In the discussion of this subject, which has lately attracted so much attention, there is danger that popular interest will be concentrated upon the wrong-doing of individuals, without regard to the defects inherent in the existing system of mutual life insurance. The detection of crime, and the punishment of individual criminals, is a good thing; so is the recovery from guilty directors of the money which they have taken from their corporations; even more desirable is an improved moral sentiment concerning any important kind of business. We gravely mistake, however, if we think that the scandals in mutual life insurance companies are altogether the result of the individual wickedness of the men who manage them. Some of the evils are found in some large enterprises of every sort; other evils are due to the nature of the business, and can neither be understood nor be cured until the nature of that business is carefully considered, both by itself and in comparison with other enterprises. The importance of life insurance makes such consideration worth while. Mr. Brandeis has shown that these companies collect from the public $500,000,000 a year, and have assets of $2,500,000,000. What are the functions of a mutual life insurance company ? How does it differ from other corporations generally, and how does it resemble them? What is the relation of its operations to those of a stock fire insurance company, for example?

A mutual life insurance company is a very large aggregate of property. In this respect it resembles some railroad companies and the steel trust; but its property is not used in carrying on its own business. It is free capital, which can be employed in any enterprise, now in one

way and now in another. In so far as the policies written are mutual, this property belongs to the policy-holders. It is made up of the premiums which they have paid in, as increased by investment. If the policy entitles the holder to participate in the earnings, they are proportionally his. If the company is a mutual company, no one shares the earnings with him except other policy-holders. His rights may be concealed by the fiction. of a small stock company which issues mutual policies, or by varied, unintelligible, and fantastic forms of policy, which purport to give him varying rights in the company's property. Notwithstanding these complications, where the policies issued are mutual, the property of the company belongs to the policy-holders. That the company-representing them all has promised to pay any one of them a given sum of money on his death, affects his rights as against his companions, but does not deprive the policyholders, taken together, of the ownership of the corporate property as a whole. They own it as the stockholders own a railroad.

Unlike a railroad company, a mutual life insurance company is not governed by those to whom the property belongs. In a railroad company, the control of the owners, or stockholders, is imperfect, indeed, but it is made considerably effectual through the knowledge and effort of a few large owners. These persons, indeed, sometimes abuse the power given them by their holdings. Sometimes they do not deal fairly with the smaller stockholders; but in general they have time and interest to concern themselves with the affairs of the railroad, and they allow the smaller stockholders, by grouping around them, to have an appreciable

share in the management. That the policy-holders do not control the management of a mutual life insurance company is abundantly clear, and that they cannot, a little reflection makes equally evident. Real control implies a real choice of acts or agents. The choice may be wise or foolish; but if the electors do not choose with some understanding of the alternatives before them, their control is nominal only, and not real. The ordinary policy-holder has not this understanding. No one has an interest in the property comparable to that of some large stockholders in every railroad and manufacturing corporation. And in a railroad or in the steel trust, the control of the stockholders would also be nominal, were it not for the large stockholdings of a few.

A bank resembles a mutual life insurance company in that most of its funds belong to persons who do not manage it or elect its directors; but, as the depositors can and do withdraw their money at pleasure, they largely control the corporate property, and can at any time, without considerable loss, separate themselves and their money from the corporation in which they have deposited it. The holder of a policy of life insurance, on the other hand, can withdraw only by a surrender of his policy. Surrender may forfeit the claim to dividends and accumulations. Reinsurance may be difficult. The immense property, larger in some cases than that of any bank in existence, must remain in the company's control for a long time. A mutual life insurance company, therefore, involves a very large amount of free capital, necessarily controlled by those who do not own it, which the real owners, depositors, or policy-holders, find it hard to withdraw or to realize upon.

It may be answered that there is nothing noteworthy in the fact that a mutual life insurance company is not a railroad or a bank. It deals with insurance, quite a different subject. How does it compare with a fire insurance company? A policy of fire insurance is a contract

wherein, upon consideration of a small sum, the company agrees to pay a large sum on the happening of an unlikely event. The consideration or premium is paid wholly in advance for a term of years, not more than five. Here the transaction commonly ends, and nothing more is done on either side until the term runs out, when new insurance is purchased, in the same company or in another, at the choice of the insured. In the unlikely event of a fire, the loss is made good. Moreover, the surrender value attached to a fire insurance policy ordinarily enables the holder to cease his connection with one company and to insure with another at any time, and at trifling cost. Even if, through the embarrassment of the company, or for other cause, he is unable to obtain proper surrender value, nevertheless he can take out new insurance in a company satisfactory to him, losing at the most only the unearned premium on his old policy, unless his building has been destroyed before the new insurance is effected. His property at risk in the management of the fire insurance company is considerable indeed, but small, even though the policy be a mutual one, as compared with his property invested in a policy of mutual life insurance.

