to their adaptability, and placed under foremen and superintendents who have some degree of knowledge of the psychology of managing and getting along smoothly with their men; when discharges are made only for cause, and after investigation, and then only with the approval of superior authority, the employer is likely to discover that many of his former difficulties have assumed much smaller proportions.

FRATERNAL INSURANCE IN THE UNITED STATES: ITS ORIGIN, DEVELOPMENT, CHARACTER AND EXISTING STATUS

BY WALTER S. NICHOLS,

Editor of the Insurance Monitor and Insurance Law Journal.

The origin of fraternal insurance must be sought in those social and communal instincts of the human family which from remote ages have led its members to coöperate for their common welfare. Fraternal organizations of one kind or another for mutual assistance have existed in the various countries from time immemorial. Under the old Roman Empire such societies were so numerous as to call for regulation by the state. During medieval times we find them in large numbers in the form of organized guilds for social, religious, and commercial purposes throughout the different countries of Western Europe. Those of England were the forerunners of the numerous friendly societies which succeeded them and whose special purpose was the relief of their members in case of sickness and the provision of a burial fund in case of death, to which was sometimes added a pension on attaining a certain age. It was from these British friendly societies that the idea of fraternal insurance was introduced into the United States at a comparatively early date in our history. But until after the middle of the last century no well directed effort was made to regulate their management in Great Britain. They were usually organized on fallacious principles. Contributions were exacted of the members regardless of age or condition of health and with no intelligent conception of the cost of the benefits which they promised. As a consequence their failures were so numerous as to become a national scandal, until their proper regulation was undertaken by the British Parliament which resulted in a thorough investigation by actuarial experts and a scientific determination of the principles on which the business must be conducted, and the rates which must be charged to secure its safety. Not until 1875 was legislation procured which placed the system of friendly societies in Great Britian on a comparatively sound foundation. The social affiliation between the

members of these British societies, however, was in many cases so strong as to hold their membership together in spite of their technical insolvency until the necessary corrective measures could be applied. In fact such social affiliations are the fundamental basis on which the successful operations of a genuine friendly society

must rest.

The development of friendly societies-more commonly known as fraternal insurance societies-in America took a somewhat more radical form than in Great Britain. With the exception of a few, like the Free Masons and the Odd Fellows, they generally attached less emphasis to the social features and more to the insurance feature. The majority of them have directed their chief work to granting death benefits. Sick benefits, when allowed, are usually cared for by subordinate local lodges.

The development of fraternal insurance in the United States has been largely shaped by the same social and economic influences which have controlled the development of ordinary life insurance. So-called fraternal societies have been largely utilized in the past for the purpose of furnishing a supposedly cheap form of life insurance with too little regard for the benevolent features which are so essential to its success. The same social and economic conditions which caused the remarkable development of life insurance in the United States during the last half century resulted in the great growth of fraternal and benevolent associations. The rapid growth of cities and the change from an agricultural to an industrial population were largely responsible for the more recent remarkable development both of life insurance and its allied forms of benevolent societies. The growth of the latter was attended with the same disregard of sound insurance principles and ignorance of the actual cost of the promised benefits as in Great Britain. The results were even more disastrous. The spirit of conservatism which controlled the expansion of life insurance in Great Britain was lacking in America. The work of the associations instead of being localized within the limited area of a small island was often expanded over a wide territory.

The great expansion of life insurance which took place after 1860 was attended by a corresponding development of fraternal and so-called benevolent societies which simply aimed to provide a cheaper form of insurance than was furnished by the regular com

panies. These associations sprang up in great numbers in the years following the sixth decade of the last century. The ordinary business corporations had already been subjected to legal restrictions designed to secure their solvency and proper mangement, but fraternal benefit associations, being presumptively of a benevolent character, were not subjected to such restraints. The consequence was that, in addition to the genuine fraternal societies, another class of associations grew up claiming to be fraternal in their character and conducted on similar lines but usually having no lodge system like the true fraternals and none of the social features. Such associations were in effect disguised life insurance companies, carried on like them for profit and seeking to compete with the regular companies by selling life insurance at rates much lower than those which the regular companies were forced to charge. This they were able to do because they were not compelled to put up the legal reserve required of the regular companies. Their contracts in consequence could not be carried out. Their numerous ultimate failures became a notorious scandal. They were popularly known as coöperatives or assessment companies, and it was not always easy to distinguish them from the genuine fraternal societies which they sought to imitate. Both of these classes of institutions, like the British friendly societies, were conducted on a scale of rates that was wholly inadequate and which at first usually took the form of assessments collected from the members to pay death claims as they occurred. They were conducted for the most part like the British societies in ignorance of the true principles of insurance.

The probability of death and the consequent cost of insurance increase with age. It is therefore necessary for the insured person either to pay a premium increasing with his age or, if he is to pay a uniform level premium, it must be excessive at the start in order to create a fund in the hands of the company from which to make good the deficiency in later years. This vital feature was ignored by the fraternal and assessment orders until bitter experience compelled its recognition. They saw the ordinary life companies, which were for the most part also young, charging premiums which were enormously in excess of their current death losses and accumulating year after year a constantly increasing reserve fund while their loss rate itself showed no apparent increase. They jumped to the conclusion that the reserve fund was a needless exaction

from the policyholders and that they could grant insurances at the current loss rates of the regular companies. They could not be made to see that the companies were still new and their business increasing at a rate which kept their average membership young notwithstanding the increasing age of individual members. The heavy lapse rates of the policies, too, by weeding out the older membership, helped the delusion. That neither the average age of the membership nor the average death rates of the regular companies sensibly increased as the years went on was a favorite argument of the benevolent orders in defense of their inadequate rates and a strong weapon in their competition for business.

Another favorite argument was the condition of the ordinary town and village community whose average ages remained the same while the individual members were continually growing older. The births equalled the deaths and so preserved the average. So the constant new additions to their membership would keep down their average age. Again they could not be made to understand that, unlike the town community, their members all started young together and their average ages were bound to increase until an equilibrium was reached dependent on the relative rates at which new members were secured and the older members were retired through lapses and deaths. Before this equilibrium age could be attained the societies had already begun to feel the stress of their increasing death losses, and their members had begun to change their membership to newer societies which could furnish cheaper insurance. Years would often elapse before this stage was reached if the membership increased at a rate sufficiently rapid. Meanwhile the society would go on in the blind belief that all was well until the increasing death rate gave warning that their rates must be increased. The attempt to do this was sure to create dissatisfaction which resulted in an increased loss of membership and a diminished supply of new members, thus enhancing the trouble which they were seeking to escape. The process of dissolution thus started gathered momentum as it continued. The expedients resorted to to make good this growing deficiency, either by increasing the rates or reducing the benefits, were generally temporary compromises which merely relieved the situation for the time, until the growing deficiency again called for a new adjustment and created a fresh loss of membership. The end came when the burden of carrying the old members could