FRATERNAL BENEFICIARY ORDERS.

Desiring to give practical effect to the foregoing review of Friendly Societies, I shall undertake to show the present position of the Fraternal Beneficiary Orders in this country and point out their weakness and what is needed for their reconstruction. I fully appreciate the serious and difficult nature of such an undertaking and shall not presume to do more than to expose actual conditions and make suggestions according to my understanding and information. The Royal Commission, in England, occupied itself for five years in the investigation of the Friendly Societies. There is no need for consuming so much time in coming to an understanding of Fraternal Orders, but the importance of the subject is of no less consequence than that involved in the inquiry made in Britain from 1870 to 1875. There are more than 200 societies in this country engaged in the business of life insurance protection. Nearly four millions of our citizens are more or less dependent upon these societies in respect to the protection of their wives and children. I have at hand a showing for 136 of the Fraternal Orders as follows:

The figures, without comment, make patent the financial condition of these orders to the expert. He can very well know that provision is not made by money accumulation for the vast sum insured, represented by the five billions of dollars promised in the face of the outstanding certificates. The Board of Directors of the Manchester Unity and the Actuaries of the Friendly Societies would pronounce these Orders "hopelessly insolvent." The actuaries and managers of Legal Reserve "Old Line” companies in America are so accustomed to measuring worth by accumulation that they, too, consider these orders on the brink of ruin and hence give them no thought nor attention, other than to denounce them for a foolish endeavor. The reason for such a view is apparent from the contrast between the above showing and the following for 27 “ Old Line" companies:

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When men are identified with institutions which have so large a proportion of total liabilities represented by actual cash (or security) assets, it is not strange that they have little regard for the stability of other institutions which oppose the plan of money accumulation and depend upon the good faith and persistency of members for the carrying out of promises for future benefits. To the expert and mathematician the billions of dollars represented in the policy and certificate contracts have a definite value as liabilities certain to mature, and they hold as a sound business proposition

that these liabilities must be offset by assets certain to be realized upon to meet such liabilities at their maturity. The character of assets necessary for this purpose are (1) the value of the future premiums and (2) the value of present accumulation. The one billion and quarter of funds called "reserve liabilities" are, in fact, assets, and added to the present value of future net premiums equal the present value of the future liabilities of the five and three-fourths billions of insurance. For those who are accustomed to measure value by this rule, it is only natural for them to look with contempt upon a scheme that would undertake to protect four billions of insurance with fourteen millions of funds.

The head officer of the largest of the Fraternal Orders, at the September (1900) session of the National Fraternal Congress, clearly defined the nature of the protection granted by the Fraternal orders and pointed out the reason for the absence of accumulated funds. He said that, for the 32 years of their operation, they haye given temporary insurance to young men at its actual cost. He declared that the Fraternal Orders had not given and could not give whole life insurance under the plan on which they are now and have heretofore been conducted. He correctly and boldly asserted that the present and past plan made no provision for the insurance of old men ; that under it protection was only extended to ages when the current yearly costs of insurance were low, and to undertake to carry old members under such a plan was to invite certain decay and failure. He told the Congress, plainly and truthfully, that the Orders must change the present plan and make old members pay the full cost for their protection-"the commercial cost, just as the old line companies do"-if the purpose was to continue the insurance protection throughout life. He insisted that the plan of collecting current yearly costs for protection could not be applied to the practice of granting whole life insurance, because of the prohibitively high rates that must be charged at advanced ages where equity is maintained between young and old members. He asserted that the past plan, under which the Fraternal Orders had been operating, was no more nor less than the "Dependency Plan "—that is to say, a plan that contemplated protection for infants; a plan that contemplated the granting of benefits which would come to the dependents of a deceased member as compensation for their loss of his earning capacity; a plan that contemplated life insurance for those who made provision for dependents by personal service-a plan that contemplated replacing the value of such personal service to the extent, in whole or part, of that value, and of being discontinued when that value ceased or no longer existed as a provision for dependents—a plan which had for its purpose the protection of dependents as usually found in everyday life, who are generally the wives and infant children of working men, rather than of merchants, manufacturers or capitalists who provide for dependents from money investments instead of from personal service direct. The , speaker admitted that there were exceptions to the general rule, but contended that the Fraternal Orders undertook to provide for the majority of cases as met in actual experience amongst the laboring classes, and experience showed that children grew up and became independent before the father attained to an age when the natural cost of insurance was exorbitant. He pointed out that the plan, as operated by the Fraternal Orders for the past thirty-two years, was wholly inadequate for granting insurance pro. tection to old men, notwithstanding the fact that old wives" were often as much dependent upon them as were minor children upon young and middle-aged fathers. He said that such a plan, for such a purpose as above indicated, did not require any accumulated funds for the fulfillment of promises in respect to future benefits; that each year's benefits were provided for from each years's contributions, and for that reason the Fraternal Orders had paid more than $300,000,000 to beneficiaries of deceased members at a cost of about $8.00 per $1000 of insurance; that to have granted whole life insurance to the young and old alike it would have cost about $18.00 per $1000.

