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The rise and fall of fraternal methods of social insurance : a case study of the Independent Order of… Emery, John C. H. 1993

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THE RISE AND FALL OF FRATERNAL METHODS OF SOCIAL INSURANCE:A CASE STUDY OF THE INDEPENDENT ORDER OF ODDFELLOWSOF BRITISH COLUMBIA SICKNESS INSURANCE1874-1951byJOHN CHARLES HERBERT EMERYB.A.(hons.), Queen's University, 1988M.A., The University of British Columbia, 1989A THESIS SUBMITTED IN PARTIAL FULFILLMENT OFTHE REQUIREMENTS FOR THE DEGREE OFDOCTOR OF PHILOSOPHYinTHE FACULTY OF GRADUATE STUDIES(Department of Economics)We accept this thesis as conformingto the required standard THE UNIVERSITY OF BRITISH COLUMBIAAugust 1993©J.C. Herbert Emery, 1993In presenting this thesis in partial fulfilment of the requirements for an advanceddegree at the University of British Columbia, I agree that the Library shall make itfreely available for reference and study. I further agree that permission for extensivecopying of this thesis for scholarly purposes may be granted by the head of mydepartment or by his or her representatives. It is understood that copying orpublication of this thesis for financial gain shall not be allowed without my writtenpermission.(Signature)Department of C^n ieN. ,` $The University of British ColumbiaVancouver, Canadaal 11093DateDE-6 (2/88)ABSTRACTMost descriptions of the rise of the Canadian welfare stateemphasize that traditional social welfare institutions werealways inadequate and it took the Depression to demonstrate theneed for better, more comprehensive arrangements. Beyond theenlightening influence of the Depression, the rise of currentwelfare state institutions is attributed to the efforts andinfluences of politicians, unions, social reformers, andintellectuals. This myth about the rise of the welfare state hasbeen so widely accepted that there has been little effortexpended in examining pre-welfare state social insurancearrangements. The findings of this case study of the IndependentOrder of Oddfellows of British Columbia (IOOFBC) sicknessinsurance indicate that before 1930 there was an extensiveformalized system of social insurance. The study also revealsthat rather than having demonstrated the inadequacies of thetraditional welfare mechanisms, the severe economic conditions ofthe Depression devastated the existing social insurancearrangements which created the impetus for the rise of thewelfare state.Up until 1930, membership in a fraternal organization, likethe Independent Order of Oddfellows (IOOF), was one of the mostimportant sources of sickness/health insurance and life insurancethroughout the world. Fraternal insurers were able to provideinsurance at a lower cost than commercial insurers through theirnon-profit motive and their use of screening and peer monitoringpractices to alleviate problems of adverse selection and moralhazard. Until 1930, 13% of the population in British Columbiahad sickness/health insurance coverage through fraternalmembership.Critics of fraternal insurance argued that while fraternalinsurers may have had low costs, they led a financiallyprecarious existence due to their hazardous pricing practices.An analysis of IOOFBC lodges for the period 1891 to 1950 revealsthat this is not a good explanation of the decline of fraternalinsurance. Even with the most hazardous of pricing practices,IOOFBC lodges had almost no probability of being bankrupted byhigh claims. Early in lodge operations, surplus revenues wereinvested in assets, like the lodge hall, which generated revenuesthat subsidized lodge operations and benefit payments.Given that fraternal insurers were viable, why was fraternalmembership not an important source of insurance coverage afterthe Depression? An analysis of the memberships of four IOOFBClodges over the period 1891 to 1980 reveals that the devastationof fraternal memberships in the Depression promoted the growth ofalternative (commercial and government) insurance arrangements.In the 1930s, more workers than ever before were without sicknessinsurance coverage. As the probability of suspension for non-payment of dues tripled, workers would have had littleexpectation of remaining in a fraternal membership long enough tocollect sick benefits that were primarily needed after age 45.iiThrough and after the Depression, IOOFBC lodges abandonedtheir insurance functions. Lodge memberships had "aged" so muchbetween 1930 and 1945 that the increased lodge benefitliabilities made reforming the IOOFBC's beneficial systemsimpractical. If changes were not made to the IOOFBC subordinatelodges' dues and benefits, lodges would have had to potentiallydraw on their assets to meet their inflated obligations. Thesolution adopted was to abandon sick benefits altogether asmembers who had always been opposed to the insurance functiongained control of the organization after 1939.iiiTABLE OF CONTENTSCHAPTER 1CHAPTER 2Abstract^ iiTable of Contents^ ivList of Tables viList of Figures ixAcknowledgementsIntroduction^ 11.1 Introduction 11.2 An Economic and Social Institution^81.3 Membership and the Fraternal^14Insurance Contract1.4 Sickness and Health Insurance Before^29the Depression1.5 Conclusions^ 33The Extent of Fraternal Membership^34in British Columbia2.1 Introduction^ 342.2 Friendly Society Membership^37Around the World2.3 Friendly Society Membership in 41British Columbia2.4 Conclusions^ 55Tables 57Figures 66CHAPTER 3^Insuring Sickness: Problems and Methods^683.1 Introduction^ 683.2 The Risk of Sickness^ 693.3 Problems of Insuring Sickness^71and Solutions3.4 Fraternal Insurance Defined 823.5 Conclusions^ 85Figures 87CHAPTER 4^The Financial Viability of Fraternal^90Sickness Insurance4.1 Introduction^ 904.2 The Case for a Flawed System^924.3 Assessing Fraternal Pricing Practices^984.4 Characterizing the Aggregate 107Claim Process4.5 Data and Estimation^ 1134.6 Analysis^ 1234.7 Conclusions 136Tables 138Figures 149ivCHAPTER 5 Duration of Membership and the Demandfor IOOFBC Sickness Insurance1525.1^Introduction 1525.2^Depression and Membership 1555.3^Sickness Benefits and Demand for 159Fraternal Membership5.4^Estimating Era Specific Hazard 170Functions5.5^Data and Spells of Membership 1775.6^Conclusions 192Tables 195Figures 204CHAPTER 6 The End of IOOFBC Sickness Insurance 2076.1^Introduction 2076.2^Depression, Age and the Cost of 209Insurance6.3^Depression and Social Transformation 2176.4^The IOOFBC's Proposed Reforms 2216.5^Conclusions 224Tables 226CHAPTER 7 Conclusions 227Bibliography 232APPENDIX 1 IOOFBC Sickness Insurance Arrangements 240APPENDIX 2 Data Description for Chapter 4 242APPENDIX 3 Methodology of Follmann, Goldberg and 245May (1990) Applied to the Estimation ofPeriod Specific Hazard FunctionsvLIST OF TABLESTable^Title^ Page2.1^Benevolent Societies in Vancouver^ 57in 1911 and 19212.2^Location of 4 Orders' Subordinate Bodies^58in British Columbia2.3^Distribution of Memberships and Population^60in British Columbia 1901-19312.4^Fraternal Membership and Population of^61British Columbia 1901-19512.5^Fraternal Membership in British Columbia^61as a Percentage of Population2.6^Percentage of Population Belonging to IOOF, KP,^62and AOF in Several Cities and Towns in BritishColumbia, 1901-19312.7^Percentage of Population Belonging to IOOF, KP^63in Several Towns in British Columbia2.8A^IOOFBC Dues Revenues and Sickness Benefit^64Payments Compared to Commercial Accident andSickness Insurers in B.C. 1913-19512.8B^Rank of IOOFBC Among Commercial Sickness and^64Accident Insurers in British Columbia 1913-19512.9^Sickness and Accident Insurance Premiums Written 65by Several Life Insurers in the Province ofBritish Columbia in 1941 and 19514.1^Average Membership Sizes for 7 IOOFBC Lodges,^1381891-19504.2A^Average Dues Revenues Per Member for 7 IOOFBC^139Lodges, 1891-19504.2B^Average Proportion of Members Eligible for Sick 139Benefits in 7 IOOFBC Lodges, 1891-19504.3^Estimated Coefficients for Compound Poisson^140Distribution4.4^Expected Dollars of Sick Relief Expended per^141Member for 7 IOOFBC Lodges, 1891-1950viTable^Title^ Page4.5^Mean Estimated Risk Loading Factors Using Only^142Net Dues Revenues for 7 IOOFBC Lodges 1891-19504.6^Mean Estimated Risk Loading Factors Using Net^142Total Revenues for 7 IOOFBC Lodges 1891-19504.7^Average $ Current Expenses Per Member for^1437 IOOFBC Lodges, 1891-19504.8A^Average Total Revenues Per Member for 7 IOOFBC^144Lodges, 1891-19504.8B^Average Ratio of Dues Revenues to Total^144Revenues for 7 IOOFBC Lodges, 1891-19504.9A^Mean Estimated Probabilities of Ruin for^1457 IOOFBC Lodges, 1891-19504.9B^Average Nominal Values of Lodge Assets Plus^145Net Total Revenues, 1891-19504.10^Periods of Risk Observed for the Seven IOOFBC^146Lodges4.11^IOOFBC Lodge Closures Before 1930^ 1475.1^IOOFBC Membership, Initiations and Suspensions^195by Decade, 1874-19515.2^IOOF Initiations 1874-1951 as Compared to^196Cloverdale no. 15 and Prince Rupert no. 635.3^Descriptions of Spells Started and Ended^1975.4^Age Distribution of Initiates at Entrance for^198Spells Ended in Each Sub-Period5.5^Age Distribution of Initiates at Exit for^198Spells Ended in Each Sub-Period5.6^Age Distribution of Members Suspended at^199Entrance and Exit for Spells Ended in theDefined Sub-Period5.7^Estimated Coefficients for Log-Logistic Density 2005.8^Lodge Specific Estimates of Log-Logistic^201Parametersvi iTable^Title^ Page5.9^Peak Hazard Rates for Exiting Membership for^202Cloverdale no. 15 and Prince Rupert no. 635.10^Conditional Probabilities that a Joiner of an^203Oddfellows Lodge Would Still Be a Member atAges 45 and 706.1^Distribution of Expected Sick Benefit Claims^226for Memberships of IOOFBC Cloverdale Lodgeno. 15 for 1929 and 1945viiiLIST OF FIGURESFigure^Title^ PageMap 2.1 Independent Order of Oddfellows of British^66Columbia Subordinate Lodges, 1874-19512.1^Fraternal Memberships in British Columbia^671874-19513.1^Observed Sickness Rates by Age,^ 87IOOF of Ontario 18963.2^Average Sickness Duration by Age, Ontario^88IOOF for the Year 18963.3^Expected Annual Sickness Benefits by Age Using^89IOOF Ont. Rates4.1^Empirical Distribution of the Aggregate Claims,^1491891-19324.2^Empirical Distribution of the Total Claims by^149Membership, 1891-19324.3^Revenues Per Member by Source, Cloverdale no. 15 1501891-19504.4^Revenues Per Member by Source, Pr. Rupert no. 63 1511910-19505.1^Average Suspensions and Initiations Per IOOFBC^204Lodge, 1874-19515.2^Hazard Functions for 30 Year Old Joiners,^205Cloverdale 155.3^Hazard Functions for 30 Year Old Joiners,^206Pr. Rup. 63ixACKNOWLEDGEMENTSI am especially grateful to Denny Hubbard, Grand Secretaryof the I.O.O.F.B.C., and the I.O.O.F.B.C. for generously allowingme access to I.O.O.F.B.C. records. I would like to thank RobertAllen, David Green and Angela Redish for their guidance andcomments on the work presented in this thesis. I would also liketo thank Ron Shearer, Robert Whaples, Michael Stutzer, BruceSmith and Peter Ward for comments I received at various stages ofthis project. I would like to thank Harry Paarsch for hissupport, encouragement and teaching throughout my time at U.B.C.,and my wife Carolyn for her support and patience. Finally, Iwould like to acknowledge the financial support that I havereceived from SSHRCC Doctoral Fellowship no. 752-91-0363.xCHAPTER 11.1 INTRODUCTIONSince the depression of the 1930s, Canadian and Americanworkers have relied upon employers and governments for solutionsto problems of economic insecurity brought on by illness,accident, unemployment and old age. In the case of sicknessinsurance, 86% of Canadian paid workers who were sick for two ormore weeks over the period 1978 to 1981 received compensation forlost wages through either employer provided insurance orcompensation, unemployment insurance or Workmen's compensation.'This is in stark contrast to the pre-Depression (pre-1930) periodwhen millions of Canadian and American men received sickness andhealth insurance through membership in voluntary organizationssuch as fraternal orders, trade unions, and work-place basedmutual benefit societies. Members of these institutionstypically received cash benefits when they were sick and unableto work, and had access to the services of a physician.While the evolution of contemporary social insurancearrangements coincides with the decline of fraternal insurancearrangements, we know very little about the causal relationshipbetween the two. Why did workers stop providing their owninsurance and turn to employers and governments after theDepression but not before? Why were paternalistic social welfarearrangements that had been proposed since the late nineteenth'Statistics Canada, Absence from Work Survey, (1982).1century only embraced after the Great Depression? Were thesearrangements supply side developments imposed by socialengineers? Did previously indifferent employers and governmentsbecome benevolent and paternalistic following the experience ofthe 1930s? (Peebles [1936]) Was the rise of the welfare state aresponse to growing demand of workers who abandoned the existingarrangements which were non-viable? (Applebaum [1961]); or asBuffum and Whaples (1991) speculate, had fraternal insurancebecome less viable boosting the growth of market insurance, andultimately state provision of insurance?This is a troubling gap in our knowledge of social insurancehistory given the extent of participation in fraternalinstitutions documented below, and the impact that the emergenceof employer and government based arrangements have had upon wagesand labour costs, employment, productivity and governmentdeficits. Only by understanding why contemporary socialinsurance arrangements emerged, can we hope to assess theirimpact on the economy. To see this one must only notice thatalternative explanations of the decline of fraternal insuranceare employed by both critics and supporters of current socialinsurance arrangements. Proponents of the welfare state, such asPeebles (1936), describe fraternal insurers as part of anobsolete system incapable of adequately meeting the needs ofworkers. Critics of the welfare state like Green and Cromwell(1984) describe the resulting inefficiencies caused bypaternalistic governments crowding out a viable and more2efficient system of social insurance. Still other authorsemphasize the monitoring capabilities and operations of fraternallodges which reduced the consequences of problems of moral hazardand adverse selection associated with contemporary paternalisticarrangements in looking for lessons about how to provide, andpotentially reform, social insurance coverage (Roback [1989],Smith and Stutzer [1992]).To provide some insight into these issues and to test thesehypothesized explanations of the decline of fraternal insurance,this work examines the provision of sickness insurance by theIndependent Order of Oddfellows of British Columbia (IOOFBC) overthe period 1891 to 1950. The analysis reveals that the fraternalinsurance system was financially viable. It also reveals thatsupply side intervention by governments and employers crowdingout the fraternal system is an unlikely explanation for thedecline of fraternal insurance. Instead, consistent with Buffumand Whaple's (1991) speculation, the Depression createdconditions that rendered fraternal insurance less viable, whichboosted the development of commercial and government insurance.The severe economic conditions of the Depression decimatedfraternal memberships resulting in more workers than ever beforebeing without insurance coverage. Also, after 10 years of fewnew joiners, the increased expected liabilities per member leftfraternal organizations unable to compete with the emergentsources of insurance after the Depression. To revamp the IOOFBCbeneficial system after 1940 was deemed "prohibitively costly" by3IOOFBC leaders. It also appears that the IOOFBC members afterthe Depression had little interest in continuing to providesickness insurance. Thus, fraternal insurers withdrewvoluntarily from the field of sickness insurance leaving themarket to commercial and government insurers.An examination of fraternal sickness insurance has lessonsthat extend beyond this specific risk to income. Johnson (1992,3) argues that before 1939 in Britain, "the most common responseto social risks in Britain ... was private rather than public,collective rather than individualistic, and local rather thannational." Thus, fraternal sickness insurance is representativeof a broad class of pre-Depression solutions to working classeconomic insecurity. For this reason, an examination offraternal sickness insurance can provide us with a betterunderstanding of developments in other fields of social insurancesuch as unemployment insurance.The body of this work is organized as follows. Theremainder of this introductory chapter describes andcharacterizes fraternal membership and the fraternal insurancecontract. The discussion focuses on the largest and oldestfraternal benevolent organization in British Columbia before1930, the Independent Order of Oddfellows, but the operations ofthis organization are compared with several other fraternalorganizations that operated in British Columbia.Chapter 2 is an examination of existing fraternal membershiprecords to estimate the extent of fraternal membership in British4Columbia from 1874 to 1950. At a time when only 2% of Canadianand American populations belonged to trade unions, 13% of BritishColumbia's population belonged to a fraternal organization. Thefindings suggest that often as many as 35% of male workers inBritish Columbia towns had fraternal sickness insurance coveragebefore 1930. The IOOFBC is also established as potentially thelargest sickness insurer in the province before 1930.In Chapter 3, the risk of sickness that workers faced isexamined. Fraternal methods for insuring this risk are thencompared to those of commercial and government insurers to definea fraternal insurer. In particular, practices for overcoming theproblems of adverse selection and moral hazard that areassociated with the insurance of a risk like sickness aredescribed.Chapter 4 examines one of the more popular explanations ofthe decline of fraternal insurance; that insurance as provided bythe IOOFBC lodges was financially non-viable, and thus,commercial and government insurance methods emerged out offinancial necessity. The distribution of lodge sickness benefitliabilities is estimated using data from seven IOOFBC lodges.Measures of lodge financial conditions based upon the moments ofthis estimated distribution reveal that although membership dueswere never adequate to fully fund the provision of lodgebenefits, the lodges had almost no likelihood of becomingbankrupt because other sources of revenue subsidized theprovision of sick benefits. In particular, rents earned from the5Lodge Hall, interest earned from investments, revenues frominitiation and degree fees, in addition to dues revenues, weremore than adequate to meet lodge benefit liabilities andoperating expenses.Given that financial non-viability cannot explain thedecline of fraternal insurance, Chapter 5 examines why workerswere attracted to join the IOOFBC for its economic benefitsbefore 1930, but not after 1940 when sick benefits were stillbeing provided. 1930 to 1939 was a pivotal decade for the IOOFBCand other fraternal insurers. Fewer workers in British Columbiawere attracted to the Order than ever before. Over the sameperiod, coverage through alternative insurance arrangements, likecommercial and employer coverage, expanded rapidly. It is notclear, however, whether these arrangements were the cause, or theresult of, few new members joining organizations like the IOOFBC.This Chapter specifically addresses why these alternatives onlydeveloped in the 1930s and not earlier. An analysis of theprobability that an Oddfellow would be suspended and withoutinsurance coverage reveals that in the Depression, more men, andin particular, more older men, were without coverage than everbefore. The estimated probabilities also suggest that relativeto the period 1891 to 1929, fraternal sickness benefits, expectedprimarily after age 45, were virtually worthless in theDepression since workers would have had little expectation ofremaining in the membership long enough to collect them. Thus,these two consequences of the severe economic conditions of the61930s created the necessary demand conditions to boost the growthof market insurance and ultimately state provided insurance.While Chapter 5 explains why few workers were attracted tothe IOOFBC after 1930, Chapter 6 addresses why the IOOFBCwithdrew from its insurance function after the Depression ratherthan revamp its beneficial system to compete with thealternatives. Analysis of members' ages reveals that before theDepression there were as many as three "young" members (unlikelyto claim benefits) for every "old" member (likely to claimbenefits). With few new members by 1945 there were two "old"members for every young "member" making the beneficial systemprohibitively costly to revamp. Even for the fraternalmemberships commercial and government insurance was considered tobe the lower cost alternative. Finally, it also appears that theeconomic conditions of the 1930s resulted in a socialtransformation of the organization. The members who remainedthrough to 1945 primarily valued the social purposes ofmembership and as such, had little interest in revamping thebeneficial system.Chapter 7 contains the conclusions of this work. The 1930sled to a transition from fraternal social insurance to paternalsocial insurance provided through employers and the government.A widespread and viable arrangement for insuring workers againstthe economic consequences of sickness disappeared only after asevere economic disruption broke the continuity and renewalprocess of membership. With no new blood from 1930 to 1945,7fraternal insurance was no longer the best type of arrangement,and the remaining members were not interested in trying to makeit so.1.2 AN ECONOMIC AND SOCIAL INSTITUTIONMembership in a fraternal organization provided men with avariety of benefits. Socially, membership in a fraternalorganization provided men with entertainment through the regularmeetings at the lodge hall and with elaborate rituals performedat meetings. Membership also provided men with a variety ofeconomic benefits, such as life, sickness and accident insurance.Despite these overtly economic functions, fraternal orders inNorth America have been primarily studied as social institutionsby historians and sociologists. (Carnes [1989], Clawson [1989])As a consequence much of the research on North American fraternalorders presents fraternal sickness insurance as a sidelineoperation of primarily social institutions. 2 More recently,authors such as Buffum and Whaples (1991), Clawson (1989) andSmith and Stutzer (1992) have examined the economic, orbeneficial, functions of fraternal organizations. Following thelead of these authors, this section establishes that the economicbenefits of membership were an important attraction for members21n Britain, the economic role of friendly societies has beenextensively documented. See Beveridge (1948), Gosden (1961) andJohnson (1992). Given that many of the North Americanorganizations were affiliated with, or imitations of, Britishfriendly societies, the North American focus on the socialdimension of these organizations is surprising.8and that the history and decline of these organizations cannot beproperly understood without an understanding of their economicfunctions.Kip (1951), who is commonly cited in the fraternal insuranceliterature, argued that although sickness/accident insurance inthe United States in the nineteenth century was chiefly providedby fraternal societies, fraternal sickness insurance wasinformally provided as a secondary function to its socialpurpose:They usually ran assessment programs in which no reserve wasmaintained and members were assessed dues when an accidentor illness occurred. These societies were commonly socialclubs or lodges that offered insurance as a sideline. 3In fact, it seems unlikely that fraternal sickness insurance wasa sideline operation. In 1889, IOOFBC Grand Master Joshua Daviesexpressed that:The payment of weekly sick benefits is the distinguishingcharacteristic of our Order, and may be regarded as thefundamental principle of Odd Fellowship... Our Order is abeneficial one, and our laws require that benefits be paidin case of sickness or accident to all alike, the rich aswell as the poor. 4Before 1930 fraternal organizations aggressively advertisedthe economic benefits of membership, like sick benefits, toattract new members. The economic benefits were also expected to3R. Kip, "Fraternal Life Insurance" (Ph.D. Diss., Universityof Pennsylvania, 1951). This quote was cited in Buffum and Whaples(1991, 102).4Joshua Davies, Grand Master of the IOOFBC, Proceedings of the15th Annual Session of the Grand Lodge of British Columbia of theI.O.O.F. (1889), 666.9encourage members to pay their dues and remain in good standing.The Knights of the Maccabees, in their 1896 History of the Order,included a section titled "A Few Facts" which highlighted theOrder's economic benefits of membership:FIRST-It is generally admitted to be the duty of every man,who has others dependent upon him, to make such provision,as is within his means, for their support and education, notonly during his life, but especially in the event of death.SECOND- It is admitted by all that it is the duty of everyman to make provision for the care and support of himself inthe event of sickness and disabilities arising fromaccidents or old age.THIRD- There is no good reason why any man may not now makesuch provision for himself and his dependents, and at anannual expense within the means of even the poor man.FOURTH- It is the duty of every man needing such protectionto procure it at the least expense, consistent with safety.FIFTH- The question naturally arises, "Where can thisprotection be safely and surely provided for me and mydependents, at a moderate expense within my means?"SIXTH- The answer: Become a member of some FraternalBeneficiary Order. There are more than 30 of thesesocieties, members of the "The National Fraternal Congress,"all of which are good, and any of which can provide youprotection at actual cost, and in no case need this be morethan one-third of what Life Insurance companies charge.SEVENTH- These societies have been successful. They aredoing more business to-day than a like number of leadingLife Insurance Companies. They are not organized for profitand gain, but exist for the purpose of furnishing theirmembers, each of whom is a co-partner in the business,protection at actual cost, and at a nominal expense formanagement, each member doing a part of the work....TENTH- They combine needed financial benefits for theirmembers with a Fraternal Brotherhood. 55"A Few Facts," History of the Maccabees, Ancient and Modern,1881 to 1896, (Port Huron, 1896).10The Oddfellows, which primarily provided sickness insurance anddeath benefits's , issued a pamphlet in 1896 that offered a similarmessage, but placed more emphasis upon the fraternal brotherhoodfeatures of membership:While the Order exerts a powerful moral and educationalinfluence, which prevents much unnecessary suffering anddistress, it also possesses an admirable system for thedispensation of material aid to its members in times ofsickness, distress, or difficulty. When an Oddfellow isprostrated by sickness his brethren are compelled to visitand care for him, to watch by his bedside when necessary,..., and the lodge of which he is a member pays him eachweek regularly a sum of money as "sick benefits." 7Some men joined fraternal lodges primarily for the economicbenefits, and did not take advantage of the social benefits.Members who joined primarily for the economic benefits were notnecessarily considered to be a positive addition to theorganization. As the leader of the Ancient Order of UnitedWorkmen (AOUW) of British Columbia complained in the Order'sAnnual Proceedings in 1893:We have, I am sorry to say, so many brethren in our rankswho will accept all the benefits of the Order but otherwisetake no interest in the same. They pay their dues andassessments, because they know that they have a first-classBeneficiary Certificate for $2,000 which cost them very6While the IOOF did not directly provide life insurance,Oddfellows could secure life insurance through several associatedbut independent organizations, such as the Oddfellows ReliefAssociation that was endorsed by several jurisdictional GrandLodges of the IOOF in Canada.7100F Grand Lodge of Ontario, "Oddfellowship: What it is, Whatit Does, Why You Should Join It," Pamphlet (1896).11little, but they are never seen at the lodge room and seldomask an acquaintance to join the Order. 8Thus, there was some portion of fraternal memberships who feltthat the benefits, and the members attracted by them, were alimiting feature of the organizations and actively lobbied tohave sickness benefits eliminated. One of the SupremeRepresentatives of Knights of Pythias (KP) of British Columbiastated in the 1913 proceedings of the Order's Annual Convention:I believe in the abolition of compulsory benefits. Thesystem is a source of more dissension, more misunderstandingand more dissatisfaction in the Lodge than any other onething. It cheapens our Order by placing it on a par withcheap accident and sickness insurance societies. 9Proponents of stipulated benefits argued that abolishingsickness benefits would remove the incentive for many members toremain in good standing, and would lead members who believed instipulated benefits to sever their ties with the Order. Theexperience of the Knights of Pythias in British Columbia suggeststhat this was an accurate view of the stipulated benefits. Until1915, the KP in British Columbia had a compulsory benefit systemwhere the Constitutions and By-Laws of the organization legallyrequired all subordinate lodges to provide stipulated, or stated,sickness benefits. Any member who was sick and unable to work,received the same benefit regardless of their personal8Proceedings of the Grand Lodge, A.O.U.W. of the Province ofBritish Columbia (1893), 10.9Annual Convention of the Grand Lodge, Knights of Pythias,Grand Domain of British Columbia (1913), 16-17.12circumstances or need of the benefit. ° Following the 1915 changein the Order's Constitution which left the provision of statedbenefits to the discretion of each subordinate lodge membership,the outcome of abandoning stated benefits was clear:There seems to be considerable difference of opinion inregard to the advisability of paying regular stated sickbenefits and although I was for some time against the payingof compulsory benefits I must admit that experience hasshown it has not been a success to do away with compulsorybenefits in our Lodges in British Columbia. I find thatwhere this plan has been put into effect the Lodge has losta number of members and others seem to be indifferent as tothe financial obligations to the Order and I would stronglyadvise our Lodges to use the utmost discretion before theymake any radical change in their beneficial system, and tohave practically the unanimous consent of their members asso many of our members seem to have had the beneficialsystem of our Order held out so strongly to them as aninducement to join."The competition for members between fraternal organizations wasanother reason that subordinate lodges continued to providestipulated benefits:In support of the payment of weekly benefits, I wish to saythat a majority of our members are composed of the labouringclass, who are looking for all the protection they can get,and such being the case, we have to face the great problemthat we are working alongside other organizations who pride1 °Opponents of compulsory benefits in these Orders favoured amore discretionary system where Lodge Brothers who were sick and indistress would receive relief according to their personalcircumstances. This system, where "no Brother would ever be knownto be neglected in the event of sickness or distress", would besimilar to that of organizations like the Benevolent and ProtectiveOrder of Elks where there was no formal benefit system, but sick ordistressed members could apply for relief granted at the discretionof the lodge. Constitution and Statutes of the Benevolent andProtective Order of Elks Canada and Newfoundland, 10th Edition (StThomas: Grand Lodge of the B.P.O.E., 1926)."Annual Convention of the Grand Lodge, Knights of Pythias,Grand Domain of British Columbia (1918), 4.13themselves on the amount of relief they furnish theirmembers. Now, is it reasonable to expect that we should beon equal footing in regard to members if we were toeliminate from our by-laws the weekly benefits? 12There is considerable evidence that the economic benefits ofmembership were an important function of fraternal institutions.As it will be shown in Chapter 3, however, the success offraternal orders in providing economic benefits was ultimatelylinked to the social aspects of the organizations. While thisstudy emphasizes the economic activities of the Independent Orderof Oddfellows in British Columbia before 1950, one must recognizethe place and importance of the social and philanthropicfunctions of the Order which carry on today.1.3 MEMBERSHIP AND THE FRATERNAL INSURANCE CONTRACTThe IOOF described the By-Laws of a subordinate Lodge as acontract between the Lodge and the initiate to the Lodge. TheBy-Laws generally defined the "reciprocal duties and obligationsof each; they prescribed the amount of contribution levied uponeach member to the common fund, and the amount of his claim uponit when sick or disabled." 13 Given this description, a wealth ofinformation exists which makes it possible to characterize thefraternal insurance contract.uAnnual Convention of the Grand Lodge, Knights of Pythias,Grand Domain of British Columbia (1905), 27-28."Constitution, By-Laws and rules of Order of Cloverdale Lodge,no. 15 Independent Order of Oddfellows (New Westminster: NewWestminster Press, 1910), 10.14Most fraternal organizations limited membership to whitemales over 19 years of age. Membership in an IOOFBC lodge wasavailable to:free white males, of the age 21 years and upwards, of soundhealth, of good moral character and industrious habits,having some known reputable means of support,..., and is nota saloonkeeper, a bartender, or a professional gambler, andbe proposed in the lodge nearest his residence, except thatlodge grant permission for his joining another lodge. 14Many organizations like the Ancient Order of United Workmen andthe Ancient Order of Foresters also had a maximum age limit.Thus, men over 40 years of age were not allowed to join theseorganizations." Certain occupations were also excluded fromjoining. While the Oddfellows and Knights of Pythias explicitlyexcluded hotel and saloon keepers, and purveyors of alcohol ingeneral," the Ancient Order of United Workmen excludedindividuals whose occupations involved working with explosives;who were members of the armed forces during a time of war,aeronauts, professional baseball players, professional footballplayers, or a jockey or rider in races. In addition to theexplicit restrictions on membership eligibility there were alsoinformal restrictions such as the AOUW Grand Lodge's14Constitution, By-Laws, and Rules of Order of SubordinateLodges I.O.O.F., "Article II, Of Membership.""Gosden (1961, 78) argues that most British Friendly Societiesprevented men over forty years old from joining."Despite this explicit criteria, there were members with"hotel keeper" listed as their occupation in IOOFBC Silver CityLodge, no. 39 in Sandon British Columbia.15recommendation that subordinate lodges not encourage extrahazardous risks like coal miners and sealers to join. °Men who applied to join an IOOFBC lodge had to berecommended for membership by a Lodge member and had to providein writing, their name, age, occupation, place of residence, andthe names of two references. A three person lodge committeeinvestigated the applicant's moral character. As in almost allfraternal organizations, the IOOFBC required that a lodgeappointed physician also examine the physical health of theapplicant." The candidate for membership then had to be electedto the membership. The entire membership cast ball ballots in avote, and if no more than two black balls appeared, the candidatewas declared elected to the membership. °17 Proceedings of the Grand Lodge, A.O.U.W. of the Province ofBritish Columbia, 1893. The greater number of restrictions on aneligible applicant's occupation reflects the Order's function as alife insurer. Thus, in addition to excluding occupations that hada high incidence of accident, high mortality occupations would beexcluded to insulate the centralized life insurance funds of theOrder. To see the detailed membership criteria, see theConstitution of the Grand Lodge of British Columbia of the A.O.U.W.