds of the insur ance departments of the savings banks have been subject to the same State taxes as the funds of the life-insurance companies. The savings departments of the banks are required to pay an annual tax of one-half of 1 percent of their average deposits, the tax to be levied twice a year in such a way that the banks pay one-fourth of 1 percent on their average deposits of the preceding 6 months.7 Not all of the deposits of the savings banks, however, are subject to taxa tion by the State.8 Mutual savings banks are exempt from taxation under the Federal income-tax laws and this exemption extends also to their insurance departments. Investments The funds of the insurance departments of the banks must be “ invested in the same classes of securities and in the same manner in which the deposits of the savings departments are required by law to be invested, except that [they] may make loans upon any policy of insurance or annuity contract issued by [them].” Such invest ments are restricted to the following: (1) Mortgages of real estate in Massachusetts not exceeding 70 percent of its value and, if the real estate is unimproved or unproductive, 40 percent of its value; (2) the public bonds of the United States, or of any State in the Union which has not defaulted for the preceding 20 years in the payment of 6 Expenses of operation are also discussed in ch. 5. 7 General Laws Relating to Taxation, ch. 63, sec. 11. 8 Sec. 12 of ch. 63, General Laws, exempts from taxes such deposits as are invested in (1) real estate used for banking purposes; (2) loans secured by mortgage of real estate taxable in Massachusetts; (3) real estate on which the title has been acquired by foreclosure, for 5 years after the title thereof is vested in the bank; (4) bonds or certificates of indebtedness of the United States; (5) bonds or certificates of indebtedness of Massachusetts issued after Jan. 1, 1906; (6) bonds, notes, or certificates of indebtedness of any govern mental unit in Massachusetts issued on or after May 1,1908, and stating on their face that they are exempt from taxation in the State; (7) shares of stock of trust companies organized under the laws of Massachusetts; (8) (under ch. 362 of the Acts of 1934) bonds and certificates of indebtedness of the Home Owners’ Loan Corporation if acquired in exchange for real estate under (3) above, or such bonds or certificates obtained through conversion of the securities so acquired pursuant to the Home Owners’ Loan Corporation Act passed by Congress in 1933. Prior to Nov. 1, 1939, similar exceptions applied to the investment of the assets of the insurance departments of the banks. The question as to whether savings-bank life insurance has borne a smaller burden of taxation than life-insurance companies is dealt with in ch. 6. FINANCIAL OPERATIONS OF THE SYSTEM 33 either the principal or interest of its legal debt, the bonds or notes of a county, city, or town in Massachusetts, the bonds or notes of an incorporated district of the State whose net indebtedness does not exceed 5 percent of the value of the property therein, or the bonds or notes of any city in other States of the Union, under certain conditions; (3) certain kinds of railway bonds; (4) certain kinds of street-railway bonds; (5) certain kinds of bonds of telephone companies and other public utilities; (6) bank stocks and bank deposits; (7) bankers’ acceptances; (8) personal notes secured by the endorsement of three citizens of the State or by proper collateral, and the notes of certain corporations, public utilities, and railroads; (9) farm loan bonds issued by the Federal Land Banks; (10) bank buildings; (11) real estate acquired by foreclosure; (12) securities acquired in settlement of an indebtedness, provided they be sold within 5 years after acquisi tion. The law also requires that no more than a certain proportion of the deposits of the savings banks shall be invested in some of the classes of securities specified above. The ratio of the amounts invested in certain classes of property to the total admitted assets of the insurance departments in the year 1940 was as follows: (1) Mortgages, 23.32 percent; (2) bonds, 53.07 percent; (3) collateral loans, 0.4 percent; (4) stocks, 1.51 percent; and (5) real estate, 2.18 percent. In addition to these investments the insurance departments of the banks had advanced, in the form of loans on policies, an amount equal to 9.66 percent of their total admitted assets. Table 9 shows the proportion of investments of each type to the assets of the system as a whole.9 T a b l e 9 . — Percentage of total admitted assets of the system invested in certain kinds of property , 1931 to 1940 Year Mort gages . Bonds Policy loans Collateral loans Stocks Real estate All others 1 1931_________________________ 1932_________________________ 1933_________________________ 1934___________ _____________ 1935_________________________ 52.66 49.82 47. 03 42.20 36. 81 22.81 26.08 28.16 33. 77 38. 77 9.01 10.60 10.74 10. 30 9. 99 4. 21 2.10 2. 33 2.11 1.41 3.67 3.28 2.12 1.20 1.74 0.12 .36 1.49 1.61 2.88 7.52 7.76 8.13 8.81 8.40 1936_________________________ 1937_________________________ 1938_________ ____ ___________ 1939____________________ ____ 1940_________________________ 33. 65 29. 29 27. 53 25. 37 23.32 44. 57 48.77 50.69 51.29 53.07 9. 43 9.30 9.74 9.66 9. 66 1.08 .88 .79 .62 .40 1.81 1.72 1.65 1.86 1.51 2. 55 2. 59 2.30 2. 24 2.18 6.91 7.45 7.30 8. 96 9.86 1 "All others” includes cash in office and banks, interest and rents due and accrued, deferred and uncol lected premiums, and several minor miscellaneous items. 9 Annual Reports of the Commissioner of Insurance, pt. 2, table D . The ratio of investments in stocks is calculated on the basis of market values. The ratio as to bonds is calculated on the basis of the amortized value. The ratios given above take into consideration the investments and assets of the General Insurance Guaranty Fund. Chapter 4 Savings-Bank Insurance and Company Insurance: Sell ing Methods, Policy Terms, and Policy Maintenance Until recent years savings-bank insurance has represented only a small part of the total amount of insurance in force in Massachusetts. Its importance, however, is to be found in its characteristics, its potentialities, and in its recent rapid growth, rather than in its abso lute size. Administrative Organisation The administration of savings-bank insurance differs markedly from that of the private insurance companies. The executive direc tion of insurance companies is generally centered in a home office, which handles financial, actuarial, and other activities for the com pany as a whole. Fully as important as the work of the home office, however, is the work of the agents in the field, whose task it is to sell life insurance, and to collect premiums, especially in the case of industrial insurance. The field work of the companies may be organ ized in two ways— (1) under the general-agent plan, and (2) under the branch-office plan. Ordinary insurance is usually sold under the general-agent plan. General agents are given charge of writing insurance policies within fairly large districts. They themselves engage subagents, with whom they make agreements as to commissions and similar matters. The subagents are responsible directly to the general agent, who in turn is responsible for the business of his district to the home office. Under the branch-office plan districts are set up, at the head of each of which is a district manager or superintendent. Under him is a corps of assistant managers or “ assistants” responsible to him. Each assistant is in turn responsible for the work of a number of agents. The salary arrangements under which the field force works under this plan are determined by the home office. Each agent is responsible to an assistant, each assistant to the superintendent or manager of the district, and the latter is responsible to the superin tendent of agencies at the home office. Industrial insurance is usually administered under the branchoffice plan. There is very close supervision of the work from top to bottom. As a rule an assistant manager has under him as many as 8 or 9 agents. Each industrial agent is assigned a so-called “ debit,” which usually includes from 500 to 1,500 policies in a given closely 34 SELLING METHODS, POLICY TERMS, ETC. 35 restricted area. One agent may not cross area lines to do business in the territory assigned to another agent. Whereas in the case of ordinary insurance the principal work of an agent consists in selling insurance, industrial insurance agents must not only sell insurance but collect weekly premiums as well.1 Payment of Insurance Agents It has already been made clear that insurance solicitors and agents are not employed by the savings banks, although two persons are regularly employed on a salary basis by the Division of Savings Bank Life Insurance for the purpose of instructing industrial workers, upon request of their employers, respecting the advantages of this form of insurance. Except to the extent that the work of these instructors results in the buying of savings-bank insurance by industrial workers, the banks sell insurance across the counter or in response to applica tions by mail, without the solicitation of prospective policyholders by agents.2 Much of the insurance ultimately purchased even by industrial workers is likely to be bought directly when they go to the savings banks for the purpose. The only payment connected with savings-bank insurance which in any sense may be regarded as compensation for sales efforts is the 3 percent of premiums which in the past authorized agencies have been permitted to receive for collecting premiums and servicing policies for the underwriting banks. No compensation is ever paid individuals. Employer agencies are no longer permitted to collect this fee, but even when they had this privilege many of them did not take advantage of it. Collection fees paid in 1940 were only 1.6 percent of premium income. Private insurance companies generally pay commissions to their agents for selling ordinary straight life insurance. These commis sions average about 50 percent of the first year's premium and 5 per cent of the annual premium for each of the next 9 years. In other words, the ordinary-insurance agent receives in commissions, during the first 10 years of the life of the policy, a sum equal to at least 95 percent of one annual premium. In addition to this, the general agent, under whom the agent works, usually receives what is called an “ overriding" commission of 15 percent of the first year's premium, 10 percent of the second year's premium, and 2% percent of all annual premiums thereafter. Thus in a period of 10 years the commissions of general agent and agent are likely to be equal to 140 percent of 1 For a description of some of the problems characteristic of this system, see parts 10 and 12 of the Hearings before the Temporary National Economic Committee, and Monograph No. 28 (pp. 248-305): A Study of Legal Reserve Life Insurance Companies, submitted to the Temporary National Economic Committee by the Securities and Exchange Commission, Washington, 1940. 2 See ch. 7, p. 82, for arguments pro and con regarding activities of these instructors. 36 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS one annual premium (95 percent to the agent plus 15 percent plus 10 percent plus 8 times 2% percent). The compensation of agents selling industrial insurance for the private companies is divided into two parts— that received for selling new insurance and that received for collecting premiums. Since 1938 most agents’ contracts also provide for extra compensation for favor able conservation of policies in force. As a rule, there is a minimum collecting salary, which increases as the collections rise. The com mission for writing new business varies with the different companies. In addition to commission and collection payments, the income of the assistant managers depends in part upon the business done by their agents, and that of the managers depends upon the business which comes through their offices. According to a study submitted by the Superintendent of Insurance in New York to a joint legislative com mittee on October 24, 1938, the average weekly compensation earned by managers, their assistants, and agents, of the largest company selling industrial insurance during the year 1936 was: Managers $187.87; assistant managers $69.61; agents $49.65. If an ordinary-insurance policy is lapsed, the incomes of the general agent and agent suffer only to the extent that they receive no further commissions. In the case of industrial insurance, however, the situa tion is very different. Prior to 1938, the agent was held entirely responsible for all policy lapses. He received, for example, a com mission of 24 weeks’ premiums when he wrote a new policy, but if any policy lapsed on his debit the company charged him a sum equal to 24 weeks’ premiums. Similarly, the managers and the assistant managers were also penalized when a policy lapsed. When growth is constant, as was the case before 1929, the field staff benefits by the receipt of commissions and by the increase in premium collections, and the lapses are not sufficient to offset the gains made. On the other hand, when the amount of insurance lapsed exceeds the amount of new insurance written, payments to agents for new insurance are offset by the lapses. This gives rise to debts owed to the companies by the agents. Moreover, since the salary of the agent varies with the amount collected in premiums, he suffers a further loss of income. At such a time the pressure upon the field staff becomes enormous. Agents, on finding their incomes falling off and their indebtedness to the companies increasing, are tempted to resort to “ high pressure” methods to maintain insurance in force and to write new insurance. Frequently they pay premiums out of their own pockets, though company rules forbid it, rather than suffer the burden of the debt of 24 weeks’ premiums which a lapsed policy would cause.3 The assistant manager, with his own income 3 It should be noted that the company pays an agent a minimum salary so long as he is employed despite the amount of his debt on account of lapse penalties. SELLING METHODS, POLICY TERMS, ETC. 37 rapidly decreasing, finds himself similarly tempted and brings pressure upon the agents under him, for not only does his income suffer at such times, but he himself is the recipient of pressure from his manager. The latter, though his guaranteed minimum salary might be re garded as high, nevertheless is judged at the home office by his ability to “ produce,” and his own income is affected considerably by lapses in his district. The serious consequences of this situation was recog nized as one of the major problems of industrial insurance and in 1938, New York, Massachusetts, and other States passed laws prohibiting companies from charging any sum against the compensation of an agent because of lapses if the policy had been in force 3 years or longer. At the same time the companies revised their entire basis for com pensating agents and managers.4 From all such problems the sav ings-bank insurance system appears to have been spared by the very nature of its method of operation. Comparison of Policy Provisions The provisions of savings-bank insurance policies are in some re spects more advantageous to the policyholders than are those of ordinary policies issued by the insurance companies. Ordinary poli cies, whether sold by the banks or the companies, usually contain provisions respecting regular payment of dividends, obtaining of loans, automatic loans for the payment of premiums, cash surrender values, and other nonforfeiture privileges. In all of these matters the pro visions of savings-bank ordinary policies are more liberal than those offered by the companies. Both the banks and the companies permit the assignment of ordinary policies for payment of debt and provide for the payment of insurance to the designated beneficiary or his heirs. In all of these respects the holders of industrial policies are at a disadvantage. Industrial policyholders, however, have an advantage over the holders of ordinary policies issued by private companies in that pro visions permitting the waiver of premiums in case of disability, clauses providing for benefit in case of disability, and those granting double indemnity in the event of accidental death are included without addi tional premium. The ordinary policies issued by the savings banks contain none of these provisions. D iv id e n d s .— In view of the fact that the cost of insurance to the policyholder depends not only upon the amount he pays in premiums, * For an exhaustive study of these problems see U. S. Temporary National Economic Committee, Hear ings, pt. 12, Industrial Insurance, Washington, 1940; and Monograph No. 28: A Study of Legal Reserve Life Insurance Companies, submitted by the Securities and Exchange Commission to the Temporary National Economic Committee (pp. 192-305), Washington, 1940. Information concerning the administra tion of the insurance business and the method of paying commissions and salaries to agents for ordinary and industrial insurance, may be found in any good treatise on life insurance. Taylor, Maurice, The Social Cost of Industrial Insurance, New York, 1933, and Maclean, Joseph B., Life Insurance, New York, 1939, are recent and useful treatises. 38 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS but also upon what he receives in the form of dividends, those pro visions in insurance policies which have to do with the payment of dividends are of importance. The holders of savings-bank policies and of ordinary participating policies issued by the insurance com panies are entitled to annual payment of dividends, if earnings permit. Dividends are payable to policyholders of the banks after the insurance has been in force for 1 year. The companies usually pay their ordi nary policyholders dividends after the policies have been in force for 1 or 2 years, though some of them require, as a condition to receiving these dividends, the payment of premiums for the second or third year. In the case of industrial insurance, dividends are not payable until after 4 years. Even then they are rarely paid in cash. Only one industrial company provides for cash payment of dividends to indus trial policyholders. A second company applies dividends to the reduction of premium payments, and this is the usual practice of the first company as well. A third company pays dividends neither in the form of cash nor as premium deductions, but credits the industrial policyholder with paid-up insurance purchasable by the dividends due him. L o a n s .— The ability to borrow money on an insurance policy is often a valuable privilege. Savings-bank policyholders may obtain loans after their insurance premiums have been paid for 1 year. The holders of ordinary policies issued by the companies do not usually have this privilege until after 2 or 3 years. Industrial policies do not provide for the making of loans at any time. A u to m a tic 'prem iu m lo a n s .— A policyholder frequently finds himself in the position of having permitted his policy to terminate without intending to do so, merely because he has forgotten or has temporarily been unable to pay premiums. The savings banks provide against such a contingency by making loans on policies in order to credit the insured with the payment of premiums when these are not received from the policyholders. Such loans are made by the banks after the policy has been in force 1 year, provided the insured has so authorized, either at the time of application or later. In such cases the loans are made automatically, without waiting for directions from the insured. The holders of ordinary policies issued by the companies do not, as a rule, receive the privilege of automatic premium loans. None of the companies selling industrial insurance permit automatic premium loans to their industrial policyholders. C ash su rren d er .— The privilege of receiving cash for a policy instead of maintaining the insurance in force by the payment of premiums is also of great value to the policyholder. Holders of savings-bank policies may obtain a cash value if they do not desire or are unable to continue their insurance at any time after it has been in force for 6 SELLING METHODS, POLICY TERMS, ETC. 39 months. The holders of ordinary policies issued by the private com panies usually do not receive any cash for their policies unless they have been in force for 2 years, though some companies pay a small cash value after 1 year. Industrial policyholders do not receive cash values until their policies have been in force 3 years or more.5 Since April 1931, the three largest industrial insurance companies have made exceptions to this practice. As a result of distress among numerous policyholders and in response to a general demand from pub lic and private welfare agencies concerned with the burden of industrial insurance among families receiving relief benefits, the companies established a life insurance adjustment bureau in New York. The bureau was authorized to adjust the amounts and types of insurance carried by clients of welfare agencies throughout the coun try, and to give cash surrender values in worthy cases before the end of the period usually required.6 P a i d -u p an d extended term in su ra n ce. — If the holder of an insurance policy discontinues the payment of premiums and does not desire to surrender the policy for its cash value, he is entitled to receive a paidup insurance policy for a reduced amount of insurance, or a policy providing for the original benefit for a certain limited (i. e., extended) term. Savings-bank policyholders are entitled to these privileges, which, together with that of obtaining cash surrender values, are called “ nonforfeiture privileges/’ after premiums have been paid for 6 months. Holders of ordinary policies with the private companies are entitled to them, for the most part, only after the insurance has been in force 3 years, though in some cases they are available after 1 or 2 years. Industrial policyholders are not entitled to paid-up insurance until after 3 years. Industrial policies issued within the last few years provide for extended term insurance after premiums have been paid 26 weeks or more. A s s ig n m e n t f o r debt. — The holder of a savings-bank policy, or of an ordinary policy carried with the insurance companies, has the privilege of assigning the proceeds of his policy as security for or in payment of a debt. No such privilege is available to the holder of an industrial policy. P a y m e n t o f benefits to n a m ed beneficiaries. — Holders of bank policies and of ordinary policies of the insurance companies are protected by a 5 The amount of cash obtainable when a company policy is surrendered is equal to its full reserve value, plus accrued dividends, and minus a surrender charge, which is limited by law to 2l percent of the face A value of the policy. Surrender charges are not made if the policy has been in force for a certain period, the length of which varies among the companies. The surrender charge made by the savings banks is limited to 1 percent of the face value of the policy. The banks pay cash value before 6 months have expired if the reserve on the policy exceeds $2 per $1,000 of insurance. In such a case the entire reserve in excess of this amount is paid. There is no surrender charge after 6 months. 6 For a description of the activities of this bureau, see U. S., Temporary National Economic Committee, Hearings, pt. 12, Industrial Insurance, Washington, 1940, pp. 5783-5799, and Monograph No. 28, A Study of Legal Reserve Life Insurance, submitted by the Securities and Exchange Commission to the Temporary National Economic Committee, Washington, 1940, pp. 295-303. 296722°—41------4 40 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS provision that settlement of the insurance on maturity shall be accord ing to the terms contracted for in the policies. Payments are to be made only to named beneficiaries, or, in case of death of the latter, to the heirs of the insured, unless otherwise provided in the policy. It is quite different, however, as regards industrial insurance. Although present industrial policies permit the insured to name a beneficiary or beneficiaries to whom the proceeds will be paid at death, provision is made that if the beneficiary so named does not submit claims within a certain period (30 or 60 days) after the policy holder’s death, the company may make payment at its discretion to the executor or administrator of the insured’s estate, or to a named beneficiary, or to any relative by blood or connection by marriage who appears to be equitably entitled to such payment. While this may seem to give the companies considerable discretion, it is much more liberal than the “ facility of payment” clause contained in policies issued prior to 1937, which read substantially as follows: The company may make any payment or grant any nonforfeiture privilege provided herein to the insured, husband or wife, or any relative by blood or con nection by marriage of the insured, or to any other person appearing to said com pany to be equitably entitled to the same by reason of having incurred expense on behalf of the insured, or for his or her burial; and the production of a receipt signed by either of said persons, or of other proof of such payment or grant of such privilege to either of them, shall be conclusive evidence that all such claims under this policy have been satisfied. The opportunities for abuses which arose because of this provision constituted a major shortcoming of industrial insurance. It gave rise to instances of payments to persons who should not have received the benefit of insurance payments. It assumed that though the beneficiary of an ordinary policy is entitled to the protection which the rigorous terms of the contract provide for him, the beneficiary of an industrial policy has his interests amply safeguarded if the company uses its own judgment as to who is entitled to receive benefits.7 D is a b ilit y .— In recent years life-insurance policies containing socalled “ disability” clauses have assumed importance. In 1896 one American company provided in its policies that in case the insured was totally disabled further payment of premiums was to be waived, and on maturity the beneficiary would be paid as though premium payments had been met continuously. By the year 1910 such a pro vision had become general in ordinary policies sold by the insurance companies. Thereafter, especially in the 1920’s, in order to compete with those who had initiated a different disability provision, com panies generally began to pay to the insured, in case of total and 7 See Taylor, Maurice, The Social Cost of Industrial Insurance, New York, 1933, pp. 80-84, for a wellconsidered treatment of this problem, and for a statement of the companies’ position on the matter. See also U. S. Temporary National Economic Committee, Hearings, pt. 12, Industrial Insurance, Washington, 1940, and Monograph No. 28, A Study of Legal Reserve Life Insurance Companies, Washington, 1940, p. 293. SELLING METHODS, POLICY TERMS, ETC. 41 permanent disability, an income of $10 a month for each $1,000 of insurance. The waiver of premium payments was also included in the disability clause. The disability income provisions became increasingly burdensome to the companies, and in 1932, as a result of an agreement, 10 of the largest insurance companies, including the most important in the country, discontinued the issuance of policies containing provisions for the payment of disability incomes and con fined their disability clauses to the waiver of premium payments. The companies generally charge a small extra premium for this privilege. The usual industrial insurance policy contains a disability clause which provides for the waiver of premiums under certain limited con ditions, without requiring extra premiums. Income payments at regular intervals to totally disabled persons are not made. Some companies not only waive further premiums when the insured becomes totally and permanently disabled, but pay one-half or all of the face value of the policy at once. The companies, despite this previous payment, usually pay the whole face value on maturity.8 The savings-bank insurance policies contain no disability clauses of any kind. More precise details as to the terms of ordinary policies sold by the banks and by seven of the most important mutual companies, and of the industrial policies sold by the three most important industrial companies, are presented in table 10. 8 Maclean, J. B., Life Insurance, New York, 1939, p. 354; Taylor, Maurice, The Social Cost of Industrial Insurance, New York, 1933, pp. 206-209. See also U. S. Temporary National Economic Committee, Hear ings, pts. 10A and 12, Washington, 1940, and Monograph No. 28, Washington, 1940, pp. 336-341. T a b l e 10.— Terms of policies issued by the savings banks, 7 of the insurance companies, and 3 industrial-insurance companies1 Dividends 2 Savings banks _____ First year (nc.)_ _ Cash surrender Surrender charge After 6 months___ To 6 months. After first year (a u to m a tic premium loan on request). O rdinary c o m panies: Company 1_____ Second year (nc.)-- After second year.. To twentieth year. Generally third __ . do Company 2 year (nc.). year. Company 3_____ First year (c.) (nc. After first year___ To second thereafter), year. Company 4 do _ After second year do After third year on To twenti eth year. straight life; af ter second year on endowment. Company 6 Company 7 After second year. do A f t e r 5 y e a r s ____do___________ (paid-up addi tional insurance only). Paid-up insur ance After 6 months. _ Automatic after 6 months. After second year. do Disability None_______________ Automatic after Premium waiver (ex second year, tra premium). do . ____ ____ do______________ None. Extra premium. Do. Premium waiver ($10 None. per $1,000 per month for men, $5 per $1,000 per month for women) (extra pre mium) . Automatic after Premium waiver (ex Extra premium. second year. tra premium). Automatic (nc.)._ _ .d o___ ______ Second year after Do. third year on st rai ght l ife; automatic after second year on endowment. _____ None. Automatic after _ .do.— second year. Automatic after Premium waiver (no Extra premium. extra premium). second or third year. After first year, _ After first year. _ Automatic after first year. A fter second A fter second year. year. After third year Company 5 year After third on st rai ght on s t r a i g ht life; after sec life; after sec ond year on ond year on endowment. endowment. First year (c.) (nc. After second year.. T o n i n t h After s ec ond thereafter). year. year. Second year (nc.)__ After second or _.do . _ After second or third year. third year. Industrial c o m panies: Company 1 ____ After 4 years (de After 3 years_____ ductions from premiums only). Company 2_ _ Loans Af t er s ec ond year. After second or third year. None__________ After third year. Automatic 26 weeks. None__________ . . . do .........