Friendly society

Friendly society (or fraternal society) is a mutual association for providing life and health insurance and old-age pension benefits to members.

See also: Insurance

Friendly societies in Britain

Various forms of friendly societies have existed since ancient China, Greece, and Rome. In Britain, they arose out of the guild system. Daniel Defoe wrote in 1697 that friendly societies were "very extensive" in England. In the mid-18th century, as the Industrial Revolution hastened the growth of British towns, the friendly society system became well established. Sometimes they were called fraternal societies, mutual aid societies, or benefit clubs. Similar organizations developed in the United States in the 19th century. Friendlies usually were formed by people with a common denominator, like the same occupation or same ethnic, geographic, or religious background.

Their lengthy success reflects that they were much more than benefit institutions. Friendlies were voluntary serf-help associations, organized by the members themselves. Friendlies served social, educational, and economic functions, bringing the idea of insurance and savings to those who might not have planned for the future. The social aspect of the friendlies should not be underestimated. Their meetings included lectures, dramatic performances, and dances both to inform and to entertain members.

Nineteenth-century commercial insurance companies couldn’t compete with the friendlies, so they focused on business clients and the rich. Workers were suspicious of the companies because of their numerous failures and scandals. Besides, insurance rates were higher than those the friendlies charged for comparable benefits.

Originally, friendlies insured against "disability to work," with little distinction between accident or sickness. This also came to mean "infirmity," i.e., insurance against old age. Most friendlies paid for a doctor’s services, burial expenses, life insurance, annuities to widows, and educational expenses for orphans. They built old-age homes and sanitariums for members and their families. Even in their early stages, they offered unemployment benefits for those in "distressed circumstances" or "on travel in search of employment." The most common pay-outs were for maternity leave and retirement pensions.

A local country society had usually few members, reaching tens or at most hundreds of individuals (in some cases also covering the families of those insured). Until the 1820s, most friendly societies were local. Due to their vulnerability to adverse conditions and actuarial risks, they organized into "affiliated orders". (The "Independent Order of Odd Fellows" had 781 lodges with 47,638 members around 1835; at the end of 1886 there were 4,351 lodges, with 617,587 members.) The local lodges kept control of their sick insurance to prevent moral hazard. As the problem does not arise with burial insurance, there was a central funeral fund. Besides the actuarial importance of a greater pool of members, other advantages included more skilled management, more transparent rules, and the possibility of transferring benefits to a different part of the country - or even to the colonies if the worker moved. It was mainly the affiliated orders that spread the idea of fraternalism to the United States.

All societies formally refused applicants who were younger or older than a certain age, had serious or chronic health problems, or were employed in extremely risky occupations. But the requirements were relaxed in practice and even the poorer members of society could get insurance within the fraternal movement. High-risk workers, like miners and railway workers, mostly formed their own societies, paying higher premiums due to a higher risk of disability. (Part of the insurance was paid by the employer. Most English miners have been members to a friendly society, a similar system worked in Prussia, which served as a model for Bismarck’s system of compulsory insurance.)

The friendlies did not collapse financially. Nor did they disappear because they failed to do their job for working people. They declined because of government action.

In Britain, the aristocrats feared the friendlies because they viewed their huge contributor funds as a means for political subversion. Eventually, a steadily growing web of uniform state-mandated benefits first duplicated, then absorbed the friendlies. The National Insurance Act of 1911 made insurance mandatory for some professions. State benefits were expanded, financed by compulsory contributions from employer and employee. Via subsidies, the friendlies were led to administer the state plan. Claims for benefits had to be filed with both systems. After WWII were the friendlies bypassed, and the loss of funding and higher state benefit rates drove many of them out of existence.

In Britain, as in the US, the movement towards mandatory insurance was supported by the medical profession. Where the friendly societies tried to secure good-quality health care for their members at reasonable prices, the doctors "felt strongly that conditions they had accepted in the marketplace should not be imposed on them by the state" and eventually "freed themselves from lay control."

In numbers

By 1801 an authoritative study by Sir Frederic Eden estimated that there were about 7,200 societies with around 648,000 adult male members out of a total population of about nine million. This can be compared with a figure based on the Poor Law return for 1803 when it was estimated that there were 9,672 societies with 704,350 members in England and Wales alone. By the time the British Government came to introduce compulsory social insurance for 12 million persons under the 1911 National Insurance Act, at least 9 million were already covered by registered and unregistered voluntary insurance associations, chiefly the friendly societies. In 1910, the last full year before the 1911 Act, there were 6.6 million members of registered friendly societies, quite apart from those not registered. The rate of growth of the friendly societies over the preceding thirty years had been accelerating.