(Victoria: Cusack Press, 1907), 79. The IOOF which insuredlocally and independently through subordinate lodges would have hadless direct interest in an individual lodge's selection of risk."Some lodges required an application fee. If the applicantwas rejected, the fee was returned, unless they were rejected onaccount of an unfavourable certificate from the physician, then thefee was returned less the doctor's fee. Even the Benevolent andProtective Order of Elks, which had no formal sickness benefitsystem, had provisions for candidates to undergo a medicalexamination.°In some cases, like AOF Nanaimo Court no. 5886, 3 black ballswere required for rejection.16The primary benefit associated with fraternal membership wasthe weekly "sick benefit". Members of IOOFBC lodges whosemembership dues were not in arrears were eligible for cashsickness benefits for each week that a lodge member was"incapable of earning a livelihood" due to sickness or accidentprovided that their incapacity was not the result of intemperanceor immoral conduct or "bodily infirmity which existed at the timeof his admission."" The Ancient Order of Foresters paid benefitsto anymember in good standing who may become lame, sick or infirmand not capable of following his trade, or earning hislivelihood in some other manner, or occupation, if it not becaused by fighting (except in self-defence), running,leaping, wrestling, or any dangerous practice, act ofbravado or venereal disease (notwithstanding he may continueto carry on his business by his wife, children or servants),shall be entitled to $7 per week for 26 weeks. $5 from 26weeks on as long as the affliction lasts. 21The value of sick benefits in IOOFBC subordinate lodges weretypically $5 to $10 per week of sickness. Equivalent to one-third to two-thirds of average weekly wages in Canada before"This wording is taken form the Constitution, By-Laws andRules of Order of Cloverdale Lodge, no. 15 I.O.O.F. (1910).Cloverdale had weekly sick benefits of 10 dollars per week between1891 and 1916, after which time the benefit was reduced to 7dollars per week. The wording and value of benefits is standardfor all lodges in the IOOFBC.21Constitution and By-Laws of Court Nanaimo Foresters' no. 5886of the Ancient Order of Foresters (Nanaimo: Nanaimo Free PressSteam Print, 1885), 26.171940 22 , benefits of this value were paid for the second to 26thweeks of continuous sickness. Lodges typically paid less for thefirst one or two weeks' benefits. n After 6 months of continuoussickness, the value of the benefit was reduced by 2 to 5 dollarsper week. After 12 months of continuous sickness, the value ofthe sickness benefit ranged from 1 to 3 dollars per week. Untilthe Depression, in IOOFBC lodges there was often no maximumlength of time that these reduced benefits could be received.The value of the IOOFBC weekly sick benefits appears to be atypical amount for fraternal organizations. The Knights ofPythias Far West - Victoria Lodge no. 1 in Victoria paid sickbenefits of $10 per week up until 1926. 24 The Ancient Order ofForesters Court in Nanaimo paid a weekly benefit of $7 per week.The Workers Benevolent Association of Canada (WBA), a UkrainiannThis estimate is based upon the average annual earnings ofproduction workers in Canadian manufacturing industries reported inSeries E44 in The Historical Statistics of Canada 2nd Edition(1983). Average annual earnings were $417 in 1910; $920 in 1919;$1,041 in 1929; $975 in 1939, and $2,067 in 1949. The estimate ofone to two thirds of weekly income is also consistent with thevalue of sickness benefits reported in the National IndustrialConference Board's (1923) study of Mutual Benefit Associations inthe United States.nOne or two week waiting periods with no benefits were allowedunder the Grand Lodge Constitution, but lodges only appear to havetaken advantage of them in the Great Depression.24In 1927, the lodge amended its By-Laws such that the lodgeVisiting Committee set the value of the benefit, a maximum of $9per week, for each individual case. By-Laws of the Far West-Victoria Lodge no. 1 (Victoria: Knights of Pythias, 1926).Appended to the 1926 By-Laws that was available from the Archivesof the Province of British Columbia was a sheet of amendments from1927.18friendly society, paid members sick benefits of $5 to $8 per weekthrough the 1920s. At the time, members in Edmonton had wages of$12 to $15 per week so the amount of the benefit was consideredby the WBA to be "substantial". 25To verify the infirmity of a claiming member, theConstitutions of most fraternal organizations, including theIOOFBC, provided for the right of a subordinate lodge to hire aphysician. A claiming member was also visited at least once aweek until restored to health by a member of the lodge VisitingCommittee, except in cases of contagious diseases, to "rendersuch assistance as each may require. oM The duties of the Court"Woodwards" of the Ancient Order of Foresters required that:The Woodwards shall visit all members of the Court known tobe sick and residing within three miles of the Court Houseat least twice a week, except in the case of infectious orcontagious diseases, the visiting days of each Woodward areoptional provided they do not both visit on the same day.In case of suspicion they may visit at will. 2725Friends in Need, The WBA Story (Winnipeg: Workers BenevolentAssociation of Canada, 1972), 116. Given that these benefits weredescribed as substantial in the 1920s, they must have beensubstantial throughout most of the period 1891 to 1950 as it wasnot until 1948 that the Consumer Price Index exceeded the valuesfor the CPI in the 1920s. See Series K8, Historical Statistics ofCanada, 2nd Edition (1983).26Even the Constitution of the Benevolent and Protective Orderof Elks, which had no formal sickness benefit system, madeprovisions for the lodge to hire a physician to tend to a member,and for a visiting committee to attend to the afflicted member.Constitution and Statutes of the Benevolent and Protective Order ofElks, Canada and Newfoundland (St.Thomas: Grand Lodge of theB.P.O.E., 1926).27Constitution and By-Laws of Court Nanaimo Foresters' no. 5886of the Ancient Order of Foresters, 20.19If a member refused to be seen or examined by a lodge appointedphysician, or a member of the visiting committee, the memberforfeit all claims to benefits for their affliction." Memberswho were determined to be falsely claiming benefits were assessedfines, required to pay back the benefits received, and wereliable to expulsion.It was also common for the Constitutions of fraternal lodgesto restrict the activities of members who were receiving sickbenefits. IOOFBC members receiving benefits were not allowed todrink alcohol or gamble. Knights of Pythias members in BritishColumbia who were receiving benefits could not be outdoors after7 PM in the winter (8 PM in the summer). The Ancient Order ofForesters had similar restrictions and also required that "anymember receiving sick pay having occasion to walk out for thebenefit of his health shall at all times leave word at hisresidence where he has gone, or be fined fifty cents.""Fraternal lodge members also had access to the services ofthe "lodge doctor" in return for their annual membership dues.The lodge physician was either a lodge member or a non-memberphysician with whom the lodge had established a contract for"Members who had taken sick while remote from the lodge wereeligible for benefits providing that the causes and circumstancesof their illness were attested to by the Noble Grand of an IOOFlodge near to him, or an attending physician, or a clergyman, amagistrate, a British Consul, or a master of a vessel."Ancient Order of Foresters Subsidiary High Court of theDominion of Canada, Report of the Proceedings of the EleventhSubsidiary High Court Meeting (Toronto: A.O.F. Executive Council,1897), 88.20medical services. Lodge doctors verified sickness claims,performed physical examinations of prospective lodge members andattended to sick members typically for a pre-paid annual fee thatwas usually based on capitation rather than on fee-for-service.The By-Laws of AOF Nanaimo Court no. 5886 called for the electedCourt surgeon to be paid 75 cents per quarter for each memberreturned to him on the previous quarter's list." The sevenIOOFBC lodges examined in this study usually had at least onemember who was a physician over the period 1891 to 1929. 31Lodge doctors also attended to the medical needs of lodgemembers' families. The nature of this coverage in BritishColumbia is difficult to determine since the Constitutions andBy-Laws of IOOFBC lodges and of British Columbian AOF Courts didnot typically define the Lodge doctors' obligations to members"See Andrews (1978).^Andrews studied the accounts of aVancouver physician and found regular payments from the AncientOrder of Foresters, the Independent Order of Foresters and theCanadian Order of Foresters.^She argued that this reflectedcapitation based payments.^Fee for service arrangements wereobserved. IOOFBC Sandon lodge no. 39's constitution stated thatphysicians were to be paid $2 per applicant for performing physicalexaminations for the lodge.mSee Rosen (1977), Naylor (1986), and Andrews (1978). Naylorargues that contract practice disappeared by 1920 but membershiprecords of the IOOFBC lodges to which I have had access, suggestthat contract practice was still found in British Columbia at leastup until the early 1930s. The Constitution of the IOOFBCsubordinate lodges provided for lodges "to employ a Physician toattend to members in good standing when sick, and pay a stipulatedsum per annum for such services out of the funds." Constitution ofWestern Star Lodge, No. 10, I.O.O.F. (1910).21families." Coverage of family members, however, was likely partof the negotiated terms of the contract. Rosen (1977, 375) notesthat in Providence Rhode Island most fraternal organizations paidphysicians $1.00 to $2.50 per member per annum. This price oftenincluded medical attendance on the entire family. Typicallyobstetrics and surgery were not included in this price. Greenand Cromwell (1984) suggest that it was typical of all friendlysocieties to provide medical attendance for members and theirfamilies.Contract practices between physicians and fraternal lodgeswere commonplace at the turn of the century." Smith and Stutzer(1992) note that friendly societies in Britain and Australia wereacknowledged to have operated as Health MaintenanceOrganizations, where it has been estimated that as many as 60% ofwage earners had access to lodge doctors. Johnson (1992, 11)reports that on the eve of the National Insurance Act of 1911, atleast half of Britain's 20,000 physicians were engaged in"The exception to this is the Ancient Order of Foresters whowould not admit a man whose wife was in poor health. This wouldsuggest that spouses were viewed as potential liabilities to theAOF Court. Constitution and By-Laws of Court Nanaimo Foresters'no. 5886 of the Ancient Order of Foresters (Nanaimo: Nanaimo FreePress Steam Print, 1885), 26."See Green and Cromwell (1984) for a discussion of the extentof contract lodge practice in Australia. The authors argue thatthere was a great deal of competition between physicians for thesecontracts. This competition in turn was thought to ensure thatdoctors would provide an adequate quality of care. Also, orderslike the AOF had an arbitration committee to field complaintsagainst the surgeon. Green and Cromwell also chronicle theoperation of these committees.22contract practices. Naylor (1986, 31) notes that the presidentof the Ontario Medical Association in 1898 decried the spread oflodge practice in Ontario, and claimed that lodge practices were"everywhere". Rosen (1977) in his analysis of lodge practices inthe United States, cites that in 1914, 8,000 persons in NorthAdams Massachusetts, a town with a population of 22,000, were inthe care of lodge physicians to whom lodge members paid an annualstipend.The survivors of members of fraternal organizations receivedfuneral benefits, and widows and orphans benefits. The value ofthe funeral benefits varied across lodges but was typically $30to $100 in IOOFBC lodges. Members also had the option ofpurchasing life insurance, or more substantial funeral benefits,from affiliated life insurance organizations. For instance, theOddfellows Relief Association sold life insurance to Oddfellowsonly. Similarly, the Knights of Pythias' affiliated InsuranceDepartment sold life insurance to KP members only . m Unlike thepreviously discussed benefits, life insurance and "substantial"funeral benefits were purchased in addition to the regularmembership. Fraternal life insurance was provided by aThis condition changed after the Depression. Essentially theLife Insurance branches had difficulty attracting new buyers sothey responded by allowing members suspended from the organizationto continue paying for the insurance coverage, and by marketingcoverage to the general public, not just members of theorganization. In essence, they were converted into mutualinsurance companies with only the name in common with theirsponsoring organization. See IOOFBC Annual Proceedings (1938),7314-7315, and KP Annual Proceedings, 1930 to 1939.23centralized agency rather than locally through the subordinatelodges.Lodges charged joiners initiation (or admission) fees. Inthe IOOFBC, these fees were typically scaled by the age of thejoiner and ranged from $10 for joiners less than 30 years of age,to over $100 for joiners over 50 years of age. 35 The AOF NanaimoCourt no. 5886 also charged "entrance" fees that were scaled bythe age of the joiner. For men between the ages of 18 and 40 whowere eligible to join AOF Nanaimo Court no. 5886, the fees were$20 plus $1 for each year over 20 to age 35. The fee was $40 forjoiners aged 35 to 37; $45 for joiners aged 37 to 39, and $50 forjoiners of 39 to 40 years of age. 36IOOFBC lodges also charged members $3 to $5 for each ofthree Degrees to which members were elected. Typically, thevalue of sickness benefits was reduced for members who held theInitiatory, First, or Second Degrees. Only members of the ThirdDegree were eligible to receive the full value of the stipulatedbenefits. Almost all members were elected to the Third Degreewithin two or three months of their initiation into the lodge.Membership dues were the major, but not the exclusive,source of funding for the sickness benefits and lodge operatingexpenses. From 1875 to 1950, almost all IOOFBC lodges had annualmembership dues of 12 dollars which was the minimum allowable35See the accompanying Appendix 1 for some sample schedules.36Constitution and By-Laws of Court Nanaimo Foresters' no. 5886of the Ancient Order of Foresters, 26.24under the Constitution of the Grand Lodge. 37 All members paid thesame amount for dues; there was no scaling by age or occupation.This annual cost of membership appears to have been standard formany fraternal organizations. 38 Members had to pay their dues"promptly" to remain in good standing to be eligible for thebenefits of lodge membership. IOOFBC lodges suspended membersfor non-payment of dues after they were 12 months in arrears.After three months of unpaid dues however, the delinquent memberwas ineligible for sickness benefits, and he was disqualifiedfrom voting or speaking on any subject at the Lodge meetings. 39IOOFBC members suspended for non-payment of dues could bereinstated. Within one year of the suspension, the suspendedOddfellow could rejoin the IOOFBC subordinate lodge upon payingthe amount of one year's dues and by receiving a two-thirds vote37In the 1939 Annual Proceedings of the Grand Lodge, GrandMaster Fabian Hugh reported that of the 56 remaining lodges in thejurisdiction, 51 charged annual dues of $12. Selkirk no. 12 inRevelstoke charged annual dues varying from $16 for youngerjoiners, to $32 for older joiners. 4 lodges charged $15, onecharged $10 and Dawson 1A charged $24.mThe Knights of Pythias in British Columbia, and the WorkersBenevolent Association of Canada both prescribed annual membershipdues of 12 dollars. The Ancient Order of Foresters did not use thesame system of charging all members the same dues. Instead, theyscaled them by an individual's age at initiation.39The Ancient Order of Foresters also struck members 12 monthsin arrears off their membership lists. AOF members 3 months inarrears were ineligible for sick benefits, and after 6 months inarrears, they were not entitled to medical advice or medicine fromthe Court Surgeon.25of members present. ° After one year the member had to pay theinitiation fee charged of an initiate of the same age, unless thelodge in question had fixed a lower amount for reinstatements intheir By-Laws. Given the age scaling of the initiation feesdescribed earlier, reinstatement may have been prohibitivelycostly for members suspended after age 40. In those cases wherethe amount required for reinstatement was reduced, theConstitution of the Grand Lodge of the IOOFBC required that sucha sum could not be less than the amount of one year's dues.After reinstatement, the member was ineligible for benefits for 6months.In addition to the annual dues, lodges often levied onedollar assessments on each member upon the death of a lodgebrother to pay the $50 to $100 funeral benefit that the lodgepaid towards funeral expenses.Beyond the dues and other fees that the members paid, IOOFBCsubordinate lodges received revenues from renting their lodgehall and properties owned, and from interest on other investmentsmade by the lodge. The Constitution of the subordinate lodgesrequired that all funds and properties of the lodges had to beheld as a trust fund to be devoted only to IOOF charitableexpenditures and other legitimate lodge expenditures. Under40In cases where the lodge refused to reinstate the member, thelodge had to issue a Dismissal certificate for 1 dollar whichentitled the individual to apply to another IOOFBC lodge in thejurisdiction. "Of Penalties and Trials," Constitution, By-Laws andrules of Order of Cloverdale Lodge, no. 15 Independent Order ofOddfellows (New Westminster: New Westminster Press, 1910), 26-29.26lodge direction, elected and bonded Trustees were to invest theselodge funds from time to time. No part of the investments,funds, properties or of proceeds of any sales of lodge propertiescould ever be divided among lodge members. Upon the closure of alodge, through surrender or forfeiture of its Lodge Charter, allthe lodge's funds and properties were surrendered to the GrandLodge of the IOOFBC.Typical of all fraternal organizations, the IOOFBCsubordinate lodges were run by elected officers, the highestranking of which was the Noble Grand. The lodge meetings wereoperated on democratic principles where any decisions, amendmentsto the lodge's Constitution and By-Laws had to be supported by75% majority to pass:" With the exception of life insurance, allof the previously described benefits of membership were typicallyprovided independently and locally by the subordinate bodies ofthe fraternal organizations. The lodges could set and adjusttheir own fees and benefits to suit local conditions but allsubordinate lodge rules and amendments to rules had to beapproved by the Grand Lodge of the jurisdiction.The subordinate lodges, or local bodies, were at the base ofthe hierarchical structure of fraternal organizations. 42 These41In British Columbia, this required majority was imposed bythe Provincial Government's Societies Act in 1920. The imposedmajority replaced the IOOFBC's self-imposed two-thirds majority.42Gosden (1961, 78) discusses local friendly societies inBritain which were as the title suggests, purely localinstitutions. Gosden argues that local friendly society was suitedto those whose lives were static but not to the worker who was27lodges or courts were often affiliated to a particularjurisdiction which had a Grand Lodge. Above the jurisdictionalGrand Lodge level was the supreme body, such as the SovereignGrand Lodge of the IOOF. Through this hierarchical structure ofgovernment, membership in a subordinate lodge was a passport toadmission in any other IOOF subordinate lodge under thejurisdiction of the Sovereign Grand Lodge, and as a result, apassport to aid and assistance from that Lodge. 43Elected officials drawn from subordinate lodge membershipsoperated the Grand Lodge. The highest ranking position in theOddfellows was that of Grand Master. The Grand Lodges each hadtheir written constitutions and general laws for the governmentof the Order within their geographic jurisdiction. These lawsand rules were enacted by the Grand Lodges themselves but theywere subject to the approval of the Sovereign Grand Lodge. Atthe head of Fraternal Organization's government was a supremebody such as the Sovereign Grand Lodge in the Oddfellowsorganization. This body assembled once a year and was presidedmobile. Most Friendly Societies in Britain prevented men overforty from joining, thus the member of a local society who had tomove to find work virtually lost all his subscriptions while theOddfellow or the Forester could "take his benefits with him" evento many parts of the colonies.43The institutional structure of the Odd Fellows was typical ofmost fraternal organizations. The Ancient Order of ForestersCourts in British Columbia were under the jurisdiction of aProvincial body which in turn reported to a supreme body located inEngland. The Knights of Pythias had an almost identical structureto the Odd Fellows with their supreme body located in the UnitedStates.28over by the elected Grand Sire. The Sovereign Grand lodge of theIOOF was located in Baltimore and it generally dictated thepowers and responsibilities of the various levels of governmentand acted as a decision maker on issues concerning the legalityor liabilities of Grand Lodge or subordinate lodge decisions.1.4 SICKNESS AND HEALTH INSURANCE BEFORE THE DEPRESSIONThere are two economic burdens of illness and accident.First the afflicted individual may have to pay medical costs suchas doctor's fees or the costs of medication. Second, if theindividual is unable to work as a result of his condition, he maylose income. Sickness insurance typically referred to an incomereplacement benefit, while health insurance referred to in-kind,or medical services, benefits. Because fraternal benevolentorganizations, like the IOOF, primarily provided cash incomereplacement benefits for times of sickness, they were technicallyproviding sickness insurance. Health insurance historians, suchas Naylor (1986) and Taylor (1986), however, acknowledge that thefraternal combination of cash sickness benefits and contractpractices between physicians and fraternal lodges definesfraternal arrangements as an early form of pre-paid healthinsurance.Today, sickness insurance and health insurance areconsidered to be distinct insurance provisions. Historically,however, they were considered to be equivalent alternatives forinsuring workers against the economic burdens of accident and29illness. Bell (1939) notes that sickness insurance and healthinsurance were considered to be interchangeable terms. Hesuggests that both types of benefits were intended to relieve theeconomic burdens of illness, but the in-kind benefits gained inpopularity since it was believed that medical services resultedin workers returning to work sooner.Pre-World War II health insurance arrangements generallyprovided only cash benefits or cash benefits along with in-kindmedical care . 44 Just as fraternal sickness insurers combined cashbenefits with access to physician's services, early healthinsurance initiatives, like British Columbia's 1936 HealthInsurance Act, called for cash income replacement benefitsalongside payment of direct medical services. In other cases,like Rhode Island's 1942 compulsory health insurance law, "healthinsurance" referred to the payment of only cash benefits:The law extends the principle of unemployment compensationto cases where the worker is unemployed due to sicknessrather than lack of work. It does not provide for medicalcare. If a worker is unable to perform any service forwages due to his physical or mental condition and is notreceiving unemployment benefits he is eligible for cashcompensation for sickness. Benefits range from $6.75 to $1844Follmann notes that the first reported collectively bargainedagreement to provide medical benefits in the U.S. was in 1926.Prior to that, Follmann claims that organized labour in the U.S.primarily had an interest in insurance protection against loss ofincome due to non-occupational injuries and illnesses. J.F.Follmann, "The Growth of Group Health Insurance" Journal of Riskand Insurance 32 (1965), 107.30a week depending on the worker's earnings in the precedingcalender year."Bell (1939) in summarizing the state of health care provision inBritish Columbia leading up to the Health Insurance Act of 1936,reports that in 1929 there were 96 companies with private healthinsurance schemes covering a total of 58,272 employees. He notedthat only 34 of the 96 plans provided for medical services."The emphasis on the income replacement benefit was likely areflection of the state of medical technology at the time. Priorto the Depression, direct medical costs may have been relativelyminor since general practitioners would still have beenrelatively limited in treatment procedures. 47 For this reasonFollmann (1965, 78) suggests that the loss of income was thegreatest cost of illness before 1945. Follmann argues that theemphasis on payment of direct medical services is a post-WorldWar II development as the evolution of medical science led to45Department of Labour, Canada, The Labour Gazette 42 (1942),1001. Rhode Island's compulsory health insurance law was the firstof its kind adopted in the U.S."Bell (1939) found that in industries where private medicalservices plans had been formed, "little, if any, assistance (informing them) had been furnished by employers." The absence ofemployer assistance suggests that these schemes were Mutual BenefitAssociations, the work-place based equivalent of friendly societieslike the IOOF. Membership in these voluntary organizations wasavailable to employees of a specific firm, or within a certainoccupation. For a detailed discussion of Mutual Benefit Societies,see National Industrial Conference Board, "Experience with MutualBenefit Associations in the United States," Research Bulletin No.65, (1923).47A. Peebles, "The State and Medicine" Canadian Journal ofEconomics and Political Science (1936), 464.31direct medical costs becoming the major cost of illness. Thus,technological advances in medicine since World War II contributedto sickness and health insurance becoming distinct provisions.Most health care policy of the last half century has focused onthe insurance of direct medical costs, not on income replacementfor times of temporary disability.Another factor which contributed to the separation of in-kind from income replacement insurance was the increasing degreeof organization amongst physicians. Physicians had always beenopposed to insurance plans which included provisions for cashbenefits. Instead they endorsed plans which called for paymentfor medical services according to the recommended fee schedulesset by the Medical Associations. Under the control of themedical profession in the 1930s:Voluntary group medical and hospital care plans covered agrowing minority of Canadians. These plans were best suitedto the stable working class and middle-income groups. Thelabourers, the unskilled, the itinerant workers, and theirfamilies, whose need for medical care was generally greaterthan any other group, were seldom able to afford coverage."Thus, since the 1930s when physicians established medicalservices plans for groups of employees, to today with governmenthealth insurance in Canada, health insurance refers to insurancefor hospitalization and medical services. Today insurance forsickness related income loss is provided through a variety ofarrangements including unemployment insurance (since 1972);48D. Guest, The Emergence of Social Security in Canada,(Vancouver: University of British Columbia Press, 1985), 100.32employer purchased group plans for disability insurance;employers providing "sick days"; etc... 491.5 CONCLUSIONSMembership in a fraternal organization provided members withthe social benefits of fraternity and with economic securitythrough a formal beneficial system. Most of these organizationsemphasized income replacement benefits, and they typically madearrangements with a physician to treat members. Fraternal lodgesscreened applicants for health or moral problems, charged ascaled fee for initiation and monitored the activities of membersclaiming sickness benefits. As we shall see in Chapter 3, thesefees, benefits and other provisions within fraternal lodge By-Laws and Constitutions were used to control problems of insuringsickness that would otherwise render this risk uninsurable.49For a detailed discussion, see Statistics Canada, Absencefrom Work Survey, (1982).33CHAPTER 2THE EXTENT OF FRATERNAL MEMBERSHIP IN BRITISH COLUMBIA2.1 INTRODUCTIONParticipation in fraternal organizations and hence fraternalinsurance coverage was widespread and extensive before 1930. Weknow for Britain and Australia that as much as 40% of the workingpopulation had health and sickness insurance coverage throughmembership in a friendly society (Johnson [1992], Green andCromwell [1984]). For the United States, there are equallyimpressive estimates of coverage of roughly one-third of adultwhite males belonging to a fraternal organization (Whaples[1992]). What about in Canada? This chapter examines the extentof friendly society membership in British Columbia over theperiod 1891 to 1951. While the estimates are necessarily lowerbounds due to the lack of survival of records from many fraternalorganizations, they demonstrate that fraternal membership was animportant source of sickness and health insurance for workers inBritish Columbia before 1930 with as much as 13% of theprovince's total population securing insurance coverage throughfraternal organizations.Estimates of the extent of membership of this magnitude haveimplications for our understanding of how social and economicinstitutions develop. H.M. Cassidy (1944), one of BritishColumbia's health insurance developers, argued that the need forgovernment run health insurance in Canada's western provinces was34pressing since there was an absence of institutions to fulfilbasic social insurance needs, particularly in the field of healthinsurance. Cassidy also believed that Ontario did not have thesame need for government action in the fields of health andwelfare:There are significant differences between the health andwelfare machinery of Ontario and of the western provinces.Ontario has a more mature system than those found in theWest. One finds more institutions, public and private, thelegacy of the institutional era of the nineteenth century."While British Columbia was a younger (and significantly lesspopulated) province than Ontario, many of the fraternalinstitutions that were in Ontario were also in British Columbia.One of the oldest and largest fraternal beneficiary societies inNorth America, the Independent Order of Oddfellows (IOOF), openedVictoria Lodge no. 1 in 1864. By 1930, there were 60 IOOF lodgeswith a total membership of around 8,000 operating throughout theprovince.The widespread operation of Oddfellows lodges over all"H.M. Cassidy, Public Health and Welfare Reorganization; thePostwar Problem in the Canadian Provinces (Toronto: Ryerson Press,1944), 335. Cassidy's belief that the western provinces lackedinstitutions had real consequences for the Province of BritishColumbia. Britain's National Insurance Act of 1911 designatedfriendly societies as official carriers of the government's non-profit health insurance. Cassidy, who spent time examiningBritain's Approved Societies system before coming to BritishColumbia in the 1930s, concluded that this system would beinadequate for British Columbia. Thus, in 1936 Cassidy decidedthat British Columbia should implement compulsory state monopolyprovision of health insurance. Allen Irving, "The Doctors Versusthe Expert: Harry Morris Cassidy and the British Columbia HealthInsurance Dispute of the 1930s," B.C. Studies 78 (1988), 53-79.35regions of the province is remarkable when one considers thelimited extent of coverage of early Health Insurance Acts, suchas British Columbia's 1936 Act. Bell (1939) noted that workersin the rural regions of the province were considered to be toodifficult to insure since it would be too difficult to collectthe required contributions for coverage.The difficulties of applying compulsory insurance toordinary farm labour are readily understood. Because of theseasonal character of the employment, such labour ismigratory in nature. Furthermore, a large part of suchlabour is employed in rural sections at a considerabledistance from commercial centres. These conditions wouldmake the application of the Health insurance Act verydifficult, consequently a broad interpretation is placedupon the term "agricultural labour". mUnlike the Health Insurance Acts which prescribed centralizedprovision of insurance, fraternal organizations like theOddfellows had local provision of coverage. For this reason,fraternal insurance operations did not have to be limited toparticular regions or occupations. An examination of friendlysociety records also demonstrates that a significant proportionof workers in British Columbia had sickness/health insurancecoverage before 1930.mD.K. Bell, "Health Insurance in British Columbia," (M.A.Thesis, University of British Columbia, 1939), 50. The broadinterpretation of "agricultural workers" likely included miners inthe interior. Harris (1985) indicates that miners in the SlocanDistrict of British Columbia were typically in their 20s and 30sand were highly mobile.362.2 FRIENDLY SOCIETY MEMBERSHIP AROUND THE WORLDMany of the friendly societies operating in Canadaoriginated in England in the late 18th and early 19th centuries.British Organizations like the Independent Order of Oddfellows,Manchester Unity, and the Ancient Order of Foresters had lodgesand courts operating throughout the world by the end of the 19thcentury as members who emigrated from England establishedbranches of their friendly societies in their countries ofdestination. The Oddfellows Manchester Unity first arrived inNorth America in Baltimore in 1819. By 1842, the North AmericanOddfellows had severed ties with the British organization andfounded the Sovereign Grand Lodge of the Independent Order ofOddfellows of North America. 