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Fraternal Sickness Insurance
Herb Emery, University of Calgary
During the nineteenth and early-twentieth century, lost income due to illness was one of the greatest risks to a wage earner's household's standard of living (Horrell and Oxley 2000, Hoffman 2001). Prior to the introduction of state health insurance in England in 1911, similar "patchworks of protection" -- that included fraternal organizations, trade unions and workplace-based mutual benefit associations, commercial insurance contracts and discretionary charity -- were available to workers in England and North America. Within the patchwork the largest source of illness-related income protection was through Friendly Societies; voluntary organizations such as fraternal orders and trade unions that provided stipulated amounts of "relief" for members who were sick and unable to work. Conditions have changed since the 1920s. Health care for family members, not loss of the family head's income, has become the chief cost of sickness. Government social programs and commercial group plans have become the principal sources of disability insurance and health insurance. Friendly societies have largely discontinued their sick benefits. Most of them, moreover, have had declining memberships in growing populations.
- Explains the types of fraternal orders that existed in the late nineteenth and early twentieth centuries and the types of insurance they offered.
- Provides estimates of the share of the adult male population that participated in fraternal self-help organizations - over 40 percent in the UK and almost as high in the US - and describes the characteristics of these society's members.
- Explains how friendly societies worked to provide sickness insurance as a reasonable price by overcoming the adverse selection and moral hazard problems, while facing problems of risk diversification.
- Discusses the decline of fraternal sickness insurance after the turn of the twentieth century.
- Concludes that fraternal lodges were financially sound despite claims that they were weakened by unsoundly pricing sickness insurance.
- Examines the impact of competition from other insurers - including group insurance, government programs, labor unions, and company-sponsored sick-benefits societies.
- Examines the impact of broader social and economic changes.
- Concludes that fraternal sickness insurance was in greatest demand among young men and that its decline is tied mainly to the ageing of fraternal membership.
- Closes by examining historians' assessments of the importance and adequacy of fraternal sickness insurance.
- Includes a lengthy bibliography of sources on fraternal sickness insurance.
Some Details and Definitions Pertaining to Fraternal Sickness Insurance
Fraternal orders were affiliated societies, or societies with branches. The branches were known by various names such as lodges, courts, tents, and hives. Fraternal orders emphasized benefits to their members rather than service to the community. They used secret passwords, rituals, and benefits to attract, bond, and hold members and distinguish themselves from members of rival orders.
Fraternal orders fell into three groups from an insurance perspective. The Masonic order and the Elks comprised the no-benefit group. Lodges in these orders often aided their members on a discretionary basis; that is where members were determined to be in "need" of assistance. They did not provide stipulated stated) insurance benefits (or relief).
econd group, the friendly societies, provided stipulated sick and funeral benefits to their members. The Independent Order of Odd Fellows, the Knights of Pythias, the Improved Order of Red Men, the Loyal Order of Moose, the Fraternal Order of Eagles, the Ancient Order of Foresters and the Foresters of America were the largest orders in this group.
A third group, the life-insurance orders, provided stipulated life-insurance, endowment, and annuity benefits to their members. The Maccabees, the Royal Arcanum, the Independent Order of Foresters, the Woodmen of the World, the Modern Woodmen of America, the Ancient Order of United Workmen, and the Catholic Order of Foresters were major orders in this group. In historical usage, the term "fraternal insurance" meant life insurance, but not sickness and funeral (burial) insurance.
The boundaries between the categories blur on close examination. Certain friendly societies, such as the Knights of Pythias and the Improved Order of Red Men, offered optional life-insurance at extra cost through their centrally-administered endowment branches. Certain insurance orders, such as the Independent Order of Foresters, offered optional sick and funeral benefits at extra cost through centrally-administered separate sickness and funeral funds. In other cases, the members of a society had privileged access to third-party insurance. The Canadian Odd Fellows Relief Association, for example, was entirely separate from the IOOF, but sold life policies exclusively to Odd Fellows.
