Newsholme, A. Vital Statistics, Chaps. X, XI, XII, XIII, XIV, XV. Yale Readings, Vol. I, Chap. VIII. Graham, W. J. Romance of Life Insurance, Chap. VII. Dawson, Miles M. The Business of Life Insurance, Chap. II. Practical Lessons in Actuarial Science. Reports of the Twelfth Census, Parts I, II. Mortality Statistics, 1909. Report on National Vitality, Parts I, II of Vol. III. Senate The Principles and Practice of Life Insurance, Seventh Edition. . Bowley, A. G. Elements of Statistics, Second Edition, Part I, Chaps. V, VII, X, Part II. Institute of Actuaries' Text Book, Part II. Proceedings of the International Congress of Actuaries. Proceedings of the Actuarial Society of America. Insurance Guide and Handbook, Fifth Edition, Chaps. II, X, XI. Practical Lessons in Actuarial Science. Miles M. Dawson, Vol. I, pp. 60-122. System and Tables of Life Insurance. Levi W. Meech. Journal of Insurance Institute, Vol. III, p. 351. Medico-Actuarial Mortality Investigation. Five volumes. CHAPTER IV THE SELECTION OF LIVES THE description given in the preceding chapter of the principles underlying the mortality of lives and the facts which the experience of insurance has disclosed might lead the reader to conclude that the actual conduct of insuring lives is very simple. However, the first problem which confronts the officials of an insurance company is that of securing a body of individuals whose life experience as insured persons will be in harmony with the principles which have been discussed in connection with the mortality table. Great care must be continually exercised in insuring lives in order that the actual experience will be within reasonable limits of the calculated. It is even more true of the insurance business than of other kinds of business that it should be able to be conducted on the plans laid down before entering upon the actual business. In almost every business adjustments can be made from time to time to bring the original plan in harmony with unexpected changes in the nature of the business; but in insurance the contracts are not only made for long periods, but also with great numbers of individuals. Therefore, adjustments can be made only with great difficulty. Selection Defined. The first problem, then, in placing the principles of insurance in practice is to select suitable lives for insurance. By selection is ordinarily meant that examination of applicants by competent physicians in order to exclude all whose present or prospective physical conditions or mental characteristics are below the standard required by the insurance society. This medical examination is, then, one of the methods devised to prevent adverse selection, that is, the conscious or unconscious attempt to secure insurance by persons who are undesirable risks. Another method used by the company to prevent adverse selection is the incorporation of certain protective clauses in the contract; such, for example, as the suicide clause, which frees the company from liability if the insured commits suicide within a certain period, usually one or two years. Adverse selection is again illustrated in the tendency of individual poor risks to select the cheaper plans of insurance, and again in the case of those seeking to defraud the company. Anything which adversely affects the company's interest in so far as it is interested in securing a group of individuals who will experience the normal experience is adverse selection. That is to say, the effort on the part of the company is to secure a group of persons who will have equal chances of risk and benefit from insurance. Benefit of Selection Defined. The lives thus chosen by the company through its agents, who are supposed to exercise good judgment in soliciting applicants, and the medical examiners, who carefully examine them, are called select lives. It has been found from long experience in insuring lives that the rate of mortality among the recently insured is lower than among the general population or among a non-insured group of equal ages which has healthy and unhealthy individuals among it. Not only is this true, but it has been found that an insured group recently selected has a lower mortality rate than a group of insured lives of equal age but of longer duration of insurance. For example, 1000 individuals insured at 30 years of age would show for a period of about five years thereafter a lower mortality than the mortality shown for the next five years of 1000 individuals, insured at 25 years of age, but now 30. This temporary advantage to the company is called the benefit of selection. This advantage enables a company to use as expenses or as dividends, which may be used to reduce the premiums, the funds thus saved, since this selection means the actual losses will be below the calculated. This favorable mortality on recently insured lives also explains why newly formed companies or companies which are increasing their numbers rapidly have frequently such a low percentage of actual to expected mortality. Rate of Mortality and Duration of Insurance. - The rate of mortality is a resultant not so much of the age of the insured as it is of the duration of the insurance. During the first two or three years of the insurance the mortality is very light. It then increases among insured lives for a considerable period of the insurance, becoming in the later years somewhat lower. These changes in the mortality experience of insured groups are due to this effect of selection which can operate |