Comparison of the Stock and Mutual Plans as Regards the Loading of Premiums

We may next pass to a discussion of the important differences between the stock and mutual plans as they manifest themselves in actual practice. In the first place it is to be noted that the gross premiums charged by mutual companies include a loading which not only amply covers all expenses, but also usually includes an additional amount to safeguard the company against any possible contingencies. Then, if the premium proves to be redundant, as is nearly always the case, the overcharge is returned.to the policyholders in the form of dividends, thus giving them protection at actual cost. Stock companies, likewise, usually load their net premiums, but the amount added does not as a rule even cover expenses, the company relying upon excess interest earnings and saving in mortality to cover its requirements for expenses and contingencies. In actual practice, therefore, the stock company charges a lower rate of premium on non-participating policies than does the mutual company on participating policies. The stock company says in effect, to quote one description, "keep the dividend of the mutual company] in your pocket". It follows the plan of discounting the future i.e. of paying its dividends in advance by charging a guaranteed low premium; while the mutual company asks a higher premium to start with and subsequently refunds the overcharges. In actual practice, therefore, a comparison of the showing which stock companies make from the standpoint of ultimate cost of insurance to the policyholder and the showing made by a mutual company requires a comparison of the net annual cost of the policy in the two companies over a series of years.

The practical difference in the matter of charging premiums by stock and mutual companies may be illustrated by the following example of a $10,000 policy issued by a certain company some twelve years ago on the participating plan at a premium of $281.10, as compared with a $10,000 non-participating policy issued at the same time and under the same conditions at an annual premium of $227. As regards the non-participating policy, the annual cost of the insurance remains a constant, namely, $227. As regards the participating policy, however, owing mainly to the accumulating value of the reserve and the excess interest earned on that increasing value, the net cost of the policy shows a steady decrease. Thus, at the end of the first year the participating policy paid a dividend of $43.40, which, when deducted from the premium of $281.10, leaves a net cost of $237.70, as compared with the non-participating rate of $227. At the end of the sixth year the annual dividend on the participating policy had increased to $54.30, thus giving a net cost of $226.80, or approximately the same as the premium of $227 charged for the non-participating policy. Thereafter the net cost of the participating policy grows less each year, while that of the non-participating policy remains the same.

The foregoing example is chosen merely to illustrate the manner in which stock companies discount the future by charging a reduced rate of premium as compared with that charged by mutual companies, with the result that the non-participating plan gives the lower cost if the policy continues in force for a considerable number of years. The period in the life of the policy at which the total net cost under the two plans will be equal differs greatly and naturally depends upon the companies used for purposes of comparison. Much has been written concerning the question as to which plan will give the cheaper protection to the insured, and innumerable examples are cited to illustrate one contention or the other. The showing made under the two plans will depend upon the companies under consideration, and the controversy concerning the subject has therefore consisted primarily of a discussion of companies and their managements. It should be recognized that a true comparison of the two plans as regards the cost of insurance a comparison of systems and not of companies requires that the companies used for illustrative purposes should operate under precisely the same conditions, that their managements should have equal ability and integrity, that they should do approximately the same amount of business yearly, and that their policies should be alike in their provisions. Having in mind a comparison of systems, as distinguished from companies, it may be said that in mutual insurance, if efficiently and honestly conducted, all of the overcharges are refunded to the policyholder and he receives his protection at actual cost, whereas under the stock plan an overcharge in the premium reverts to the benefit of the stockholders.