Senator MILLIKIN. That says, "policies providing disability insurance and waiver benefits." What are waiver benefits? Mr. MILLER. The premium was waived, as well as the payment of an income provided. Senator MILLIKIN. I see. Mr. MILLER. In the second bar we had a similar group of policies providing the waiver benefit only, with no cash benefits; and the third bar shows experience under small intermediate policies which provided waiver of benefits for a year, followed by disability installments at the rate of about $5 a month, installments of the face amount. The second set of bars shows the corresponding comparison after 10 years of disability. Senator KERR. What does that mean? Mr. MILLER. The people here [indicating] had been disabled for 10 years and 6 months. There was a 6 months' qualification period involved. These are the number of people, shown in the first set, of bars qualifying for benefits after 6 months of disability, and this second set shows how many were still disabled and drawing benefits 10 years later. The CHAIRMAN. After a lapse of 10 years? Mr. MILLER. Yes, sir. All comparisons are based on 100,000 policyholders of the same age distribution. It will be noted with the cash-income benefit of $39 per month, on the average, which incidentally is less than the $50 average estimated for the H. R. 6000 benefits, more than twice as many are disabled as under policies providing little or no cash benefits. Senator KERR. But under policies which, aside from the cash benefit, were identical, I take it? Mr. MILLER. As to the first two, that is true. They are ordinary policies. The third bar is based on intermediate policies having an average face value of only about $500, so that this shows the effect of the difference in the amount of benefit. Here it was $5 a month, which reduced the amount of insurance payable on death. The average payment of $39 a month in the first case did not affect the death benefit. Senator MILLIKIN. Would you mind summarizing your conclusions from that chart? Mr. MILLER. The conclusion that I draw from this is that where there is a substantial cash benefit, in this case an average of $39 a month, there is much more disability claimed than where there is either no cash benefit but simply a waiver of premium, or where there is a very small cash benefit. Senator KERR. And that is as between groups of people who otherwise are similar? Mr. MILLER. Yes; the same age distribution, covering the same period of years. The CHAIRMAN. And the same given number of people? Mr. MILLER. Yes; all three bars, or all six actually, are based on 100,000 policyholders. That is, these are rates per hundred thousand. Senator MILLIKIN. But are they all suffering from the same degree of disability? Mr. MILLER. That is the point that I would like to develop now. The definitions are substantially the same, if not precisely the same, but the incentives are different. Senator MILLIKIN. Let us assume the same degree of disability for the occupants of all three bars there. Let us assume that. How would you know? I mean, if a fellow does not apply, how would you know? The difference between the top of your second bar and the top of your black bar reflects the people who are not getting benefits, does it not? Mr. MILLER. That is true. Senator MILLIKIN. And if they are not getting benefits, how are you in a position to examine them and to determine their degree of disability? Mr. MILLER. That is a very good point. But this difference has been found in all sorts of comparisons. Now, in my own company I have on a number of occasions analyzed our experience according to the size of the benefit, and I find that where the benefit is, say, as much as $50 a week for disability, the rates are much higher than at $20 or some smaller amount. So there is a very close correlation between the size of the benefit and the amount of disability claimed. Senator MILLIKIN. I think common sense would lead you to that conclusion. But I am just wondering about the validity of your statistical approach, there, unless you can show that everybody in all of those bars suffered from precisely the same degree of disability. Mr. MILLER. That is the point that I am trying to bring out, or will bring out later, I trust, that the degree of disability is a very difficult thing to measure or ascertain. Senator MILLIKIN. All right. Go ahead. Mr. MILLER. Now, this difference in experience among the three types of benefit cannot be the result of differences in selection of the risks, for all groups represent insured policyholders in the same company selected on the basis of health, habits, occupation, and character. Indeed, it is probable that those insured for income benefits were the more carefully selected. It also seems implausible that the higher costs under the income benefits can be accounted for by lax claim administration. All three groups were handled by the same company, and it is not reasonable to believe that more care was taken in the payment of very small claims. than in those involving substantial amounts of cash. My interpretation of these data is that the payments under the waiver and installment benefits, the