Chapter 9

These rules, as will readily be seen, must have powerful influences on trade and manufactures. Many individual warehouses and mills are, with their contents, insured for very large sums, £10,000, £20,000, £50,000, £100,000 and more. An additional charge of 5s. or 10s. % in respect of a supposed increase of risk may mean a payment by the owner of several hundred pounds a year, and may operate as a complete veto on some arrangement or some machine which it might otherwise be desirable to resort to. The occurrence of a few severe fires in one town, followed by an increase of insurance rates, may have, and indeed has had, the effect of driving some branch of trade to another locality, the seat of greater caution or better fortune. It is therefore obviously desirable that so important an influence should be exercised, not precariously or capriciously, but according to the combined wisdom and experience of those associations which may be supposed to understand the subject best, and which obtain their experience in the way that makes it perhaps of most value, by paying for it.It is equally for the public benefit that rates of insurance should be fixed on some common scale. Suppose the system of unrestricted competition to be tried, the first effect will be a general and great reduction in rates. But it may be said, “So much the better for the insured; if the offices can afford this reduction of rate, it will only be a fair result of competition; if they cannot afford it, they will be the losers, but the public will gain; will the effect not be simply to reduce the rates to the paying point and no further?” This would be all very well if the paying point could be absolutely ascertained or determined in any way beforehand, but the rate comes first and the losses come afterwards. In other businesses prices are based on some certainty as to the cost of production, but in selling fire insurance the cost is not known till after it has been sold. In a free competition it is the sanguine man’s views which regulate the market price, and the rates therefore cease to be remunerative. The consequences are that some offices disappear altogether, others take fright in time to avoid ruin, though not to escape serious loss, persons who might establish new offices are deterred from doing so, the business gets the character of being a highly speculative and hazardous one, requiring extravagant profits to induce men to carry it on at all, and the public have to bear the cost. Unrestricted competition therefore is not for their advantage.The combination for uniform rates has another beneficial effect; it serves to distribute the burden of losses fairly. If it is a just thing that cotton-spinners should bear all the losses that arise in cotton-mills, and not leave them to be borne by the owners of private dwelling-houses, or vice versa, it is well that the loss by each class of risks should be measured fairly. But, while the experience of any one office, taken by itself, furnishes a very imperfect criterion, each contributes its quota of knowledge and experience to the common stock, and the public get the benefit both of broad and trustworthy data and of that peculiar and intimate acquaintance with each different class of property or process which the conductors of one company or another are sure to possess.No conventional or excessive rates can, however, be maintained for any length of time. Some member of the union is sure to perceive that popularity and profit may be gained by introducing a lower rate, if a lower rate is manifestly sufficient, or a new company starts into existence to remedy the grievance. It is to be remembered, too, that the directors and shareholders who control the offices are likewise insurers, quick to raise the question of how far the rates they have to pay as individuals are justified by the risks run; and if it cannot be shown that these rates are a true measure of the risk, offices are soon constrained by a sense of justice or by self-interest or by pressure from without to mitigate them. In short, the association is a union bound together by necessity and tempered by competition.Adequately to measure the risk of loss by fire demands not merely reference to an extended experience but a watchful regard to current changes. While the profits of fire insurance business fluctuate considerably from year to year, and seem even to follow cycles of elevation and depression, the tendency on the whole appears to be towards a growth of risk, although excessive competition among offices prevents the rates from rising in proportion.

It is equally for the public benefit that rates of insurance should be fixed on some common scale. Suppose the system of unrestricted competition to be tried, the first effect will be a general and great reduction in rates. But it may be said, “So much the better for the insured; if the offices can afford this reduction of rate, it will only be a fair result of competition; if they cannot afford it, they will be the losers, but the public will gain; will the effect not be simply to reduce the rates to the paying point and no further?” This would be all very well if the paying point could be absolutely ascertained or determined in any way beforehand, but the rate comes first and the losses come afterwards. In other businesses prices are based on some certainty as to the cost of production, but in selling fire insurance the cost is not known till after it has been sold. In a free competition it is the sanguine man’s views which regulate the market price, and the rates therefore cease to be remunerative. The consequences are that some offices disappear altogether, others take fright in time to avoid ruin, though not to escape serious loss, persons who might establish new offices are deterred from doing so, the business gets the character of being a highly speculative and hazardous one, requiring extravagant profits to induce men to carry it on at all, and the public have to bear the cost. Unrestricted competition therefore is not for their advantage.

The combination for uniform rates has another beneficial effect; it serves to distribute the burden of losses fairly. If it is a just thing that cotton-spinners should bear all the losses that arise in cotton-mills, and not leave them to be borne by the owners of private dwelling-houses, or vice versa, it is well that the loss by each class of risks should be measured fairly. But, while the experience of any one office, taken by itself, furnishes a very imperfect criterion, each contributes its quota of knowledge and experience to the common stock, and the public get the benefit both of broad and trustworthy data and of that peculiar and intimate acquaintance with each different class of property or process which the conductors of one company or another are sure to possess.

No conventional or excessive rates can, however, be maintained for any length of time. Some member of the union is sure to perceive that popularity and profit may be gained by introducing a lower rate, if a lower rate is manifestly sufficient, or a new company starts into existence to remedy the grievance. It is to be remembered, too, that the directors and shareholders who control the offices are likewise insurers, quick to raise the question of how far the rates they have to pay as individuals are justified by the risks run; and if it cannot be shown that these rates are a true measure of the risk, offices are soon constrained by a sense of justice or by self-interest or by pressure from without to mitigate them. In short, the association is a union bound together by necessity and tempered by competition.

Adequately to measure the risk of loss by fire demands not merely reference to an extended experience but a watchful regard to current changes. While the profits of fire insurance business fluctuate considerably from year to year, and seem even to follow cycles of elevation and depression, the tendency on the whole appears to be towards a growth of risk, although excessive competition among offices prevents the rates from rising in proportion.