Friendly Societies and Sickness Insurance
From the late eighteenth and early nineteenth centuries, friendly societies were often local lodges with no affiliations to other lodges. Over time, larger national and sometimes international orders that consisted of local lodges affiliated under jurisdictional grand lodges and national or international supreme bodies displaced the purely local lodge.1 The Ancient Order of Foresters was one of England's larger affiliated Orders and it had subordinate Courts and jurisdictions in North America. The first Independent Order of Odd Fellows (IOOF) subordinate lodge in North America opened in Baltimore in 1819 under the jurisdiction of the British IOOF Manchester Unity. In the 1840s, the North American Odd Fellows seceded from the IOOFMU and founded the IOOF Sovereign Grand Lodge (SGL) that had jurisdiction over state and province level Grand Lodge jurisdictions in North America.
For the United Kingdom near the peak of the self-help movement in the 1890s, estimates of participation in friendly societies and trade unions for insurance against the costs of sickness and/or burial range from as many as 20 percent of the population (Horrell and Oxley 2000), to 41.2 percent of adult males (Johnson 1985) to one-half or more of adult males and as many as two-thirds of workingmen (Riley 1997). Estimates for participation in self-help organizations in North America are somewhat lower but they suggest a similar importance of friendly societies for insuring households against the costs of sickness and burial. Beito (1999) argues that a conservative estimate of participation in fraternal self-help organizations in the United States would have one of three adult males as a member in 1920, "including a large segment of the working class." Millis (1937) reports that 30 per cent of Illinois wage-earners had market insurance for the disability risk in 1919 where fraternal organizations were the principal source of market insurance.
Characteristics of Friendly Society Members
Studies of British friendly societies suggest that friendly society membership was the "badge of the skilled worker" and made no appeal whatever to the "grey, faceless, lower third" of the working class (Johnson 1985, Hopkins 1995, Riley 1997). The major friendly societies in North America found their market for insurance among white, protestant males who came from upper-working-class and lower-middle-class backgrounds. Not surprisingly, the composition of local lodge memberships bore a resemblance to that of the local working population. Most Odd Fellows in Canada and the United States, however, were higher-paid workers, shop keepers, clerks, and farmers (Emery and Emery 1999). As Theodore Ross, the SGL's grand secretary, noted in 1890, American Odd Fellows came from "the great middle, industrial classes almost exclusively." Similarly, studies for Lynn, Massachusetts and Missouri found a heavy working-class representation among IOOF lodge memberships (Cumbler, 1979, p.46; Thelen, 1986, p. 165). In Missouri the social-class composition of Odd Fellows was similar to those for the Knights of Pythias and three life-insurance orders (the Ancient Order of United Workmen, the Maccabees, and the Modern Woodmen of the World). Beito's (2000) work suggests that while the poor, non-whites and immigrants were not usually members of the larger fraternal orders' memberships, they had their own mutual aid organizations.
Friendly Insurance: Modest Benefits at Low Cost
Friendly society sick benefits exemplified classic features of working-class insurance: a low cost and a small, fixed benefit amount equal to part of the wages of a worker with average wages. By contrast, commercial policies for middle-class clients offered insurance in variable amounts up to full-income replacement, at a cost beyond the reach of most workers. The affiliated orders established Constitutions which standardized rules and arrangements for sick benefit provision. For most of the friendly societies, local lodges or courts paid the sick claims of its members. Subject to requirements of higher bodies, the local lodge set the amounts of its weekly benefit, joining fees, and membership dues. The affiliation of lodges across locations also resulted in members having portable sickness insurance. If a member moved from one location to another, he could transfer his membership from one lodge to another within the organization.
To claim benefits in the IOOF, a member had to provide his lodge with notice of sickness or disability within a week of its commencement. On receiving notice of a brother's illness, the member of the visiting committee was to visit the brother within twenty-four hours to render him aid and confirm his sickness. Subsequently, the lodge visitors reported weekly on the brother's condition until he recovered.