52 The North American Oddfellows hada peak membership of over 1.9 million members in 1921.Other fraternal organizations were unique to North America.Included in this group are organizations like the Knights ofPythias, the Improved Order of Redmen, the Ancient Order ofUnited Workmen, and the Woodmen of the World. The common ties ofall these "friendly" organizations was their combination ofeconomic benefits such as sickness and life insurance, withsocial entertainment provided from interaction with other memberswithin the lodge, and also through elaborate rituals performed by52For a history of the Odd Fellows Manchester Unity, and earlyfraternalism, see Moffrey (1910). For the history of fraternalorganizations in general and detailed histories of hundreds offraternal organizations, see Stevens (1907).37the members at lodge meetings."Membership in friendly societies in England was substantial.Johnson (1992) estimates that in 1901 there were 4.1 millionmembers of friendly societies offering a full range of sicknessbenefits in England and Wales. This corresponds to roughly 41%of the male population aged 20 and over. Total membership roseto 4.4 million by 1911 and 4.5 million in 1931, by which time theproportion of the adult male population covered had fallen tojust under one-third.For Australia, Green and Cromwell (1984) provide similarestimates where as late as 1950, 2 million individuals (one-quarter of the Australian Population) had coverage for primarymedical care through friendly societies. Green and Cromwell notonly estimate the extent of membership in Australia, but also theproportion of the Australian population benefitting from friendlysociety services. They indicate that around the time of WorldWar I each contributing member to a friendly society represented4.34 persons once the average number of dependents was taken intoaccount. The inclusion of dependents yields an estimate of over40% of the Australian population having health insurance coveragethrough friendly societies before 1930."For detailed discussions of the social functions ofmembership and discussion of ritual, see Clawson (1989) and Carnes(1989).38GREEN AND CROMWELL'S (1984) . ESTIMATED FRIENDLY SOCIETYBENEFICIARIES IN AUSTRALIAmTOTAL^TOTAL^TOTAL^MEM. BEN.YEAR^MEMBERS BENEFICIARIES POPULATION^POP. POP.1892 242,426 1,034,945 3,276,903 0.07 0.321913 506,779 2,199,419 4,819,249 0.11 0.461930 652,216 2,830,614 6,471,426 0.10 0.441938 636,689 2,037,401 6,924,046 0.09 0.29Green and Cromwell's numbers will be important for providing acontext for examining the extent of friendly society membershipin Canada. Typically, only white males between the ages of 18and 70 were eligible to be members of friendly societies. Whilethe ratio of members to total population seems modest, therecognition that these members had dependents is important wheninterpreting coverage estimates.Friendly societies were also important in small countries asFletcher's (1985) study of Trinidad and Tobago demonstrates.Fletcher chronicles the arrival and growth of friendly societiesfrom the early British immigrants to Trinidad and Tobago. Withstate encouragement, 23.5% of the population belonged to, andhence had health insurance coverage through, friendly societiesin 1945 (the peak proportion of population covered).Studies of the extent of membership in the United States arenot as well developed but they do suggest a similar extent ofparticipation to that in Britain and Australia. Whaples (1992)estimates that in the late 19th and early 20th centuries, 30% of'Green and Cromwell (1984, 221). For 1892, 1913, and 1930 thedependent multiplier was 4.34. For 1938, it is only 3.2.39American adult white males were members of fraternal lodges."As noted in Chapter 1, Rosen (1977) cites that over one-third ofthe population of North Adams Massachusetts in 1914 were in thecare of lodge physicians to whom lodge members paid an annualstipend. Roback (1989) presents the findings of a study ofseveral Chicago city blocks in 1918. The study revealed that 25%of wage earners over 14 years of age had disability insurance.Stevens (1907) presents more comprehensive estimates offraternal membership in the United States in his Cyclopaedia ofFraternities. Stevens reports a total of 10,567,672 members inall secret societies in the United States in 1907. Subtractingoff the Masonic memberships, since Masonic orders did not provideinsurance to members, yields an estimated total membership ofroughly 9 million, or almost 10% of the United States populationin 1907. 56For Canada, we have Naylor's (1986) estimate of 172,000friendly society members in Ontario in 1917, roughly 18% of themale labour force in the province, and roughly 5% of the total"This estimate may include members of non-benefit societieslike the Masonic Orders and the Benevolent and Protective Order ofElks."The number of persons residing in the United States in 1907was 87,000,000. The Statistical History of the United States fromColonial Times to the Present (Stamford: Farfield Publishers,Inc., 1965), Series A2. Stevens (1907) estimates include non-U.S.membership. The fraction of membership which this represents islikely small. For instance, Stevens reports a total IOOFmembership for North America in 1896 of 745,508. 33,400 were IOOFmembers in Canadian subordinate lodges. p. 91.40provincial population. 57Unions provide an interesting comparison group. In 1914,there were 2,282,361 union members in the United States which wasapproximately 2.5% of the population. By 1950 when there were14,300,000 union members in the United States, the ratio of unionmembers to total U.S. population was 9.4%." In Canada in 1914,there were 160,120 union members accounting for 2% of theCanadian population." By 1951, the ratio of union members tototal population in Canada had risen to 7.1%. 642.3 FRIENDLY SOCIETY MEMBERSHIP IN BRITISH COLUMBIAHenderson's Vancouver Directory for 1921 listed 21Benevolent Societies for the city of Vancouver (See Table 2.1).Unfortunately, the records for most of these organizations arenot readily available, and may no longer exist. Records fromfour of the larger organizations, the Independent Order of57This is using the 1921 estimate of Ontario's male labourforce found in Historical Statistics of Canada 2nd edition, SeriesD517. The male labour force in 1921 is reported to have been923,413. The 1921 population of Ontario was 2,933,662."The number of union members in the United States is reportedin Series D743 in The Statistical History of the United States fromColonial Times to the Present, (Stamford: Fairfield Publishers,Inc., 1965). The population of the United States is reported inSeries Al of the same Volume."Department of Labour, "Report of the Deputy Minister ofLabour," Annual Report (1914), 85.wHistorical Statistics of Canada, (1983). Total UnionMembership in Canada in 1951 was 1,029,000 (Series E175). Totalpopulation of Canada in 1951 was 1,029,000 (Series Al).41Oddfellows (IOOF), the Knights of Pythias (KP), the Ancient Orderof Foresters (AOF) and the Ancient Order of United Workmen (AOUW)have survived so it is possible to determine at least the partialextent of friendly society membership in British Columbia.The IOOF was the largest and oldest of the fraternal ordersoperating in the Province. The first IOOF lodge in BritishColumbia opened in Victoria in 1864 under a charter granted bythe Grand Lodge of California. The British Columbia Grand Lodgeof the IOOF was instituted in 1874, by which time there were 408members in five IOOF subordinate lodges in the Province. TheOrder expanded rapidly after 1890 and by 1900 there were 3,216members in 40 subordinate lodges. The Order's peak membershipwas in 1928, at 8,250 members in 63 lodges. By the end of theDepression, the membership had fallen to 5,335 in 56 subordinatelodges. By 1951 the membership was 4,909 in 63 lodges.The Knights of Pythias instituted their British ColumbiaGrand Lodge in 1890. It appears that the KP may have been thenext largest organization to the Oddfellows in British Columbia.Figure 2.1 presents the memberships of the two organizations from1874 to 1951. The KP's peak membership was in 1913 with 4,573members in 42 subordinate lodges. During World War I the KPmembership declined dramatically, falling by 1,500 members by1920. Nine subordinate lodges closed between 1913 and 1920. Incomparison, from a high of 7,092 members in 1914, the IOOF lost816 members by 1918, after which time the membership increasedeach year until 1928. The KP membership recovered to 3,89942members by 1927, but it never did regain its pre-World War Ileve1. 61 By the end of the Depression in 1939, the membership hadfallen to 2,958; and by 1951 there were 2,477 Knights of Pythiasin British Columbia.The first Court of the Ancient Order of Foresters in BritishColumbia opened in Victoria in 1873. The AOF remained affiliatedto the British organization throughout its history in BritishColumbia. From 58 members in 1874, the Foresters had 802 membersin British Columbia by 1900. By 1916 there were 2,989 members in19 Courts. 62Finally, the Grand Lodge of British Columbia for the AncientOrder of United Workmen was formed in 1892. The primary benefitassociated with the AOUW was life insurance, although subordinatelodge memberships could provide for stated sick benefits if theyso desired. The Proceedings of the Grand Lodge of the AOUW GrandLodge for British Columbia indicate that at least half of thesubordinate lodges paid sick benefits. The AOUW reached a peakmembership in British Columbia of 1,026 members in 1902. In 1903the Order introduced a new assessment system for its "Beneficiary61The proceedings of the Annual Convention of the Grand Lodgeof the British Columbia KP for 1918 suggested that the decline wasprimarily experienced by lodges which had abandoned providingstated sick benefits after 1915. See Chapter 1, pages 12 and 13.62These numbers are compiled from selected Annual Publicationsof the Directory of the Ancient Order of Foresters FriendlySociety, published by the Executive Council of the A.O.F. inBritain. Complete series may be available from High Court inEngland. Stevens (1907) reports that there were 40,000 AOF membersin the U.S. in 1907. In the same year, there were 1,330,000 IOOFmembers.43Certificates" which effectively doubled the cost of the insurancefor the Order's average aged joiner of 30 years. 63 By 1906, themembership had fallen to 660; and by 1917, 515. In 1949 therewere only 229 members.Table 2.2 compares the locations of the four Orders'subordinate lodges or Courts. Map 2.1 shows the location of the90 IOOFBC subordinate lodges that opened before 1951. The IOOFBChad subordinate lodges throughout the Province, with the spreadof the organization closely following the spread of population."The KP typically had lodges in the same places as the IOOFalthough the IOOF lodges were most often the first to open (ofthe four Orders examined) in a given location. One of theimportant features of the locations of these lodges, is theirprevalence in small rural and mining towns, areas that framers ofB.C.'s 1936 Health Insurance Act felt government insurance wasunimplementable. °°Originally, the AOUW had a scale of Assessments for itsBeneficiary Certificates of $500, $1000 and $2000, that were basedupon the member's age in a given year. Based upon financialdifficulties of some American jurisdictions that were attributed tothis system of assessments, the AOUW implemented assessments basedon a member's age at initiation. Conditional on the age at whichthey joined, they paid a level assessment for the remainder oftheir membership. Under the old system, a member aged 18 to 24paid monthly assessments of $1.20. By age 50, they were payingmonthly assessments of $3.55."To see how the spread of fraternalism reflects population,compare the lodge locations on Map 2.1 and listed in Table 2.2 with"MAP 1. Population: Historical, 1911-1931" in A.L. Farley, Atlasof British Columbia, (Vancouver: University of British ColumbiaPress, 1979).°See earlier discussion and Bell (1939).44In contrast to the KP and IOOF, the AOF and the AOUWprimarily operated in the larger and more established regions ofthe province. Of the 19 AOF Courts in British Columbia in 1916,only 4 (Kamloops, Nicola, Nelson, and Merritt) were not locatedon Vancouver Island, or in the Vancouver vicinity. Of the 19Courts, 5 were in Victoria, one was in Nanaimo, one was in NewWestminster, and 4 were in Vancouver. By 1900, there were 25AOUW lodges in British Columbia, 13 of which were located inVictoria, Nanaimo, New Westminster, and Vancouver.Table 2.3 compares the distribution of memberships of theIOOFBC, the KP and the AOF to the distribution of BritishColumbia's population. In general, the distribution of theIOOFBC's membership reflects the population distribution in theprovince. The AOF had a significantly disproportionate share oftheir membership in Victoria, compared to the distribution ofpopulation. When 8% of the province's population was located inVictoria in 1911, 53% of the AOF's membership was in Victoria.Both the KP and AOF have lower proportions of their membership inVancouver than the proportion of Provincial population inVancouver. This may reflect that the other organizations inVancouver, particularly the ethnic based Orders, had a greatershare of their memberships in Vancouver than elsewhere . mmOne particular example of this is Bell's (1939) report thatin 1929, about 58,000 workers had sickness insurance coveragethrough their workplace. The employers however, were not providingthe coverage. Bell notes that few employers had offered anyassistance at all in setting up the insurance arrangementssuggesting that the arrangements Bell described were Mutual Benefit45The IOOF, KP, AOF and AOUW had a total membership of 14,597in 1921, roughly 7% of the number of males over 19 years of agein the Province, and roughly 2.9% of the Province's totalpopulation. Table 2.4 presents the total memberships for theseorganizations from 1901 to 1951 along with Census estimates ofthe total provincial population, and total male population over19 years of age. Unfortunately the post 1921 extent of coverageonly represents the numbers for the IOOF and KP since the lastAOF report available was for 1916. This accounts for theprecipitous decline in the proportion of population belonging tothe fraternal organizations.There are at least 20 other benevolent associations that arenot included in these estimates for British Columbia.Considering that the memberships of four fraternal organizationsalone represent direct coverage for sickness and health for 7% ofmales over 19 years old, the full extent of fraternal coveragemust have been significant. Stevens (1907) estimated that therewere 10,567,672 members in all Secret Societies in the UnitedStates in 1907 (this number includes members of the Masons andElks who did not provide sick benefits). 2,120,000, or 20%, ofthis number were members of the IOOF, the KP, or the AOF. IfStevens estimated distribution of members across organizationsfor the U.S. was representative of the distribution in BritishAssociations which were work place based friendly societies. Thefigures Bell presents suggest most of this coverage was amongstfirms with large numbers of employees and as such, was likelyconcentrated in the larger urban areas like Vancouver.46Columbia, then the total membership in all secret societies inBritish Columbia would have been 69,905. Thus, 13% of theProvince's total population, or 35% of males over 19 years of agein British Columbia, belonged to a fraternal organization in1921. The magnitude of this estimate is directly comparable withGreen and Cromwell's (1984) estimated extent membership forAustralia before 1930, and with the estimated extent ofmembership for the United States in 1907 using Stevens (1907)membership numbers. Thus, it would appear that as a source ofsickness and health insurance, the fraternal providers were justas important in British Columbia as they were in the older, morepopulated and established areas.Also, if one considers that many of the workers covered byfraternal insurance had dependents, the full extent of thepopulation benefitting from fraternal insurance may have beenmuch higher. 67 While the conjugal conditions of members offraternal organizations are unknown, as is a precise estimate forthe average number of dependents per member which Green andCromwell (1984) had for Australia, it is possible to proxy thenumber of dependents per member with the average number ofpersons per family in Canada. In 1921, there were an average of4.3 persons per family in Canada. In 1931, this number had°HBenefittingH from membership could be interpreted at aminimum as members' dependents being protected from theconsequences of the household head being unable to work due toillness or accident. As described in Chapter 1, it is also likelythat dependents had access to medical services of the Lodge Doctor.47fallen to 3.9." These numbers are comparable to Green andCromwell's (1984) reported average number of dependents ofAustralian friendly society members of 4.34. Thus, placingbounds on the ratio of dependents to fraternal order membersbetween 0 and 4.3, the percentage of the B.C. populationbenefitting from fraternal membership of themselves or a familymember in 1921 was between 13% and 56%.Because the relative importance of the four organizationsexamined varied geographically, estimates of the extent ofpopulation belonging to these organizations are presented forselected cities and towns in British Columbia. Starting with thelargest city in Table 2.6, about 5% of the male population ofVancouver (3% of the total population) belonged to either theIOOF, the KP or the AOF before 1931. 69 In Victoria, 12% of themale population (7% of the total population) belonged to one ofthe three organizations before 1931. In Nanaimo, 20% of the malepopulation (12% of the total population) belonged to one of thethree Orders. And most impressive is Ladysmith, a bedroomcommunity for the coal mines south of Nanaimo, where 20% of the"Series A255 "Average Number of Persons Per Family, Canada,1881 to 1976," Historical Statistics of Canada, Second ed. (1983).°The 1911 number is low primarily due to a difference in thedefinition of Vancouver for which the Census population wasestimated. The other cities and towns examined do not suffer fromthe same problem with the exception of Nanaimo where the censusnumbers for male and female population include the population inthe suburbs of Nanaimo for some years. The total population forNanaimo city was adjusted by the ratio of males to total populationto get the number of males in Nanaimo.48total population, or 35% of the male population belonged to oneof these organizations before 1931. Ladysmith was not theexceptional case as Table 2.7 presents similar coverage estimatesfor Sandon, a mining community in the Kootenay region of theprovince, and Cloverdale, a farming community east of NewWestminster. Clearly for towns like Ladysmith, fraternalmembership was an important source of sickness and healthinsurance.The lower proportion of population represented by theseorganizations in the larger cities likely reflects that therewere more organizations absent from these coverage estimates thanin the smaller towns like Ladysmith, rather than a lesserimportance of fraternal sources of insurance. If this is thecase, then the estimates for the smaller communities suffer lessfrom the problem of excluded organizations.The disparity in the exclusion bias amongst the estimatesfor cities and towns reflects how these institutions spreadthroughout the province. The Oddfellows and the Knights ofPythias were the first, and often only, orders to establishlodges in small towns. 7° The establishment of fraternal lodges in70I0OFBC and KP lodges were often the only ones listed forsmall towns in Henderson's and Wrigley's B.C. directories. Also seeTable 2.2. In smaller towns, there may have only been enoughprospective members to support one or two lodges. In Cloverdale,for instance, there were KP and AOUW lodges opened in 1892 and 1893respectively, but both lodges closed within a couple of years. TheIOOFBC lodge however, opened in 1891 and closed in 1981.Cloverdale had a population of less than 500 for most of the Pre-Depression period so one lodge may have been all that the town'spopulation would support. In his 1904 Report, the Grand Master of49a city or town reflected the arrival of Order members fromelsewhere rather than institutional innovation. As workers movedabout the Province they took with them the knowledge andframework of the institution to which they belonged. Since theIOOFBC and the KP were the largest organizations in BritishColumbia, they had more members who could have moved andestablished new lodges than did smaller organizations, ororganizations that served only particular ethnic groups.While the extent of population belonging to theseorganizations is one dimension of their importance as a source ofsickness and health insurance, it is also possible to show thatfinancially, these organizations were an important source ofcoverage. Table 2.8A compares the total premiums and losses forall commercial accident and sickness insurers in British Columbiawith the total membership dues revenues and total sick benefitspaid for the IOOFBC. Unfortunately, it was not possible to get abreakdown between the sickness and accident components ofcommercial insurance as many companies reported only the totalsfor both. Also, IOOFBC sick benefits were paid if an accidenthad resulted in a member being unable to work, so the IOOFBCnumbers contain an unidentifiable portion of accident relatedthe IOOFBC after visiting Cloverdale suggested that the "availablematerial for new members is limited." The IOOFBC Grand Lodge in1904 expressed the opinion that "Victoria and Vancouver are theonly cities in this jurisdiction that should at present have morethan one (IOOFBC) lodge." Annual Proceedings (1904), 2321.Subsequently in Ladysmith, Revelstoke, and Nanaimo the 2, 3, and 2IOOFBC lodges in those towns were amalgamated into one for eachtown.50claims. The IOOFBC dues are treated as a Premium paid forinsurance coverage, and the sick benefits paid would be theOrder's equivalent to losses.In 1913, the IOOFBC paid sick benefits of $31,624, roughly10% of the total amount paid by the 30 commercial insurers in theProvince. Table 2.8B shows that in 1921, no commercial insurerhad higher premiums or larger losses than the IOOFBC suggestingthat the IOOFBC was the largest sickness insurer in the province.The IOOFBC's position and rank as a source of insurance remainedhigh until 1931 after which time the Order's position began todecline. By 1951, the IOOFBC had become a relativelyinsignificant sickness insurer paying only $12,873 in sickbenefits.Table 2.8A suggests that there was a large amount ofcommercial sickness and accident insurance in force in 1913. By1921 however, the premiums received by commercial insurers washalf of the 1913 value. This precipitous decline in the amountof commercial sickness and accident insurance in force occurredas a result of the Worker's Compensation Act in British Columbiain 1917. Prior to 1917, employers had been purchasing employer'saccident liability insurance. After 1917, they no longer neededthis coverage.Most of the growth in commercial accident and sicknessinsurance premiums written occurred after the Depression. From1921 to 1941, most of the growth in commercial sickness andaccident insurance coverage was the result of a growing51population (See population numbers in Table 2.4). Commercialinsurers appear to have made gains in the extent of theircoverage only after 1941. In 1913, the total premiums receivedby commercial insurers divided by the total population of theprovince gives a per capita premium written of $2.44. Followingthe introduction of Worker's Compensation laws in 1917, this percapita premium fell to $0.91. By 1941 the per capita premiumwritten by commercial sickness and accident insurers was stillonly $1.04. By 1951 the per capita premium ($2.77) had nearlytripled since 1941 and had finally surpassed the amount ofpremium received before 1917 when employers were purchasingaccident liability insurance. flThe growth in commercial insurance coverage after theDepression was through group insurance arrangements funded byemployer and employee contributions (Follmann [1965]). Applebaum(1961, 27) argues that the growth in voluntary health insurancecoverage in the United States after the Depression was encouragedby the U.S. Congress who:by allowing contributions to welfare plans to be tax-deductible as business expenses, encouraged the financing ofthese plans. Favorable tax treatment, together with thehigh income of corporations during the war period and thehigh rate of corporate and excess profits taxes, contributedto the establishment of many new welfare plans. EmployersnOf the $3,238,508 total premiums received for 1951, $579,000in premium, almost 20% of the provincial total, were received byMutual Benefit Health and Accident Association alone. This insurerwas not listed in the 1931 Insurance Department Annual report forBritish Columbia, and in the 1941, this insurer had reportedpremiums written of $184,622 (22% of the $850,343 total sicknessand accident premiums written for British Columbia).52also realized that they could improve employer-employeerelations by granting such benefits at a relatively lowcost.Applebaum also suggests that the growth in health insurancecoverage was boosted by World War II wage stabilization policieswhich limited wage bargaining. These policies encouraged anumber of labor unions and employers to establish health andwelfare plans. By 1945, there was a staggering extent ofemployee's group life, illness and accident insurance in privatecompanies in the United States.At the end of 1945, over 5,920,000 persons carried groupaccident and health insurance providing for an averageweekly benefit of $17 for wage loss during disability; grouphospital insurance covered over 7,800,000 employees andtheir families; and group life insurance, the mostwidespread type of group coverage, was in effect for nearly11,400,000. 72In Canada, there also appears to have been favorable taxtreatment of welfare plans. In 1938, the government of Canadaamended the Income War Tax Act to include amongst the classes ofincome exempt from taxation "any lump sum payable by an employerfor each of the first ten years after the establishment of anemployees' superannuation or pension scheme." 73 In 1942, theGovernment of Canada amended the Income War Tax Act to make lifeinsurance premiums tax deductible. 74 Disability coverage wasnLabour Gazette (1946), 1687.73Labour Gazette (1938), 893.74The 1942 amendment read as: "7A. (1) Any person except thoseto whom subsection three of this section applies, may deduct fromthe aggregate of the taxes otherwise payable by him in any yearunder subsections one and three of this Act the aggregate of (a)53often obtained as an extension of the life insurance contract.Table 2.9 compares the sickness and accident insurance premiumswritten by 7 life insurers in British Columbia in 1941 and 1951.In 1941 the total sickness and accident insurance premiumswritten by insurance companies was $850,343. The seven lifeinsurance companies in Table 2.9 had written $103,669, or 12% ofthis total. By 1951 the total premiums written by all companiesin British Columbia had grown to $3,238,508. The amount ofpremiums written for sickness and accident insurance by the sameseven life insurance companies had increased to $848,249, or 26%of the total premiums written in the province. Thus, over the 6years of favorable tax treatment, life insurers contributed to asubstantial portion of the growth in commercial sicknessinsurance.In Canada, and particularly in British Columbia, enrolmentin non-profit group medical insurance plans also mushroomed after1940. Guest (1980) indicates that in the 1930s, under theauspices of the medical profession:Voluntary group medical and hospital care plans covered agrowing minority of Canadians. These plans were best suitedpayments into any superannuation, retirement or pension fund orplan approved by the Minister which are paid by the taxpayer as aterm of his employment or in connection with a membership in atrade union; (b) premiums on (i) life insurance policies on thelives of the taxpayer his spouse and dependents..." Chapter 28 inthe Statutes of Canada 1942-43, 6-7 King George VI Parts I-II. Thetax deductibility of life insurance premiums ended in 1948 with thepassing of the Income Tax Act which superseded the Income War TaxAct. By 1943, the Canadian and Catholic Federation of Laboursuggested that sickness insurance and unemployment insurancepremiums and labour union contributions be deductible in the samemanner as life insurance premiums. Labour Gazette (1943), 383.54to the stable working class and middle-income groups. Thelabourers, the unskilled, the itinerant workers, and theirfamilies, whose need for medical care was generally greaterthan any other group, were seldom able to afford coverage. 75In 1937 there were only 733 Canadians enrolled in these plans.By 1945, this number had grown to 112,000. In 1951, there1,569,215 Canadians enrolled in these plans. 76Given that group insurance plans typically have a compulsoryelement for all members of a designated group, it is notsurprising that IOOFBC leaders in 1939 argued that thedevelopment of employer and employee joint funded schemesdiminished the appeal of beneficial arrangements like theIOOFBC's. 772.4 CONCLUSIONSInstitutions were imported and adapted, not invented. Thisexplains why British Columbia, a relatively young Province, hadmany of the same institutions and same extent of social insurancecoverage as the older more mature regions of the world. InBritish Columbia before 1931, 13% of the total population75Guest (1980), 100.76For an excellent discussion of these developments see Naylor(1986), Private Practice, Public Payment. One of the first andlargest of these non-profit medical plans was the Medical ServicesAssociation plan established by physicians in British Columbia.Naylor argues that these plans laid the foundation for thedevelopment of government health insurance even though they wereestablished by physicians to demonstrate there was no need forcompulsory government health insurance.77I0OFBC Annual Proceedings (1939).55belonged to a fraternal beneficiary society, and hence had healthinsurance coverage. This number is more important when considersthat it does not include any adjustment for dependentsbenefitting from the membership, nor does it include workersreceiving coverage through union membership or through theworkplace.56TABLE 2.1BENEVOLENT SOCIETIES IN VANCOUVER 1911 AND 19211911^1921Ancient Order of Foresters^ X^XAncient Order of Hibernians XAncient Order of United Workmen^X^XBrotherhood of American Yeoman XBrotherhood of Locomotive Engineers andFiremen^ XBrotherhood of Railway Trainmen^XCanadian Order of Chosen Friends XCanadian Order of Foresters X^XCatholic Order of Foresters XFraternal Order of Eagles^ X^XIndependent Order of Foresters X XIndependent Order of Oddfellows^X^XIndependent Order of Oddfellows,Manchester Unity^ XKnights of Columbus X^XKnights of the Maccabees^ X XKnights of Pythias X^XLegion of Frontiersmen XLoyal Orange Lodge^ X^XLoyal Order of Moose XModern Woodmen of America^ XOrder of Canadian Home Circles XSons of England^ X^XSons of Herman XSons and Daughters of Ireland^X^XSons of Norway X XSons of St. George^ X^XSons of Scotland X XSources: "Secret and Benevolent Societies" in Henderson'sVancouver Directory, (Vancouver: Henderson Directory Co., 1911and 1921).57TABLE 2.2LOCATION OF 4 ORDERS' SUBORDINATE BODIES IN BRITISH COLUMBIA(LOCATION BY DATE OF FIRST LODGE OPENED)PLACE IOOF KP AOF AOUWVictoria 1864 1890 1873 1893New West. 1870 1890 1877 1893Nanaimo 1874 1890 1875 1893Comox 1890 1877 1893Wellingtonn 1883 1890 1877Chilliwack 1886 1909 1893Vancouver79 1886 1890 1886 1893Kamloops 1887 1894 1900Cumberland 1889 1892Revelstoke" 1890 1899Cloverdalen 1891 1892 1893Nelson 1891 1897 1900 1897Duncan 1892 1892 1908Vernon 1892 1893Ladner 1892 1893North Bend 1892 1923Ashcroft 1893Kelowna 1909 1900 1894Atlin 1894Agassiz 1894Northfield 1894 1891Mission City 1894Haney 1922 1894Enderby 1905 1904 1894Golden 1895Cedar 1895Rossland 1896 1896 1900 1896Carson 1896Trail 1899 1897 1896Greenwood 1897 1900Sandon 1897 1897Slocan 1897New Denver 1897Trout Lake 1898Noyes to Ladysmith in 1900 when Wellington coal mines close.nVancouver includes Burnaby and Colquitlam.wSelkirk no. 12 originally formed in Donald B.C. in 1890,movedto Revelstoke in 1899. First lodge formed in Revelstoke isRevelstoke no. 25 in 1894. The two lodges merge in 1904 retainingthe charter of Selkirk no. 12.nIncludes Langley.58Cranbrook 1899 1903PLACE IOOF KP AOF AOUWFernie 1902 1903 1900Ladysmith 1901 1901 1900Moyie 1900 1905Grand Forks 1900 1901Pheonix 1901 1900Armstrong 1902Beaton 1903Crofton 1903Ymir 1903Midway 1905Nicola 1905Arrowhead 1906Creston 1947 1906Penticton 1907 1912Princeton 1907 1912Nakusp 1907Hosmer 1908 1907North Van. 1908 1907Michel 1908 1908Salmon Arm 1908Kaslo 1908Summerland 1908Merritt 1912 1911 1908Prince Rupert 1910 1910Corbin 1910 1923Colquitlam 1911Cobble Hill 1911Prince George 1911Burnaby 1912 1948 1911Powell River 1929 1911Abbotsford 1912Dawson YT 1912Port Alberni 1941 1912Courtenay 1913Lumby 1920Smithers 1921Terrace 1922Kimberley 1922 1923Anyox 1925Salmo 1930Chemainus 1934Sydney 1941Lake Cowichan 1944Parksville 1944Castlegar 1944Oliver 1945Falkland 1947NOTES: The IOOF and KP listings are complete for 1864 to 1947.AOUW lodges only for the period 1893-1897. AOF are for 1874 to1916 with several years of missing information.59TABLE 2.3DISTRIBUTION OF MEMBERSHIPS AND POPULATION IN BRITISH COLUMBIA1901-1931British Columbia1901178,6573,3861,7181911392,4805,8203,9042,6531921524,5827,0583,3663,5571931694,2637,6183,426PopulationIOOFKPAOFVancouverPopulation 29,432 120,847 163,220 246,593(% of B.C.^Pop.) (16) (31) (31) (36)IOOF 638 1324 2141 2392(% of IOOF,^all B.C.) (19) (23) (30) (31)KP 163 630 464 660(% of KP,^all B.C.) (9) (16) (14) (19)AOF 97 450 584(% of AOF,^all B.C.) (13) (17) (16)VictoriaPopulation 20,919 31,660 38,727 39082(% of B.C.^Pop.) (12) (8) (7) (6)IOOF 501 649 664 605(% of IOOF,^all B.C.) (15) (11) (9) (8)KP 228 466 275 169(% of KP,^all B.C.) (13) (12) (8) (5)AOF 260 1400 1485(% of AOF,^all B.C.) (36) (53) (42)NanaimoPopulation 6130 6254 6559 6745(% of B.C.^Pop.) (3) (2) (2) (1)IOOF 257 383 299 245(% of IOOF,^all B.C.) (8) (7) (4) (3)KP 135 200 234 232(% of KP,^all B.C.) (8) (5) (7) (7)AOF 170 173 185(% of AOF,^all B.C.) (10) (7) (5)NOTES: The AOF membership numbers for 1911 and 1921 are actuallynumbers for 1913 and 1916. All membership numbers are from theProceedings of the Organizations Annual Sessions of therespective Grand Lodge. The population numbers are from theCanadian Censuses .60TABLE 2.4FRATERNAL MEMBERSHIP AND POPULATION OF BRITISH COLUMBIA 1901-1951MEMBERS^ POPULATIONYEAR^IOOFBC^TOTAL TOTAL^MALEOF 4 OVER 191901 3386 6793 178657 856471911 5820 13055 * 392480 1901681921 7058 14597" 524582 1991361931 7618 11044 + 694263 2669981941 5213 8089 ++ 8178611951 4909 7615 ++ 1165210NOTES: * AOF membership for 1913 used since 1911 number notavailable. " AOF membership for 1916 used since 1921 notavailable. + AOF and AOUW numbers not available so total onlyfor IOOF and KP. ++ AOF numbers not available so includes onlyIOOF, KP and AOUW.TABLE 2.5FRATERNAL MEMBERSHIP IN BRITISH COLUMBIA AS A PERCENTAGE OFPOPULATIONIOOFBC ONLY^ TOTAL OF 4YEAR^% OF TOTAL^% OF MALES^% OF TOTAL^% OF MALESPOPULATION OVER 19^POPULATION^OVER 191901 1.8 3.9 3.8 7.91911 1.5 3.1 3.3 6.91921 1.3 3.5 2.8 7.31931 1.1 2.9 1.6 4.11941 0.6 0.91951 0.4 0.6NOTES: See table 2.4 for membership and population numbers usedfor calculating percentages in this Table.61PERCENTAGEVancouverIN SEVERALTABLE 2.6OF POPULATION BELONGING TO IOOF, KP, AND AOFCITIES AND TOWNS IN BRITISH COLUMBIA1901-1931(1) (2) % OF % OFYEAR IOOF KP AOF TOTAL POP. MALE POP. (1) (2)1901 638^163 97 898 27010 15978 3.3 5.61911 1324 630 450 2404 123902 74390 1.9 3.21921 2141 494 584 3219 107016 58306 3.0 5.51931 2392 660 3052 246593 131473 1.2 2.3Victoria(1)^(2)^% OF % OFYEAR IOOF KP AOF TOTAL^POP. MALE POP. (1) (2)1901 5011911 6491921 6641931 605Nanaimo228 684 1413466 1400 2515275 1485 2424169 77423688316603872739082142751908920107201446.0 9.97.9 13.26.3 12.12.0 3.8(1)^(2)^% OF % OFYEAR IOOF KP AOF TOTAL^POP. MALE POP. (1) (2)1901 257 135 170 5621911 383 200 173 7561921 299 234 185 7181931 245 232 477LadysmithYEAR IOOF KP AOF TOTAL1901 229 77^16^3221911 219 199 226 6441921 217 121 127 4651931 180 111^2916130625465596745(1)POP.7463295196714433488^9.2 16.13744 12.1 20.23515^10.9 20.43599 7.1 13.3(2)^% OF % OFMALE POP. (1) (2)43.21886^19.5 34.11061 23.6 43.8796^20.2 36.6NOTES: All population estimates from Censuses of Canada. AOFnumbers not available after 1916. Pre-1916 numbers were providedby Peter Ward, Department of History, U.B.C.62TABLE 2.7PERCENTAGE OF POPULATION BELONGING TO IOOF, KPIN SEVERAL TOWNS IN BRITISH COLUMBIA1901-1931SandonYEAR^IOOF^KP TOTAL^POPULATION^% OF POP.1901^691911 231921^531931 42Cloverdale0483206971854255115160030012.547.014.214.0YEAR^IOOF KP TOTAL POPULATION % OF POP.1901^28 0 281911 39 0 391921^65 0 65 300 21.61931 115 0 115 500 23.0Prince RupertYEAR^IOOF KP TOTAL POPULATION % OF POP.19011911 60 64 124 4184 3.01921 79 89 168 6393 2.61931 99 76 175 6350 2.8NOTES: Population estimates for Sandon 1911 and 1901 from 1911Census of Canada. Prince Rupert Population figures from Censusas well. The remaining population estimates are from Wrigley'sBritish Columbia Directories.63TABLE 2.8AIOOFBC DUES REVENUES AND SICKNESS BENEFIT PAYMENTS COMPAREDTO COMMERCIAL ACCIDENT AND SICKNESS INSURERS IN B.C. 1913-1951COMMERCIAL INSURERS^IOOFBC# OF^TOTAL $ TOTAL $YEAR^CO.'S PREMIUM LOSSES^DUES^BENEFITS PAID1913 30 955,751 320,061 74,912 31,6241921 35 475,974 232,664 77,347 34,2571931 69 739,957 481,903 79,997 37,8591941 84 850,343 422,443 53,735 21,0171951 115 3,238,508 1,747,135 47,912 12,873SOURCES: Annual Reports of the Department of Insurance forBritish Columbia. Commercial numbers include coverage for bothsickness and accident. 1913 figures include employers liabilityinsurance. 1951 numbers include insurers explicitly insuring for"health".TABLE 2.8BRANK OF IOOFBC AMONG COMMERCIAL SICKNESS AND ACCIDENT INSURERSIN BRITISH COLUMBIA 1913-1951# OF COMPANIES WITH^# OF COMPANIES WITH$PREM1UM > IOOFBC $ DUES^$LOSSES > $ IOOFBCYEARBENEFITS PAID1913 4 51921 0 01931 1 41941 5 51951 16 2064TABLE 2.9SICKNESS AND ACCIDENT INSURANCE PREMIUMS WRITTEN BY SEVERAL LIFEINSURERS IN THE PROVINCE OF BRITISH COLUMBIA IN(Dollars)1941 AND 1951COMPANY NAME 1941 1951Aetna Life Insurance Co. 11,311 134,843Confederation Life Assoc. 