Long before the enactment of the Massachusetts non ' 11 forfeiture law, however, as long ago as 1792, a life an nuity company in Philadelphia, now known as the Presby terian Ministers' Fund, organized in 1759 and restricting its membership to ministers of that faith, had allowed surrender values in paid-up annuities under particular cir cumstances; and in 1852 it began also to allow surrender values in paid-up insurance. By reason of the limited clientele of this company, this had no influence upon the general practice.
In 186o, while the agitation about surrender values was in progress, and before the Massachusetts non-forfeiture law was enacted, the New York Life Insurance Company introduced a whole life policy paid-up in ten years the first of that form in this country and inserted the condi tion that it could be surrendered, after being in force for at least two years, for paid-up whole life insurance for as many tenths of the original amount as full year's pre miums had been paid. The credit for this initiative has been variously assigned; it was publicly claimed by Pliny Freeman, formerly actuary of the company, after he left its service and while he was president of another com pany, and the claim was not challenged.
This was the first guarantee of surrender value priv ileges by any American life insurance company doing a Izo general business. Even after the Massachusetts non-for feiture bill had passed, the Massachusetts life insurance companies were so far from being reconciled to that law that for a time they put a waiver of the same into the ap plications. Later, however, they made a virtue of neces sity, and urged the beneficial nature of the law as a means of influencing business. Two other companies, the Mutual Benefit Life Insurance Company of New Jersey and the National Life Insurance Company of Vermont the latter, under the advice of Elizur Wright as its con sulting actuary soon afterward adopted the policy of allowing liberal surrender privileges and have adhered to it to this day. The Mutual Benefit later earned for itself a reputation for especial liberality by voluntarily guaranteeing automatic extension of the insurance for a definite term, upon failure to pay premiums.
From time to time other companies conceded surrender values in one form or another mainly in paid-up insur ance of the same kind as the original insurance, but for a reduced amount. The movement toward more liberal surrender privileges was in full swing when the tontine insurance reaction set in. It was but partially and tem porarily checked by that; but the non-forfeiture law of New York, modeled somewhat on the non-forfeiture law of Massachusetts, except that it permitted either paid-up or extended insurance as might be provided in the policy and also required that it be applied for within six months, was amended so as to legalize waivers of its provisions.
The allowance of cash surrender values was longer de layed. Though in 188o no longer insurance commissioner
of Massachusetts, Elizur Wright yet had such influence that he prevailed upon the legislature to repeat the old non-forfeiture law and enact one which required that cash surrender values be allowed with other alternative surrender values.
121 The determination of the amount of the cash surrender value was directed by this statute to be made upon a pe culiar basis, invented by Mr. Wright. Starting with the individual terminal reserve, the reasoning was as follows : If all who were not going to die within one year were to withdraw, each receiving the individual reserve of his policy, the remaining reserve, with the new premiums paid, would not be enough to meet the death claims. In like manner, though not to the same degree, if those who withdrew are better lives than those who remain, the re serves on the remaining insurances may not be sufficient, together with future premiums, to pay out. It is gen erally considered that, on the average, those who sur render or discontinue are better lives than those who re main; and also that cash values would be an incentive to withdraw, causing many more withdrawals of the best lives than would otherwise take' place. This lowering of the average quality of the lives insured is called "adverse selection," and the danger of "adverse selection" was in those days given as the most conclusive argument against cash values.
This argument caused Elizur Wright to investigate: How would adverse selection affect the conditions and what could be done to offset the deterioration occasioned by it? The manner in which adverse selection affects the com pany is by enhancing the actual "costs of insurance," and the way in which it may be offset is to increase the reserve by an amount equivalent to the present value of this in creased risk of death. The way in which it enhances the "costs of insurance" for the remaining lives is by remov ing lives which would, as a class, have contributed more in their contributions to pay future "costs of insurance" than the actual costs under their policies only would have been; and the conclusion was arrived at that the measure 122 of this financial damage to the company was a percentage on all future tabular "costs of insurance" which would be realized from the policies surrendered. To the present value of all future "costs of insurance" of a policy that is, of all future contributions to pay the excess of death claims over the reserves Mr. Wright gave the name "in surance value," and he fixed upon a "surrender charge" that is, a sum to be deducted from the terminal reserve in determining the cash value equal to 8 per cent. of this "insurance value." This rule was embodied in the statutes of Massachusetts and remained the law until i9oo, when a simpler but more arbitrary rule was sub stituted.