Strengths of Friendly Society's Insurance: Low Overhead, Effective Monitoring
The local lodge or court system of the affiliated friendly societies like the IOOF and the Ancient Order of Foresters had important strengths for the sickness-insurance market. First, it had low overhead costs. Lodge members, not paid agents, recruited clients. Nominally-paid or unpaid lodge officers did the administrative work. Second, the intrusive methods of monitoring within the lodge system helped friendly societies to respond effectively to two classic problems in sickness insurance: adverse selection and moral hazard.
Overcoming the Adverse Selection Problem
An adverse selection of customers for sickness insurers refers to the fact that when the insurance is priced to reflect the average risk of a specified population, unhealthy persons (above average risk of sickness) have more incentive than healthy persons to purchase sickness insurance. Adverse selection in fraternal memberships was potentially a large problem as many orders had membership dues that were not scaled according to age despite the reality that the risk of sickness increased with age. To keep claims and costs manageable, an insurer needs ways to screen out poor risks. To this end, many organizations scaled initiation fees by the age of an initiate to discourage applications from older males, who had above-average sickness risk. In other cases, fraternal lodges or courts scaled the membership dues by the age at which the member was initiated. In addition, lodge-approved physicians often examined the physical conditions and health histories of applicants for membership. Lodge committees investigated the "moral character" of applicants.
Overcoming the Moral Hazard Problem
Sickness insurers also faced the problem of moral hazard (malingering) -- an insured person has an incentive to claim to be disabled when he is not and an incentive to not take due care in avoiding injury or illness. The moral hazard problem was small for accident insurance as disability from accident is definite as to time and cause, and external symptoms are usually self-evident (Osborn, 1958). Disability from sickness, by contrast, is subjective and variable in definition. Friendly societies defined sickness, or disability, as the inability to work at one's usual occupation. Relatively minor complaints disabled some individuals, while serious complaints failed to incapacitate others. The very possession of sickness insurance may have increased a worker's willingness to consider himself disabled. The friendly society benefit contract dealt with this problem in several ways. First, by having one to two week waiting periods, and much less than full earnings replacement, self-help benefits required the disabled member to co-insure the loss which reduces the incentive to make a claim. In many fraternal orders, members receiving benefits could not drink or gamble and in some cases were not allowed to be away from their residence after dark. The activities of the lodge visiting committee helped to ward off false claims. In addition, fraternal ideology emphasized a member's moral responsibility for not making a false claim and for reporting on brothers who were falsely claiming benefits.
Problem with Lack of Risk Diversification
On the negative side, the fraternal-lodge system made little provision for risk diversification. In the IOOF, the Knights of Pythias and the Ancient Order of Foresters, each subordinate lodge (or Court) was responsible for the sick claims of its members. Thus in principle, a high local rate of sick claims in a given year could shock a lodge's financial condition. Certain commercial practices might have reduced the problem. For example, a grand lodge could have pooled the risks from all lodges in a central fund. Alternatively, it could have initiated a scheme of reinsurance, whereby each lodge assumed a portion of the claims in other lodges. Yet any centralization stood to weaken a friendly society's management of adverse selection and the moral hazard. The behaviour of lodge members was observed to be a function of the structure of the benefit system. In 1908, for example, when the IOOF, Manchester Unity, in New South Wales, Australia established central funds for sick and funeral benefits, the effect was to turn the lodges into "mere collection agencies." Participation in lodge affairs fell off, and members developed a more selfish attitude to claims. "When the lodges administered sick pay," Green and Cromwell observed, "the members knew who was paying -- it was the members themselves. But once 'head office' took over, the illusion that someone else was paying made its entry" (Green and Cromwell, 1984, pp. 59-60).
