Nature of life insurance and the basic, part3

Part1 of "Nature of life insurance and the basic" can be found here
Part2 of "Nature of life insurance and the basic" can be found here

To insure a single life for $1,000 during a given year, it is
clear, is in the nature of a gamble, because the individual must
either die or survive that period, with the result that there is
either a 100 per cent, loss or gain. If the number of per-
sons insured is increased to one hundred the element of un-
certainty will still be present to a large extent, although the
variations in the number dying or surviving the year will be
much less than that noted in the preceding case. But if
500,000 lives of similar physical condition are combined in the
same group, and more than that number of lives are now in-
sured in each of several American companies, the fluctuation
in the rate of death from year to year will vary only by the
smallest fraction of 1 per cent., with the result that the com-
pany will be able to determine in advance the amount of its
death claims and thus to place its business upon a non-specu-
lative basis. In fact, if the number of lives insured by a com-
pany were so large as to make the application of the law of
average perfect, practically all uncertainty as to the amount
of loss that would be experienced during a given period would
be removed.

When the insurance is furnished by a company with capital
or surplus which answers as a given guarantee of stability, it
becomes a business, instead of a speculation, the distinction
being that while an individual who assumes a single risk either
loses or gains thereby the whole amount involved, the company
which takes many, by means of the aggregate business reduces
the possible variations to narrow limits and really makes of
insurance a business attended with less peril than almost any
other. . . . During a given year an individual either dies or he
survives the year; the result is a 100-per-cent. loss or
a 100-per-cent. gain, if one wagers upon the one life. But
make one hundred thousand of these bets upon persons of
the same age and like physical condition and the variation in
the result will not be 2 per cent, usually, instead of 200 per cent.
There is nothing more uncertain than life and nothing more
certain than life insurance.

Necessity of Accumulating a Fund for the Payment of
Claims. While all forms of insurance are alike in that they
require for their successful operation a combination of many
risks into a group, they are vitally different as regards the
nature of the risks covered. In this respect the chief differ-
ence between life and other forms of insurance is that in the
latter the contingency insured against may or may not hap-
pen, and as regards the great majority of policies written,
does not happen, while in life insurance the event against
which protection is granted, namely death, is a " hazard con-
verging into certainty." It is necessary, therefore, if a life-
insurance policy is to protect the insured during the whole of
life, to provide not only against the risk of death each year,
but also to accumulate an adequate fund for the purpose, as
Mr. Dawson states, "of meeting at the ultimate limit of
human life an absolutely certain claim if one has up to that
time been escaped." He further adds : " It was failure to
see the necessity for providing for an increasing hazard, con-
verging into certainty, which has caused many serious errors
in the fundamental plans of some institutions formed to
furnish life insurance, and the thing which separates plans
of insurance into sound and unsound is precisely whether
intelligent regard for this principle has guided the company
in determining its rates of premium and the management and
disposition of its funds."

Nature of life insurance and the basic, part2

Part1 can be found here

But while the institution of life insurance was first care-
fully 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 cen-
tury 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 in-
surance, $2,000,000,000; and assets $270,000,000. 5 During
the next decade the companies experienced a decline, but following
1880 the business enjoyed a phenomenal and almost
uninterrupted growth.

It is possible to present only approximately the total in-
surance 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 in-
come $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 in-
surance. At the close of 1913, 509 such orders carried certifi-
cates 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 an-
nually in claims; yet these enormous figures are small com-
pared with what they will be at the close of the next genera-
tion.

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 busi-
ness 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-
certainty -will there be as to the amount of loss that will be
incurred.

Nature of life insurance and the basic, part1

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 stand-
point of the individual, it is impossible to foretell or pre-
vent, 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 in-
dividuals to safeguard themselves against such misfortunes
by having the losses of the unfortunate few paid by the con-
tributions 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 uncer-
tain 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." * From the standpoint of the
individual, however, life insurance may be defined as con-
sisting 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
the Economic Theory of Risk and Insurance 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 life-
insurance 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 com-
pany or society, or had been considered by any legislature in
Europe prior to the year 1760." 3 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 ac-
cording to age.