second and third columns, there, represent actual disability, if you can define such a term, while under the income benefit payments were made to many individuals who, but for the incentive of a disability income, might have become reestablished as productive members of society. I do not mean to state or imply that the difference is due to malingerers who have deliberately deluded the insurance company. Rather, I would say they have deluded themselves. Many have deluded their doctors as well, no doubt. There is little argument today over the proposition that the mental attitude and the emotions of an individual have a profound effect on his physical well-being. These apparent malingerers are, for the most part, really disabled according to any practical criterion of disability, but would not have been if there had been no disability income to rely upon. I do not believe that a Government administrator or a Government rating board would be any quicker to terminate disability benefits in such cases than the insurance claim adjuster. Chart B shows the experience during the depression under two types of benefits. This broken line, here, shows the loss ratios on noncancellable life income disability policies. These were the fancy benefits to which Senator Millikin alluded earlier. Senator KERR. The what? Mr. MILLER. The fancy benefits, large amounts in many cases. Now, the advocates of Federal disability benefits have stated that this experience, and similar experience under life-insurance disability benefits, is irrelevant, because of the nature of the selection and because of the large benefits frequently involved. But here in the solid line we have the experience under group-life-insurance benefits, showing that with small policies issued to workingmen under a plan that eliminated the effects of individual selection, we had an even worse trend and experience during the depression. In fact, as a result of that experience, most companies discontinued not only the noncancellable forms of disability benefits but also this particular form of group benefit. Senator MILLIKIN. What system of graph paper did you use in doing your base work? Mr. MILLER. This is a chart called a ratio chart of semilogarithmic chart. The vertical scale is a logarithmic scale, and it is used where we are comparing unlike things. Senator MILLIKIN. It has a tendency to exaggerate your rise, does it not? Mr. MILLER. No; it actually flattens it out. Senator MILLIKIN. I do not mean that it is wrong mathematically, but I mean visually does it not give a larger distortion than the logic of mathematics might call for? Mr. MILLER. On the contrary, sir, it reduces the steepness. For example, here, from 100 to 150 is this distance [indicating], whereas, going up the same distance as from the 100 line to the 150 line brings us almost to the 250 line. Senator MILLIKIN. And how about your time element? Senator MILLIKIN. Evenly spaced? Mr. MILLER. Yes. That is why we call it semilogarithmic. It is arithmetic on the horizontal scale and logarithmic on the vertical scale. Senator KERR. Apparently in 1933 there was a very sharp downturn in the line? Mr. MILLER. That is true. Senator KERR. What does the information show as to how long that trend continued? And to what extent did it go? Mr. MILLER. It is impossible to give that information on these particular trends, because as to two of the five or six companies whose noncancellable lifetime benefit experience is involved here, one want out of business and the other was drastically reorganized, because they were "broke" by these benefits. Senator KERR. Well, now, what about those who survived? Mr. MILLER. Their experience improved right through to about 1945. The wartime experience was very favorable. Then, since the war, there has been a slight upward tendency. Senator KERR. Can you tell us whether or not it has developed to the point where the loss ratio now is below the 100, or above it? Mr. MILLER. On the surviving companies, involved here, I am not sure. I think the ratio is still at an unprofitable level. I would say 100 percent-near 100 percent-but I shouldn't give a figure because I haven't checked that. Senator KERR. I would think that when the experience is along the horizontal line marked "100," it is a break-even line. Is that correct? Mr. MILLER. That is correct for the group line, which shows the difference between actual and expected losses. Senator KERR. I do not see any difference between actual and expected. I only see one line. Would that be the actual, or the expected? Mr. MILLER. In the case of the group experience, the 100-percent line indicates that the actual experience was just the same as the expected; but on the noncancellable, the 100 percent indicates that the loss ratio is a hundred percent, which would mean that the company paid out just as much in claims as they took in in premiums, leaving nothing for expenses and taxes. Senator KERR. Well, of course, they stopped writing new policies of that kind, did they not? Mr. MILLER. That is true. Senator KERR. Is it the case that they are still paying under their old policies to any considerable extent? Mr. MILLER. Yes; they