TheTariffsystem has steadily developed in minuteness of classification and in adaptation to wider experience, as well as to the changes in the character of many classes of risks by improvements in building and by the introductionTariff difficulties.of new kinds of goods and machinery. The estimates of risk and the determination of premiums are largely governed by individual opinion and by competition, no amount of experience furnishing a statistical basis on which trustworthy predictions of average loss can be made. Hence it is only by constant co-operation among insuring institutions in the exchange and combination of their observations that justice can be done to them and to the public. The proper extent of this co-operation is easily attained where the business is free from all restrictions except those of the common law, as in Great Britain, and the competition of capital for profits is keen enough to keep the rates within reasonable limits. But in countries in which the government regulates the business in a more paternal spirit, and meddles with all its details for the avowed purpose of securing the safest and best public service, many difficulties arise. This is increasingly the case in several of the nations of Europe, notably in Austria, Switzerland and Germany.

But it is in the several states of the United States that the government supervision of insurance has most interfered with and modified the natural development of the business. In recent years, beginning with 1885, sixteen of these states have enacted legislation, dictated by the growing jealousy of corporate powers and privileges, forbidding fire insurance companies or their agents to combine in any form for the determination of rates. Companies have often been indicted, fined and deprived of authority to issue policies because of membership in associations for the purely scientific purpose of ascertaining their average experience. The courts have frequently narrowed in their interpretations the sweeping intent of such laws, but have generally sustained them as within the power of the legislature, and at the present time there is an overwhelming public sentiment in large sections of the country arrayed against every semblance of union or consultation among the companies upon the basis of their business. In several instances all the important insurance companies have withdrawn their agencies at once from particular states, and the business community has been sorely distressed for want of their protection. But the popular prejudice has not yielded to its demand, and the companies have never been able to maintain their own position with unanimity, the temptation to secure a vast business upon any terms being always too strong for some of them to resist. This form of legislation has beyond dispute increased the cost of insurance to the people, while it has embarrassed and disturbed the regular work of the companies.Another pernicious tendency of popular legislation in the United States is found in theValued Policy laws, the first of which was adopted by Wisconsin in 1874, providing that when any insured building is wholly destroyed by fire the amount of the policy shall be conclusively taken as the amount of the loss. This principle, with various modifications and extensions, has become law in some twenty states of the Union, though in many of them its enactment has been vigorously resisted by the executive government; several governors have vetoed such bills, while most of the supervising officers have had the intelligence to disapprove them. The provision is regarded by all insurance authorities as highly dangerous, inviting over-insurance and incendiarism; and there is no doubt that it has this tendency in many instances. But the statistics available, while showing that in general the rate of loss has increased where such laws are in force, do not demonstrate any such wide and ruinous stimulation of fraudulent practices as has been apprehended by thoughtful critics. The actual result is commonly to throw upon the insurer the responsibility for providing in advance against over-insurance by minute surveys and, in special cases, for continual watchfulness against depreciation. Like all other interference of government with private contract, however, it has a marked effect in increasing the difficulty and expense of business transactions.

Another pernicious tendency of popular legislation in the United States is found in theValued Policy laws, the first of which was adopted by Wisconsin in 1874, providing that when any insured building is wholly destroyed by fire the amount of the policy shall be conclusively taken as the amount of the loss. This principle, with various modifications and extensions, has become law in some twenty states of the Union, though in many of them its enactment has been vigorously resisted by the executive government; several governors have vetoed such bills, while most of the supervising officers have had the intelligence to disapprove them. The provision is regarded by all insurance authorities as highly dangerous, inviting over-insurance and incendiarism; and there is no doubt that it has this tendency in many instances. But the statistics available, while showing that in general the rate of loss has increased where such laws are in force, do not demonstrate any such wide and ruinous stimulation of fraudulent practices as has been apprehended by thoughtful critics. The actual result is commonly to throw upon the insurer the responsibility for providing in advance against over-insurance by minute surveys and, in special cases, for continual watchfulness against depreciation. Like all other interference of government with private contract, however, it has a marked effect in increasing the difficulty and expense of business transactions.

The direction in which fire insurance as a social institution calls most pressingly for improvement is the extension of the principle of co-insurance. The importance of this can only be understood by remembering that theNeed of co-insurance.aggregate losses of the community by fire are chiefly made up of innumerable small fires and not of sweeping conflagrations. The experience of every company confirms the general truth, that the number of fires in which a building is totally destroyed, or in which the loss amounts to the greater part of the property exposed under the same risk, is comparatively very small. It may be asserted with confidence that, in the grand aggregate of the business, much more than three-fourths of the loss occurs in fires in which less than one-tenth of the insurable value at risk is destroyed. The practical result is obvious. If fires destroy a million of dollars’ worth in property insured for its full value, and a million’s worth more in property insured for one-tenth of its value, the insurers will pay $1,000,000 upon the first group and more than $750,000 upon the second. But if all the insurance is taken at the same rate the insurers will have received premiums ten times as great on the former group as upon the latter. This rough illustration shows that in an equitable adjustment of rates the amount insured as compared with the value exposed is a prime element, and that premiums might justly form a scale, highest on the smallest fractions ofvalue, and diminishing rapidly as the percentage of insurance increases. Such a scale is, however, impracticable for many reasons, apart from the endless complications which, even if it could be constructed, it would introduce into the classification of risks. Any scientific plan of insurance, therefore, must provide another method for maintaining the proportion between amounts of premiums paid and the share in its benefits obtained for them. This is the purpose of what are generally calledaverageorco-insurance clauses. The principle is, that when a proper rate for a class of risks is found, then the insured may protect at that rate any percentage of such a risk, and in case of fire shall be indemnified for the same percentage of his loss. When once clearly grasped, this principle largely simplifies and rectifies the business. It is in universal use in marine insurance under the name of “average,” and is there recognized as indispensable. It is embodied in all fire policies in France, Germany and several other countries of Europe, and in 1826 was made compulsory in Great Britain by law in all “floating policies,” those, that is, which cover stocks of goods distributed in several places and in fluctuating amounts. But it has not yet become general in Great Britain or America, although every writer of authority on the subject, and every practical underwriter of large experience, approves it. Systematic attempts have been made since about 1892 to extend its application in the United States with much success, but they have been met by strong opposition, which shows a widespread misunderstanding of its true bearing.