4,464 113,727Great-West Life Assurance Co. -- 131,591London Life Insurance Co. 43,438 168,904Loyal Protective LifeInsurance Co. 22,949 57,227Metropolitan Life Insurance Co. 20,903 150,734Mutual Life Assurance Co.of Canada 604 91,223TOTAL 103,669 848,249% of Total Premiums Writtenin Province of B.C. 12 26Sources: Province of British Columbia, Annual Reports of theSuperintendent of Insurance, 1942 and 1952.6563.33 .30.65.56*• 9 • 5064. • 48•23 .1813.22* .59.58• 5149,55,60,61,62,66.52^.66^38;.32.32*,25.20t •8,10,14,19,22,2426,29,31,37,41,44'.3,13*,27t^.28.34.12,25*.49.*41 ..46*•91.57.40• 16„,43^.68•36.35.42 :53147.44*37,045*,31,41,14*,33*INDEPENDENT ORDER OF ODDFELLOWS OF BRITISH COLUMBIASUBORDINATE LODGES, 1874-19511. VICTORIA/Victoria (1864)2. COLUMBIA/Victoria (1874)3. ROYAL CITY/New West.(1874)4. DOMINION/Victoria (1874-1936)5. BLACK DIAMOND/Nanaimo (1874)6. HARMONY/Ladysmith (1883)(Originally located in Wellington)7. EXCELSIOR/Chilliwack (1886)8. VANCOUVER/Vancouver (1886)9. TATNAI/Kamloops (1887)10. WESTERN STAR/Vancouver (1889)11. UNION/Cumberland (1889)12. SELKIRK/Revelstoke (1890)(Originally Located in Dlonald B.C.)13. ROYAL CITY/New West. (1890-1899)14. ACME/Victoria (1891-1898)15. CLOVERDALE/Cloverdale (1891)16. KOOTENAY/Nelson (1891)17. DUNCAN/Duncan (1892)18. VERNON VALLEY/Vernon (1892)19. MT. PLEASANT/Vancouver (1892)20. CENTENNIAL/Nanaimo (1892-1908)21. DELTA/Ladner (1892)22. GOLD RANGE/North Bend (1892-1906)23. ASHCROFT/Ashcroft (1893)24. ISLAND/Eburne,Vancouver (1893)25. REVELSTOKE/Revelstoke (1894-1904)26. PACIFIC/Vancouver (1894)27. AMITY/New West. (1894-1936)28. CHEAM/Agassiz(1894)29. PERSEVERANCE/Northfield (1894-1896)30. FRIENDSHIP/Nanaimo (1894-1897)31. BANNER/Ladysmith (1894-1904)32. MISSION CITY/Mission City (1894-1897)33. PEERLESS/Victoria(1894-1901)34. ROCKY MOUNTAIN/Golden (1895)35. CEDAR/Cedar (1895-1902)36. ROSSLAND/Rossland (1896)37. CARSON/Carson City (1896-1901)38. BOUNDARY VALLEY/Greenwood (1897-1922)39. SILVER CITY/Sandon(1897-1939)40. SLOCAN/Slocan (1897)41. TROUT LAKE/Trout Lake (1898-1913)42. KEY CITY/Cranbrook (1899)43. ENTERPRISE/Trail (1899)44. WILDEY/Moyie (1900-1916)45. GATEWAY/Grand Forks (1900)46. SNOWSHOE/Pheonix (1901-1920)29. PERSEVERANCE/Ladysmith (1901-1905)47. MT. FERNIE/Fernie (1902)48. CORONATION/Armstrong (1902)49. CAMBORNE/Beaton (1903-1913)50. EUREKA/Enderby (1905)51. PENTICTON/Penticton (1907)52. PRINCETON/Princeton (1907)53. MAPLE LEAF/Hosmer (1908-1914)54. MICHEL/Michel (1908)55. NORTH VAN./North Va56. MT. IDA/Salmon Arm (157. SUNSHINE/Kaslo (190858. OKANAGAN/Summerla59. ORCHARD CITY/Kelown60. LITTLE MOUNTAIN/S. Va^(1909)61. FAIRVIEW/Vancouver (19162. GRANDVIEW/Vancouver (163. PRINCE RUPERT/Pr. Rupe64. CORBIN/Co rbin (1910-1935)65. CARIBOO/Pr. George (1911)66. PARK/Burnaby (1912)13. PITTITKO/Merritt (1912)14. AARON/Vancouver (1912-1934)20. ABBOTSFORD/Abbotsford (1912-1938)1A. DAWSON/Dawson Y.T. (1912)22. RIDGELEY/S. Vancouver (1914-1933)25. FIDELITY/Mission (1914)29. HASTINGS/Vancouver (1917)30. BULKLEY/Smithers (1921)31. KERRISDALE/Kerrisdale (1921)32. MAPLE RIDGE/Haney (1922)33. LAKELSE/Terrace (1922)35. SULLIVAN/Kimberly (1922)37. N. BURNABY/Vancouver(1925)38. ASKEW/Anyox (1925-1937)41. SASAMAT/Vancouver (1927-1940)44. DAYLIGHT/Vancouver (1927-1944)46. MALASPINA/Powell River (1929)49. HILLCREST/Vancouver (1934)53. ARROWSMITH/Port Albemi (1941)56. VICTORY/Oliver (1945)64. FALKLAND/Falkland (1947)67. POUCE COUPE/Poouce Coupe (1947)68. BOUNDARY/Creston (1947)* Closed Before 1930t Closed 1930-1939t* Closed 1940-19516/900080007000600022 5000c) 40003000200010000Figure 2.1: Fraternal Memberships inin British Columbia, 18 7 4-19 517\.... -./,^\\„/^\^/i^■di\\, \ .---;,1/AAA•• . -••• -+ +_.--100FKPAOFAOUW1874 1884 1894 1904 1914 1924 1934 1944Year6 7CHAPTER 3Insuring Sickness: Problems and Methods3.1 IntroductionWhile economists are familiar with commercial and governmentinsurance, the methods of fraternal insurers have only recentlybeen examined (Buffum and Whaples [1991], Smith and Stutzer[1992]). Because fraternal insurers combined a social dimensionwith their insurance "contract", they had solutions to problemsof moral hazard, adverse selection, and financial risk associatedwith insurance provision that were different from commercial andgovernment insurers. So successful was the fraternal method ofinsurance that before 1930, fraternal organizations dominated thefield of sickness/health insurance and were an important rival tocommercial life insurers. This chapter examines the sources ofthe advantages that fraternal insurers had over commercial andgovernment providers in fields of social insurance by comparingwhat will broadly be called "methods of insurance".The best analogy for a fraternal organization is that of anon-profit club. Sandler and Tschirhart (1980) define a club asa "voluntary group deriving mutual benefit from sharing one ormore of ... production costs, the members' characteristics or agood characterized by excludable benefits." 82 Fraternal insurers82T. Sandler and J.T. Tschirhart, "The Economic theory ofClubs: An Evaluative Survey," Journal of Economic Literature 18(1980), 1482.68shared all of these characteristics and it is these features thatdistinguish fraternal methods of insurance from that ofcommercial and government insurance. This definition will be thefocus of the following discussion of the problems of insuringrisks like sickness and the solutions to these problems underdifferent methods of insurance. Where commercial and governmentinsurers rely on centralized administration and compulsoryparticipation, fraternal insurance was administered locally withvoluntary participation. Fraternal insurers applied intrusivemethods of screening and monitoring that commercial insurers orgovernments would have had difficulty applying. For a voluntarysystem like that of fraternal insurers to be implementable, italso had to be possible to identify and exclude bad riskindividuals.3.2 THE RISK OF SICKNESSSickness benefits provided by fraternal insurers were muchlike a pension with the majority of expected benefits comingafter age 45. In 1896, the Grand Lodge of the Independent Orderof Oddfellows in Ontario carried out a one time survey of itslodges. They compiled a table that showed the number of membersaged 21 to 90 in the Order; the number at each age who were sickat some time in 1896; the total weeks sickness experienced in1896 by those sick at each age; and the number at each age who69had died in 1896. 83 The data represent the experience of 22,669Oddfellows.Figure 3.1 presents the age specific probabilities of beingsick. Notice the increase in the likelihood of sickness,especially after age 45. At age 21, there was less than a 10%chance that an Ontario Oddfellow would be sick and unable to workin a given year. By age 45, this probability was 15%, and by age60, there was a 30% chance that the member would be sick andunable to work at some time in a given year.Figure 3.2 presents the age specific average weeks ofsickness. This is the expected duration of sickness conditionalupon being sick. Again there is an important age pattern in theduration of sickness. For Oddfellows under 45 years of age whowere sick and unable to work, they were sick on average for 4weeks. By age 60, sickness lasted close to 8 weeks on average.Given this pattern of sickness experience, the expectedliabilities of a worker for an insurer were clearly correlatedwith the individual's age. Age specific expected annual claimswere calculated as the value of the weekly benefit times theaverage weeks sickness for each age, times the probability ofclaiming at each age. The annual expected sickness benefits byage are presented in Figure 3.3. For a weekly sickness benefitof 5 dollars, individuals aged 21 to 42 had an expected annual"It is not possible with these data to determine whether amember who was sick several times in 1896 was counted once as sickat some in the year, or once for each time he was sick.70sickness benefit of 3 dollars. From ages 43 to 55, the value ofthe expected annual sickness benefit increases to 5 dollars.These numbers suggest that over a lifetime, a member could expectone week's sickness per year." The important pattern to noticeis how much of the benefits were expected after age 45. Atypical Oddfellow would have received 72% of his total expectedlifetime (21-65) benefits after age 45.How significant was the risk of sickness for a worker?Armstrong (1932, 284) cites that German experience recorded overa twenty year period showed that for every case of work relatedillness and accident, there were nine cases of non-work relatedillness. Given that work related illness and accident havealways been considered one of the greatest risks to a worker'seconomic well-being, sickness must have been serious concern forhouseholds. As we shall see in the next section, the highincidence of sickness across all ages and the degree to whichsickness liabilities increased with age made sickness aparticularly difficult risk to insure.3.3 PROBLEMS OF INSURING SICKNESS AND SOLUTIONSSickness has always been considered one of the mostdifficult risks to insure. Applebaum (1961) notes that"Here I have defined a lifetime to be up to age 65. A joinerat age 21 who remained a member until age 65 could expect to besick one week per year. A member who joined at age 42 and remaineduntil age 65 could expect 1.5 weeks of sickness per year. Afterage 65 or 70, members who chose to remain in the membership werenon-beneficial members.71commercial health insurance in the United States was marketed fora brief period in the 1920s but the insurers suffered heavylosses prompting them to withdraw from the field until the 1930s.According to Applebaum, the insurers felt that the need forhospital and medical services could not be predicted accuratelyenough. These described difficulties of insuring sickness arethe outcome of three problems associated with insuranceprovision. Insurers face the problems of adverse selection,moral hazard, and risk diversification. The nature of theseinsurance problems has dictated the form of contemporary socialinsurance arrangements. In particular, most social insurancearrangements whether commercially or publicly provided havecompulsory participation of members amongst a designated group,and highly centralized administrative arrangements. Fraternalorganizations which provided insurance employed very differentmethods. Participation was voluntary and administration wasdecentralized.ADVERSE SELECTIONAdverse selection is a name applied to one of the mostserious problems associated with insurance provision where onlythe individuals most likely to make a claim under the insurancecontract choose to purchase the coverage. Suppose that aninsurance company planned to offer insurance for lost income dueto illness. Upon investigation the company finds that theincidence of sickness varies across the ages and occupations ofpotential purchasers of insurance within the population. If this72company were to price their insurance based on the averagesickness rate of the population, they would be bankrupt within ashort time. At the average rate, good risk individuals (unlikelyto claim) would find insurance costly and choose not to purchasecoverage, while bad risk individuals (likely to claim) would findthe cost relatively cheap and purchase the insurance. Thecompany attracts a biased, or adverse, selection of customers.Because the contract was priced based on the average sicknessexperience of the population, the liabilities of the company willexceed what they receive in revenues. To break even, the companycould price their insurance based upon a worst case situationwhere every consumer was in the high risk category. Clearly thiswould only exacerbate the adverse selection problem as only thehighest risk individuals would be attracted to a higher costcontract, and hence be the only individuals with insurancecoverage.In health and sickness insurance, the problem of adverseselection has become a standard motivation for either governmentprovision of insurance or government mandates for employers toprovide sickness and health insurance for employees." Becauseinsurance firms must price to meet the average expectedliabilities of potential purchasers rather the average expectedliabilities of the population, it may be possible that requiringthe purchase of insurance by all of the population is an"For instance see Varian, Intermediate Microeconomics, Thirdedition (1993), 607.73improvement for everyone. High risk types obtain coverage at alower cost, and low risk individuals can purchase coverage onmore favourable terms than the contract offered under thevoluntary arrangement where only high risk types purchased thecoverage. Government provision of insurance typically requirescompulsory participation of a defined population. If employersprovide coverage for employees, they can purchase group insurancecoverage which is priced according to the average incidence ofclaims of the covered group of employees."There are two dimensions to the adverse selection problemwith insuring sickness. First, due to hereditary or occupationalfactors some men were more likely to be sick than others.Second, older men are more likely to be sick than young men.Compulsory insurance arrangements overcome the potential biasedselection of purchasers that would arise under a voluntarypurchase situation by compelling all workers to purchase coverageirrespective of age and heredity. Fraternal insurers haddifferent solutions for problems of adverse selection. Thefraternal approach to insurance was to screen applicants formembership with physical examinations and to charge eitherinitiation fees or annual dues that encouraged individuals to"Varian (1993) suggests that this situation "where the marketequilibrium is dominated by a compulsory purchase plan, is quitesurprising to most economists." In cases where observablecharacteristics "signal" an individual's likelihood of making aninsurance claim, it is possible to use a graduated payment schedulebased on these characteristics. The preceding discussion presumesthat the insurer cannot determine the purchaser's risk type apriori.74join when they were young and in a lower risk category.The requirement that applicants be examined by a lodgeapproved physician allowed fraternal insurers to exclude overtlyhigh risk individuals. The IOOFBC medical examinations werethorough with 28 questions in all that the lodge doctor had toaddress, the last being "Do you unhesitatingly recommend theapplicant for membership?". The doctor asked about theapplicant's family history of medical problems. Applicants wereasked if their parents were still alive; if so, what age werethey; if not, what was the cause of death and at what age didthey die? They were asked if there was any history of hereditarydiseases in the family. In addition to expected questions aboutheight, weight, age, and respiration, other questions included:12. Has he now or ever had any serious disease, personalinjury, the loss of limb, or rupture?13. Has he at any time had paralysis, apoplexy, insanity,rheumatism, or any organic disease?15. Has he ever had ague, remittent, bilious or otherfever? If so, state the frequency and the duration of suchillness and when it occurred.16. For what disease or personal injury has he requiredprofessional assistance?21. Are the functions of the brain, the muscles and thenervous system in a healthy condition?23. Is there any indications Bright's Disease, or any otherdisease of the kidney's, bladder or urinary organs?24. Do you suspect the existence of any syphilitic taint?27. Do you consider the Applicant, from occupation,temperament, hereditary predisposition, or otherwise, morethan usually liable to disease or ill-health?"While it is difficult to determine exactly why IOOFBC"Emphasis added. Independent Order of Oddfellows, "MedicalExaminer's Report. Application of ... For Membership in ... Lodgeno. ... I.O.O.F." (1925) This form was included in the MembershipRegister of IOOFBC Slocan City Lodge no. 40.75Applicants were rejected, the Ancient Order of United Workmen inBritish Columbia reported in the Grand Medical Examiner's Reportthe number of applicants rejected and the reason for therejection. From 1892 to 1901, the AOUW of British Columbiarejected 120 of 1420 applicants. The most common reasons forrejection were "consumptive family history" (50 rejections);heart disease (12 rejections); "bad physical condition" (8rejections); and "over age" (6 rejections)".The AOUW (and the AOF) explicitly excluded men over 40 yearsold from joining the Order(s). Given the pattern of sicknessdescribed in the previous section, this was clearly an importantpractice for controlling the problem of adverse selection. Underthe IOOFBC's system of level dues and benefits, it was clearly inan individual's interest to delay joining until they were olderand in more immediate need of sickness insurance. By delayingjoining, a worker would have cheaper insurance over theirlifetime. For the lodge, however, these workers would not havepaid in what they expected to receive in benefits, hence theywere a threat to the financial viability of the lodge:Most societies prevented men over forty from joining sinceit was the contributions of the first half of the workinglife which were intended to pay for the benefits requiredduring the sickness expected in a man's later years."This practice appeared to effectively eliminate age related"Report of the Grand Medical Examiner", Annual Proceedings ofthe Grand Lodge of the AOUW of British Columbia (1901), 31-40."Gosden (1961, 78).76adverse selection as the average age of applicants accepted byAOUW subordinate lodges was 33.51 years. The IOOFBC employed adifferent strategy, age graded initiation fees." The purpose ofthese fees was to encourage members to join when younger, and todiscourage older workers from applying. The age gradedinitiation fees charged by IOOFBC subordinate lodges appear tohave been effective in accomplishing this result. For fourIOOFBC lodges for which the ages of initiates could bedetermined, only 27 of 725 initiates were over 45 years of agebetween 1891 and 1980. The average age of IOOFBC initiates was30 years (see Chapter 5). Because of this age baseddiscrimination, workers had to join when young or not all.Fraternal organizations also discriminated based onoccupation. Chapter 1 detailed what many of these occupationswere, but an additional example was the IOOFBC's response to theCanadian government's introduction of conscription in World WarI. The IOOFBC Grand Lodge recommended that subordinate lodgesreject applicants of drafting age until the end of World War I.In addition to the formal measures for excluding high riskindividuals, fraternal lodges had informal measures. Inparticular, because applicants had to be elected to membership,they could be excluded if at least two members had misgivingsabout their admittance to the lodge membership.Some Orders like the Ancient Order of Foresters not only usedage graded entrance fees, but also dues that were scaled accordingto the age at which the member joined the Order.77MORAL HAZARDAnother difficulty with providing insurance is the problemof hidden action, called moral hazard. Sickness as an insurablerisk suffers from the problem that often the degree ofdebilitation is somewhat subjective, thus determining theaccuracy of a claim is difficult. An insured person could claimto be sick when he is in fact healthy. It may also be the casethat an insured person could malinger, or claim that he was stillsick after he had recovered. Also, purchasers of insurancecoverage may not take enough preventative measures to avoidmaking a claim. If these actions (or lack of actions) areunobservable then there is no simple solution to the problem ofmoral hazard. As the amount of claims paid increases, the ratesmust reflect the added costs of these abuses. In this situationagain, a compulsory plan could be justified since workers wouldotherwise opt to not buy insurance as the moral hazard drivencosts of insurance increased.Based upon their social function, and their localadministration of sickness insurance, fraternal orders had theability to control moral hazard problems. Because of theirsocial dimension, they had practices which by and large, madehidden actions observable. Lodge "visiting committees" and lodgephysicians were utilized to ensure that the afflicted member wastruly incapacitated. Thus, the member claiming sick benefitsfrom an IOOFBC lodge was visited once a week until he was againin good health. Members who claimed benefits while away from78their usual lodge had to obtain verification of their sicknessfrom a reputable individual like a physician, a clergyman, or anofficer of the nearest IOOFBC subordinate lodge. Under thoseconditions, the visiting committee of the nearest IOOFBC lodgevisited the sick member.Fraternal lodges also placed restrictions on the activitiesof members claiming benefits. As discussed in Chapter 1, membersclaiming sick benefits could not gamble or drink alcohol. If anIOOFBC member falsely claimed, malingered, or violated theserules, the lodge had the power to expel the member, who uponexpulsion, could never join any other IOOF subordinate lodgeunder the jurisdiction of the Sovereign Grand Lodge of the IOOF(i.e. North America). When men applied to an IOOF subordinatelodge, they were asked explicitly whether they had been suspendedor expelled from any Lodge of the IOOF." When lodges expelled orsuspended a member (or if they rejected a member), they had tonotify the jurisdictional Grand Lodge. The names of allexpelled members were listed in the jurisdiction's Black Book.For men over forty, the threat of censure would have been astrong deterrent to malingering since they might not be able tojoin any other Order because of their age.In addition to the Visiting Committees, lodge members wereobligated to report any violations of lodge By-Laws committed by"Sovereign Grand Lodge of the Independent Order of OddFellows, Question Book for Subordinate Lodges (Baltimore:Sovereign Grand Lodge of the I.O.O.F., 1901).79lodge Brothers. If it was determined that a lodge member hadknown of a transgression, and had not promptly reported it, thatmember was liable fines or expulsion. Green and Cromwell (1984,53-59) argue that the local administration of sick pay inAustralian friendly societies not only made supervision feasible,but it also made it possible to:to create a real sense of moral responsibility amongstmembers. Members who choose to cheat were defrauding notsome faceless bureaucracy, but their own brothers. And in avery real sense, they cheated themselves, for the funds ofeach branch were nothing more than the pennies contributedregularly by each member.Green and Cromwell note that friendly society members were knownto keep a close watch on each other. The authors cite numerousexamples of the peer monitoring which occurred in the Australianfriendly societies.Finally, as described in Chapter 1, the IOOFBC and the AOFwould not pay benefits to a member who was unable to work if hisincapacity was the result of intemperance, venereal disease, orthe result of a dangerous activity (See Chapter 1, page 17).RISK DIVERSIFICATIONIn the insurance literature, the more risk can be spreadacross individuals, location and time, the more predictable theexpected events become. Clearly the centralized administrationof compulsory government social insurance is an examplediversified risk. The local and independent provision ofsickness insurance by IOOFBC subordinate lodges was potentially athreat to the financial viability of the lodges. In particular,events like epidemics with potentially catastrophic claim sizes80for a lodge were a threat. In contrast, if there had been acentralized insurance system for Canada, a flu epidemic inBritish Columbia might have been inconsequential to the viabilityof the insurer if there were no epidemic in the other provinces,hence the average claim remains manageable.A common practice for diversifying risk is to have insurersreinsure with one another. In the context of the IOOFBC, thispractice would amount to each lodge bearing a portion of theclaims burden faced by other lodges. Under full reinsurance, acompletely centralized system would be mimicked. In the IOOFBChowever, reinsurance of sickness liabilities between subordinatelodges was rare. Subordinate lodges which were typically greatdistances (and even mountain ranges) apart could not ensure thatthe other lodges were not free-riding on the reinsurance. If thefunds of a lodge in Victoria were affected by the claims of alodge in Sandon, the Victoria members could not be certain thatthe Sandon Visiting Committee verified claims as the contractrequired, nor could they be certain the Sandon lodge's claimswere valid. Second, the different age distributions ofsubordinate lodges may have precluded reinsurance. For instance,given that older members are associated with higher sicknessclaims, a lodge populated with mostly young members may have beenreluctant to reinsure with a lodge full of older members.Reinsurance practices to diversify subordinate lodges' riskswere not widely used (if at all) in the IOOFBC. Lodges thusoperated locally and independently. Was this a limiting feature81of the IOOFBC which threatened the Order's long term viability?This is of course an empirical issue, and one which is examinedin detail in Chapter 4. The findings in that Chapter suggestthat lodges which survived the first decade of operation facedalmost no risk of bankruptcy due to high claims. Also, not oneIOOFBC lodge was "ruined" when the influenza epidemic of 1919swept through British Columbia.3.4 FRATERNAL INSURANCE DEFINEDAs suggested in the introductory section, the best analogyfor a fraternal organization is that of a non-profit club.Sandler and Tschirhart (1980) define a club as a "voluntary groupderiving mutual benefit from sharing one or more of ...production costs, the members' characteristics or a goodcharacterized by excludable benefits." 92 To characterize afraternal insurer, this definition is used to illustrate thedifferences between fraternal and commercial and governmentinsurers.The voluntary nature of fraternal membership is adistinguishing feature, particularly in the field of sickness andhealth insurance. While there are voluntary commercial insurancecontracts, most commercial and government sickness and healthinsurance arrangements have taken advantage of the compulsory92T. Sandler and J.T. Tschirhart, "The Economic theory ofClubs: An Evaluative Survey" Journal of Economic Literature 18(1980), 1482.82principle." Thus, if a worker is part of a designated group,such as a firm's work force or a provincial population, they mustpurchase the insurance coverage. The importance of thisdifference comes when one asks, who benefits from the insurancecoverage? As Varian (1993) suggested, when insurance marketsotherwise would not exist, all risk types benefit from acompulsory contract. In this case, high risk types pay less forinsurance than if they were the only types purchasing insurance,and low risk types benefit because the compulsion of all low riskindividuals improves the terms of the insurance contract.Clearly, low risk types are better off if high risk typescan be excluded from purchasing insurance coverage. This isessentially what fraternal insurers did. While membership wasvoluntary, fraternal lodges screened and excluded potentiallyhigh risk individuals. Thus, here are two elements of the clubdefinition; members of a fraternal lodge derive a mutual benefitfrom sharing risk amongst other good risk individuals; and thissituation is only possible because the members are able toidentify one another, exclude bad risk individuals andeffectively control problems of moral hazard. 94 These features in"Peebles (1936) notes the widespread adoption of thecompulsory principle in social insurance since the end of thenineteenth century. Also see Chapter 2.94Smith and Stutzer (1992, 2) present several examples of thisfrom other fields of insurance. In one case they cite that themortality experience of fraternal insurers was significantly betterthan that of commercial companies at the time suggesting thatfraternals served relatively low risk individuals and weresuccessful in controlling moral hazard in life insurance (i.e.83turn tie into the third element, production costs.One source of lower production costs comes from theexclusion of high risk types. Obviously lodge liabilities wouldbe lower. Another source would be from the lodge's contractpractice arrangements with a physician. Green and Cromwell(1984) document the degree of competition between physicians forlodge practices, and they argue that this led to friendly societymembers receiving medical attention at much cheaper rates than ifthey went to a physician as an individual. So significant wasthis feature of lodge "production", that Green and Cromwell(1984, 113) note that Australian lodge physicians accused thefriendly societies of forcing doctors to submit to "sweat"contracts.Finally, the greatest source of reduced production coststhat created a mutual benefit for members was their non-profitnature, and the fact that they were operated by the non-paidlabour of members. Membership in a fraternal organizationbrought with it the obligation of participation in the operationand administration of the lodge and all of its functions. TheKnights of the Maccabees claimed in 1896 that the 30 FraternalBeneficiary Societies belonging to the National FraternalCongress could:provide you with protection at actual cost, and in no casefaking death). They also cite that in the 19th and 20th centuries,numerous small business persons formed their own property andcasualty mutual insurance schemes after they failed to convincestockholder owned insurers of their intent to control accidentsbetter than other insureds in the same line of business.84need this be more than one-third of what Life Insurancecompanies charge... They are not organized for profit andgain, but exist for the purpose of furnishing their members,each of whom is a co-partner in the business, protection atactual cost, and at a nominal expense for management, eachmember doing a part of the work. °Smith and Stutzer (1992) cite several other examples of the costreducing impact of this fraternal obligation. They note that inthe histories of many mutual insurers, managers and directorsserved with little or no compensation because they wereinterested in providing insurance at cost and one way to do thiswas to keep expenses down, in particular the compensation ofofficers. %3.5 CONCLUSIONSThe risk of sickness was considered one of the mostdifficult to insure. Because of their non-profit motives, andtheir monitoring and screening capabilities, fraternal insurerswere able to dominate the field of sickness insurance. Membersbenefitted from favourable costs of insurance by sharing riskswith only other good risk individuals, by controlling moralhazard, and by keeping operating costs low by exploiting thevoluntary, largely non-compensated labour of members for"History of the Maccabees, Ancient and Modern, 1881 to 1896,(Port Huron, 1896).Smith and Stutzer (1992, 16). While one could argue thatthis comparison ignores the implicit costs of a member's labour, itis important to recognize that many members were never activelyinvolved in lodge operations, hence they offered no time and had noimplicit cost of labour. Lodges appear to have been perpetuated byan "enthusiastic" core of the membership. See AOUW quote on page11 of Chapter 1.85administration. Neither the government nor a profit maximizingfirm had the intrusive monitoring and screening capabilities tohave these cost advantages. In the fraternal lodge, low risktypes benefitted from sharing risk with only one another byexcluding high risk types, and by limiting production costs. Ina commercial firm, any such gains are not shared by the insuredindividuals, but instead are extracted by the owner of the firm.Under a government insurance system with compulsoryparticipation, the bad risks cannot be excluded.Given that fraternal insurers had such advantages inproviding sickness insurance coverage, why commercial andgovernment insurers came to dominate the market after theDepression is a mystery. Was it because fraternal insurers couldnot adequately diversify risk with their local provision? Werethey crowded out by the government? These questions areaddressed in the following chapters.860.5I5 0.4C)0 0.3..:0.1FIGURE 3.1: Observed Sickness Ratesby Age, IOOF of Ontario 18960.6,,,,IiIIIIII,III,,,,,,I,IIIIIIIIIII,..,IiIiiiii21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69Age in Years087FIGURE 3.2: Average Sickness Durationby Age, Ontario IOOF for the Year 1896a)1110987654321 iiiiiiimiiimmillIIIIIIIIIIIIIIIIIIIIIIIIIIII21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69Age in YearsFIGURE 3.3: Expected Annual SicknessBenefits by Age Using IOOF Ont. Rates5045403530a, 2520151050■1 11111 1:1111111111111111111111111111111111111111111111111111121 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69$10/wkDues, $12--A--$5/wkAge in Years89CHAPTER 4THE FINANCIAL VIABILITY OF FRATERNAL SICKNESS INSURANCEIf a centralized society could not safely undertakesickness insurance throughout the country, the State could notdo so either. And there was no need for the State to try. Theleading societies giving sick benefits- the Manchester Unity andthe rest- were respectable bodies, governed in the interests oftheir members and only needing help and guidance in becomingactuarially solvent.Lord Beveridge, 1948.4.1 INTRODUCTIONDespite the informational and monitoring advantages enjoyedby fraternal insurers (described in Chapter 3), many of thehistorians and social reformers of the early twentieth centurywho examined the fraternal system, dismissed it as a failedmethod of social insurance since many of the fraternal ordersemployed `non-actuarial' pricing practices. In organizationslike the IOOFBC, all members paid the same amount of membershipdues and in return, all members were eligible for the same levelof benefit. Because the risk of illness was observed to increasewith an individual's age, this practice was thought to beincompatible with the goal of a financially sound insurancescheme in a voluntary pay-as-you-go (current cost) system(Moffrey [1910], Gosden [1961], Clawson [1989]). The conclusionfollows that fraternal insurance collapsed beneath its burden ofunsupported liabilities except in those cases where the ordersadopted commercial methods like age-graded membership dues. Thisexplanation of the decline of fraternal methods of insurancesuggests that commercial and government insurance methods were90financially necessary, and inevitable, developments.A necessary first step in studying the decline of fraternalinsurance is to address the claim that fraternal insurers failedbecause they were actuarially unsound. Independent Order ofOddfellows of British Columbia (IOOFBC) lodges operated withlevel dues and benefits from 1875 until 1950, when they appear tohave largely abandoned sickness insurance activities. For thisreason they provide an excellent opportunity to assess whetherapplying level dues and benefits was as financially unsound asbelieved, and whether inherent financial problems can explain thedisappearance of fraternal sickness insurance. To evaluate thefinancial soundness of IOOFBC insurance pricing and operations, Iuse two measures developed from tools of insurance pricing: Theimplicit degree of risk loading, which is an ex ante measure ofthe extent to which the price of membership was adequate to meetexpected annual sickness benefit claims; and the probability ofruin, which is the likelihood that claims against lodge fundswould be large enough to bankrupt the lodge in a given year.Both measures are constructed from the moments of thedistribution of aggregate sickness benefit claims which Iestimate using financial and membership data from seven IOOFBClodges for the period 1891 and 1950. I find that level dues andbenefits were not incompatible with financially sound insuranceprovision. Analyses of the risk loading measures show thatalthough net revenues from prescribed membership dues alone wereinadequate to meet expected sickness benefit claims, initiation91fees from new members and revenues from rents and interestgenerated by lodge assets subsidized sickness benefit provisionso that the lodges almost always had net revenues in surplus ofexpected sickness benefit claims. The estimated probabilities ofruin reveal that these lodges never faced any significant risk ofbankruptcy. Thus, these results indicate that inherent financialnon-viability is unlikely to have been the reason the fraternalsystem disappeared.Because of its use of level dues and benefits, and itsdecentralized funding of the benefits, the IOOFBC's sicknessbenefit provision represents the 'most fraternal' of methods.This is important because pricing practices and institutionalarrangements varied between fraternal orders, and even betweenlodges within the same orders. 