- . after Automatic after 2 weeks on en dowments, or 3 weeks on life policies. bO Double indemnity for accidental death Premium waiver (pay Paid, no extra pre mium required. ment of half face value of policy and payment of full face value on death). Premium waiver (pay Do. ment of face value for half disability, payment of full face value for full dis ability, and payment of full face value at death). SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS Companies Extended-term insurance Company 3. After 5 years (cash or d educ t i on from premiums). .do. None Automatic after 26 weeks. Premium waiver (pay ment half face value and payment full face value at death). Do. 2 “ c.,” that is, “ conditioned,” indicates that dividends are paid only after renewal premiums are paid; “ nc.,” that is, “ nonconditioned,” indicates that dividends are paid whether or not renewal premiums are paid. SELLING METHODS, POLICY TERMS, ETC. i The ordinary companies covered in this table include 6 important mutual insurance companies doing business in Massachusetts and a seventh company of very long stand ing chartered by the State. Details as to policy terms for the ordinary-insurance com panies have been taken from the 1939 editions of the Flitcraft Compend and of the Spec tator Co.’s “ Handy Guide to Standard and Special Contracts.” .do. 00 44 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS Maintenance of Insurance by Policyholder The fundamental purpose of buying an insurance policy is to secure protection. It is commonplace, however, that not all insurance is maintained in force by the policyholder until it is terminated by death, maturity, or expiry. Policies may lapse— that is, they may be terminated by the failure to pay premiums— and the insured receives in return for what he has paid in the past only the insurance protection which was his while the policy was in force. Policies may be sur rendered for cash, and the insured gets in return for his past premiums the insurance protection received while the policy was in force and a sum in cash, in addition. It is clear that a policy which is terminated by death, or maturity, fulfills completely the purpose for which it was bought, that a surrendered policy does so to a lesser extent, and that a policy which is lapsed serves the policyholder or his beneficiary least of all. It might naturally be expected that if a policyholder is entitled to receive cash surrender value on his policy or to obtain a loan on it at a comparatively early date, he is unlikely to permit it to lapse. The amount he may receive as a loan is about as much as he may obtain in cash surrender value, except that in the first instance interest is deducted in advance from the reserve to which he is en titled, while in the second instance the surrender charge is deducted and the policy is canceled. If his insurance has been in force 1 year and he is unable to continue his premium payments, the fact that he may borrow on his policy or that he is entitled to surrender it for cash would have the effect of preventing a lapse. If he has to wait 3 years for these privileges, the probability of lapse would be greater. The savings-bank policies may be surrendered for cash after 6 months, and often even earlier. Loans may be obtained on the policies after a year. These terms are more favorable than those offered by the insurance companies. It would be reasonable to expect, therefore, that the banks would have a smaller proportion of lapses. The data show this to be the case. The proportion of lapsed insurance to new insurance written for 27 ordinary companies, 4 industrial companies, and the savings banks, all operating in Massachusetts since 1908, at 4-year intervals from 1911 to 1931, is shown in table 11. The data are given separately for savings-bank ordinary, company ordinary, and industrial insurance.9 9 The 27 ordinary insurance companies and the 4 industrial insurance companies here covered include all of the companies in the State which carried on business continuously in the period from 1908 to 1931. The data for these companies have been borrowed from an unpublished thesis by D. Bradford Damon, entitled “ The Economic Value of Savings Bank Life Insurance” (Boston, 1933), p. 51. This thesis is available at the library of Northeastern University. SELLING METHODS, POLICY TERMS, ETC. T a b l e 45 11,— Proportion of lapsed insurance to new insurance written, at J+-year intervals, 1911 to 1931 Year Com Savingspany bank ordinary ordinary P ercent 1911_____________ 1915______________ 1919 ____ ____ 14.4 4.1 2.6 P ercent 15.4 16.8 9.7 Indus trial P ercen t 57.5 56.4 39.6 Year 1923______________ 1927______________ __________ 1931 Com Savingsbank pany ordinary ordinary P ercent 1.9 .9 1.2 P ercent 18.3 24.3 33.3 Indus trial P ercen t 34.8 57.5 61.8 The table shows that the highest lapse ratio for the savings banks in the years represented was reached in 1911, when it stood at 14.4 percent. The lowest lapse ratio was that of 1927, when it was 0.9 percent. The highest ratio for ordinary insurance sold by the com panies during the years covered was reached in 1931, when the figure was 33.3 percent. The lowest ratio was that of 1919, when it stood at 9.7 percent. The highest ratio for industrial insurance was that of 1931, when the figure was 61.8 percent, while the lowest ratio for the years covered in the table was 34.8 percent, reached in the year 1923. If one averages the experiences of all years during the entire period from 1908 to 1931, for the companies included in the table above and for the banks, the average proportion of lapsed insurance to new insurance written each year was 2.6 percent for savings-bank in surance, 21.0 percent for ordinary insurance, and 54.5 percent for industrial insurance. If the experience of all the insurance organizations operating in Massachusetts is considered, it is found that the proportions of insurance lapsed to new insurance written were 1.54 percent for the savings banks, 30.33 percent for all company ordinary insurance, and 28.90 percent for industrial insurance in the year 1938, and 1.44, 27.61 and 16.62 percent, respectively, in the year 1939.1 An analysis of the 0 proportion of insurance lapsed to all insurance in force is likewise greatly to the advantage of the banks. Thus the rate of lapses in 1938 to insurance in force at the beginning of the year was 0.23 percent for the banks, 2.45 percent for ordinary insurance, and 3.66 percent for industrial insurance. A comparison of the proportion of the number of policies lapsed, rather than of the amount of insurance lapsed, to new policies issued If the analysis is based not on the proportion of new insurance written in each year but on the amount of insurance terminated, the experience of the years 1908 to 1931 indicates that on the average the proportion of insurance lapsed to the face value of all insurance terminated (by death, maturity, expiry, surrender, and lapse combined) was 38.3 percent for ordinary, 73.5 percent for industrial, and 12.9 percent for savings-bank insurance. (Damon, D. Bradford. The Economic Value of Savings-Bank Life Insurance. Boston, Northeastern University, 1933 (unpublished thesis), p. 51.) 46 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS shows similar results. Table 12 shows the proportions for all insurance organizations for the years 1931 to 1939, inclusive.1 1 T a b l e 12 .— R a tio between n u m ber o f 'policies lapsed and n u m ber o f n ew policies w ritten , 1 9 3 1 to 1 9 3 9 Year Savings- Company bank Industrial ordinary ordinary P ercent 1931______________ 1932_____________ 1933______________ 1934______________ 1935_____________ 1. 2 2.6 2.6 2.3 2.3 P ercent 3 5 .7 45.6 40.9 32.8 32.4 Year P ercen t 76.2 107.5 88.9 69.8 45.3 1936______________ 1937______________ 1938______________ 1939_____________ Savings- Company bank Industrial ordinary ordinary P ercen t 1.3 1.4 1.7 1.4 P ercen t 29.9 26.3 30.4 18.4 P ercent 34.5 30.8 27.6 16.6 It should be pointed out that in recent years the industrial com panies have been granting extended term insurance values in event premiums are discontinued after 26 weeks’ payments have been made. Thus, the lapse ratio is less, but the number of “ expires” has soared since a large percentage of industrial policies issued are never carried as long as 3 years. There are several reasons for this favorable lapse experience of the savings banks. One is to be found in the provisions of their policies as described above. Of particular importance is the fact that insur ance carried with the banks can be surrendered for cash after it has been in force only 6 months and even earlier, as contrasted with the usual 2- or 3-year period on ordinary policies carried with the com panies and with the 3-to-5-year period on industrial policies. Further factors are the nonforfeiture privileges, which are available after 6 months on savings-bank policies, as compared with 2 or 3 years on com pany policies, and the fact that loans are available at the end of 1 year in contrast to the usual 2- or 3-year limit on ordinary insurance and the absence of loan provisions in industrial policies. It is possible also that the rapid growth of the system has some effect which might be eliminated when the rate of growth declines. A final factor is that savings-bank insurance is not likely to be oversold, and is accord ingly less likely to be given up by the policyholder. The unusually small number of lapses of savings-bank policies might appear to be due to the fact that policyholders terminate their insur ance by surrendering their policies for cash. The banks’ experience with respect to cash surrender does not, however, disclose a very large proportion of surrendered insurance. Table 13 presents the propor tion of cash surrender to new insurance written by the organizations 1 Information concerning the ratio between the amount of insurance lapsed and the sum of the amount of 1 new insurance plus the amount of old insurance revived, yields similar results to that in the foregoing tables. The proportion of lapses for 1924 on this basis was 20.7 percent for company ordinary. The lapse ratio had risen to 46.6 percent by 1932. The lapse ratio for industrial insurance on this basis was 42.2 percent in 1924. By 1932 it had mounted to 79.8 percent. On the other hand, the lapse ratio for the banks was 3.1 percent in 1924. By 1932 it had fallen to 2.6 percent. (Annual Reports of the Commissioner of Insurance of Massa chusetts, tables G and H.) 47 SELLING METHODS, POLICY TERMS, ETC. operating in Massachusetts since 1908, at 4-year intervals from 1911 to 1931, for savings-bank ordinary, company ordinary, and industrial insurance, together with the figures for all companies operating in Massachusetts in 1935 and 1938.1 2 T able 13 . — P r o p o r tio n Year Savings- Company bank Industrial ordinary ordinary P ercen t 1911 1915 1919 1923 o f cash surrender to n ew intervals , 1 9 1 1 to 1 9 8 8 - _ ________ __________ __________ 16.6 17.9 16.7 5.0 P ercent 13.3 15.4 6.1 12.2 in su ra n ce Year P ercen t 2.9 5.0 3.8 3.9 1927_____ 1931______________ 1935______________ 1938______________ w ritten , at J^-year Savings- Company bank Industrial ordinary ordinary P ercent 12.8 13.2 19.4 13.8 P ercent 12.9 28.0 34.1 27.4 P ercen t 8.6 23.1 42.7 45.5 Savings-bank ordinary insurance experienced its lowest cash sur render ratio in the 4 years covered by the table in 1923, when the proportion of cash surrender values to new insurance written was 5 percent. The highest ratio was that of 1935, when it stood at 19.4 percent. Company ordinary insurance experienced the lowest ratio in 1919, when it stood at 6.1 percent. The highest ratio was that of 1935, when the proportion was 34.1 percent. The lowest proportion for industrial insurance in the years covered by the table was 2.9 percent in the year 1911, and the highest, 45.5 percent, in the year 1938. During the years 1932 and 1933 the savings banks, in common with the insurance companies, experienced a large increase in cash sur render ratios. In 1932 the ratios were 33 percent for savings-bank ordinary insurance, 57.1 percent for the ordinary insurance of all companies operating in the State, and 34.9 percent for all industrial insurance. In 1933 the ratios had risen still further to 45.6, 68.4, and 48 percent, respectively.1 3 A policyholder who is under financial pressure but who desires to maintain insurance in force, rather than to surrender his policy for cash, may prefer to borrow on it. He can thus pay premiums from the proceeds of his loan and at the same time get financial relief. The savings banks extend policy loans after the insurance has been in force for 1 year. The insurance companies, on the other hand, do not as a rule lend on ordinary policies until after 2 or 3 years. They do not lend at all on industrial policies. Despite the fact that the savings-bank experience with cash surrender shows that fewer policy12 The companies included for the years 1911 to 1931 are the same as those covered in table 11 on p. 45. All companies operating in Massachusetts are included for 1935 and 1938. is The data for ordinary-insurance surrender ratios prior to 1932 refer to the experiences of 27 ordinary companies and 4 industrial companies, and come from Damon, D. Bradford, The Economic Value of Sav ings Bank Life Insurance, Boston, Northeastern University, 1933 (unpublished thesis). Information upon which the percentages of cash surrender values to new insurance in 1932 and 1933 are based is for all com panies and comes from the Annual Reports of the Commissioner of Insurance of Massachusetts, pt. 2, tables G and H. 48 SAVINGS-BANK LIFE INSURANCE---- MASSACHUSETTS holders resort to it than do those of the companies, and despite the fact that the banks make loans on policies at an earlier date, savingsbank policyholders make less use of their borrowing privilege than com pany policyholders. Table 14 shows the percentage of all assets invested in policy loans b y all insurance organizations doing business in Massachusetts and b y the savings banks considered separately.1 4 T a b l e 14. — P ercen tage o f assets invested in p o lic y loa n s , 1 9 2 8 to 1 9 8 9 Year All insur ance, in cluding Savingssavingsbank bank insurance insur ance P ercent 1928_______________________ 1929______________ ______ 1930_______________________ 1931. ______________ ____ 1932_______________________ 1933____ ___________________ 11.5 12.6 13.7 15.4 17.0 16.6 Year P ercen t 7.1 7.2 7.9 9.0 10.6 10.7 1934_______________________ 1935_______________________ 1936_______________________ 1937_______________________ 1938_______________________ 1939_______________________ All insur ance, in cluding Savingssavingsbank bank insurance insur ance P ercen t 15.4 13.9 12.5 11.8 11.2 10.0 P ercen t 10.3 10.0 9.4 9.3 9.7 9.7 During this 12-year period the lowest percentage of assets invested in policy loans by all insurance organizations considered as a whole was reached in 1939, when it stood at 10.0. The highest percentage was reached in 1932, when the figure was 17. In the case of savingsbank insurance, the lowest proportion of assets invested in policy loans was that of 1928, when the ratio was 7.1 percent. The propor tion rose with some degree of regularity until it reached its highest level of 10.7 percent in 1933. Attention should be given to the fact that loans on insurance policies are to a large extent not repaid. Consequently, if the loan plus the accumulated interest exceeds the surrender value of the policy, the insurance is in effect canceled. The final result of borrow ing on a policy may thus be the same as that of surrendering it for cash, and the proportion of assets invested in loans has a direct bearing upon the problem of maintaining insurance in force. It is evident from the data on lapses, cash surrender, and policy loans that savings-bank policies are more likely to be kept in force than are those issued by the insurance companies. The terms of the savings-bank policies themselves, which facilitate cash surrender and borrowing, serve to explain in part why lapse ratios are unusually low. The relatively small amount of surrendered insurance and policy loans cannot, however, be explained to any great extent by the favorable terms of the policies. It is probable, however, that an important explanation of the relatively large number of surrendered policies and policy loans experienced by the insurance companies is 1 Data on amounts and proportions invested in policy loans are contained in the Annual Reports of the 4 Commissioner of Insurance of Massachusetts, pt. 2, table D. SELLING METHODS, POLICY TERMS, ETC. 49 the fact that the latter have outstanding a larger proportion of old policies than the banks have. As a consequence, the reserves on the company policies are likely to be larger, and the surrender and loan values being likewise greater, the policyholder is tempted to take advantage of them to a greater extent than he would be if the policy were relatively new and the amounts available small. How important this factor is can only be surmised. Though it is probably of some consequence, its importance will obviously diminish as the savingsbank insurance system grows older and its proportion of old policies increases. The fact that savings-bank policies are more likely to be maintained in force than those of the insurance companies has another important explanation, however. In the absence of a system of agents’ com missions, savings-bank insurance is not so often oversold and the persons who buy it are more likely to purchase only what they believe they can afford. They are thus not so likely to permit their policies to lapse, to surrender them, or to borrow on them as are persons who have been sold more insurance than they can afford to carry.1 6 See appendix F for a comparison of the surpluses of the companies and of the insurance departments of the banks. The reserves required by law are the same for the insurance companies and the insurance departments of the banks, though the interest rate assumed is not always the same. The banks and many of the insur ance companies assume that reserve funds on their ordinary insurance will earn interest at the rate of 3 percent, and use the American Experience Table in calculating reserves. The industrial-insurance reserves of the companies have been based on the Standard Industrial Mortality Table and an assumed interest rate of 3 H percent. Chapter 5 Savings-Bank Insurance and Company Insurance: Costs to Policyholder W e have seen that in general the terms of savings-bank life-insur ance policies are more advantageous to the policyholders than are those of policies issued by the insurance companies, and that savingsbank insurance is more likely to be kept in force. These are matters of much importance to policyholders, but they are probably of no greater consequence than is the cost of carrying the insurance. Does it cost more or less to buy savings-bank insurance than it does to buy life insurance from the companies? If there is a considerable differ ence in cost, what is the reason? Cost to the Policyholder The most effective and the fairest method of comparing the costs of the insurance sold by different insurance organizations is to deter mine what a policyholder of a given age, carrying a given type of protection, would have actually paid out on the average for each year if he had carried his policy during a certain period and then surrendered it for cash. This amount would be made up of the premiums paid each year, the size of which would depend upon his age on becoming insured as well as upon the amount and kind of insurance carried. The size of the annual premium would of course not change from year to year. A t the end of each year the policyholder would usually receive a dividend, which would tend to be greater with each succeeding year as the reserves on his policy grew in size. If one adds the total premiums paid during a given number of years and subtracts from that sum the total amount received in dividends, the result is the net amount he has paid to keep the insurance in force during the period. If, however, a person surrenders his policy at the end of a given period, he gets a cash value. In order to find what it has cost to be protected during the period prior to surrendering the policy, it is necessary to deduct from the net amount paid what is received in cash surrender value. The result is the net cost for the period, and dividing it by the number of years in the period gives the average yearly net cost. (The net cost as thus computed does not take into account the interest earned on premiums.) 50 51 COSTS TO POLICYHOLDER A simple example will make the method clearer. Suppose that the annual premium is $25 per year and that the policy is maintained for 10 years. The sum of the 10 years* premiums is $250. Assume that in 10 years dividends to the amount of $50 have been returned to the policyholder. The net payments for 10 years are therefore $200. Suppose, further, that when the policy is surrendered for cash the insured receives the sum of $140. The net cost of carrying his insur ance for the 10-year period is thus $200 minus $140, or $60. Dividing this by 10 gives the average yearly net cost, or $6. In the comparisons of net cost that follow it is assumed that the insurance policy has a face value of $1,000; that it was taken out in 1930; that the policyholder was then 35 years old; that the premiums were paid annually; that the dividends entering into the computation were those actually paid over the period 1931 to 1941; and that the policy was carried for 10 years and then surrendered for cash.1 The policies to be considered are an ordinary straight life policy, an ordinary 20-payment life policy, and an ordinary 20-year endowment policy. The policies compared are those issued by 9 of the most important life-insurance companies in the country, and by the 15 savings banks operating in 1930 considered as a whole. Table 15 compares the net costs of an ordinary straight life policy. T 15 .— A n n u a l net costs o f a $ 1 ,0 0 0 straight life p o lic y issu ed in 1 9 3 0 , at age 3 5 , based on actual dividends p a id during fo llo w in g 1 0 yea rs, and a ssu m in g p o lic y was surrendered in 1 9 4 0 able Company Company: No. No. No. No. No. No. No. No. 2 _______________________ 3 ________________________ f 4 __________ _ __ _ \ 5________________________ 6 _______________ ____ 7 ______________________ 8 _____ 9__ ________ _____ _ Average, 9 companies____ _ Average yearly net cost $8.01 6.49 7.20 1 4.41 2 6.40 7. 26 6. 36 5. 66 6.84 4. 79 6.34 Average yearly net cost Bank Bank: No. No. No. No. No. No. No. No. No. No. Nn No. No. No. No. 1________________________ 2________________________ 3_______________________ 4_ __________________ 5 _____________________________ 6 _____________________________ 7_______________ _______ 8_ _______________ ___ 9 ___________ ___ . 10_______________________ 1 1 12_____ _ ______ ______ _ 13 ____________________ 14________ _________ ___ 15_______________________ Average, 15 banks 3__ _ ____ $2.22 2.85 3.69 3.69 2.22 2.22 2.89 2. 52 2.60 3. 42 2.66 2.40 2.40 2.40 2.59 2.72 1 Company No. 4 issues a straight life policy only in amounts of $5,000 or more, but its costs are shown for comparative purposes on a $1,000 basis. 2 Company No. 4 issues this policy in amounts of less than $5,000 in the form of endowment at age 85. 315 banks are here covered because only that number were operating in 1930. As shown above, the annual net cost of policies issued by the com panies averaged $6.34, or 233 percent, more than the average annual 1 Tables presenting the data entering into the comparisons here made in more complete form may be found in appendix G, on comparative costs of insurance to the policyholders. The appendix also includes tables of comparative costs based on the assumption that dividends paid in 1940 would continue to be paid during the 10 years following. 52 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS net costs of policies issued by the banks. The average annual cost of the policy with the banks was $5.29 less than the cost of the policy written by the company with the highest cost, and $1.69 below that of the company with the lowest cost.2 The comparative average yearly net costs of a $1,000 20-payment life policy issued at age 35 are shown in table 16. T a b l e 16 .-— A n n u a l net costs o f a $ 1 ,0 0 0 ord in a ry 2 0 -p a y m e n t life p o lic y issu ed in 1 9 8 0 , at age 8 5 , based on actual dividends d u rin g fo llo w in g 1 0 yea rs, and a ssu m in g p o lic y was surrendered in 1 9 4 0 Company Company: No. 1 _______________________ No. 2________________________ No. 3 ________________________ No. 4________________________ No. 5_____________________ No. 6_______________ _____ ___ No. 7_______ _________________ No. 8 ____________________ . No. 9_____________________ __ A verage cost, 9 companies-- Average yearly net cost $6.75 4.97 5.68 5.26 5. 36 4. 78 3.87 5. 05 2.95 4.96 Bank Bank: No. No. No. No. No. No. No. No. No. No No. No. No. No. No. 1___ .. ___ __ 2_____________________ 3 . .. ___ 4 _______ _____ ___ 5 . ___ 6 __________ 7______________________ 8 . _________ 9 .. ______ _ 10 11_________ -_ _ _ 12_______________________ 13_______________________ 14_______________________ ! 15_______________________ Average, 15 banks 1 ............ ...... Average yearly net cost $0.54 1.29 2.27 2. 27 . 54 . 54 1.34 . 90 . 99 1.96 1.06 .75 .75 .75 .97 1.13 115 banks are here covered because only that number were operating in 1930. In the case of 20-payment life-insurance policies, the annual net cost of those policies issued by the 9 companies averaged $3.83 higher than the net costs charged on the average by the savings banks. The banks charged $5.62 less than the company with the highest cost and $1.82 less than that with the lowest cost. The bank with the highest cost was still 23 percent less than the company with the lowest cost. The final comparison for ordinary insurance concerns the costs of a $1,000 20-year endowment policy issued at age 35. The annual net cost of the 9 companies for this type of policy was $2.44 cents, while all the banks, considered as a whole, returned to the policyholders an average annual net gain of $2.33. The net gains of the 15 banks varied from $1.35 to $2.88. Thus all the banks not only furnished the protection, but returned to the policyholders a sum in dividends and cash surrender values which was greater than all the premiums paid.3 2 It should be noted that the amounts recorded in the tables in this section and in appendix Q do not take into account the factor of compound interest. If costs recorded took this factor into account the results would be different in actual amounts, but the costs with the banks would still be lower. 3 The data on premiums, dividends, and cash surrender values for the companies upon which the fore going tables are based come from the Flitcraft Compend for 1940. Data for the savings banks were obtained from the Division of Savings Bank Life Insurance, Statehouse, Boston. 53 COSTS TO POLICYHOLDER T 17 .’— A n n u a l net costs o f a $ 1 ,0 0 0 o rd in a ry 2 0 -y e a r en dow m ent p o lic y issu ed in 1 9 3 0 , at age 3 5 , based on actual dividends d u rin g fo llo w in g 1 0 yea rs, and a ssu m in g p o lic y w as surrendered in 1 9 4 0 a b l e Company Average yearly net cost Company: No. 1________________________ No. 2 ________________________ No. 3_________ _____________ No. 4________________________ No. 5 ___ ___ No. 6___ ______________ ___ No. 7________________________ No. 8--_ _______________ . _ No. 9--. ______ _____ $4.07 2.71 3.02 2.97 2. 52 2. 60 1.30 2. 37 .43 Average cost, 9 companies____ 2.44 Bank Bank: No. No. No. No. No. No. No. No. No. No. Nn No. No. No. No. Average yearly net gain 1 1________________________ 2________________________ 3________________________ 4________________________ 5________________________ 6__________________ ____ 7________________________ 8________________________ 9____________________ _ . 10_______________________ 1 1 12_______________________ 13_______________________ 14_______________________ 15_____________ __________ $2.88 2.13 1.35 1.35 2.88 2.88 2.14 2. 53 2.44 1.52 2.38 2 68 . 2.68 2.68 2.47 Average gain, 15 banks 2 _____ 2. 33 i All of the 15 banks actually returned a net gain to the policyholder. None of the companies did. 215 banks are here covered because only that number were operating in 1930. The comparative costs which are shown in the foregoing tables represent only what it would have actually cost to carry the policies in question with the different insurance organizations under the condi tions assumed. If other conditions had been assumed, the actual costs to the policyholders would have been different. If a period of 5 or of 15 years, instead of a 10-year period, had been assumed, or if the assumed age had been other than 35, or if the dividends entering into the computation had been assumed throughout to be those paid in the year 1940, or if the policies were assumed to have been issued in 1931 instead of 1930, and the dividends payable in 1941 were therefore substituted for those paid in 1930, the results of the comparisons would also have differed. In general, however, the comparisons, whatever the basis upon which they might have been made, would have shown similar results, namely, that the cost of savings-bank ordinary insur ance to the policyholders is in general considerably below the cost of ordinary insurance sold by the companies.4 A comparison of the cost of savings-bank insurance and of industrial insurance sold by the insurance companies is even more to the ad vantage of the banks. Before presenting such a comparison it should be pointed out, however, that savings-bank insurance and industrial insurance are not strictly comparable. Premiums on industrial insurance are collected weekly by insurance agents, while premiums on savings-bank insurance cannot be paid more frequently than once a month. The cost of collecting premiums every week is obviously greater than the cost of receiving them at the banks every month. * Appendix G, on comparative costs to the policyholders, presents tables based on other assumptions than those used in the text. 54 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS Furthermore, industrial straight life policies are regarded as paid up at ages varying from 70 to 75, whereas straight life policies issued by the banks provide for regular payment of premiums until the policy is terminated. Finally, industrial policies of the straight life and endowment variety include provisions for disability payments and for double indemnity in case of accidental death which may prove to be especially valuable. N o extra premiums are charged for these privileges. The banks do not include such provisions in their indi vidual policies at all. Tw o of the three important industrial insurance companies charge premiums of 20 cents per week ($10.40 over a year’s period) for an industrial straight life policy issued at age 35, with a face value of $276.6 For the same amount of straight life insurance the savings banks would charge a monthly premium of 55 cents, or $6.60 for a year. Table 18 shows the net costs of carrying these policies for 10 years and surrendering them at the end of the period. T a b l e 18 . — N e t costs o f $ 2 7 6 o f straight life in su ra n ce p o licies issu ed in f o r m o f in dustrial p o lic y b y 2 co m p a n ies , and in f o r m o f o rd in a ry p o lic y b y savings ba nks , based on dividends p a id in 1 9 4 0 Company or banks Company No. 1 __ __ _ ______ Company No. 2______ _______ ___ _ Average of 26 banks1__ _ __ 10 years’ 10 years’ 10 years’ premiums dividends payments $104.00 104.00 66.00 $11.40 10.40 12.99 $92.60 93.60 53. 01 Cash value $35.88 35.88 40.30 10 years’ net cost $56. 72 57.72 12.71 Average annual net cost $5.67 5.77 1. 27 1 In 1930, 28 banks were operating but only 26 were paying dividends, as 2 banks had not completed tbeir first year, as compared with 15 in 1930. Since the dividends assumed were those paid in 1940, 26 banks are included. The average annual net costs are thus $1.27 for the banks, as compared with $5.67 and $5.77, respectively, for the two private companies covered. In view of the fact that prior to 1938 a large proportion of industrial insurance was sold in the form of endowment policies, a comparison of their relative cost is pertinent. The two industrial companies compared above charged weekly premiums of 25 cents ($13 over a year’s period) for a 20-year endowment policy for $200 issued at age 35. For an ordinary policy of a similar character the savings banks charge a monthly premium of 80 cents ($9.60 for 12 months). The comparison of net costs is presented in table 19. 5 The third important industrial company does not sell precisely the same amount of insurance for a weekly premium of 20 cents and for that reason is not included. 55 COSTS TO POLICYHOLDER T 19 .— N e t costs o f $ 2 0 0 o f 2 0 -y e a r en dow m en t in su ra n ce issu ed at age 3 5 in f o r m o f in du strial p o lic y by 2 c o m p a n ies , and in f o r m o f o rd in a ry p o lic y by savings banks, based on dividends pa id in 1 9 4 0 able 10 years’ 10 years’ 10 years’ premiums dividends net pay ments Company or bank Company No. 1 ______ ____ _ - ___ _______ ______ Company No. 2 Average of 26 banks ___________________ $130.00 130.00 96.00 $14. 25 13.00 11.05 $115. 75 117.00 84.95 Cash value $72.75 72.75 78.89 10 years’ net cost $43.00 44. 25 6. 06 Average annual net cost $4.30 4.43 .61 Whereas the banks’ policy had an average cost of 61 cents per year, assuming the policy was surrendered in 10 years, the companies charged net costs of $4.30 and $4.43.6 If the policies considered were to be surrendered before the expira tion of the 10-year period, the comparison of net costs would be still more favorable to the savings bank. Cash surrender values may not be obtained on most industrial policies before 3 years or more. The savings banks, as has been pointed out, pay cash surrender values after 6 months, and even earlier. A cost comparison with most industrial policies based upon periods of less than 10 years would accordingly be to the greater advantage of the banks.7 The reasons for these relatively low costs must be sought in the experience of the companies and of the insurance departments of the savings banks with respect to expenses, the nature of the return on their invested assets, and mortality losses. Expenses o f Operation The expenses of the savings-bank insurance system are much lower than those of the private companies.8 The proportion of expenses to gross premiums for all the organizations operating in Massachusetts, and for the savings-insurance banks alone, for the years from 1927 to 1938, is shown in table 20. Although the expense ratios for both ordinary and industrial insur ance show a decrease in recent years, the expense ratio for ordinary insurance is still substantially higher than that of the savings banks, and the industrial-insurance ratio, despite the high original premiums for this insurance, is double that of ordinary insurance and three times as high as savings-bank life insurance.9 6 Data in the tables are from the 1939 edition of the Handy Guide to Standard and Special Contracts, Best’s Illustrations, 1940, and from the Division of Savings Bank Life Insurance. 