CHAPTER I NATURE OF LIFE INSURANCE AND THE BASIC PRINCIPLES UNDERLYING IT Definition and Extent of Life Insurance.- Mankind is exposed to many serious hazards such as fire, disability and premature death, the happening of which, from the standpoint of the individual, it is impossible to foretell or prevent, but the effects of which, such as the loss of property or earnings, it is highly important to provide against. It is the function of insurance in its numerous forms to enable individuals to safeguard themselves against such misfortunes by having the losses of the unfortunate few paid by the contributions of the many who are exposed to the same risk. If the hazard under consideration is that of premature death, the loss suffered is indemnified through life insurance. From the community standpoint life insurance may be defined as "that social device for making accumulations to meet uncertain losses through premature death which is carried out through the transfer of the risks of many individuals to one person or a group of persons." 1 From the standpoint of the individual, however, life insurance may be defined as conisting of a contract, whereby for a stipulated compensation, called the premium, one party (the insurer) agrees to pay the other (the insured), or his beneficiary, a fixed sum upon the happening of death or some other specified event. Life insurance had its origin much later than the leading forms of property insurance and its real rise to importance dates back only about half a century. The first attempts at associated life insurance, as far as is known, were undertaken in Great Britain. In 1699 there was formed the "Society of 1 WILLETT, ALLAN H., The Economic Theory of Risk and Insur ance, 106. Assurance for Widows and Orphans" and in 1706 "The Amicable Society for a Perpetual Assurance Office." It has been estimated that between 1699 and 1720 probably fifty lifeinsurance schemes were started in Great Britain,2 but all were conducted under methods very defective as compared with those now in general use; in fact, Mr. Holcombe concludes: "It may be taken as established that no plan of life insurance as we now understand it had been contemplated by any company or society, or had been considered by any legislature in Europe prior to the year 1760." In 1762, when the total amount of life insurance in Great Britain is said not to have exceeded £350,000, the Equitable Assurance Society of London commenced operations, and this society may be regarded as the first to use the modern system of insurance, its policies being issued for fixed amounts and the premiums graded according to age. a But while the institution of life insurance was first carefully studied and applied in Great Britain, its greatest growth has been in the United States, dating chiefly since the Civil War. A few figures will make clear the extent and rapidity of this development. Exclusive of annuity contracts, it has been estimated that the total number of life-insurance policies. in the United States at the beginning of the nineteenth century did not exceed one hundred. By 1860 the companies reporting to the Insurance Department of the State of New York showed a total of only 56,000 policies with a face value of $163,000,000, while the annual premium income amounted to only $4,700,000 and the assets to $24,000,000. By 1870 the companies authorized to do business in the state of New York showed the following totals: Annual premium income, $90,000,000; number of policies, 740,000; face value of insurance, $2,000,000,000; and assets $270,000,000.5 During the next decade the companies experienced a decline, but fol 2 HOLCOMBE, JOHN M., “Observations on Life Insurance History," Yale Insurance Lectures, i, 18. 3 Ibid., p. 19. Ibid., p. 24. 5 Ibid., p. 25. lowing 1880 the business enjoyed a phenomenal and almost uninterrupted growth. It is possible to present only approximately the total insurance carried by the numerous corporations and associations now operating in the United States. Some idea, however, of the present magnitude of the life-insurance business in the United States may be obtained from the aggregates for the year 1913, published in the Insurance Year Book. At the close of that year, it appears that as regards 259 companies the amount of insurance in force aggregated $20,564,000,000, the annual premium income $715,000,000 and the total income $925,000,000, the annual payments to policyholders $468,000,000, and the admitted assets $4,658,000,000. To these enormous totals, however, it is necessary to add the business of the numerous fraternal orders which grant insurance. At the close of 1913, 509 such orders carried certificates aggregating $9,622,000,000 while their annual income amounted to $144,000,000, their annual claims to $101,000,000, and their assets to $183,000,000. The vastness of these figures can scarcely be comprehended. They testify to the fact that the value of life-insurance protection is rapidly being recognized by the rank and file of the nation's population. At present over 32,000,000 policies and fraternal certificates, aggregating over $30,000,000,000 of insurance, are carried in the United States, and over $569,000,000 is distributed annually in claims; yet these enormous figures are small compared with what they will be at the close of the next generation. Combination of Many Risks into a Group Is Necessary to Make the Law of Average Apply.- Our definition of life insurance, it will be recalled, involved "the transfer of risks of many individuals to one person or a group of persons." Such a combination of risks is absolutely essential if the business is to be established on a basis other than speculation or gambling. To eliminate the speculative factor it is necessary to proceed on the theory that the larger the number of separate risks of a like nature combined into one group, the less un |