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(2) If not, has the Supreme Lodge in force mortuary assessment rates not lower than those indicated as necessary by the National Fraternal Congress Mortality Tables?
To discover whether the foreign body as well as the Massachusetts corporation was doing business here on May 23, 1901, it is necessary to look at the history of the statutes relative to such foreign corporations and associations.
St. 1888, c. 429, § 11, provided:
Fraternal beneficiary corporations, associations or societies organized under the laws of another state, now transacting in this commonwealth business as herein defined, and which now report or which shall report when requested to the insurance department, may continue such business without incorporating under this act, by conforming in other respects to the foregoing provisions and to the requirements of section thirteen of this act.
This section was repeated substantially in St. 1890, c. 341, § 11. In 1892 a special act (chapter 40) was passed, providing as follows:
Section eleven of chapter four hundred and twenty-nine of the acts of the year eighteen hundred and eighty-eight, as amended by section one of chapter three hundred and forty-one of the acts of the year eighteen hundred and ninety, is hereby amended by striking out, in the first and second lines, the words "associations or societies", and adding to the section at the end thereof the following: . . . The transaction of the business defined in this act, by any corporation, association, partnership or individuals, unless organized or admitted as provided herein, is forbidden.
Since at the time of the passage of the St. 1892, c. 40, the Supreme Lodge was an association and not a corporation, from and after the passage of that act the Supreme Lodge had no right to continue in business in Massachusetts. The right previously existing, of a foreign unincorporated association thus taken away, was never restored. See St. 1894, c. 367, § 10; St. 1898, c. 474, § 13; St. 1899, c. 442, § 18; St. 1901, c. 422, § 18; R. L., c. 119, § 13.
Since St. 1892, c. 40, destroyed the right of such an association to continue in business in Massachusetts without being admitted according to law, I advise you that you have no authority to admit the Supreme Lodge to Massachusetts now unless it shall appear that it has adopted and has in force mortuary assessment rates which are not lower than those indicated as necessary by the National Fraternal Congress Mortality Tables. It becomes necessary,
therefore, to consider whether its mortuary assessment rates are high enough.
Taking the National Fraternal Congress Mortality Tables and interest at four per cent. which is the same rate used by the Fraternal Congress and by this company in its computations, I find that the level premium required at age twenty is $10.57; that is, one entering the company at age twenty must pay $10.57 at the beginning of each year in order that the company may have on hand $1,000 with which to pay his benefit certificate when he dies at the time appointed in, the mortality table. A portion of this premium goes the first year for current insurance, a larger portion for reserve. To illustrate suppose one thousand enter at age twenty and remain until death; during the first year a small proportion of them will die; enough money is taken from the premiums of those who live to make up in addition to the premiums received from those who die the amount of those losses; the balance goes to reserve. The next year more of each premium goes to pay current mortality and less to reserve. After many years all the annual premiums will be required to pay the increasing death losses, and, in addition, sums must be taken from the reserve. Finally, the last man of the one thousand dying, there will be exactly $1,000 left of the reserve to pay his certificate. Obviously, the accumulation of a reserve is necessary to keep the company solvent. Under the section of the statute which I am considering (§ 13), a company must have in force" rates which are not lower than those indicated as necessary by these tables. Necessary for what? This can only mean necessary for keeping the company in a condition of solvency so that it may meet the losses, assuming that members will die as fast as and no faster than the tables predict. This phrase inevitably implies that the rates must be sufficient to produce a sufficient reserve if the members die according to the mortality rate of the tables. These rates, moreover, must be kept in force. The company must collect them.
It has been suggested that the statute does not require a fraternal corporation to collect any reserve, that it may continue, since the enactment of this provision (St. 1901, c. 422, § 18), as before to assess merely for current mortality, the effect of this provision being simply to set a maximum limit upon the assessments which it may call, and my attention is called to the earlier requirement codified in the same statute as section 7, that such company may collect, in addition to a death fund amounting to three assessments on all the members, an emergency fund not exceeding at any time five per cent. of the aggregate face value of its outstanding certificates. In brief, one section of the chapter,
the earlier in original enactment, limits the death fund arbitrarily to a percentage of the face value of the certificates in force, while another section, later in enactment, requires, by its necessary construction, that a death fund be accumulated by a company organized or admitted subsequent to May 23, 1901, large enough to keep the company mathematically solvent, according to the National Fraternal Congress Tables. This being a flat contradiction, I advise that the earlier arbitrary limit of section 7 must yield to the later scientific adjustment of the rates in section 13, and can be applied only to companies organized or admitted before that date.
The annual level premium which a company must collect and hold for death claims at age twenty is, then, $10.57. This increases each year, until at age fifty-five it is $40.83.