The co-insurance clause, indeed, which has been generally approved by the American associations of underwriters, and applied in the great commercial cities, is less sweeping than the parallel agreements used in France and Germany. The latter regard the insured owner as self-insurer for the entire value at risk not covered by the policy, and grant indemnity only for that fraction of the loss which the amount insured bears to the whole amount exposed. The American clause is less logical, commonly providing that: “If at the time of fire the whole amount of insurance on the property covered by this policy shall be less than 80% of the actual cash value thereof, this company shall ... be liable only for such portion of such loss or damage as the amount insured by this policy shall bear to the said 80% of the actual cash value of such property.” But this limitation of the basis of co-insurance average to 80% of the total value is in perfect harmony with the conservative policy which seeks in all cases to prevent over-insurance. The most serious danger to which the entire system is open is that a fire may promise profit to the insured. To avoid this, it is a small enough margin to exclude from protection by the policy one-fifth of the estimated value, and to require the owner to assume that proportion of the risk. It is therefore reasonable not to require in any case a larger share than four-fifths to be covered, and not to press the co-insurance principle so far as to offer a differential advantage to those who insure above this limit. Thus, for practical purposes, and in the general mass of business, the 80% clause may be accepted as approximately the best application of the principle. It makes possible substantial equity in distributing the cost, while it does not interfere with proper safeguards against over-insurance. The cordial support of the mercantile community in the great cities, and of the most intelligent state officers, has been given to it.A popular outcry has, however, arisen against all forms of co-insurance, on the superficial and mistaken assumption that in every case the principal sum named in the policy measures the insurance paid for by the premium; and that any limitation upon it must be a wrong to the insured, for the emolument of the insurance corporation. No less than ten states have passed laws prohibiting the clause within their jurisdiction, though Maine in 1895, after a trial of two years, repealed the prohibition. The law of Tennessee, a typical form, is as follows: “Insurance companies shall pay their policyholders the full amount of loss sustained upon property insured by them, provided said amount of loss does not exceed the amount of insurance expressed in the policy, and all stipulations in such policies to the contrary are and shall be null and void” (except in case of insurance upon cotton in bales). In several states the use of the co-insurance clause is made a penal offence. It is an interesting fact, however, that while this principle, whenever it has been generally applied, has led not only to a fairer equalization of premium rates, but, on the whole, to a marked reduction of them, the laws in question have deprived the people adopting them of the resulting benefit. In the year 1899 the average premium rate upon all fire risks written in the states in which co-insurance was wholly or partly prohibited was something more than $1.20 per $1000, while in the rest of the country, where the clause was permitted and to a large extent used, the rate was but 96 cents per $1000. The marked difference, which tends to increase, is a perpetual object-lesson which must in the end appeal strongly to the popular intelligence.

A popular outcry has, however, arisen against all forms of co-insurance, on the superficial and mistaken assumption that in every case the principal sum named in the policy measures the insurance paid for by the premium; and that any limitation upon it must be a wrong to the insured, for the emolument of the insurance corporation. No less than ten states have passed laws prohibiting the clause within their jurisdiction, though Maine in 1895, after a trial of two years, repealed the prohibition. The law of Tennessee, a typical form, is as follows: “Insurance companies shall pay their policyholders the full amount of loss sustained upon property insured by them, provided said amount of loss does not exceed the amount of insurance expressed in the policy, and all stipulations in such policies to the contrary are and shall be null and void” (except in case of insurance upon cotton in bales). In several states the use of the co-insurance clause is made a penal offence. It is an interesting fact, however, that while this principle, whenever it has been generally applied, has led not only to a fairer equalization of premium rates, but, on the whole, to a marked reduction of them, the laws in question have deprived the people adopting them of the resulting benefit. In the year 1899 the average premium rate upon all fire risks written in the states in which co-insurance was wholly or partly prohibited was something more than $1.20 per $1000, while in the rest of the country, where the clause was permitted and to a large extent used, the rate was but 96 cents per $1000. The marked difference, which tends to increase, is a perpetual object-lesson which must in the end appeal strongly to the popular intelligence.

The varying attitude of several civilized governments towards the institution of insurance has found significant expression in their tax laws. In Great Britain a stamp duty of 6d. was imposed in 1694 upon “every piece of vellum orTaxation of insurance.parchment or sheet of paper upon which any policy of insurance should be engrossed or written,” and was doubled in 1698. It was further increased (reaching 3s. 10d. per policy in 1713) and varied by many subsequent acts, under some of which the percentage duty on fire insurance was also made payable by stamps upon policies. But in 1865 the stamp tax was finally reduced to the nominal sum of 1d. upon each policy. A far heavier burden, however, was imposed upon insurers by the measure of Lord North in 1782, charging all fire insurances in force with an annual duty of 1s. 6d. for every £100 insured. In 1815 the general rate was made 3s. per £100, but was collected once for all upon the policy when issued; and it so remained until reductions began in 1864. The duty was wholly abolished in 1869. The revenue from this source reached its highest point in 1863, when it was £1,714,622, presumably representing insurances effected in that year to the amount of £1,143,081,333. There are no data for determining the amount of premium receipts or of losses realized on the same volume of insurance; but the tax was recognized by economists as well as by all parties to the policy contracts as an excessive burden. In many instances it more than doubled the cost of insurance. Its effect in discouraging the prudent custom of insuring against fire was very serious, and after its abolition this custom extended so rapidly that it soon became, and continues, practically universal in Great Britain. Upon the continent of Europe fire insurance is generally taxed quite heavily; most so in France, where the direct duties on the premiums, together with the registry and stamp taxes paid by the companies, have been estimated to add one-fourth, or perhaps one-third, to the cost of insurance.

In the United States the companies are taxed, each by the state in which it is domiciled, upon their real estate, and often upon their capital, surplus of profits, and are required in other states to pay fees to the insurance departments, and commonly an excise of from 1 to 2½% of their premiums. An elaborate table is prepared each year by a committee of the National Board of Fire Underwriters, showing the aggregate amount of taxes paid by the companies operating in New York in comparison with their receipts and profits. The statement received and published by the board in 1900 contained the following:—

In qualification of this statement, it may be said that the reported expenses appear to include taxes, and that the additions charged, to liability are to some extent theoretical and flexible. It also appears from the state reports that upon the entire capital and net surplus of $191,000,000 employed in the business in the United States by 316 joint-stock companies, dividends to the amount of $8,000,000, or 4.2%, were paid in 1899 to shareholders. Nevertheless it is true that competition among the companies, together with unfriendly legislation, has reduced the profit upon their aggregate capital near the vanishing point, and that the taxes, the average rate of which increased 50% within the period 1891-1899, are heavier in many states than can be justified by public policy or by the analogy of other corporate interests. The true principle, doubtless, is that while the capital employedin insurance for gain ought to contribute to the state the same share of its profits as other capital, yet the premiums, agencies, policies and entire machinery representing only losses, and providing for their distribution, should be exempted, as far as the necessities of the public treasury permit.

