Scientific American Supplement, No. 787, January 31, 1891

Chapter 8

Chapter 83,791 wordsPublic domain

As far as insurance is concerned, there is less difference between regular and co-operative companies than is generally supposed. Regular companies assess each policy in advance for a year's insurance at a time, while co-operative societies furnish insurance only from one assessment to another. The difficulty in the way of collecting the assessment in the latter case would seem to be greater than in the former, owing to the more permanent nature of the regular insurance contract.

In compensating agents the assessment companies naturally pay in proportion to the insurance obtained, inasmuch as there is no other basis to go upon, but regular companies usually pay the agent a percentage of the premium _which includes a considerable trust fund_ over and above the assessment for actual insurance. It is easily seen that by the last method the agent's compensation increases in proportion to the amount of savings bank business forced upon the company.

To realize how far we are from anything like a scientific, not to say common sense basis for insurance expenses, we have but to examine the following list, which gives the ratios between the expenditures for general expenses in 1889, and those for the extension of the business. For every $100 used in a general way, the different companies spend for commissions and agency expenses: $37, $66, $67, $78, $91, $106, $110, $113, $120, $140, $157, $161, $173, $175, $186, $189, $200, $202, $222, $264, $311, $346.

It will doubtless be said that I am taking a very advanced position when I say that in the ideal life insurance scheme there is no place for the commission system. Solicitors will be a necessity only so long as they are in the field, but fifty years of life insurance has taught our community its true value and, thanks to the modern press, the institution it is no more likely to fall into desuetude than is Christianity or the moral law.

For the convenience of bringing the company to the individual, the latter should be willing to pay a fee. The man who renders another a service or puts his superior knowledge at another's disposal should look to the party benefited for his remuneration. Any compensation given for such service to a go-between by a mutual company is paid by all, and the question arises, Is the advantage to the company of sufficient importance to warrant the imposition of this tax upon all its members promiscuously? The following, from the Massachusetts Insurance Commissioner's Report for 1885, leaves no doubt as to the convictions of the writer on this important matter:

"The expensiveness of the life insurance policy is not because the level net premium is too high, for the premium is absolutely just, and the policy holder gets full value; but the complaint justly applies to the excessive expense charge. A person who wants insurance, life or fire or other, should be able to buy it at first cost without paying tribute of profits to middlemen. To that complexion the matter will finally be brought by the force of intelligent opinion, whatever resistance may be opposed by persons whose thrift lies in the perpetuation of the expensive system now in fashion."

It requires but a slight degree of prophetic vision to predict that in a very few years the companies in self defense will be obliged to change their method of compensating agents.

Several companies have already begun the reform by grading commissions; granting a percentage proportional to the amount of insurance likely to be done on the policy. Other companies have simply reduced the amount of the commission rate, thus virtually withdrawing from active competition.

This will, in a certain degree, explain the wide variation in the figures given above, where it is noticed that, in five companies out of twenty-two, the total agency expenditures amount to less than the general expenses, while in six cases the companies spend more than double as much on the former as on the latter. In either class we find representatives of the five largest companies in the country.

On applying the foregoing ratios to the business of the existing companies we find that, calling the theoretical expenses $100, the actual expenditures for 1889 were as follows: $112.67, $118.34, $150.40, $194.48, $208.16, $208.53, $228.66, $235.89, $248.44, $250.79, $258.33, $258.57, $265.14, $267.19, $267.92, $274.47, $294.17, $314.96, $335.70, $377.94, $616.70.

In this discouraging exhibit there is one ray of comfort. The combined assets of the two companies heading the list amount to over $100,000,000. There is no question as to their financial standing, and both show a large increase in membership over the previous year. I may also say here that it is a difficult matter to get at the actual "cost of insurance" in the various companies. Many of them, on their own acknowledgment, do not compute the advance cost of carrying their "amount at risk," and others, for reasons of their own, do not care to state the figures. In cases where the correct figures were not obtainable, I have assumed the cost to have been 1-1/3 per cent. of the mean amount at risk.

If we should, in our comparison, omit the actual agency expenses and commissions, the ratios would stand as follows:

Where I would allow $100 the companies actually used: $43.17, $55.90, $65.21, $77.21, $82.39, $88.34, $91.99. $91.98. $92.19, $94.65, $97.15. $99.55. $99.11. $102.86, $109.35, $125.05, $133.03, $141.92, $195.90, $207.06, $287.72.

As might be supposed, the first two ratios are those companies before alluded to. These companies might have doubled their advertising account and expended $300,000 between them on agents' salaries, and still have kept within my allowance.

