contended that many defaulting policyholders are bound by neces-
sity to realize upon their policies ; but such realization is, from my
standpoint at least, something that is not inherent in the nature
of a life insurance policy; has been engrafted upon it by force
of circumstances and by competition, and is totally foreign to its
nature and, as a matter of fact,, we know practically that it tends
to defeat the very object for which the life insurance policy is
taken out.
Q. Your position is that primarily an insurance policy is to give
a man a certain amount, or give his beneficiaries a certain amount
in case of death ? A. Yes. sir.
Q. And that if he pays for a certain length of time, and is
then unable to continue his payments, it is sufficient if he re-
ceives a paid up policy for the amount to which his payments en-
title him, that policy payable at death? A. Yes, sir.
Q. But that in the scheme of life insurance he should not on de-
fault be entitled to receive an amount in cash? A. No, sir.
Q. Well, now, what difference does it make to the company,
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whether they pay him on default an amount in cash or give him
a paid up policy for the amount which his premiums will buy?
A. I think it makes considerable difference, Mr. Hughes. In the
first place, it is only good lives who take cash surrender values.
A man who knows his health to be impaired will not risk giving
up his insurance for cash. In that case, the mortality rate of the
company is accentuated to a greater or less degree. In the second
place, if a man knows he can surrender his policy at any time,
experience shows that he is tempted to do it at the slightest provo-
cation ; that is, if he needs a little money, he is liable to give up
his insurance. But, in my mind, the worst feature of cash sur-
render values lies in the opportunity which it gives to agents
of different companies to twist policyholders from one company
into another. They thereby increase the total business to the
company from which the policy is taken by reason of the fact
that that company is put under the obligation, or under the ne-
cessity, or under the apparent necessity, of replacing that life,
and it is not in the interest of the man himself, because if he sur-
renders a policy in one company for its cash surrender value and
uses the proceeds to buy insurance in another, he must pay for
his insurance at the advanced age. Those are the principal ob-
jections that seem to exist against that system. There is one
more, and that is that the system of cash surrender values encour-
ages and inculcates the idea that a policyholder has a definite
interest in the funds of the company in which he is insured — a
definite and specific interest, which is not in accordance with the
facts.
Q. Why shouldn't he be regarded as having a definite interest
in the funds of the company, if he has provided a portion of it?
A. He has an undivided and unapportioned interest, for it is im-
possible in any individual case to say what the interest of any
individual policyholder in the reserve accumulations of the com-
pany is. The reserve, of course, is computed for certain — ^the
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tables of reserves, rather, give tabular values for a given amount
of insurance, and it is impossible to say in the individual case
that the reserve on an individual policy is so much money, for
the reason that in that individual case the risk insured may be of
extraordinary vitality, and of extraordinary prospects of longev-
ity, in which case the reserve is very much less than the tabu-
lar value, or the risk may be very much impaired; in fact, near
death, in which case the reserve approximates very closely to the
face of the policy.
Q. You look at life insurance, then, from ihe insurance and
not from the investment standpoint ? A. Largely, yes, sir.
Q. Your idea is that an insurance company, so far as possible,
should give a man life insurance at the least possible cost? A.
At a reasonable cost, yes, sir.
Q. And that the relations of the policyholders to the com-
pany should be regarded as purely contractual ? A. Purely so.
Q. With reference to the insurance that is payable to him under
his policy in the event stated? A. Yes, sir.
Q. And that he should not be educated to regard himself as
having invested so much in the company and entitled to certain
cash returns — is that the point? A. That is the point, yes, sir.
Q. Now, are there any other respects in which the cost to the
company of providing insurance is lessened by the elimination
of cash surrender value features, other than improving the rate
of mortality, the reduction in expense because of the diminution
in twisting, so-called, and the fact that you have stated that a man
would be led to regard a policy more from a contractual point
of view — that last does not involve any reduction of expenses,
does it ? A. No, sir.
Q. The other two do involve that? A. The other two involve
that.
Q. Have you had any experience or data which will enable
you to judge to what extent you can improve the mortality rate
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by removing the temptation to surrender policies for cash sur-
render values? A. No, sir. I cannot say that I have.