One aspect of the taxation of fire insurance is of especial interest, namely, the very general disposition of legislatures and municipal authorities to impose upon the underwriters the cost of fire departments. The systematic prevention and extinguishment of fires are everywhere assumed to be proper work for the community at large. But the first license granted by the crown to issue insurance policies in London in 1687 was conditioned upon regular contributions by the authorities to support the king’s gunners as a fire brigade, and in the public mind the privilege of insuring the prudent has ever since been vaguely associated with the duty of guarding the property of the whole community. The voluntary support of fire patrols by the companies in London, New York and other cities has done much to promote this view; and a substantial part of the taxes paid upon fire policies in the United States is levied for the support of fire departments, the pay and pensions of firemen and similar purposes. The tendency to increase such taxes, under the pretext that the protection afforded is for the special benefit of the companies, is strong in some of the states; though it would be equally rational to compel life insurance companies to maintain general hospitals for the sick.

The most complete statistics of the fire insurance business collected in any country are those presented in theUnited Statesto the National BoardStatistics.of Fire Underwriters at each annual meeting. The following summary of part of the information submitted by the committee on statistics, 10th May 1900, giving the amount of fire risks insured in the United States, premiums received for them, and losses paid upon them, by all joint-stock fire insurance companies for the year 1899 will serve as an example:—

Fire Insurance in the United Slates. Joint-Stock Companies.

These returns do not include mutual companies. The compilers of theInsurance Year-Book, however, obtain from the several state departments of insurance the reports of all companies made to them of the business done within each state; and from these it appears that in 1899, for example, 160 mutual companies assumed fire risks to the amount of $1,119,772,848. Many small local associations have made no returns, but their operations are too limited to materially affect the aggregate. It is noteworthy that while mutual companies transact less than 6% of the business of the whole country, yet in the state of Rhode Island, a densely peopled manufacturing community, they have more than 78%, and in Massachusetts nearly 24%; and that, while less than one-ninth of the insured property of the United States is situated in these two states, they contain nearly two-thirds of that which is insured by mutual associations.

The fire insurance business of foreign companies in the United States was comparatively small until 1870. Four strong British corporations were then in the field, and their transactions amounted to less than 9% of the entire joint-stock business. But their success attracted others in rapid succession, especially from Great Britain and from Germany, and in 1880, 19 foreign companies assumed 23.7% of all the risks reported to the National Board; in 1889, 23 such companies took 30.3%; and in 1899, 35 such companies took 33.2%. The distribution of the business among them is not given by the board tables, but can be gathered from the reports of the American branches to the insurance departments of the states, which are summarized in the Spectator Company’s Year-Books. The total net payments of the British and colonial fire insurance companies in connexion with the disastrous fire in San Francisco in 1906 amounted to over ten million pounds, and the prompt settlement of all claims strengthened considerably their position in the United States.

In theUnited Kingdomthe statistics of fire insurance are less accessible and less complete, no official records being made of the local distribution of the property insured, while the published accounts of the companies are not sufficiently uniform and detailed to make a trustworthy summary of the entire business possible. Much of it is done by foreign companies, of whose British business we have no separate statement. A statement of the revenue accounts of the various British companies insuring against fire will be found in the annualInsurance Blue Book and Guide.

In theDominion of Canadathe insurance companies make detailed reports to the government bureau, and the statistics of the business are full and accurate. The following table shows the aggregate business of five companies in the Dominion in 1869 and 1907:—

Upon thecontinent of Europethe fire insurance business is conducted partly by local companies in each country and partly by the great international offices of Great Britain and Germany. The local associations in Austria, Germany and Switzerland are of three classes—public assurance organizations connected with local governments, private mutual companies and joint-stock companies. It is impossible to obtain balance-sheets of all, nor is any information available concerning the local distribution of the risks, or the whole amount of property insured. The capital employed by stock corporations in this business in each country, and the aggregate premium receipts and payments for losses in the last year of which a report is available will be found in the annualPost Magazine Almanack.

While most of the fire insurance business in theAustralian coloniesis in the hands of British companies, local institutions for the purpose have had a considerable development on the same general lines as in Great Britain and with similar freedom from interference by the governments. But no accounts of the receipts and losses are available, most of the companies conducting a marine or life insurance business, or both, under the same general management.

Beyond the limits of the great commercial nations, no satisfactory information is accessible concerning the practice of fire insurance. Even in Spain and Portugal there is far less intelligent interest in the subject than in neighbouring countries, and the agencies of foreign companies transact much of the business in the large towns. Six Portuguese companies have maintained themselves for many years, a few of them for nearly a century, and have established agencies in the Spanish islands and in Madeira. For other nations than those mentioned, the only systematic effort to collect the facts is made by the compilers of theYear-Book, and the results are extremely meagre. The great British and German corporations are zealous in extending their transactions to the commercial ports everywhere, and local companies are often formed in the British colonies. In addition to those in Canada and Australia some companies in South Africa have become financially important. Small native companies have been successful in establishing their credit in Japan, Brazil, the Argentine Republic, Chile and Peru. A considerable business is done in insuring the property of foreign residents in the Levant, on the coasts of Asia, in South Africa and the Pacific Islands, but mostly by European companies, and as an incident to the more general practice of marine insurance. There are several successful fire companies among the Dutch in Java. The small business in Mexico appears to be wholly in the hands of foreign companies.