97 Lodges or orders that employedage graded fees and centralized funds or reserves tend toapproximate commercial providers. Examining the methods mostdistinct from commercial insurance practices provides the mostdirect test of the viability of the fraternal method.4.2 THE CASE FOR A FLAWED SYSTEMHistorians and social reformers of the early twentiethcentury have argued that the fraternal system was inherently97For example, the Knights of the Maccabees, and the AncientOrder of Foresters used age graded assessments (dues). IndependentOrder of Odd Fellows lodges each kept their own funds for payingbenefits, while the Fraternal Order of Eagles had centralized fundsfor the whole order.92flawed because fraternal order members lacked adequate knowledgeof actuarial principles. The implicit, and sometimes explicit,implication of this belief is that the insurance practices usedby commercial insurers, such as age-graded fees and centralizedoperations, would have solved the financial problems of fraternalorders. If this view is valid, then the rise of commercialinsurance arrangements was a natural development in response tothe failure of fraternal practices. This section of the Chapteris a summary of some of the prevailing opinions about thefinancial viability of the fraternal system, and the potentialsources of fraternal financial problems.Much of what we know about the financial problems offraternal sickness insurers comes from examinations of theexperience of British Friendly Societies." Moffrey (1910), whowas a leader of the IOOF Manchester Unity, suggested that thefinancial distress of IOOFMU lodges in the 1870s revealed thefinancial inadequacy of the existing "crude" insurance methodsthat had persisted from the early 1800s. Moffrey claimed thatlodges that continued to operate with level contributions andbenefits were unable to accumulate the necessary reserves to meetthe increasing benefit claims that were associated with an aging98North American critics of fraternal sickness insurance appearto have directly adopted descriptions of British experience.Peebles (1936), in arguing for the need for Government healthinsurance in Canada, asserts that fraternal beneficiary societieswere always short of funds. Although he is not explicit aboutwhich country's friendly society experience he is reporting,Peebles appears to be describing British experience.93membership. To overcome these financial difficulties, theleaders of the IOOFMU urged the subordinate lodges to adopt arecommended schedule of contributions. These proposedcontributions were "scientifically graded in accordance with theage of the initiate" to reflect the actuarial reality of illnessliabilities increasing with an individual's age. Moffrey notedthat by 1900 most IOOFMU lodges adopted age graded contributionson the grounds that the experience of the 1870s illuminated theinevitability that level contributions and benefits wouldultimately lead to insolvency.Gosden (1961) in his analysis of 19th century Britishfriendly societies argues that levying rates of contributionwhich were inadequate to cover proposed benefits was the mostcommon "cause of the collapse of local friendly societies and ofindividual lodges of the large orders in the early days." 99 Healso identifies level dues and benefits as a primary source offriendly society financial difficulties. Gosden suggests thatthere were seldom financial problems early in a lodge'soperations when the membership was young and relativelyhomogeneous. As the membership aged, however, claims increasedresulting in increases in prescribed contributions. The increasein the cost of membership discouraged young men from joining andthe lodge's membership eventually declined until the lodge99P.H. Gosden, The Friendly Societies in England 1815-75(Manchester: Manchester University Press, 1961), 28.94closed. m Gosden notes that although level dues and benefitswere often accompanied by age-graded initiation fees to overcomethese problems, the graded initiation fees were never sufficientfor capturing the early actuarial surpluses that a member avoidedpaying by joining later in life. 101 Like Moffrey, Gosden suggeststhat age graded dues were the solution to these financialproblems.Gilbert (1965) argues that towards the end of the 19thcentury British friendly societies had developed into financiallyweak institutions. Gilbert claims that the amount of competitionfor members between friendly societies limited the extent towhich they could increase contributions or cut benefits. Thisproblem in turn was exacerbated by the increased longevity ofmembers. As the membership aged, fewer members died, but morewere sick. Tension was created because contributions could notbe raised to meet the higher liabilities of the aged members, andfraternal obligation meant that long-time lodge members could notbe denied financial relief or benefit as long as a penny ofreserves was left to help them. Gilbert claims that many oldermembers began to live on sick pay year after year, in essence100 Zelizer (1979) in her analysis of fraternal life insurancepresents the same model of fraternal decline.101Moffrey (1910, 188) argues that simply charging a higherinitiation fee was an early crude attempt to deal with theincreased liabilities of incapacity brought on by age. He furtherargues that the graded initiations fees were primarily intended tokeep men of higher ages out of the society, rather than to chargean additional amount sufficient to cover the cost of extrasickness.9 5collecting a pension from a society that was never established toprovide such a benefit. Gilbert's hypothesis, like Gosden's,suggests that aging members became a problem as the lodge randown reserves and assets due to paying 'pensions' not accountedfor in the prescribed contribution/benefit combination.Clawson (1989), in her recent examination of Americanfraternalism, expands on the theme of the need for soundactuarial principles in benefit provision. Clawson suggests thatfinancially hazardous practices, such as the use of level duesand benefits, reflected fraternal claims of mutuality that arosefrom the fraternal system being based on quasi-kin relationships.Because the system was based on moral concerns and not thepractical need to administer an actuarially and fiscally soundenterprise, the success of fraternal benefit societies was alwaystenuous. Clawson concludes that fraternal benefit societiescould not survive without abandoning their principle ofmutuality:Ultimately the insurance fraternities adopted commercialmethods or failed and disbanded. But the image of fraternalinsurance as different from and morally superior tocommercial insurance continued to attract members well intothe twentieth century. °2Like Clawson, Applebaum (1961) suggests that fraternalinsurance was non-viable because it was not based upon sound1m Clawson, Constructing Brotherhood (1989), 227. Thecommercial principles to which Clawson refers, are age gradedmembership fees, required physical examinations for joiners, andexclusion of men engaged in hazardous occupations.96actuarial principles. He argues that the efforts of fraternalorders in providing sickness insurance represent an experimentalperiod in health insurance development in the United States. Heclaims that although a few orders later became insurancecompanies, a lack of knowledge of actuarial principles resultedin many of these groups becoming financially stressed and oftenforced into bankruptcy.Finally, both Moffrey (1910) and Clawson (1989) documentresistance by members of the IOOFMU and the Ancient Order ofUnited Workmen respectively, to switching to age gradedcontributions. In 1888, the IOOFMU sent a schedule of theirrecommended age-graded fees to all IOOF Grand Lodges in NorthAmerica. While the recommendations were acknowledged by the IOOFof British Columbia, only one lodge in the history of theprovincial order adopted age graded dues. Given the purportedfinancial problems associated with level dues and benefits, suchresistance to change deserves some explanation. Clawson (1989)believes that this rigidity of arrangement was due to moralconcerns of fraternalism over-riding actuarial reality, whileGilbert (1965) suggests that the persistence of supposedlyhazardous fraternal insurance practices was due to factors likecompetition for members between friendly societies. I address analternative explanation in the following sections. Change didnot occur because change was not necessary. In particular, Iassess the extent to which level dues and benefits were a threatto the financial viability of fraternal insurance with measures97that are discussed in the next section.4.3 ASSESSING FRATERNAL PRICING PRACTICESHistorically, both the adequacy of the membership price andthe financial condition of a fraternal benevolent society havebeen assessed with an expected present value measure known as avaluation. Moffrey (1910) describes valuation as follows:The assets consist of the cash on hand and the amount duefrom members, i.e., the actual present value of their futurecontributions. The liabilities are the present value offuture benefits. When the assets are more than theliabilities the lodge is said to possess a surplus; when thereverse is the case the lodge is in a deficiency... In thatcase (of a deficiency) it would be necessary, to prevent thedecay of the lodge, either to increase the contributions andthus show a greater present value or to decrease thebenefits, that their present value might not exceed thetotal assets... K6There are several problems with the valuation method as a measureof a fraternal lodge's financial condition. First, valuationsrequire assumptions about interest rates which have importantconsequences for the usefulness of the valuation measure.Gilbert (1965) suggests that high assumed interest rates in late103Moffrey (1910), 190-191. Valuations usually accounted forcontributions only (i.e. membership dues) since it was felt thatthis was the only revenue source that could be expected with anydegree of certainty.Valuations were based on actuarial life and morbidity tables."The probability of survival of the units in the association to anygiven age has been duly calculated and provided for in thevaluation tables...The actuary has to ... take into account therate of interest the lodge is realising, and to judge whether thatrate is likely to be maintained throughout the life of the youngestmember. He has also to see whether the experience of the lodgeconforms to the standard adopted for the valuation before thestock-taking is complete."9819th century valuations of British friendly societies camouflagedthe actual extent of their financial problems. In addition, withthe valuation method, one assumes that there are no changes inthe membership, hence valuations do not account for the impact offuture younger members on lodge assets and liabilities.By evaluating a lodge's ultimate worth, valuations primarilyidentify potential future financial problems. Thus, this measureis not necessarily a good measure of a lodge's immediatefinancial condition. As Moffrey (1910) notes,The lodge can continue its work by making a re-arrangementof its mutual bargain with its members, who are in aposition of both debtors and creditors... It is, therefore,incorrect to describe any lodge with a deficiency onvaluation as necessarily insolvent. 104Finally, since a valuation is defined by average claims, it doesnot account for variation in the size of annual benefit claims;thus, it does not account for a lodge's risk of high claims. Itis possible that a lodge with a positive valuation could havebeen `ruined' if claims in a given year were high enough toexhaust available net revenues and assets.Given the limitations of the valuation method, I examine twoalternative measures of the financial soundness of fraternalinsurance methods, the implicit degree of risk loading and theprobability of ruin, that capture some of the essential featuresof the valuation measure and that do not depend upon an assumedinterest rate or upon an assumption of closed membership. These104Moffrey (1910), 191.99measures, which are widely used in the insurance literaturem ,are superior to the valuation measure (for reasons to bedescribed shortly) for identifying the sources and extent offinancial difficulties in fraternal lodges.Borch (1990) provides the following decomposition for theprice charged to an individual for insurance coverage:P=c+E+R^ (4.1)The price, P, is set to cover: E, the expected claims of thecontract; c, a portion of the insurer's overhead costs inproviding the coverage; and R, a risk premium (or a risk loading)charged over and above the expected claims to reduce thelikelihood of the insurer becoming insolvent.Suppose that an individual purchases sickness insurance froman insurer. Let z i>0 denote the dollars per year sicknessbenefit claim size for an insured person i. z i has thedistribution function SjzO with mean'°5For example, see Karl Borch, The Economics of Insurance (NewYork: North Holland, 1990); or R.E. Beard, T. Pentinkanen and E.Pesonan, Risk Theory: The Stochastic Basis of Insurance (London:Chapman and Hall, 1984).100E[zi]lzidSi (zi ) .If we assume that there is proportional risk loading, soR=7rE[M 155, where n is a parameter representing the degree of riskloading, then:Pi=ci+E[zi] +itE[zi ]^ (4.2)ci is the share of the insurer's overhead costs paid byindividual i and E ic i=C, the total overhead costs of the insurer.We can now impose the observed institutional arrangementsfor pricing membership in an IOOFBC lodge on the pricing equationabove. Because the members of a fraternal lodge were poolingrisk with one another, they had to determine how to pricemembership to meet the expected aggregate sickness benefit claimsof the membership. In a given year, a lodge of i=1,...,M memberswould experience total sickness claims of:Z=E Zi2=1Z is the lodge's aggregate claim and it is the product of thetotal number of weeks of benefit claimed and the stipulated155The choice of proportional risk loading for a study like thisone is arbitrary. Risk loading could also be defined on highermoments of the claims distribution, such as the variance. Riskloading on only the mean of the distribution was selected for thiswork because my intent is to estimate a residual portion of theinsurance price, rather than a prescribed but unknown (to theresearcher) parameter. Given this intent, the simplestspecification was chosen.101weekly benefit. If each member i, i=1,...,M, faces a claim sizedistribution Sj•), and these claim size distributions areindependent across all i members, then the expected aggregateclaim against lodge funds is:ME[z] =E[E zi ] =E E[zi ]2=1^2.1With the observed practice of charging all M members thesame 'price' or membership dues, the price expression given in(4.1) can be expressed as:P=—c +(I-En) E[Z]^ (4.3)This expression reflects that each member was paying an equalshare of the lodge's total overhead (operating) costs, C, and anequal share of the membership's aggregate risk loadedliabilities. Notice that the price in (4.2) represents anactuarially determined price since it is set according to therisk characteristics of the individual insurance purchaser. Theprice given in (4.3) is not adjusted to reflect any individualmember's risk characteristics, (like age which was observable),so it is an example of a non-actuarially determined price. 167I can exploit this pricing framework to use it as a measureof the adequacy of the price of membership for meeting expected07Of course if members are homogeneous in all respects, (4.2)and (4.3) are equivalent. The importance of this distinction, isthat critics of fraternal insurance argue that (1.3) was setindependently of E[zj, so it was a non-actuarial pricing practice.102benefit claims and a measure of the financial condition offraternal lodges. The implicit degree of risk loading associatedwith a lodge's price of membership is a measure of adequacy inpricing since it is interpreted as the extent to which duesrevenues net of operating costs were adequate to meet expectedclaims in a given year. Rearranging the pricing equation (4.3),the degree of risk loading can be expressed as:n -  MT-C -1E[Z] (4.4)Positive risk loading, y>0, implies that the prescribedmembership dues are 'adequate' in the sense, that on average, thelodge has annual revenues in surplus of annual operating expensesand expected claims. If y=0, then the prescribed price is enoughto just cover the insurer's expected liabilities after operatingexpenses. Negative risk loading, y<0, reveals that membershipdues are inadequate. -1<y<0 suggests that at the charged price,net revenues are insufficient for meeting expected claims, henceon average the insurer will be running down accumulated reserves,or assets, to meet claims. Finally, if n<-1, then the price ofmembership is not even sufficient to meet the insurer's operatingexpenses.If the dues, P, and the stipulated weekly sick benefit wereperfectly responsive to changes in the lodge's overhead costs, orto changes in the membership's expected insurance liabilities dueto aging members or turnover in the lodge's membership, then thedegree of risk loading y could have remained constant over time.103An interesting feature of IOOFBC lodges, however, was that thedues charged and the prescribed weekly sick benefit providedrarely changed over the period 1890 to 1932. 1°8 This implies thatany qualitative changes in the lodge's membership that affectedthe lodge's expected liabilities, or changes in overhead costs,were entirely borne by adjustments in it, the risk loadingparameter. Thus, the implicit degree of risk loading of thelodge's pricing can tell us whether pricing was ever a problem inIOOFBC lodges, and whether the adequacy of the lodges' pricingwas deteriorating over time.For an evaluation of the IOOFBC insurance contract andsystem, the implicit degree of risk loading is an intuitivelyappealing measure relative to the valuation. Given thecharacterization of fraternal insurance as a pay-as-you-gosystem, we are interested in whether the price charged wasadequate to meet lodge liabilities in a given year, and whetherthis adequacy changed over time. The risk loading measureassesses the adequacy of the insurance pricing based upon such acurrent cost, or pay-as-you-go, definition. The valuationmeasure defines adequacy as more of a long run concept; willpricing today be adequate to meet claims today and in the future?While this difference in information provided by the measures'During the depression of the 1930s, some IOOFBC lodgesreduced the value of the stipulated sick benefits or suspendedpayment of them altogether. This will be addressed later in theChapter. The observed rigidity of Dues and Benefits was not uniqueto the IOOFBC lodges. Gilbert (1965) notes this rigidity waswidespread in British Friendly Societies.104leads me to choose the risk loading measure, the valuationmeasure was probably more suited to needs of fraternalorganizations. I am, ex post, analysing whether the IOOFBClodges were able to meet their annual expected liabilities. AnIOOFBC leader before 1930 faced a different problem. At theprescribed dues and benefits, could they have operatedindefinitely? The valuation was in essence a pessimistic measuresince it was based on the assumption that no more joiners wouldcome to the lodge. This assumption meant that the valuationaccounted for the worst case scenario, the winding up of thelodge. Hence the measure required an assumed interest rate toevaluate the adequacy of lodge reserves to meet the lifetimeexpected claims of the membership being evaluated.Since the risk loading measure evaluates the adequacy ofprescribed dues on an annual basis, it is independent of theinterest rate. Thus, this measure is not affected by assumptionsover what was the appropriate rate of interest to be used. Also,as mentioned earlier, the valuation measure does not allow forturnover in the membership and consequent changes in the expectedliabilities. If it were desired, the risk loading measure couldbe summed and discounted to construct a measure like thevaluation. Essentially it would measure contributions relativeto expected liabilities like the valuation, but it would allowfor changes in the membership over time.A shortcoming of both the valuation and risk loadingmeasures is that neither measure accounts for the likelihood that105a lodge could have been bankrupted. The probability of ruinprovides a context for analysing a lodge's financial conditionand safety of benefit provision. By definition the probabilityof ruin describes the likelihood that sickness benefit claims ina given year are large enough to exhaust available assets (orreserves) and net revenues, hence, bankrupting the lodge. Forinstance, if the risk loading measure shows that membership dueswere inadequate to meet expected claims, then the probability ofruin, which incorporates assets and accumulated funds, suggestswhether or not this feature of lodge pricing was of anyconsequence.Formally the probability of ruin can be expressed as:TR-c441P R = Pr [ Z> TR- C+A] =1- f dF (Z)0(4.5)TR are the annual total revenues, and A is the value of thelodge's assets at the beginning of the year. F(Z) is thedistribution function of the aggregate claim. Obviously, boththe level and behaviour of PR over time are related to the degreeof risk loading v. If it is positive, then on average the lodgeshould be accumulating assets and the probability of ruin isdecreasing, while if it is negative, the probability of ruin, orthe likelihood of a lodge's insolvency, is increasing.Both the risk loading measures and the probability of ruinrequire information on the distribution of the aggregate sicknessbenefit claims, F(Z), and its moments. Characterizing this106distribution is the subject of the next section.4.4 CHARACTERIZING THE AGGREGATE CLAIM PROCESSCharacterizing a lodge's degree of risk loading andprobability of ruin, involves estimating a lodge's 'loss', orclaims, distribution F(Z). Beard, Pentinkanen and Pesonan (1984)suggest using a normal approximation for the aggregate claimsprocess when the number of claims is large. This approximationwould greatly simplify evaluating probabilities of ruin andexpected annual claims. The empirical distribution of 213observed aggregate claims from seven IOOFBC lodges over theperiod 1891 to 1950 is presented in Figure 4.1. The distributionappears to be non-normal as it is skewed to the right. Figure4.2, which presents the empirical distributions for observationsfrom lodges with memberships greater than 50 members and lessthan 50 members, indicates that the normal approximation is lessreasonable the smaller is the lodge membership. An alternativeestimation strategy is needed.Based on collective risk theory, Beard et al. (1984)describe an alternative method for characterizing lossdistributions that as an approximation should be adequate forOddfellows lodges. With the collective method, the individualpolicy structure is ignored and the portfolio is considered as awhole. 1°9 The 'process' considered is one in which only times and109The alternative method, referred to as the individual method,is to consider the lodge 'portfolio' of contracts covering members107number of events (claims) are recorded. No attention is given tothe particular policies from which the claims have arisen. Thismethod will be used for characterizing the lodges' aggregate lossdistributions since an abundance of data for IOOFBC lodges thatsuits this method exist in the Proceedings of the Annual Sessionsof the Grand Lodge of the I.O.O.F.B.C., 1889-1950.Beard et al. describe the distribution of the aggregateclaim under the collective approach as a Compound Poisson Processthat consists of a claim number process, and a claim sizedistribution. The motivation for this distribution isstraightforward. Suppose all that was observed for a lodge was atotal sickness benefit payments of B' for a given year. Thisobserved total claim could have been the result of one memberclaiming B'; or two members claiming a total of B'; or threemembers claiming a total of B', etc... Given this decomposition,the desired approximation for the actual claims process accountsfor the likelihood of different numbers of claims, and thelikelihood that a given number of claims would generate theobserved claim size. Thus, the claim number process describesthe number of claims arising from the membership of an individuallodge, while the claim size distribution concerns the sums ofagainst a loss of income due to illness, as made up of a number ofindividual policies, each with its own probability of a claim (e.g.the probability that a member of age a claims at least a week ofsickness benefit is p(a)). The total claim is the sum of thecontributions from individual policies and their associatedprobabilities. While this method would be ideal, it is not suitedto the data I have.108individual claim sizes, which is the aggregate claim.The probability distribution of the total amount of claims(also referred to as the aggregate claim or total losses),Z= Zi Zi 0=1incurred during a one year time interval for a membership of sizeM can be characterized as:F(Z)= p(k) S k (Z) .r16 (4.6)p(k) is a function which gives the probability that the number ofclaims in one year is equal to k, and Sk (Z) is the distributionfunction for the sum of k claim amounts.If certain conditions are satisfied m, the claims numberprocess p(k) can be described by the Poisson distribution:p(k) =Pr [No . of Claims=k] -  ak.e-8 k! (4.7)where 6>0 is a parameter indicating the average number of claimsin a time unit. For the Poisson process the expected number ofclaims and the variance of the number of claims are;mBeard et al. assume that the claims number process satisfiesthe following conditions: 1) events occurring in two disjointedtime intervals are independent; 2) the number of events in a timeinterval depends only on the length of the time interval, and noton its initial value; and 3) that the probability that more thanone event will occur at the same time and the probability that aninfinite number of events will occur in some finite time intervalare both zero.109E[k] =8 =Tar [k] .^ (4.8)The occurrence of claims depends on both the number of lodgemembers, and the chance that a particular member will make aclaim. The Poisson process arises as a product of these twoinfluences.The second component of the compound distribution is theclaims size process, S k (Z). Let z i>0 represent an individualmember's claim against the lodge's funds. z i is a randomvariable and it is assumed that individual claim sizes aremutually independent and equally distributed with thedistribution function S i (z i). Assume that the distributionfunction for an individual claim is known and identical for allindividuals, so Sj•)=S(•) for all i=1,...M members. Since itis assumed that the individual claims (the z i) are mutuallyindependent, the sum of the k claim amounts has the distributionfunction Sk (Z), where Sk (Z) is the kth convolution of thedistribution function S(•) which is assumed to be known.Implicitly, if member i does not make a claim, then z i=0.If a member becomes sick and claims benefits, there is someminimum benefit payment B>0, so z i>0 for any member who makes aclaim. Suppose that for members who collect benefits, theirindividual claim sizes are distributed exponentially so:110ME[E zi ] =—k2=3.^ . (4.12)S(zi ) =1 - e - I3z1The expected claim size for an individual claimant ut is:00E[zi ] =fzidS (zi ) = i .0(4.9)(4.10)When the individual claim sizes have independent and identicalexponential distributions, the sum of k claims has a Gammadistribution. So for a given number of claims k,zSk (Z) f  (1113)1c-113e-ul3 dur(k)0(4.11)with the expected total claimSince the number of claims k is an integer, the Gamma functionr(k)=(k-1)!. The empirical distributions in Figures 1 and 2 havea general shape that is consistent with the shape of a gammadistribution.For the compound Poisson distribution, the expectedaggregate claim for a lodge is:"The distinction that this is the average claim size for amember who claims is important. Clearly, for a given member whomay or may not claim, the expected claim size must account for thelikelihood of no claim so that average claim size will be lowerthan that given in (4.10). The expected claim size for members whoclaim, however, is the relevant value for this analysis.111RE[z]lzdflz)=„P .0 (4.13)It is the product of the expected number of claims defined in(4.8) and the expected claim size of an individual defined in(4.10). The variance of the aggregate claim is:8Var[Z] =—p2 (4.14)To estimate the moments of F(Z), and to evaluate F(Z) forprobabilities of ruin, we need to recover estimates of 6 and fl.Suppose that for 1=1,...,n lodges, we observe pairs of numbers ofclaims k and the total value of claims paid Z, so for eachobservation 1 we observe {k 1 , Z 1 } ^Notice that if k1=0, then Z 1=0with probability one. If k 1>0, then Z 1>0 since there is a minimumclaim size associated with any claim. For this reason, F(Z) canbe thought of as having a mass point at a claim size of zero, anda continuous density for all Z>0. When the claim number processis Poisson, the likelihood of observing an aggregate claim ofzero dollars is:F(0) =Pr [k=0] =e -8 .^ (4.15)When kl>0 the likelihood of observing a {k 1 ,Z 1} combination isgiven by the density,f(Z) - 8 ke -8 .  (ZP) k-I- Pe -ztl k!^r(k)^' (4.16)Define D 1=0 if Z 1=0, and D 1=1 if Z 1>0. The contribution of the lth112observation to the likelihood function is:11 . (e -8 ) (1). ( okie-6 .ki !^r (xi))1).z,1^k -1^-ZIPRic.' (zip) 1 p e^D1=e 6 u ^ )k1 ! r (k)1.The Log of the likelihood function is:LLF=log (L) =r log (//) .(4.17)(4.18)where n is the number of observations.Time invariant covariates, denoted by X, to control fordifferences in the extent and intensity of a lodge's exposure torisk can be introduced with8 (X) =exp (X13) , and, p (X) =exp (X4) .^(4.19)Estimates of 6(X) and fl(X) can be obtained with maximumlikelihood estimation of the log likelihood function definedabove in (4.18).4.5 DATA AND ESTIMATIONData for this analysis are from the 1891 to 1950 Semi-Annualand Annual Returns from seven IOOFBC lodges for the period 1891113to 1950. 112 From these Returns, the following information wasobtained for each lodge for the year of observation: the numberof members; revenues from dues; revenues from admission anddegree fees; revenues from rents and interest; and revenues fromall other sources. Also obtained were the annual expenditure onsick claims 113 ; the number of weeks claimed; the number ofclaimants; total relief expenditure including funeral benefitsand other special relief; current or operating expenses; and thevalue of lodge assets. A detailed discussion of these data canbe found in the accompanying Appendix 2. These data representthe full financial and membership history of each lodge.The seven IOOFBC lodges examined in this paper representthree generations of Odd Fellows lodges. 114 The oldest lodges in112The Constitution of the I.O.O.F.B.C. required all subordinatelodges to complete Semi-Annual Returns in June and December of eachyear. The Semi-Annual Returns contained information on anyadditions or deductions from a lodge's membership, and the value ofrevenues received, by source, for the Return Period. The AnnualReturns were completed in December of each year. These Returnslisted the names of all members, relief expenditures, currentexpenses, and the value of lodge Assets.113Expenditure on sick claims includes two components, paymentsof weekly sick benefits and payment of direct medical expenses. Itis impossible to identify directly these two components since onlythe total is reported. Because the value of the weekly benefit wastypically reduced after 6 and 12 months of continuous claims, andbecause I cannot identify the length of individual claim periods,I cannot perfectly infer the benefit component of the total fromthe total number of weeks claimed.114Please see the accompanying data Appendix for a discussionof the selection of lodges used in this study. When lodges closed,their membership register, and typically miscellaneous otherrecords, were sent to the Grand Lodge. Thus, these lodges wereselected for this analysis because I have detailed membership datafor these lodges that will be used in future research. Corbin 64114this sample are Cloverdale no. 15, opened in 1891, and Duncan no.17 opened in 1892. In 1897, Silver City no. 39 (at Sandon B.C.)and Slocan City no. 40 opened in the Kootenay region of BritishColumbia. Opened in 1910, were Prince Rupert no. 63 and Corbinno. 64. Finally, Maple Ridge no. 32 opened in Haney B.C. in1922. Table 4.1 shows that these lodges had smaller membershipsthan the IOOFBC average. This is not surprising as eleven`urban' lodges, located in Vancouver, Victoria, and NewWestminster, that all had memberships of greater than 200,accounted for 40 per cent of the total I.O.O.F.B.C. membership. ""With the exception of Prince Rupert, the lodges in thissample were located in small towns. Cloverdale, a farming andrailroad community in the Fraser Valley, had populations of 300in 1921 and 500 in 1928. Duncan, on Vancouver Island, was alogging and mining town with a population of 1,729 in 1929, and3,500 in 1935. Slocan and Sandon were both mining towns in theKootenay region of British Columbia. Sandon's population was 400in 1909, 300 in 1918, 600 in 1921, 300 in 1928, and 200 in 1935.Slocan had a population of 250 in 1918, 450 in 1928, and 200 in1935. Prince Rupert, on the northwest coast of British Columbia,was the first lodge in this sample to close in 1935; and the lastto close was Cloverdale in 1980. These were not the only lodgeswhich closed. Many that closed were subsequently "merged" withother lodges so the records went to the new lodge rather than theGrand Lodge. Thus, the seven lodges are a subset of lodges whichclosed over the period 1891 to 1992.115Vancouver no. 8, with 350 members, had the largest membershipin 1928.115was a Grand Trunk Pacific Railway terminus and had fishing andmining industries. Prince Rupert's population was 3,000 in 1909,8,000 in 1921, 7,500 in 1929 and 6,350 in 1935. Corbin was acoal mining town located in south east B.C. near the Alberta-B.C.border. Corbin's population was 400 in 1918, 500 in 1929 and 400in 1935. 116For this analysis I have assumed that the aggregate claimsof each lodge were independent of other lodges' claims. 117 Ialso assume that for an individual lodge, aggregate claims in agiven year were independent of previous claims. Thus, I amtreating the annual observation of claims for each lodge asindependent draws from the aggregate claim process. The periodof data used for the estimation of the aggregate claims processis restricted to 1891 to 1932. Up until 1932, all lodges chargedannual dues of 12 dollars in return for a weekly sick benefit of5 to 10 dollars. The data, and reports in the AnnualProceedings, suggest that after 1932, some of these lodgessuspended benefit operations altogether, while others reduced thevalue of the weekly benefit, or established waiting periods,and/or set a maximum number of weeks that benefits could bereceived. Since suspended benefit provision, or partiallysuspended benefit provision, are difficult to identify in these116All of this information was obtained from various volumes ofHenderson's and Wrigley's B.C. Directories.117This assumption still admits common `shocks' that may havehit all lodges in the same year, such as the flu epidemic of 1919.116data, including observations from the post-1932 years could biasthe estimated expected claim downward. Thus, the data set usedto estimate the parameters of the aggregate claim distributionconsisted of 213 observations generated by the seven IOOFBClodges over the period 1891 to 1932. The estimated distributionis used to predict expected benefit payments with the post-1932data to see how benefit provision changed in the depression. Theestimated distribution is also used to examine whether the 20IOOFBC lodges that closed before 1930 did so for financialreasons.In the estimation of the aggregate claims distribution,variables were included to capture both the extent and intensityof a lodge's risk exposure. To capture the effect of membershipsize on the aggregate claim, a proxy for the number of 'eligible'members (EM) for collecting benefits was included in the expectednumber of claims parameter, 6(X), to reflect the likelihood thatmore members implies more claims. Since eligible members couldnot have their dues more than 13 weeks in arrears, under theassumption that eligible members had paid their full $12 in duesthat year, the number of eligible members is proxied by thenumber of members multiplied by the ratio of dues revenues permember to $12. This measure is a crude proxy but is preferableto using the unadjusted number of members which clearlyoverstates a lodge's extent of exposure to claims, especiallyduring economic downturns. Table 4.2A presents the average duesrevenues per member and the average proportion of eligible117members. The impact of the depression on dues revenues and theimplied proportion of members eligible for benefits is striking.Cloverdale 15 appears to have had the least disruption over thisperiod. These tables also reveal that the lodges used in thisanalysis suffered more on average in the depression than the restof the IOOFBC lodges. With the exception of Cloverdale, thelodges also had persistently lower eligibility rates than theIOOFBC average.The second group of variables that are incorporated into theexpected number of claims parameter 6 and also in the claim sizeparameter 0, are 'age' proxy variables that are intended tocapture the effects of increasing intensity of risk exposure fora lodge. One of the hypothesized problems with fraternalsickness insurance was that the lodge memberships had increasingproportions of high risk, older members the longer the lodgeoperated. Thus, it is likely that lodges experienced increasingnumbers of claims and larger average claim sizes the longer thelodge operated. To try to capture the influence of an agingmembership, dummy variables constructed from the number of yearsa lodge had operated are included in the estimation to proxy anaging membership. 