Admitting, for the present at least, the reasonableness of the proposed allowance for the expenses of the banking and insurance departments of the business, we have before us the problem how to equitably adjust the burden among the great variety of policies.

In the first place, _there should be no policy in the company that does not contribute its proportionate share of the expense allowance during every year of its life_. I make a special point of this, for at present the policies which have become paid up, either by the payment of a single premium at the outset or by the completion of a stipulated number of payments, contribute practically nothing to the expense account after the premium payments cease.

The following plan, I think, complies with all the requirements of the problem. By the proposed method every policy, at all stages of its existence, contributes its exact share to the expense fund, whatever its plan of payment may be.

Let us, as an illustration, examine the case of a ten year endowment policy, taken out at age 30, and consider it under three aspects, first, as paid for in advance by a single payment, second, as paid by five annual payments, and third, as paid for annually throughout the term. I have used this short term endowment policy simply for convenience, the rule applying equally to policies of longer term or to the ordinary life policy, which is, in fact, an endowment policy payable at death or age 100.[1]

[Footnote 1: The expense allowance on a plain life policy for $1,000, taken at age 33, would be about $5.29; net premium (com. ex. 4 per cent.), $18.04; total office premium, $23.33; present rate $24.10.]

Taking the case of the single premium endowment policy for $1,000, we find that the following sums are required, each year to provide for the care of the reserve and to pay the government fees (1 per cent. of reserve):

The insurance expenses should be covered by the 20 per cent. allowance given below:

Consequently the total contribution required from this policy each year is:

The present value of all these contributions is found to be, at 4 per cent. interest, $71.6394; in other words, this sum paid at the outset, provides a fund from which we may deduct the current expenses of each year in advance, and by accumulating the balance at the assumed rate of interest from year to year, we shall have enough to pay the anticipated expenses, leaving nothing over.

In the above case the sums in hand at the beginning of the year are as follows:

We find a somewhat different condition existing during the first years of a 5-year endowment policy. As there is more insurance and less banking, the requirements are as follows:

+----------+-----------+--------+---------+ | 1 P. Ct. | 20 P. Ct. | | | | on | on | Total. | Initial | | Reserve. | Cost. | | Fund. | ------------+----------+-----------+--------+---------+ 1st year | $1.5038 | $1.2572 |$2.7610 |$12.9769 | 2d " | 3.0406 | 1.0216 | 4.0622 | 23.6015 | 3d " | 4.6503 | .7852 | 5.4355 | 33.2979 | 4th " | 6.3367 | .5378 | 6.8745 | 41.9538 | 5th " | 8.1039 | .2996 | 8.4035 | 49.4594 | 6th " | 8.4136 | .2566 | 8.6702 | 42.6981 | 7th " | 8.7381 | .2076 | 8.9257 | 35.3890 | 8th " | 9.0781 | .1556 | 9.2337 | 27.5009 | 9th " | 9.4346 | .0988 | 9.5334 | 18.9979 | 10th " | 9.8086 | .0344 | 9.8430 | 9.8430 | ------------+----------+-----------+--------+---------+

As the premium payments extend over only five years, the expense contributions must all be paid during that time and are most conveniently made by a uniform addition to the net premium.

The present value of the amounts in column 3 is $60.0819, and the equivalent annuity for five years is $12.9769. This amount, received for five consecutive years, will put the company in funds to pay current expenses and leave a reserve of $42.6981 at the beginning of the sixth year, which, as we have seen in the analysis of the single-premium policy, is the sum required for future expenses on the paid up basis.

In like manner we find that the 10-year annuity equivalent to the present value of the annual contributions in the case of an annual-payment policy is $5.534, thus:

+----------+-----------+--------+---------+ | 1 P. Ct. | 20 P. Ct. | | | | on | on | Total. | Initial | | Reserve. | Cost. | | Fund. | ------------+----------+-----------+--------+---------+ 1st year | $.8234 | $1.3514 |$2.1748 |$ 5.5340 | 2d " | 1.6473 | 1.2478 | 2.8951 | 9.0275 | 3d " | 2.5096 | 1.1388 | 3.6484 | 11.9116 | 4th " | 3.4124 | 1.0210 | 4.4334 | 14.1277 | 5th " | 4.3572 | .8916 | 5.2488 | 15.6161 | 6th " | 5.3479 | .7534 | 6.1013 | 16.3160 | 7th " | 6.3853 | .5966 | 6.9819 | 16.1572 | 8th " | 7.4726 | .4270 | 7.8996 | 15.0763 | 9th " | 8.6127 | .2418 | 8.8545 | 12.9977 | 10th " | 9.8086 | .0344 | 9.8430 | 9.8430 | ------------+----------+-----------+--------+---------+

The present value of the ten yearly expense items given in the "total" column above is $46.6812, which is equal to a ten-year annuity of $5.534. The several premiums stand now as follows:

ENDOWMENT: $1,000, AGE 30, PAYABLE AT DEATH OR 40

Net Prem.[2] Margin. Total.