IV. Life Insurance

Guesses at the probable length of life for the purpose of valuing or commuting life-estates, leases or annuities were made even by the ancients, and crude estimates of the number of years’ purchase such interests are worth occur inHistory.Roman law and in many medieval writings. In 1540 the English parliament enacted that an estate for a single life should be valued as a lease of seven years, one for two lives as a lease of fourteen years, and for three lives as a lease of twenty-one years. More than a century laterThe Cambridge Tables for renewing of Leases and purchasing Liens, a standard work in England, with the certificate of Sir Isaac Newton to its accuracy, proposed, as a remedy for the inequity of this fanciful rule, to make the increase for each additional life less by one year, so that, valuing a single life at ten years, two lives shall be reckoned as nineteen years and three lives as twenty-seven years. No distinction of ages was recognized, and the results, tabulated to decimal parts of months, are worthless. Thus the foremost minds of the world had as yet no apprehension of a true method of reasoning on the subject. The first clear insight into the character of the problem appears inNatural and Political Observations on the Bills of Mortality, published in 1661 under the name of John Graunt, a haberdasher and train-band captain of London. Graunt recognized the principle of uniformity in large groups of vital and social facts, and actually prepared, from the mortality registers of London, what he calls a “Table showing of one hundred quick conceptions, how many die within six years, how many the next decade, and so for every decade till 76.” This was the earliest crude suggestion of a table of mortality, and Graunt’s interest in the inquiry was scientific, without definite practical purpose. But a little later the sale of annuities was pressed upon governments as a method of discounting future revenues. In 1671 John de Witt, grand pensionary of Holland, reported to the states general a plan for such sales upon a scientific method, the insight and skill of which, had he possessed proper statistical data, would have anticipated results only reached by later generations. The report, however, was buried in the Dutch archives and forgotten for nearly two centuries. It was unknown in England when, in 1692, the government undertook the sale of annuities. A loan of £1,000,000 was offered, each £100 paid in to purchase a life annuity of £14, without distinction of age. A table accompanied the offer, purporting to show how many of 10,000 persons now living, old and young taken together at random, are likely to die in each year from one to ninety-nine. The purchasers, though without clear understanding of the principle, were instinctively shrewd enough to select healthy young lives for annuitants, and the nation paid enormously for the error. This speculation of the public treasury led the eminent mathematician and astronomer, Dr Edmund Halley, to examine the subject. In 1693 he presented to the Royal Society a study of “The degrees of mortality of mankind.” The parish registers of England took no note of age at death, and Halley, perceiving that the average durationHalley’s Table.of life in large groups of persons can only be determined when ages at death are known, sought in vain a statistical basis for such an inquiry in his own and in many other countries. But it happened that the city of Breslau in Silesia had kept such records, and he succeeded in obtaining the registers for five years, 1687-1691, including 6193 births and 5869 deaths. No census of the city having been taken, Halley made the best estimate he could of the population, and computed how many of a thousand children taken at the age of one year will die in each succeeding year. Arranging the results in three parallel columns, showing in successive lines the age, the number living at that age, and the number of deaths during the year, he formed the first mortality table. The arrangement was itself a discovery, exhibiting at a glance the essential data for valuing life-risks, and suggesting solutions for problems which had puzzled the ablest students. This general form of the mortality table remains in use as the natural and best for such collections of facts. The method of using such a table in calculating the values of life contingencies was also discovered by Dr Halley. He showed that where a payment is to be made at a future date, if a named person be then alive, its present value is the sum which compounded at interest during the interval will amount to that payment multiplied by the fraction representing the probability that the person will survive. These two elements, compound interest and the probability of life or death, are the foundations of the theory of life contingencies.

From Halley’s time the progress of the theory has been in three directions: first, in accumulating facts from which averages are deduced, and analysing the data so as to eliminate disturbing influences, that is, in constructing trustworthy tables of mortality; secondly, in extending the inferences from such tables, and multiplying their applications to needs of practical life; and thirdly, in facilitating the calculations which these applications require. But while Halley thus firmly and lastingly drew, in outline, the theory of life contingencies, the numerical results attained by him were grossly imperfect. Forced by the lack of data to assume that the population was stationary, and to rely on a rude estimate of its numbers, he well knew that his conclusions were but provisional. Yet they were far in advance of the general mind of his time. As late as 1694, and even in 1703, parliament substantially re-enacted the old law for valuing leases at seven years for each life. The meagre Breslau Table long remained the only serious attempt to utilize actual observations of mortality for scientific purposes. In 1746 A. de Parcieux (1703-1768), a mathematician of Paris, published anEssai sur les probabilités de la durée de la vie humaine, in which he presented mortality tables formed by himself, one from the records of certain Tontine associations, and five others from those of several religious orders in Paris. The Tontine experience table was a much closer approximation to the true course of mortality, as shown by later investigations, than any of its predecessors, and indeed now appears, despite the crude manner in which the materials were treated, to have been more accurate and more trustworthy than the Northampton or even the Carlisle Table of much later date. The essay of de Parcieux was an important source of information to advanced students in France and Germany, but attracted no general or popular interest, nor was it followed up by progressive researches of the same character in continental Europe, while it remained almost unnoticed in England.

Throughout the 18th century the customary treatment of life annuities was as chaotic and fanciful as before, though some writers of eminence, most notably Dr Thomas Simpson of London (1752), treated the theory of the subject with great intelligence, and in 1753 James Dodson of London (great-grandfather of Augustus de Morgan) projected a life insurance company in which the premiums should be accommodated justly to the ages of the insured. But life insurance as a business really began with the Equitable Society of London, founded in 1762. The associates petitioned for a charter, but the law officers of the crown refused it, saying that the scheme depended for success on the truth of certain tables of life and death, “Whereby the Chance of Mortality is attempted to be reduced to a certain standard. This is a mere speculation, never tried in practice.” The society was organized as a voluntary association, and began business in 1765. Its premiums were computed from the Breslau Table, with some corrections from the London Bills of Mortality, and were far higher than any now in use. But the managers, in face of actual business, needed more light. Dr Richard Price, a student of the new science of life contingencies, was consulted, and soon devised tests of the society’s experience and measures of the financial results, which are in principle those still practised. He also aspired to construct a more accurate table of mortality, and discovered data in certain parish registers of Northampton which promised to represent the average of life in England.Northampton Table.From these he formed in 1780 the Northampton Table of Mortality, and computed a new and largely reduced scale of premiums for the society. The historical importance of the Northampton Table lies in the profound impression it made on the general mass of intelligent persons.Although mortality had long been recognized by special inquirers as a promising theme for statistical inquiry, its actual treatment, except in the narrow school founded by Johann Süssmilch in Germany (1746), and in the isolated and almost prophetic work of de Parcieux in France, had been speculative and vague. Demoivre handled it with mathematical acuteness, but framed his scale of mortality (about 1750) on a hypothesis of his own, not on known facts. Out of each group of eighty-six deaths, according to this scale, one dies on the average each year till all are gone; so that x being the present age, the probability of death within a year is always 1/(86-x). This conjecture, which, during middle life, served as a rough approximation to the truth, almost as well as some of the early tables of repute, long found remarkable acceptance among men of science. Dr Price’s researches first brought to general apprehension the conviction that a large basis of observed facts is the only source of real knowledge. The government of the day felt the influence of the movement. In 1786 Pitt, then chancellor of the exchequer, consulted Dr Price on plans for the conversion of debt, and in 1789 the government first showed knowledge that in granting annuities ages must be distinguished, and that the prospective life at ninety and that at twenty-five are not to be estimated as equal. About 1808 a conversion of 3% into annuities was planned. The Northampton Table was adopted, and Morgan computed rates from it which were used for twenty years. It proved to represent a mortality far in excess of the average, and in 1821 John Finlaison, being made actuary to the debt commissioners, protested against the rates in use. But not until 1828, when the treasury had lost two millions of pounds by selling annuities too cheap, was the law repealed. Finlaison then constructed a new and less wasteful scale for conversions, but singular results followed. At the age of ninety, for instance, £100 would purchase an annuity of £62. Combinations were formed to purchase annuities on the lives of old people selected for their vigour; 675 of these were taken, with a further loss of at least a million to the treasury. The Northampton Table, in fact, like the earlier Breslau Table, was formed without a census, and upon the false assumption that the population was stationary. Dr Price’s estimate, founded on the recorded baptisms, was much too low, many of the people being of a sect which rejected infant baptism. His table represents an average life of twenty-four years, whilst subsequent inquiries indicate a true average of about thirty years at that time in the same parishes. The actual mortality in the Equitable Society proved to be less by one-third than that anticipated by the table. The error had consequences of vast moment. The immediate and dazzling prosperity of the societies founding rates on this supposed scientific basis excited the public imagination, stimulated the business exceedingly, and led to many extravagant projects, followed by fluctuations and failures which impaired its healthy growth and usefulness.