Q. That is a mere general judgment? A. That is a general
judgment— one on which most actuaries would ag^ee.
Q. You have said that you have also eliminated loan features,
if I understand you correctly? A. Yes, sir.
Q. You mean by that the option to the policyholder to obtain
a certain loan upon his pc4icy? A. Yes, sir.
Q. Now, under your new form of policy, do you give no right
to receive a loan? A. No, sir.
Q. Why not? A. Because a loan is merely a deferred sur-
render. A man receives a certain amount of cash in the form
of a loan, secured by his policy as collateral with the interest on
the loan paid in advance, and experience has shown that only
about five per cent, of those loans are ever paid off, that is, by the
insured reimbursing to the company the cash which he receives.
The company realizes on its security by accepting the surrender
of the policy when the loan is due and is not paid.
Q. Recurring again to the question of surrender values, are
you familiar with the experience with the Australian Provident?
A. Only in a very general way.
Q. That is a company which pays the largest cash surrender
values, is it not? A. Yes.
Q. Is it ilot also the company which has the lowest mortality
rate? A. I think that statement is true, as a general statement,
yes.
Q. Does not the mortality rate of the companies that give cash
surrender values compare favorably with the experience of those
who in the past have not given them ? A. It is claimed so, yes.
Q. If that is so, how can you reconcile it with what you have
said as to the expectation of an improved mortality rate in the
absence of the option- to take cash surrender values? A. Well,
I make that statement on theoretical grounds, and also because the
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full effect of that self-selection against the company, which is
evidenced and manifested in the taking of cash surrender values
is only felt to a large degree, or at least up to this time has
only been felt to a large degree, in companies which, for the time
being, have become discredited. In fact, you may say there is
practically no experience on that point, no thorough experience
on that point, although it is a well established matter of record
that companies which make a feature, and h^ve for many years
made a feature, of cash surrender values have lost a larger pro-
portion of their insurance by surrender than companies which have
not made a feature of cash surrender values.
Q. It is suggested that the Australian Mutual Provident So-
ciety exhibits an extremely low rate of lapses, and so does the
Mutual Benefit, which is a cash surrender company. A. Well,
as to the Mutual Benefit, in comparison with another company,
which is twice the size as regards amount of insurance, the sur-
renders in the Mutual Benefit were approximately within a few
thousand dollars of the surrenders in the second company in
1904; in other words, the rate of surrender in the Mutual Benefit
was twice what it was in the other companies.
Q. Was its rate of premiums any higher? A. The rate of pre-
miums was lower.
Q. The Mutual Benefit? A. The Mutual Benefit, yes, sir.
Q. If the cash surrenders were quite as great and the rate of
commissions was lower, why would not that show that they were
able to give a low priced policy despite the advantages to the in-
sured in cash surrender? A. It does show that.
Q. Does not that militate against the proposition you have ad-
vanced ? A. Well, on the face of it, yes ; but the effect of these
things are only visible and only manifest when examined over a
term of years. I do not like to speak about other companies,
but it has always seemed to me, at least, it has seemed to me for a
number of years, that if the Mutual Benefit ever got into difficul-
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ties, its difficulties would be very much accentuated by its adher-
ence to the programme of low premiums and cash surrender
values.
Q. Then the cash surrender values and low premiums are all
right in times of prosperity? A. I think so.
Q. But if there is anything which tends to discredit a company
and its business falls oif, it would tend to discredit it? A. Yes.
Q. Was the limitation of cash surrender values So the
limitation of cash surrender values is an anchor to the wind-
ward? A. It would seem so to me.
Q. Would you think you could reduce premiums simply because
you eliminated cash surrender values? A. No, sir.
Q. Then whatever profits came from that elimination would be
gained by the stockholders? A. Or by an increase in the divi-
dend on participating policy.
Q. What has enabled you to put out this policy, which you
speak of, upon lower rates of premium, if you were not justified
in doing it by eliminating the cash surrender feature ? A. Simply
an extremely reduced cost in getting the business.