Commercial Insurers Couldn't Match Friendly Societies in the Working-Class Sickness Insurance Market
On balance friendly societies provided an efficient delivery of working-class sickness insurance that commercial insurers could not match. Without the intrusive screening methods and low overhead of the decentralized lodge system, commercial insurers could not as easily solve the problems of moral hazard and adverse selection. "The assurance of a stipulated sum during sickness," the president of the Prudential Insurance Company conceded in 1909, "can only safely be transacted ? by fraternal organizations having a perfect knowledge of and complete supervision over the individual members."2
The Decline of Fraternal Sickness Insurance
By the 1890s, friendly societies in North America were withdrawing from the sickness insurance field. The IOOF imposed limits on the length of time that full sick benefits had to be paid, and one or two week waiting periods before the payment of claims began. In 1894, the Knights of Pythias eliminated their constitutional requirement that all subordinate lodges be required to pay stated sick benefits. By the 1920s, the IOOF followed the Knights of Pythias and eliminated its compulsory requirement for the payment of stipulated sick benefits. In England, where friendly societies opposed government pension and insurance schemes in the 1890s, they did not stand in the way of the introduction of Old Age Pensions in 1908 and compulsory state health insurance in 1911. Thus, the decline of fraternal sickness insurance pre-dates the Depression of the 1930s and for many organizations dates from at least the 1890s.
Unsound Pricing Practices?
Why did sickness insurance provided by friendly societies decline? Perhaps friendly society sickness insurance was a casualty of unsound pricing practices in the presence of ageing memberships. To illustrate this argument, consider the IOOF benefit contract. On the one hand, the incidence and duration of sickness claims increased with a member's age. On the other hand, most IOOF lodges set quarterly dues at a flat rate, rather than by the member's age, or the member's age at joining. As the IOOF lodge benefit arrangement was essentially insurance benefits provided on a pay-as-you-go basis (current revenues are used to meet current expenditures), this posed little problem during a lodge's early years when its members were young and had low sick-claim rates. Over time, however, the members aged and their claim rates showed a rising trend. When revenues from level dues became insufficient to cover claims, the argument goes, the lodge's insurance provision collapsed. Thus fraternal-insurance provision was essentially a failed, experimental phase in the development of sickness and health insurance.
Lodges Were Financially Sound Despite Non-Actuarial Pricing
By contrast with the above scenario, evidence for British Columbia showed that the IOOF lodges were financially sound, despite their non-actuarial pricing practices (Emery 1996). Typically a lodge accumulated assets during its first years of operation, when its members were young and had below-average sickness risk. In later years, as its membership aged and the cost of claims exceeded income from members' dues and fees, income from investments made up the difference. Consequently none of British Columbia's twenty lodge closures before 1929 resulted from the bankruptcy of lodge assets. Similarly none of the British Columbia lodges had a significant probability of ruin from high claims in a particular year.
Non-payment of dues also helped lodge finances. A member became ineligible for benefits if he fell behind in his dues. If he fell far enough behind on his dues, his lodge could suspend him from membership or declare him "ceased" (dropped from membership). A member's unpaid dues continued to accumulate after suspension. Thus a suspended member had to pay the full, accumulated amount (or a maximum sum, if his grand lodge set one), to get reinstated. Lodges did not pay sick claims to members who were in arrears.
Turnover of Membership Explains How They Remained Financially Sound
When members did not pay their dues owing to be reinstated, their exit from membership relieved lodge financial pressures. Most men joined fraternal lodges when they were under age 35 and for the members who quit, they typically did so before age 40.3 Thus, a substantial proportion of initiates into fraternal memberships did not remain in the membership long enough for their rising risk of illness after age 40 to pose a problem for lodge finances. On average, they belonged when they were most likely net payers and quit before they were net recipients. These features of the substantial turnover in fraternal memberships helps to explain how fraternal lodges were actually going concerns when official actuarial valuations of lodge finances and reserves inevitably showed that the lodges had actuarial deficits at the prevailing levels of dues. These valuations assessed the adequacy of accumulated reserves and dues revenues expected over the remaining lifetimes of the membership at the time of the valuation for meeting the expected benefits of the membership over the remainder of the members' lifetimes. The assumption that all current members would remain in the membership until death always resulted in valuations that showed the sick benefits were inadequately, if not hazardously, priced. The fact that many members were not lifetime members meant that the pricing was not so hazardous.