118 If the observed claim was for a lodge thatmIt would also be possible to use the lodge age directly, butit is doubtful that much would be gained from doing so. Wheredetailed age and membership duration information was available,there appears to have been little movement in the average age oflodge members before 1930. For Cloverdale no. 15 (opened in 1891),the average age of lodge members was 37.1 in 1909, 40.4 in 1919,and 40.4 in 1929. For a detailed discussion, see Chapter 6.118had operated more than 10 years and no more than 20 years, D 10=1;more than 20 years and no more than 30 years, Dm= 1; and if theobservation was for a lodge that had operated for more than 30years, D30=1. The underlying assumption of these variables, isthat a lodge in its second decade of operation had, on average,more older members than a lodge in its first decade of operationand as a result, could expect to have more claims, and largerclaim sizes. 119 Finally, because lodges often opened in mid-year,or may not have been fully operational soon after opening, anadditional 'age' variable is included. If the observed claim isfrom a lodge in its first two years of operation, D0 =1.Observed aggregate claims, numbers of claims, and thevariables just described were used to estimate the log of thelikelihood function defined by (4.17) and (4.18) with thefollowing parameterizations of S and 13:8 ( x) =exp ( (61 0 4-eiEM+02DopEN+63Dio +04Dzo +05D3o) )( X) =exp (- (eo+e 1DopEN+e2D10 + .3D2o +4)4D3o) ) (4.20)Note that the coefficients in (4.20) are pre-multiplied by -1.Table 4.3 presents the estimated coefficients of the estimatedexpected aggregate claim distribution. As predicted, theexpected number of claims increases with the extent of exposure119It is possible that these variables may be picking up periodeffects rather than the influence of an aging membership as Iassert since most of the D 20 and D30 observations are from the 1920sand early 1930s. Thus, period specific dummy variables wereincluded in one estimation to ensure that higher claims were notspecific to a given period. There was no significant periodeffect.119as measured by the number of eligible members since thecoefficient on EM is significantly less than zero. The agedummies that proxy intensity of a lodge's exposure to risksuggest that lodges in the first two years of operation hadsignificantly fewer claims than lodges in the third to tenthyears of operation. Lodges in their eleventh to twentieth yearsof operation showed no significant difference in expected numberof claims or average claim size. Finally, the coefficients on D20and D30 suggest that lodges beyond the second decade of operationshad significantly more claims but insignificantly larger averageclaim sizes. The estimated claims distribution suggests that,relative to the first decade of operations, lodges did experiencehigher annual aggregate claim sizes over time as the membership`aged' .120In general, the estimated aggregate claim distributionperforms well in predicting the expected aggregate claims.Recall that fitted expected aggregate claim is given by:8 oilE[z] - 0 (2)Table 4.4 presents the expected dollar value of sickness benefitclaims per member by decade and below in brackets, thecorresponding observed dollar value of sickness benefit claimspaid per member by decade. The first three columns of the tablesuggest that for the period 1891 to 1929, the estimatedmiRe know this is not the result of inflation since the nominalbenefit levels were fixed over this period.120distribution provides reasonable estimates of the expected claimper member. The only notable exception is Sandon no. 39 1910-1919, where the average benefit payment per member for the decadewas $1.89 when the average of the predicted payment per member is$3.43. A likely explanation of this is that Sandon no. 39 had nobenefit claims in 1911, 1912, and 1913; years in which miningoutput in the area appears to have been negligible 121 , so it ispossible that the eligible members proxy overstates the actualextent of the lodge's exposure to claims for those years. 122 Thepredicted claims also suggest that sickness benefit payments tooka larger share of a member's dues revenues as the lodges aged.Because the data used in the estimation of the aggregateclaim process were the sick relief payments for the period 1891to 1932 only, columns (4) 1930-1939, and (5) 1940-1950 ofthe table represent out of sample predictions. Comparing theexpected payments with the observed payments in columns (4) and(5) of the table, it appears that in the depression period onlyPrince Rupert 63 was curtailing benefit activities. The lodgewas paying an average of $0.71 per member over the decade when$2.70 per member was predicted if the same claims distributionapplied. The IOOFBC averages suggest that cases like PrincemTim Karlsson, "Silver Production in the Slocan MiningDistrict" (Mimeograph, University of British Columbia, 1989).122Recall, that members had to be unable to follow their regularwage earning occupation to qualify for sick benefits. Given thatthere was virtually no mining activity, it is likely that manymembers who were miners had left the town, or were unemployed butstill on the membership roles.121Rupert were exceptional as average claim payments remain close topre-depression levels. 123 It also appears that both Sandon 39 andCorbin 64 continued to provide benefits as they had in the pastright up until they closed in 1937 and 1935 respectively. Overthe period 1940-1950, it appears that the remaining lodges in thesample have significantly curtailed sick benefit activity as thepredicted claim per member clearly overstates the benefits paidper member. This clearly indicates that sick relief paymentpatterns changed after the depression, with the actual paymentsbeing significantly lower than expected.The patterns of claims described in the literature insection 4.2 are present in these data. The share of duesrevenues going towards paying sick claims was increasing aslodges 'aged'. Two lodges closed in the depression; anothersuspended benefit provision. Finally, after the depression, theI.O.O.F.B.C. appears to be abandoning its provision of sicknessbenefits. The remaining task is to examine whether the observedclaims and their subsequent increases were of any consequence tothe financial viability of fraternal lodges as the literaturesuggests; and to determine whether financial problems associatedwith benefit provision can account for the IOOFBC's abandonment123Some of the reduction in claims paid per member in thedepression reflects the situation that I.O.O.F.B.C. lodges retainedmembers who would have been suspended for non-payment of dues inthe past. Most of these retained members would have beenineligible for benefits since they were either in arrears orunemployed. The impact of this retention of ineligible members, isthat the observed claim per member falls.122of sickness insurance activities. It is to these issues that Inow turn.4.6 ANALYSISThe expected annual claims were generated for eachobservation using the estimated coefficients in Table 4.3 and thespecifications for (3(X) and 6(X) given in (4.20). Risk loadingmeasures, as defined in equation (4.4), were constructed withthese estimated expected sickness benefit claims, annual revenue,cost and membership data for the seven lodges in the sample.Recall that the risk loading measure compares revenues net ofnon-sickness benefit related expenditures to expected totalsickness benefits. Here, the current expenses include all lodgeexpenditures except lodge sick benefit payments. Currentexpenses do include expenditures on funeral benefits and other(non-sickness) "relief". m Hence, the risk loading measureindicates the adequacy of net revenues for meeting expectedsickness benefit payments.Risk loading measures were first calculated for thehypothetical situation that membership dues were the only' 24These expenditures are included in current expenses ratherthan included in relief expenditure or excluded altogether forseveral reasons. Funeral benefits were often funded throughassessments rather than dues, and as such were not pre-paidexpenditures, so there is limited 'risk' associated with them.Because the Lodge Semi-Annual Returns reported dues and assessmentrevenues received to pay for funeral benefits, it is necessary tonet them out as a cost. Sick claims accounted for the bulk ofrelief expenditures, usually over 90% of the total.123revenues coming into the lodge, and hence had to cover allexpenses. The risk loading estimates calculated using duesrevenues only, are presented in Table 4.5. For most of theperiod 1891-1929, after current expenses, dues of $12 were notadequate to meet current expected claims. Not only were the duesinadequate, the risk loading measures show some deteriorationover time. Since the lodges were not accumulating reserves outof dues alone, dues were also insufficient to meet futurepotentially higher claims payments. Only Cloverdale 15 hadpositive average risk loading over the entire period 1891 to 1929(Column 6). This reflects the fact that Cloverdale hadrelatively low operating expenses (see Table 4.7), and becauseturnover, or members quitting appears to have been less of aproblem than in the other lodges (see Table 4.2). After 1929,none of the lodges have positive risk loading. After 1939, onlyone of the four remaining lodges could meet lodge operatingexpenses out of dues alone.Looking at Table 4.2, Average Dues Per Member, Table 4.4,Average Expected Claim Per Member, and Table 4.7 Average CurrentExpenses Per Member, the sources of the deterioration in the riskloading measure become apparent. Table 4.4 shows that over time,a greater share of dues revenues were going to meet expectedclaims. Table 4.7 reveals that Cloverdale 15 and Duncan 17experienced some inflation in operating expenses per member in124the 1920s. 125 In the 1930s, the lodges experienced a precipitousdecline in dues revenues per member (see Table 4.2) with anincrease in operating costs per member. The increase in costsmay reflect the increased burden per member of the fixed costs ofoperating the lodge as lodge memberships contracted. 126 Finally,operating expenses per member in the 1940s are double those ofthe previous decade suggesting that the inflation of the 1940swas a problem for these lodges with fixed nominal dues.The risk loading measure constructed from observed annualdues revenues yields evidence about the adequacy of lodge`pricing' that is consistent with Moffrey's (1910) pessimisticview of level dues and benefits that was based upon valuations ofIOOFMU lodges. Given that the risk loading measure is typicallynegative, it is clear that these lodges never had net duesrevenues in surplus of expected sickness benefit liabilities.This would suggest that if present value calculations, similar toa valuation, were completed for these lodges, the calculationswould reveal that these lodges had deficient pricing.Next, risk loading measures are calculated allowing for theother sources of revenue for the lodges. In particular, the50perating costs per member were always higher in the earlyyears of lodge operations since they typically had to accumulateI.O.O.F. paraphernalia, record books, etc... In some cases, lossesdue to fire, such as for Cloverdale 15 in 1894, resulted inexceptionally large once and for all costs that influence theaverage operating expenditures.'26This is a conjecture because fixed costs of lodge operationscannot be identified since only total costs were reported in theAnnual Returns.125lodges received initiation and degree fees from new joiners, andthe lodges earned rents from their properties, and interestincome from invested funds. Table 4.8 shows the total revenuesper member and the ratio of dues revenues to total revenues.Typically, dues accounted for only 60 to 75 per cent of lodgerevenues, so these other sources were significant. Once theseadditional revenues are accounted for, the risk loading measurescalculated with total lodge revenues, in Table 4.6, show thatafter covering current expenses, total revenues were alwaysadequate to meet expected annual claims before 1929. Over 1930-1939, the average of the risk loading measure is substantiallylower than in the previous decades largely because dues revenuesfell dramatically, operating expenses did not, and income frominitiation fees was non-existent as few new joiners came to thelodges. Income from rents and interest also fell which increasedlodges' reliance on the lower dues revenues. Notice that inthree lodges, Cloverdale 15, Slocan 40, and Maple Ridge 32,revenues were still adequate to meet expected benefit payments.Of the four lodges with negative risk loading, dues were stilladequate to meet operating expenses. After 1939, revenues fromall sources returned to pre-depression levels but the riskloading measure is negative for Cloverdale 15 and Duncan 17because operating expenses were much higher. In general, therisk loading measure is substantially lower for the period after1929.Two conclusions can be drawn from the risk loading measures.126The first is that dues were not adequate on their own to meetexpected claims. The lodges, however, invested surplus revenuesfrom initiation and degree fees and dues from early in theiroperations, in properties and investments which generatedrevenues that subsidized later benefit provision.' Figure 4.3shows this pattern as it plots Cloverdale no. 15's initiation anddegree fees per member and revenues from rents and invested fundsper member against the year of operation. Notice the bulge inlodge income with the initial bulge of joiners, then the modest,but steady, income from other sources. Figure 4.4 which showsthe same information for Prince Rupert no. 63 indicates thatPrince Rupert did not achieve the same stream of earnings fromrents and interest. Once a lodge was established, the membershipdues were a toll paid by members to share in revenue generatingassets. In the context of a commercial firm, the members wereusing lodge 'profits' to subsidize benefit provision. The secondresult is that this system appeared to have been working up untilthe depression of the 1930s. During and after the depression therisk loading measures suggest that unless the members werewilling to liquidate assets to meet current claims, the systemneeded some reform in light of the dramatic inflation in lodgeInGiven the importance of invested funds, the IOOFBC GrandLodge issued the following suggestion. "In most places Lodges owntheir halls, and their enterprise in some instances in thisdirection may possibly lead to embarrassment and loss, especiallyin the less solid mining towns in the interior, and the Lodgesshould be very careful how they invest their funds." "GrandMaster's Report" Annual Proceedings of the Grand Lodge of theIOOFBC (1899), 1740-1741.127operating costs after World War II.The risk loading measure has demonstrated that on averagethe lodges could meet their claims, but over time, this abilitydeclined. The remaining question is how risky was the benefitprovision? How likely was it that these lodges would have becomeinsolvent? To answer these questions, probabilities of ruin forthe seven lodges were evaluated with the estimated coefficientsof the aggregate claims distribution presented in Table 4.3; theparameter specifications given in (4.20); the Poissonspecification given in (4.7); the Gamma specification given in(4.11); the reported value of assets from December of theprevious year128 ; and the revenues net of operating expenses andother non-sickness relief expenditure from the current year.This reflects the stock of assets at the beginning of the yearunder consideration, and the net addition to assets.For a given finite number of claims k, where k is a positiveinteger, if Z has a Gamma distribution with parameters k and f3;ks k (z) = 1 - T•  (Z(3) 1c-le -Z13 (k- 1) !Thus, using the following recursion to evaluate the Standardized1281Ip until 1926, lodges only reported the total value of theirassets, which included real estate, bonds, furniture and regalia,cash on hand and dues in arrears. Furniture and dues in arrearsare typically considered illegitimate assets for liquidation soideally they would not be included.128Gamma claim size distribution 129 ;S k (Z) =1-e-10[1+4+  (4)24..^4. (4)1c-132!^(k-1)!it is possible to evaluate numerically the probability of ruinPr [Zt>TR t -Ct +A t ]^p(k) .S k (TR t -Ct +A t) .Table 4.9 presents the average probabilities of ruin bydecade for the seven lodges. From these estimates, it appearsthat there was almost no chance that the lodges would have becomeinsolvent. Thus, even though the adequacy of the price ofmembership to meet expected claims deteriorated, it was of noimmediate financial consequence to the lodges. Even in thedepression, the lodges display no deterioration in theirprobability of ruin. Sandon 39 and Corbin 64 disappeared in thedepression, but both wound up with a significant amount ofassets. Sandon 39 primarily had bonds that were transferred toSlocan 40 when the two lodges `merged'. Sandon 39 apparentlydisappeared because there were no Oddfellows left in the town in129Mood, Graybill and Boes, Introduction to the Theory ofStatistics, 3rd Edition (New York: McGraw-Hill, 1974) 114. Forfl=1, Sk (Z) is called the incomplete gamma function. Thus, thestandardized Gamma distribution refers to the distribution of X=Zj3rather than Z.129the 1930s. 13° ^similar explanation can be made for Corbin 64'sdisappearance.While these lodges generally faced no risk of insolvency,two cases observed and displayed in Table 4.10 deserve some note.First, Cloverdale 15 was `ruined' in 1894 because the uninsuredlodge hall was destroyed by fire. 131 In this case, however,Oddfellows from a nearby IOOF lodge `visited' and donated moneyto the unfortunate Cloverdale membership to restore the lodge.The negative value of assets plus net revenues in that year,which automatically yields the probability of ruin equal to one,appears to result from the loss of lodge assets, but also fromthe purchase of a new lodge hall being included in currentexpenses. It appears that it was common to restore lodgesdestroyed by fire in the late nineteenth century, but there wasalso increasing encouragement from the Grand Lodge for130"August 16, 1935- Meeting of Silver City Lodge, No. 39,Sandon. Postponed. Bro. Neil Tattrie coming to my meeting atSlocan City, and informed me he was the only resident member atthat time in Sandon, making the request that the Charter not belifted as the members would be returning home when conditions werebetter." "Grand Master's Report: Official Visits," Proceedings ofthe Sixty-Second Annual Session of the Grand Lodge of BritishColumbia I.O.O.F. (1936), 6872.131Duncan 17 also has a probability of ruin of 1 in the sameyear, and it may be due to fire losses as well but this was notapparent in the Annual Proceedings of the Grand Lodge. Thus, likethe Cloverdale case, this probability may be the result of a book-keeping practice where borrowed funds were spent and included inoperating expenses.130subordinate lodges to acquire adequate fire insurance.' 32Tables 4.9 and 4.10 present evidence that lodges were mostprone to failure early in their operations before theyaccumulated any significant amount of assets. This finding isopposite to the situation Gosden (1961) describes (see section4.2). Prince Rupert 63 displays this pattern in its early years.It appears that because Prince Rupert had trouble retainingmembers as suggested by its low observed dues paid per member,most of its dues and initiation fee revenues were spent on lodgeoperating expenses. As a consequence, the lodge had little inthe way of funds available to invest. By the end of its firstdecade of operations, however, the lodge seems to have improvedits retention of members and established itself. Probabilitiesof ruin for the post 1926 period that were evaluated with lodgeassets net of the value of dues in arrears and the value of lodgefurniture and regalia reveal that Prince Rupert was, by then, afinancially healthy lodge)" Unlike the case where lodges weredestroyed by fire, lodges that had difficulties becomingestablished received advice and encouragement from the Grandlodge and other lodge memberships but no financial aid.mCloverdale no. 15's Hall was destroyed by fire again in 1904,but in that case they had fire insurance so they suffered less ofa financial loss. In the Annual Proceedings of 1904, the IOOFBCGrand Master noted that the "lodge had the great misfortune for thesecond time to lose its hall, with the contents. Loss on thebuilding was $2500, Insurance $1500."133Fees owed to the insurer and office furniture are typicallyconsidered inadmissible assets for liquidation when evaluating thefinancial condition of an insurance company.131So far the analysis has shown that fraternal insurers werenot inherently non-viable for financial reasons, and howfraternal insurers accomplished this without even charging duesadequate to meet annual liabilities. The question remains,however, are these findings simply the result of analysing abiased selection of financially healthy lodges? To address thispossibility, the risk loading measure and the probability of ruinmeasure were applied to data from the 20 IOOFBC lodges thatclosed before 1930. 134 Before 1930, a total of 84 IOOFBC lodgesopened. Given that almost a quarter of them closed before theDepression, it is obviously of some interest to find out if theyclosed for financial reasons.Table 4.11 presents the characteristics of the 20 lodgesthat closed, including their estimated probabilities of ruin inthe year that they closed. Of the 20 lodges, the AnnualProceedings of the IOOFBC Grand Lodge reported that 8 closed forthe same reasons as Sandon 39, and Corbin 64. There was adecline in mining activity, members left the towns and the lodgesclosed. 4 lodges that closed were small and appear to have beenin areas where the prospects of establishing a substantialmembership were limited. One example is North Bend where many of134The Compound distribution was also re-estimated using thedata from the seven lodges examined previously, but also the claimsand membership data from these twenty lodges.^The estimatedexpected claim changed very little.^The variance, with 511observations instead of the just the original 213, was smaller.Thus, the original estimated distribution is used in the analysissince it will provide a more pessimistic probability of ruin andhence a stronger result.132the members worked for the Canadian Pacific Railway. Thesemembers were frequently out "working on the line" thus holdingmeetings was difficult. 7 other lodges were "merged" with otherIOOFBC lodges in the same town. In most cases these mergersappear to have taken place to strengthen the position of theOddfellows in the town. In particular, the wave of mergers in1904 followed the suggestion of the Grand Lodge that onlyVancouver and Victoria were large enough to support more than onelodge. The merger of the New Westminster lodges followed thegreat fire in 1899 which destroyed most of the town of NewWestminster, including the lodge building of Royal City no. 13.In these mergers, the memberships and assets of the smallerlodges in the towns merged into the larger lodge(s) in the town.For example, when the membership of Selkirk 12 moved from DonaldB.C. to Revelstoke, it ultimately assumed the membership andassets of the existing, but smaller, lodge already in Revelstoke.Based on the estimated probabilities of ruin, it appearsthat these lodges did not close due to bankruptcy. None of thelodges appear to have had as precarious a financial condition asPrince Rupert no. 63 did in its first decade of operation. Thereare however, signs that some of these lodges may have developedfinancial problems. As suggested earlier, the long term successof an IOOFBC lodge lay in the membership's ability to generaterevenues from investments and properties to subsidize sickbenefit liabilities. Prince Rupert no. 63 had not establishedthese revenues sources early on and that is what contributed to133the early financial problems. Of the 20 lodges that closed, 12failed to establish these revenue streams as revenues from rentsand interests were below one dollar per member in each year theyoperated. Of the 12 lodges, 5 closed within 5 years of opening;3 closed after 7 years; 1 after 9 years; 1 after 10 years; and 2after 12 years.The fact that Prince Rupert no. 63 did not close suggeststhat the income characteristics of these lodges was not the wholeexplanation for their closing. In cases like these, however,lodges were more vulnerable to closing due to two factors,business conditions and heavy sickness claims. Camborne no.49 (9years of operation), Northfield no. 29 (3 years operating) andMission City no. 32 (3 years operating) closed because ofeconomic conditions in the towns (See Table 4.11).Five other lodges have a more interesting explanation forclosure, which demonstrates the vulnerability lodges faced earlyin their operations. In its fifth year of operation, Acme no. 14in Victoria experienced heavy sickness claims. The lodge openedin 1891 and by December of that year had 56 members and noassets. By 1894, the lodge had 104 members and $1,928 in assets.In 1895, only the fifth year of lodge operations, 16 of 97members claimed a total of $1,272 in sick benefits, equivalent to$13.11 per lodge member when dues per member were only $12! Thissize of claim was particularly large for such a new lodge as theaverage of claims per member in the IOOFBC was typically below $6per member (see Table 4.4). The assets of the lodge fell by134$600, but more significantly, the lodge lost 38 members by 1896,and by the time the lodge closed in 1897 there were only 63members and $785.75 in total assets. It appears that themembership lost confidence in the future of the lodge. Peerlessno. 33 in Victoria had a similar fate when in 1895, only itssecond year of operation, sick benefits paid per member were$8.60. The size of the membership fell in each year after fromits peak of 166 in 1895, to 114 in 1900 the year the lodgeclosed. Three other lodges experienced a similar fate,Centennial no. 20 in Nanaimo, Banner no. 31 in Ladysmith andCedar no. 35.As additional support that these lodges were vulnerable toclosure due to their lack of subsidizing revenues, consider thatPrince Rupert no. 63 never experienced sick benefit payments ofover $6 a member. Thus, in some sense, Prince Rupert's continuedoperation was a matter of luck (i.e., low claims). 135 Cloverdaleno. 15 in 1925 paid almost $10 per member in Sick Benefits in1925 but had substantial revenues from rents and interest, andalso had, by that time, substantial assets. Thus, older,established lodges like Cloverdale had the capacity to absorbperiods of heavy claims without the membership losing confidencein the Lodge.135It is possible that Prince Rupert's low claims was the resultof members agreeing not to collect benefits. A member was notcompelled to do this however, and if he applied for sick benefitsand was denied, he could appeal to the Grand Lodge to enforcepayment. To fund payments in that case, special assessments couldbe levied on the other members.1354.7 CONCLUSIONSFraternal sickness insurance did not disappear for financialreasons. Although prescribed membership dues of $12 per yearwere not adequate to meet lodge operating expenses and expectedsickness liabilities, lodge memberships invested funds frominitiation and degree fees to establish additional revenues fromrents earned from lodge properties, and from interest earned fromother lodge investments. Once these additional revenue sourcesare taken into account, it appears that there was almost nolikelihood that a lodge would be bankrupted by its sicknessinsurance activities. Lodges that failed to establish theseother revenue sources were vulnerable to closure. Alsovulnerable to closure were lodges in the early years ofoperation. Of 20 IOOFBC lodges that closed before 1930, heavyclaims within the first 5 to 10 years of operation appear to havecontributed to lodge closures in only 5 cases.This analysis suggests that even with the hazardous practiceof level dues and benefits, fraternal sickness insurance was notdisappearing because of inherent financial problems. In thissense, commercial principles like age graded fees were notnecessary as a solution to financial problems because it appearsthat there were no financial problems. This could at leastpartially explain the resistance of the IOOFBC and the IOOFMUmemberships to abandoning level dues and benefits to adopt agegraded fees. The valuation measures revealed that lodges wouldultimately face financial difficulties because it allowed only136for dues revenues, and not other revenue sources, and it ignoredthe impact of new joiners on the membership who may have keptaverage liabilities low over time.At the end of the Depression, IOOFBC lodges were stillviable insurers of sickness yet few workers were attracted to theIOOFBC for insurance after the Depression. The IOOFBC respondedto this development by withdrawing from its insurance function.The abandonment of sickness benefits by IOOFBC lodges through the1930s may have been the result of the deterioration in lodgerevenues. Even though there was no probability of bankruptcy,members may have been strongly opposed to running down assets tomeet claims. As described in Chapter 6, this appears to havebeen the case. In evaluating these developments it is crucial torecognize an underlying assumption about predicted postDepression expected liabilities used in the preceding analysis.While the measures allowed for changes in revenues andexpenditures (other than sickness claims), the measures imposethat the underlying claims process did not change in the 1930s.Thus, it assumes that the underlying age structure of themembership in the Depression was consistent with the pre-Depression period. As we shall see in the next two Chapters,this assumption is not a good description of this period in theIOOFBC's history. Thus, the withdrawal of the IOOFBC from thefield of sickness insurance had more to do with the impact of thesevere economic conditions of the Depression rather than inherentfinancial non-viability.137Table 4.1Average Membership Sizes(1)Year^1891-Lodge^Open 1909for 7(2)1910-1919IOOFBC Lodges,(3)1920-19291891-1950(4)1930-1939(5)1940-195015 1891 36.7 45.5 96.7 90.6 71.917 1892 49.8 70.6 58.0 50.0 46.739 1897 49.5 33.1 51.6 42.040 1897 33.2 35.3 45.8 42.1 51.863 1910 68.1 88.2 79.0 65.164 1910 48.3 65.5 40.632 1922 86.3 89.9 87.9Average for 7 42.4 50.2 69.8 65.9 64.7IOOFBC 87.3 114.2 126.3 104.9LEGENDLodge^Lodge Name^Location15 Cloverdale Cloverdale17^Duncan^Duncan39 Silver City^Sandon40 Slocan Slocan City63^Prince Rupert^Prince Rupert64 Corbin^Corbin32 Maple Ridge^Haney138Table 4.2AAverage Dues Revenues per Member for7 IOOFBC Lodges, 1891-1950(1)^(2)^(3)^(4)^(5)Year^1891-^1910-^1920-^1930-^1940-Lodge^Open 1909 1919 1929 1939 195015^1891^9.80^11.14^10.91^10.13^9.8517 1892 10.73 10.28 10.29 8.93 10.3139^1897^9.71^10.69^10.15^6.5740 1897 9.88 10.22 11.07 6.11^5.5963^1910 7.70^9.65^8.95 10.1364 1910 9.87 9.92 8.5232^1922^ 9.23^8.69^9.27Average for 7^10.06^9.98^10.20^8.42^9.03IOOFBC^ 10.77 10.84 11.29 10.26Table 4.2BAverage Proportion of Members Eligible for SickBenefits in 7 IOOFBC Lodges, 1891-1950(1)^(2)^(3)^(4)^(5)Year^1891-^1910-^1920-^1930-^1940-Lodge^Open 1909 1919 1929 1939 195015^1891^0.82^0.93^0.91^0.84^0.8217 1892 0.89 0.86 0.86 0.74 0.8639^1897^0.81^0.89^0.85^0.5540 1897 0.82 0.85 0.92 0.51^0.4763^1910 0.64^0.80^0.75 0.8564 1910 0.82 0.83 0.7132^1922^ 0.77^0.72^0.77Average for 7^0.84^0.83^0.85^0.70^0.75IOOFBC^ 0.87 0.90 0.94 0.85Notes: All seven lodges had prescribed dues of $12 per year forthe whole sample period. To be eligible for benefits, a member'sdues could not be more than 13 weeks in arrears. Eligiblemembership is calculated as total dues revenues divided by $12times the number of members. The IOOFBC numbers are the Orderwide averages. Only 4 of 64 lodges did not have dues of $12.139Table 4.3Estimated Coefficients for Compound Poisson DistributionPoisson ClaimVariable Coefficient St.Error T-RatioNumber EM -0.01782 0.00144 -12.397Parameter DOPEN 0.28135 0.18955 1.4843D10 0.02902 0.08916 0.3255Dm -0.17954 0.09445 -1.901D30 -0.39713 0.09827 -4.0413Constant -0.42091 0.09354 -4.4999Exponential DanN -0.11187 0.18422 -0.6073Claim Size D 10 0.047 0.09113 0.5158Parameter Dm 0.0563 0.09667 0.5821D30 0.12553 0.09125 1.3757Constant 3.6553 0.0658 55.555213 Observations. -LLF=3664.787. Under the null hypothesis thatall coefficients equal zero except the constants yields-LLFR=3779.837. The Likelihood Ratio Statistic=230.1 and isdistributed V(9).Expected Claim Sizes and Claim Numbers for Hypothetical Lodgesof 50, 100 and 150 Eligible MembersNo. MembersExpectedLodge^# ClaimsExpected $Claim SizeExpected $Total ClaimAge (5) ( 10) (60)50 DOPEN 2.80 34.59 96.93BASE 3.71 38.68 143.63D10 3.61 40.54 146.23Dm 4.44 40.92 181.83D30 5.52 43.85 242.23100 DopEN 6.83 34.59 236.27BASE 9.05 38.68 350.10D10 8.79 40.54 356.45Dm 10.83 40.92 443.21D30 13.46 43.85 590.44150 DopFN 16.65 34.59 575.93BASE 22.06 38.68 853.38D10 21.43 40.54 868.87Dm 26.40 40.92 1080.36D30 32.82 43.85 1439.24140Table 4.4Expected Dollars of Sick Relief Expended per Member for 7 IOOFBCLodges, 1891-1950(1)^(2)^(3)^(4)^(5)Year^1891-^1910-^1920-^1930-^1940-Lodge Open 1909 1919 1929 1939 195015^1891^2.83^3.35^4.96^4.34^3.97^(2.97)^(4.77)^(4.95)^(4.03)^(1.29)17^1892^2.68^2.95^4.00^3.88^4.42(2.64)^(2.25)^(3.27)^(3.58)^(0.76)39^1897^2.59^3.43^3.35^3.62(3.48)^(1.89)^(3.44)^(5.67)^(^)40^1897^2.91^3.07^3.69^3.64^3.10(1.97)^(2.60)^(3.89)^(2.67)^(1.48)63^1910 2.00^2.43^2.70^4.11(^)^(1.83)^(2.83)^(0.71)^(0.34)64^1910 2.52^2.41^3.01(^)^(2.72)^(2.56) (4.16)^( -- )32^1922 2.31^2.35^2.76(^)^(^)^(1.40) (1.79) (1.30)Average for 7^2.75^2.89^3.33^3.35^3.67(2.77)^(2.67)^(3.24) (2.91)^(1.03)IOOFBC^(5.33)^(4.93)^(5.43)^(4.70)NOTES: The expected sick relief paid per member is calculatedwith the coefficients in Table 4.3 and the specifications for6(X) and /3(X) given in (4.20). The term reported in bracketsbelow the expected claim is the corresponding average observedsick relief paid. The IOOFBC averages are much higher, but thisappears to largely be the influence of a few of the longeroperating and larger urban lodges, particularly Victoria no. 1which consistently paid exceptionally high average benefits.141Table 4.5Mean Estimated Risk Loading Factors Using Only NetDues Revenues for 7 IOOFBC Lodges1891-1950(1) (2) (3) (4) (5) (6) (7)Year 1891- 1910- 1920- 1930- 1940- 1891- 1930-Lodge Open 1909 1919 1929 1939 1950 1929 195015^1891 -0.23 0.87 0.26 -0.17 -1.69 0.18 -0.9717^1892 -1.22 1.20 0.16 -0.34 -0.67 -0.22 -0.5239^1897 -0.51 -0.79 -0.33 -1.81 -0.54 -1.8140^1897 -2.47 -0.48 0.02 -2.01 -4.58 -1.11 -3.3563^1910 -2.83 -1.12 -0.73 -2.14 -1.98 -1.4764^1910 -0.35 -0.61 -1.21 -0.48 -1.2132^1922 0.28 -0.94 0.28 -2.05Averagefor 7 Lodges-1.03 -0.40 -0.21 -0.94 -2.43 -0.53 -1.66NOTES: The risk loading measure was calculated with duesrevenues only, the estimated coefficients in Table 4.3 and thespecifications of 6(X) and fl(X) given in (4.20).Table 4.6Mean Estimated Risk Loading Factors Using NetTotal Revenues for 7 IOOFBC Lodges1891-1950YearLodge Open(1)1891-1909(2)1910-1919(3)1920-1929(4)1930-1939(5)1940-1950(6)1891-1929(7)1929-195015^1891 1.68 2.08 1.15 0.18 -0.66 1.64 -0.2617^1892 2.29 5.20 0.45 -0.16 -0.34 2.57 -0.2539^1897 1.89 0.92 1.79 -0.37 1.56 -0.3740^1897 1.50 1.37 3.45 3.18 1.11 2.05 2.1063^1910 0.34 0.42 -0.27 0.49 0.38 0.1364^1910 3.13 1.08 -0.24 2.11 -0.2432^1922 6.91 1.75 6.91 1.19Average 1.86 2.17 2.04 0.75 0.25 2.02 0.51for 7 LodgesNOTES: The positive risk loading for Slocan no. 40 in the 1930sis largely the result of Sandon no 39's assets being transferredto Slocan in the 1930s. Thus revenues of over $10,000 wererecorded in one year alone.142Table 4.7Average $ Current Expenses Per Member for7 IOOFBC Lodges, 1891-1950(1)^(2)^(3)^(4)^(5)^Year^1891- 1910- 1920- 1930- 1940-Lodge Open 1909^1919^1929^1939^195015^189117^189239^189740^189763^191064^191032^19226.13^2.95^3.51^5.12 12.3610.38^2.97^4.80^5.49^7.977.05^9.13^6.69^6.7712.41^7.27^7.01^7.87 14.6010.08^9.24^7.44 13.747.49^7.99^8.456.04^8.13 13.56Average for 7^8.83^6.65^6.47^6.95 12.45IOOFBC 5.99^6.38^7.10^7.80NOTES: Current expenses includes all general expenditures forthe operation of the lodge; i.e. property taxes or rent, heating,books, stationary, building repairs etc... It also includes theannual per capita taxes (0.5 to one dollar per member on thesemi-annual return) paid to Grand Lodge. It does not includeexpenditure on investments, charity or relief, or funeralbenefits. It does not include expenditure on sickness benefits.143Table 4.8AAverage Total Revenues Per Member for7 IOOFBC Lodges, 1891-1950YearLodge Open15^189117^189239^189740^189763^191064^191032^1922Average forIOOFBC7(1)1891-190914.0819.1713.9020.1316.75(2)1910-191915.0522.0616.2215.7413.2217.0116.5517.87(3)1920-192914.7411.6017.0823.3813.4014.0521.4416.3819.79(4)1930-193911.599.6611.7318.4510.1311.4514.5712.6819.82(5)1940-195013.9911.8322.9919.0119.2813.9917.17Average Ratiofor 7YearLodge Open15^189117^189239^189740^189763^191064^191032^1922Average for 7IOOFBCTable 4.8Bof Dues Revenues to Total RevenuesIOOFBC Lodges, 1891-1950(1)^(2)^(3)^(4)^(5)1891-^1910-^1920-^1930-^1940-1909^1919^1929^1939^19500.71^0.75^0.75^0.88^0.740.60^0.58^0.90^0.93^0.880.76^0.69^0.60^0.550.53^0.66^0.53^0.46^0.270.67^0.73^0.89^0.600.62^0.73^0.760.48^0.60^0.490.65^0.66^0.68^0.74^0.600.60^0.55^0.57^0.60Table 4.9AMean Estimated Probabilities of Ruin for 7 IOOFBCYearLodge Open(1)1891-1909Lodges,(2)1910-19191891-1950(3)1920-1929(4)1930-1939(5)1940-195015^1891 0.05270 0.00000 0.000007 0.00000 0.0000017^1892 0.05556 0.00000 0.000000 0.00000 0.0000039^1897 0.00000 0.00000 0.000000 0.0000040^1897 0.01165 0.00000 0.000000 0.00000 0.0000063^1910 0.00088 0.001308 0.00000 0.0000064^1910 0.00004 0.000000 0.0000032^1922 0.000000 0.00000 0.00000Average 0.03417 0.00015 0.000193 0.00000 0.00000for 7 LodgesNOTES: The probabilities of ruin reported in the table arecalculated with revenues reported from all sources and assetvalues, and are interpreted as the probability that claims in agiven year would exceed total assets and revenues net ofoperating expenses.Table 4.9BAverage Nominal Values of Lodge Assets Plus Net TotalYearLodge Open(1)1891-1909Revenues,(2)1910-19191891-1950(3)1920-1929(4)1930-1939(5)1940-195015^1891 2520 4936 7495 7616 643517^1892 3475 10765 2385 1732 203039^1897 2208 3238 6122 612340^1897 1889 3650 5656 6321 1099263^1910 900 2083 4113 663264^1910 1458 2695 206432^1922 4711 5973 7135Averagefor 7 Lodges2599 4158 4441 4956 6645145Table 4.10Periods of Risk Observed for the Seven IOOFBC LodgesLodge Year Members $ Assets+Net Rev.Probability^Notesof Ruin15 1891 28 324 0.001331^Lodge Opens1892 56 945 0.0000001893 53 2668 0.0000001894 50 -1199 1.000000^Lodge Destroyed1895 39 2169 0.000000 by fire 1894.1924 113 6989 0.0000011925 111 8189 0.0000011926 104 8220 0.0000001927 114 8528 0.0000001928 112 8705 0.0000401929 113 9332 0.0000271930 115 9110 0.00000017 1893 42 1348 0.000000^Lodge possibly1894 48 - 506 1.000000 destroyed by1895 45 2357 0.000000^fire 189440 1897 26 101 0.149145^Lodge opens1898 34 346 0.0020471899 36 834 0.0000051900 31 639 0.0002061901 36 1625 0.00000063 1910 27 320 0.001842^Lodge opens1911 60 492 0.0006111912 79 1289 0.0000001913 78 1330 0.0000001914 84 1602 0.0000001915 78 1179 0.0000001916 70 974 0.0000011917 67 756 0.0000441918 66 494 0.002556^Low eligibility1919 72 559 0.003778 Rates over this1920 80 931 0.000008^Period1921 79 692 0.0074771922 69 544 0.0055941923 72 1823 0.00000064 1910 32 396 0.000378^Lodge opens1911 39 1238 0.000000NOTES: A period of risk is defined as any period where theprobability of ruin is greater than 1 in a million. This tableis presented to illuminate the averages presented in Table 4.9.146Table 4.11IOOFBC Lodge Closures Before 1930Lodge/Location^Year^Year^Pr[Ruin)Open Close at Close29 Perseverance/Northfield 1894 1896^0.000143Membership:^OPEN:37^PEAK:37 (1894) CLOSE:28(Official Reason: Lodge having trouble since coal mines in areaclosing)30 Friendship/Nanaimo 1894^1897^0.000000Membership:^OPEN:61^PEAK:61 (1894) CLOSE:46(Official Reason: Merged with Black Diamond no. 5 in Nanaimo)32 Mission City/Mission 1894^1897^0.000051Membership:^OPEN:41^PEAK:41 (1894) CLOSE:22(Official Reason: Agricultural District suffering from thedepression, nearly all lodge brothers had left Mission City)14 Acme/Victoria^1891^1898^0.00000Membership:^OPEN:56^PEAK:104(1894) CLOSE:63(Official Reason: Merged with Dominion no.4 in Victoria)13 Royal City/New West.1890^1899^0.00000Membership:^OPEN:64^PEAK:90 (1893) CLOSE:67(Official Reason: Destroyed by fire that consumed town of NewWest.; merged with other lodge in town New West. No. 3)33 Peerless/Victoria 1894^1901^0.000000Membership:^OPEN:160 PEAK:166(1895) CLOSE:114(Official Reason: Merged with Victoria no.1 )37 Carson/Carson City 1896^1901^0.000011Membership:^OPEN:29^PEAK:31 (1898) CLOSE:16(Official Reason: Small membership unable to hold regularmeetings)35 Cedar/Cedar District 1895^1902^0.000014Membership:^OPEN:44^PEAK:54 (1898) CLOSE:42(Official Reason: Scattered Membership, merged with Centennialno. 20 in Nanaimo)25 Revelstoke/Revelstoke 1894^1904^0.00000Membership:^OPEN:26^PEAK:69 (1900) CLOSE:62(Official Reason: Merged with Selkirk no. 12, originally locatedin Donald B.C. but which relocated in Revelstoke)31 Banner/Ladysmith^1894^1904^0.000000Membership:^OPEN:83^PEAK:89 (1898) CLOSE:68(Official Reason: Merged with Harmony no. 6 in Ladysmith)147Table 4.11 continuedIOOFBC Lodge Closures Before 193029 Perseverance/Ladysmith 1901 1904^0.000000Membership:^OPEN:48^PEAK:51 (1904) CLOSE:51(Official Reason: Merged with Harmony no. 6 in Ladysmith)22 Gold Range/North Bend 1892 1906^0.00000Membership:^OPEN:20^PEAK:41 (1895) CLOSE:34(Official Reason: Many members work for CPR and were often outon the line. Since members in town irregularly, had troubleholding meetings)20 Centennial/Nanaimo 1892^1907^0.000665Membership:^OPEN:104 PEAK:144(1907) CLOSE:144(Official Reason: Merged with Black Diamond no. 5 in Nanaimo)41 Trout Lake/Trout Lake 1898^1912^0.000000Membership:^OPEN:20^PEAK:55 (1904) CLOSE:28(Official Reason: Mining failed in District, members left town)49 Camborne/Beaton^1903^1913^0.000029Membership:^OPEN:22^PEAK:29 (1906) CLOSE:20(Official Reason: Mining failed in District, members left town)53 Maple Leaf/Hosmer 1908^1914^0.000000Membership:^OPEN:57^PEAK:61 (1909) CLOSE:58(Official Reason: Merged with Mt. Fernie no. 47 in Fernie onaccount of business depression)44 Wildey Lodge/Moyie 1900^1915^0.000000Membership:^OPEN:32^PEAK:74 (1909) CLOSE:44(Official Reason: St. Eugene Mine closed and bulk of membershipleft Moyie)46 Snowshoe/Pheonix^1901^1920^0.000000Membership:^OPEN:39^PEAK:129(1915) CLOSE:88(Official Reason: Decline of mining in region)38 Boundary Valley/Greenwood 1897 1922^0.000000Membership:^OPEN:31^PEAK:106(1907) CLOSE:33(Official Reason: Decline of mining in the region)56 Mt. Ida/Salmon Arm 1908^1925^0.000000Membership:^OPEN:18^PEAK:33 (1913) CLOSE:26NOTES: The "Official Reasons" are the comments on lodge closuresor mergers found in the Annual Proceedings of the Grand Lodge ofthe IOOFBC.148Figure 4.2 JskC60403CaalDFIGURE 1: Empirical Distribution of theAggregate Claims, 1891-193204^s,p0302DIFigure 4.1o^an 4103® ®1D[EED ID 920 7fD gm inDollarsFIGURE a Empirical Distribution of theTotal Claims by Membership, 1891-19320 an tn an am In1W^ID ED 7CL1 MO 1103Dollars149FIGURE 4.3: Revenues joer Member bySource, Cloverdale no. 1 5, 1 8 9 1 —1 9 5 02520155g 1050^1891^1901^1911^1921^1931^19411896^1906^1916^1926^1936^1946YearDues^Initiation Fees^Rents and Interest1507 //Dues Initiation Fees^Rents and Interest0 i^,^1ii^1,1^1^i1910^1 19 e^1920 1 l93g ' 1 1941) ' I 194,4 I1FIGURE 4.4: Revenues per Member bySource, Pr. Rupert no. 63, 1 9 1 0 —1 95 0151CHAPTER 5Duration of Membership and the Demand for IOOFBCSickness Insurance5.1 INTRODUCTIONWhile the IOOFBC lodges survived the financial hardshipsexperienced in the 1930s, the severe economic conditions of theDepression devastated the lodge memberships. Between 1930 and1939, 37 per cent of IOOFBC members were suspended for non-payment of dues and the number of Oddfellows in British Columbiafell from a peak membership of 8,250 in 1928, to 5,568 by 1938;the lowest number of members since 1910. The Order neverregained its pre-Depression popularity. Before 1930, the IOOFBCaveraged over 4,000 initiations per decade. From 1940-1951,there were only 2,263 initiations. Why membership in the IOOFBCwas desirable before 1930 but not after 1940 is perplexing whenone considers that most of the IOOFBC subordinate lodges providedthe same sickness benefits and performed the same socialfunctions in 1940 as in 1930. While the development ofalternative sources of sickness and health insurance coincideswith the decline in fraternal insurance coverage, it is not clearwhether these developments were the cause, or the result, of thedecline in fraternal insurance. The following analysis showsthat the devastation of fraternal memberships in the 1930sboosted the growth of commercial and government insurance. Moreworkers than ever before were without insurance coverage. Also,the insurance coverage secured through Oddfellows membership was152worthless for workers who would have had little expectation ofremaining in the membership long enough to collect sicknessbenefits that were largely expected after age 45.Most explanations of the rise of commercial and governmentsocial insurance arrangements emphasize supply side influences.For example, Guest (1985) suggests that Constitutional barriersare an explanation for the lack of government social insuranceactivity in Canada before 1940. 136 Applebaum (1961) and Follmann(1965) both credit the rise of voluntary health insurancearrangements in the United States to changing labor legislationand tax treatment which favoured employers and unions bargainingover health care provision. Sautter (1991) suggests that onlyafter the Depression enlightened workers and employers as to theplight of unemployment for workers, did they address a problemthat had always existed. Why were Constitutional barriers togovernment social insurance initiatives eliminated after 1940 butnot before 1930? Why would unions provide insurance coveragethemselves before 1940 but negotiate its provision from employers136Guest (1985, 7-8) suggests that "as the need for health andwelfare provisions on a nationwide basis grew with Canada'sincreasing industrialization, the responsibility for initiating andpaying for those services was, by judicial interpretation (of theBritish North America Act), left firmly in the care of theprovinces who lacked the necessary finances to carry out theresponsibility... Insofar as the constitutional dilemma wasconcerned, advances in social welfare legislation had to wait uponone of three developments: a provincial government's willingnessand ability to finance needed measures; an amendment to the B.N.A.Act to permit federal entry into an area of jurisdiction otherwiseassigned to the provinces; or the development of strategems tosecure federal financial help without appearing to violate theprovisions of the B.N.A. Act."153only after the Depression? Something must have changed on thedemand side of insurance markets to support these supply sideinitiatives.To identify changes in the demand for fraternal coverage andfor alternative insurance arrangements, this Chapter examines theimpact of the great Depression upon the IOOFBC through ananalysis of the determinants of demand for fraternal membership.In particular, the probability that a worker remained in themembership, and hence had insurance coverage, is estimated forthree eras, 1891 to 1929, 1930 to 1939 and 1940 to 1980, usingmembership data from four IOOFBC lodges. The estimatedprobabilities reveal that the 1930s were unlike any other periodfor the IOOFBC. The probability that an Oddfellow would havebeen suspended in the 1930s was at least three times higher thanin the pre-Depression period. More men than ever before,including workers who previous to 1930 had relatively securesickness insurance coverage through IOOFBC membership, werewithout insurance coverage. Another consequence of the highrates of suspension was that the sickness insurance coveragesecured through IOOFBC membership was worthless in the Depressionsince members (and prospective members) had little expectation ofremaining in the membership long enough to collect sicknessbenefits that were primarily expected after age 45. Thus, unlikeearlier economic downturns, the severity of the Depressioncreated the demand conditions that supported the development ofalternative sources of insurance. Consistent with Buffum's and154Whaples' (1991) speculation on the erosion of the viability offraternal insurance, the devastation of fraternal memberships inthe 1930s was one influence which boosted the growth of marketinsurance, and ultimately state provision of insurance.5.2 DEPRESSION AND MEMBERSHIPTo understand how the severity of the economic conditionsimpacted on organizations like the IOOFBC, some discussion of theIOOFBC's membership before 1930, and the development ofalternative insurance arrangements is necessary. The decade 1910to 1919 provides an interesting comparison to the 1930s becauseit is a period within which an economic downturn was followed bya World War. Over the period 1910 to 1919, the number of IOOFBCmembers suspended was almost as high as the number of memberssuspended in the 1930s. While the IOOFBC went on to a prosperousperiod of growth through the 1920s, the IOOFBC membershipcontinued to decline after the Depression because few new memberswere attracted to the Order. In contrast, commercial insurers inthe field of sickness insurance made only modest gains in the1920s, while commercial insurers dominated the market after 1940(See Chapter 2).The membership history of the IOOFBC graphically displaysthe change in the attraction of Oddfellows membership for men inBritish Columbia between the pre- and post-Depression periods(Table 5.1). From 1874, the year of the Grand Lodge's formationin British Columbia, to 1951, the IOOFBC initiated 20,941155members. The overwhelming majority of initiations, 17,192 (82%of the 1874 to 1951 total) took place before 1930. During the1930s, there were only 1,586 initiations which was the lowesttotal for a decade since 1880 to 1889. This number ofinitiations is less than half of that for the last decade of the19th century when the Province's population was substantiallysmaller. Given the well-described severity of the economicconditions of the Depression, it is not surprising that there wasa low number of initiations. It is revealing, however, that thenumber of initiations remained low following the Depression, eventhough the population of British Columbia grew from 817,861 in1941 to 1,165,210 in 1951. Clearly, fraternalism did not retainits pre-Depression appeal for the men of British Columbia.The numbers of suspensions for non-payment of dues by decadepresent a similar picture. 3,490 suspensions in the 1930s (37%of 1930 total membership plus initiations 1930-39) was thehighest level of suspensions over the history of the IOOFBC for agiven decade. Numerically, the closest period to the Depressionwas the period 1910 to 1919 when the number of suspensions roseto 3,208.'37 Following the Depression, the number of suspensionswas much lower even as a percentage of membership.Figure 5.1, which shows the average number of initiationsand suspensions per lodge from 1874 to 1951, reveals additional137Members enlisted in the armed forces during World War I werenot suspended if their dues were in arrears. The IOOFBC lodgeseither forgave the dues in arrears or paid them directly for theenlisted members.156information about the periods previously discussed. Besides1895-1897, these two decades were the only periods that theaverage number of suspensions exceeded the average number ofinitiations. For 1910-1919, the total number of suspensions forthe decade was "high", but so was the decadal total ofinitiations. The average annual number of suspensions per lodgeincreased towards a peak of nearly 10 suspensions per lodge in1915-1916. The average annual initiations fell from a peak of 15per lodge in 1913 to a low of less than 5 per lodge. From 1914-1918, the average annual initiations were the lowest in thehistory of the Order before 1930. By 1919, initiations wereincreasing and suspensions were falling.While the high number of suspensions in the 1930s is worthyof note, it is the accompanying low number of initiations thatdistinguishes this decade from earlier periods. The averageannual number of suspensions in the 1930s were not as high asthose over 1915-1916 during World War I, but for the history ofthe Order the levels were "high". In the 1930s, the averagenumbers of initiations were regularly lower than the 1914-1918levels, and for a longer period of time. The numbers ofinitiations and suspensions over 1910-1919 suggest that the badtimes in this period were relatively severe, but also relativelybrief. The 1930s were also a severe period but the economicdownturn was far more prolonged.Another important difference between the 1910-1919 periodand the Depression period is that alternative insurance157arrangements prospered after the Depression but not in 1920s. Asdescribed in Chapter 2, the extent of sickness and healthinsurance provided by commercial insurers and through non-profitgroup health plans exploded after the Depression. In the publicsphere, Guest (1985) argues that the various levels of Canadiangovernment had little interest in issues of social security inthe 1920s. In contrast, the post-Depression period was one ofunprecedented expansion of government activity in the field ofsocial insurance. 138Clearly there had to be important changes on the supply sideof insurance, such as government legislation, constitutionalchanges and even fraternal organizations' own actions after 1939(these developments are the subject of Chapter 6) for thesealternative insurance arrangements to emerge. Ultimately,however, these changes would have required changes on the demandlmOne example of this difference is government interest inHealth Insurance in British Columbia. In 1919, a royal commissionon health care recommended a provincial system of health insuranceand outlined a plan for implementing it. The government neveracted upon the recommendation. In 1936, the Province of BritishColumbia passed the first Health Insurance Act in Canada. The Actregistered just over 78,000 workers (Bell [1939]) but was neverbrought into force due to the organized opposition of physicians(Guest [1980]). Applebaum (1961) describes the role of fraternalorganizations in defeating a similar health insurance movement inthe United States in 1919. The organizations felt that the healthinsurance would undermine their own importance. No such oppositionfrom fraternal organizations in the United States towards post-Depression health insurance developments is mentioned. Gilbert(1965) describes a similar development for timing of theintroduction of government provided pensions in Britain. He arguesthat prior to 1908, the friendly societies had successfullydefeated similar government initiatives. The policy was ultimatelyintroduced only once the clout of friendly societies had weakenedwith what he claimed were financial difficulties.158side. Thus, what remains to be explained is why fraternalismnever regained its pre-Depression appeal and how this was relatedto a prolonged period of disruption. Resolution of this issuelies in examining who was attracted to join Oddfellows lodges,how long they remained as members; and most importantly, whatfactors changed to diminish the appeal of fraternal sicknessinsurance to improve the appeal of the alternatives.5.3 SICKNESS BENEFITS AND DEMAND FOR FRATERNAL MEMBERSHIPAs a benefit of membership, sickness benefits were much likea pension with the majority of expected benefits coming after age45 139 (See Chapter 3). Thus, the influence of sickness benefitsupon the decision to join (or not to join) a fraternal lodgewould have depended upon the prospective joiner's expectations ofreceiving the benefits at some time in the future.The fraternal sickness insurance contract clearly reflectedthis age-related sickness experience. While all but a few lodgesin the IOOFBC prescribed membership dues of 12 dollars formembers of all ages from 1875 to 1950, and offered a weeklysickness benefit of 5 to 10 dollars (the value varied by lodgeand often by length of the illness) that was also independent ofa member's age, they charged initiation fees which were scaled bythe age at which an individual joined an IOOFBC lodge. Typically139The IOOF of Ontario data from 1896, analysed in Chapter 2,indicates that 72% of expected lifetime (ages 21-65) sicknessexperience came after age 45.159the fees were 10 dollars if the initiate was under thirty yearsof age; 15 dollars if between the ages of 30 and 40; 15 dollarsplus 2 dollars for every year over 40 if between 40 and 50 yearsof age; and 15 dollars plus 4 dollars for every year over 40years of age if the initiate was over 50 years of age. 140Suppose that each year a lodge member must decide whether ornot to pay his dues and remain in the lodge membership. If theannual dues are not paid, the lodge suspends the member for non-payment of dues. 141 Thus, the individual can choose between twostates, in the membership and out of the membership. For now,the transition of interest between the two states for a member isfrom membership to non-membership. The member can change statesat any time.If a member chose the non-membership state, he was unlikelyto return to membership due to the rules concerningreinstatement. If the member was suspended for non-payment ofdues, he could be reinstated within 12 months of the suspensionprovided that he paid one year's dues and received a favourablevote for reinstatement from two-thirds of the lodge membership.For members who had been suspended for longer than 12 months,they essentially had to reapply for membership. Unless the LodgeBy-Laws specified otherwise, they had to pay the initiation feemFor a discussion of the role of these age graded fees, seeChapters 3 and 4.1411.An IOOFBC member was suspended for non-payment of dues afterthey were 12 months in arrears on their dues.160corresponding to the age at which they applied for reinstatement.Given that few reinstatements were observed in IOOFBC lodges (seeTable 5.3), the decision to quit an IOOFBC lodge appears to havebeen a permanent one.Consider a simple two period model of fraternal membership.In the first period a member is "young" and, as a limiting case,he is never sick in the "young" period. When the member is "old"in the second period, there is some probability, 6, that he willbe sick and unable to work. Each of the two periods comprisesseveral years. In each year, a member has an annual income whichis an independent draw from the distribution p(Y). If the memberis sick in the old period, he suffers a loss of income of amountS(Y).Since there is no sickness in the young period, youngmembers only derive social enjoyment from membership. An oldmember however, receives the social benefits and he receives asickness benefit of amount B if he is sick and unable to work.The amount of utility a member derives from the social benefitsof membership may differ across members. For instance, somemembers who join only for the purposes of securing sicknessbenefits may derive no social utility from membership. Supposethat the social benefits of membership can be summarized in avariable 8 ; which is specific for each member i. Members withhigher values of e i value the social benefits of membership morethan members with lower^In the membership the worker derivese i from the social interaction associated with membership in both161his "young" period of membership and in his "old" period ofmembership.For each year of the "young" period, the worker has aninstantaneous utility function defined over income Y and thesocial benefits of membership 8, which is concave in botharguments:U(Y,e) , where (Io 0, U,0, U8es0 , Uyi3OFor the "old" period, the expected utility from membership can besummarized by a value function V(B,8) which is increasing in thesocial benefits of membership, and in the sick benefits. Tosimplify notation, the sick benefit B is listed as an argument ofthe function V(.). When sickness related income loss isotherwise uninsured, the provision of sickness benefits increasesexpected income in the old period. '42Suppose each young individual can be indexed by T, thenumber of years until the individual reaches the beginning of the"old" period. The higher is a member's age A, the lower is T andthe closer he is to his old period. Allowing for the oldperiod's utility to be discounted, the discount rate 0(T)e[0,1]is decreasing in T. For a higher aged young member, T is lowerso the old period's utility is worth more since the member willbe in that period sooner.mIf workers were expected utility maximizers, and S is theprobability of sickness, the function V can be specified as:V(0,0)=. (1-6)U(Y,0)+6U(Y-S(Y),0) for a non-member, andV(B,8)=(1-6)U(Y-D,8)+6U(Y-S(Y)-D+B,8) for a member.162Each year the young member must choose whether or not to payhis dues and stay in the membership. The member chooses to paydues and stay in the membership based upon his current utility ofmembership given 8 and Y, but also upon his expected utility forthe old period. If the member pays his dues D and stays in themembership, his expected utility is:V n1=U(Y-D,O) +4) (T) V(B 4 O)If the individual chooses not to pay dues D and he exits thelodge membership, he has an expected utility of:Vnm=U(Y, 0) +4) (T) V(0, 0)Consider a member of age A, TA years from the start of hisold period. It is possible to characterize the probability thatthis individual will choose to continue paying dues D and remainin the membership. The individual will pay dues D and stay inthe lodge ifVni-Vntn=U(Y-D,Ø) -U(Y, 0) +4)(TA ) [V(B,6) -V(0, 0)Define Y' to be the minimum, (or reservation), income thatsatisfies the decision rule Vm-Im>0 given 8, 6, /3 and 0. Theprobability that the member will pay dues, is the probabilitythat his realization of Y i exceeds Y.Pr [Stay in Lodge] =Pr [^= fy:p (Y) dY.This decision is repeated each year with each realization ofincome Y.163It is straightforward to show that when sickness benefitsare provided B>0, for given 8, S(Y), D, and A, and provided0(T)>O, there is a higher probability that a member will remainin the membership than in the case where no sickness benefits areprovided, B=0. 143 For a given amount of dues, D, equating theexpected lifetime utility when B>0 with the case where B=O,yields the expression:17 (B4O) =V ( 0, 0 )As long as the old period utility is not discounted to zero,providing sickness benefits for the same dues increases theprobability that the young member will choose to stay in themembership. For the same cost, they expect to receive morebenefits. When B>0, Y 13 *<Y: for the condition to hold. Whensickness benefits are offered, and the old period utility is notdiscounted to zero, the minimum income required to remain in themembership falls.This suggests that the elimination of sickness benefits1468 and 8 are exogenous to the member. While it is possiblethat a member would prefer the lodge to lower B and allocate morelodge resources to production of social benefits, such changeswould be difficult for a member to implement. Recall from Chapter1, a 75% majority vote was required to implement such changes.Given heterogeneity over 8, the social benefits, such consensus waspotentially difficult to achieve. The literature on clubs suggeststhat heterogeneous memberships have difficulty achievingconsensuses, hence we would expect rigidity in lodge "production"choices. As a result, individual members are unlikely to change,or are unlikely to expect to change any part of the fraternalinsurance contract, hence it is exogenous to the member's decision.T. Sandler and J.T. Tschirhart, "The Economic Theory of Clubs: AnEvaluative Survey," Journal of Economic Literature 18 (1980), 1481-1521.164after 1930 by some IOOF lodges lessened the appeal of membershipfor many of the members in those lodges, especially for memberswith a lower social utility of membership 8 1. For a givenopportunity cost of membership, "non-social" (low 9) members havea higher likelihood of exiting. Consistent with the Knights ofPythias' experience (see Chapter 1), eliminating sicknessbenefits reduced the proportion of workers interested inremaining in a fraternal lodge.It is also possible to demonstrate that older members,ceteris paribus, had a higher probability of remaining in themembership. Because the "old" period is closer for members withhigher ages, hence lower T, the old period is discounted lessthan for a younger (higher T) member. Thus, the expected utilitygain from sickness benefits for a higher age member is largerthan for a younger member. For this reason, Y" decreases withthe length of time a member was in the lodge. Y * is also lowerfor members who delayed joining until older ages. Old membershave a lower probability of exiting the membership since thecloser importance of sickness benefits would lead them at themargin to accept a higher real cost of staying in the membership.Ceteris paribus, an older member required a greaterreduction in income to quit the membership than a younger member.If incomes rise, the real cost of membership falls and membersare more likely to pay dues. In contrast, when incomes fall, thereal cost of membership rises, and the probability of suspensionrises. Combining this result with the previous age result, an165important implication is that when incomes fell, older memberswere less likely to be suspended than younger members.A specific case of interest would be members' responses toperiods of unemployment. During spells of unemployment,Oddfellows would have had reduced income but also, they wereineligible for sickness benefits. 144 Paying to remain as a memberin good standing, when not eligible for benefits, may not havebeen a priority for all individuals. From the preceding results,older members would be more likely to continuing paying duesthrough a spell of unemployment.Consider now the influence of sickness benefits upon thedecision to join, or not to join, an Oddfellows lodge. Theindividual under consideration is not a member, but trying todecide whether or not to become a member. The prospective youngjoiner, T years from the beginning of his "old" period, knows El i ,6, and B. Based upon his knowledge of the income distributionp(Y), and the behaviour of lodge members in the past and present,the joiner has an estimate of the probability P(T) that he willstill be in the membership at the start of his old period.P(T), the probability that the individual will still be inthe membership T years later at the beginning of the "old"period, is just the probability that he would not exit prior to Tyears. Given that Y * is potentially decreasing the longer a144The IOOFBC By-Laws stated that sickness benefits were paidonly if the member, in good standing, was unable pursue hislivelihood as a result of illness or accident.166worker was in the lodge membership, the reservation income issubscripted by the year of membership. The probability that ajoiner would still be in the membership after T years is theprobability that the spell of membership continued each year:P(T)=Pr[memberata45]=Irt.i [1 -LY`P Y)dY]If the individual does not join the lodge, he has anexpected utility of:Vm=U(Y, 0) +V(0, 0)Given an initiation fee of I(A) (scaled by age A), theprospective joiner's expected utility from lodge membership is:Vm=U(Y-I (A) -D,e) +P(T)V(B,e) + (1-P(T) ) V(0, 0)The individual will join the lodge if Vm-Vnin>0. Looking across apool of prospective joiners, define Y * to be the minimum incomerequired to satisfy the participation condition. Again, comparedto the no sickness benefit case of B=O, if P(T)>O, then providingsickness benefits B>0 reduces Y * increasing the probability thata worker would choose to join.Would older workers be more likely to join? Vm-Vm isincreasing in P(T) if P(T) is higher for older prospectivejoiners, but it is also decreasing in the initiation fee I(A)which increased in age. Thus, while older prospective joinershad a higher expected utility from sickness benefits if they hada higher probability of remaining in the membership to collectsickness benefits, the higher initiation fee would increase the167real cost of membership. The influence of age A upon relativepropensities to join would depend upon the magnitudes of thesetwo influences .145Given that so much of the need for the sickness benefitsoccurred after age 45, the importance of sickness benefits inattracting prospective members depended upon their perceivedlikelihood that they would still be in the membership to receivethe benefits when the sickness benefits were needed. Thus, acrude measure of the attractiveness of fraternal sicknessbenefits would be the probability that they would still have beena member at age 45, the age arbitrarily chosen as the beginningof the "old" period. If the probability of getting the oldmember's utility falls, so does the prospective joiner's "desire"to join. Membership would primarily appeal to individuals whohave a high expectation of enjoying the social side ofmembership.The preceding model indicates that given the fixed nominaldues, benefits and initiation fees, workers were more likely tojoin and remain in the membership when incomes were high and thereal cost of membership was low. Without sickness benefits,fewer members would choose to pay dues and fewer new memberswould be attracted to the lodge. Members of higher ages are morelikely to remain in the membership than younger members. Thus,all else equal, a greater reduction in income is required for145The following section presents empirical evidence as to thesepropensities.168older members to quit from the membership than the incomereduction needed to induce young members to quit. The agepattern of joiners may be non-monotonic due to the opposinginfluences of time to the "old" period and the age scaledinitiation fee. Finally, the influence of the sickness benefitsupon attracting new members depends upon P(T), the probabilitythat the joiner would be in the membership when "old" to collectthe benefits. Thus, the following sections examine the length oftime members of IOOFBC lodges stayed in the membership.Estimates of P(T) are then constructed to determine if the"value" of fraternal insurance for prospective joiners changed inthe Depression.One final point that deserves note is the development ofalternative sources of insurance which would also have reducedthe probability that a worker would join an organization like theIOOFBC to obtain insurance coverage. The improvement of thealternative, or non-membership utility, increases the reservationincome needed to purchase membership reducing both theprobability a member would pay to stay in good standing but alsothe probability an individual would join. Obviously the growthof group insurance coverage provided through the workplace after1940 could explain the reduced number of joiners after theDepression. However, why the growth of these arrangementsoccurred only after the 1930s must still be addressed to completethe story of the decline of fraternal insurance.1695.4 ESTIMATING ERA SPECIFIC HAZARD FUNCTIONSThe preceding model related the influence of sick benefitsin attracting new members to fraternal