In the latter case, he commonly pays a large annual premium to obtain a large payment in the future. This future payment is as certain as death; the amount payable is a fixed sum, to be increased by dividends; the time of payment is in doubt. The total amount payable should equal the earnings of the premiums paid during an average life. In a life policy, the premium is large. In a fire policy, the premium is small, and, though the amount payable may be stated somewhat as it has been stated for a life policy, yet the resemblance is in word rather than in reality. A man will die; the building probably will not burn. In a life policy, the sum risked by the insured in the management of the insurance company equals the sum of all premiums and interest thereon, somewhat increased or

diminished by the time at which death occurs. Until a fire has actually happened, the sum risked by the insured in the management of a fire insurance company is only the unearned part of the premium last paid, usually a small sum. In a life policy, surrender ordinarily involves considerable loss; the insured cannot ordinarily reinsure himself on the same terms; the annual premium payable on the policy he surrenders has been uniform, and, upon reinsurance, he will find that premium considerably increased by reason of his increased age. In the case of a fire policy, on the other hand, surrender ordinarily involves no considerable loss, and reinsurance is a simple matter.

Mutual life insurance, then, is a joint enterprise, wherein a great number of people deposit large sums of money for investment, which sums, with their accumulations, are to be paid out again to them, not altogether in proportion to the amount of their individual deposits, but in part, so that the longer lived get less for their money than do those who die first. The enormous accumulated deposits of these policy-holders are managed by persons who have no interest in the property by way of ownership. That a few of the managers may happen to be policyholders is unimportant. Their proportionate ownership is insignificant.

Some of these managers are paid large salaries. The salaries are not deemed commissions upon property managed, but are without certain basis of computation, and are fixed by the recipients. By various devices, such as the fictions of corporate existence and of corporate stock, the fictitious resemblance of life insurance to other kinds of insurance, and the confusion caused by the variety of policies issued, these managers have come to be looked upon as the owners of the depositors' property. In truth, they are but the agents of the policy-holding owners in its management. Much of the confusion has arisen from an imperfect use of terms, and from a failure to perceive the true relations of the parties

involved. In some cases, the founders of mutual life insurance companies have shown great skill in inducing people to invest their savings in the manner described. This fact does not entitle their relatives and connections to large salaries for all future generations; and yet, without interest in the property managed. the founders of an insurance company choose their successors, and thus perpetuate the control in their family and friends for generations.

Not all those who are concerned in the company's management receive salaries. Most of the directors receive no salaries, as such, for their fees gained by punctual attendance at directors' meetings may be neglected, they are so small. Some directors have used their position, which involves the control of great sums of money, to obtain financial favors for themselves as individuals; to get into syndicates, for example, to borrow from their corporation in aid of their private speculation. True, they repay what they have thus borrowed, but they are on both sides of the dealing with their company, and this position tries unduly a man's impartiality. When speculating with their company on joint account, they have occasionally skimmed the cream for themselves.

Let us look at the matter for a moment from the director's point of view. He is a man of financial importance and skill. He has no considerable pecuniary interest in the company. If he is to make no profit from his directorship, why should he give to it his valuable time? The director of a railroad gives time and thought to its management because he owns a considerable part of the property managed. The time which he gives is given to the management of his own property, and so, in effect, he is paid; but it has been shown that the director. of a mutual life insurance company does not, and cannot, own the property which he manages, and so he is without that means of payment for time spent which an ordinary corporate director pos

sesses. If the insurance director makes nothing out of his position, he gives of his charity to an enormously rich corpo

ration.

But the loss to the policy-holders caused by payment of excessive salaries and by the pickings of directors has been small compared to other losses almost neglected by the newspapers. In the large concerns with which we are dealing, the excessive salaries of a few people do not impose a very heavy burden upon the large property involved, and the clerks and subordinate employees of insurance companies are not generally overpaid. Most of the directors have been men of generally good intentions, working for the company's profit as well as for their own, more or less misled by the same fictions which have misled the public. The risks which they have taken in syndicate investments and the like have usually been profitable. These have broadened the basis of corporate investment, and, upon the whole, have very likely increased the percentage of return on the money invested, though this cannot be proved. The direct cause of the policyholders' chief loss is not here.