In 1877, registered membership had been 2.75 million. Ten years later it was 3.6 million, increasing at an average of 85,000 a year. In 1897 membership had reached 4.8 million, having increased on average by 120,000 a year. And by 1910 the figure had reached 6.6 million, having increased at an annual average rate since 1897 of 140,000. It was at the height of their expansion that the state intervened and transformed the friendly societies by introducing compulsory national insurance.

Friendly societies in the US

Mutual aid was particularly popular among the poor and the working class. For instance, in New York City in 1909 40 percent of families earning less than $1,000 a year, little more than the "living wage," had members who were in mutual-aid societies. The "new immigrants," such as the Germans, Bohemians, and Russians, many of whom were Jews, participated in mutual-aid societies at approximately twice the rate of native whites and six times the rate of the Irish. This may have been due to new immigrants' need for an enhanced social safety net.

By the 1920s, at least one out of every three males was a member of a mutual-aid society. Members of societies carried over $9 billion worth of life insurance by 1920. During the same period, "lodges dominated the field of health insurance." Numerous lodges offered unemployment benefits. Some black fraternal lodges, taking note of the sporadic nature of African-American employment at the time, allowed members to receive unemployment benefits even if they were up to six months behind in dues.

Under lodge medicine, the price for healthcare was low. Members typically paid $2, about a day's wage, to have yearly access to a doctor's care (minor surgery was frequently included in this fee). Non–lodge members typically paid about $2 every doctor's visit during this time period.

Low prices for lodges did not, however, necessarily translate to low quality. The Independent Order of Foresters, one of the largest mutual-aid societies, frequently touted that the mortality rate of its members was 6.66 per thousand, much lower than the 9.3 per thousand for the general population.

Lodges also had incentives to keep down costs. For instance, the Ladies Friends of Faith Benevolent Association, a black-female society, would pay members taken ill $2 a week if they saw the lodge doctor, and $3 if they didn't. A visiting committee also checked on the claimant to guard against false claims. Members who failed to visit the claimant were fined $1.

Mutual-aid societies also enforced moral codes. In 1892, the Connecticut Bureau of Labor Statistics found that societies followed the "invariable rule" of denying benefits "for any sickness or other disability originating from intemperance, vicious or immoral conduct." Many societies refused to pay benefits for any injury sustained in the "participation in a riot." Some lodges even denied membership to people who manufactured explosives or played professional football.

Many mutual-aid societies branched out and founded their own hospitals and sanitariums. The Securities Benefit Association, or SBA, charged $21 for an 11-day stay at their hospital in Kansas, while the average at 100 private hospitals was $72. Again, quality was not necessarily sacrificed for price. At the SBA's sanitarium, the mortality rate was 4.5 percent, while the historical average for sanitariums was 25 percent. This is especially impressive considering that 30 to 50 percent of all cases admitted to the SBA's sanitarium were "advanced."

A large number of African-American societies also created their own hospitals. In the early 20th century, it was not a given that African-Americans would be admitted into many hospitals. If they were, they frequently had to face such indignities as being forced to bring their own eating utensils, sheets, and toothbrushes and to pay for a black nurse if none was on staff. When the Knights and Daughters of Tabor in Mississippi, a black fraternal society with a reach across only a few counties, opened Taborian Hospital in 1942, membership nearly doubled in three years to 47,000.

Mutual-aid societies also founded 71 orphanages between 1890 and 1922, almost all without government subsidy. Perhaps the largest of these was Mooseheart, founded by the Loyal Order of Moose in 1913. Hundreds of children lived there at a time. It had a student newspaper, two debate teams, three theatrical organizations, and a small radio station. The success of Mooseheart alumni was remarkable. Alumni were four times more likely than the general population to have attended institutions of higher learning. Male alumni earned 71 percent more than the national average, and female alumni earned 63 percent more.