In spite of gross defects, the Northampton Table remained for a century by far the most important table of mortality, employed as the basis of calculation by leading companies in Great Britain, and adopted by the courtsRecent actuarial progress.as practically a part of the common law. Parliament, followed by some state legislatures and many courts in America, even made it the authorized standard for valuing annuity charges and reversionary interests. But in life insurance practice it is now wholly antiquated. Like its most famous successor, the Carlisle Table of Joshua Milne, it rested upon observations of the population of a town. How far this limited and peculiar group represented the nation was still doubtful; no less so how far the rate of mortality among applicants for insurance, accepted by the offices, would correspond with that of the urban citizens or of the whole body. As soon as the companies had sufficient records of their own experience the work began of striving to construct, for business use, tables which should truly express it. This branch of research has ever since been prosecuted with all the resources they could command of industry, practical judgment and mathematical skill; and the successive achievements in it may be accepted as in general the sum and measure of the progress of actuarial science. Now the recognition of an ascertainable uniformity in human mortality has become part of the general stock of thought. But actuarial science, which originated in Great Britain, was long the peculiar and almost exclusive possession of British students, and even till now has been practised most fruitfully in its first home, mainly by the actuaries of life insurance institutions, but with important contributions from other inquirers, especially those in the service of the registrar-general. The most complete storehouse of technical and practical learning on the general theory and on all its applications to life insurance practice is found in the successive volumes of theJournal of the Institute of Actuaries. The tables published by the Institute in 1872, founded on the experience to 1863 of twenty companies (seeAnnuity), still remain the most authoritative expression of the mortality of insured lives, and have largely replaced all earlier standards in the valuations of the British companies, more than three-fourths of which, in their latest returns to the Board of Trade, compute their reinsurance reserves by the Hm.and Hm.5tables. But for several years a committee of the Institute and of the Scottish Faculty of Actuaries has been engaged in collecting and arranging for investigation the far vaster experience which has now accumulated in the hands of sixty companies, including the records of more than a million policies. The large basis of facts thus obtained will be treated with special reference to different classes of risks, and will throw much light on difficult questions of selection, which have hitherto been treated speculatively, or at least without the conclusive evidence of large averages, and are still more or less in controversy. Some of these will require more detailed notice hereafter.

It is only since the middle of the 19th century that actuarial science has rapidly advanced in other countries, chiefly under the stimulus of the extending practice of life insurance. Both in America and upon the continent of Europe the small business transacted by the pioneer companies was largely conducted on empirical and conjectural methods from year to year, English custom being consulted as a guide in fixing premiums. The Gotha Bank, the first institution to insure lives upon business principles in Germany, adopted at its foundation in 1827 a mortality table formed by Charles Babbage upon the basis of the Northampton Table, corrected from cursory notes upon the early experience of the Equitable Society, which had been given by its actuary to a general meeting of its members in 1800. The French companies, and several in Germany of later origin than the Gotha, took as their standard the so-called Table of de Parcieux, previously described; and this table, with modifications dictated by experience, continued until very recently in general use in France. The Seventeen Companies’ Table of 1843 was adopted by the Insurance Commissioners of Massachusetts, who in 1859 introduced the methods of state supervision of insurance now generally practised in the United States. This table, though long superseded in the esteem of actuaries in their ordinary work, is still the standard for official valuations in most states of the union, a fact which has given it undue prominence. The so-called American Table, derived in 1868 from the limited experience of the largest American company during its earliest years, was the first important work of the kind done in America. In view of its narrow basis of facts, it has stood the test of time singularly well, and it is now in wider use than any other for computing the premiums of American companies. Its most marked difference from the standard British tables for insured lives is that it indicates a decidedly lower rate of mortality throughout the period of mature manhood, between the ages of thirty-five and seventy-five, though with a higher rate at the extremes of life; and this peculiarity is also found in American tables deduced from more recent and far larger experience.Actuarial science has been widely cultivated in the United States of late years, the numbers and zeal of its professional students having kept pace with the extraordinary growth of life insurance. The aggressive activity of the companies has brought the principles of the business home to the popular mind as in no other country, and a large number of periodicals are devoted entirely to the subject. These tendencies have been strengthened by the system of supervision practised by the states, which has also greatly influenced public opinion, directing attention in an extraordinary degree to certain special and technical features, to the neglect of more comprehensive and more useful criticism. In the official work of the state departments the actuary’s province appears substantially to begin and end with the valuation of liabilities upon the net premium basis, which is applied with increasing strictness as the sole and final standard of solvency, and the determination by it of the “legal surplus” of each company. But a considerable number of professional actuaries have prosecuted their studies in a scientific spirit, and most of these since 1889 have been associated in the ActuarialSociety of America, which has established a high standard of professional competence in its examinations and transactions. The question how far the rate of mortality among insured lives in America is fairly represented by tables drawn from British experience has attracted much inquiry; and many companies have made important contributions to it from their own records, in several instances in the finished form of carefully graduated tables, each with an individual character, but all with some features which distinguish them as a group. By far the most comprehensive effort to establish a standard table for America is that of a committee of actuaries, for which, in 1881, L. W. Meech published the classified experience of thirty offices to the end of 1874, including most of the large companies in the United States, and embracing more than a million policies. The observations collected in this work have furnished materials for many important investigations, but the finished tables have rarely been applied in practice, being drawn from an aggregation of largely incongruous experiences, the influence of each of which upon the general average is indeterminate.The business of life insurance upon the continent of Europe has given an extraordinary stimulus to actuarial studies. Before 1883 the German companies computed their premiums and reserves by antiquated life tables. The most approved of these, as illustrating the duration of German life, was that prepared by Brune of Berlin in 1837 from the records for seventy years of an annuity society for widows, which practised careful medical selection of the husbands and kept exact mortality registers. In 1883 was published an admirable table founded on the combined experience of twenty-three German companies, which has superseded all other standards for ordinary valuations within the German empire. The French companies generally continued to rely on the tables of de Parcieux, with modifications of their most glaring defects, until a still later date. In 1898 a committee of French actuaries published a new set of tables drawn from the experience of four of the principal offices in France, and these are now accepted as the best basis for life insurance practice by similar companies there. Schools of actuarial science have been opened in both Germany and France, and the professional actuaries of these countries, and of Austria and Belgium, have formed associations for the promotion of their pursuits. Sessions of delegates from the several institutes and societies of actuaries throughout the world meet triennially in general congress in the various capitals. Such sessions do much to broaden and harmonize the scope and aims of the profession.