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A trer and more comprehensive statement of the actual conduct of Fraternal Orders could not have been made. A more complete exposition of their plan of operation could not have been given. A better explanation of their lack of accumulated funds is not possible.

Other prominent members of the Congress took issue with the speaker, and denied that the fraternal plan contemplated protection alone to the dependents of young and middle-age-i men, but that it assured the old man of a provision for the "old wife" when left widowed and desolate of provision for the widowed daughter and her infant children of provision for the dependent grand-children-of provision for any one to whom he might (within the law) make payable the sum insured.

This contention brings me to the first point of my writing where the purpose is expressed to show the present position of the Fraternal Beneficiary Societies. In fact, that position is stated for me in the discussion between the members of the last National Fraternal Congress. The first presentation gives the plan of practical operation under which the business of fraternal insurance has been conducted. The second gives the construction of that plan by the majority of the officials of Fraternal Orders. The truth then is this: The real plan of operation has been of the nature of yearly term insurance with collections and payments on the post mortem method; the representations of the plan have been to the effect that there was a limitation to the number or amount of assessments and that protection was granted for the whole of life.

Both parties to the contention in the National Fraternal Congress were in the right. The first was right in exposing the practical conditions of operation during the last 32 years. The second was right in voicing the general conception of fraternal protection. Fortunately, too, both parties recognized the necessity for a change in plan or concep tion. The first wanted the conception changed to conform to the present plan; the other wanted to change the plan to conform to the prevailing conception. And that is the present position of Fraternal Beneficiary Societies in America.

The weakness of this position is very apparent.

If the present plan is continued, and officials and members are brought to a realiz ation of its true nature, all benefits must be withdrawn from members when they have attained an age at which the cost of their protection exceeds the amount provided for in the agreed scale of assessments. At present the trouble is that benefits are paid upon the death of members who had long since passed such an age and who had not paid the full cost of their protection for many years. With the practice of having an age limit for admission an Order must have been in existence for a number of years before aged members are numerous, in consequence of which, practical operation may have been precisely as stated by the quoted speaker to the Congress, while officials and members alike could have believed that provision had been made for protection throughout life. Until an Order has been in existence for 15, 20, or 25 years, (according to the age limit of admission), there is an absence of very old members and of heavy losses incident to old age, so that when information comes only with experience full knowledge of true conditions is long delayed. The weakness of the position in trying to continue the present plan, with a complete understanding of it, is in the effect upon the membership when made to realize the real character of the present temporary protection.

If the present plan is changed, and officials and members are made to appreciate that continued operation under it will not bring results according to their conceptions and desires and previous understanding, it will be necessary to at once levy contributions adequate in amount to provide for the benefits promised or expected, and to equalize the contributions according to age and risk. This change of plan to meet concep. tion is no less difficult than to alter conception so as to conform to the plan. The weakness of it is in the uncertainty of its acceptance by the majority of members.

The main weakness of the present position comes from without the Orders most concerned. While there are many difficulties in the way of bringing about any change

in present methods, or in the conception of them, those difficulties could be the more readily overcome were it not for the continuous organization of new Orders with all of the original defects and misconceptions of the older Orders. These new Orders have higher rates of assessment, but they promise more benefits and thus commit themselves to old errors by having inadequate contributions for their promises. The officials deceive themselves and the members by promising old age and other benefits which are not likely to mature into claims for many years. No account is taken of such future liabilities, and hence present surplus from current assessments is held to be sufficient to make them level and uniform. The rates of assessment adopted by these new orders are even lower than rates which must be adopted by the older orders if they change to a sound basis along the lines of whole life protection. With their natural advantage of lower death-rate and long deferred and numerously promised benefits, these new organizations make strenuous effort to secure members from the older orders and no doubt would be more successful in their endeavor were the latter to disturb their membership by undertaking radical changes. If the legislatures of the several States can be induced to carry into effect the recommendation of the Fraternal Congress this difficulty will be largely removed.