7 Cost comparisons of other types of policies than those considered in this section show somewhat similar results. 8 The question as to whether the savings-bank policyholder pays all the costs of his insurance is dealt with in ch. 7. * Annual Reports of the Commissioner of Insurance of Massachusetts, pt. 2, tables M and N. 2 9 6 7 2 2 ° — 4 1 ------- 5 56 T SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS able 2 0 .— P ercentage total ex p en ses are o f p r em iu m in co m e in sa vin gs-ba n k in su r ance , ord in a ry in su ra n ce, and in dustrial in su ra n ce , 1 9 2 7 to 1 9 3 8 Year Savingsbank or All ordi nary in dinary insurance surance P ercen t 1927. __________ 1928_. __________ 1929______________ 1930_____________ 1931______________ 1932. __________ 4. 55 4. 53 4. 63 4. 73 4. 97 5.18 P ercen t 18. 82 18.13 18. 32 17. 96 16.19 15. 44 Indus trial in surance Year P ercen t 27. 64 26. 30 26. 34 24. 45 22. 92 22.02 1933 .. 1934 . . 1935 ___ 1936 ________ 1937_____________ 1938 ___ Savingsbank or All ordi nary in dinary insurance surance P ercen t 5.00 4. 84 5. 02 1 6. 29 17.16 18. 33 P ercen t 14.14 13. 95 13. 67 13. 71 14.13 13. 77 Indus trial in surance P ercent 22. 77 23.90 24.74 25. 53 25. 32 25. 45 1 On Nov. 1, 1935, gross premiums were substantially reduced on all ordinary policies issued on and after that date. Thus, the ratio of expenses to gross premiums received should be expected to increase over previous years when higher premiums were charged, and also in comparison with companies whose gross premiums are considerably higher. Figures in the above table refer to the ratio of insurance expenses to premium income. The reduction in the loading charges, and the resulting lower premiums adopted by the savings-insurance banks on November 1, 1935, would provide an increasing ratio of expenses to premiums even though the actual expenses remained constant. A comparative analysis made by the actuary of the Division of Savings Bank Life Insurance of all the insurance expenses (excluding invest ment expenses) shows that the actual expense per $1,000 insurance in force for all banks was $2.58 in 1937; $2.59 in 1938; $2.66 in 1939; and $2.64 in 1940. It has frequently been asserted that the actual expenses of the insurance departments of the banks prior to 1934 were larger than those represented in the published reports of the insurance commissioner, since the latter have not taken into account the expenditures by the State in maintaining the Division of Savings Bank Life Insurance. In a preceding chapter it has been explained that prior to 1927 all the expenses of the division were paid by the State, but that beginning in that year the insurance banks have each year reimbursed the State for an increasing proportion of the expenses of the division, until, in 1934, all the expenses of the division were being met by the banks. To the extent, however, that the State has in the past incurred unre imbursed expenditures in maintaining the division, it is true that the reported ratios of expenses to premiums of the banks in that period have not taken all insurance expenses into account. During the earlier years of the system, the premium income of the banks was much lower and the expenditures of the State were proportionately greater than they have been in the past decade. It is, therefore, true that the expense ratios for the earlier years would, if the State's expenditures were taken into consideration, be in greater excess of the published ratios than they have been in the past decade. Table 21 shows the expense ratios of the savings-bank insurance system as a whole, taking into account the unreimbursed expenditures 57 COSTS TO POLICYHOLDER of the State, for alternate years from 1923 to 1940. It shows the insurance expenses of the banks, the expenditures not reimbursed to the State, the total expenses of the system, and the ratio of total expense to premium income. T able 2 1 . — S a vin gs-ba n k in su ran ce exp en ses and ratios to p rem iu m in clu d in g net expenditures b y S ta te , 1 9 2 5 to 1 9 4 0 in co m e , [Amounts in thousands of dollars] Ratio of total to premium income Banks' ex penditures Net State expendi tures 1925_______________________________________________ 1927_ _ . ______________________________ ______ 1929___ _____________________ _ ___ ______ . 1931_______________________________________________ 1933_. ________________________ _______________ $51.1 72.2 109.5 153. 5 162.8 $32.5 30. 5 28.0 19.0 4.0 $83.6 102.7 137.5 172.5 166.8 7.28 6.49 5.85 5. 57 5.12 1935_______________________________________________ 1937_______________________________________________ 1939_______________________________________________ 1940_____ _______________________________________ 215.8 358. 7 460.9 505.4 0 0 0 0 215.8 358.7 460.9 505.4 5.02 i 7.16 1 8. 96 i 9.35 Year Total P ercen t 1 On Nov. 1, 1935, gross premiums on policies issued on and after that date were substantially reduced. Thus, the ratio of expenses to premiums received should be expected to be higher. Even if the unreimbursed expenditures of the State are taken into consideration in formulating the expense ratios of recent years, the expenses of the savings-bank insurance system are still proportion ately much smaller than those of the private companies. Probably the most important factors explaining the higher expense ratios of the companies are their method of paying commissions for writing insurance and the cost of collecting premiums. The proportion of premium income paid by four mutual companies selling both ordinary and industrial insurance 1 in salaries and commissions, and 0 by the savings banks in salaries, for each of the years from 1929 to 1939 is shown in table 22. T 2 2 . — R a tio o f salaries and co m m issio n s to p r em iu m in com e o f 4 in su ran ce co m p a n ies selling both o rd in a ry and in du strial in su ra n ce, com pared with ratio o f salaries to p r em iu m in co m e o f savings banks , 1 9 2 9 to 1 9 8 9 able Year Savingsbank ordi Company Industrial ordinary nary in insurance insurance surance P ercen t 1929. 1930. 1931. 1932. 1933. 1934. 2.91 2.95 2.79 2.80 2.60 2.47 P ercen t 14.52 14.19 13. 71 12. 50 12.29 12.12 P ercent 22. 81 21.24 19. 56 18. 65 19.44 20. 44 Savingsbank ordi Company Industrial ordinary nary in insurance insurance surance Year P ercen t 1935_____________ 1936........................ 1937______________ 1938________ ____ : 1939_____________ Average____ 1 Gross premiums on policies issued on and after Nov. 1, 1935, reduced. received should be expected to increase. 2.73 i 3.06 13. 36 i 3.97 i 4.24 3.08 P ercent 11.47 10.67 11.01 10. 41 9.38 12.02 P ercen t 21.42 22.01 21.61 21.31 19.87 20.76 Thus, ratio of salaries to premiums 1 0 These were the only four companies selling both kinds of insurance in the State during the entire period. 58 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS The table shows that the highest ratio of salaries to total incomes experienced by the insurance departments of the banks during the period 1929 to 1939 was that for the year 1939, when the figure was 4.24 percent. The lowest ratio for the period was attained in 1934, when it stood at 2.47 percent. The highest ratio of salaries and com missions to total income of the ordinary departments of the four com panies during the period was that for the year 1929, when the figure was 14.52 percent. The lowest ratio, 9.38 percent, was reached in 1939. In the case of the industrial departments of the four com panies, the highest ratio for the period was that for the year 1929, when the figure was 22.81 percent, and the lowest that of 1932, when it stood at 18.65 percent. The average ratio of salaries to premium income of the insurance departments of the banks during the 11-year period 1929 to 1939, was 3.08 percent. The average ratio of the ordinary-insurance departments of the four companies for the same period was 12.02 per cent. For their industrial departments it was, during the same period, 20.76 percent. Thus the ratio of salaries and commissions to total income over the period considered was on the average almost four times as high for ordinary insurance and almost seven times as high for industrial insurance as the ratio of salaries to total income of the insurance banks. It has been pointed out that no commissions are paid in connection with savings-bank insurance. The salaries which are included in the above calculations are confined to those incurred directly by the in surance banks themselves, and, prior to 1934, do not include all of the salaries paid to the staff of the Division of Savings Bank Life Insurance.1 The annual salaries paid to the whole staff in 1939 1 amounted to $48,160,1 all of which was repaid. 2 Over the period from 1908, when the system first came into exist ence, to 1940, the total amount paid by the insurance departments of the banks in salaries was $1,577,090. This was 2.69 percent of the total premium income received.1 3 Taxation The proportionately high expenses of operation of the insurance companies as compared with those of the banks may be explained to a slight extent by the fact that the companies have borne a somewhat 1 It should be emphasized, however, that, beginning in 1929 an increasing proportion was absorbed, until 1 by 1934 all the expenses of the division, including the salaries, were reimbursed to the State by the banks. 1 This amount included the salary of the deputy commissioner, the State medical director and his assist 2 ant, the State actuary and 4 actuarial clerks, 16 clerks and stenographers, and 2 field workers. is Data on expense ratios may be found in the Annual Reports of the Commissioner of Insurance, pt. 2, tables M and N. Data on income, on which these ratios are based, are contained in table B. Salaries of principal officers of the companies are contained in table N of the report for each year. Statistics of amounts paid in salaries are to be found in table C of the reports. Information with respect to total salaries and total premium income of the insurance departments of the banks may be found in the annual joint reports of the commissioner of banks and the commissioner of insurance on the condition of the savings-bank insurance system. COSTS TO POLICYHOLDER 59 heavier burden of taxation. The basis upon which the savings-bank insurance system is taxed has been explained in chapter 3. The banks, it will be remembered, pay no Federal income taxes and no fees to the insurance department of the State. The Commonwealth levies upon the insurance companies, and since November 1, 1939, upon the insurance departments of the banks, an annual excise tax of one-quarter of 1 percent of the net value of all policies in force on citizens of Massachusetts at the end of the pre ceding year. “ N et value” is defined as being equal to the combined aggregate of the mean reserves of each policy or group of policies.1 4 The insurance companies are also required to pay Federal income taxes. Under the Federal Revenue Acts of 1932 and 1934, covering the income years 1932 to 1935, American insurance companies paid a tax of 13% percent of their net income. Foreign companies paid a like tax on their net income from American sources. The taxable net income of the insurance companies is defined as their “ gross income,” which includes all income received from interest, dividends, and rent, minus certain items.1 Federal income tax rates for Ameri5 i* The State also taxes foreign companies (i. e., those not incorporated in the State) on the same basis, except that if the jurisdictions in which those companies reside levy taxes on a higher basis than those levied by Massachusetts, the foreign companies must pay in addition a retaliatory tax which would bring their tax up to the level which Massachusetts companies would have to pay in the foreign jurisdictions. Massa chusetts also taxes foreign companies 2 percent of the gross premiums collected on Massachusetts business minus the dividends returned to policyholders, or enough more to raise the total to the amount which domestic companies are taxed in the home jurisdictions of foreign companies operating in Massachusetts. The courts have interpreted the provisions of the law taxing premiums in such a way that it is levied only to the extent necessary to bring the tax paid up to the level of the tax on net value of policies. If the gross premium tax on foreign companies results in a higher tax than would be levied on the net value basis, the foreign companies pay the former. In addition to the taxes already described, which are levied on insurance business proper, insurance companies are taxed at the rate of 1 percent of the premium income on annuity contracts, except where such taxes are already paid by the companies to other jurisdictions. (Mass. Gen. Laws Relating to Taxation, ch. 63, secs. 18, 20, 21, and 22.) 1 5 The exempted items include: (1) Interest received from obligations of a State, Territory, or political subdivision thereof, or the District of Columbia, or United States possessions, from Federal Farm Loan securities, and from obligations of the United States and its instrumentalities other than Federal Farm Loan securities; (2) an amount equal to 4 percent of the legal insurance reserves, or, if the rate assumed in setting up such reserves is less than 4 percent, an amount equal to 3 % percent of the reserves; (3) dividends received from corporations themselves subject to Federal income taxation for 1936 and subsequent years—dividends on stock of domestic corporations themselves subject to income taxation are not deductible from gross in come, but 85 percent of such dividends is deductible in computing taxable net income; (4) 2 percent of the sum held as reserve for deferred dividends to policyholders; (5) investment expenses, provided that if such expenses are included in the general expenses the total deduction under this head should not exceed onequarter of 1 percent of the book value of the mean invested assets; (6) taxes and other expenses paid on the real estate held by the companies, not including special assessments and expenditures for new buildings or permanent improvements; (7) a reasonable allowance for depreciation of property; and (8) interest paid or accrued on the companies’ own debts. (United States Revenue Acts of 1932, 1934, 1936, and 1938, and Internal Revenue Code, secs. 201, 202, 203, 22b; U. S. Treasury Department, Bureau of Internal Revenue, Regulation 77, Income Tax Revenue Act of 1932, Washington, 1933, pp. 270-276.) It should be noted that whereas, prior to November 1, 1939, there were a great variety of deductions per mitted by the State laws taxing savings banks and their insurance departments when assets were invested in certain kinds of securities, the State taxes on insurance companies, being levied on net value of policies or on premium income, permitted no deductions from the tax base in computing the tax. Since November 1, 1939, the insurance departments have been taxed on the same basis as the companies. As regards the Federal income tax, however, the range of exemptions, as is clear from the foregoing discussion, is extensive. The only important difference in the exemptions permitted the savings banks by the State laws and those permitted the insurance companies under the Federal income tax law appears to be that, whereas income from mortgages held by the banks is deducted from the tax base, such exemption is not permitted the insurance companies by the Federal law. 60 SAVINGS-BANK LIFE INSURANCE----MASSACHUSETTS can life insurance companies for the income years 1936 and 1937 were 15 percent of the “ normal-tax net income,” as defined in the act of 1936. For the income years 1938 and 1939 such tax rates were 16K percent of the “ special class net income” as defined in the act of 1938 and the Internal Revenue Code. Foreign companies having no United States insurance business were taxable for the income years 1936 to 1939 as other foreign corporations. In addition to the taxes described, the insurance companies are required to pay to the State department of insurance a wide variety of fees.1 6 It is possible, fortunately, to measure the difference in the burdens of taxes borne by the insurance companies and by the insurance departments of the banks with a considerable degree of accuracy. The reports of the Commissioner of Insurance of Massachusetts give data on the amounts paid annually by the insurance departments of the banks and by the insurance companies in the form of taxes and fees. In the case of the companies these data include all amounts so paid, whether to the State of Massachusetts, to other States, or to the Federal Government. The data for the years 1930 to 1939 are given in table 23.1 It shows the amounts paid in taxes and fees in 7 each year and the premium income in the case of the savings-bank insurance system, the Massachusetts companies, and all insurance companies. T a 23.— Total taxes and fees,e and 'premium income, of savings-bank insurance b l system, Massachusetts companies, and all companies, each year 1980 to 1989 Savings-bank life insurance Massachusetts companies All companies Year Taxes Premium income Taxes and fees 1930______________________ $15,162 1931______________________ 15, 996 1932______________________ 17, 217 1933______________________ 22, 214 1934______________________ 26,170 $2,644, 733 3,095, 236 2,979,423 3, 256, 373 4, 075, 775 $4,762, 571 4, 935, 366 5,330, 247 4,984,617 4,188, 419 27, 628 31, 771 40, 429 49, 845 55, 685 4, 300,824 4,686,767 5, 013,693 4, 787,124 5, 408, 513 4,428, 313 5,897,136 5,869, 714 6,251,436 6, 791, 237 ___ 302,117 40, 248,461 1935______________________ 1936______________________ 1937______________________ 1938______________________ 1939______________________ Total_________ Premium income Taxes and fees $259, 334,881 $60,383,185 276, 548,841 61,828, 340 268,129,665 62,725,045 271,820, 213 59,689, 889 282, 994,638 53, 473, 795 311, 304,405 307, 283, 665 313,191, 294 328, 389,129 319,197, 432 Premium income $2, 997, 508, 775 3,152, 099, 471 3,027,024,051 2, 917, 270, 242 3,077,829,604 54,841, 523 62, 517, 769 67, 408, 937 70,686, 692 73, 602, 342 3, 211,187,825 3,191, 725, 539 3, 253,162, 306 3, 269, 846,645 3, 259, 024, 371 53,939, 056 2, 938,194,163 627,157, 517 31, 356, 678,829 1 Among others, these fees include the following: (1) $50 for an examination prior to the granting of a 8 license or certificate to do business in the State; (2) 2H mills for each $1,000 of insurance for the service of valuing the life policies of the domestic insurance companies; (3) $20 required from each foreign company for filing the original financial statement necessary before it may do business in the State, and for each financial statement which must be filed annually thereafter; (4) $2 annually, paid by the companies for the license of each insurance agent employed by them; and (5) $2 for each certificate of the valuation of a company’s policies, or of the examination, statement of the condition, or statement of the qualification of the companies. (Mass. Gen. Laws, ch. 175, sec. 14.) 1 Annual Reports of the Commissioner of Insurance of Massachusetts, pt. 2, table C. 7 61 COSTS TO POLICYHOLDER A comparison of the ratios of taxes and fees to premium income shows that during the entire period 1930 to 1939 the savings-bank insurance system paid 0.75 percent, the Massachusetts companies 1.82 percent, and all companies taken together 2.0 percent of premium income for the purpose. Over the whole period 1909 to 1940, the insurance departments of the banks paid in taxes a sum equal to 0.71 percent of their total premium income for the period.1 8 During the 5 years 1935 to 1939 the proportion of premium income paid to the State as taxes by the companies on their Massachusetts business was 2.03 percent, or about 2% the ratio paid by the banks, which was 0.85 percent. The banks’ ratio, which for their whole his tory was 0.71 percent, rose from 0.57 percent in 1930 to 1.03 percent in 1939. The insurance companies’ ratio rose slightly during the same period from 2.01 percent to 2.26 percent.1 9 In view of the fact that the mutual savings banks pay no Federal income taxes it is interesting to observe what is paid in this form by the insurance companies. The amounts paid as Federal income taxes by the Massachusetts life insurance companies to the United States Bureau of Internal Revenue are shown in table 24. The table also shows the premium income of these companies, and the proportion of premium income paid to the Federal Government. 2 4 . — Federal income taxes paid by Massachusetts life-insurance companies, their premium income, and ratio of Federal income taxes to premium income, 1933 to 1938 T able Amount of tax Year 1933__________________________________________ __ ___ __ 1934_________________________________ ___ _ _ ______ 1935_______________________________________________________ 1936_______________________________________________________ 1937____________________________________ ________________ 1938_______________________________________________________ T o t a l ..___ __ __ _ ___ ___ ___ ________ _ ______ Premium income $118,267 5,074 1, 658 89, 206 13, 590 29,437 $271, 731,067 282, 906, 354 311, 219,061 307,147, 325 313,126, 599 328,182,835 257, 232 1,814, 313, 241 Ratio P ercent 0.0435 .0018 .0005 .0290 . 0043 .0090 .0142 It will be observed that for the period 1933 to 1938 the Massachu setts companies paid 0.0142 percent of their premium income in the form of Federal income taxes.2 0 The results of this analysis may be summarized as follows: (1) Over the whole period of their existence up to 1940 the savings-insurance banks paid 0.71 percent of their premium income in taxes; (2) this was also approximately the proportion they paid during the years 1 See appendix H. 8 1 Appendix H presents a table showing the amounts paid in taxes to the Commonwealth by the insurance 9 departments of the banks and by the companies, and their premium income during the period 1930 to 1939. The data on taxes paid to the State are from the Annual Reports of the Massachusetts Commissioner of Corporations and Taxation, 1930-39, obtained from the records in the commissioner’s office. 2° Data on Federal income taxes were obtained from the TJ, S, Bureau of Internal Revenue, 62 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS 1930 to 1934, although during the years 1935 to 1939 the proportion rose to 0.85 percent; (3) the private companies chartered in Massa chusetts paid to all the jurisdictions taxing them or requiring the payment of fees during the period 1930 to 1939 an amount equal to 1.82 percent of their premium in comes; (4) the amount paid by all insur ance companies operating within the State was 2.0 percent of pre mium income; (5) the Massachusetts companies paid 0.0142 percent of their premium incomes during the period 1933 to 1938 in the form of Federal income taxes. It is not unreasonable to suppose that ap proximately the same proportion was paid to the Federal Government by all the insurance companies. It may be concluded that the insurance companies have paid roughly about 2 percent of their premium income in taxes and fees, as compared with about two-thirds of 1 percent, and in recent years somewhat more, paid by the insurance departments of the banks. The difference in tax burden is thus approximately 1% percent of premium income. It cannot, therefore, be held responsible in any significant degree for the difference in the cost of insurance to the policyholders. Since November 1, 1939, the insurance departments of the banks have been subject to the same State excise tax as other life-insurance companies domiciled in Massachusetts. Earnings on Invested Assets The relatively low cost of savings-bank insurance is partly due to the fact that the insurance departments of the banks have in the past earned a higher rate of return on their invested assets than have the insurance companies. The net rate of income earned by the savingsbank life-insurance system and by all insurance organizations during the period 1927 to 1938 is shown in table 25. T able 25 . — Net rate of income earned on investments by banks and by all insurance organizations including banks, 1927 to 1938 1927 _ . ________ ______ 1928 _ __________ 1929. _ 1930___ . ________ 1931___________________ 1932 _ __ All insur ance organi zations, including banks P ercent Year Savingsbank in surance depart ments P ercen t 5.25 5.18 5.39 5.14 5.12 5.02 5.02 5.04 5.02 5.02 4.91 4.65 1933___________________ 1934_____________ ______ 1935___________________ 1936___________________ 1937___________________ 1938___________________ Savingsbank in surance depart ments All insur ance organi zations, including banks P ercen t Year P ercen t 4.67 4.47 3.90 3.91 3.93 3.84 4.25 3.89 3.66 3.73 3.68 3.56 The more favorable earnings of the banks in the past may be credited in part to the difference in the types of investments which may be made by the companies and by the savings-bank insurance departments. As has been shown in chapter 3, investment of all the COSTS TO POLICYHOLDER 63 assets of the insurance departments of the banks is closely restricted. The insurance laws of Massachusetts and of some other States require that 100 percent of the paid-in capital of the companies and at least 75 percent of their reserve funds must be invested in the restricted range of securities open to the savings banks. The exceptions to this statement are as follows: (1) The companies may invest in the securi ties of any political jurisdiction in the Dominion of Canada, whereas the savings banks may not do this; (2) the companies may invest in real estate and mortgages on property anywhere in the United States, whereas the banks may invest only in such items within the State of Massachusetts; (3) the companies may not invest in bank stock, as the savings banks are permitted to do. All of the funds of insurance companies, except the 75 percent of reserves and the capital, may be invested in the securities open to the companies as stated above, and also in bank and trust-company stock, shares of cooperative banks, and deposits of savings banks and savings depart ments of trust companies in the State. Whether the banks will continue to average higher earnings on their invested assets is of course problematical. In recent years, they have grown relatively faster than the life-insurance companies and therefore have been investing a higher percentage of their relative assets at current low yields. Offsetting this lower yield may be the facts that the quality of new investments made is higher than some of the older bonds bearing higher coupons and that recent real estate loans based on values in a depressed market with provisions for amortization are sounder than older mortgages placed in times of inflated property values, without provision for adequate amortization. The fact that the banks may invest only in mortgages on real estate in Massachusetts, while insurance-company mortgages may represent property all over the country, is probably responsible in part for the better investment experience of the banks in recent years. M ost of the bank mortgages are for small amounts and represent property in the community in which the bank operates. In the case of the m ort gage investments of the insurance companies considerable funds have been invested in large buildings, and in western and southern farm lands, which have had an unfortunate earning experience in recent years.2 1 2 1 Data on the net rate of income earned on investments may be found in the Annual Reports of the Com missioner of Insurance, pt. 2, tables M and N. The restrictions imposed by law on the insurance compa nies’ investments are contained in the General Laws of Massachusetts, ch. 175, secs. 63-68. For percentage distribution of savings-bank insurance investments see ch. 3, table 9. Hearings before the Temporary National Economic Committee, pt. 10A and T. N. E. C. Monograph No. 28 (c. 20), give a comprehensive analysis of the operating results and investments of the 26 largest life-insurance companies. 64 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS M ortality Experience A further reason for the low costs of savings-bank life insurance is to be found in the comparatively low ratios of actual to expected mor tality losses experienced by the banks. These ratios for the banks, for all ordinary insurance, and for industrial insurance, during the years from 1917 to 1938, are shown in table 26. The table indicates that mortality ratios are generally lowest in the case of savings-bank insurance.2 2 The lowest ratio during the period for savings-bank insurance was that of 1921, when the figure was 32.12 percent. The highest ratio was that of 1918, the year of the influenza epidemic, when it reached 77.90 percent. Ordinary insurance experienced its lowest ratio in 1925, when the figure was 51.51 percent, and its highest ratio in the epidemic year, 1918, when it stood at 96.69 per cent. The highest ratio for industrial insurance, 142.78 percent, was experienced in the same year, while the best year was 1938, when the industrial mortality ratio was 43.76 percent. It should be noted that the mortality ratios for savings-bank life insur ance were lower than those for all ordinary insurance and for industrial insurance in every year, and that in all but the last 9 years of the period the mortality ratios for ordinary insurance were lower than those for industrial insurance. It should also be observed that the mortality ratios of savings-bank life insurance have been lower during the last 4-year period as a whole than in any of the preceding 4-year periods shown. The ratios for ordinary insurance showed a fairly steady decline until 1925. They rose between 1926 and 1933, and have since receded. On the other hand, the mortality ratios for industrial insurance have shown a remarkable decline throughout the period.2 3 T a b l e 26.— Ratios of actual to expected mortality losses for savings-bank, all ordi nary, and industrial insurance, 1917 to 1988 Year All ordi nary in Savings- surance Industrial bank in including surance savings- insurance bank life insurance P ercen t 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 30.19 77.90 63.57 57.90 32.12 45.36 51.97 45.57 44.98 43.24 43.74 P ercent 63.05 96.69 66.40 60.29 51.88 53.68 55.10 53.09 51. 51 53.59 53.78 Year P ercen t 93.96 142.78 83.25 76.13 63. 52 65.42 66.69 65.21 66.02 68.07 63.88 All ordi nary in Savings- surance Indus bank in including trial in surance savings- surance bank life insurance P ercen t 1928-...................... 1929......................... 1930. ........... 1931. ........... 1932......................... 1933........................ 1934 ........... 1935 ........... 1936 ______ 1937______________ 1938 ______ 36.22 46.85 41.55 39.43 39.85 36.77 41.22 40.06 33. 51 35.89 34.20 P ercent 57.91 60.89 61.80 63.48 63.10 63. 31 61.73 60.49 61. 05 58.95 56. 95 P ercen t 64.23 66. 37 60.04 59.50 55.72 56. 25 53.64 50.98 50. 05 47. 52 43.76 2 It should be noted that whereas savings-bank and, as a rule, ordinary-insurance ratios are based on the 2 American Experience Table, industrial-insurance ratios are based on the Standard Industrial Mortality Table, which assumes greater risks of mortality. If all ratios were based on the same table, the industrial ratios would, of course, be relatively greater than those shown in the table. 2 Mortality ratios are published in the Annual Reports of the Commissioner of Insurance, pt. 2, tables 3 M and N. COSTS TO POLICYHOLDER 65 The ratio of actual to the expected mortality for the savings-bank life-insurance system was 34.41 percent in 1939 and 33.67 percent in 1940. The reports of the Commissioner of Insurance showing the experience of the companies for 1939 and 1940 were not available when this was prepared. In general, actual industrial mortality has been considerably above that for ordinary insurance, although there has been remarkable improvement among industrial risks in recent years. There is, in general, a greater burden of mortality among wage earners than among the rest of the population. This should not, however, cause industrialinsurance ratios to be higher, since the industrial companies base their calculations of expected mortality losses upon the Standard Industrial M ortality Table, which takes into account the higher mortality among wage earners. Even though this higher mortality does not affect the ratios of actual to expected mortality losses, it would ac count in part for relatively high industrial premiums, since larger reserves would be necessary to meet the greater likelihood of paying insurance benefits. Generalizations based on mortality ratios must be used with great care, and are especially unsafe when they result in comparisons be tween different insurance organizations.2 Though at first glance 4 they appear to demonstrate that the mortality ratios of the banks are lower than those of the companies, they by no means prove conclusively that this is so for all ages and all types of insurance. T o do this it would be necessary to examine the ratios of the banks and of the com panies at given ages and for similar policies. Official data on this point are not available in the published reports. T o procure them from a sufficient number of companies has not seemed feasible. Un der the circumstances, therefore, it seems desirable to consider sav ings-bank mortality ratios by making an analysis of the factors which are relevant to the question, and to refrain as much as possible from relying on data concerning average mortality ratios. It is pertinent to point out, however, that there is general agreement that savingsbank mortality ratios are relatively low. Undoubtedly one important reason for the relatively high indus trial mortality ratios is that no medical examinations are required of applicants for industrial insurance, as they usually are in ordinary insurance issued by the companies and in savings-bank insurance. Some of the ordinary companies sell group insurance, the mortality ratios for which, largely because medical examinations are not usually required, are much higher than for straight life insurance. These 2 4 On the dangers involved in making such comparisons see a paper by Edward W. Marshall entitled “ The Interpretation of Mortality Statistics,” printed in vol. 33 of the Transactions of the Actuarial Soci ety of America, 1932 (pp. 74-91); and a memorandum by C. R. Fitzgerald, actuary of the State Mutual Life Assurance Society of Worcester, Mass., prepared in 1931. 