At single premium. $687.228 $71.6394 $758.8674 At five premiums. 150.615 12.9769 163.5939 At annual premiums. 84.172 5.5340 89.7060

[Footnote 2: Thirty American offices. Discount from middle of year, Vx-½ or (M x 1.01961) / Dx.]

By the actuaries' rate we have, with the customary loading for expense:

Single premium: $721.66 (loaded, $34.36). Five premiums, $188.70 (loaded $37.78). Annual premium, $105.65 (loaded $21.11).

Admitting the correctness of the new method, we must conclude that the present single premium is not sufficiently loaded to cover its own expenses, while the annual payment policy pays more than its just share. A prominent and thoroughly informed life insurance president says in this connection: "Many of the policies, particularly the short term endowments, are charged with too high a percentage of expenses to prove a good investment at maturity or profitable to the insured in case of surrender." This is not to be wondered at when the applicant for a 10-year endowment policy sees at a glance that he must pay, in the gross, more than is returned unless he should die in the interim, in which case a plain "life" or "term" policy would have answered the purpose. Under the new system of assessing expenses one form is as desirable as another, from the standpoint of the insured or the company.

The new premium for the 10-year endowment policy, $89.71, commends itself at once to the applicant, who can easily see that his total outlay must fall short of the amount ultimately to be realized, of course, disregarding interest and probable dividends in both cases.

In discounting the future expense contributions I have not taken the chances of dying into account. Hence the expense reserve in any instance applies only to that individual case, and, in the event of death or surrender before the maturity of the policy, the amount of the expense fund not used would naturally revert to the insured.

The scheme of expense assessment outlined above will doubtless be pronounced impracticable by the majority of insurance men.

Such a far reaching reform is too much to hope for, at least in the immediate future.

No well informed life insurance expert will deny that there are opportunities for improvement in the business, but to graft new methods on old companies is a hopeless undertaking.

It is well, however, to have new methods well matured in advance of the public demand, and I feel convinced that the ideas here set forth are in the line of the reform which, before long, must be instituted by the companies if they would retain the confidence and patronage of the community.

Doubtless many insurance presidents could tell of suggestions which have impressed them favorably and which they would gladly have adopted were it not for the injustice done thereby to older members and the changes necessary to bring existing contracts into conformity with the new system. Similar objections may be urged against the ideas here advanced, and I must confess I hardly see a way by which the present suggestions can be utilized by existing companies. We can only hope that sooner or later some of the new theories may be practically tested. Meanwhile the companies at present in the field are doing a great work for the good of humanity, even though their methods may be, in some particulars, more practical than scientific.

Winchester, Mass. FRANK J. WILLS.

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THE FLOOD AT KARLSBAD.

During the flood which occurred in Germany and Bohemia, the last week of November, Karlsbad was especially unfortunate; it suffered such an inundation as had never before been known in the "Sprudelstadt." On the evening of November 23, the Tepl was very much swollen by the rain, which had continued for several days, but it was supposed that there was no danger of a flood, as the bed of the river had been put in proper condition. During the forenoon of November 24, the water suddenly began to rise with such astonishing rapidity that within half an hour all the lower streets were like turbulent rivers and the Alte and Neue Wiese were transformed into a lake. The stores on the Alte Wiese were under water to the roofs, and the proprietors, who were trying to save their goods, were surprised by the water and had to take refuge in the trees. They were rescued by having ropes thrown to them, and during this work a catastrophe occurred which was a great misfortune to all classes of citizens. The beloved burgermeister of Karlsbad, Dr. Rudolf Knoll, who had just recovered from a severe illness, was, with others, directing the work from the balcony of one of the houses, when a rope by which a man was being drawn through the water broke, and the man was carried off by the waves. The fright and excitement of the scene gave the burgermeister a shock which caused his instant death, but the man who was in danger was brought safely out of the water.

The water was 9 ft. in Marienbaderstrasse, the Marktplatz, Muhlbadgasse, the Sprudelgasse, Kreuzgasse, Kaiserstrasse, and Egerstrasse, and flooded the quay, causing great destruction. All places of business were flooded, the doors and iron shutters were pushed in by the force of the water and the goods were carried away or ruined.

