STATE SUPERVISION AND REGULATION OF BENEFICIARY

ASSOCIATIONS.

Paper Read by Mark W. Stevens of the Loyal Guard, Before the Law Section of the National Fraternal Congress, At Its Session

in Detroit, 1910.

Mr. President and Gentlemen of the Law Section:

Fraternal beneficiary societies are corporations created by, and deriving their charter from the state. The power to create a corporation carries with it, as a general rule, the power to regulate and supervise.

Supervision and regulation are two distinct propositions. Regulation is provided by statute, and the act of the legislature creating a corporation, usually recites its powers, limitations and restrictions; also how, and in what manner it shall conduct its business.

The supervision of corporations is the function of one of the departments of state government. Fraternal beneficiary societies in most of the states are under the supervision of the state insurance department. Insurance commissioners have no power to regulate; that is the function of the legislative department of state government. The business of the insurance commissioner is to supervise only. The insurance commissioner is a part of the executive branch of state government whose duty it is to see that the law is observed, and not to make laws. He may, however, make and promulgate reasonable. rules to carry into effect the law regulating societies. The determination by the commissioner, as to whether the statute is being observed, involves somewhat the interpretation of the statute. The granting of and renewal of licenses is dependent upon the fact whether the commissioner determines that the society has observed, and does observe, the law; to that extent he may be said to exercise some judicial powers; but in any event it is not the exercise of such judicial powers, or the exercise of such judicial discretion that is not reviewable by the courts.

In dealing with fraternal societies, the distinction between them and old line companies must always be observed. The one with the power to make rules and laws for their own management, and the choosing of its officers is lodged in a board of directors, and in the other such power is lodged in the membership. If a so-called old line company is a mutual company, then the policy holders may indirectly participate in shaping its course, but usually through proxies given to members of the board of directors; so that in all systems of insurance, except fraternal, the will of the policy holders is of little importance in the management.

It has come to be understood that a fraternal society, if it would be permanent and abiding, must have adequate rates of contribution to meet the ever-increasing death rate. The doctrine that the death rate can be kept normal, and that a society can continue to carry its members to that end on a level rate plan at current cost, or less than actual cost, by reason of an increasing membership, is well stated by the Texas court of civil appeals in the case of the Fraternal Mystic Circle v. Ericson, when it states that such a doctrine is as fallacious as it is to say that a merchant can sell his goods for less than cost, because he sells so many of them.

The fact that there are a considerable number of societies whose rates are entirely inadequate is not in all cases due to the fact that the management has not used its best endeavor to re-adjust in some manner so as to place the society on a sound basis. A large number of societies have already overcome the situation.

The great question with which the system is now face to face is, "How can all the societies be placed on a firm and enduring basis?" Underlying this question is the one paramount fact that must be remembered; that the power to do the very thing that will preserve them, is lodged in the membership; they have the power, if they will. It can be accomplished by educating the membership to the necessity, and just in proportion as they become educated will they act; so that, briefly stated, the whole matter lies with the membership. "They must work out their own salvation.'

The best means of education to be employed is publicity. The members should be informed of the actual condition of the society. A valuation may be, and undoubtedly is, necessary to ascertain the true condition. If a valuation discloses a deficit, tell them so-if you want the members to act intelligently, they must know the whole facts, nothing with reference to the condition of the society as to whether or not it is on a sound basis, should be concealed. To inform the

members that the rates are inadequate and not demonstrate the fact, is a mere statement without verification, and detracts very much from the force of the argument.

Another method that is suggested, and that has been agitated by the National Fraternal Congress, is to compel a re-adjustment by legislation. The Congress has never gone so far, nor has it ever sanctioned in full the legislation suggested and urged by the Convention of Insurance Commissioners. The difference of opinion between the majority of the members of the Congress, and some of the insurance commissioners, arises, undoubtedly, from the viewpoint of each. Some of the commissioners seem to measure and judge the fraternal societies by the standard of old line insurance companies. This, in part, may be due to the fact that some of the societies favor the issuing of similar contracts, in certain respects, which is considered by many fraternalists to be absolutely foreign to the real objects of the fraternal system.

The commissioners properly insist upon a representative form of government, but they seem to forget that in a representative form of government the power is vested in the membership, and that if the membership were to be forced or coerced, then the theory of a representative form of government is a failure in expressing the honest sentiments of the membership.

I do not mean to be understood as opposing adequate rates nor to favor postponing any favorable means to that end, for in the Congress the writer has always voted in favor of adequate rates, but I do think it very unwise for officers who are vested with the power of supervision merely, or for the management of a fraternal society to judge and measure fraternal societies by the standard of old line companies, and to that end to suggest and urge legislation.