Actuarial science has been widely cultivated in the United States of late years, the numbers and zeal of its professional students having kept pace with the extraordinary growth of life insurance. The aggressive activity of the companies has brought the principles of the business home to the popular mind as in no other country, and a large number of periodicals are devoted entirely to the subject. These tendencies have been strengthened by the system of supervision practised by the states, which has also greatly influenced public opinion, directing attention in an extraordinary degree to certain special and technical features, to the neglect of more comprehensive and more useful criticism. In the official work of the state departments the actuary’s province appears substantially to begin and end with the valuation of liabilities upon the net premium basis, which is applied with increasing strictness as the sole and final standard of solvency, and the determination by it of the “legal surplus” of each company. But a considerable number of professional actuaries have prosecuted their studies in a scientific spirit, and most of these since 1889 have been associated in the ActuarialSociety of America, which has established a high standard of professional competence in its examinations and transactions. The question how far the rate of mortality among insured lives in America is fairly represented by tables drawn from British experience has attracted much inquiry; and many companies have made important contributions to it from their own records, in several instances in the finished form of carefully graduated tables, each with an individual character, but all with some features which distinguish them as a group. By far the most comprehensive effort to establish a standard table for America is that of a committee of actuaries, for which, in 1881, L. W. Meech published the classified experience of thirty offices to the end of 1874, including most of the large companies in the United States, and embracing more than a million policies. The observations collected in this work have furnished materials for many important investigations, but the finished tables have rarely been applied in practice, being drawn from an aggregation of largely incongruous experiences, the influence of each of which upon the general average is indeterminate.

The business of life insurance upon the continent of Europe has given an extraordinary stimulus to actuarial studies. Before 1883 the German companies computed their premiums and reserves by antiquated life tables. The most approved of these, as illustrating the duration of German life, was that prepared by Brune of Berlin in 1837 from the records for seventy years of an annuity society for widows, which practised careful medical selection of the husbands and kept exact mortality registers. In 1883 was published an admirable table founded on the combined experience of twenty-three German companies, which has superseded all other standards for ordinary valuations within the German empire. The French companies generally continued to rely on the tables of de Parcieux, with modifications of their most glaring defects, until a still later date. In 1898 a committee of French actuaries published a new set of tables drawn from the experience of four of the principal offices in France, and these are now accepted as the best basis for life insurance practice by similar companies there. Schools of actuarial science have been opened in both Germany and France, and the professional actuaries of these countries, and of Austria and Belgium, have formed associations for the promotion of their pursuits. Sessions of delegates from the several institutes and societies of actuaries throughout the world meet triennially in general congress in the various capitals. Such sessions do much to broaden and harmonize the scope and aims of the profession.

Elaborate efforts have been made by several governments to employ the machinery of census bureaus for determining the general rate of mortality, and it has been the worthy ambition of able actuaries to devise trustworthy methods of utilizing the census returns for this purpose. The British Statistical Office under Dr William Farr and his successors, and, later, the Swiss Federal Bureau of Statistics have accomplishedRates of mortality.the best work in this direction, and the series of “English Life Tables,” founded on successive decennial censuses, interpreted by the registered deaths during the intervals, are the most useful data now available for the average value of civilized life. But all such general tables are as yet but tentative and provisional. The imperfections of mortuary registries and of census returns are great, and corrections are largely conjectural. Until more complete methods of collecting the facts are practised, the experience of life insurance companies promises to furnish the only mortality tables having claim to authority. It is already becoming evident that the general rate of mortality, and in particular the rate at each age of life, not only differs widely in different communities, but undergoes important changes in successive generations. A multitude of forces are at work in civilized society which must influence the average duration of life, such as the extension and concentration of many industries, the vast growth of cities, the progress of medical and hygienic science, the increase of wealth, comfort and luxury, the changes in the frequency and destructiveness of war. It is plausibly maintained, on the one hand, that these and other causes have already added some years to the average lifetime of civilized man; and, on the other hand, that their combined effect has been to lessen the sharpness of the struggle for existence, to rescue the weaklings from destruction and enable them to multiply, and so to weaken society at large. The final decision of the question will be found in the gradual modifications of the true table of mortality through successive epochs.