66 SAVINGS-BANK LIFE INSURANCE----MASSACHUSETTS group-insurance ratios are included in the data for ordinary insurance. The savings-bank mortality ratios also include losses due to group insurance. Since the proportions between group insurance and ordi nary insurance carried by the banks and all the companies are similar, the difference in ratios between the banks and the ordinary companies cannot be explained on this ground.2 5 It has been commonly declared that since savings-bank insurance is relatively new it would naturally experience a lower mortality ratio than that of insurance companies which have operated over a long period of years. This statement is based on the fact that since a new insurance system is not so likely to have as many old people among its policyholders as an old system, the great improvement which has been made in the elimination of disease among younger persons and their consequent increase in longevity since the time when the American Experience Table was constructed result in a mortality ratio favorable to the insurance system with the greater proportion of young policyholders.2 Another item operating in favor 6 of a new insurance system is the fact that it is likely to have among its policyholders a greater proportion of very recent entrants, in whose case the effect of the preliminary medical examination has not yet been dissipated.2 Since, as compared with long-established insurance 7 companies, the insurance departments of the savings banks probably have a smaller proportion of aged policyholders, and since it is true that the system has grown very rapidly of late, the fact that savingsbank insurance is relatively new may properly be given some of the credit for the favorable mortality ratio which it enjoys. Proponents of savings-bank life insurance answer that the savings in actual mortality at the younger ages, in comparison with that expected by using the American Experience Table, is adjusted in loading and dividend formulas, and that the extra savings resulting during the “ select” period is used for acquisition costs and to build up immediate surplus funds. Furthermore, an analysis of the actual ultimate mortality experience for the years 1926 to 1940, with all lives examined within 4 years excluded, made by the State actuary for the Division of Savings Bank Life Insurance, showed substantially lower mortality at practically all ages in comparison with the model table Z compiled from the ultimate experience of 14 large companies. Another factor wdiich appears to be pertinent arises from the method of selling insurance. In border-line cases, where the medical examiner is in doubt as to what his decision should be, the influence and persuasion of the insurance agent may occasionally be the deter mining factor in the approval of the applicant. In this connection it is 2 See Annual Reports of the Commissioner of Insurance of Massachusetts, pt. 2, table G. 6 2 See p. 68 for a discussion bearing on this matter. 6 2 The medical examination tends to eliminate bad risks. After 3 or 4 years, however, the insured may 7 develop new ailments, and the effect of the examination may thus be said to have “ worn off.” COSTS TO POLICYHOLDER 67 important to note that the compensation of no individual is directly increased or decreased if a physician approves or fails to approve an application for savings-bank insurance. As in the case of the private companies the medical examiner’s fee is the same whether or not the applicant is approved; but whereas, in the case of the companies, rejection by a physician will affect the income of the agent and his immediate superiors, in the case of savings-bank insurance there is no commission or other income lost to anyone if a doubtful applicant is rejected. The only possible exception to this statement is that agencies collecting premiums for the banks are entitled to receive 3 percent of these collections as fees. It should be pointed out, however, that the possibility of persuasion or influence being brought to bear upon the medical examiners by collection agencies is exceedingly small, as is obvious from the fact that in 1940 only 1.6 percent of premium income was actually paid in collection fees. Another factor which probably operates in favor of the savings banks is the relatively small amount of insurance carried by the average policyholder in the system. As will be shown in chapter 7, the great m ajority of savings-bank policyholders are persons whose incomes are not high. Experience indicates that persons who hold policies of many thousands of dollars are poorer risks than are small policyholders. Since some risks are always likely to prove unsound in the end, a large risk falling in this category would occasion a heavier mortality loss than a small one. In other words, the death of a person carrying a $100,000 policy would result in mortality losses equal to those due to the death of 100 persons of the same age, each carrying a $1,000 policy of the same type. Furthermore, wealthy persons are more likely to engage in irregular living, if for no other reason than that they can afford it better than people with small or moderate incomes. That insurance companies believe these facts of importance is obvious, since they go over applications for large insurance policies much more carefully than they examine those for small policies. They usually make an examination, with the aid of a credit agency using under-cover investigators, to find out whether the applicant for a large policy is a man of good habits, and they often reject such appli cations on grounds which, though not usually stated to the applicant, are as a rule not even considered worth investigating in the case of applicants for small policies. Despite such investigations, however, risks are often accepted which in the end turn out to have been unsound. Though the savings-bank insurance system also inquires carefully into the living habits of large applicants and is likely to accept small applicants merely if the latter are sound in health, the fact that such a small proportion of their policyholders are well to do probably operates in favor of a lower mortality ratio than that experienced by the companies. 68 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS In later years large amounts of savings-bank insurance have been sold, with the encouragement of employers, to workers in factories throughout the State. Such establishments have usually been of the modern type. Sanitary and safety conditions have been of a high order. As a result the employees of such plants are likely to prove good insurance risks. This also may account to some extent for the lower mortality ratios of the banks. Perhaps another contributing factor to the lower savings-bank life-insurance mortality is that living and health standards in general are higher in New England than in some other sections of the United States, and that since savings-bank life-insurance policyholders are largely concentrated in Massachusetts, the resulting mortality experi ence should be lower than for the companies whose risks are scattered throughout the country. To what extent may the admittedly low ratio of the banks be expected to continue? As the system becomes older the proportion of aged persons insured in it will become greater. This appears to be the only important factor which might operate in the future in the direction of a higher ratio but, as was previously pointed out, the actual ultimate mortality experience of the banks, with recently examined lives excluded, over a 15-year period was lower at practi cally every age when compared with the combined experience of the companies. Operating in favor of maintaining the existing favorable experience are the following factors: (1) The system has attained a momentum which promises to bring in large numbers of new policy holders every year, with the consequence that the part played by the effect of recent medical examinations in promoting a low ratio may actually become more important than it is; (2) the very nature of the system, with its elimination of agents’ commissions and the part they play in encouraging the acceptance of bad risks, will be effective in maintaining a lowered mortality ratio; (3) savings-bank life insurance is not likely to experience to any considerable extent reduction in the proportion of small policyholders. There is every reason, therefore, to suppose that savings-bank insurance will continue to enjoy a relatively low mortality ratio, both immediate and ultimate. It should be observed in conclusion that it is not possible to account with finality for the mortality ratio of the savings-bank life-insurance system by assigning definite and exact credit to any of the factors discussed. M uch of the discussion is admittedly based on a priori reasoning. T o the extent that such reasoning is sound the ratio may be regarded as explained, at least in part. That some of the factors above described actually do affect the mortality ratio does not seem open to question. Others have been stated conjecturally and con- COSTS TO POLICYHOLDER 69 ditionally. Complete accuracy and finality do not seem possible of attainment in the solution of the problem.2 8 In the final analysis, however, the mortality ratios of the savingsbank insurance system are lower than those of the private companies taken as a whole. This factor, together with relative expenses and earnings on assets, plays an important part in accounting for the lower cost of savings-bank life insurance. 28 Suggestions with respect to an explanation for the low ratio of the insurance departments of the banks were obtained in numerous interviews. Those with Dr. Burnett, the State medical director, and with Mr. Richard Harding of the Associated Industries, were especially valuable in this respect. A memo randum by Mr. Harding, entitled “ The low mortality of savings-bank life insurance,” is particularly sug gestive as is the statistical analysis of the savings-bank life-insurance mortality experience for the years 1926-40, made by Mr. Eugene Caldwell, State actuary of the Division of Savings Bank Life Insurance. Chapter 6 Factors Affecting Grow th of Savings-Bank Life Insurance An important factor affecting the growth of savings-bank life insur ance is its advantage to the policyholders as compared with the in surance bought from insurance companies, whether of an industrial or ordinary type. Its favorable cash surrender privileges, the greater availability of loans on policies, the various other types of nonforfeiture privileges, the fact that, because of paying no commissions to agents and having a relatively favorable mortality experience, savings-bank insurance may be obtained at comparatively low cost— all these advantages make it a desirable type of insurance for the ordinary person. Its rapid growth in recent years indicates that its advantages are becoming more widely known among the citizens of Massachusetts. Perhaps a contributing factor to the growth of savings-bank life insurance has been the widespread criticism and unfavorable pub licity about industrial insurance during the past decade, culminating in an investigation by a committee of the New York Legislature, and by the Temporary National Economic Committee.1 Public Support As in any important movement, the character of its leadership has had much to do with the growth of the system. From the begin ning of the campaign to enact the savings-bank insurance law until the present moment, the system has been fortunate in the type of leaders who have promoted its interests. Throughout its history it has had among its advocates some of the leading business men, labor leaders, and educators of the State.2 It has also had the advantage of the active support and aid of the Massachusetts Savings Bank Insurance League. The league was formed on November 26, 1906, with former 1 See Hearings on Insurance before the Temporary National Economic Committee, pts. 10 and 12, Wash ington, 1940; also, T. N. E. C. Monograph No. 28, ch. 16, Washington, 1940. 2 At the beginning of its career such important persons as Governors Bates and Douglas, and President Eliot, of Harvard University, were its advocates, and it benefited from the unpaid services of Gen. S. H. Wolfe, one of the leading independent insurance actuaries in the country, who served as consulting actu ary. In recent years it has had the active support of former Gov. David I. Walsh, now United States Senator, of Mr. Lincoln Filene, of Mr. B. Preston Clark of the Plymouth Cordage Co., of almost every Governor of the Commonwealth and of the officials of the State Federation of Labor. For many years it has been greatly aided by Mr. Judd Dewey, now deputy commissioner of the Division of Savings Bank Life Insurance, who served it as unpaid counsel. The system of savings-bank life insurance benefited especially from the leadership of Miss Alice H. Grady. She became the financial secretary of the Savings Bank Insurance League when it was founded in 1906, and retained that position until January 1, 1934, when she 70 FACTORS AFFECTING GROWTH 71 Gov. W . L. Douglas, a leading industrialist, as president, and an influ ential group of persons as its other officers. Its original name was The Massachusetts Savings Insurance League. On February 3, 1930, the organization incorporated under the title of “ The Massa chusetts Savings Bank Insurance League.” 3 The earliest task of the league was to promote public support for the enactment of the original bill. As soon as the bill became law the league devoted its attention toward interesting the savings banks in setting up insurance departments, an effort in which it was not successful until 1908, when both the Whitman Savings Bank and the People’s Savings Bank of Brockton came into the system. During its entire history the league has carried on active publicity work to promote savings-bank insurance.4 It has cooperated closely with the work of the State Division of Savings Bank Life Insurance at all times in fulfilling its aim, “ to acquaint the people of Massachusetts with the opportunities offered by the savings banks for securing life insurance and old-age annuities at cost.” 5 Numerous other organizations have joined with the league in pro moting savings-bank insurance and in defending it against attacks. From the beginning the movement has had the support of many of the trade-unions of the State. The Massachusetts State Federation of Labor, the Boston Central Labor Union, and the American Feder ation of Labor have taken a position in favor of savings-bank insurance. The Boston Chamber of Commerce, in early years the Massachusetts Civic League, and in recent years the Credit Union League of Massa chusetts and the Associated Industries of Massachusetts, have been among its supporters.6 resigned because of ill health. On September 10,1917, she was elected clerk and secretary of the General Insurance Guaranty Fund, and served as such until her death on April 19,1934. The trustees of the fund appointed her executive secretary of savings-bank life insurance on June 12,1919. When the law creating the position of deputy commissioner of Division of Savings Bank Life Insurance was passed on May 28,1920, the trustees appointed her to this position and she remained deputy commissioner until her death. Both the friends and the opponents of the savings-bank insurance system testify to Miss Grady’s loyalty and ag gressiveness as the actual head of the system. She seems to have been a redoubtable protagonist and to have defended savings-bank insurance with great effectiveness. 3 See pt. 1, ch. 1. <The league has published various pamphlets, solicited speaking engagements, arranged for community projects, and actively defended the system against legislative attempts to restrict its scope. 5The activities of the league have been supported by contributions from a considerable number of per sons. Prominent among them have been Mr. Charles H. Jones, president of the Commonwealth Shoe & Leather Co. and holder of the first policy issued under the law (policy No. 1 of the Whitman Bank), Mr. Lincoln Filene, Mr. B. Preston Clark, Mr. Louis Kirstein, Mr. H. P. Kendall, Mr. J. E. McElwain, Mr. E. J. Bliss of the Regal Shoe Co., Mr. Alfred H. Avery, and Mr. James L. Richards of the Boston Con solidated Gas Co. The present officers of the league include Mr. Lincoln Filene, chairman of the board of directors, Mr. Alfred H. Avery, president, Mr. Judd Dewey, first vice president, United States Senator David I. Walsh, second vice president, and Mr. Charles W. Rehor, third vice president. Its treasurer is Mr. J. William Fellows, and its executive secretary, Mr. J. Warren Lusk. 6 It is significant that since 1934, whenever legislation has been introduced which the officials of the Divi sion of Savings Bank Life Insurance regarded as prejudicial to its interests, representatives of both the State Federation of Labor and the Associated Industries of Massachusetts, two groups frequently in opposi tion to one another, have joined in defending savings-bank life insurance against what each organization regarded as an unwarranted attack upon it. 2 9 6 7 2 2 ° -— 4 1 --------6 72 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS A ctivities o f Employers and o f Associated Industries o f Massachusetts Savings-bank life insurance has at all times received the active support of many employers. The savings-bank insurance law, by permitting the setting up of agencies empowered to receive applica tions for insurance and to accept premiums as agents for the issuing banks, makes possible the establishment of an employer’s agency by any employer who wishes to promote the sale of the insurance among his workers. When a worker buys savings-bank life insurance through an agency set up by his employer, he frequently authorizes the agency to make weekly or biweekly deductions from his wages and directs that these deductions be deposited in some savings bank until such time as a sum sufficient to pay the premium has been accumulated to his credit. A t that time the savings bank turns the premium over to its own insurance department, or if it is not an issuing bank, to the insurance department of the bank which issued the policy. The function of the employer who acts as agent is not only to make wage deductions and transfer them to the savings banks, but to do what he can to educate his employees concerning the advantages of savingsbank insurance. The fact that the Division of Savings Bank Life Insurance employs instructors whose function it is to carry on this education is of importance in this connection. For years numerous personnel managers in the State have urged their workers to buy their insurance from the savings banks. As a result of their efforts and those of a number of important employers in the State, the Associated Industries of Massachusetts, the most important organization of manufacturers in the Commonwealth, be came interested in savings-bank life insurance. A secretary who devotes his time exclusively to the promotion of savings-bank insur ance is employed by the organization.7 He has made numerous surveys with the aim of giving employers an idea of the savings which their workers would make if they carried savings-bank policies instead of industrial policies. These surveys have usually succeeded in con vincing employers of the advantages of savings-bank life insurance.8 Attitude o f the Savings Banks Throughout the history of the system savings banks have hesitated to enter the ranks of the issuing banks. In 1912 only 4 banks were 7 Mr. Richard B. Harding has held this post since its creation in 1930. The Associated Industries in that year also established a subcommittee on savings-bank life insurance. 8 It should be understood that neither the Associated Industries nor the employers who set up agencies before that organization became interested in savings-bank life insurance are in this connection interested in the sale of group insurance. Their concern is with the sale of ordinary life insurance among employees as a substitute for the industrial insurance held so extensively by workers and their families. The material upon which this section is based was obtained from interviews, in June and July 1934, with the following persons: Mr. Richard B. Harding; Mr. B. Preston Clark; Mr. Royal Parkinson, personnel manager of the American Optical Co.; Mr. A. M. Porton, personnel manager of Crompton & Knowles; Mr. H. Smith, cost accountant of the Uxbridge-Worcester Co.; and Mr, Paul W, Viets, employment manager of the Plymouth Cordage Cq, FACTORS AFFECTING GROWTH 73 issuing policies and it took more than 10 years before other banks joined them. Six banks joined the system between 1923 and 1925. The greatest number came in from 1929 to 1931, when 11 new banks began to issue policies. A t present, in addition to the 29 issuing banks themselves, other savings banks and their branches, to the number of 159, act as agencies receiving applications and premiums for savings-bank insurance. Despite the relatively rapid growth of the system in recent years, its slow acceptance by savings banks as a whole requires consideration. W hy have not more of the 191 mutual savings banks operating in the State in 1941 become issuing banks? Undoubtedly the conserva tism of the trustees and officers of the banks is a factor of importance. Their long tradition of carefulness and circumspection in the manage ment of their institutions was largely responsible in the early years for their refusal to venture into the field of insurance. It is not unlikely that the same factor still operates, in numerous instances, to keep the banks exclusively in the savings-bank business. Another hindrance to the establishment of insurance departments may be the fact that officers of insurance companies and insurance agents are often on the boards of trustees of the savings banks, and they are not likely to encourage the establishment of insurance departments. A further factor which operates to retard the entrance of banks into the system is the fact that, though savings-bank insurance has been sold for many years, many trustees of banks are still unacquainted with its advantages and the nature of the system itself. M any of the savings banks, too, are very small, with limited personnel and equip ment. Despite these factors, the number of banks acting as underwriters and the much greater number serving in the capacity of agencies indicate that the system offers certain advantages to those banks which are associated with it. One of these advantages has been sug gested by an opponent of the savings-bank insurance system as at present operated. Wesley E. M onk, general counsel of the Massa chusetts M utual Life Insurance Co. and a former insurance commis sioner of Massachusetts, described one motive of savings banks which sell insurance as follows: Savings banks and their trustees, as such, in my judgment, are not interested in engaging in the life-insurance business except for one reason, and that reason is a perfectly sound one, so far as the savings banks are concerned, if they desire to complicate their business to that extent. That reason is based upon the thought and belief that in obtaining policyholders in their life-insurance depart ments, they thereby encourage people to become depositors in the savings de partments of the savings banks. This thought is similar to that which exists in connection with Christmas clubs, school deposits, and other means of inducing people to open accounts, and the same reasoning applies to those savings banks 74 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS which have no savings-bank insurance departments, but who are acting as agents for the collection of premiums.9 Undoubtedly, this is a fair statement of one of the motives of the savings banks in associating themselves with the system. The officers of the banks are convinced that such an association actually does increase the number of their depositors. They point out that when an employer is directed to make deductions from the wages of his workers for the payment of premiums, he deposits the amounts so deducted with the savings banks, where they remain on deposit until such time as an amount sufficient to pay the regular premium has accrued. Not only does this result in an increase in the deposits of the banks, but it also increases the number of regular depositors. Furthermore, these depositors are likely to become regular customers of the savings banks. The savings departments may also benefit in those instances where policyholders pay premiums directly to the banks. Such persons are brought into regular contact with the banks. If they have not been depositors before, they are more likely to become depositors as a result of such contacts. Furthermore, the fact that the banks encourage the deposit of small sums regularly and the payment of insurance premiums from such deposits at quar terly, semiannual, or annual intervals, is likely to lead to an increase both in deposits and in the number of regular deposits. It should be remembered also that agency banks collect a transmission fee equal to 3 percent of the premiums they receive and that this may often amount to more than the cost of collection. Furthermore, the banks which are connected with the system come into possession of funds which are available, to a considerable extent, for investment in the communities which they serve. Their prestige and importance are thereby enhanced and their part in the business life of the community assumes greater proportions. It is significant that the Savings Bank Association of Massachusetts, which represents the mutual savings banks of the State, and which was indifferent to savings-bank life insurance over a period of many years, has appeared on several occasions before committees of the legislature and opposed the passage of legislation which might be conceived as being directed against the system.1 0 In 1938, the issuing banks formed a permanent association called the Savings Bank Life Insurance Council, its object, as defined by its bylaws, being “ the general welfare of the savings banks in this Common9 Monk, Wesley E. Observations Relative to Savings Bank Life Insurance. Testimony before the joint legislative committee on insurance, Feb. 12, 1930, p. 3. The information upon which this section is based was obtained from interviews with officials of the Division of Savings Bank Life Insurance; with Charles J. Bateman, Jr., former director of the division of savings banks in the department of banking; with Q. Arthur Small, treasurer of the Uxbridge Savings Bank; and from a number of mimeographed letters issued under the signatures of officers of various savings banks. FACTORS AFFECTING GROWTH 75 wealth, their agencies and policyholders.” 1 All advertising for the 1 system is now handled through this office, as well as the compilation of statistics and information of interest to the banks, the instruction and supervision of agencies, and other coordinating activities. The creation of this office is an indication of the growing importance of savings-bank life insurance to the savings banks, and the increased interest therein on the part of their executive officers. 11 Clyde S. Casady, a member of the staff of the State Division of Savings Bank Life Insurance from 1932 to 1938, was appointed full-time executive secretary of the Council when it was formed. Chapter 7 Criticism of Savings-Bank Life Insurance The savings-bank life-insurance system has been subject to criticism for many years. Its opponents have not asserted that the system is unsound from an actuarial point of view. Their position has been well expressed by an important life-insurance official as follows: “ No objection can be made to savings-bank life insurance as insurance. It is sound insurance actuarially. It can be bought at a low net cost. Some of the methods used in the promoting and conduct of the busi ness, however, are objectionable.” 1 The purpose of the present chapter is to describe the objections which have been commonly made to the operation of the savings-bank life-insurance system, and to attempt, where feasible, to evaluate them. The significant criticisms of the system may be considered under the following heads: (1) That savings-bank insurance is at present not fulfilling the purposes for which it was originally intended; (2) that savings-bank insurance does not give the service available to the policyholder of the insurance companies; (3) that savings-bank insurance can be sold at a low cost to the policyholder only because part of its actual cost, at least in past years, has been met by subsidies from private sources and from the depositors of the banks.2 1 Monk, Wesley, E. Observations Relative to Savings Bank Life Insurance. Testimony before the joint legislative committee on insurance, Feb. 12, 1930, p. 1. 3Another criticism is concerned with the fact that the insurance companies have been compelled to pay a higher tax than have the insurance departments of the banks. This matter is discussed in ch. 5, in which it is shown that whereas the insurance departments of the banks have paid about two-thirds of 1 percent of their premium income in taxes, the insurance companies have paid a proportion about three times as great. On November 1,1939, the basis of taxing savings-bank insurance was changed to the same as the companies. Two other frequently reiterated criticisms are not considered in the text, since they appear not to be per tinent to the merits of the Massachusetts system of savings-bank life insurance as an insurance organization. The first has to do with the fact that the savings-bank insurance enjoys certain advantages not available to private companies. These consist of the location of the Division of Savings Bank Life Insurance in the statehouse, the use of the State seal on stationery used by officials of the division, and the activities of em ployees of the State division to promote the sale of insurance competing with that sold by the companies. It is contended that these things create an impression among the citizens of the State that the Common wealth of Massachusetts itself guarantees the safety of savings-bank insurance, and that for the State to promote actively the sale of such insurance and to permit false ideas as to the existence of a State guaranty to continue, constitute a species of unfair competition with the companies. The objection has been ex pressed in the following terms: “ It is carried on under the false belief, and practical misrepresentation to the public, that it is State in surance. As a matter of law and as a matter of fact, it is not State insurance. Not one dollar of value of the property of the Commonwealth is back of it, and not one obligation of the State guarantees it, and yet purchasers of this insurance believe that if perchance contracts are in danger of not being carried out, the Commonwealth in some way or other is a guarantor of their fulfillment. “ It is a fact that this general belief that the Commonwealth is back of this insurance is encouraged, if not by direct expression, certainly by the implication which arises when representatives of the Savings Bank Insurance Division of the State request an entree to business concerns and request assistance from the heads of business houses to instruct, educate, and solicit this insurance for the savings banks. It needs no proof that a representative of the State of Massachusetts, appearing with his credentials, will receive more atten tion and will obtain privileges and preferences that the representatives of aprivate con cernwill not receive. 