It will be conceded that the men and women who are charged with the responsibility of the management of fraternal societies have as great interest in the welfare and perpetuity of the society as the average insurance commissioner who may, by the fortunes of politics, be called to temporary exercise supervision over them. Nor can there be any doubt but that the management of these societies, with, perhaps, few exceptions, are using every effort to educate their members to the necessity of reaching a sound basis. Many have succeeded, others will succeed.

That the management of these societies are as well informed as the ordinary commissioner there can be no room for doubt. The management of fraternal societies, and the majority of the members, know very well that the plans and forms of operation of fraternal societies, and old line companies, do not run along parallel lines, and they are unwilling to be judged by the standards of old line companies.

What is needed is harmony between the commissioners and the several managements. If both are able to differentiate fraternal associations and old line companies and work along mutual lines, more progress will be made. If commissioners will understand that they are merely a part of the executive branch of the state government charged with the duty of seeing that the law is observed and the management of fraternal societies who are charged with the duty of educating their members along the lines of adequacy and safety shall continue the work of education by truthfully telling them of the true condition and the inevitable result, then self preservation of the members will in the end prompt them to act.

One situation that confronts us, is the fact that the several commissioners make and promulgate department rules that are so dissimilar in many respects that societies doing business in several states find it very embarrassing to comply with all, and each commissioner seems to find authority for his course in the law of the state, and in some states the commissioners claim to be vested with wide authority and they assume to exercise such authority, and to exercise such discretionary powers as they deem necessary for the proper supervision of the societies. If we were to have uniform legislation strictly along fraternal lines, based upon and in harmony with the principles upon which these societies rest, and sufficiently comprehensive, so that the supervising department would not find it necessary to read anything into the law by interpretation, conditions that frequently arise would be avoided, the rules of the various departments would be more uniform, and what is of greater importance we would be able to obtain. more uniformity in the decision of the courts.

Although the fraternal system is composed of many different societies, yet we are each mutually interested in the good of all. We may not always be able to secure the enactment of such legislation as we may think of benefit to the system, but it is reasonably safe to assume that we can defeat any bad or unfavorable legislation which is given fair and proper publicity. We have a common end to attain, "stability and perpetuity." It cannot be attained by state supervision merely; it cannot be attained by legislation along the lines of old line companies, but it can be attained by continuing the work of education along the lines so happily begun and partially consummated.

The right of insurance commissioners to favor legislation which they believe to be proper and beneficial no one will deny. Indeed, uniform legislation in all the states is most desirable, and it is eminently proper that the fraternalists should confer with the commissioners concerning legislation; but assuming that the fraternalists who

have given the subject years of study are just as well informed and possess just as much wisdom as the commissioners, as to what is beneficial and wholesome, they should just as earnestly oppose all legislation which they believe to be injurious to the fraternal system. The fact that legislation is proposed by the commissioners should not have a feather's weight, if, in our judgment, it is injurious. It is not a question of propriety or ethics, but a question of business and fraternity.

A readjustment of old members is a troublesme problem; experience has demonstrated that ever so slight an increase in rates or an unusual frequency of assessments creates unrest and suspicion, resulting in a loss of members from the young and healthy, while the old and impaired remain; no one knows this fact better than the management whose society has had the experience. It is urged, however, that if minimum rates were fixed by statute and all societies thereafter organized were required to adopt them, and that within a reasonable time societies already organized were required to adopt such rates, there would be no motive for members to cease their membership in a society because there would be no other society with inadequate rates with which they could affiliate. I think it is problematical just what the result would be in any manner of readjustment. It seems to me that we are making rapid progress by the voluntary action of societies growing out of the fact that the membership are fast becoming educated to the point that adequate rates are essential to the perpetuity of the system.

Some have doubted the propriety or policy of the Congress in publicly advertising our so-called infirmities, thereby giving to the opposition a weapon with which to attack us; and yet, upon the other hand, the agitation has undoubtedly been the means of making it possible for many societies to reach a solid and sound basis. I think the position of the Fraternal Monitor, that "What is now most desirable is a period of suspension of hostilities and a rest from public agitation,' is sound, except as may be necessary in continuing the work of education which is accomplishing much; and if, in the end, the membership of any society will not yield to what their better judgment and candor teaches, it must suffer the consequences, while the societies that are willing to become educated to the necessities, and act accordingly, will not only strengthen and preserve the society in their day, but enable it to live on, and on, and continue to be the greatest blessing to humanity ever conceived by man.