Competition from Other Insurers
If poor finances cannot explain the decline of friendly society sickness benefits, then perhaps increasing competition from government and commercial insurance arrangements can explain the decline. Trends for competition do not provide strong support for this explanation for the decline of friendly society sickness-insurance. Competition for friendly societies came from commercial-group plans, government workmen's compensation programs, trade unions and industrial unions, company-sponsored mutual benefit societies, and other fraternal orders that provided life insurance, or non-stipulated (discretionary) relief.
Group insurance used the employer's mass-purchasing power to provide low-cost insurance without a medical examination (Ilse, 1953, chapter 1). Often the employer paid the premium. Otherwise employees paid part of the cost through payroll deductions, a practice that kept the insurer's overhead costs low. The insurance company made the group-plan contract with the employer, who then issued certificates to individuals in the plan. Group plans compared favourably with IOOF benefits in terms of cost and the amount of the benefit. They also gave a viable commercial solution to the problems of adverse selection and moral hazard.
During the 1920s, however, group plans were available to few workers. In the United States, they missed men who were self-employed or employed in firms with less than fifty workers. The employee's coverage ceased if he left the company. It also stopped if either the insurer or the employer did not renew the contract at the end of its standard one-year term. When coverage ceased, the employee might find himself too old or unhealthy to obtain insurance elsewhere. More importantly, the challenge of commercial-group insurance was just beginning during the 1920s. By 1929 Americans and Canadians in group plans were less numerous than the number of Odd Fellows alone.
Government programs such as compulsory sickness insurance dated from 1883 in Germany and 1911 in Britain. Between 1914 and 1920, eight state commissions, two national conferences, and several state legislatures attended to the issue in the United States (see Armstrong, 1932, Beito 2000, Hoffman 2001). Despite these initiatives, no American or Canadian government -- national, state, or provincial -- adopted compulsory sickness insurance until the 1940s (Osborn, 1958, chapter 4; Ilse, 1953, chapter 8).
Workmen's compensation was another matter. During the years 1911-25, forty-two of the forty-eight American states and six of Canada's nine provinces passed workmen's compensation laws (Weis, 1935; Leacy, 1983). Nevertheless, half of all state laws in 1917, and a fifth of them in 1932, applied only to persons in hazardous occupations. None of the various state laws covered employees of interstate railways. In twenty-four states, the law exempted small businesses; in five it exempted public employees. In some states the law was so hedged with restrictions that the scale of benefits was uncertain. Although comprehensive by American standards, Ontario's law omitted persons in farming, wholesale and retail establishments, and domestic service (Guest, 1980).
Overall, government programs provided negligible competition for friendly society sick benefits during the 1920s. No state or province provided for compulsory sickness insurance. Workmen's compensation laws were commonplace, but missed important parts of the workforce. More importantly, industrial accidents accounted for just ten percent of all disability (Armstrong, 1932, pp. 284ff; Osborn, 1958, chapter 1).
Labor unions traditionally used benefits to attract members and hold the loyalty of existing members. During the 1890s miners' unions in the American west and British Columbia reportedly devoted more time to mutual aid than to collective bargaining (Derickson, 1988, chapter 3). By 1907 nineteen unions, accounting for 25 per cent of organized labor in the United States, offered sick benefits (Rubinow, 1913, chapter 18). During the 1920s, however, the friendly society competition from unions followed a declining trend. After years of steady growth, for example, the membership of American trade unions dropped by 32 per cent between 1920 and 1929.4 Similarly, the membership of Canadian trade unions fell by 23 per cent between 1919 and 1926. In an unprecedented development in 1926, the street railway workers' union in Newburgh, New York, obtained commercial group-sickness coverage through a collective bargaining agreement with the employer (Ilse, 1953, ch. 13). Although rare during the 1920s, this marked the start of collective bargaining for sick benefits rather than direct union provision.