Q. How do you achieve that ? A. By paying less commissions.
Q. How much commissions — what rate of commissions do you
pay in connection with that new form of policy? A. We are
paying twenty per cent, on participating policies and fifteen per
cent, on non-participating.
Q. What renewal commissions do you pay on that class? A.
7i on participating and five per cent on non-participating.
Q. What period of years? A. Fourteen years.
Q. Take the aggregate cost of the new sort of insurance and
compare it with the old sort, what is the saving? A. To the pol-
icyholder do you mean ?
Q. No, I mean in the commissions paid to get the business.
Commute the renewal premiums for the sake of illustrations,
and take the entire amount as a charge against the premium for
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the first year and what would be the comparison? A. Something
like I GO per cent., I should th^ik.
Q. You would take it under the old sort of policies, under ibe
old rate as averaging what? A. 75 per cent.
Q. And under the new rate? A. ap per cent.
Q. That is, without the renewals? A. Adding the present
value of the renewals to that, I should §ay that the sum would
be somewhere near 100 per cent. The diflference there is 55 per
cent., and I think it is fair oflf-hand to consider the present value
of renewals is about 45 per cent.
Q. So you would make it 65 per cent, in one case and 100 per
cent, in the other? A. Yes.
Q. So you would gain about 35 per cent. ? A. Yes, sir.
Q. How can you place this insurance, when you give your
agents such small commissions? A. You cannot place much of
it through the agents.
Q. Then how do you place it? A. Well, we have written a
large amount of it direct with policyholders.
Q. You mean policyholders coming to your office? Well,
Q. In answer to advertisements or circulars? A. A very few.
Q. Do you make arrangements for writing such insurance
directly at the office? A. Yes, sir.
Q. Was that in vogue before the new administration came in?
A. No, sir.
Q. Is it practiced by other companies? A. So far as I know,
it is.
Q. As a rule, do companies insure people directly at the office
without handing them over to agents? A. I think they do-
that very small amount of people that come in for that purpose.
Q. How do you place the most of it? A. Through agents.
Q. But that, I thought you said, could only be to a small ex-
tent ? A. Well, as compared with the other classes of business.
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Q. How far have you been able to push this new class of pol-
icies? A. We have written about $275,000 of it only.
Q. Since the ist of January? A. No, since the ist of Sept«n-
ber.
Q. What is the total amount of business you have written
since the ist of September, approximately? A. About seven and
one half millions.
Q. Did the Mutual Life prior to 1899 give cash surrenders?
A. Only at the end of a term of years, not annual cash surrender
values.
Q. Will you tell me what amount of the Mutual Life's business
was in force in 1894, approximately? A. $855,000,000.
Q. And what amount was written in the next five years, ap-
proximately? A. About $836,000,000.
Q. And the total of the insurance in force and the insurance
written in the next five years would be $1,690,000,000? A. Yes.
Q. What was in force at the end of 1899? A. $1,251,000,000.
Q. Which shows there was discontinued about $639,000,000,
or about 40 per cent, of the total ? A. Yes, sir, that is right.
Q. Now, during that period cash surrender values were not
allowed? A. No, sir.
Q. Now, if you will turn to the Mutual Benefit. A. Here it
is (indicating).
Q. What amount was in force at the end of 1904? A. $209,-
000,000.
Q. And written in the next five years, how much? A. $173,-
000,000, or something about like that.
Q. Making a total of $382,000,000? A. Yes, sir.
Q. At the end of 1899 there was in force how much? A. $260,-
712,000.
. Q. Leaving $120,000,000 discontinued, or about 31 per cent, of
the total? A. Yes, sir.
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Q. And during that period the Mutual Benefit did give cash
surrender values? A. Yes, sir; it did.
Q. But you recur to your original proposition that people are led
to discontinue when they are in difficulties, or may desire to change
their policies or for some reason or another, by reason of the
fact that they are able to get a cash surrender value? A. Yes, sir.
Q. Whereas they would persist if they were not able to get
a cash surrender value? A. In many cases, I think so, yes, sir.
