You are reading a page from The Fraternal American Table,
American Insurance Union (1926)
Part
of the American Term Life Insurance History Project
Term Life Insurance
Discussion of Mr. Fackler's Paper Before Fraternal
Actuarial Association
Tuesday, February 23, 1926
Chicago, Illinois
Hotel Sherman
By
George Dyre Eldridge
While I have intended taking part in this discussion, I had
hoped that it might be opened by someone else.
The paper that has been presented by Mr. Fackler, and
which I regret he could not be here to read, is to my mind more
far-reaching than simply the presentation of the claims of one
table over another.
We are faced in the insurance world today with an ex-
tremely interesting situation in regard to the basis allowable for
valuation and, incidentally, for the construction of net prem-
iums, and, necessarily as well as naturally, it follows that we
have an interest in the discussion which has arisen, although at
present it concerns more the commercial companies than it does
fraternal organizations. None-the-less, the latter will be more
or less affected by the decision ultimately reached.
I fear that in approaching the general question, too many
of the representatives of fraternal insurance have looked upon
the table to be used from one aspect only—either that of the
construction of premiums or of the determination of reserves.
They have failed to weigh in conjunction the two functions
which a table of mortality performs and to measure the inter-
relation between the two results.
From the printed comments that appear, the fraternal
spokesman seems to be looking at the matter rather from the
standpoint of reserves, and with the feeling that any lessening
of the requirements in regard to net premiums will necessarily
be a lessening of the reserve security, and therefore an attack
upon the foundation of our rates and our solvency.
It does not follow, as you know, that because a table may be
lower or higher in certain periods than another, and produce
therefore higher or lower net premiums, there will follow higher
or lower reserves as a necessary result.
We all know that the American Experience Table of Mor-
tality requires higher net premiums than, for example, the
American Men Ultimate, and at the lower ages the differences
are quite large and very noticeable, but, as a fact, the reserves
required by the American Men Ultimate range some two per
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cent higher than those by the American Experience Table, soJ
that the granting of the privilege of constructing net premiums
upon the basis of the American Men Table would not be followed
by a decrease in reserve security, but, rather, as Mr. Fackler
has pointed out, by an increase in the general reserve, and there-
fore by an increase in the security that lies behind the contracts.
The functions of a premium, however constructed, are three-
fold. It must take care of the current expenses; it must take
care of the current cost of the benefit, and it must provide a
suitable and sufficient reserve to establish the soundness and
solvency of the institution.
It does not necessarily follow that all three of these func-
tions will be provided by one table, by one basis, or by a single
standard.
As a matter of fact, it has been assumed in the construe-
tion of premiums that the expense element is outside of the
premiums, and in talking of premiums we have talked usually of
net premiums, which will provide for the current mortality and
the reserve accumulation only.
If that were the fact alone, it would stand to reason and I
don't say it does not stand to reason even if it is not the fact
alone—it would stand to reason that the institution which paid
its death claims as they matured, that is, met current mortality,
and provided the reserve on a recognized standard required by
the nature of the contract, would be solvent and might be per-
mitted to construct its premiums upon any basis that would en-
able it to do these things. That was the earlier theory, even in
commercial insurance, but the time has come, and long since in
commercial life insurance, when it is recognized that the prem-
ium is a single entity that must take care of expense, current
mortality and reserve.
If the premium is sufficient for these three purposes, it is
sufficient for the solidity of the institution, and we have been
so far educated in this idea, that when we have come, as frater-
nal organizations, to the construction of a line of real life in-
surance, based on the security necessary to make it real, we have
seemingly lost sight of the differences which legislation and
statutory requirements make between the two systems of in-
surance.
I hazard nothing in saying that today commercial life in-
surance companies, while using the American Experience Table
as a basis of reserves, do not use it as a basis for the construe-
tion of the premium, at least so far as the net premium is con-
For years certain commercial companies have used as gross
premiums the net rates required by the standard of valuation
for the contracts offered, and we have overlooked the fact that in
fraternal insurance this is not allowed, that we are under an
entirely different rule.
If the commercial life insurance company pays its claims,
and maintains its reserves on the American Experience Table of
Mortality, then so long as its gross premiums are equal to the
net required by the American Experience Table and three and a
half per cent interest, at least in all of the States with one or two
exceptions, the use of that net premium is allowed as a gross
premium and the expense provisions are taken from what was
originally and is presumably the net premium.
For instance, certain institutions in the East for a long
while have offered and' are selling life insurance at the net
premium on the American Experience three and a half per cent
used as a gross premium and taking from this net premium the
expense expenditures, so that the net premium on the three and
a half per cent American is, in fact, the premium which takes
care of expense, current mortality and reserve.
The fraternal, however, is living and operating under a
different statute entirely. If such a society—especially since the
rule that was made last December by the Insurance Commis-
sioners—is claiming to operate on the American Experience
four per cent standard, it means, not a premium that will take
care of the expenses, current mortality and reserve, but simply a
premium that will take care of the current mortality and the
reserve, and outside of that it must provide the expense element
or the moneys that can be used for expenses and in promoting
the institution.
This, in itself, creates a situation entirely different to that
which the commercial companies are facing and, in point of fact,
calls for consideration of the matter from an entirely different
standpoint to that from which commercial companies must look
at the same situation.
In fact, supporting what I have already said, that the com-
mercial companies do not base their premiums, and are not re-
quired to base their premiums, on the standards prescribed by
the statute, we have now a company in the East that has put out
a set of gross premiums, which at many ages, are less than the
net required by the American Experience three and a half per
cent table.
The fraternals cannot face competition of this character.
The considerations that may be. dealt with by these commercial
companies are not the considerations the fraternals have to face,
because the latter have to provide for expenses in addition to
the net premium, and have to hold the net premiums sacred
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simply to provide for two of the three elements for which a
proper premium should provide.
So, too, in valuation, the requirements of the statute, as
regards commercial companies, does not look to the actual net
premium, but simply requires the establishment of a statutory
reserve based on the assumption that the company is charging
the proper net premium for the contract that it is issuing, as
well as providing for the expenses.
Recently, in connection with a newly organized commercial
company (I don't like the expression "Old Line" and "Legal Re-
serve" seems to be unfit now, so long as we are required to hold
a legal reserve) I went to one of the departments and asked how
far a company would be allowed to go in issuing a participating
policy on non-participating rates, and the answer of the depart-
ment was, "So long as the gross premium conforms to the Amer-
ican Experience three and a half and does not drop below that,
we have got nothing to do with the rates. All we have to do is
to establish the fact of the maintenance of the tabular reserve.
If the gross premium falls below the American Experience three
and a half per cent net, then a deficiency reserve must be
On the other hand the fraternal statute prescribes that the
benefits shall be valued and that the premiums (that portion
which cannot be used for expenses—that is, the premiums which
are to provide the benefit, including the necessary reserve, of
course) shall be valued and the difference between the two is the
required reserve.
It was supposed, at one time, in Mobile in 1910, in fact, that
there was incorporated in the statute an alternate method of
valuation by which an institution which was operating on stand-
ard rates and maintaining the standar