Company-sponsored Sick-Benefit Societies
Company-sponsored sick-benefit societies, often known as Mutual Benefit Associations, originated in a tradition of corporate paternalism during the 1870s (Brandes, 1976; Brody, 1980; Zahavi, 1988; McCallum, 1990). The United States had more than 500 such societies by 1908. Typically these societies obtained most or all of their funds from employee dues, not company funds, ostensibly to encourage the workers to be self-reliant.
Participation was voluntary in 85 per cent of 461 American societies surveyed on the eve of the First World War. Eligibility for membership commonly required a waiting period (a minimum period of permanent employment). A major disadvantage, compared to fraternal order sickness benefits, was that coverage ceased when the employee left the firm. In the amount and cost of the benefit (benefits of $5 to 6 per week for up to thirteen weeks for annual dues of $2.50 to $6 per year) the societies were similar to fraternal lodges.
The institutions were part of a larger program of corporate welfarism that had developed during the First World War in conditions of labor scarcity, labor unrest, rising union membership, and government management of capital-labor relations. At the war's end, however, the economy slumped, the supply of labor became abundant, unions became cooperative and were losing members, and wartime government-economic management ended. In the new circumstances, the pressure on businessmen to promote welfare programs abated, and the membership of company-sponsored sick-benefit societies entered a flat trend.5 By 1929 the societies were still a minority phenomenon. They existed in 30 percent of large firms (250 or more employees), but in just 4.5 percent of small firms, which accounted for half the industrial work force (Jacoby, 1985, ch.6).
Competition from Insurance Orders
Friendly societies (orders with sick and funeral benefits) also competed with the insurance orders (orders with life and/or annuity benefits in small amounts) that offered an optional sick benefit. The Maccabees, Woodmen of the World, Independent Order of Foresters, and the Royal Arcanum were some main rivals in the insurance-order group for the friendly societies.
The insurance-order sick benefit had several features of commercial insurance and compared poorly with the friendly-society benefit. In many cases, these orders paid sick claims from a centrally-administered "sick and funeral fund," not local lodge funds. They financed sick claims by requiring monthly premiums, paid in advance, not quarterly dues. Their central authority could cancel the member's sickness insurance by giving him notice; in the IOOF, by contrast, the member retained his coverage as long as his dues were paid up. A member could draw benefits for a maximum of twenty-six weeks in the Maccabees and a maximum of twelve weeks in the IOF. During the 1920s, competition from fraternal life insurance orders showed a flat or declining trend. In terms of membership size, the largest friendly society, the IOOF, gained ground on all competitors in the insurance-order group.
Broader Economic and Social Trends in the 1920s
Another popular explanation for the decline of friendly society sick benefits is one of "changing times" where friendly societies provided an outdated social arrangement. Here fraternal orders were multiple-function organizations that offered their members a variety of social and indirect economic benefits, as well as insurance. Thus in principle, the declining trend for IOOF sickness insurance could have been a by-product of social changes during the 1920s that were undermining the popularity of fraternal lodges (Dumenil, 1984; Brody, 1980; Carnes, 1989; Charles, 1993; Clawson, 1989; Rotundo, 1989; Burley, 1994; Tucker, 1990). For example, the fraternal-lodge meeting faced competition from new forms of entertainment (radio, cinema, automobile travel). The development of installment buying and consumerism undermined fraternal culture and working-class institutional life. Trends in sex relations sapped the appeal of all-male social activities and fraternal ritual of lodge meetings. The rising popularity of luncheon-club organizations (Kiwanis, Lions, Kinsmen) expressed a popular shift to a community-service orientation, as opposed to the fraternal tradition of services to members. The luncheon clubs also exemplified a popular shift to class-specific organizations, at the expense of fraternal orders, which had a cross-class appeal. Finally, with the waning popularity of lodge meetings, lodge nights became less useful occasions for making business contacts.