Q. And that by reason of that, if the cash surrender value is
eliminated as the paid up insurance is substituted, the company
will have a gain — should have a gain? A. Should have a gain,
yes, sir.
Q. In the persistence of its business? A. I would like to make
this explanation, Mr. Hughes, that if a surrender value is grant-
ed in the form of paid up insurance only, there is no company
which will not turn that paid up insurance into cash on a basis
which will yield a profit to the company, and which will entail
a surrender charge, which is a very fair measure of the loss
sustained by the holder of the paid up insurance.
Q. Why, is not that equivalent to giving cash surrender values
equaling the present worth of the paid up insurance? A. It is
the same thing; but if you incorporate the present worth of the
paid up insurance in the policies, such values would show up
so poorly, in comparison with the cash surrender values, which
are used by most companies, there would be no inducement in
them.
Q. How many forms of policies does your company write, how
many do you use? A. Oh, I should think about seventeen or
eighteen.
Q. What proportion of those forms are used most frequently?
A. I should say the life and the twenty payment life forms.
Q. And what proportion of your business would be on the life and
twenty payment life forms, or take life and limited payment whether
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twenty years or not? A. Oh, I should say 75 or 80 per cent.
Q. How many forms of the seventeen or eighteen are used in the
life and limited payment life? A. There would be only four.
Q. Then the other fourteen forms are used only in 25 per cent,
of your business? A. Yes, sir.
Q. There are some of those forms that are scarcely used at all,
are there not? A. Yes, sir.
Q. How many of those? A. I should suppose five or six.
Q. That are hardly used at all ? A. Yes, sir.
Q. Then you will have eight or nine forms that would be
used for about 25 per cent, of your business and about four or
five forms that would be used for 75 per cent, of your business?
A. Yes, sir.
Q. Have you this new form of policy here ? A. Yes.
Q. Is that it (handing paper) ? A. That is it.
Q. Now this policy contains a cash surrender value provision,
does it not ? A. Yes, providing for a value at the end of twenty
years.
Q. You endeavored in getting up this form of policy to re-
duce insurance to its lowest terms, I mean to make as simple a
form as possible? A. Yes, sir.
Q. And as cheap an insurance as possible? A. For people
who wanted life insurance for that purpose only and would be
willing to come and ask for it themselves.
MR. HUGHES: I offer this policy in evidence.
(Policy marked Exhibit 766.)
Q. Now what is the diflference between the rate of ipremium paid
on that policy and upon an ordinary life policy of the other
forms issued by your company ? A. About thirteen per cent.
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Q. About thirteen per cent.? A. Yes.
Q. So that by that form of policy you plan to give the policy-
holder who is willing to come to the company and be insured,
or who has written through an agent receiving the reduced rates
of commission, you have stated, a reduction in the premium?
A. Yes.
Q. That is about the amount of it? A. That is about the
amount of it.
Q. Does the company receive the saving in the difference
of premium? A. That remains to be seen.
Q. According to your estimate? A. I tried to arrange the
loading upon those premiums so as to make them homo-
geneous with the premiums on standard forms of insurance,
paying standard rates.
Q. Your rating is the same? A. Yes.
Q. Your loading is much less? A. About twenty-two per
cent. less.
Q. That represents the net estimated saving in commissions?
A. Yes.
BY THE CHAIRMAN:
Q. Mr. Tatlock, on this subject of forms, if you consider life
insurance classes, there is the ordinary life class, the limited pay-
ment life class, the endowment class and term insurance, I sup-
pose? A. Yes.
Q. What other classes of life insurance are there? A. Well,
that covers the whole field as basal forms.
Q. Is term insurance a modification of endowment, or vice
versa? A. No, it is a modification of life, inasmuch as it provides
only for the insurance to be payable at death during a certain term
of years. ,
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Testimony of John Tatlock
Q. Are there any of those four classes which are modifications
one of the other, so that the classes of life insurance can be em-
braced in less than four classes? A. Limited pa)mient policies
are simply modifications of the ordinary life form, providing that
the premium shall be paid simply during the term of years, instead
of the life of the contract.
Q. So you could roughly divide life insurance into two classes,
ordinary life and endowment? A. Yes, sir.