The situation is this: On the one hand are the executive officers and directors. They are interested in the gross amount of business done. of deposits received. The more money on deposit in the company, the larger will be the president's salary, the greater a director's financial influence. The amount of insurance written is regarded as almost the only test of corporate success. No other test is obvious, such as the dividends of other corporations. There is no effectual competition in rates. As has been said, the method of writing the policies and of making returns obscures the result of corporate operations, and bewilders the policy-holder, generally a man of not much experience or capacity. The notion that the business is chiefly one of insurance, rather than of the investment of savings with an insurance feature

added, obscures the true nature of the enterprise. Mere size is aimed at by everybody, and the policy-holder thinks himself the gainer.

On the other hand is the insurance agent, whose livelihood, often scanty, depends upon the gross insurance written. So long as men can be induced to buy life insurance, he has no interest in the price paid for it, unless perhaps that the price be high on which his commission is based. Officers, directors, and agents alike are thus interested in the insurance written, the premiums paid, the gross deposits, and in nothing else. The agent cares nothing for corporate economy, so long as he gets his commission. The management cares nothing about the size of his commission if the gross business is increased. What interest has the policy-holder, property-owner, or depositor in the matter? It is to be borne in mind that the property in the company's hands at any time belongs to those who are policy-holders at that time, not to those who may take out policies in the future. And the policy-holders or depositors at a given time have no more interest in an increase of the deposits than have the depositors in a savings-bank. If the insurance company be well established, they have no interest whatsoever. Let us come to particulars:

The John Hancock Insurance Company, of moderate size, believed to be managed with honesty, holds about $37,000,000, conservatively invested. There is no evidence of excessive salaries, or of directors' misconduct. This company, with pride, and by way of advertisement, sets out its operations of 1905 as follows:

Premiums received $15,031,141.56
Interest, rents, etc. $1,504,397.97

about fourteen per cent on the assets permanently invested, was thus spent in the management of the property, and three fourths of this sum, four and a quarter million dollars, was paid to agents, apart from other kinds of advertising.

The Metropolitan Life Insurance Company, with a moral record not as good as that of the John Hancock, in nearly forty years of existence (through 1904) received in premiums $418,729,463, and from other income $33,551,623. Total $452,281,086. It paid to policy-holders $149,330,965, and had left as assets $128,094,315, while it spent $178,843,319. The methods of this company may be illustrated by an argument it made before the Armstrong Committee. It gravely contended that its policies which lapsed in the first year of their existence, policies on which the insured paid considerable premiums and got absolutely nothing in return, were yet a source of loss to the company by reason of the commissions paid to its agents. Though the insured got nothing in return for the premiums he paid, yet, in order to receive these premiums, the company disbursed nearly three times their amount. The insured lost his deposit, and yet the company also lost by the operation. The company paid its agents for extracting money from the insured, and the insured paid the agents for extracting money from the company. What would be thought of a savings-bank which allowed its agent to keep all deposits of a certain class, and in addition paid him two dollars for every dollar so kept. Waste can no farther go. On the lapsed policies of that year, the premiums received amounted to $417,435. For this payment the insured got nothing, yet the company, by reason of its payments to its agents, figured that it lost over $1,000,000 besides.

The Prudential Company in less than thirty years (through 1904) received from premiums $290,091,973 and from other sources $ 20,789,916 in all $310,881,889

It will be answered that the insurance companies above mentioned are industrial companies, and that the cost of managing an industrial company is necessarily large. Its agents are paid, not only for getting new business, but also for collecting weekly premiums upon policies in force. The ordinary mutual life insurance company, such as the New York, the Mutual, or the Equitable, does not show this condition of affairs. There is some force in the answer, but it remains true that, if an industrial insurance company sold its insurance at cost to those persons who applied for it and who were ready without solicitation to keep up their premium payments, the cost of the insurance so provided would be not more than two thirds of what it has actually been. The waste can be shown in another form of statement. The management of property is generally recompensed by a percentage of the income. These two companies received over $700,000,000 of deposits, on which there accrued over $50,000,000 of income, -a very small return. All the income was spent in cost of management, and over $250,000,000 of principal besides. Industrial insurance is the insurance of the poor, who thus paid in these two companies alone over $300,000,000 for the care of their savings. The economic waste is almost inconceivable, yet most of the recipients of the $300,000,000 got little more than a living wage.1 The vice of the system is illustrated by the practice of one of these same companies, which paid its president a percentage on new business. This is as if the owner of property should pay his agent a com

1 In Collier's Weekly for September 15, Mr. Brandeis has made a detailed statement of the operations of the industrial companies, with full comparison of figures.