There are a number of changes in our laws on insurance that I might suggest if I were not hopeful that the Commissioners at their next session will approve a Code for adoption by the several States, and therefore I think it best to defer a statement of them until after the report of the Committee on Uniform Legislation is made; and then, if success does not attend our efforts in this direction, it will be in time for the action of the next Legislature to recommend such changes as I may deem proper in my next Report.

RECEIPTS AND EXPENDITURES.

The revenues for the past year are in excess of any previous year, and show a steady increase of the business of insurance in this State; while the expenses of conducting the Department have been kept at the lowest limit possible with a due regard for effi ciency and expedition in the administration of the affairs of the office.

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The receipts for the fiscal year ending November 30th, 1905, amounted to $267,898.50, of which the sum of $24,526.50 was collected by former Commissioner Hon. Lloyd Wilkinson, from December 1st, 1904, to January 9th, 1905; and the balance by my immediate predecessor, Hon. Frank I. Duncan.

I gratefully acknowledge my obligations to those who have been associated with me in the labors of the Department for the intelligent and efficient manner in which they have performed their respective duties; as also to your Excellency, the Comptroller, and the Treasurer for official and personal courtesies shown me. I have the honor to be,

Very respectfully yours,

BENJ. F. CROUSE,
Insurance Commissioner.

REPORT OF ACTUARY.

BALTIMORE, May 8, 1906.

HON. BENJAMIN F. CROUSE,

Insurance Commissioner,

DEAR SIR:

In my report made a year ago to the Hon. Frank I. Duncan, Insurance Commissioner, special reference was made to certain conditions then existing in the field of life insurance, and the attention which had been directed to alleged extravagancies in expenditure on the part of some of the larger companies.

Since that report was written the subject thus referred to has become one of profound interest wherever American life insurance companies operate. The situation became so acute that on July 20, 1905, the Legislature of the State of New York, in which State the largest companies are located, appointed a Joint Committee for the express purpose of investigating the affairs of life insur ance companies. This Committee, known from the name of its Chairman as the Armstrong Investigating Committee, after taking voluminous testimony during a period of six months, presented its report to the Legislature on February 22, 1906.

This report, while not impeaching, or even throwing suspicion upon, the financial solvency of the companies examined, disclosed conditions which were startling to the financial world, as well as to the great body of policy-holders.

It was shown that the control of the three great companies, whose reported assets aggregated on December 31, 1994, the summ of $1,252,731,113, being more than one-half the assets of all the life insurance companies doing business in this country, was vested in a very few persons. Where the company was controlled by stockholders, the possession of stock to the par value of $50,000 insured control; if the company were purely mutual, through the apathy of policy-holders the holding of a handful of proxies insured control. As the Armstrong Committee's report states, page 6, "the result has been an autocracy maintained almost without challenge. Whatever efforts have been directed against it have proved abortive." As a result of this situation these great com

panies have been controlled and managed by a few irresponsible officers who have procured for themselves enormous salaries, have used the funds of the companies in speculations for their own profit, have kept secret accounts of profits obtained through speculations, have used funds of the companies for the purpose of influencing elections and legislation, which, for the purpose of avoiding scrutiny have been charged against these secret accounts. And, as a consequence of these methods, presidents of the companies and members of their families have grown enormously rich, while the cost of insurance, in consequence of progressive diminution in the apportionment of surplus to policyholders, has steadily increased.

When it is considered for what purpose life insurance was first devised and proposed, and upon what grounds it has been urged upon applicants, that is to say, the making provision for the widow and orphan; when it is remembered at what cost of pecuniary self-denial policies of insurance, procured for these purposes, have been maintained by many persons who would forego the comforts of life rather than allow their life insurance to lapse, the enormity of the offense of those who have been guilty of grossly increasing the burden of its cost by extravagancies, by the misapplication of funds, and the personal acquisition of enormous fortunes by means of having control of this business, is appalling.

It is said that the mills of the gods grind slowly but exceedingly fine; but in this case, whatever wrongs were done, the retribution has been swift and terrible. Of the presidents of the three largest companies which have been the subject of the recent legislative investigation, who a year ago were considered as among the most powerful financial factors in this country, one has found refuge in the grave, one in a sanatorium, and the third has gone beyond seas. To correct and prevent in the future the evils disclosed, the Committee of the New York Legislature recommended certain remedial legislation embodying regulations as to the organization of life insurance companies; the control of the companies by the policyholders; limitation as to the volume of new business; the retirement of capital stock where it existed; the regulation of investments; prohibition of political contributions and of lobbying; limitation of expenses; rules as to the valuation of policies and

the giving of surrender values; and also as to ascertainment and distribution of surplus. Further provision was made for standard forms of policies, for greater publicity and more efficient State supervision. Most of these regulations have already been enacted into law in the State of New York.

A bill embodying many of these features, proposed by a Committee of Insurance Commissioners of which you are a member, is now pending before the Congress of the United States, which, if enacted, will be applicable to companies transacting business in the District of Columbia, and is designed to serve as a model for insurance legislation elsewhere throughout the country.

In one respect I would respectfully suggest that in the legislation in New York and in that proposed before the Congress, namely the provision requiring an annual distribution of surplus by life insurance companies, is injudicious. The business of life insurance is made possible by the prevalence of a certain regularity in the occurrence of deaths, or the rate of mortality. But this average death rate does not assert itself with precision annually, any more than does the downfall of rain, the range of temperature, or the yield of crops. In order to ascertain the average a longer period than one year is required. In England a period of five years for the ascertainment and apportionment of surplus was adopted nearly a century and a half ago and has been followed ever since with satisfactory results. In my judgment the legislation in Maryland enacted at the session of the Legislature just ended, which provides for an accounting and apportionment of surplus at least once in every five years is thoroughly sound, and far wiser than a requirement for annual distribution of surplus. It leaves companies which elect to do so free to make distributions more frequently, but imposes no unreasonable burden upon a business in which fluctuations, favorable and unfavorable, are inevitable.

A little more than forty years ago some of the larger companies mistaking the financial conditions which arose from the Civil War to be permanent in their character, adopted the plan of annual dividends. When the error was discovered, instead of frankly acknowledging that annual distribution of surplus was not appropriate to the business, and could not be maintained with any degree of regularity, recourse was had to the plan of deferred divi

dends as a means of concealing the fact. Therefore, many of the evils which it is now sought to correct, are probably attributable to the injudicious attempt to make annual distribution of surplus. This was primarily prompted by rivalry for business and a mísapprehension of conditions. If a regular annual distribution of surplus from and after the first year of insurance were certainly possible, it would only prove that the premiums charged are unnecessarily high; and this, the most careful students of life insurance and of finance do not believe to be the fact.

Very respectfully,

CLAYTON C. HALL,

Actuary.