76 CRITICISM T h e 77 O r ig in a l P u r p o se It has been asserted frequently that the intention of the savingsbank insurance law when passed was to meet the evils of industrial This results in unfair competition * * *” (Monk, Wesley E. Observations Relative to Savings Bank Life Insurance. Testimony before the joint legislative committee on insurance, Feb. 12,1930, p. 1.) Another critic asks, “ Could there have been found any group of 12 men financially equipped who would not have been willing to pay actually in cash into the State $1,000,000 or even twice that sum for such an exclusive charter, for the use of the statehouse as a home office, and for the right to use the State seal with which to create and broadcast the impression that the State is guaranteeing a life insurance company so constituted?” (De Groat, Floyd E. Mutual Savings Banks and Mutual Life Insurance. Reprinted from article in the Spectator (issues of Mar. 19 and 26 and Apr. 2,1931), p. 4.) Critics of the system have suggested that as a means of eliminating these objections, all connection between the savings-bank insurance system and the State be severed. It is proposed that the banks themselves engage actuaries and medical directors, and operate their insurance departments without the aid or super vision of the Division of Savings Bank Life Insurance and of the General Insurance Guaranty Fund, the officers and members of which are government appointees or employees of the State. In 1930 and in 1939 these proposals were embodied in bills considered by legislative committees but were not approved. (See minority report of Representative Philip A. Sherman, member of the special recess commission ap pointed to study proposed limitations of savings-bank insurance. House No. 2124, 1939.) The advocates of the savings-bank life insurance do not, of course, deny the fact that the system is bene fited by the State’s connection with it. They point out, however, that the officials of the division and the banks make every effort to explain that there is no State guaranty of savings-bank life insurance. They assert that the State, in fostering the system, is doing something socially desirable, since the system has the effect of offering insurance to the citizens of the State under conditions which are to their great advantage. They believe that in order to promote socially desirable ends, the State is justified in following such a course. A second criticism which appears to have no relation to the merits of savings-bank insurance is to the effect that the savings banks should not be in the insurance business. In the pamphlet already quoted, Mr. Wesley E. Monk says that “ The savings banks should not be in the insurance business any more than insurance companies should be in the savings-bank business. It is just as logical to permit mutual insurance companies to be in the savings-bank business as a motive by which more insurance could be sold, as it is to permit savings banks to be in the insurance business in order to induce more savings accounts.” (Monk, Wesley E. Observations Relative to Savings Bank Life Insurance. Testimony before the joint legisla tive committee on insurance, Feb. 12, 1930, p. 5.) Mr. F. E. De Groat puts the matter as follows: “ Should mutual life insurance companies enter the savings-bank field? It is possibly one of the greatest safeguards with which mutual life insurance is surrounded that either by charter provision or by choice, it has confined itself to the making of contracts which involve the life risk. The charter of one of the most famous life-insurance companies in America expressly provides the following: ‘ No part of the funds of said corporation shall be used for banking purposes.’ “ Mutual savings banks have naught to do with the making of contracts, nor of interest guaranties; they are depositories only. The departure of mutual savings banks from the performance exclusively of those functions which have made them what they are, may prove unwise; adding to their functions by making contracts involving the life risk, is deplored by many persons of unquestioned financial acumen, including some of those prominently identified as directors of the greatest savings institutions in America.” (DeGroat, Floyd E. Mutual Savings Banks and Mutual Life Insurance. Reprint from article in the Spec tator (issues of Mar. 19 and 26, and Apr. 2, 1931), pp. 13-14.) Against this position the advocates of the savings-bank insurance system urge that if the banks are in the insurance business when they operate a distinct insurance department within their establishments, the insurance companies are no less in the banking business when they sell endowment insurance, which is a combination of insurance protection and savings, and when they sell annuities, which is a form of savings. They point out that endowment insurance has constituted, over the last few decades, an increasingly important form of insurance sold by the private companies. This attitude is expressed clearly in an open letter written by Mr. Elmer A. MacGowan, treasurer of the New Bedford Institution for Savings, to a person who complained that the savings banks had no busi ness to enter the insurance field. The letter declares: “ As a matter of fact, the life-insurance companies have entered the banking field. That is to say, they are soliciting and receiving savings as such. You know * * * that only a fraction of the premium on endowment policies represents or is claimed to represent the insurance feature, and at the younger ages more than half of the premium is intended to enable the company to pay the policy off at a stated time. A considerable part of the 3 billion dollars of assets of [a certain company] is made up of moneys which it has received in this way, not as cost of life insurance and not for the purpose of meeting any death claims, but for the purpose of repayment to the policyholders in the form of accumulated savings under endowment policies. If that is not engaging, to all intents and purposes, in the banking business, then I don’t know what is. Certainly you are doing in that connection an important part of the banking business. That is, you are collecting and receiving savings for investment as such.” (Elmer A. MacGowan, in an open letter to Mr. D. Howard Nolan of New Bedford, June 7, 1930, obtainable from the Division of Savings Bank Life Insurance.) 78 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS insurance, that the law was sought because it was regarded as neces sary in order to enable workers to buy insurance at low cost and under reasonable conditions, and that at present, with the maximum amount which may be purchased in any one bank equal to $1,000 and the possibility of buying savings-bank insurance in amounts as great as $25,000, the system has departed from its original purpose and has become a system of ordinary life insurance, catering to the needs of persons in the higher income groups. One critic expresses this position in the following words: At the time the savings-bank life insurance came into being, the chief reason back of it was that it provided a method by which the man of small means could procure insurance cheaply. It was not admitted, and would have been disputed and denied, that it was made for bank directors or others of equal means.3 Another puts the matter as follows: It came into being as an instrumentality for the benefit of the working class. In other words, it would furnish industrial insurance at a cost below that in regular industrial companies. The limit of insurance on a single life was to be $500, and in the beginning only four banks availed themselves of the permissive law to enter into life-insurance transactions. The industrial field in due course was abandoned for the reason that the plans were totally inadequate for the job in hand. It embraced life insurance of the ordinary type, and makes today its principal appeal to the well-to-do, so that, while originally set up by the State for a charitable purpose— an insurance breadline, so to speak, for the poor and needy— the line remains, but those who stand in it are more often the rich and greedy.4 The critics have proposed that in order to put the system once more upon the course which it was intended to run, the maximum which may be carried by any one person should be limited to $3,000 or per haps $5,000, regardless of the number of banks authorized to write insurance. The proponents of savings-bank insurance admit, in answer to the foregoing objections, that one of the principal purposes in the mind of the framers of the law was to eliminate the evils of industrial insur ance by proposing a sound substitute for such insurance. They point out, however, that there were other purposes which the law was intended to fulfill. The bill in its original form, and as finally enacted in June 1907, permitted each insurance department to write policies up to the maximum of $500 on a single life and placed no limit upon the number of banks which might establish insurance departments. When the bill was enacted there were 189 mutual savings banks operating in the State. Thus it would have been possible at the time, if all the banks had chosen to enter the system, for a single person to carry policies totaling $94,500. The possibility of this was sMonk, Wesley E. Observations Relative to Savings Bank Life Insurance. Testimony before the joint legislative committee on insurance. Feb. 12, 1930, p. 6. 4 De Groat, Floyd E. Mutual Savings Banks and Mutual Life Insurance. Reprint from article in the Spectator (issues of Mar. 19 and 26, and Apr. 2,1931), p. 4. CRITICISM 79 present for all to read in the bill itself. Mr. Alfred A. Aikin, then the treasurer of one of the large savings banks in Worcester and later the president of the New York Life Insurance Co., speaking before the legislative committee in opposition to the enactment of the savings-bank life-insurance bill on April 4, 1907, implied this was a possibility if the bill were passed.5 The advocates of savings-bank insurance also point out that at the time the law was enacted there was in effect a limit of $1,000 upon the amount which anyone might have on deposit in a single savings bank. A limit on the amount of insurance seemed equally desirable. Where as the limit on deposits in a bank has since been increased to $4,000, the insurance maximum has only been doubled. They assert further that the increase in the permissible maximum of insurance sold to one person by a single bank was not put into effect clandestinely. It was the result of the passage of a law by the State legislature, and, as in all such cases, the measure was subject to examination which might have resulted in its rejection if it was regarded as undesirable by the legislators. Finally, they assert, if savings-bank insurance is found to be a desirable type of insurance for persons with larger incomes than those of the workers, and at the same time is attractive to workers, there is no good reason why the former should be denied the advantages which may accrue to them by buying insurance from the banks. In 1938, the Massachusetts Life Underwriters Association intro duced a bill into the legislature seeking to limit the total amount of savings-bank life insurance which the banks might issue to any individual to $3,000.6 State-wide interest was aroused and after spirited legislative debates, the proposal was referred to a Special Recess Commission for further study. The report of this commission, filed March 1, 1939, is a comprehensive review of the entire contro versy and, beside the proposed limitation, it deals with 11 additional considerations.7 In an effort to answer the charge that savings-bank life insurance was being bought by the higher income groups, the Division of Savings Bank Life Insurance engaged the Recording and Statistical Corpora tion of New York to make an independent tabulation of the actual amount of insurance owned by individual policyholders. A summary of their findings as of August 31, 1938, is shown below. 6 Wilmot R. Evans, president of the Boston Five Cents Savings Bank, in an open letter to Mr. Guy Cox, June 4, 1930, a copy of which is on file in the Division of Savings Bank Life Insurance. 6 A limit of $3,000 was adopted in New York at the time the law was passed. 7 Commonwealth of Massachusetts House Report No. 2124. In the words of the commission’s report, “ It became apparent, as the hearings progressed, that there were issues underlying the controversy which did not appear and would not have been brought out had the commission confined the testimony offered solely to the question of limitation. * * * The commission considered it its duty, therefore, to examine carefully into the charges and countercharges of unfair practices and set forth its conclusions with relation thereto.” 80 T able SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS 27 .- — Amount of savings-bank life insurance held by individual policyholders, August 81, 1988 Persons holding insurance Total savings-bank insurance held Number Percentage Cumulative Cumulative of total number percentage Less than $1,000 ___________ ___ ___________________ $1,000_____________________________________________ $l,001-$2,000_______________________________________ $2,001-$3,000_______________________________________ $3,001-$5,000_______________________________________ 22,026 40, 797 7,806 3, 874 4,030 26. 79 49.62 9.50 4. 71 4. 91 22,026 62,823 70, 629 74, 503 78, 533 26.79 76.41 85.91 90. 62 95. 53 $5,001-$10,000______________________________________ $10,001-$15,000_____________________________________ $15,001-$20,000_____________________________________ $20,001-$24,000_____________________________________ 2,693 516 259 220 3.28 .64 .29 .26 81, 226 81, 742 82,001 82, 221 98.81 99. 45 99. 74 100.00 As is apparent, 26.8 percent of all persons holding savings-bank lifeinsurance policies on August 31,1938, were insured for less than $1,000; 76.4 percent for $1,000 or less; 95.5 percent for $5,000 or less; and 98.8 percent for $10,000 or less. Only 1.2 percent had bought insurance for more than $10,000, even though it has been possible to buy $20,000 or more since 1930. These statistics are interesting in the light of the classification of occupations of all applicants for savings-bank life insurance during the period November 1, 1927, to June 30, 1934, at the time this study was originally made. For purposes of simplicity, applicants were grouped under the heads of wage earners, clerical workers and farmers, pro fessional men, business men and executives, homemakers and students, and doubtful cases. The greatest difficulty was experienced in decid ing whether a particular person should be classed as a professional worker or business man, or as a wage earner or clerical worker. For example, if an applicant gave his occupation as an engineer, was he really a civil engineer or a mechanical engineer, in which case he should be classed as a professional, or was he a locomotive engineer or a stationary engineer, in which case he should be classed as a wage earner? If his occupation was recorded as an accountant, was he really a professional accountant, perhaps possessed of the certificate of a certified public accountant, or was he a bookkeeper in a small establishment? In every case in which it seemed impossible to say that an applicant belonged to a definite group, he was put under the heading of “ doubtful.” 8 The table indicates that about 50 percent of all applicants belonged under the head of clerical and other workers and farmers, that about 12 percent were definitely classifiable as professional and business men and women, about 25 percent as homemakers and students, and about 13 percent as in the doubtful group. The implications of the data go beyond the foregoing statement, however. It seems not unreasonable to assume that a large number of those classified as homemakers or 8 See appendix J for complete analysis. CRITICISM T 81 28 .-— N u m b er o f a p p lica n ts f o r savin g s-b a n k life in su ra n c e in certain groups and their p rop ortio n to all a p p lica n ts , N ov em ber 1, 1 9 2 7 , to J u n e SO, 1 9 8 4 a b l e Period W age earn ers, clerical workers and farmers Professional, business, and Homemakers and students executive Doubtful Total Per Per Per Per Num centage Num centage Num centage Num« centage Num ber of total ber of total ber of total ber of total ber Per cent 3,911 2,188 4,919 5,857 4,404 4, 334 4,164 100.00 100.00 12.98 29,777 100.00 2,169 1, 276 2,412 2,827 2,006 1,986 2,119 55.46 58. 32 49.03 48. 27 45. 55 45.82 50.89 511 249 685 687 579 516 357 13.07 11.38 13.93 11. 73 13.15 11.91 8. 57 601 330 1,018 1,592 1,305 1,435 1,252 15.37 15.08 20.70 27.18 29. 63 33.11 30.07 630 333 804 751 514 397 436 Total- _____________ _ 14, 795 Nov. Nov. Nov. Nov. Nov. Nov. Nov. 49.69 3,584 12.04 7, 533 25. 30 3,865 1, 1, 1, 1, 1, 1, 1, 1927-0ct. 31, 1928___ 1928-0ct. 31, 1929___ 1929-Oct. 31, 1930___ 1930-Oct. 31, 1931___ 1931-Oct. 31, 1932___ 1932-Oct. 31, 1933___ 1933-June 30, 1934.___ 16.11 15.22 16.34 12. 82 11. 67 9.16 10. 47 ioo. o e 100.00 100.00 100.00 100.00 students come from the low-income groups, and that the same is true of those classified as doubtful. On the basis of these assumptions it appears that well over half of all the applicants come from low-income groups.9 From the foregoing, it is quite obvious that, whatever may have been in the minds of the framers of the law, or of the legislature which enacted it, persons with low incomes and purchasers of relatively small amounts of insurance generally constitute the system’s policy holders. In disposing of the question of limitation, the Special Legislative Recess Commission concluded: 1 0 The commission carefully considered all of the arguments presented in favor of and against the proposal for a statutory limitation, particularly with respect to the assertion that savings-bank life insurance has either failed in its purpose or outgrown its scope as originally intended. In order to secure all the informa tion possible as to what might have been the original intent in establishing savingsbank life insurance the commission requested an interview with Mr. Justice Brandeis at Washington, which he very graciously granted. During this inter view he explained to the commission the situation as it existed at the time the law was passed, and reviewed various conditions then existing. He also indicated to the commission that the underlying purpose and intent of the original sponsors of this legislation was to benefit residents of the Commonwealth who were willing to avail themselves of it and who exercised habits of thrift; furthermore, that it would tend to create a control of local capital by citizens of Massachusetts, and afford to them the opportunity of managing the investment thereof. After giving very careful consideration to the arguments presented and the information obtained, the commission is of the opinion that the Commonwealth ®Appendix J indicates the way in which applicants were grouped under the various heads in the above table. The classification of farmers along with wage earners has no significance, even if the farmers are prosperous ones, for in the year ending Oct. 31,1928, only 14 persons out of a total of 2,169 in the wage-earning and farming group were recorded as farmers, and some of these may have been agricultural wage earners. In 1929, the numbers were 4 and 1,276, respectively; in 1930, 16 and 2,412; in 1931, 12 and 2,827; in 1932, 20 and 2,006; and in 1933, 10 and 1,986. Furthermore, it must be remembered that school teachers, whose incomes generally are not large, are classed among the professional and business men and women. In 1928 there were 132 teachers among the applicants out of a total in the group of 511; in 1929 there were 46 out of 249; in 1930, 154 out of 685; in 1931, 152 out of 687; in 1932, 158 out of 579; and in 1933, 141 out of 516. i° Commonwealth of Massachusetts House Report No. 2124, p. 13. 82 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS should not by legislative enactment deprive any of its citizens possessed of initia tive and thrift of such benefits as savings-bank life insurance may afford. There fore the commission does not recommend that a limitation be placed upon the amount of savings-bank life insurance which any individual may purchase. Critics of savings-bank life insurance declare that the system as at present operated departs from the original intention of the law in a second respect. According to them the idea of selling insurance across the counter without the use of solicitors was partially abandoned when the law was amended in 1915 to permit the employment of two instructors by the State Division.1 1 It is clear that, regardless of the manner in which the instructors are employed, they do work which is done for private insurance companies by insurance agents. To the extent that the instructors’ work leads to the making of applications for savings-bank insurance, their func tion is similar to that of life-insurance agents. The advocates of the savings-bank life insurance point out, however, that the idea of selling insurance across the counter was not abandoned when instructors were employed. In their view, the essential difference between the employment of savings-bank insurance instructors and of solicitors by the private insurance companies rests in the fact that whereas the income of the latter closely depends upon the amount of insurance they sell, the income of the instructors employed by the Division of Savings Bank Life Insurance, who are on a straight salary basis, does not vary directly with their success in getting prospects to apply for insurance with the banks. The purpose of prohibiting the employ ment of solicitors by the banks was to prevent the development of a system of agencies with its high costs in the way of agents’ commis sions and “ high-pressure” methods of insurance salesmanship. The Special Recess Commission, after considering the pros and cons of this subject, concluded that “ * * * as there are now three of these field workers in the employ of the Commonwealth, this number should be sufficient to carry out the intent and purposes for which their positions were created, and their work should be confined and restricted solely to the required effort (of presenting and bringing before the general public the advantages of savings-bank life insurance and instructing the people how and where to make application for it).” In any event, it seems fair to state that the amount of savingsbank insurance resulting from the instructors’ efforts is a small per centage of the total bought over the counter and by mail from the banks, employer agencies, and credit unions throughout the State. n These instructors were added in 1915 after the then Qov. David I. Walsh, in a message to the legislature, urged employers “ to bring the advantages of savings-bank life insurance to the attention of their employees,” and recommended “ an increase in the appropriation for the Savings Bank Life Insurance Division, in order that a thorough and systematic campaign of education shall be extended to every man, woman, and child in the Commonwealth. Hundreds of thousands of our people do not know of the existence of this splendid institution. We ought to advertise its existence. A government does not do its duty by merely enacting beneficial laws—it must see that the knowledge of these laws is brought to the people.” CRITICISM 83 Services to Policyholders Critics of savings-bank life insurance have frequently declared that the banks do not give their policyholders as much service as do the companies. The latter are said to give superior service with respect to (1) certain policy provisions, (2) persuading people to buy insurance protection, (3) advice to policyholders, and (4) the collection of premiums.1 2 It was pointed out in chapter 4 that insurance policies may be bought from the private companies which contain provisions for pre mium waiver (and in industrial policies for the payment of benefits in case of disability), and for double indemnity in case of accidental death. It is often asserted that the savings banks, since they sell no policies containing such provisions, are therefore unable to give as much service to policyholders as the companies. The assertion is, of course, justifiable. In view of the fact that savings-bank policies are held so largely by workingmen who are not likely to buy special disability insurance, it might be desirable for the banks to sell insur ance providing at least for the waiver of premiums in case of disa bility, if the insured desires to pay the small extra cost which the com panies usually charge ordinary policyholders for such a provision. It is also said that persons must be sold insurance or they will not buy it, and that, though the banks get most of their insurance business without the intervention of solicitors, their failure to employ salesmen results in the restriction of the sale of savings-bank insurance. In surance companies, it is claimed, serve the individuals to whom they sell policies when they persuade them to protect themselves and their families by buying insurance. Advocates of savings-bank insurance generally admit that more of it could be sold if agents and solicitors were generally employed to sell it. To engage a large staff of agents for such purpose, however, would bring back the very agency system which it was the intention of the law to eliminate. They assert that the fact that over $200,000,000 of insurance was in force with the savings banks in April 1941 shows that an increasing number of thrifty people will buy insurance without being urged to do so by insurance agents.1 3 12 The arguments in answer thereto are contained in a published booklet, The Manning Letter, being the reply of Judd Dewey, Deputy Commissioner of the Division of Savings Bank Life Insurance, to certain ques tions propounded in writing by Mr. Earl G. Manning, a general agent for one of the larger mutual life insurance companies. See also, Open Letter to Philadelphia Savings Banks, by Clyde S. Casady, execu tive secretary Massachusetts Savings Bank Life Insurance Council, May 1941. 13 A Nation-wide survey sponsored by the Life Insurance Presidents Association in 1938 to determine the public’s attitude toward the business of life insurance disclosed the startling information that life-insurance salesmen are a rather sore point with many people. Twenty-two percent of those interviewed wanted to do away with salesmen altogether. While some believed that this would reduce the cost of life insurance, the major indictment against the salesman, by those interviewed, rested upon the belief that he was a nuisance and often indulged in misrepresentation. In addition to the 22 percent who would do away with salesmen altogether, another 18 percent indicated that they resented the salesmen’s methods. (See address entitled “ Facing the Facts” by Dwight L. Clarke, executive vice president, Occidental Life Insurance Co. of California, reported in Life Insurance Courant, October 1939.) 84 SAVINGS-BANK LIFE INSURANCE---- MASSACHUSETTS The report of the Special Legislative Recess Commission referred to previously commented (p. 8): There are fundamental differences in the set-up and methods of operation be tween the savings-bank (“ over-the-counter” ) insurance and commercial life insur ance companies employing soliciting agents. * * * * * * it is recognized that life insurance is a necessity of life which most of our citizens need, but of which many will not avail themselves unless urged or solicited so to do through the medium of agents. It must be borne in mind that life-insurance companies render a most valuable and needed service, and whereas there are a great number of persons who will voluntarily and without the inter vention of an agent purchase life insurance, the Commission believes that it is in the public interest that both methods should be preserved. It is often declared that insurance agents perform valuable services by acting as insurance advisers for people who cannot afford the luxury of engaging an independent insurance counselor. Furthermore, the agents are often looked to by the holders of industrial insurance for advice on matters not relating to insurance and are frequently regarded as family friends and advisers. That insurance agents act in these capacities cannot be denied. It is possible, however, that as an insur ance adviser an agent employed by a particular company is not always the best person to give impartial advice as to the most desirable form of insurance to buy.1 4 It is said, finally, that the collection of weekly premiums by indus trial insurance agents saves the insured time and trouble and helps him to keep the insurance in operation. The answer made to this point is that the costs of the agency system are much higher than are justified by the services of collecting premiums and keeping insurance in force.1 Those who support savings-bank life insurance declare 5 further that the relatively low rate of lapse and the relatively high proportion of insurance which is carried to maturity in the savingsbank insurance system prove that an agency system like that of the insurance companies is not necessary either to secure regular payment of premiums or to maintain insurance in force. “ S u b s id ie s ” In recent years critics of savings-bank insurance have emphasized their belief that the policyholders of the savings banks have not them selves borne the entire cost of their insurance. The policyholders are said to be able to obtain insurance at a relatively low cost because part of the expense of operating the system has been paid by the taxpayers, 1 In the survey referred to in footnote 13, only 6 percent of the persons interviewed said they looked upon 4 life-insurance salesmen as needed in explaining life insurance to the public or helpful in the guidance of their life-insurance plans. 1 See U. S., Temporary National Economic Committee, Hearings, pt. 12, Industrial Insurance, and 5 Monograph No. 28, ch. 15, Washington, 1940. According to a Special Study of Industrial Insurance made and published by the New York Department of Insurance (1938), approximately 28 percent of the industrial policyholders of the largest company selling this form of insurance pay their premiums over the counter at district offices in order to receive a refund of 10 percent of premiums paid if they continue such payments for a year. CRITICISM 85 by private persons who contribute to its support, and especially by the depositors of the savings banks. It has been shown already that in previous years the entire expense of operating the office of the Divi sion of Savings Bank Life Insurance was borne by the taxpayer, that beginning in 1927 the insurance departments began to assume an increasing part of this expense, and that since 1934 the taxpayer has paid nothing to maintain the State Division of Savings-Bank Life Insurance, the entire operating expenses having been reimbursed to the State by the banks. It has been shown also that though in earlier years the expenses of the Division were borne entirely by the State, and that this meant that the policyholder paid less than he might otherwise have had to pay, in later years the expenditure of the State constituted only a small fraction of the total expenses of operation.1 It seems reasonable to say that the State’s expense in 6 connection with the savings-bank insurance system has at no time been an important factor in the low cost of savings-bank insurance to policyholders. As to subsidies from private agencies, it has been frequently as serted that large contributions, made through the Massachusetts Savings Bank Insurance League, to the cause of savings-bank insur ance, have been used to promote its sale. The league has published pamphlets and advertisements which have proved useful to the savings-banks’ insurance business. The costs of this publicity, which in the case of the insurance companies would have to be borne entirely by the policyholders, have in the case of the banks been borne by philanthropists interested in advancing the sale of savings-bank insur ance. Some critics believe that the total amount of these contribu tions has been so large as to play an important part in explaining the low costs of savings-bank insurance. An investigation was made of the books of the league from the year 1908 to the year 1939. During this entire period meticulous accounts were kept of every contribution received and of every ex penditure made by it. As a result of an examination of these accounts it is possible to say that over the period as a whole contributions to the work of the league have not amounted to as much as 1 percent of the combined premium income of the savings-bank insurance system. In recent years it has been considerably less. Subsidies from savings-bank depositors, it has been stated, have taken the form of the insurance departments of certain banks paying inadequate amounts as rents and salaries. It is obvious that even a new department uses clerks and requires the supervision of savingsbank officers. It is obvious also that even a new and small insurance department requires space. When the department pays little or nothing for salaries and rent it is assumed that such expenses are 1 See chs. 3 and 5, sections on expenses of operation. 