Subject Matter to Which State Legislation Especially Applies

Having outlined in a general way the duties and powers of the officials intrusted with the supervision of insurance companies, we may next outline in detail the particular functions which it is the purpose of government regulation to perform and the particular subjects and practices to which it is applied. While space forbids a detailed discussion of all the legislation which, has been adopted in the different states, practically all the important laws may be grouped conveniently tinder the following seven heads:

Standard of solvency. Companies are required by law to charge themselves with a minimum reserve as a liability. While the legal reserve requirement is not uniform in all the states, it may be said that nearly all the leading states require companies to maintain reserves on policies issued since about 1900 which shall at least be equal to those based on the American Experience table of mortality with interest at 3½ percent. In some states reserves computed on a 4 percent, basis are acceptable, while in others the companies, if they base their computations on an interest rate lower than that prescribed by law, are obliged to hold the higher reserves that result. On policies issued prior to about 1900 the reserve standard is usually based on the American Experience table with 4 percent, interest.

Organization and admission of companies. Although the organization of insurance companies is governed largely by the law applying to the organization of corporations in general, most states have seen fit to supplement their general corporation law with special acts pertaining only to insurance companies. Level-premium companies are usually required to deposit with the state approved securities to the value of $100,000 or some other designated sum. The manner of incorporating companies and the conditions under which they can begin business are also prescribed, and frequently the retirement of the guaranty stock of a mutual company and the maximum interest return that the holders of such stock may receive are fully set forth. Much of the legislation in most states is concerned with the conditions under which foreign companies may enter the state, and usually relates to their ability to meet iheir obligations, to the licensing of their agents, and to the filing of a copy of their charter, a certificate showing that they are authorized to transact business, a copy of all their policy forms, and a complete statement of their financial condition and valuation of policies. In order that legal process may be served, a foreign company must also appoint a resident of the state its attorney. Various states also forbid the removal of suits from state to federal courts.

Publicity through annual statements and examinations. All states require the companies transacting business within their borders to submit annual statements relative to their operations and financial condition. These statements, made out according to the form prescribed by the. insurance department, usually show in detail the company's assets and liabilities, income and expenditures, a gain and loss exhibit, a schedule of all classes of investments by kind and amount, and an exhibit of the number and kind of policies written during the year, the amount and kind of insurance in force, and the amount of insurance terminated in various ways. The statements thus received are published in the annual reports of the insurance departments and are thus available to the public and to the representatives of competing companies. As,a rule the statements, as adjusted by the commissioner, must also be published a designated number of times in one or more daily or weekly newspapers of general circulation, the companies to attend to the details of publication. To further protect the public, insurance commissioners are authorized to make periodical and, for probable cause, special examinations of the affairs of the companies, and to publish the result of such examinations whenever they deem it to the best interests of the public to do so. The periodical examinations involve an appraisal of the company's assets, a determination of its liability, and an inspection of its books and records.

Equitable treatment of policyholders. Reference is had here chiefly to those provisions of the law which aim to prevent discrimination and misrepresentation, to standardize policy provisions, and to bring about economy of management. Discrimination between insurants of the same class and equal expectation of life, as to rates, benefits or conditions of the contract is prohibited under heavy penalties in most of the states. Nearly all the states also prohibit an agent or other representative of a company from giving, as an inducement to insure, any direct or indirect rebate of premiums payable or any other valuable consideration not specified in the contract. In this connection numerous statutes also prohibit the officers and representatives of any company from giving or selling as an inducement to insurance, or in any connection therewith, any stock or other securities of any insurance company.

No person connected with any life-insurance company, according to the law of many states, is allowed to issue or circulate directly or indirectly, any estimate or statement which misrepresents the terms, benefits and advantages of any policy which his company issues, or the dividends to be paid thereon. The use of any name or title of any policy which misrepresents the true nature thereof is likewise prohibited. Nor may any representative of a company resort to misrepresentation with a view to inducing any policyholder in another company to lapse, forfeit or surrender his insurance. Statements of the insured are declared by the laws of some states as constituting representations and not warranties. Misrepresentations are not considered as voiding a policy unless the same are of material importance. Not only do all the states, as we have seen, protect the insured against excessive forfeitures in case of surrender and lapse, but many have undertaken in recent years to adopt certain standard policy provisions ; to require all life and endowment policies to contain or to exclude certain prescribed provisions; to compel companies to print prominently on the face of the policy a plain description of its character, dividend periods and other peculiarities, so that the holder thereof shall not be liable to mistake its nature; and to require all policy forms and indorsements to be filed with and approved by the commissioner. Lastly, it should be stated that many of the states have shown a strong disposition to regulate the expenses of companies and to prevent the accumulation of unnecessary surplus funds. To this end laws have been enacted which (1) prescribe the methods of allotting dividends; (2) prohibit the payment of pensions, political contributions and excessive commissions; and (3) place a limit upon salaries, the amount of expense which may be incurred to secure new business, the amount of surplus that may be withheld from policy-holders, and the amount of new business that may be written.

Taxes and fees. A study of the insurance laws of the different states shows a remarkable absence of uniformity in the way life-insurance companies are taxed. -Some states levy the tax on all or a part of the companies' assets; others tax their net receipts; but by far the greater number tax the gross premiums, the rate varying all the way from 1 to 3 percent. In addition to these taxes there exists a great variety of license fees, fees for filing charters, statements and other papers, and in some states municipal license fees. A recent compilation showed that total taxes and fees paid by life-insurance companies operating in the United States aggregate annually approximately $12,000,000, a sum considered grossly excessive by those who wish to see the state encourage the widest possible dissemination of the benefits of life insurance.

The present heavy taxation of life insurance is attributable chiefly to general ignorance on the part of the public and the lawmakers of the true nature of legal-reserve insurance, and to the fact that taxes on this business, especially those levied on gross premiums, are so easily collected. Probably not more than one out of every twenty policyholders understands the true function of the reserve. The general public and the lawmakers see only the billions in assets that are being accumulated, and naturally conclude that such huge funds should be taxed like any other property, overlooking the intimate relation that life insurance bears to the welfare of the family and the state, as well as the fact that the large reserves referred to represent merely the accumulations of millions of policyholders which are held in trust for them and which are necessary for the fulfillment of the companies' obligations to the insured for the protection of his wife and children. To a large extent the heavy tax burden is also traceable to the fact that as regards most states the companies operating therein are foreign companies and for that reason, especially when it is believed that they take millions out of the state, are not regarded as entitled to leniency.

The taxation of life-insurance companies has long been a much discussed subject. Among students of the question there is a very widespread conviction that the states in this country, instead of repressing the growth of life insurance through excessive taxation, should adopt a policy of encouraging the widest possible use of its beneficent protection among their citizens as is done by practically all other leading civilized nations. The supporters of this view take the position that a life-insurance policy in itself constitutes a self-imposed tax, and that it cannot properly be regarded as income-producing property. Their contention is that life-insurance policies merely represent funds accumulated through the sacrifice of the insured for the protection of dependents, and thus not only benefit the entire community but relieve the state of the necessity of supporting large numbers who would otherwise be dependent on charity. They, therefore, hold that the business should not be taxed more than is necessary to pay for the cost of its proper supervision.

Other main subjects covered. To the foregoing groups of subjects two others should be added, viz, the regulation of 4 investments and the supervision of agents. These, however, need not be discussed here since the first was covered in the chapter on "Life-insurance Investments" and the second will be treated in the chapter on "The Law Pertaining to the Agent."