Downfall

The first major legislation, in 1893, was promoted by the friendlies themselves. They lobbied in Washington through the National Fraternal Congress. This organization represented 100 friendly societies with 6 million members and $7 billion in insurance funds. It pressed for passage of the "Uniform Bill," forcing all new friendlies to adopt the same mortality rates. This would put them at a competitive disadvantage to the established societies. However, instead of driving off the upstarts, this legislation blurred the distinction between friendlies and commercial life insurance companies. Legally they were grouped together. As a result, the commercial insurance companies gradually absorbed the friendlies, leaving consumers with fewer choices.

A major blow against fraternalism occurred when the American Medical Association gained control of the licensing of medical schools. In 1912, a number of state medical boards formed the Federation of State Medical Boards, which accepted the AMA's ratings of medical schools as authoritative. The AMA quickly rated many schools as "unacceptable." Consequentially, the number of medical schools in America dropped from 166 in 1904 to 81 in 1918, a 51 percent drop. The increased price of medical services made it impractical for many lodges to retain the services of a doctor. Medical boards also threatened many doctors with being stripped of their licenses if they practiced lodge medicine.

The next most damaging piece of legislation was the Mobile Law. The Mobile Law required that mutual aid societies show a gradual improvement in reserves. Until this time, societies had tended to keep low reserves in order to pay the maximum benefits possible to members. High reserve requirements made it difficult for societies to undercut traditional insurance companies. The Mobile Law also required a doctor's examination for all lodge members and forbade all "speculative" enterprises such as the extension of credit to members. By 1919, the Mobile Law had been enacted in 40 states.

The requirement that all members undergo a medical examination effectively barred mutual-aid societies from the growing group-insurance market. Group insurance is insurance offered to a large group of people, such as all the employees at a company, without a medical examination. From 1915 to 1920, the number of people insured under group policies rose from 99,000 to 1.6 million. Some lodges, such as the Arkansas Grand Lodge of the Ancient Order of Workmen, tried to get around the medical examination requirement by offering group insurance at a higher price than normal lodge coverage, but this put them at a competitive disadvantage.

Mutual aid was hindered in other ways. Lodges were prohibited from providing coverage for children. This opened the door for commercial companies to offer industrial policies in which children's coverage was standard. The number of industrial policies rose from 1.4 million in 1900 to 7.1 million in 1920. By 1925, industrial policies surpassed the number of fraternal policies. Group medical insurance also eventually became tax deductible, while private plans such as those purchased through a lodge did not.

Fraternal hospitals also came under attack. During the 1960s, the regulation of hospitals increased. Taborian Hospital in Mississippi was cited for "inadequate storage and bed space, failure to install doors that could swing in either direction, and excessive reliance on uncertified personnel." A state hospital regulator said of the Taborian Hospital, "We are constantly told that you do not have funds to do these things [make improvements], yet if you are to operate a hospital, something has to be done to meet the Minimum Standards of Operation for Mississippi Hospitals."

The Hill-Burton Hospital Construction Act of 1946 also hurt many fraternal hospitals, especially black hospitals. The act required that hospitals receiving federal funds use a portion for indigent care and that services be offered "without discrimination on account of race, creed, or color." Although this enabled many blacks to get free service at hospitals previously unavailable to them, it also cut into the membership base for black fraternal hospitals. Additionally, some hospitals, such as Taborian Hospital and the Friendship Clinic in Mississippi, received no funds, while their nearby competitors received millions.

The advent of Medicare also hastened the decline of fraternal hospitals. MIT economist Amy Finkelstein estimated that Medicare drove a 28 percent increase in hospital spending between 1965 and 1970 by encouraging hospitals to adopt new medical technologies. Smaller hospitals, such as many fraternal hospitals, were not able adopt new technologies as quickly as larger hospitals and were driven out of the market, another finding supported by Finkelstein.

Some fraternal societies escaped the attack of the state by converting into traditional insurance corporations. Both Prudential and Metropolitan Life have their origins in fraternalism. Many societies, however, simply died off.

Although millions of Americans are still members of fraternal societies such as the Masons or Oddfellows, the organizations no longer have the importance in society that they once did. The history of fraternalism serves as a reminder of the power of human cooperation in a free society.

Links

• Friendly Societies, 1911 Encyclopedia Britannica
• Reinventing Civil Society: The Rediscovery of Welfare Without Politics (pdf) by David G. Green, 1993
• Anton Howes - After The Welfare State (video), November 2012
• Friendly society at Wikipedia