8 86 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS borne by the savings department of the bank and that the insurance department is not bearing its proper share of the joint expenses. The insurance policyholder, it is claimed, is therefore being subsidized by the savings-bank depositor, who, because the savings department pays more than its fair share of the bank’s expenses, must receive in interest on his deposit account a smaller return than that which he might otherwise get. Not only is this conclusion said to be deducible from the undoubted records of the insurance departments of the banks themselves, showing as they do that numerous banks in the early years paid no rent or salaries or paid very small amounts for these purposes, but it is said to follow also from the fact that insurance dividends of the banks are based on a higher rate of interest than is actually paid savings depositors. For example, in 1940 the dividend formula used for savings-bank life-insurance dividends assumed 3.75 percent interest, whereas the savings depositors of the same savings banks received only 2 to 3 percent interest on their deposits. The advocates of the savings-bank insurance system make the following answer to this criticism. They assert that after an insur ance department gets started it should be expected to and generally does pay all of its direct expenses and a fair share of the joint expenses of the bank, and that it frequently pays more than its fair share. They maintain, however, that it is just for a bank not to charge its insurance department with rents and salaries until the latter gets reasonably well started in the performance of its business. They point out that generally a new insurance department requires no additional space and no additional clerical help. The savings bank is thus at first put to no additional expenditure for space and labor as a result of establishing a new insurance department. Even if it could be shown that in its early years an insurance department does not pay its proportionate share of the joint expenses of the bank, the fact that the deposits of the bank increase because of the new insurance business justifies the bank in not charging the department with larger amounts for rent and salaries.1 7 1 The practice of the Massachusetts banks in allocating expenses between the savings and insurance depart 7 ments was described in detail by Clyde S. Casady, executive secretary of the Massachusetts Savings Bank Life Insurance Council in a letter to C. B. Plantz, assistant vice president, New York Savings Bank, under date of June 12, 1939: Our bank trustees and officers have tried to apply common sense to the problem of allocating expenses. Most of the trustees are business men used to installing new departments, adding new machines, and hiring new personnel. While in the long run it is expected that a new department or a new machine or a new clerk will contribute enough to the organization to pay its own way and share in the overhead, no practical man expects it to do so immediately. Time must be allowed to permit it to get going. For that reason, the trustees of our banks have considered it reasonable, wise, and fair to charge newly-established insurance departments with the cost of additional clerks hired, additional space added, and for additional expenses which the savings bank proper would not have had. During the first few months, any new department in any organization requires extra supervision and extra time spent on it until the system is installed and the clerks become familiar with the routine required. Good management dictates that any new department or service added, which promises long-run benefits, be put on its feet. It’s like a bank renovating a fore closed apartment building. No accountant or bank officer or examiner would expect to get the additional outlay back the first year, or even to get a high return on the investment, but certainly it is hoped and expected that over a period of years the additional time and money spent will be justified. At the present time, our banks with established insurance departments are paying all direct expenses from insurance funds, including salaries of all persons working on insurance, rent, usually based upon the relative space used, all supplies, postage, advertising, etc., and are contributing to the general administrative ex penses usually in proportion to their ledger assets. CRITICISM 87 As for the claim that the case against the insurance department is proved by indicating the difference between the return going to the policyholders and to the depositors, the protagonists of the savingsbank insurance system assert that this is ignoring a fundamental differ ence between the ways expenses are provided for in the two depart ments. All savings-bank life-insurance premiums contain a special “ loading” for expenses, as was explained on p. 3. In the savings departments, on the other hand, expenses must be paid out of invest ment income, and in addition losses must be taken and certain amounts set aside for guaranty funds and surplus. In the insurance depart ment there are three sources of net profits available for these purposes; namely, large savings from the use of an obsolete mortality table, gain from loading, and gain from investments. Thus, with expenses taken care of by the loading and with the profits accruing from several sources, it is fair and proper that approximately the net rate of interest earned be used in the calculation of dividends— which is merely a return of profits or “ overcharges” to policyholders. A comparison of the actual net interest earned in the savings and insurance departments of the banks indicates a surprisingly close average. Between 1929 and 1938, the average gross rate of interest earned by the savings departments of the 10 banks with insurance departments in 1929 was 5.08 percent, whereas the average rate earned by the insurance departments of these same banks was 5.06 percent. It is also pointed out that over a period of time, a savings depart ment, since it may at any time be asked to pay its depositors on de mand, must have on hand a larger share of its funds than is the case with the insurance department, which is thus able to invest a much greater proportion of its assets at more favorable rates. The implication that the assumption of a 3.75-percent rate of interest has any necessary connection with a rate of interest earned on invested assets is also denied. Officials of the State Division of Savings Bank Insurance state that the assumed interest rate of 3.75 percent was used only as the interest factor in the basic dividend formula. Other fac tors, such as expense and mortality, also enter into the basic dividend formula. The formula is used for the purpose of determining the manner in which the amounts set aside each year for the payment of dividends shall be distributed among the various classes of policy holders. If the interest factor assumed in the formula is relatively high, those policyholders with large reserves to their credit will be paid In Massachusetts, most of our banks have buildings more than adequate for their present needs in view of the plateau in growth during the past 10 years. The rapidly growing insurance departments not only help share in the general overhead of the building, but are helping materially by contributing to the salaries of those officers who spend a part of their time supervising the insurance departments. In addition, the insurance departments have provided opportunities for jobs and more rapid promotion to many young people. Besides, savings-bank life insurance is the one service not offered by competitors which is definitely bringing in new customers, particularly young people and wage earners. Those are tangible benefits to our savings departments after the insurance departments are once established. 296722°— 41------7 88 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS a greater share of the total sum paid out as dividends, and those policyholders with small reserves will receive a lesser share. On the other hand, if the interest factor in the formula is lowered from 4 to 3.75 percent, as it was in 1938, the dividends paid to the policyholders with large reserves to their credit would decrease more than those paid to policyholders with smaller reserves. The fundamental issue raised by the controversy is whether or not the depositors of the savings banks pay a substantial part of the expenses of the insurance carried by the bank’s policyholders. This issue is so important and its implications so vital to the operation of the savings-bank insurance system that it deserves the most thorough going examination possible. For if it be true that the depositors subsidize the policyholders, there exists an obvious injustice not only to the depositors but also to the insurance companies. Before pro ceeding with an investigation of the matter, it should be pointed out that only the items of rents and salaries appear among those which the insurance departments are said not to bear in proper proportion. The expenses for such items as the fees of medical examiners, taxes of the insurance departments, advertising, printing, and postage give rise to no controversy, since they are in practically all cases directly incurred by the insurance departments, definitely allocable to them, and usually directly paid by them. If attention is confined to the problem of rents and salaries, the issue as to the equitable distribution of joint expenses between the two departments m ay be regarded as covered. It should be pointed out further that the critics of the system are not inaccurate in pointing to the fact that numerous insurance depart ments paid neither salaries nor rents in their early years. Thus, in the year 1932 only 1 of the 11 banks which came into existence during the period from 1929 to 1931 paid anything either as salaries or as rent. In 1933, 6 of these banks paid no salaries and 8 paid no rents. In 1934, 1 bank paid neither salaries nor rent and 6 others paid no rents. B y 1940, however, all of these banks were paying substantial sums in the form of salaries and rents as will be shown in table 29. In considering the allocation of expenses two assumptions should be stated: (1) Each department should share equitably in the joint expenses of the savings banks, as required by law. (2) If a building, or an officer or worker of any kind, is exclusively used by the insur ance department, that department should bear the entire cost incurred by such use. Obviously thorough investigation into the affairs of each savingsinsurance bank, in order to determine to what extent a building is used only by the insurance department and the extent to which officers and workers are employed exclusively in that department, CRITICISM 89 was not feasible. Our intensive effort was made to find quantitive criteria applicable to both the savings and the insurance departments which are available in the records and which are sufficiently com parable to furnish a reasonable basis upon which the distribution of joint expenses might be made. The sets of criteria which suggested themselves were as follows: (1) The amount of deposits in the savings department may be com pared with the amount of insurance in force in the insurance depart ment ; (2) the deposits received in a given year by the savings depart ment may be compared with the premium income received by the insurance department; (3) the ledger assets of the savings department may be compared with the ledger assets of the insurance department. Other possibilities, such as total income, receipts and payments, and the number of deposit accounts and of policies, were considered, but in each case they were discarded as less satisfactory than any of those mentioned. Each of the above criteria was considered and tested carefully. The results were neither satisfactory nor conclusive. Amount of deposits and amount of insurance in force— the first set of criteria— are obviously not comparable. All the deposits of a sav ings department are liabilities to the depositors, which they may demand at any time. In contrast, the total amount of insurance in force is not a liability to the policyholders. Only that portion of the amount of insurance in force is a liability to the policyholders which equals what the insurance departments have set aside as reserves, plus accrued dividends, premiums paid in advance, undivided profits, and surplus. Furthermore, neither the amount of insurance in force nor the amount of deposit liability is an adequate measure of the work which may be required of each department. The second set of criteria, the amount of deposits received and the premium income, is hardly more satisfactory than the first. The premium income of an insurance department may possibly be, in some respects, a fair measure of the day-by-day work which must be done, as well as a rough indication of the amount of space which might be required. Deposits received, however, are a poor indication of the amount of work in the savings department, for there is about as much work required when a person withdraws a deposit as when he makes one. The net deposit income of a given year might be almost a negli gible quantity, though the activity required because of large-deposit income received and large deposits paid back to depositors might be very considerable. Furthermore, neither the first nor the second set of criteria properly takes into account the amount of work required of each department in keeping records of business first done before the current year. Such business requires the keeping of accounts and the necessity of managing the investment of funds no less than does current business. The premium income and the deposit income of a 90 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS bank in a given year might be small, but the work done in the current period as a result of deposits made and premiums paid in previous years might be great. The most satisfactory set of criteria available to serve as a basis for the allocation of joint expenses seemed to be the ledger assets of both departments. In the first place, both the insurance and the savings departments of the banks have ledger assets, and they are thus more strictly comparable in this respect than the other criteria. Second, ledger assets take into account to some extent the volume of present business as well as that of past business. Third, ledger assets represent more adequately than the other criteria the tasks involved in keeping accounts, filling out forms, and similar work, and also the work of managing the investment of assets. Ledger assets are not a perfect measure, however. Large assets are not likely to require much more care and work in investing than smaller ones. Certain kinds of insurance, such as group insurance, and that on which premiums are paid frequently, require more work to handle than others. It is clear, furthermore, that ledger assets are by no means a good measure of current business activity in each department, for while savings accounts may be in a state of flux and require much activity at a given time, ledger assets may show little indication of this fact; and while a given year’s insurance business may be relatively slight and therefore require less current work, ledger assets are not directly indicative of the situation. Using the ledger assets of each department alone as the criteria for determining the proper basis for the distribution of salaries and rents is not a valid measure. For example, on this basis in 1939 the ratio of total salaries and rents paid to ledger assets of the insurance departments averaged 0.91 percent, whereas the ratio of total salaries and rents paid to ledger assets of the savings departments was only 0.29 percent. Every one of the 24 insurance departments in opera tion more than 1 year paid a higher ratio of salaries and rents to ledger assets than did the savings departments of the same banks. Ledger assets do seem to be the best available means of distributing the joint expenses of the bank after each department has paid all direct expenses applicable to its business. The following table shows the ratios of salaries and rents to premium income for each insurance department since its establishment, and during the year 1940. 91 CRITICISM T a b l e 2 9 . — P r e m i u m i n c o m e r e c e iv e d , a n d s a la r ie s a n d r e n ts p a id , b y i n s u r a n c e d e p a r t m e n t s o f s a v in g s b a n k s f r o m th eir e s ta b lis h m e n t to a n d d u r i n g 1 9 4 0 From establishment to 1940 Bank Total premium income Total salaries and rent Ratio to premium Premium income income of salaries and rent P ercen t No. No. No. No. 1 - - ........................................... — $9, 893, 969 2..................................................... 6, 968, 387 5, 692, 948 3_____________ ___________ ____ 4__._____________________ _____ 4, 659, 945 27, 215, 249 No. No. No. No. No. No. 5_____________________________ 6 ._________ ___________________ 7_____________________ ______ __ 8_____________________________ 9_____________________________ 10.___________________________ 4,166, 356 4, 232,450 1,465,419 3, 622, 946 2, 709,874 2,129, 560 Total, Nos. 5-10 _____________ No. No. No. No. No. No. No. No. No. No. No. 11___________ __________ ____ 12______________________ ______ 13_____________________________ 14____________________________ 15_____________ _____ __________ 16_______________ ____ _________ 17____ ______ __________________ 18_____________________________ 19______________________ ______ 20______________ ____ __________ 21___________________ ____ ____ No. No. No. No. No. Total, Nos. 22-26_____________ 958, 992 20, 972 2.19 Grand total---------------------------- 58, 626, 595 1,851, 379 3.16 Ratio to Salaries premium and rent income of salaries and rent P ercen t 3.02 3.39 3.78 5. 03 $576,060 382, 509 298,506 271,295 $19,731 13,346 14, 210 16,188 983, 983 3.62 1, 528, 370 63, 475 4.15 101, 377 125,093 56,398 96, 287 100, 469 69, 402 2.43 2. 97 3.85 2. 66 3. 71 3.26 372,092 354, 384 132, 537 357, 675 259, 449 187, 414 11,994 15, 646 6, 585 13, 627 13, 932 8, 073 3. 22 4. 41 4. 97 3.81 5. 37 4. 31 18, 326, 605 549, 026 3.00 1, 663, 551 69, 857 4.20 822, 272 3, 713, 370 762, 795 1, 446, 750 972, 922 781, 994 456, 749 812, 411 1, 375, 213 467, 367 513, 906 16, 302 110,857 19,804 17, 906 25, 501 16,953 12,485 21, 519 28,417 16, 380 11,274 1.98 2. 99 2. 60 1.24 2.62 2.17 2. 73 2. 65 2.07 3. 51 2.19 99,829 554, 901 114,853 184, 621 117,662 139,465 91,286 137,425 239, 352 88, 410 109, 334 2, 761 25,274 3,487 5, 371 4,174 5,135 2,808 5,861 8, 308 3,859 3,495 2. 77 4. 56 3.04 2. 91 3. 55 3.68 3. 08 4. 26 3. 47 4. 37 3.20 Total, Nos. 11-21_____________ 12,125, 749 297, 398 2.45 1,877,138 70, 533 3.76 22_____________________________ 23_____________________________ 24_____________________ ____ 25____________ _______ _________ 26____________________________ 193, 812 312,484 351, 552 45, 881 55, 263 5, 421 3,989 9,787 1,122 653 2.80 1. 28 2. 78 2.45 1.18 42,520 78, 729 129, 569 28, 631 32,141 1,627 1,823 5,688 722 428 2. 61 2. 32 4. 39 2. 52 1.33 311, 590 10, 288 3. 30 5, 380, 649 214,153 3. 98 Total, Nos. 1-4 ___________ $298,457 236,092 215,012 234,422 1940 3.43 3.49 4.76 5.97 Certain facts are apparent: (1) Those banks in operation 25 years or more (Nos. 1-4) have paid an average of 3.62 percent of their premium income for salaries and rents; banks in operation between 10 and 18 years (Nos. 5-10) paid 3.0 percent; banks in operation between 8 and 11 years (Nos. 11-21) paid 2.45 percent; banks in operation 1 to 6 years (Nos. 22-26) paid 2.19 percent. It may be recalled that during its first 5 years a new insurance department is exempt from any share in the operating expenses of the State Division of Savings Bank Life Insurance. As a department grows it assumes all direct expenses, an increasing share of the joint expenses of the bank, and its share of the expenses of the State Division of Savings Bank Life Insurance. (2) There is a wide variation in the expenses of the various banks, which may be due to any one or several of the following factors: Relative proportion of group and ordinary insurance 92 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS in force; relative amount of annuity premiums received; location of bank (obviously an insurance department located in downtown Boston must pay higher rents and salaries than a department of equal size in a country or suburban tow n ); over-the-counter activity in new sales and as a collecting agency for other banks; size, age, and relative proportion of State expenses; judgment of trustees as to proper allocation of expenses; and efficiency of management. (3) Every insurance department paid a larger proportion of its premium income for salaries and rents in 1940 than the average paid since its establish ment. Several reasons for this suggest themselves. The reduction in gross premiums on November 1, 1935, means that expenses will be a higher proportion of the reduced premiums on policies issued since that date than would the same expenses on the old higher premium basis. Banks Nos. 11 to 26, inclusive, have recently assumed a larger share of the expenses of the State Division of Savings Bank Life Insurance. And finally, it may be that the increasing difficulty of certain savings departments in earning sufficient interest to pay divi dends equal to those of competing institutions, as contrasted with the substantial profits in the insurance departments each year, may influ ence the officers and trustees to allocate a gen erous proportion of the bank’s expenses to the insurance department. On the basis of the foregoing analysis, the following conclusions seem reasonable: (1) The growing insurance departments are paying their direct expenses and absorbing an increasing proportion of the joint expenses and overhead of the savings-insurance banks. (2) Taking the savings-insurance system as a whole, the officers and trustees of the savings-insurance banks appear to be allocating an equitable share of the joint expenses of the banks to the insurance departments. (3) The cost of savings-bank life insurance to policy holders is lower for reasons other than that the depositors of savings banks are paying part of such costs. Chapter 8 Summary and Conclusions The Massachusetts system of savings-bank life insurance was designed to provide dependable life insurance and annuities at low cost. Under the system, mutual savings banks in Massachusetts may establish insurance departments. These are operated independently of the savings departments of the banks, but generally under the same executive direction. All insurance departments are under the direction and guidance of the Division of Savings Bank Life Insurance, a branch of the State government. They are subject to supervision by the commissioner of insurance and the commissioner of banks of the Commonwealth. (See ch. 2.) The law establishing the system of savings-bank life insurance was enacted in June 1907. The Whitman Savings Bank, in June 1908, established the first insurance department. There are at present 29 issuing banks in the system. Four joined between 1908 and 1912, 6 between 1923 and 1925, 11 between 1929 and 1931, and 8 since 1934. Including the savings banks which write insurance, there were, in June 1939, 517 agencies of various kinds scattered throughout the State at which application for savings-bank insurance might be made. (See chs. 1 and 2.) The banks sell all the usual types of ordinary insurance policies and annuity contracts, life insurance, endowment insurance, term insurance, and group insurance. Industrial insurance of the usual type is not sold. A person may buy a maximum of $1,000 of insurance and $200 annuity income from any one insurance bank. However, the maximum obtainable from all banks in the system is $25,000 insurance, $1,200 annuity income purchased by installment premiums, or $600 annuity income bought by a single premium. (See ch. 2.) In 1923, there was $25,678,000 of insurance in force. It had risen to $57,837,000 in 1928, to $93,187,000 in 1933, and to over $200,000,000 in April 1941. A t the end of October 1940 there was over $11,000,000 of group insurance in force with the banks. (See ch. 1.) Savings-bank life insurance is held to a great extent by workers and others receiving low incomes. On August 31, 1938, 76.4 percent of the persons insured held insurance for $1,000 or less; 90.6 percent for $3,000 or less; and 95.5 percent for $5,000 or less; and only 1.2 percent held policies for more than $10,000, even though it is possible to buy amounts 93 94 SAVINGS-BANK LIFE INSURANCE— MASSACHUSETTS up to $25,000. (See ch. 7.) No agents are employed by the banks to sell insurance, and no commissions are paid for its sale. (See ch. 2.) Premiums may be paid monthly, quarterly, semiannually, or annually. It is a common practice for a policyholder to make regu lar deposits with a savings bank and to authorize it to turn over an amount equal to the regular premiums due from him to the insurance department of the same bank or another bank as they become pay able. (See ch. 2.) The cost of ordinary life insurance sold by the savings banks is lower than that of ordinary insurance sold by the private companies. Ordinary insurance in general costs much less than industrial insur ance. (See ch. 5.) One important reason for this difference in cost is that the expenses of operation of the savings-bank insurance system are relatively low. The ratios of expense to premium income in the years 1928, 1933, and 1938 were, respectively 18.13, 14.14, and 13.77 percent for private ordinary insurance; 26.3, 22.77, and 25.45 percent for private indus trial insurance; and 4.53, 5.0, and 8.33 percent for savings-bank ordinary insurance. This is due principally to the fact that savingsbank insurance is sold without the use of agents employed on a com mission basis. (See ch. 5.) A second reason for the lower cost is that the savings-bank insurance system has enjoyed a more favorable mortality experience than that of the private insurance companies. The mortality ratios for the years 1928, 1933, and 1938 were, respectively, 57.91, 63.31, and 56.95 per cent for private ordinary insurance; 64.23, 56.25, and 43.76 percent for private industrial insurance; and 36.22, 36.77, and 34.2 percent for savings-bank life insurance. (See ch. 5.) Still another reason for the lower cost of savings-bank insurance is the fact that it has generally received a higher rate of return on its invested assets than have all insurance organizations as a whole. This rate of return in the years 1928, 1933, and 1938 was, respectively, 5.04, 4.25, and 3.56 percent for all insurance organizations, and 5.18, 4.67, and 3.84 percent for the insurance departments of the banks. (See ch. 5.) The low cost of savings-bank insurance has sometimes been credited to the existence of so-called “ subsidies” which enable the policy holders to escape the full cost. One of these is said to be paid by the taxpayers, who for many years paid the expenses of the State Division of Savings Bank Life Insurance. Since 1927 these expenses have been borne increasingly by the insurance departments of the banks, and since 1934 the taxpayers have paid nothing for the support of the division, its entire expenditures being borne by the banks themselves. (See ch. 3.) SUMM ARY AND CONCLUSIONS 95 Another subsidy has consisted of the expenditures by the Massa chusetts Savings Bank Insurance League to promote the sale of savings-bank insurance. During the period from 1908 to 1939 the expenditures of the league in behalf of savings-bank insurance have not equaled as much as 1 percent of the premium income of the savingsbank insurance system. (See ch. 7.) The depositors of the savings banks have often been said to subsidize the bank’s policyholders by paying a share of the salaries and rents of the insurance departments. Investigation shows, however, that the tendency is for the insurance departments of the banks as a whole to bear all their direct expenses and at least an equitable share of the joint expenses of the bank. (See ch. 7.) Lower costs are also attributed in part to the fact that the insurance companies, which pay both State and Federal taxes, have borne a larger burden of taxes than have insurance departments of the savings banks, which pay no Federal income tax. In recent years the com panies have paid approximately 2 percent of their premium income in taxes and fees. The savings-bank insurance system has paid approxi mately two-thirds of 1 percent in taxes to the State throughout its existence, though in recent years it has paid about eight-tenths of 1 percent. Since November 1, 1939, the insurance departments of the savings banks have paid taxes on the same basis as the insurance companies. (See ch. 5.) The terms of the savings-bank insurance policies are in general more favorable to the policyholders than are those of the insurance companies. Cash surrender values are available in 6 months, and loans on policies may be obtained at the end of 1 year. Other non forfeiture privileges, such as extended term insurance and paid-up life insurance, are obtainable at the end of 6 months if cash premium payments are discontinued. On the other hand, most of the com panies include provisions in their policies permitting the waiver of premiums in case of total and permanent disability, a small extra premium being charged for this privilege. The policies of the savings banks do not have such provisions. (See ch. 4.) The lapse ratios of savings-bank insurance are unusually low. During 1938 the average ratio of insurance lapsed to new insurance written was 28.90 percent in the case of private industrial insurance, 30.33 percent in the case of private ordinary insurance, and 1.54 percent in the case of savings-bank insurance. (See ch. 4.) Part II Savings-Bank Life Insurance in New York 97 Chapter 1 Savings-Bank Life Insurance in New York In 1938, 31 years after the establishment of savings-bank life insurance in Massachusetts, the New York State Legislature, upon the strong insistence of Gov. Herbert C. Lehman, passed a similar law enabling the savings banks in New York to establish life-insur ance departments. The act, which went into operation on January 1, 1939, as originally passed followed the provisions and wording of the Massachusetts law with several important differences. In March 1940, the New Y ork law was further changed. The major differences between the savings-bank life-insurance laws in the two States are as follows: 1. Limitation o f insurance.— In both States an individual bank is limited to the issuance of a $1,000 policy. In New York, however, it is provided by statute that the maximum amount of insurance issued on any one life be limited to $3,000. In Massachusetts it is possible by statute to obtain as many thousands of dollars of insurance as there are issuing banks. A t the present time, however, a voluntary limit of $25,000 has been adopted by the Massachusetts banks. 2. Administration of the system.— In Massachusetts, the savingsbank life-insurance law creates a State Division of Savings Bank Life Insurance, in which is set up the machinery for the operation of the system. The trustees of the General Insurance Guaranty Fund are given administrative powers over this Division of Savings Bank Life Insurance, which is entirely separate from the insurance and banking divisions. In New York the original law provided for a Division of Savings Bank Life Insurance within the insurance department, with administrative powers given to the superintendent of insurance. In 1940, the New Y ork law in this connection was drastically changed. All administrative powers were transferred from the superintendent of insurance to the trustees of the Savings Banks Life Insurance Fund (formerly called the General Insurance Guaranty F und). The Savings Banks Life Insurance Fund under the amended law is a body corporate in the banking department. In Massachusetts, the trustees of the General Insurance Guaranty Fund appoint, and may remove, an administrative officer (the deputy commissioner), the State actuary, and the State medical director— both of the latter having specific duties and powers enumerated in the 99 100 SAVINGS-BANK LIFE INSURANCE---- N E W YORK law. Their clerks and assistants are appointed from State civilservice lists. The operating expenses of the Division are advanced to the State by the issuing banks, but are paid through regular State channels. Under the amended New York law, the trustees of the Savings Banks Life Insurance Fund 1 are directly responsible for the admin istration of savings-bank life insurance, and they may appoint such employees as they deem necessary to carry out their duties. All administrative expenses are paid by the Fund trustees. Each bank pays its own operating expenses. 3. Special expense and guaranty funds.