The house called "Zum Kaffeebaum" was undermined and part of it fell to the ground; the same fate was feared for other buildings. The Sophien and Curhaus bridges were carried away. Other bridges were greatly damaged, and the masonry along the banks of the river was partially destroyed. The Sprudelgasse was completely washed out, and the condition of the Muhlbadgasse was almost as bad. The fire department with its apparatus had great difficulty in saving the inhabitants and guests, as there were very few boats or pontoons at their command, and the soldiers (Pionniere) from Prague and the firemen from the neighboring towns did not arrive until evening. Fortunately the water began to fall in the night, and the next day it had gone down so that it left its terrible work visible. The Sprudel and the mineral springs were not injured, but, on the other hand, the water pipes of the bathing establishments and the gas pipes were completely destroyed.--_Illustrirte Zeitung._

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THEATRICAL WATER PLAYS.

In one of the plays at Hengler's Circus in London a water scene is introduced, for which purpose the main ring is flooded with water in a manner which is both striking and interesting.

The ring is entirely lined with stout macintosh sheeting, and into this, from two large conduits. 23,000 gallons of water are poured, the tank being filled to a depth of some 2 ft. in the remarkably short time of 35 seconds. A steamboat and other small craft are then launched and the adventures of the heroine then proceed. She falls overboard, we believe, but is saved after desperate and amusing struggles. Our engravings, which are from the _Graphic_, illustrate the mode of filling the ring with water, and the steamboat launch.

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SCIENCE IN THE THEATER.

In the pretty little hall of the Boulevard des Italiens, at Paris, a striking exhibition of simulated hypnotism is given every evening.

This entertainment, which has met with much success, was devised by Mr. Melies, director of the establishment, which was founded many years ago by the celebrated prestidigitator whose popular name (Robert Houdin) it still bears. This performance carries instruction with it, for it shows how easily the most surprising phenomena of the pathologic state can be imitated. To this effect, several exhibitions are given every evening.

Mr. Harmington, a convinced disciple of Mesmer, asks for a subject, and finds one in the hall. A young artist named Marius presents himself. Mr. Harmington makes him perform all sorts of extravagant acts, accompanied with a continuous round of pantomimes that are rendered the more striking by the supposed state of somnipathy of the subject. At the moment at which Marius is finishing his most extraordinary exercises, a policeman suddenly breaks in upon the stage in order to execute the recent orders relative to hypnotism. But he himself is subjugated by Mr. Harmington and thrown down by the vibrations of which the encephalus of this terrible magnetizer is the center. When the curtain falls, the representative of authority is struggling against the catalepsy that is overcoming him.

All the phenomena of induced sleep are successively simulated with much naturalness by Mr. Jules David, who plays the part of Marius in this pleasing little performance.

At a certain moment, after skillfully simulated passes made by the magnetizer, Mr. David suddenly becomes as rigid as a stick of wood, and falls in pivoting on his heels (Fig. 1). Did not Mr. Harmington run to his assistance, he would inevitably crack his skull upon the floor, but the magnetizer stands just behind him in order to receive him in his arms. Then he lifts him, and places him upon two chairs just as he would do with a simple board. He places the head of the subject upon the seat of one of the chairs and the heels upon that of the other. Mr. David then remains in a state of perfect immobility. Not a muscle is seen to relax, and not a motion betrays the persistence of life in him. The simulation is perfect.

In order to complete the astonishment of the spectators, Mr. Harmington seats himself triumphantly upon the abdomen of the subject and slowly raises his feet and holds them suspended in the air to show that it is the subject only that supports him, without the need of any other point of support than the two chairs (Fig. 2).

Usually, there are plenty of persons ingenuous enough to think that Mr. David is actually in a cataleptic sleep, one of the characters of which is cadaveric rigidity.

As Mr. David's neck is entirely bare, it is not possible to suppose that the simulator of catalepsy wears an iron corset concealed beneath his clothing. He has performed a feat of strength and skill rendered easy by the exercise that he has given to the muscles occupying the _colliciæ_ of his vertebral column. This part of the muscular system is greatly developed in the weakest and least hardy persons. In fact, in order that man may keep a vertical position and execute an infinite multitude of motions in which stability is involved, nature has had to give him a large number of different organs. The muscles of the back are arranged upon several superposed layers, the vertebral column is doubly recurved in order that it may have more strength, and, finally, rachidion nerves issue from each vertebra in order to regulate the contraction of each muscular fasciculus according to the requirements of equilibrium. The trick is so easy that we have seen youths belonging to the Ligue d'Education Physique immediately imitate Mr. David after seeing him operate but once.