It is my conviction that the present condition of Fraternal Orders, and the weakness of their present position, should be thoroughly understood for a full appreciation of the reforms and changes which are necessary. The enemies of the system may undertake to make capital out of the exposure for themselves and their unworthy purposes, but they cannot stay the progress of the Fraternal Orders nor prevent the successful consummation of the reforms which are now being inaugurated. The same earnestness characterizes the officials of these orders, in their determination to improve and perpetuate their organizations, as seen in the acts of officials of Friendly Societies during the last half century. The latter are faithfuly at work and the former will be no less faithful and no less successful. What has been accomplished in Britain can be accomplished in America. There as here were the same criticisms and contempt, the same antagonism and opposition, the same unworthy competition from business companies and the same unfraternal competition from new orders. There were in England the same difficulties encountered in taking up and carrying out reforms. There were some millions of misinformed members to be educated into a correct conception of sound insurance principles, whether for temporary.or permanent protection. It is a noble work that has been done in Great Britain. It is a noble and grand work that is being done in this country. It is not one of selfish commercialism, but has a stronger and deeper hold upon the workers. The history of man cannot be traced far enough back to go beyond the time when altruism was not a part of human nature, or when it failed to wield an influence stronger and mightier than sordid selfishness. That influence prevails to-day in the fraternal movement and gives to it strength and vitality which

assures success.

THE PARAMOUNT QUESTION.

I have said that the officials of the Friendly Societies, thirty to forty years ago, had to meet and solve the same hard problems which are now presented to the officials of our Fraternal Orders. About that time they had learned, from a tabulation of the experience of their societies, the actual cost of the protection being granted. Only two years ago were tables of their own experience compiled for the Fraternal Orders. Not until last year were those tables recommended for consideration to the members of the Na. tional Fraternal Congress. Only in this year, 1900, have the tables been sufficiently recognized to be urged upon the states as a suitable standard for determining rates of assessment. After having the evidence, from their own experience, of the costs of the benefits promised, the officials of the Friendly Societies set about to levy additional contributions to cover that cost, or to reduce the benefits so as to bring cost within the

contributions then collected. The question of cost of benefits and adequacy of contributions is the one now prominently before the officials of Fraternal Orders. Only in one way can that question be satisfactorily settled. It is no matter whether the operation be under the "Dependency" plan, or the "Step-rate" plan, or the “Level Premium" plan, or a combination of those plans, there is but one way in which to grant just, equitable and safe insurance protection, and that is by having the contributions sufficient to cover the cost of promised benefits and to have each and every member pay his individual share of that cost proportionate to the liability for his benefit. Every sensible man will admit that benefits cannot be paid unless their cost is collected, and every fairminded man will confess that each member should pay in proportion to the liability assumed for his benefit, and yet the failure to apply these plain principles in practice has caused all of the trouble that has ever come to any Fraternal Order or Friendly Society which has been honestly managed.

GENERAL INSURANCE PRINCIPLES.

I am painfully aware of the serious nature of the undertaking in presuming to suggest changes necessary for the reconstruction of the fraternal system in order that assessments rates may equitably provide for promised benefits. Nevertheless I shall attempt the task because the general principles which should control in making the changes seem to me to be plain and practical.

As to any particular plan being popularly received, that fact can only be determined in this country by future experience. As to the principles which should control in the adoption of any particular plan, they have been determined by past experience and can be laid down with certainty. These principles may be summarized as follows: 1. Business conduct cannot be truly fraternal nor equitably cooperative unless each member pays the full cost for his protection;

2. The full and proper cost for insurance protection can only be determined by the ages of the members;

3.

Adequate and sufficient rates of assessments to cover the full and proper cost for insurance protection must be determined by the ages of the members, and must not be less than the amount shown, by past experience, to have been adequate and sufficient;

4. If the current cost of protection is to be met by current collections the rate of assessment must increase with the advance in age of the members, and this increase must continue so long as the protection continues;

5. If it is desired that the rate of assessment shall remain uniform and level as of age at entry it must, in the early years, exceed the current cost of protection, and the excess collections be accumulated by yearly additions and interest accretions into a fund that will equal and offset the increased costs in the later years of the insurance-to be sufficient for that purpose the accumulated fund must not be less than the difference between the present value of the benefits and the present value of the future assessments, that difference being the exact and only true measure of such an accumulation;

6. If it is desired to have a combination of the step-rate and level rate, the rate of assessment must increase with the advance in age during the period for the step-rate and, in the same period, there must be an added amount to the rate of assessment for an accumulation to maintain the level rate-or at the end of the step-rate period the rate of assessment must be made high enough to yield an excess for accumulation, since a level rate absolutely demands an accumulated fund to maintain it.

These are well established insurance principles and Fraternal Orders must apply them in the conduct of their business or they cannot give permanent protection to their members—nor can they give, without the application of these principles, temporary insurance that will be just and equitable to their young and old members.