— Under the Massachusetts law, and the New York law as originally passed, banks establishing life-insurance departments were required to provide at least a $5,000 special expense guaranty fund and a $20,000 special insurance guaranty fund by individual subscription. Whenever the funds in the General Insurance Guaranty Fund in Massachusetts reach $100,000 or more and are deemed sufficient by the commissioners of insurance and banking, the trustees of the fund are permitted to provide the $20,000 guaranty fund for new banks entering the system. This point was reached in 1921, since which time the General Insur ance Guaranty Fund has provided the special guaranty fund for the 25 banks which have subsequently established insurance departments. On July 1, 1940, the New York law was changed so that the individual insurance guaranty funds have been consolidated into a central Savings Banks Life Insurance Fund, which, in addition to the legal reserve and surplus funds of the individual banks, will guarantee the risks of the various insurance departments. The new law provides that in order to establish an insurance department not less than $20,000 must be invested in the Savings Banks Life Insurance Fund and an initial surplus of not less than $20,000 established in the lifeinsurance departments of the individual banks. Investments in certificates of the Savings Banks Life Insurance Fund of the surplus funds of life insurance departments are now legal investments for New York savings banks, although both funds may be provided by private subscriptions. 4. Contributions of fu n d s.— Under the Massachusetts law, the insur ance departments were required to contribute 4 percent of their pre mium income to the General Insurance Guaranty Fund until the fund reached $100,000 or 5 percent of the reserves, at which time the trustees could reduce or discontinue the contributions. This point was reached and contributions were discontinued in 1921. 1 Trustees, appointed July 1, 1940, are Judge Edward A. Richards, president East New York Savings Bank; Henry W. Proffitt, trustee Empire City Savings Bank; Albert E. Cluett, Executive vice president Troy Savings Bank; Richard A. Brennan, president Brevoort Savings Bank; Oliver W. Roosevelt, execu tive vice president Dry Dock Savings Institution; George D. Whedon, president Monroe County Savings Bank; Henry R- Kinsey, president Williamsburgh Savings Bank. COMPARISON W IT H MASSACHUSETTS SYSTEM 101 The New York law, as amended in 1940, provides for contributions of not less than 2 nor more than 4 percent of the premium income to the Savings Banks Life Insurance Fund until investments in the fund are retired, and thereafter not to exceed 1 percent except with the ap proval of the superintendent of banks. A t such time as the fund exceeds $500,000 or, in conjunction with the surpluses of the individ ual insurance departments, 10 percent of the aggregate reserves, con tributions are no longer required except at the direction of the super intendent of banks. The trustees of the fund, with the approval of the superintendent of banks, may discontinue the contributions of the banks whenever the fund reaches $200,000. The Connecticut savings-bank life-insurance law, enacted in 1941, follows the amended New York plan in practically all respects. Participation of Banks On July 1, 1941, 26 savings banks in the State had been authorized to provide savings-bank life insurance either as issuing or agency banks. The total insurance in force as of that time was $15,334,500, representing 18,914 policies. The names of the banks, their locations, and the dates their insur ance departments were established, are as follows: IS S U IN G B A N K S East New York Savings Bank, Brooklyn__________________________Jan. 6, 1939 Lincoln Savings Bank, Brooklyn__________________________________ Do. New York Savings Bank, Manhattan_____________________________ Do. Mechanics Savings Bank, Rochester______________________________ Jan. 24, 1939 Troy Savings Bank, Troy__________________________________________ Apr. 6, 1939 18, 1939 Empire City Savings Bank, Manhattan___________________________ Apr. Bush wick Savings Bank, Brooklyn________________________________ Nov. 1, 1939 Syracuse Savings Bank, Syracuse_________________________________ Oct. 7, 1940 Greater New York Savings Bank, Manhattan____________________ Apr. 28, 1941 Rochester Savings Bank, Rochester_________________________________ May 6, 1941 Dry Dock Savings Institution, Manhattan________________________ June 9, 1941 North River Savings Bank, Manhattan___________________________ May 15,1941 Dollar Savings Bank, Manhattan_________________________________ June 1, 1941 Harlem Savings Bank, Manhattan________________________________ July 1,1941 AGENCY BANKS Citizens Savings Bank, Manhattan Oneida County Savings Bank, Rome Oswego City Savings Bank, Oswego Irving Savings Bank, Manhattan Bank for Savings, Ossining Flushing Savings Bank, Flushing Oswego County Savings Bank, Oswego Peekskill Savings Bank, Peekskill Rome Savings Bank, Rome Schenectady Savings Bank, Schenectady Ithada Savings Bank, Ithaca Seneca Falls Savings Bank, Seneca Although the New York savings banks have shown far more interest in savings-bank life insurance than did the Massachusetts savings banks in the early days in that State, the same causes which held back 102 SAVINGS-BANK LIFE INSURANCE— N E W YORK participation in Massachusetts are evident in New York. These are the pressure of other banking problems; a natural reluctance to engage in what seems to be new business; influence of insurance agents and companies on bank officers and trustees; and a desire to wait and see how the system works with those banks that have engaged in the business. The amendments to the law which were adopted early in 1940 are an outgrowth of the studies of a committee of the Savings Banks Association of New York. According to a news bulletin of that asso ciation on M arch 22, 1940, the adoption of these amendments “ promises to result in a considerable extension of the service of savings-bank life insurance/’ and the participation of additional banks is expected. The recent entrance of several large New York City banks into the system seems to substantiate this prediction. Cost o f Insurance N o conclusions as to the eventual cost of insurance in the New York savings banks can be reached at this time, as only second-year figures are available. Premium rates are somewhat higher than those of the Massachusetts banks, due to the necessity of building up the Savings Banks Life Insurance Fund from contributions of premium income (2 percent at the present time). In order to cover this contribution, the premium loading in the New York system is substantially higher than that of Massachusetts. A comparison of gross premiums is shown in table 30. T a b l e 30 .— G ross 'prem ium s on $ 1 ,0 0 0 p o lic y in M a ssa ch u setts and N e w Y ork 20-payment life Straight life Age Massachu setts New York Massachu setts New York Endowment at age 65 Massachu setts New York 10 years.______________ 15 years____ ________ 20 years_______ _______ 25 years... ________ $12.15 13. 36 14.85 16. 72 $13. 73 14. 97 16. 49 18. 39 $21.29 22. 73 24.44 26. 48 $23.04 24. 51 26.26 28.33 $13.93 15.63 17.81 20.65 $15. 55 17.28 19.50 22.39 30 years_____ _______ 35 years_______ _______ 40 years_______________ 45 years______________ 19.11 22.19 26.23 31.64 20. 82 23. 96 28.07 33.58 28. 91 31.84 35. 45 40.09 30.80 33.78 37.47 42.18 24.42 29.61 37.06 48.39 26.23 31. 52 39.10 50.64 50 years. ___________ 55 years.. _______ 60 years______ _ __ 65 years____ _____ _ 30.00 49.09 63.10 82. 72 41.07 51.35 65.61 85. 59 46. 25 54. 73 66.78 84.45 48.45 57.09 69. 36 87.35 67. 33 104.64 69. 92 107.91 No complete comparison of dividends is possible as only the secondyear dividend figures for the New York system are available. Firstand second-year dividends for both systems are shown in table 31. As is evident from these figures, savings-bank life insurance in New York is somewhat higher in cost at the present time than it is in Massachusetts, due apparently to the following factors: 103 COMPARISON W IT H MASSACHUSETTS SYSTEM T a b l e 31.— F ir s t- and secon d -yea r dividends on $ 1 ,0 0 0 p o lic y in M a ssa ch u setts and N e w Y ork [1941 New York scale and Massachusetts basic scale] Straight life Massachusets Age 20-payment life New York Massachu setts Endowment at age 65 New York Massachu setts New York First Second First Second First Second First Second First Second First Second year year year year year year year year year year year year 10 years___________ $1.61 15 years,. ___ ___ 1. 62 20 years _ ________ 1.63 25 years _____ ______ 1.65 30 years,, 35 years _ _ 40 years ,, 45 years $2.60 $1.70 2.62 1.77 2. 63 1.87 2.67 2.00 $2.70 $1. 64 2.77 1. 66 2.87 1.67 3.00 1.69 $2. 68 $2. 21 2. 70 2. 29 2. 73 2. 40 2. 77 2. 55 $3. 21 $1.62 3. 29 1.63 3. 40 1.64 3. 55 1.66 $2.62 $1.80 2.64 1.89 2.67 2.04 2.70 2. 22 $2.80 2.89 3.04 3. 22 , _____ 1.66 ______ 1. 69 ______ 1.73 _ ____ 1.79 2.70 2. 76 2.84 2.96 2.17 2. 39 2.71 3.16 3.18 3.40 3.72 4.18 1.70 1.73 1.76 1. 82 2. 79 2. 86 2.92 3.04 2. 73 2.94 3. 23 3. 63 3.72 3.94 4.23 4. 65 1.68 1.73 1.77 1. 86 2.75 2.84 2.94 3.12 2.47 2.82 3. 32 4.10 3. 47 3.82 4. 33 5.11 1.90 2. 05 2. 31 2.74 3.18 3.47 3.95 4. 72 3. 84 4. 89 6. 51 8.96 4.89 5.98 7. 64 10.16 1.92 2.08 2. 33 2.74 3. 22 3. 52 3.98 4. 71 4. 24 5. 21 6.71 9. 05 5. 28 6. 28 7.83 10.23 2. 01 2. 28 3.40 3.88 5.42 7.96 6.44 8.94 50 years , _ _____ 55 years _ _ ______ 60 years,_ _ _____ 65 years 1. Contribution in New York of 2 percent of premium income to Savings Banks Life Insurance Fund. (Like contributions were orig inally made in Massachusetts to the General Insurance Guaranty Fund but are now no longer required.) 2. The New York figures are based entirely on first- and second-year business, including acquisition costs on first-year policies. 3. A relatively small amount of insurance in force in New York as compared to Massachusetts over which to spread “ fixed” expenses. All of the above factors which contribute to the higher cost of insurance in New Y ork appear to be temporary in nature. Con tributions to the Savings Banks Life Insurance Fund may be reduced or discontinued as the fund increases. A few years of operation will provide a broader base of insurance against which fixed costs of operation may be charged. It may be reasonably assumed that an increased volume of insurance may be handled without expenses being increased in the same ratio; also, the percentage of first-year business with its acquisition costs will become less and less with each year of operation. In considering the question of relative costs of the two systems, it is significant that in the early days of the Massachusetts system the cost of insurance was higher than costs in New York at the present time. It seems probable that over a period of years, differences in costs, if any, between the two systems will be negligible. T w o Years’ Experience Although it is possible to obtain a maximum of $3,000 insurance in the New York system, the average application has been for about 2 9 6 7 2 2 ° — 4 1 ------- 8 104 SAVINGS-BANK LIFE INSURANCE---- N E W YORK $1,000. The average policy is for approximately $800. A cross section of the policyholders by occupation is given in the following analysis. OCCUPATIONS OF APPLICANTS P ercen t Students___________________________________________ Mechanics__________________________________________ Housewives_________________________________________ Clerks______________________________________________ Children under school age_________________________ Professional persons________________________________ Salesmen___________________________________________ Domestics__________________________________________ Civil servants______________________________________ Miscellaneous______________________________________ 19. 14. 14. 11. 9. 7. 3. 3. 2. 14. 0 9 7 3 5 4 3 1 7 1 100. 0 Most of the applicants for savings-bank life insurance in New York have been persons of limited incomes. A sampling of personal data furnished by applicants for insurance reflects the following dis tribution of wage groups: WAGE GROUPS OF APPLICANTS W e e k ly in co m e P ercen t Less than $15______________________________________ $15 to $20_________________________________________ $20 to $30__________________________________________ $30 to $50__________________________________________ Over $50___________________________________________ 6. 10. 38. 36. 8. 0 9 0 6 5 100. 0 The following table shows the amount of insurance outstanding on December 31, 1940, classified by the banks of issue: T a b l e 32.-— Am ount of savings-bank life insurance outstanding December 31, 19^0 ( paid-for basis) Name of bank East New York Savings Bank________________________________ _________ ____ Lincoln Savings Bank of Brooklyn _ _ _ __________ __ _________ _____ __ New York Savings Bank_________ _________________________________________ Mechanics Savings Bank of Rochester___________ _________ ________________ Empire City Savings Bank. __ _____________________________ _____ _ Troy Savings B ank._ ______ _ __________________ ______ _ __ _____ _ Bushwick Savings Bank _ _______________ __ ________ __ __ ______ Syracuse Savings Bank _______ ____ ______________________ ________ _ _. Total ___________________ _________ _____________________ Number of policies Amount 2, 629 3,044 5,120 524 2, 284 384 401 22 $2,201,666 2,454, 728 4, 063, 403 474, 513 1, 729, 385 350, 301 354,869 21,000 14,408 11,649, 865 The above figures compare with 7,949 policies for the amount of $6,605,900 on a paid-for basis outstanding on December 31, 1939, the end of the first year of operation of the life-insurance departments. COMPARISON WITH MASSACHUSETTS SYSTEM 105 A t the end of the second year in New York, the system in that State had more insurance in force than the Massachusetts system had after 10 years of operation. Although there is no other means of measuring the public response to savings-bank life insurance in New York, it is obvious that there are many factors which make such a comparison inconclusive. For example: (1) The eight banks in New Y ork which established insurance departments during the first 2 years have more depositors than the total number of depositors of all 29 savings-insurance banks in Massachusetts at the present time. (2) In Massachusetts in 1908 savings-bank life insurance was a “ social experiment.” In 1939 New York adopted a proven system of life insurance. (3) M ore people in recent years have come to look upon life insurance “ as a necessity of life” to be purchased as means permit. M any no longer need to be sold. These people have been voluntary buyers of savings-bank life insurance in New York. Conclusions Certain conclusions may be reached from the operation of savingsbank life insurance in New York, limited as it has been. 1. There is a demand for savings-bank life insurance in New York, as evidenced by applications in 2% years for more than $15,000,000 of insurance. 2. Buyers of savings-bank life insurance have been largely people of limited income. M ore than 40 percent of the applicants have had no insurance at the time they applied, and 25 percent held only small industrial policies. Over one-half of the applicants have incomes of $30 per week or less. 3. It is evident that the banks which provide savings-bank life insurance are enthusiastic about its benefits to the community and to the banks. They ha\e found that it is a valuable source of goodwill and that it attracts substantial numbers of new customers to the bank. (More than 50 percent of the applicants for savings-bank life insur ance in New York have not been savings-bank depositors.) 4. Present indications point to a substantial expansion in the num ber of New Y ork savings banks providing this service, with aggressive promotional activities in publicizing this new thrift service. From the history of savings-bank life insurance in Massachusetts, it is evident that there is an inherent vitality in the “ over the counter” life-insurance idea. It is this quality which kept the Massachusetts system operating during the years from 1912 to 1922, in which no new banks came into the system, and the volume of insurance written by the banks which at that time had insurance departments was very small as measured by the figures of recent years. It is highly significant that after 30 years of operation of savings-bank life insurance in Massachusetts, the State of New York adopted the same means of 106 SAVINGS-BANK LIFE INSURANCE— N E W YORK providing low-cost life insurance. Connecticut followed suit in 1941, and bills were considered but not enacted by the legislatures of Penn sylvania, Maine, Maryland, Rhode Island, and New Jersey. T o what extent the “ over the counter” life-insurance idea will ultimately spread to other States, no one can foretell. It seems certain, however, that the successful operation of savings-bank life insurance in New York will do much to stimulate interest in this form of insurance elsewhere. Part m Appendixes 107 Appendix A Group Insurance in Force in Massachusetts T a b l e 1.-— A m o u n ts o f grou p in su ran ce in fo rce in M a ssa ch u setts with in su ran ce c om p a n ies and with savings ba n k s , 1 9 2 9 ' to 1 9 8 8 Year 1929 .................... 1930........... .............. 1931 _ __ _ 1932 _ _ 1933..................... All com panies, excluding savings banks $288, 224,000 316.465.000 323.036.000 298,933, 000 290.375.000 Savings banks Year $12,361,000 12, 385,000 15, 607,000 10.433.000 10.170.000 1934___ __________ 1935________________ 1936______ _______ 1937________________ 1938___ __________ 1 All com panies, excluding savings banks Savings banks $303, 779,000 310.970.000 341, 711,000 394.389.000 400,644,092 $10,394,000 11.549.000 12.390.000 14.033.000 13.085.000 1 Data from Annual Reports of Commissioner of Insurance, Massachusetts, pt. 2, table 1. 109 Appendix B Insurance Guaranty Funds The savings-bank-insurance law in Massachusetts provides that the trustees of the General Insurance Guaranty Fund may reduce the per centage of premiums payable to the fund by the banks, or may dis continue such payments altogether, whenever the net assets of the fund are in excess of $100,000 over all liabilities or whenever the net assets exceed 5 percent of the aggregate outstanding insurance reserve of all the savings banks, whichever is the greater. The trustees may, however, require further payments at any time.1 B y October 31, 1921, the net assets had reached $116,224, which was 7.4 percent of $1,568,840, the amount of the aggregate insurance reserves. Thereafter, under the law, the trustees of the fund, with the approval of the commissioner of insurance, could waive payments by the banks, since the net assets of the fund were well above both the $100,000 minimum and 5 percent of the reserves. Contributions ceased in June 1921 and have not since been made. The net assets of the fund, which were $122,159 in 1922, or 6.6 percent of the insur ance reserves, increased to $181,719 in 1933 and to $197,014 in 1939. B y 1924 the proportion of assets of the fund to reserves had fallen to 4.9 percent and by 1933 was down to 1.4 percent. On October 31, 1940, it was 0.66 percent. It might be argued that section 23 of the savings-bank-insurance law might have been interpreted so that the trustees of the fund would have regarded themselves as bound to require further payments from the banks as soon as the proportion of net assets to reserves fell below 5 percent, as it had by October 31, 1924, but this was not the interpretation adopted. The section in question is as follows: S e c . 2 3. R ed u ction o f con tribution to G eneral In su r a n ce G u a ra n ty F u n d .— Whenever the net assets of the General Insurance Guaranty Fund over all liabilities exceed $100,000 or 5 percent of the aggregate outstanding insurance reserve of all savings and insurance banks, whichever is the greater, the trustees of said fund may, with the approval of the commissioner of insurance, reduce the per centage of premiums on insurance and annuities so payable to it or altogether discontinue the same; but said trustees may require at any time thereafter said contribution to be made at a rate not exceeding that provided for in section 18. The final clause seems to justify the interpretation of the trustees, since it is reasonable to suppose that if they “ may require at any time 1 Mass. Gen. Laws, ch. 178, secs. 18, 19, 20, 23. 110 APPENDIXES 111 thereafter said contribution to be made,” they have the right to decide that it need not be made. It is significant, in this connection, that at no time since the system came into existence has it been necessary to use any part of the General Insurance Guaranty Fund. Furthermore, other sections of the law have been amended to permit the banks to maintain substantially larger individual surplus funds. (See appendix C.) The trustees of the General Insurance Guaranty Fund have author ity to waive the requirement that a new insurance bank must first establish a special insurance guaranty fund before it may operate, whenever in the opinion of the commissioner of insurance and the commissioner of banks the funds of the General Insurance Guaranty Fund are sufficient, and on condition that the bank enter into a contract with the General Insurance Guaranty Fund whereby the latter guarantees all risks of the bank until such time as the bank shall have a surplus of not less than $20,000 nor less than 10 percent of the aggregate insurance reserve.2 The first 4 banks to open insurance departments set up special insurance guaranty funds as required by section 5 of the law. They paid interest on the advances made to them for the fund until they were able to retire the amounts advanced. The Whitman Bank retired its special guaranty fund of $20,000 in 1916, the People’s Savings Bank of Brockton in the same year, and the Berkshire County Savings Bank of Pittsfield in 1921. The City Savings Bank of Pitts field retired $5,000 of its fund in 1920 and the remaining $15,000 in 1922. The other 25 banks which have come into the system, be ginning with November 1922, have not been required to establish special insurance guaranty funds.3 a Mass. Gen. Laws, ch. 178, sec. 19. 3 The information in this appendix, apart from the provisions of the law, has been obtained from the annual joint reports made to the legislature by the commissioner of insurance and the commissioner of banks on the savings and insurance banks. Appendix C Insurance Reserves and Surplus In Massachusetts one of the duties of the State actuary is to prepare and procure tables computing the legal reserve to be held under insur ance and annuity contracts.4 The reserves set aside on the levelpremium life-insurance policies and on group-insurance policies now issued b y the insurance banks are based on the American Experience Table, calculated at an interest rate of 3 percent (policies issued prior to Novem ber 1, 1935, were based upon 3% percent interest). The reserves set aside to meet annuities issued since August 1938 are based upon the new (1937) Standard Annuitants Table. On October 31, 1937, the aggregate insurance and annuity reserves of the savings and insurance banks were $22,612,796 against $139,706,498 of insurance in force. A year later the analogous amounts were $25,069,137 and $154,788,376, and in October 1939 they were $27,627,578 and $173,123,657.5 Every insurance bank is required by section 21 of the savings-bankinsurance law to set apart annually, as a surplus from net profits,6 not less than 20 percent nor more than 75 percent of its profits until such surplus equals 10 percent of its net insurance reserve or the amount of its special insurance guaranty fund, whichever is greater. Thereafter, it may add no more than 15 percent of the annual net profits to surplus, nor shall the surplus at any time exceed 10 percent of the insurance department’s reserve except with the approval of the State actuary. This surplus is maintained in order to meet, as far as necessary, the losses of the insurance department arising from an unexpectedly great mortality, depreciation in its securities, or other losses, and for the maintenance of a stable dividend scale. Since none of the banks which have entered the system since 1922 have been required to set up a special insurance-guaranty fund, only the limit of 10 percent of the insurance reserve of those banks has served as the maximum which its surplus might be permitted to attain. On October 31, 1922, more than 10 years after the first four banks had entered the system, their aggregate surplus was $125,239, which was 6.7 percent of their combined insurance reserves of $1,856,911. Mass. Gen Laws, ch. 178, sec. 15. See pp. 2-4 for a discussion of the principle of insurance reserves. 6 Annual Report of the Commissioner of Insurance, report of commissioner of insurance and commissioner of banks on savings and insurance banks and the General Insurance Guaranty Fund for 1938,1939, and 1940. 8 Net profits consist of gains on earnings, expenses, and mortality, accruing because premiums were set higher than the year’s experience proved necessary. * 112 113 APPENDIXES In 1940 the net profits of the 28 insurance departments were $1,201,577. Of this, $242,785, or 20.2 percent, was added to surplus. The aggregate surplus in that year was $2,536,381, which was 8.35 percent of the aggregate reserves of $30,386,667 and 1.3 percent of the total of $191,539,618 insurance in force. Table 2 gives the names of the banks and the approximate propor tion of surplus to reserves in each in 1939 and 1940.7 T able 2 . — P r o p o r tio n o f su rp lu s to reserves in each in su ra n ce bank in M a s sa c h u s e tts , 1 9 8 9 and 1 9 4 0 Bank Whitman________ People’s_________ Berkshire County_ City_____________ Lynn Five Cents. _ Lynn Institution.. North Adams____ Cambridgeport___ Massachusetts___ Waltham________ Lowell__________ Boston Five Cents. Grove Hall______ Cambridge_______ 1939 1940 P ercen t P ercen t 10.2 7.4 8.2 7.6 7.8 8.7 7.8 10.0 5.7 6.1 5.1 3.7 8.2 5.2 10.3 7.7 9.5 8.4 7.7 8.7 7.2 10.6 4.3 6.4 4.6 3.7 8.9 4.5 Bank New Bedford________ _______ _ Arlington_______ ____________ Uxbridge_______ ____________ Beverly_________ _______ _____ Wildey_______________________ Leominster___________________ Fall River____________________ Canton____ _________________ Plymouth Five Cents_________ Newton __ ___________________ Boston Penny________________ Brockton________ ___________ Average1______ _______ 1939 1940 P ercen t P ercen t 6.4 7.4 7.4 7.4 5.3 8.0 5.9 6.1 7.6 6.6 3.3 2.5 8. 30 6.1 7.0 7.7 5.2 6.1 9.2 6.3 6.8 8.4 8.0 9.0 8.5 8. 35 1Includes the General Insurance Guaranty Fund. It should be pointed out that the ratio of surplus to reserves is affected not only by net profits and efficiency of operation, but also by the relative proportion of insurance and annuity reserves, of group insurance in force, and of new issues to old insurance in force. Where the annuity reserve is relatively high, the ratio of surplus to reserves will tend to be relatively low. Where there is considerable group insurance in force, the ratio of surplus to reserve will tend to be pro portionately high. During the early policy years, special provision is made in the dividend formula for extra contributions to surplus, so that a bank with a high proportion of new issues should have a rela tively high ratio of surplus to reserves. 7 Data in this section are taken from the annual reports of the commissioner of insurance and commissioner of banks to the legislature on the savings and insurance banks and the General Insurance Guaranty Fund. The figures for aggregate amounts of insurance are given in pt. I, ch. 1, table 2. Appendix D M ortality Ratios and Unification of Mortality The calculations involved in the unification of mortality in Massa chusetts are based not upon the tables used in arriving at net insurance premiums and reserves, but upon a modification of these tables to bring them more nearly in line with the experiences of the banks. Thus the mortality ratio according to the tables used in calculating unification of mortality was 77.56994 percent in 1939, whereas accord ing to the American Experience Table the system’s ratio of actual to expected mortality in the same year was 34.41 percent.8 Table 3, which is reproduced as prepared by the State actuary, shows the result of unification of mortalit}^ for the year ending October 31, 1939. It will be noted that a total of $34,162.62 was paid into and paid out by the General Insurance Guaranty Fund. The largest amount was received by the People’s Savings Bank of Brockton (No. 2), and the largest amount was paid by the Massachusetts Savings ank (No. 9). The savings-bank life-insurance system has had an interesting mortality experience during its existence; the highest ratio of actual to expected mortality, according to the American Experience Table, having been reached in 1918 at the time of the influenza epidemic, when the ratio was 77.9 percent. After that year the lowest ratio was 32.12 percent, attained in 1921. In 1939 the ratio was 34.41 percent and in 1940 it was 33.67 percent. The ratios are lower if group insurance, under which risks are accepted without examination, is excluded. Thus the ratios for ordinary insurance alone were 32.64 percent in 1939 and 32.2 percent in 1940. Table 4 gives the ratios 8 The mathematical process of obtaining the sums (unification amounts) due to or from each bank is as follows: 1. Total actual mortality losses (all banks) X Total expected adjusted mortality losses Expected mortality losses (all banks) of individual bank X — (Actual mortality losses of individual = —(Unification amount of bank) individual bank) The adjusted losses in the denominator of the first fraction in equation 1, for ordinary level-premium insurance policies, are obtained by multiplying the expected losses under the American Experience Table by 0.85 and subtracting $5 for each $1,000 of risk. This is the method of adjustment applied only to policies 4 or more years old. Further adjustment is made for younger policies to take into account the fact that the effect of the original medical examination as yet has not generally “ worn off.” The adjustment is not rigid, but is changed from time to time as experience suggests. The unification for annuities, group insurance, and other forms of policies is computed in a similar manner. The several items then are added together and the bank pays or receives the net total unification for all classes of business. 2. 114 APPENDIXES 115 of actual to expected mortality losses for ordinary insurance, for group insurance, and for ordinary and group insurance combined, for each year from 1917 to 1940.9 T a b l e 3 . — O rd in a ry in su ran ce■ unification o f m ortality■ M a ssa ch u setts sa vin gs— — bank life in su ra n ce , 1 9 S 9 Actual mortality Expected mortality 3 Bank2 1 Unification Unified mortality Receive Pay No. No. No. No. No. 1_____ 2_____ 3_____ 4_____ 5_____ $94, 269 60,008 47,899 40, 012 50,869 $70, 512.09 51,427.48 44, 665. 70 32,939. 40 44, 739. 34 $73,124.41 46,548.17 37, 155. 22 31,037. 28 39, 459. 05 No. No. No. No. No. 6_____ 7_____ 8_____ 9_____ 10____ 51,088 18,173 40, 281 31, 909 25,178 45,178. 97 19, 263. 03 32,086.01 18,342. 59 17,888. 84 39,628. 93 14, 096. 78 31,245. 95 24, 751. 79 19, 530. 56 No. No. No. No. No. 11____ 12____ 13_____ 14____ 15____ 11,731 47, 421 10, 406 14, 508 11,677 6,684. 46 36, 408. 58 7,225. 26 9,031. 24 6, 395.34 9, 099. 73 36, 784. 44 8,071. 93 11, 253. 85 9,057. 84 2, 415. 27 375. 86 846. 67 2, 222. 61 2,662. 50 No. No. No. No. No. 16____ 17_____ 18____ 19____ 20____ 11, 374 8,227 11,095 17,845 7,574 5,852. 84 4,065. 09 8,069. 83 8, 643. 33 6,057. 57 8,822. 80 6,381. 68 8,606.38 13,842. 35 5,875.15 2,969. 96 2, 316. 59 536. 55 5,199.02 No. No. No. No. No. No. 21_____ 22_____ 23_____ 24_____ 25_____ 26____ 7,208 3,071 3, 738 6,953 661 613 6,865. 95 982. 05 3,978. 87 3,351.95 1,079.31 973.13 5, 591.24 2,382.17 2,899. 56 5, 393. 44 512. 74 475. 50 Total. 633, 788 491, 628.94 491,628.94 34,162. 62 $4,879.31 7, 510. 48 1, 902.12 5, 280. 29 5, 550.04 5,166. 25 840.06 182. 42 1,274. 71 497. 63 $2, 612.32 6, 409. 20 1,641. 72 1,400.12 2,041. 49 512.74 34,162.62 1 Ratio of actual to expected losses = 77.56994 percent. 2 See pt. I, ch. 1, table 1, for key to bank members. s “ Expected mortality” here is adjusted as explained in footnote 8. T a b l e 4 . — M o r ta lity ra tios , M a ssa ch u setts savin g s-b a n k life in su ra n ce , 1 9 1 7 to 1 9 4 0 Year Ordinary Ordinary Group insurance insurance and group combined 1917 1918_____________ 1919 _______ 1920_____________ 1921 ________ 1922 _________ 1923 _____________ 1924_____________ 1925 ............... 1926 ...................... 1927......................... 1928......................... 29. 76 71.34 52. 50 33.79 20.35 25. 84 25.03 34. 72 29. 48 31. 98 36.88 27. 43 28.44 81. 87 75. 78 75.00 42. 51 55. 64 73. 38 51.35 65. 59 65. 72 60.00 59. 72 30.19 77.90 63. 57 57. 90 32.12 45.36 51. 97 45. 57 44. 98 43.24 43. 74 36. 22 Year 1929______________ 1930______________ 1931_____________ 1932._____________ 1933_______ ____ 1934______________ 1935______________ 1936_____________ 1937______________ 1938______________ 1939............. ........... 1940— .................... Ordinary Ordinary Group insurance insurance and group combined 39.28 34. 55 33. 68 35. 99 30. 77 36. 34 37. 63 28. 46 32.62 28. 85 32.64 32.20 67. 70 61.47 57. 30 55. 91 66. 76 66. 50 56. 45 57. 30 54. 21 66.82 51.43 45.98 46.85 41. 55 39.43 39.85 36. 77 41.22 40.06 33. 