Rising Health-Care Costs
The decade also gave rise to two important insurance-related developments. The one, described above, was the diffusion of commercial-group plans for income-replacement insurance. The other was the emergence of health-care services as the principal cost of sickness (Starr, 1982). In 1914 lost wages had been between two and four times the medical costs of a worker's sickness, or about equal if one included the worker's family. During the 1920's, however, the medical costs soared, by 20 per cent for families with less than $1,200 income and 85 per cent for families with incomes between $1,200 and $2,500. The medical costs were highly variable as well as rising. Effectively, a serious hospitalized illness could consume a third to a half of a family's annual income.
External Changes and Competition Don't Explain the Decline of Fraternal Sickness Insurance Well
Changes during the 1920s, however, provide a poor explanation for the declining trend for the friendly-society sick benefit in North America. First, the timing was wrong. On the one hand, the declining trend dated from the 1890s, not the 1920s. On the other hand, key developments during the decade were at an early stage. By 1929 commercial-group insurance was established, but not widespread. Similarly, health insurance scarcely existed, despite the rising trend for the health-care costs. As Starr explains, health insurance presented an extreme problem of moral hazard that insurers did not solve until the 1930s.6 Second, we lack a theory to explain why the waning of interest in lodge meetings would have caused a declining trend for the sick benefit. Finally, the "changing times" explanation, on its own, incorrectly portrays the sick benefit as a static product that became less relevant in an exogenously changing society and economy.
Young Men Value Sickness Insurance
If external pressure did not cause the decline of the friendly society sick benefits, then why did friendly society sickness insurance decline? Emery and Emery (1999) argue that the sick benefit was primarily in demand amongst men who lacked alternatives to market insurance. For example, at the start of their working lives, male breadwinners had no older children to earn secondary incomes (family insurance). They also lacked savings to cover the disability risk (self-insurance). Thus men joined the Odd Fellows when they were "young". They then quit after a few years as family and self-insurance alternatives to market insurance opened up to them. Further, as the friendly society sick benefit was a form of precautionary saving, demand for it would have declined as a household accumulated wealth.
Aging Membership and the Declining Demand for Sickness Insurance
Over time, fraternal memberships were ageing as rates of initiation slowed and suspensions from membership continued on at steady rates. Initiates and suspended members were disproportionately from the lower age groups in the memberships thus slower membership growth in the friendly societies represented ageing memberships. In this context of the demand for the sick benefit over the life-cycle, ageing fraternal memberships became less attached to the sick benefit. Thus, as the memberships aged, their collective preferences changed. Older members had priorities and objectives other than sickness insurance.
Friendly Societies and Compulsory State Insurance
Despite the similarity of organizations and the high rates of participation in them in the late nineteenth and early twentieth centuries, the role of voluntary self-help organizations like the friendly societies, diverged on either side of the Atlantic. In England, the "administrative machinery" of friendly societies was the vehicle for introducing and delivering compulsory government sickness/health insurance under the Approved Societies system that prevailed from 1911 to 1944 at which time the government centralized the provision of health insurance (Gosden 1973). In North America the friendly society sickness insurance arrangement declined from at least the 1890s despite growing memberships in the organizations up to the 1920s. While the friendly society sickness insurance declined, government showed little activity in the health/sickness insurance field. Only through the 1930s did commercial and non-profit group health and hospital insurance plans and government social programs rise to primacy in the sickness and health insurance field.7
Critics of Friendly Societies' Voluntary Self-Help
Critics of voluntary self-help arrangements for insuring the costs of sickness argue that voluntary self-help was a failed system and its obvious short-comings and financial difficulties were the impetus for government involvement in social insurance arrangements. (Smiles 1876, Moffrey 1910, Peebles 1936, Gosden 1961, Gilbert 1965, Hopkins 1995, Horrell and Oxley 2000, Hoffman 2001). Horrell and Oxley (2000) argue that friendly society benefits were too paltry to offer true relief. Hopkins (1995) argues that for those workers who could afford it, self-help through friendly society membership worked well but too much of the working population remained outside the safety net due to low incomes. At best, the critics applaud the intent of individuals taking the initiative to protect themselves and for friendly societies in pioneering the preparation of actuarial data on morbidity and sickness duration that aided commercial insurers in insuring the sickness risk in a financially sound way.
