International Styles

Various Assessment Plans that Have Been Used

One of the most interesting phases of fraternal insurance to study relates to the various assessment plans that have been employed. The first one to be generally adopted was the "flat assessment" plan, according to which the same assessments were charged regardless of age. Manifestly, this plan results in assessing the younger members much more than the actual cost of their insurance and the older members much less. The assessments charged under this plan also proved in nearly all instances to be woefully inadequate. In the course of time the defective character of this crude method became apparent. As the age of the members increased the death losses grew heavier with the result that assessments had to be increased. Younger members soon realized that they were paying much more than their just share to meet current claims, which, it was observed, were being paid to an increasing extent to the older members. The younger members would, therefore, escape paying heavy assessments by withdrawing from the society, usually to join some younger society where protection could be obtained at a lower cost, while the old and infirm members would remain. Because of this adverse selection the average age of the membership in the society, and consequently the assessments, would rapidly increase, thus further accelerating the rate of withdrawal on the part of young and healthy members.

Under these conditions it would soon become impossible to secure any more new members. The proportion of the remaining members who were aged or infirm would now rapidly increase and death losses would also increase correspondingly. With the membership decreasing and death losses rapidly increasing; assessments would, in the course of time, reach prohibitive figures with the result that the society would dissolve, thus depriving a large number of old or sickly certificate holders of the protection for which they had contributed for years and which, under the circumstances, could not be replaced with insurance in a regular company. The influence exerted by this adverse selection is indicated by the two following actual examples.4 The first column in each case represents the membership of the society and the second column the number of deaths per 1,000 during successive years. It will be noticed that in the case of the first society, for example, the membership decreased in eleven years from 62,457 to 16,894, or nearly 73 percent., while the death rate increased from 12.5 per 1,000 to 33.9, or over 171 percent.

The next assessment plan to be generally adopted was the so-called "graded assessment". Here assessments were graded according to the age of entry, varying, for example, from $.60 at age 20 to $2.50 at age 60. It was, however, again the purpose of the society to collect just enough to pay current losses, and the rates were intended to represent approximately the mortality at the several ages. Moreover, the rates were not changed and a member who entered the society at age 25 would continue to pay the rate for that age during subsequent years. This plan, it is clear, although not as crude as the preceding one, nevertheless becomes increasingly advantageous to the members as they grow older and therefore, like the preceding plan, also works a hardship upon the younger members.

A third plan had in view increasing the rate as the member grows older, but this plan it is apparent will prove unattractive if extended to very advanced ages. Consequently the rates under this plan were not increased after the member attained a stipulated age like sixty.

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