For the purposes of life insurance the future of mortality tables looks to less ambitious problems. The business calls for exact equity in determining the value of all life contingencies, and therefore for the most precise forecast attainable of the dates at which the amounts assured must be paid. Some idea of the historical progress of this inquiry may be gathered from the accompanying table, which epitomizes the general characteristics of a number of typical tables of mortality, showing at ages which are multiples of five years the annual death-rate indicated by each of them. The comparison will be found interesting in many ways, most strikingly, perhaps, as suggesting what is confirmed by a detailed examination of the facts, that insured life on the average in Great Britain is decidedly inferior to that in the United States, but superior to that upon the continent of Europe, and especially in Germany. From a careful investigation of the published experience, Dr McClintock concludes: “It is an ascertained fact that after the first five years of insurance the probability of death,” in Great Britain, “is fully one-fifth greater at any given age than the corresponding probability shown by American experience”; while “the average value of assured life in Germany is as much inferior to that shown in the Hm.experience as that in America has been found to be superior.”1

Table showing the number of Persons who will die in a year out of 100,000 who have attained the given Age, according to several Tables of Mortality.

No final explanation has been given, and there is no proof that the average life in America is longer than in England or Germany. Dr McClintock inclines to believe that one potent cause of the great difference in the insured experienceProblems of selection.is that, while European offices have generally awaited applications, which are commonly prompted by some sense of need for insurance, the custom of American companies is actively to solicit business through agents. On the average, lives which are only induced by persuasion to insure are better than those which voluntarily apply. That this suggestion pointsout a real and perhaps an important differentiating influence upon groups of risks is not doubted, but the measure of its effects has not yet been determined. The question is one of many which yearly assume more prominence, and which, as a class, are conventionally termed problems of selection. Assuming that the general rate of mortality is precisely known, any deviation from it occurring in a special group of insured lives, as the result of some influence peculiar to that group, is called the effect of selection. If insurance were offered on equal terms to all, the feeble and dying would apply in disproportionate numbers, and the mortality would be excessive. To avoid this danger careful medical examinations are required, excluding risks which appear to be impaired; and this selection by the insurer uniformly reduces the mortality below the general average during the earliest years of insurance. During these years large numbers of the insured withdraw, either from inability or from indisposition to pay their premiums, but the motive to do so is weakest with lives which have become impaired. The average vitality is lowered by the loss on the whole of a superior class, and the average mortality of those who persist rises. The extent of this influence varies widely with the proportionate number of lapses and the motives which induce them, increasing in a startling degree when lapses multiply in a discredited company, and remaining small, or even at times doubtful, under very favourable conditions; so that the ascertainment of its amount in different circumstances, and for different groups of the insured, is a problem of extreme complication. Its importance is increased by two tendencies which have grown stronger in the practice of recent years: first, to permit at all times the withdrawal by any policyholder of a substantial part of the technical or average reserve upon his assurance, a privilege which legislation and public opinion in the United States have extorted from the companies; and, secondly, the extensive introduction, under competition for public favour, of forms of policies which grant the option, at fixed dates in the future, between withdrawing the entire “accumulations,” or technical reserve and surplus, and continuing the insurance. It is well known that at the maturity of these options the motive is strong for impaired lives to remain insured, and that the cash withdrawals are so largely of superior lives that the subsequent rate of mortality is much increased. Other problems in selection arise from varieties in the forms of policies. It is commonly recognized that there are general and marked differences between the mortality experienced upon assurances issued at low and those at high premium rates. Policies for short terms, on which the computed net rates are the lowest, have been found so unprofitable to the insurers that they are rarely granted, and only with a very heavy loading of the tabular value. Upon those insured for life, with annual premiums, there is a large and constant excess of death losses above the endowment assurances, while groups of policies with tontine or cumulative features or reserved bonuses, available only after surviving a term of years, uniformly experience a low mortality.

It is also to be remarked that it is found in general that the average amount of policies matured by death is higher than the average of all policies in force; and some actuaries incline to believe that tables of pecuniary loss might, for practical use, take the place of tables of mortality, since the actual claims are in units of money, not of lives. The vast field of inquiry opened to actuaries by these and many more special questions of selection promises to engross more and more of their attention and labour. The technical methods of reducing and treating the data of mortality have been brought to a high degree of perfection, but the necessity for a better classification of the data themselves, with reference to special groups of lives or policies, differentiated by social or local circumstances, by business methods, by forms of contract, by race or personal characteristics, must assume ever greater prominence. It is conceivable that, at some period hereafter, the practical reliance of the offices will be more upon tables to be computed for such special groups, from select experience, than upon those drawn from vast aggregates without discriminating among their somewhat incongruous divisions.

The mortality tables in common use, however, have been proved by a vast experience to furnish a safe and fairly equitable basis for the business of assuring lives. Assuming that the table shows how many of a large group nowThe interest factor.assured may be expected to end in each succeeding year, the present value of the claims upon them depends exclusively upon the rate of interest at which funds will accumulate. Exact foresight of this rate being impossible, the insurer must assume a rate which can with certainty be realized. The difficult problem of determining the limits of safety in this assumption attracts the more attention now, because of the recent persistent decline in the average productiveness of invested capital. The actuary is forced to observe that the interest factor in his calculations is much less definitely fixed by known facts than the mortality factor. The longer a contract has to run, the greater the effect of the difference in rate. The value of a payment to be made in thirty years is greater by above one-half with interest taken at 3% than at 4½%, and one to be made in thirty-six years is more than twice as great. Hence the most careful study of the forces determining for long periods the average rate of interest is fundamental in life insurance. The tendency of opinion is to hold that a progressive lowering of interest rates must result from the accumulation of wealth. In support of this belief it is pointed out that from 1872 nearly to the present time there has been a general and somewhat uniform decline in the yield of invested capital, as represented by government stocks, mortgage loans, savings bank deposits and discounts in all commercial nations. The movement has been disguised by wide fluctuations, temporary or local, but has been on the whole world-wide and continuous, when great masses of capital, such as the investments of life companies, are kept in view. The fall has been greatest, too, in countries where rates were formerly highest, suggesting that as the great financial markets of the world become more intimately connected the normal rate of interest assumes a more cosmopolitan character, with an increasing tendency to equality among them. These considerations have had an important influence upon the computations of life insurance companies. In Great Britain, and commonly in continental Europe, the leading offices from the first assumed lower rates of interest than those in America, usually 3½ or 3%; and the reductions in their estimates have as yet been moderate, only thirty-one out of seventy-four British offices having lowered the interest basis in their valuations reported to the Board of Trade.

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