Positive Assessments of Friendly Societies' Roles
In contrast, Beito (2000) presents a positive assessment of fraternal mutual aid in the United States, and hence working-class self-help, for dealing with the economic consequences of poor health. Beito argues that fraternal societies in America extended social welfare service, such as insurance, to the poor (notably immigrants and blacks) and working class Americans who otherwise would not have had access to such coverage. Far from being an inadequate form of safety net, fraternal mutual aid sustained needy Americans from cradle to grave and over time, extended the range of benefits provided to include hospitals and homes for the aged as the needs in society arose. Beito suggests that changing cultural attitudes and the expanding scale and scope of a paternalistic welfare state undermined an efficient and viable fraternal social insurance arrangement.
Government's Role in "Crowding Out" Self-Help
Similarly, Green and Cromwell (1984) argue that state paternalism crowded out efficient fraternal methods of social insurance in Australia. Hopkins (1995) suggests that while friendly societies were effective for aiding a sizable portion of the working class, working class self-help "had been weighed in the balance and found wanting" since it failed to provide income protection for the working classes as a whole. Hopkins concludes that compulsory state aid inevitably had to replace voluntary self-help to "spread the net over the abyss" to protect the poorest of the working class. Similar to Beito's view, Hopkins suggests that equity considerations were the reason for undermining otherwise efficient voluntary self-help arrangements. Beveridge (1948) expresses dismay over the crowding out of friendly societies as social insurers in England following the centralization of compulsory government health insurance arrangements in 1944.
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1 See Gosden (1961), Hopkins (1995) and Riley (1997) for excellent discussions of the evolution of friendly societies in England.
2 Cited in Starr (1982, p. 242). British industrial-life companies did not offer sickness insurance until 1911, when government allowed them qualify as approved societies under the National Health Act. In acting as approved societies, their motive was not to write sickness insurance, but rather to protect their interest in burial insurance. See Beveridge, 1948, p. 81; Gilbert, 1966, p. 323.
3 Emery and Emery (1999). Riley (1997) shows that British men in their twenties were the majority of initiates and members who exited did so within "a few years of joining".
4 Data for unions are from Wolman, 1936, pp. 16, 239 and Leacy, 1983, series E175. By 1931 just 10 per cent of non-agricultural workers in the United States were unionized, down from 19 per cent in 1919 (Bernstein, 1960, chapter 2). Unions affiliated with the American Federation of Labor accounted for approximately 80 per cent of the total membership of American labor unions (Wolman, p.7). The reported AFL membership statistics are high. Unions paid per capita tax on more than their actual paid-up memberships for prestige and to maintain their voting strength at AFL meetings. In 1929, the United Mine Workers, an extreme case, reported 400,000 members, but probably had just 262,000 members, including 169,000 paid-up members and 93,000 "exonerated" members (kept on the books because they were unemployed or on strike).
5 Brandes (1976, chapter 10) places their membership at 749,000 in 1916 and 825,000 in 1931.
6 The probable costs of health-care claims were hard to predict (Starr, 1982, pp. 290-1). As with income-replacement insurance, sickness was not a well-defined condition. In addition, the treatment costs were within the insured's control. They also were within the control of the physician and hospital, both of which could profit from additional services and raise prices as the patient's ability to pay increased.
7 Employer-purchased/provided group plans came to be the most common source of the health insurance coverage in the United States (Applebaum, 1961; Follmann, 1965; Davis, 1989). In Canada, provincial government health insurance plans, with universal coverage, replaced the work-place based arrangements in the 1960s.