51 35.89 34.20 34 41 33.67 9 Data for ordinary and group insurance for the whole period separately, and for ordinary and group insur ance combined for the year 1940, are from the records in the State actuary’s office. The ratios for all losses combined may be found in pt. 2 of the annual reports of the commissioner of insurance for the years 1917 to 1938. Appendix E Basic Dividend Scale A basic dividend scale is used by numerous insurance organizations as a method of apportioning dividends among various classes of policy holders. As explained in chapter 3 of part I, such a scale is drawn up with a view of giving some degree of stability to the dividends paid from year to year on policies of a given type in force for a given number of years. In calculating the basic scale the insurance organization must take into account the factors of expense, mortality, and earnings on assets. The scale is as a rule drawn up on the basis of past expe rience with these three items. The amount of profits on hand at the end of the fiscal year is a given sum. An analysis of its origin discloses that it comes from four major sources: (1) Savings on expenses; (2) gains on mortality; (3) interest earnings in excess of the amount required to maintain reserves; and (4) gains or losses from investments. An equitable distribution among the policyholders of what remains of these profits after a portion has been set aside to surplus requires that each one receive substantially that portion which is fairly attributable to his policy from each of the three sources. In order to achieve this equitable distribution the actuaries make up a dividend formula containing a factor for each of the three elements. The expense factor is fairly constant but is somewhat higher in the earlier years of the policy than in the later, since it is assumed that the expense of medical examination and the making of initial records in connection with the policy will be incurred in the earlier years. The mortality factor is usually considered constant at any given attained age of the policyholder. The interest factor now used in the dividend formula for the savingsbank life-insurance system in Massachusetts is 3.75 percent. It is apparent that this interest factor is increasingly important as the amount of assets earning interest in connection with any given policy increases. In general, reserves would be larger in the case of an endowment policy and a limited-payment policy than in the case of a straight life policy. They would also be larger in the case of policies which have been in force for long periods of time. It should be borne in mind, however, that irrespective of the assumed rate of earnings on assets, the amount of dividend that can be paid to policyholders is in the last analysis determined by the actual profits on hand after insurance reserves and the legal minimum to surplus have been put aside and expenses of operation have been paid. 116 Appendix F Comparison of Surpluses of Insurance Companies and of Insurance Departments of Banks The savings-bank insurance departments in Massachusetts, as has been shown in chapter 2 of part I, are required to set aside to surplus an annual sum of no less than 20 percent nor more than 75 percent of their net profits, until such time as the surplus equals 10 percent of the insurance reserve or the sum of $20,000, whichever is the greater. Thereafter no more than 15 percent of the net profits may be put to surplus in any one year, and the total surplus may at no time exceed 10 percent of the reserves (except with the approval of the State actuary). In contrast, the laws of Massachusetts permit the insurance companies to establish surpluses or “ safety funds,” but the companies may not add to surplus if the latter exceeds 12 percent of the insurance reserve. They are required by the commissioner of insurance to main tain “ adequate reserves” at all times.1 The amounts of surplus and 0 reserves, and the proportions of the former to the latter for the years 1930 to 1939 in the savings-bank insurance departments and in the insurance companies, are shown in table 5.1 The table indicates 1 that for the 10-year period covered, the proportion of surplus to reserves was 8.9 percent in the case of the savings-bank insurance system and 5.9 percent in the case of the companies. S u r p lu s and reserves , and p rop ortio n o f su rp lu s to reserves , in savin gsbank in su ran ce s yste m and in in su ran ce co m p a n ies , 1 9 8 0 to 1 9 8 9 T able 5.-— Savings-bank life insurance Year Surplus Reserve Ratio (percent) All companies Surplus and capital Ratio (percent) Reserve 1930____________________ 1931____________________ 1932____________________ 1933____________________ 1934___________________ _ $830,695 948, 467 1,071, 507 1,198,479 1,300,658 $8, 733, 358 10,255,924 11,399,856 12,738,632 14,960,948 9.5 9.3 9.4 9.4 8.7 1935........ .......................... . 1936____________________ 1937............... ..................... 1938____________________ 1939____________________ 1,566, 357 1,869,993 2,001,407 2,083,351 2, 293, 596 17, 214,146 19,791,785 22,613,189 25,069,137 27, 627, 578 9.1 9.4 8.9 8.3 8.3 925,203,890 1,027,650,363 1,029,027,061 1,097,304,809 1,161,032,097 16, 588, 383, 737 17,653,571,442 18,850,597,028 19,871,828,781 20, 848,098, 668 5.6 5.8 5.5 5.5 5.6 15,164, 510 170, 404, 553 8.9 9, 847, 533, 022 166, 978, 407, 421 5.9 Total_____________ $935, 940, 248 $13, 534, 219, 439 998,942,646 14,403,457,876 925,608,703 14,687,086, 729 888, 534,135 14,934,837, 622 858,289,070 15,606,326,099 1 Mass. Gen. Laws, ch. 175, sec. 141. 0 1 The General Insurance Guaranty Fund is included in the savings-bank data on surplus. 1 Reports of the Commissioner of Insurance, Massachusetts, pt. 2, table E.) 117 6.9 6.9 6.3 5.9 5.5 (Annual Appendix G Costs to Policyholder This appendix contains a table showing comparative costs of savings-bank ordinary insurance and company ordinary insurance in Massachusetts in greater detail than do the tables in chapter 5 of part I and two additional tables showing comparative costs calculated on different bases than the base used in the text. The tables are presented in the following order: 1. Straight life policies, 20-payment life policies, and 20-year endowment policies, issued at age 35 in 1930, based on actual dividend history. 2. Straight life policies, 20-payment life policies, and 20-year en dowment policies, issued at age 35, based on dividends payable in 1940. T able 6.— C om parative net costs in M a ssa ch u setts o f a $ 1 ,0 0 0 p o lic y issu ed in 1 9 3 0 , at age 3 5 , based on actual dividend h isto ry d u rin g fo llo w in g 1 0 yea rs STRAIGH T LIFE POLICY Company or bank Annual premium 10 years’ premium 10 years’ dividends 10 years’ net pay ments Cash value 10 years’ at end of net cost if 10 years surrendered Company: No. 1_____________________ No. 2____________________ No. 3 i___________________ No. 4 1 ___________________ No. 5___________________ _ No. 6_____________________ No. 7_____________________ No. 8_____________________ No. 9____________________ No. 10i__________________ $24.89 28.11 26.00 24.00 28.11 26. 35 27.00 28.11 26. 88 23. 24 $248.90 281.10 260.00 240.00 281.10 263. 50 270.00 281.10 268.80 232. 40 $43.79 70.23 51.04 38.96 62. 52 53.89 67.41 66.73 74.92 31.39 $205.11 210.87 208.96 201.04 218. 58 209.61 202. 59 214. 37 193.88 201.01 $125.00 146.00 137.00 137.00 146. 01 146. 01 146. 01 146.00 146. 01 137.00 $80.11 64.87 71.96 64.04 72. 57 63.60 56. 58 68. 37 47.87 64.01 Average of 10 companies.. 26. 27 262. 70 56.09 206. 60 141. 20 65.40 23.90 23.90 23. 90 23.90 23. 90 23. 90 23.90 23.90 23.90 23.90 23.90 23. 90 23.90 23.90 23. 90 239.00 239.00 239.00 239.00 239.00 239.00 239.00 239.00 239.00 239.00 239.00 239.00 239.00 239.00 239.00 81.06 74.77 66. 30 66. 30 81.06 81.06 74. 30 78. 05 77. 25 69.08 76.61 79.24 79.24 79.24 77.38 157.94 164. 23 172. 70 172. 70 157.94 157.94 164. 70 160.95 161. 75 169. 92 162. 39 159. 76 159. 76 159. 76 161. 62 135. 76 135. 76 135. 76 135. 76 135. 76 135. 76 135. 76 135. 76 135. 76 135. 76 135. 76 135. 76 135. 76 135. 76 135. 76 22.18 28.47 36.94 36.94 22.18 22.18 28.94 25.18 25.99 34.16 26. 63 24.00 24.00 24.00 25.86 23.90 239.00 76.06 162. 94 135. 76 27.18 Bank: No. No. No. No. No. No. No. No. No. No. No. No. No. No. No. 1_____________________ 2______________ ______ 3_____________________ 4_____________________ 5_____________________ 6____ _ __ _ ___ ___ 7_____________________ 8____________________ 9_____________________ 10____________________ 11___ __ _____________ 12____________________ 13____________________ 14____________________ 15____________________ Average of 15 banks_____ 1 Endowment at age 85. 118 119 APPENDIXES 6.— C om parative net costs in M a ssa ch u setts o f a $ 1 ,0 0 0 p o lic y issu ed i n 1 9 8 0 , at age 8 5 , based on actual dividend h istory during fo llo w in g 1 0 yea rs — Continued T able 20-PAYMENT LIFE POLICY 10 years’ net pay ments Cash value 10 years’ at end of net cost if 10 years surrendered Annual premium 10 years’ premium 10 years’ dividends Company: No. 1____________________ No. 2____________________ No. 3____________________ No. 4 ____________ ____ _ No. 5 ___________________ No. 6____________________ No. 7____________________ No. 8 _ _ _______________ No. 9____________________ No. 10___________________ $33.32 38.34 34.87 32.13 38. 34 36.22 36.70 38.34 36. 85 31.51 $333.20 383.40 348. 70 321.30 383.40 362.20 367.00 383.40 368.50 315.10 $46.68 78.73 59.95 36.67 73.99 58.60 72.51 77.90 83.18 36.35 $286.52 304.67 288.75 284.63 309.41 303.60 294.49 305.50 285.32 278. 75 $219.00 255.00 232.00 232.00 255.78 255. 78 255.78 255.00 255. 78 232.00 $67.52 49.67 66.76 62.63 63.63 47.82 38. 71 60.50 29.54 46. 75 Average of 10 companies.. 35.66 356.62 62.46 294.16 244.81 49.35 33.20 33.20 33.20 33.20 33.20 33.20 33.20 33.20 33.20 33.20 33.20 33.20 33.20 33.20 33.20 332.00 332.00 332.00 332.00 332.00 332.00 332.00 332.00 332.00 332.00 332.00 332.00 332.00 332.00 332.00 94.41 86.91 77.09 77.09 94.41 94.41 86.38 90.85 89.90 80.19 89.19 92. 31 92. 31 92. 31 90.12 237. 59 245.09 254.91 254.91 237. 59 237. 59 245.62 241.15 242.10 251.81 242.81 239.69 239.69 239.69 241.88 232.19 232.19 232.19 232.19 232.19 232.19 232.19 232.19 232.19 232.19 232.19 232.19 232.19 232.19 232.19 6.40 12.90 22. 72 22.72 5.40 5.40 13.43 8.96 9.91 19.62 10.62 7. 50 7.50 7.50 9.69 33.20 332.00 88.52 243.47 232.19 11.28 Company or bank Bank: No. No. No. No. No. No. No. No. No. No. No. No. No. No. No. 1____________________ 2 ____ ____ 3____________________ 4 ______________ 5 ______________ 6 ___________________ 7____________________ 8 _ _ ___________ 9 ________ 10 . _______________ 11 _ ________ 12____________________ 13___________________ 14___________________ 15___________________ Average of 15 banks_____ 20-Y EA R EN DOW M EN T POLICY Company: No. 1____________________ No. 2____________________ No. 3 ___________________ No. 4____________________ No. 5____________________ No. 6___________ _ ___ No. 7 ___________________ • No. 8 _ _ __ _ No. 9____________________ No. 10___________________ Average of 10 companies..Bank: No. No. No. No. No. No. No. No. No. No. No. No. No. No. No. 1____________________ 2 ______________ ._ 3____________________ 4____________________ 5 . _____________ 6____________________ 7____________________ 8 ___________________ 9____________________ 10___________________ 11 _ _____________ 12 ._ ____________ 13___________________ 14___________________ 15 ________ ____ Average of 15 banks____ 2 9 6 7 2 2 ° — 41- -9 $47.63 51.91 50.14 46.12 51.47 49.85 50.00 51.91 50.64 45. 43 $476.30 519.10 501.40 461.20 514. 70 498. 50 500.00 519.10 506.40 454. 30 $51.62 85.00 75.25 35.46 82.09 65.04 79.54 88.40 94.68 41.78 $424.68 434.10 426.15 425. 74 432.61 433.46 420.46 430. 70 411. 72 412. 52 $384.00 407.00 396.00 396.00 407.45 407.45 407.45 407.00 407.45 396.00 $40.68 27.10 30.15 29.74 25.16 26.01 13.01 23.70 4.27 16.52 49. 51 495.10 69.89 425.21 401. 58 23. 63 44.72 44.72 44. 72 44.72 44. 72 44. 72 44.72 44. 72 44.72 44. 72 44. 72 44. 72 44.72 44. 72 44. 72 447.20 447.20 447.20 447.20 447.20 447.20 447.20 447.20 447.20 447.20 447.20 447.20 447.20 447.20 447.20 79. 97 72.47 64.66 64. 66 79.97 79.97 72.62 76. 52 75.56 66.40 74. 98 78.00 78.00 78.00 75.90 367.23 374. 73 382. 54 382. 54 367.23 367.23 374. 58 370.68 371.64 380. 80 372.22 369.20 369.20 369.20 371.30 395.99 395.99 395. 99 395. 99 395.99 395. 99 395.99 395. 99 395. 99 395. 99 395.99 395. 99 395. 99 395.99 395. 99 +28. 76 +21.26 +13.45 +13.45 +28. 76 +28. 76 +21.41 +25. 31 +24.35 +15.19 +23. 77 +26. 79 +26. 79 +26. 79 +24.69 44. 72 447.20 74. 51 372.69 395.99 +23.30 120 SAVINGS-BANK LIFE INSURANCE Table 6 gives in detail the material covered in text tables 15, 16, and 17. D ata for insurance companies are taken from Flitcraft Compend, 1940 edition; data for the 15 banks which have been in operation 10 years or more were obtained from the Division of Savings Bank Life Insurance, Statehouse, Boston. T able 7.— C om pa rative net costs in M a ssa ch u setts o f a $ 1 ,0 0 0 p o lic y issu ed at age 8 5 , based o n dividends p a ya ble in 1 9 4 0 STRAIGH T LIFE POLICY 10 years’ net pay ments Cash value 10 years’ at end of net cost if 10 years surrendered Annual premium 10 years’ premium 10 years’ dividends Company: $26.57 No. I . ............................. . 28.11 No. 2______________ ______ 26.06 No. 3_...................... ............. / 22.56 No. 4 i......................... ......... \ 25.35 28.11 No. 5 .— .............................. $265.70 281.10 260.60 225.60 253.50 281.10 $48.68 73.80 40.95 36.94 41.74 57.87 $217.02 207.30 219.65 188. 66 211. 76 223. 23 $131.00 131.00 148.00 131.00 132.00 131.41 $86.02 76.30 71.65 57.66 79. 76 91.82 6..................................... 7_________ ___________ 8____ ________________ 9____________________ 10 8 __________________ 26.35 27.00 28.11 26.88 26.09 263.50 270.00 281.10 268.80 260.90 49. 23 54.98 63. 62 70.84 42.26 214. 27 215.02 217.48 197. 96 218. 64 146.01 146.01 131.00 146.01 142.00 68.26 69.01 86.48 51.95 76.64 Average of 10 companies.. Average of all banks.. _ ._ 26.47 22.19 264.72 221.90 52.81 46.99 211. 91 174.91 137. 77 146.01 74.14 28.90 Company or bank No. No. No. No. No. 20-PAYMENT LIFE POLICY Company: No. 1.............................. . No. 2____________ ________ No. 3____________________ No. 4____________________ No. 5____________________ $36.44 38.34 35.84 34.95 38. 34 $364.40 383.40 358.40 349. 50 383.40 $52.01 80.69 47.86 42. 91 56.20 $312.39 302. 71 310. 54 306. 59 327. 20 $231.00 231.00 256.00 231.00 230. 78 $81.39 71. 71 54. 54 75. 59 96.42 6_____________________ 7____________________ 8____________________ 9____________________ 10 8 __________________ 36.22 36.70 38. 34 36.85 35. 23 362.20 367.00 383.40 368. 50 352. 30 52.16 60. 25 74. 28 77.94 53. 02 310.04 306. 75 309.12 290.56 299. 28 255. 78 255. 78 231.00 255.78 229.00 54. 26 50. 97 78.12 34.78 70. 28 Average of 10 companies.. Average of all b a n k s___ 36. 73 31.84 367. 25 318. 40 59. 73 50. 44 307. 52 267.96 240. 71 255. 78 66.81 12.18 No. No. No. No. No. 20-YEAR EN DOW M EN T POLICY mpany: No. 1_____________________ No. 2____________________ No. 3____________________ No. 4____________________ No. 5_____________ _______ $50.08 51.91 49. 53 48.28 51.47 $500. 80 519.10 495. 30 482. 80 514. 70 $56.67 84. 87 57. 52 45. 01 61.00 $444.13 434. 23 437. 78 437. 79 453. 70 $383.00 383.00 407.00 383.00 382.45 $61.13 51.23 30.78 54.79 71.25 6_____________________ 7____________________ 8____________________ 9____________________ 108__________________ 49.85 50.00 51.91 50. 64 49. 39 498. 50 500. 00 519.10 506. 40 493. 80 56.20 67. 62 81. 98 87.94 62.07 442. 30 432. 38 437.12 418. 46 431. 73 407.45 407. 45 383.00 407. 45 388.00 34.85 24. 93 54.12 11.01 43. 73 Average of 10 companies. _ Average of all banks_____ 50. 31 45.17 503. 05 451. 70 66.09 55.26 436. 96 396.44 393.18 407.45 43.78 H -ll. 01 No. No. No. No. No. 1 Company 4 issues a straight life ordinary policy only in amounts of $5,000 or more, but its cost is here shown for comparative purposes on the $1,000 basis (first line of figures); this company issues insurance for less than $5,000 on an endowment at age 85 policy (second line of figures). Companies 3 and 10 likewise issue policies for endowment at age 85, and the data in the table for these companies refer to such policies. 8 Company 10’s premiums cover disability benefits, which include the waiver of premiums and the pay ment of proceeds in installments with interest over a period of 10 years. 3 The cash-surrender value of all of the banks was $11.01 in excess of the average total 10 years’ net pre miums, resulting in an annual net surplus of $1.10. 121 APPENDIXES The companies in table 7 are the same as those considered in chapter 5 of part I. Data for companies in this table were taken from the Flitcraft Compend for 1940; data for the banks were secured from the Division of Savings Bank Life Insurance. The companies in table 8 are the same as those considered in chapter 5 of part I. Data for the companies are from Best’s Illustrations Revised (1940); data for the banks come from the Division of Savings Bank Life Insurance (1940). T a b l e 8 . — C om parative net costs in M assa ch u setts o f a $ 1 ,0 0 0 straight life p o lic y , based on dividends p ayable in 1 9 4 0 POLICY ISSUED A T AGE 25 Company or bank Annual premium 10 years’ premium 10 years’ dividends 10 years’ net pay ments Cash value 10 years’ at end of cost if 10 years surrendered Company: No. 1____________ _____ ___ No. 2____________________ No. 3 i___________________ No. 4 2 ___________________ No. 5 2 ___________________ No. 6____________________ No. 7____________________ No. 8 _ _______________ No. 9____________________ No. 1 0 2 __________________ $20.48 21.49 19.89 19.04 21.51 20.14 20. 70 21.49 20. 55 19. 59 $204.80 214.90 198. 90 190. 40 215.10 201.40 207.00 214.90 205. 50 195. 90 $42.60 66.88 37.28 34. 42 43. 61 44.64 42.19 57. 66 65. 68 30. 97 $162.20 148.02 161.62 155.98 171.49 156. 76 164. 81 157. 24 139.82 164. 93 $89.00 88.00 100.00 89.00 89.23 98.94 98.94 88.00 98.94 91.00 $73. 20 60.02 61.62 66.98 82. 26 57. 82 65. 87 69. 24 40. 88 73. 93 Average of 10 companies.. Average of all banks ___ 20. 49 16. 72 204.88 167. 20 46. 59 33. 99 158. 29 133. 21 93.11 98.94 65.18 34.27 POLICY ISSUED AT AGE 35 Company: No. 1____________________ No. 2____________________ No. 3 1 ___________________ No. 4 2 ___________________ No. 5 2 ________ ____ ______ No. 6____________________ No. 7____________________ No. 8____________________ No. 9____________________ No. 10 2 __________________ Average of 10 companies. _ Average of all banks_____ 26. 57 28.11 26.06 25. 35 28.17 26. 35 27.00 28.11 26.88 25. 98 265. 70 281.10 260. 60 253. 50 281. 70 263. 50 270.00 281.10 268. 80 259. 80 48. 68 73.91 40. 95 41.71 45. 65 49. 23 47. 70 64.62 76. 61 36.24 217.02 207.19 219. 65 211. 79 236. 05 214. 27 222. 30 216. 48 192.19 223. 56 131.00 131.00 148. 00 132. 00 131.98 146.01 146.01 131.00 146.01 141.00 86.02 76.19 71.65 79. 79 104.07 68.26 76.29 85. 48 46.18 82. 56 26.86 22.19 268. 58 221. 90 52. 53 35.70 216. 05 186. 20 138.40 146.01 77. 65 40.19 POLICY ISSUED AT AGE 45 Company: No. 1____________________ No. 2____________________ No. 3 1 ___________________ No. 4 2 ___________________ No. 5 2 ___________________ No. 6____________________ No. 7____________________ No. 8____________________ No. 9____________________ No. 10 2 __________________ Average of 10 companies,. Average of all banks,, 1 Endowment at age 85. 8 Life paid up at age 85. 37.10 39. 55 36. 77 36. 33 39.70 37.08 38. 00 39. 55 37. 82 37. 27 371.10 395. 50 367. 70 363. 30 397. 00 370. 80 380. 00 395. 50 378. 20 372. 70 58. 95 74. 75 47. 01 51.82 49. 42 55.62 55. 09 75.05 86. 92 48. 34 312.05 320. 75 320. 69 311.48 347. 58 315.18 324. 91 320. 45 291. 28 324. 36 191.00 191.00 216.00 193.00 192. 79 212. 62 212. 62 191.00 212. 62 199.00 121. 05 129. 75 104. 69 118. 48 154. 79 102.56 112. 29 129. 45 78. 66 125. 36 37. 92 31.64 379.17 316. 40 60. 30 39. 35 318.87 277.05 . 201.17 212. 62 117. 71 64.43 Appendix H Comparison of Taxes Paid to State by Insurance Com panies and Savings-Bank Life-Insurance System Table 9 shows chusetts by the companies, their premium income, T able 9. — the amounts paid in taxes to the State of Massa savings-bank insurance system and the insurance premium income, and the ratios of such taxes to during the years 1930 to 1939. T axes on M a ssa ch u setts bu sin ess pa id to the State by in su ra n ce depart m ents o f banks and by in su ran ce c o m p a n ies , 1 9 8 0 to 1 9 3 9 Savings-bank life insurance Year Taxes Premium income Companies Ratio (percent) Taxes Premium income Ratio (percent) 1930________________ 1931________________ 1932________________ 1933________________ 1934________________ $15,162 15, 996 17, 217 22, 214 26,170 $2, 644, 733 3, 095, 236 2, 979,423 3, 256, 373 4,075, 775 0.57 .52 .58 .68 .64 $1,848,825 1, 967, 510 2,089,421 2, 111, 938 2,163, 610 $162,900,074 170, 324, 096 169, 003, 016 170, 377,383 175, 288, 999 1.13 1.16 1.24 1.24 1.23 1935________________ 1936________________ 1937________________ 1938________________ 1939________________ 27, 628 31, 771 40,429 49, 845 55,685 4,300,824 4, 686, 767 5, 013, 693 4, 787,124 5,408, 573 .64 .68 .81 1.04 1.03 2, 225, 044 2,453, 537 2, 553, 599 2, 600, 251 2, 723, 730 179, 819, 979 176, 463,437 173, 291, 911 183, 085, 547 193, 000, 000 1.24 1.39 1.47 1.42 1.41 Total___ _ _ __ 302,117 40, 248,461 .75 22,737,465 1, 753, 554, 442 1. 30 During these years, the banks paid 0.75 percent in taxes to the State, while the insurance companies paid 1.3 percent of their pre mium income, almost twice as much proportionately.1 2 12 The data on State taxes paid by the companies are obtained from the Annual Reports of the Massa chusetts Commissioner of Corporations and Taxation, 1930-39, obtained from the records of the commis sioner’s office. The figures for the banks are those reported in the annual reports of the commissioner of insurance. 122 Appendix I Amount of Insurance Held by Individual Policyholders Table 10 shows the amount of savings-bank life insurance held by individual policyholders in Massachusetts on August 31, 1938. T able 10*— N u m b er o f in divid u als in su red b y savings banks in M a ssa ch u setts f o r stated a m o u n ts, as o f A u g u s t 8 1 , 1 9 8 8 Amount Number of per sons Less than $1,000— . $1,000 __________ $1,500____________ $2,000____________ $2,500____________ $3,000____________ $3,500___ _____ $4,000____________ $4,500____________ $5,000____________ $5,500___ ______ $6,000_______ ____ $6,500____________ $7,000____________ $7,500____________ $8,000____________ $8,500____________ $9,000____________ $9,500____________ $10,000.. _______ $10,500___________ $11,000___________ $11,500 ______ __ $12,000___________ $12,500______ 22,026 40, 797 1,221 6, 585 532 3,342 89 1,162 61 2,718 29 587 14 299 45 265 11 116 6 1,321 5 66 4 82 6 Percent Cumu age of lative total percentage 26.79 49.62 1.49 8.01 .65 4.06 .11 1.41 .08 3.31 .04 .71 .02 .36 .06 .32 .01 .14 .01 1.61 .01 .07 .00 .10 .01 26.79 76.41 77.90 85.91 86.56 90.62 90. 73 92.14 92. 22 95. 53 95. 57 96.28 96. 30 96. 66 96. 72 97.04 97.05 97.19 97.20 98.81 98.82 98.89 98.89 98.99 99.00 Amount $13,000__________ $14,000__________ $14,500__________ $15,000__________ $15,500__________ $16,000__________ $16,500__________ $17,000__________ $17,500__________ $18,000__________ $18,500__________ $19,000__________ $19,500__________ $20,000__________ $20,500__________ $21,000__________ $21,500__________ $22,000__________ $22,500__________ $23,000__________ $23,500__________ $24,000__________ Total Number of per sons 94 68 3 198 2 50 4 27 1 20 1 10 1 143 1 66 2 10 3 64 1 73 Cumu Percent age of lative percentage total 0.12 .09 .00 .24 .00 .06 .00 .03 .00 .02 .00 .01 .00 .17 .00 .08 .00 .01 .00 .08 .00 .09 82,221 123 99.12 99.21 99.21 99.45 99. 45 99. 51 99. 51 99. 54 99.54 99. 56 99. 56 99.57 99.57 99. 74 99. 74 99.82 99. 82 99.83 99.83 99. 91 99.91 100.00 Appendix J Illustration of Method of Classifying Applicants for Savings-Bank Life Insurance The method by which applicants for savings-bank life insurance were separated into the classes “ Wage earners, clerical workers, and farmers,” “ Business and professional people,” and “ Doubtful cases,” is shown below and illustrates, for the month of June 1934, the method o f classification which was used to reach the results described in chapter 7 of part I under the subject “ The original purpose.” W a g e ea rn ers , clerical w ork ers, and farm er s Assembler Auto mechanic Beamer Axminster setter Bellboy Bench worker Blanking operator Bobbin boy Bookkeeper Boxer Braider Buffer Bus operator Cabinetmaker Carpenter Case packer Cashier C. C. C. worker Chauffeur Clerk Compositor Comptometer operator Construction worker Crane operator Custodian Domestic Drawer-in Dye hand Electrical inspector Electrician Errand boy Factory worker Feeder Finisher Fireman Fruit grower 124 Greenskeeper Hairdresser Housemaid Janitor Journeyman Laborer Leather cutter Leatherworker Letter carrier Loomfixer Machine operator Machinist Mail carrier Meat cutter Mechanic Messenger Meter reader Moving-picture operator M older Nurse Oil refining Opening-room man Overseer Painter Paper finisher Patrolman Patternmaker Paymaster Plater Plumber Polker Preparation-room worker Pressman Printer Radio operator Radio service Repairman Rope maker Rubber winder Sailmaker Saleslady Secretary Sewing Shearer Shipper Shoemaker Shoeworker Speeder tender Spinner Station employee Stenographer Stereotyper Steward Stock clerk Stock chaser Storekeeper Tanner Telephone operator Tester Textalite operator Timekeeper Tool maker Typesetter Typist Watchmaker Watchman Water inspector Weaver Well driller Wire drawer Wire inspector Wrapper 125 APPENDIXES P r o fe ss io n a l and bu sin ess p eop le Advertising writer Architect Army officer Assistant manager Auditor Candy manufacturer Civil engineer Clergyman Dentist Deputy assessor Executive Lawyer Manager Physician Physicist Physiologist Pilot Prison officer Professor Research director Sales manager Shoe dealer Social worker Statistician Superintendent Teacher Treasurer D o u btfu l Accountant Artist Assistant foreman Assistant overseer Assistant purchasing agent Banking Chemist Collector Druggist Engineer Estimator Field representative Foreman Inspector Jeweler Milk dealer Newspaper Pharmacist Purchasing agent Sales promotion Supervisor Tube manufacturing Unemployed Appendix K Comparison of Amounts of Endowment Insurance in Force W ith Insurance Companies and W ith the Banks The savings banks encourage the purchase of whole-life instead of endowment insurance. The data on the relative amounts of both kinds of insurance carried with the banks and with the insurance companies are informative on this point. The amounts of whole-life and endowment insurance carried in the seven largest companies selling ordinary insurance which operate in Massachusetts are given in table 11. The data cover all such insurance in force among the companies both in and out of the State in the year 1938. T a b l e 11 .* A m o u n ts and 'percentages o f w h ole-life and o rd in a ry en d ow m en t in su r — ance in fo r c e in M a ssa ch u setts with the 7 largest in su ra n ce c om p a n ies in 1 9 3 9 Amount in thousands Percentage of total Company Whole life Endowment Whole life Endow ment Other No. 1______________________________ No. 2 _ _ _ ________ _____________________________ No. 3....... ................... ......... .................. No. 4___________ ___________________ No. 6______________________________ No. 6______________________________ No 7__________ ____________________ $4,133, 481 7,395,001 3,056, 655 5,465, 709 3, 246, 497 6, 368,670 1,876,117 $339, 335 3,937, 664 384, 467 1,155, 603 397, 496 2, 279, 865 138,405 88.26 62.25 83. 94 80.39 84.88 70.20 92.23 7.25 33.15 10. 56 17.00 10. 39 25.13 6.80 4.49 4.60 5.50 2.61 4.73 4.67 .97 Total_________________ _______ 31, 542,130 8,632,835 75.22 20.59 4.19 The amount of endowment insurance for all the seven companies in 1939 was 27.4 percent of the amount of whole-life insurance in force. Whole-life insurance constituted 75.22 percent and endowment insur ance 20.59 percent of all the ordinary insurance in force with the companies. It should be noted that company No. 2 and company No. 6 issue many endowment policies maturing at age 85 instead of whole-life policies, which these policies resemble, and that their amount of endowment insurance is accordingly much larger than it would otherwise be. If one excludes data for companies No. 2 and No. 6, it is found that the amount of endowment insurance with the remaining five companies was 13.8 percent of the amount of whole-life insurance in force. Among the five companies whole-life constituted 83.49 per cent and endowment 11.51 percent of all the ordinary insurance in force. 126 127 APPENDIXES In the year 1939 whole-life insurance constituted 86.3 percent and endowment insurance 4.9 percent of all ordinary insurance in force with the savings banks. The proportions of whole-life insurance and endowment insurance of an industrial nature to all industrial insurance in force with the three largest industrial companies, and the proportions of whole-life and endowment insurance to all ordinary insurance in force with the savings banks, are shown in table 12. 12 . — P ro p o rtio n s o f w h ole-life and en dow m ent in su ra n ce to all in su ra n ce in force in M a ssa ch u setts with 8 largest in du stria l com p a n ies and w ith savings hanks, 1 9 0 8 to 1 9 8 9 T able Industrial insurance Savings-bank ordinary insurance Year Whole-life Whole-life Endowment P ercen t 1908 _________ ___________ 1912 _____________________________________ 1916________ ____________________________ 1920 _____ _ - ________ 1924 __ _____ __ __ __________ 1928 _ . ___ ____________ ________ 1932 ___ _ _ __________ 1936 __________ _______ __________ 1938 ______________________________ 1939_______________________________________ Endowment P ercen t P ercen t P ercen t 67.9 73.3 73.7 70.9 69.3 50.2 47.4 54.5 55.7 58.8 31.4 25.1 23.6 25.9 36.4 43.7 40.3 35.5 34.3 31.4 14.0 27.2 44.3 52.2 74.6 82.8 86.0 86.7 86.7 86.3 78.7 68.3 52.6 44.9 23.1 13.1 7.3 5.6 5.1 4.9 The significance of the relative amounts of whole-life and of endow ment insurance is of less importance if the policies are carried many years, especially in view of the fact that any whole-life policy may be matured as an endowment at an advanced age by leaving the dividends with the insurance organization. Many policies, however, are lapsed after a relatively short period, and a relatively large amount of endow ment insurance is, therefore, not so likely to be desirable from the policyholders’ point of view, since premiums for such insurance are higher than they are for whole-life insurance.1 3 is Data on amounts of the various types of insurance in force are from the Annual Reports of the Com missioner of Insurance of Massachusetts, pt. 2, table Q. Appendix L .—Bibliography [Pamphlets and leaflets are indicated by (P.) and (L.)] G o v e r n m e n t P u b lic a tio n s Massachusetts— Division o f Savings Bank Life Insurance Application for life insurance policy. Boston, 1940. Basic dividend scale. (Premiums and dividends, straight life, 20-payment life, 20-year endowment.) Boston, 1940. (L.) Brief survey of the Massachusetts system of savings-bank life insurance and old-age annuities. Boston, 1940. (P.) Comparative net costs, straight life insurance, age 35, $1,000. (L.; mimeographed.) Boston, 1940. General Laws of Massachusetts, chapter 178: Savings Bank Insurance Law. Boston, 1939. (P.) Grady, Alice H.: The romance and development of savings-bank life insurance in Massachusetts. (P.) Address before New Century Club, Boston, November 29,1932. Growth of savings-bank life insurance. Plans for savings and insurance. Boston, 1940. Boston, 1940. Premium rates for annual premium policies. Double savings plan. Boston, 1940. (L.) (L.) Boston, 1940. (L.) (L.) Other Government Publications M assach u setts. C o m m issio n er o f B a n k s. Annual reports, 1907 to 1940, part I. --------------- Statutes. —— Boston. Savings banks and institutions for savings. Boston, 1940. C o m m issio n er o f C orp o ra tio n s and T a xa tion . Annual reports. Boston. --------------- General laws relating to taxation and special assessments. 1940. Boston, ------- C o m m issio n er o f In su r a n ce . Annual reports, 1907 to 1939, part II. Boston. --------------- General laws relating to insurance. Boston, 1939. —— C o m m issio n er o f In su r a n ce and C o m m issio n er o f B a n k s. Annual reports relating to savings and insurance banks and the General Insurance Guaranty Fund, 1908 to 1940. Boston. ------- S p ecia l C om m ittee f o r In vestiga tio n and S tu d y Report, January 1934. Boston. (S. 100.) ------- S p ecia l J o in t L i f e In su r a n ce . L egisla tive o f B a n k in g Structure. C om m ittee to S tu d y L im ita tio n o f S a vin gs Report, March 1939 (House 2124). N ew Y ork. J o in t C om m ittee on In vestiga tio n o f L ife In su ra n ce. Report, 1906. (Assembly Document No. 41.) ------- S u p erin ten d en t o f In su r a n ce . Annual reports, 1939-40. ■------D ep a rtm en t o f In su ra n ce. Study of industrial insurance, 1939. 128 Bank 129 APPENDIXES U n t .S i C ongress. ta e t d e s Board of Actuaries of the Civil Service Retirement and Disability Fund. 13th annual report. 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