are, very heavily. I would be very glad to supply such information as is available on that point later, if that is desired. The CHAIRMAN. If you will do so, we will be glad to have it. (The information to be supplied follows:) Hon. WALTER F. GEORGE, Chairman, Senate Committee on Finance, MONARCH LIFE INSURANCE CO., Senate Office Building, Washington, D. C. DEAR SIR: In the course of my testimony concerning H. R. 6000 on March 2, 1950, you inquired as to the subsequent course of the ratios shown in chart B. This chart indicated the disability experience of certain companies under group life and noncancellable disability indemnity insurance from 1925 to 1934. I stated that comparable data could not be shown for the later years, but that I would file with the committee such information as was available. This information follows: The group disability experience presented in chart B was based upon the business of seven companies, which, during this period, provided approximately 90 percent of all group insurance in the United States. Until 1932, group life insurance policies contained total and permanent disability clauses providing for the payment of the face amount either in one sum or in installments. Because of the very adverse experience that developed under this form of benefit, particularly during the depression, the principal group insurance companies in 1932 discontinued writing this form of benefit in new policies. Also this form of disability clause was removed from many other policies on their subsequent renewal. (Transactions of the Actuarial Society of America, vol. XLII, p. 94). Therefore, by 1935 so much of the group life insurance business had been issued with, or changed to, a more restricted form of disability provision that the subsequent experience is not comparable with that shown for the years 1925 to 1934. The difficulty in extending the line showing the loss ratios under noncancellable disability policies providing life indemnity was occasioned by the fact that one of the companies whose experience is included was forced into reorganization and another one was liquidated and its business reinsured. In the first case, the disability policies were continued by the reorganized company after the benefits were reduced to percentages of their original amounts ranging from 20 to 90 percent, the ratio depending upon the form of policy and other 60805-50-pt. 3—21 factors. In the second case, the reinsuring company agreed to pay amounts varying from 25 to 100 percent of the original indemnities. In both instances the reduced indemnities were subject to restoration from future earnings. A third company included in this group has been very successful, but changed to the sale of a different type of policy not providing life indemnity. Since separate figures are not published to show the subsequent experienec under its life indemnity policies, it was necessary to exclude the business of this company as well as that of the other two in order to show comparable figures from 1925 to date on this type of business. After excluding these three companies, there remained six companies, none of which have written any of this noncancellable disability business since 1931 but all of which have continued to pay benefits under the renewing policies in accordance with their original terms. There are shown in the table below the noncancellable disability loss ratios portrayed in chart B, together with the corresponding ratios for these six companies, the second series being extended through 1949. It will be noted that while the course of this experience has been very erratic, the losses have substantially exceeded the premiums earned by the companies in every year since 1930. Senator Kerr also inquired whether an estimate had been made that 80 percent of the disabled persons could be rehabilitated. I replied that I had seen such an estimate in an official report and would furnish the citation later. The statement which I had in mind appears on page 5 of a report on Aid to Physically Handicapped by the Committee on Labor, Subcommittee on Aid to Physically Handicapped (pursuant to H. Res. 45, House of Representatives, 79th Cong., 2d sess.), a copy of which is attached. The statement referred to begins as follows: "The Director of the persent Office of Vocational Rehabilitation has informed the subcommittee that nearly 80 percent of disabled persons can be rehabilitated without the use of special types of facilities." It is further stated in this report that a large number of the remaining 20 percent can be rehabilitated either fully or partially if special additional facilities are available. If any additional data are desired by the committee, I shall be pleased to furnish them if it is possible for me to do so. May I again express my appreciation of the opportunity of presenting my statement to the Senate Committee on Finance. Respectfully submitted. JOHN H. MILLER, Vice President and Actuary. Senator MILLIKIN. Where you have a cancellable policy, you have it within your control to keep the expectation and the practice together? Mr. MILLER. That is right. But this is on noncancellable. |