Q. And limited payment and term insurance would be really
modifications of ordinary life? A. Yes.
BY MR. HUGHES:
Q. You have said that there was a thirteen per cent, reduction
in the gross premium ? A. Yes.
Q. And that is twenty per cent, of the loading, twenty per cent,
less on the loading as compared with the old form? A. No, it
would be more than that ; it would be nearer twenty-five per cent.,
twenty-six per cent., because the old forms are quoted six per
cent, less eighty cents.
Q. And this is how much? A. This is fourteen per cent., plus
twenty-five cents.
Q. You mean twenty per cent, of the premium when you say
twenty per cent. ? A. Yes.
Q. So that the reduction in the loading is in the neighborhood
of twenty-five per cent. ? A. Yes. Or it would be the difference
between the fourteen and the thirty-six.
Q. Figure it out, Mr. Tatlock, so we can have a definite state-
ment. A. It is a reduction in the loading itself of sixty per cent.
Q. The loading upon the premiums in the new form of policies
is about sixty per cent, less than the loading upon the premiums on
the old form? A. Yes.
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Q. And the premiums themselves gjoss are about thirteen per
cent, less in the former case than in the latter? A. Yes.
Q. Have you made any effort to reduce the expenses incident to
the getting of business, aside from the introduction of this form of
policy? A. Y.es, sir.
Q. What is it? A. The total reduction of expenses for the first
nine months of 1905, as compared with the first nine months of
1904, amount to about $121,000. Of that about eighty thousand
to eighty-five thousand dollars is in reduction of fixed charges of
the agency.
Q. What do you mean by those ? A. I mean as the various al-
lowances for traveling and expenses, and the reduction of a cus-
tom which pertained under the old management of the Washing-
ton, of allowing salaries to their managers as well as commissions.
Q. Have you not impaired the efficiency of your field force?
A. No, sir, I do not think so.
Q. Have you increased it? A. I think we have — yes sir.
Q. Just explain how you were able to cut off salaries and reduce
them and keep the force just as efficient? A. Well, it has been
accomplished largely by the removal of old incumbents and re-
placing with other men, but there have been cases as, for instance,
in Chicago, where the company up to this year maintained three
separate offices, neither one of which really earned its fixed
charges, if I may use that expression. Two of those offices have
been cut off, saving the allowances thence, and salaries which were
paid there, and a better business has been done this year through
one office than last year through three.
Q. In other words, you got rid of a good deal of dead wood?
A. Yes.
Q. Apart from those efforts, have you made any change in the
system? A. We have improved — I think I may use that term —
the methods of agency accounting. We have succeeded in install-
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ing a system, through which the agents render us frequent ac-
counts — in fact, sending their cash balances every week, instead
of every month.
Q. What do you do with regard to making advances to agents ?
A. In some cases advances from fifty dollars to one hundred and
fifty dollars a month are made against future renewal commis-
sions.
Q. How often is that done, in how many cases? A. I think
that pertains, probably, in half of the cases, perhaps sixty-five per
cent. — perhaps two-thirds of the cases — largely an inheritance
which could not at once be cut off, and it has been done in some
cases where men have been appointed this year in order to get
them started.
Q. What was the amount of the agents' balances at the end
of 1904? A. Forty-five thousand dollars.
Q. What is the amotmt of them now, or at the last convenient
date ? A. Ninety-three thousand dollars.
Q. Was the $44,000 the amount reported or the actual amount ?
A. Well, my recollection is that that was the amount reported,
although it may have been $65,000. I am not certain as to that.
Q. What was the real amount? A. The real amount, my im-
pression is, was $45,000. My memory may have failed on that
point.
Q. Then they have greatly increased this year? A. Yes, but I
would like to explain that, if you will allow me.
Q. Yes, explain it. A. We found that there was a large
amount of money owing to the company from old-established
agencies, which did not appear upon the company's ledger as a
debt It had simply been charged off from year to year as an
expense, but under the contracts of those agents, those amounts
were really due to the company and the agents owed them. We
have, therefore, restored those amounts to the ledger, and that