What are the rates of the Supreme Lodge, Ancient Order of United Workmen, throughout these ages? At age twenty the rate is said to be $12.60, leaving out of sight the guaranty fund which will be discussed later. At age fifty-five it is said to be $50.40, and at each intermediate age the rate is said to be greater than the corresponding rate required by the National Fraternal Congress Tables.
But the rates, thus arranged in parallel columns,
are not really parallel; they do not stand for the same thing respectively; $10.57 in the National Fraternal Congress column means that $10.57 is paid in advance to the company as a yearly premium; $12.60 in the Ancient Order of United Workmen column means that, if the company sees fit to collect twelve monthly assessments of $1.05 each, it will have taken from the member during the year $12.60. But, in fact, the Ancient Order of United Workmen collects only eight or nine of the monthly assessments, so that the rate which it enforces is less than the National Fraternal Congress rate.
It seeks to justify this failure to collect rates equal to those in
dicated as necessary by the National Fraternal Congress Mortality Tables by pointing out that it gives its members the benefit of the company's gain in mortality over that of the tables by assessing only enough to cover the reserve element of the annual premium and the actual mortality of the year. Instead of collecting the whole premium and returning to each member his share of the company's gain from vitality, in the form of a dividend, as mutual old line companies are supposed to do, it declares a dividend to its members by failing to assess them for more than is actually needed, in addition to the reserve.
There is no authority in the fraternal law for paying dividends to members in any mode. Formerly, such corporation would assess only from hand to mouth, relying on new blood" to support the business. The inevitable result was the freezing out of old members or insolvency, — often both. There was no occasion for dividends and none were authorized. Indeed, there is an express provision that the whole benefit fund shall be used only for the payment of death and disability benefits (§ 7). Now, a new company or a newly admitted company is required to have in force rates based on these mortality tables. In order to give members the benefit of a gain in actual over predicted mortality, that provision of section 7 must be changed by legislation.
A similar criticism applies to the classified rates of the Supreme Lodge, under which members are insured on the renewable term plan, instead of the level plan, paying a higher rate during each successive term of five years until they reach the age of thirtyfive, when, if they remain in the order, they are required to pay the level rate of $50.40 thereafter. Under this system a man of twenty pays a maximum of $6 in assessments during the year; a man of fifty-four a maximum of $18; a man of fifty-five a maximum of $50.40. While these amounts are higher than the National Fraternal Congress rates for the corresponding ages, they are not rates which are enforced.
Thus far, I have discussed only the rates up to age fifty-five. Thereafter the so-called rate of the Supreme Lodge continues $50.40 until the end of the table, while the rate required by the National Fraternal Congress Mortality Tables increases with rapidity; so that while one who enters at sixty must pay a level rate of $53.34, one entering at sixty-five must pay $72.32, and at seventy $97.91.
The company argues that this makes no difference since it has in force a by-law prohibiting the admission of members above the age of fifty-five. But the members who are insured by the company are at present of all ages, and only a few of them since their
entry into the order have paid the rates necessary to keep the order solvent under the National Fraternal Congress Tables. That the rates may be not lower than those indicated as necessary by the tables, each member must pay in from the time the law takes effect enough to create the reserve required to carry out his contract of insurance. It is not sufficient that the company makes its rates high enough for those it admits for the future, while carrying old men whose present rates are not high enough to insure the fulfilment of their contracts. At the time of changing from the old way to the new the company must treat those who entered under the old-fashioned system and have paid only for their current insurance as new members, and charge them the rates suitable to their ages when the change is made. Those members are like persons insured in an old line company, who carry yearly renewable term insurance whereby they pay each year the current cost of insurance; at any given time they must pay the rate of attained age, not the rate of age of entry. Whether they are given in exchange a step-rate or a level rate, it must be that applicable to their attained age.
If at and since the age of entry the members had been paying National Fraternal Congress rates, there would of course be no occasion for raising their rates now. But as they have only been paying current insurance they must begin paying the National Fraternal Congress rates fitting the ages which they have attained at the time the law goes into effect upon the company.
I advise you, therefore, that even were the company to begin now to collect rates equal to the National Fraternal Congress rates from all members below the age of fifty-nine, the age when the National Fraternal Congress rate begins to exceed the so-called Ancient Order of United Workmen rate, it could not be admitted to do such business in this Commonwealth.
In this connection should be noted the contention of the Supreme Lodge that its "guaranty fund" obviates the need of collecting from all members the necessary rates. The company has calculated the deficiency arising from the cause just discussed, and has established to meet it an additional rate which it assesses upon the members under the age of fifty-five. At the time of each assessment of the beneficiary rate it makes an additional assessment which goes to the guaranty fund. The present value of the guaranty assessments which may be laid, if all the members stay in the order and pay them, is said to be in excess of the present value of the deficiencies. Thus the company increases the premiums of the young to make up for the lack of sufficient premiums from the old.
The efficacy of this method depends upon the persistence of those