orders to the probabilitythat the prospective joiner would still be in the membershipseveral years later, at age 45 after which most of anindividual's lifetime sickness experience was expected. What wasthe probability that a 30 year old joiner of an Oddfellows lodgewould still be a member 15 years later at the beginning of hisheavy expected sickness period? This is just the probabilitythat the member had not quit at any year prior to the 15th.Characterizing the impact of sickness benefits upon theprobability an individual would join the lodge membershipinvolves estimating how long Oddfellows remained in lodgememberships over three defined periods; pre-1930, 1930-1939 andPost 1939. The natural approach to analysing such probabilitiesis to employ the tools of duration analysis that are commonlyapplied to the analyses of duration of unemployment, durations ofmarriages, etc...The duration of membership in an Oddfellows lodge, (the timefrom joining the lodge to time of exit)^can be modelled as arandom variable. When an individual entered the lodge, theirspell of membership began. In each year there was somelikelihood that the spell would end due to low income and theywould exit the lodge into the non-membership state.A standard econometric approach to estimate the probabilityof quitting the membership would be to specify a (unconditional)170probability function, f(t)=Pr[exit in year t], directly. Supposewe observe N members of an Oddfellows lodge and how long theyremained in the membership. Suppose after one year ofmembership, n l of the N members quit; after two years ofmembership, n2 members quit; after three years, n 3 members, etc...The unconditional probability of quitting the membership after jyears in the membership is f(j)=nn/N. One drawback of thisprobability is that it involves the simultaneous consideration ofall of the possibilities of quitting between years 1 and j. Thisapproach is not intuitively or theoretically appealing given themodelling of the membership decision as an annually repeateddecision.From the model before, in each year of membership j, amember draws an income from the distribution p(Y). Based uponthat draw, the member decides whether or not to pay his dues andremain in the membership. Kiefer (1988) suggests that in such aframework the event of exiting the membership can be described asthe outcome of a sequence of simpler, conditional events. Again,suppose we observe N individuals' spells of membership, and afterj=1,...,T years in the membership, n n members quit. Theprobability that a member would quit in the first year ofmembership is h(1)=n 1/N. At the beginning of the second year ofmembership, S(1)=N-n 1 members remain, or have survived to thesecond period. Given that n 2 are observed to quit, theprobability of quitting in the second year of membership,conditional upon having paid dues in the first year is171h(2)=n2/S(1). The probability of quitting the membership in agiven year can be modelled as a sequence of simple conditionalevents; the probability of quitting the membership in year j,conditional upon having not quit up to year j-1. The h(•)'s,which can differ across years, are "hazard functions" for therandom variable, t, the number of years in the membership. Theydescribe the probability of exiting the lodge membership at tyears conditional upon having remained in the membership until tyears. For each hazard function specification, which emphasizesa conditional probability, there is a mathematically equivalentspecification in terms of a probability distribution, whichemphasizes an unconditional probability. The hazard function andprobability distribution specifications are alternative ways ofdescribing the same system of probabilities. M6Both the conditional probability of exit, described by thehazard function, and the unconditional probability of exit, canbe expressed in terms of the distribution and probability densityfunction of the random variable^the length of membership.Let f(t) be the probability density function, and F(t) be thedistribution function for^where f(t)=dF/dt. The hazardfunction at time t, h(t), can be expressed as the probabilityMIT.M Kiefer, "Economic Duration Data and Hazard Functions,"Journal of Economic Literature, 26 (1988), 646-679. To illustratethe difference between the conditional and unconditionalprobabilities, Lancaster (1990) uses the example of the probabilitythat a person dies at age 45. The unconditional probability givesthe proportion of people ever born who die at age 45, while thehazard function, or conditional probability gives the proportion of45 year olds who die at age 45.172density function divided by one minus the distribution function.h(t)-  f(t) 1-F(t)The denominator of h(t) is often referred to as the "survivor"function since it describes the proportion of spells which havenot ended by t, and hence are still at risk to end.When characterizing hazard functions with data, there aretwo types of observations that one encounters; completed anduncompleted spells. Completed spells are observations where anindividual member is observed to have quit the lodge membership.Spells are called uncompleted when a spell in progress wascontinuing at the end of the study period, or if it was notpossible to observe the individual until the time of their exit.In an Oddfellows lodge, some members transferred their membershipto a new lodge where their exit from Oddfellows membership wasnot observable (to the researcher). In cases like these, theobservations are called right censored at the length of time theydisappeared from observation. Define a variable d i=1 if thespell of membership is a completed spell, and equal 0 if theobserved spell was censored at lengthSuppose that we have a sample of i=1,...,n observations ofthe observed length of time individual i was a member in anOddfellows lodge, and d i. Assume that the process generating then observed spells did not change for the entire period that anOddfellows lodge operated. Using maximum likelihood techniques,this sample could be used to estimate the underlying parameters173of the distribution of membership durations 0. The likelihoodfunction is:L( t) =1E 1 f( ti/4) ) di [ 1—F( ti.4)) l 1-diThe first term in the likelihood function is the density functiondescribing the lengths of completed spells, while the latter termis the survivor function which accounts for censored spells.Based upon the observations of the previous sections, wewant to investigate whether the hazard function characterizingmembership spells before the Depression was qualitativelydifferent from the hazard function describing membership spellsin the Depression of the 1930s. Choosing 1930 as the start ofthe Depression, and 1939 as the end of the Depression, allow thehazard function to be potentially different across three definedintervals. Let t=Y e-Yb where Y e denotes the year the observedspell ended, and Yb denotes the year in which the spell began.An important and necessary assumption is that only the length ofspell matters, not the calender year that the spell began.Consider the following hazard function for a hypotheticalindividual who joined an Oddfellows lodge before 1929:h(t)=6(Ye-Yb )^if Ye<1929,- 4.4(Ye-1929)^if 1930<Ye<1939,^(5.1)=f1(Y e-1939)^if Ye>1940.6(t), g(t) and 0(t) represent potentially different hazardfunctions. The Overall hazard function h(t) is thus specified by6(t) for the length of time a spell was in progress before 1930;174then A(t) for the portion of time the spell was in progress 1930-1939; and finally, n(t) for the length of time a spell was inprogress after 1939. Follmann, Goldberg and May (1990)demonstrate that the overall likelihood function for estimatingh(t) factors into the distinct contributions of the disjointperiods.Suppose that we have n observations of (t i ,di), i=1,...,n,where t i is length of time until member i's spell ends or iscensored, and d i is a dummy variable equal to 1 if the spellcompletes, and 0 if the spell is censored at length t i. The nobservations of (t i ,d) can be grouped as follows:n 1 observations where Yb<1929 and Ye<1929n2 observations where Yb<1929 and 1929<Ye<1939n3 observations where Yb<1929 and Ye>1939n4 observations where 1929<Yb<1939 and Ye<1939n5 observations where 1929<Yb<1939 and Ye>1939n6 observations where Yb>1939 and Ye>1939Using the data transformation procedure of Follmann et al.(1990) described in Appendix 3, the overall likelihood functionL(s,A,n) for estimating the hazard function characterized in(5.1) becomes:L(8,11, 0) =L1( 8 ) 'L2 (1).1,3 (0)The likelihood function factors into functions of 5, A and nthus, the overall likelihood function can be maximized bymaximizing L 1 (5), L2 (A) and L3 (11), era specific likelihoodfunctions, separately. From the original n observations threesamples have been created for estimating the era specificlikelihood functions; a 1 (5' sample for estimating L 1 (5); a 1 11'175sample for estimating Ig (A); and a 1 0' for estimating L3 (n).In the '6' sample, there are two types of observations. n 1spells that were completed or censored prior to 1929 haveuntransformed observations. n 2 spells that began prior to 1929but completed or were censored after 1929 are treated as censoredat the length of spell completed by 1929. For the IA' sample,there are three types of observation. n 4 spells that began after1929 and ended or were censored by 1939 have untransformedobservations. The n2 spells begun before 1929 that ended or werecensored by 1939 are treated as failing after time t i-(1929), thelength of time that they were in the IA' regime. Essentially,the spells are divided such that they are treated as a new spellunder the new regime. The third type of IA' observations consistof the n3 spells begun before 1929 that ended after 1939, and then5 spells begun between 1930 and 1939 that ended after 1939.These spells are treated as censored at a IA' spell length of1939-max(Yb ,1929). The , n , sample can be described in a similarfashion.Covariates can be incorporated into this framework. Onepossible scheme is:8(t)=80(t)exp(z41),( 91 0 ( t) exp (X /4)2 ) ,( t) =0 0 ( t) exp(W /4)3 )60('), µo (•) and no (.) are baseline hazard functions; Z, X and Ware vectors of covariates; 0 1 , 02 and 03 are parameter vectors.1765.5 DATA AND SPELLS OF MEMBERSHIPThe names, ages, and years of entry and exit were recordedfor all members of four Independent Order of Oddfellows lodgesthat provided sickness benefits in British Columbia over theperiod 1891 to 1980. 147 There were 1044 observed spells ofmembership for individuals who belonged to Cloverdale no. 15(1891-1980), Sandon no. 39 (1897-1939), Prince Rupert no. 63(1910-1970) and Corbin no. 64 (1910-1935). The membershiphistories for the four lodges examined in this paper arerepresentative of the IOOFBC's membership history (See Table5.2).Table 5.3 presents the "Descriptions of Spells Started andEnded". 865 of the 1044 observed spells began between 1891 and1929; 64 spells began between 1930 and 1939; and 115 spells beganafter 1939. In the latter period, Cloverdale no. 15 and PrinceRupert no. 63 were the only lodges of the four still operating.Initiation, accounting for 80% of spells started before 1930, wasthe most common way in which individuals joined Oddfellowslodges. Before the depression, 10% of observed membership spellswere for individuals who transferred into the lodge after beinginitiated elsewhere. Charter members were the founding membersof the lodge who had previously been members elsewhere. Forniames, ages, years of entry and how members entered thelodge, i.e. initiation or transfer, were obtained from lodgemembership registers. Year of exit and how the member exited wasobtained from the Semi-Annual Returns filed by the lodges in Juneand December of each year. Semi-Annual returns were also used toverify the year of entry and the way of entry.177these individuals there is an unknown start date for theirOddfellows membership. Reinstatements, which account for only 6%of observed spells, were members who were suspended for non-payment of dues who paid to return to good standing in themembership (See Chapter 1).Of the 1044 observed membership spells, 540 ended before1930; 247 ended between 1930 and 1939; and 257 ended after 1939.Before 1929, the 71 per cent of completed spells ended becausemembers stopped paying their dues for 12 months and weresuspended. Given the low number of reinstatements, it appearsthat members who were suspended did not return to the membership.Of the membership spells completed in the Depression, only 60 percent ended by suspension for non-payment of dues. Notice,however, that during the Depression, Sandon 39 and Corbin 64 bothclosed. At the times the lodges closed, 70 members were still onthe membership rolls (26% of spells ended). Dues paymentsreceived per member fell well below 12 dollars, the amountrequired for good standing. 148 Thus, the number of suspensions isprobably understated in the 1930s because prior to the closing,members who would have been suspended in earlier times were148Average dues revenues per member per year for 1920-1929 and1930-1939 were $10.15 and $6.57 in Sandon no. 39; $9.92 and $8.52in Corbin no. 64.; $10.91 and $10.13 in Cloverdale no. 15; and$9.65 and $8.65 in Prince Rupert no. 63. The IOOFBC AnnualProceedings reported that over the depression, many of the membersapparently had left the towns and in Sandon, the lodge wasessentially dormant, awaiting better times to return. AnnualProceedings, 1930-1939 Grand Master's Reports.178retained on the rolls. 14917% of the observed spells ended when members transferred,or withdrew to transfer, into other IOOF lodges. In this case,members ended their spell in one lodge, but membership wascontinuing elsewhere. For this reason, spells ended by transferor withdrawal are treated as right censored. Before 1940, 10% ofthe spells ended with a member's death. Deaths are also treatedas censored observations since exiting membership by suspensionis of economic interest.Of the 1044 observed spells, the member's age at the time ofjoining the lodge is known for 849 of the spells. The cases forwhich age is unknown are the ages of most charter members, mostmembers who transferred into the membership, and all members inCloverdale 15 who began their spell before 1904. In the firsttwo cases, it was not necessary to record ages for theseindividuals since dues and entry fees of transferring memberswere not scaled by age. The pre-1904 Cloverdale cases areunknown because a fire in 1904 destroyed the lodge buildings andconsequently all the lodge records. An analysis of spellduration, and entrance and exit characteristics reveals thatother than over-representation of members entered by transfer,mAnother reason why the number of suspensions may beunderstated is that in 1934 the IOOF passed emergency legislationwhich allowed subordinate lodges to cancel members' dues inarrears. The Annual Proceedings only reports on lodges use of thislegislation suggests that this was not taken advantage of by theCloverdale or Prince Rupert lodges. The Sandon and Corbin lodges,as noted, were dormant so they had not explicitly taken advantageof this legislation.179the observations with no age information are similar to those forwhich age is known.The mean and median ages of initiates are virtuallyidentical for the pre-1930, 1930-1939 and post 1939 periods. Themean age at initiation was roughly 30 years old while the medianage was 29 years old. Table 5.4 presents the age distribution ofinitiates whose membership spells ended before 1929, between1930-1939 and after 1939. Of the 725 initiates for whom there isage information, 361 exited their lodges before 1930, 190 exitedduring the depression and the remaining 174 exited after 1939.Notice that there is no distinction as to how their spells ended,just that they entered by initiation and their membership in thelodge ended in the defined sub-period. As described in Section5.3, Oddfellows initiates in British Columbia paid an initiationfee that was scaled according to their age. Before 1929, only 2%of initiates were over 45 years of age, and 76% of initiates wereunder 35 years of age.Table 5.5 presents information on the ages at exit for themembers who joined by initiation. Between 1891 and 1929, 87% ofinitiates' membership spells ended before the member was 45 yearsof age. This reflects that either older members were unlikely toexit, or there were few older members over age 45 to observeexiting. This is unlikely to be a mere statistical artifactsince the mean age at entrance was 30 years old, and even theyoungest lodges in this sample had operated at least 19 years by1929. This suggests that, as described in Section 5.3, if180sickness benefits were important for members, there was a lowerlikelihood that older members would quit. Given a mean age atexit of 35.1 and a median age exit of 34, initiates on averageremained in the membership for only 5 years.Consider now the ages of initiates who exited during theDepression period. Notice that the mean and median age at exitincreased substantially from 35 to 43 years. Thus, one impact ofthe depression was to displace older members who had not beenexiting in the earlier period. Given the prediction that ceterisparibus, a greater reduction in income was required to induceolder members to be suspended, economic downturns before 1930 hadnot been lengthy or severe enough to dislodge the older workersfrom the membership. The prolonged period of deterioration ininitiations and suspensions relative to 1914-1918 suggests thatthe length of Depression exhausted older worker's resources. 15°Because the initiate exit numbers include the members ofCorbin 64 and Sandon 39 who ended their membership because thelodges closed, we want to ensure that this was not the reason forthe observed increase in exit ages. Table 5.6 shows thedistributions of exit ages for all spells ended by suspension fornon-payment of dues. Unlike the previous table, these spells donot include deaths, transfers or presence at lodge closure. Inthis case however, we are not discriminating by how the spell15°This finding is consistent with MacKinnon's (1990)observation that during the depression, middle aged men were wellrepresented on relief rolls whereas it was not common for thisgroup to be relief recipients before the Depression.181started. 151 Again the mean age at entrance is roughly 30 yearsold. Before 1930 the average age at suspension was 35.7 yearsold, suggesting an average spell length of 5.7 years. In theDepression, the mean age at suspension was 41.5 years. As beforethe main impact of the Depression appears to have been thedisruption to older members spells of membership. Unlike thepre-Depression period, where few spells were observed to end bysuspension after a member reached age 45, in the Depression, thelikelihood of suspension was high across all ages.While the preceding tables are suggestive, they may still bespurious results due to general aging of the lodge memberships asnoted earlier. It may be that there were just more older membersat risk to exit in the Depression than in the earlier period.Also, we want to quantify the impact of these changes upon thedemand for membership. Thus, the empirical strategy ofcharacterizing the conditional probability of being suspended fornon-payment of dues after a given length of time as a lodgemember is implemented.The empirical model of period specific hazard functionsdetailed in the previous section requires the specification of afunctional form for the baseline hazard function. The Log-Logistic density specification given in (5.2) was chosen becauseof its flexible shape, and because it nests cases which mimic151The characteristics of age at entrance (the terms inbrackets) for these spells are virtually identical to the entrancecharacteristics of initiates' ages presented in the previous table.182more restrictive (i.e. monotonic) specifications. 152ar3 (a t) 13-1 f(t) -[1+ (a t)(5.2)Covariates were introduced into the model as outlinedearlier. These included the age at which an individual'smembership spell began (AJ. Because Follmann et al.'smethodology involves censoring spell lengths as of a given pointin time, and treating continuing and new spells as identicalunder the new regime, some additional controls for anindividual's age had to be incorporated. For example, suppose weobserve a 30 year old joiner in 1920 who remains in the lodge toat least 1929. Under the methodology of Follmann et al., thelength of his membership spell under the initial regime iscensored at nine years. The methodology treats the time in thelodge in the new regime as independent of the time spent in thelodge under the previous regime. Under the new regime, beginningin 1930, the individual is now 40 years old but his portion ofthe spell in the new regime is treated as a new spell, andidentical in behaviour to that of a 30 year old joiner in 1930,as indicated by A 1 . Thus, a tenure variable, treated as anexogenous characteristic at the start date of the new regime, is152As a guide in choosing this specification, Follmann et al.'s(1990) data transformation procedure, described in the previoussection, was applied to the 1044 observed spells of membership toconstruct Kaplan Meyer empirical hazard functions. The empiricalhazards rates for the periods 1891-1929 and 1930-1981. The shapeof the empirical hazard for both periods suggests that Log-Logisticdensity specification given in (5.2) would be a reasonable choice.183included to adjust the initial conditions for the new regime toaccount for the possibility that long term members were lesslikely to exit the lodge. The membership tenure variable (TEN)measures the length of time an individual had been in the lodgemembership under the previous spell regime(s). Finally, tocapture lodge specific effects, dummy variables (Dcwv ,DsAND ,Domm )to indicate the lodge to which the member belonged are includedand interacted with Ai and TEN; .The general functional form given in (5.2) is implementedfor the periods 1891-1929, 1930-1939 and 1940-1981, and a and j3are parameterized as follows:a<30=exp(4• 01 4-Ai +c-TENi +Ei3 .1 cpij i-Ei3 .1 4.1;DijAi -Fri.i 4i1JD,J TENi )p <3 ° =exp (41+Ei=1 4D1;(40+ 4• 21Ai +4)2 TENi Ei3 =1 4)20iDii +ri.i 4)21.1Di 'Ai +E3 =1 412iD TENS)a DeP eXpp Dep exp ( 4)3 413.1 =1 4 A)a > 39 = eXP4/ 3o +4:1)1Ai +4)2 TENj. +Ei3 .1 44/Dij +Ei3 .1 4 DijAi+V'j3 .1 Cipii TEN i )p )39 =exp+E3.1=1Ai is the age at joining; TEN; is the length of time individuali's membership spell was in progress prior to 1929 for theDepression, or 1939 for the post-Depression. Dr1 if individuali was a member in lodge j. Prince Rupert 63 is the excludedlodge so the lodge dummies were defined for Cloverdale 15, Sandon39 and Corbin 64. Notice that the covariate vector is identicalfor all three periods, but that the coefficient vectors aredifferent for each period. It is possible to test if 01=02=03,that the period specific hazard functions are the same.184For the 849 observations for which age at joining was known,the '6' sample, 'A' sample and the , n , sample, described inAppendix 3, are obtained and the factorized likelihood function,described previously, estimated. The estimates of 0 1 , 4,2, and 03are presented in Table 5.7. 153 While the coefficients on thelodge dummies and the lodge specific age and tenure variables aregenerally insignificant, the restriction that the lodge specificcoefficients for each sub-period were jointly equal zero wassoundly rejected with a likelihood ratio test.The sign and magnitudes of the age coefficientsunambiguously support the prediction that members who delayedjoining until later ages were less likely to exit thememberships, hence they had a stronger attachment to the lodge.Lodge specific estimates of a and B for the three periods arepresented in Table 5.8. The coefficients on the age at entryvariable are all negative for the initial regime period, 1891-1929. Cloverdale no. 15 had the strongest age effect with anestimated coefficient of -0.03966, significant at size 0.1.Sandon no. 39, with an estimated coefficient of -0.01924 also hada significant age effect. Prince Rupert no. 63, and Corbin no.64 both had insignificant age effects, although Prince Rupert'scoefficient of -0.017 is close in magnitude to Sandon's153To control for left censored spells, estimations includinga dummy variable equal to 1 if the spell began by any other waythan initiation (20% of the observed spells) were carried out.Likelihood ratio tests revealed that this variable added nothing tothe explanatory power of the model.185coefficient."4During the Depression period, the age at which a memberjoined was no longer a good predictor of the strength of theirattachment to the lodge. Cloverdale no. 15's age effect isvirtually absent with an estimated coefficient of -0.006. Corbinno. 64's age effect is positive in the Depression indicating thatolder members were more likely to exit. For Prince Rupert no. 63however, the age effect changes very little between the periods.Examining the age coefficient alone, it is not clear whether thisindicates the Depression was particularly kind to Prince Rupert,or the Pre-Depression period was just as unstable as theDepression period. After the Depression, Cloverdale no. 15continued to provide sickness benefits and the age effectreturned to the pre-Depression level. Prince Rupert no. 63's ageeffect weakened after the Lodge stopped providing sicknessbenefits following the Depression.The tenure variable which measures how long an individualhad been a member of the lodge prior to 1929, (and then prior to1939), indicates that in the Depression, Cloverdale no. 15'slongtime members were less likely to exit than newer members.Thus, while age at initiation no longer influenced theiMIt is possible that the lack of significance of the PrinceRupert and Corbin coefficients reflects that they were the twonewest lodges in the sample. They had only operated for 19 yearsby 1929, whereas Cloverdale had operated for 38 years, and Sandonhad operated for 32 years. There might not have been enoughvariation in ages in the younger lodges to estimate a precise ageeffect.186persistence of membership, membership tenure had a strong effect.For Prince Rupert no. 63 there is no significant tenure effectsuggesting that unlike Cloverdale, longer term members were nomore attached to membership than new members. For Cloverdale,the tenure variable indicates that the Depression pruned offnewer members from the lodge, but longer term members wereretained.'55To better examine the characteristics of membership, fittedhazard functions were generated for hypothetical 30 year oldjoiners for each sub-period. For Cloverdale no. 15 (Figure 5.2)the change in membership spell behaviour is readily apparent.For the Pre- and Post-Depression periods, the hazard functionshave generally low levels and very flat profiles. For theDepression period the probability of being suspended issubstantially higher across all lengths of membership spell.Likelihood ratio tests indicate that the behaviour of membershipspells in the Depression was significantly different from thepre- and post- Depression periods. It was not possible however,to reject the null hypothesis that membership spell behaviourbefore and after the Depression was the same.Figure 5.3 presents the generated hazard functions forPrince Rupert no. 63. The levels of the hazard functions for allperiods are relatively high compared to Cloverdale. Thus, inanswer to the earlier query as to whether the Depression was mild155This may reflect that through the Depression, greaterleniency on suspension rules was afforded to long term members.187in Prince Rupert, or the Pre-Depression period harsh, it appearsthat Prince Rupert's membership was unstable before theDepression. Likelihood ratio tests cannot reject the nullhypothesis that spell behaviour in the Pre-Depression andDepression periods was the same. In contrast to Cloverdale no.15 that continued to provide stipulated benefits, a likelihoodratio test reveals that the post-Depression period, when PrinceRupert no. 63 no longer provided sickness benefits, wasstatistically distinct from both of the earlier periods.For the pre and post- Depression periods, Cloverdale memberswere half as likely to be suspended from the lodge membership aswere members of Prince Rupert. Table 5.9 compares the peakhazard probabilities for hypothetical 21 and 30 year old joinersin each period. For Cloverdale 15 before the Depression, thepeak exit probability for a 21 year old joiner was 0.0574 after10 years of membership. A 30 year old joiner in Cloverdale had apeak probability of being suspended of 0.04 after 15 years ofmembership. For Prince Rupert no. 63, 21 year old joinersreached the peak probability of 0.09, almost double that ofCloverdale, after 12 years in the lodge. A 30 year old joinerhad a peak exit probability of 0.078 after 14 years ofmembership. This probability is higher than the peak exitprobability for a 21 year old in Cloverdale. Notice that beforethe Depression, the peak hazard for a thirty year old joineroccurred at roughly 45 years of age. Once the member entered thehigh expected sickness period of their lives, the probability of188exit declined.' 56In the Depression, members of both lodges had virtually thesame probability of exiting. During the depression the peakhazard rates increased dramatically. For Cloverdale, 21 and 30year old joiners faced peak hazard rates that were triple thevalue of the pre-depression values, 0.1 higher. Prince Rupert'speak hazards also increased but only by 0.04, from an already"high" pre-Depression value.Finally, the numbers for the post-Depression period indicatethat while fewer new members joined the lodges, the membershipsseem to have recruited more selectively. Members who joinedafter 1939 remained for relatively long periods if they survivedin the membership beyond the initial 2 or 3 years. Anotherfactor that may have reduced the exit probabilities was thedeclining real cost of membership. Membership dues remained at$12 per year during the inflationary post-W.W. II years.What remains to be resolved is why few men joined theCloverdale 15 or Prince Rupert 63 lodges after the Depression.Why would Oddfellows membership have been appealing in 1920 butnot in 1940? Prince Rupert with fewer new members after 1939 issomewhat easier to understand. Without the sickness benefits,the lodge was restricted largely to social functions and hence wemight expect membership to appeal to a smaller portion of the156This could also reflect that after age 40, men had feweralternative sources of coverage. Many organizations would notadmit men over forty. In others, initiations fees were expensivefor men over forty. See Chapter 1.189population. That Cloverdale 15 did not attract many new members,when stipulated benefits were still being paid to sick members,suggests that fraternal sickness insurance was not an attractivesource of insurance. The answer lies in understanding theconsequences of the previously described impact of the Depressionupon sickness insurance.As described earlier, most of an individual's expectedsickness experience occurred later in life, well after anindividual of age 30 (the average age of a joiner) joined anOddfellows lodge. Obviously, the attractiveness of sicknessbenefits for a prospective joiner depended upon the probabilityhe would still be a member after age 45 when he expected to needthe insurance. Table 5.10 presents the probabilities thathypothetical joiners of ages 21 and 30 in each period would stillbe in the membership at the ages of 45 and 70. Theseprobabilities are interpreted as the likelihood that a joinerwould have remained in the lodge to T years conditional uponhaving not exited in each year prior to T years. If h(t) is thehazard rate for exiting the membership, that is the probabilityof exiting after t years conditional on surviving in themembership to t-1 years, then the probability an individualjoiner would have been in the lodge T years later is calculatedas:P(T) =Pr [member after T Years] li Tt.i [1-h ( t) ]These numbers are perhaps the most striking. Consider a190prospective 21 year old joiner before 1930. If the pre-Depression regime had continued, the probability that the 21 yearold would have been in the lodge 24 years later at age 45, at thebeginning of the heavy sickness period of life, was only 29% inCloverdale, and 15.8% in Prince Rupert. Based on these numbers,if prospective joiners had any notion of these probabilities, itis hard to believe that sickness benefits had a strong influenceupon a 21 year old's decision to join since there was less than a30% probability that he would be in the membership when thebenefits would matter most in his life. For an individual whodelayed joining until age 30, the odds were high that he wouldstill be in the membership 15 years later at age 45. ForCloverdale, the probability was 60%, for Prince Rupert, only 41%.Again, the value of sickness benefits in the Prince Rupert lodgewould have been less because the probability of being in themembership when the benefits were most needed was substantiallylower.When one examines the probabilities that a joiner wouldstill be in the membership at age 45 in the Depression regime, itis not hard to see why few individuals would have been attractedto fraternal insurance. For a prospective 21 year old joiner,the probability that he would be in the lodge to receive sicknessbenefits after age 45 fell to 4.7% in Cloverdale and 7.5% inPrince Rupert. For a thirty year old joiner, the probabilitythat he would still be in the membership at age 45 fell from60.5% to 16.1% in Cloverdale, and from 41.6% to 23.7% in Prince191Rupert. Based upon the observed suspensions in the lodge, aprospective joiner would have felt the sickness benefits werevirtually worthless. A prospective joiner would have had littleexpectation of ever receiving benefits that were largely receivedlater in life. Individuals would still have been attracted tofraternal lodges for the social pleasures of membership, butmembership would have appealed to a smaller proportion of thepopulation.5.6 CONCLUSIONSBefore the Depression, the IOOFBC and other fraternalorganizations had been an important source of sickness insurancefor workers in British Columbia. Following the Depression,significantly fewer men were attracted to fraternal membership,even though sickness benefits were still provided. While theevolution of paternalistic insurance coverage coincides with thedecline of fraternal coverage, the preceding analysis revealsthat fraternal insurance was in decline before paternalisticinsurance arrangements were widespread. This suggests thatfraternal arrangements, while desirable in the past, had losttheir appeal for members and prospective members as a result ofthe Depression of the 1930s.Analyses of the probabilities of exiting Oddfellowsmembership for four lodges in British Columbia indicate thatsickness benefits in the pre-Depression period had a stronginfluence on membership related decisions. Older joiners, closer192to the heavy expected sickness experience period of their lives,were less likely to quit after a given length of time in thefraternal lodge. Also, the probability that a member would quitfrom the lodge declined after 45, the beginning of the heavyexpected sickness period.During the Depression high rates of suspension occurredacross all ages of members. Because so much of the expectedlifetime sickness benefits occurred after age 45, sicknessbenefits would have been valued by members who typically joinedOddfellows lodges before age 35 if there was a substantialprobability that they would still be in the membership to at age45 to collect the benefits. For 30 year old joiners before 1930,there was a 40% to 60% probability that they would still be inthe membership at age 45 to take advantage of the sicknessbenefits. Through the Depression, the probability that a 30 yearold joiner would still be a member at age 45 fell to roughly 20%.Not only did this development diminish the value of fraternalsickness benefits, but it also resulted in more workers than everbefore not having insurance coverage. In this way the Depressionof the 1930s created the necessary demand conditions to supportcommercial and government insurance arrangements.The decline of fraternal sickness insurance through theDepression may be suggestive for explaining existing debatesabout the rise of welfare state institutions. Sautter (1991)documents organized labour's opposition to Unemployment Insurancebefore 1930, and subsequent reversal of stand in the Depression.193Workers may have been more receptive to paternalisticarrangements, like unemployment insurance, once the value ofexisting arrangements declined. In any case, these findingssuggest that demand side forces for the evolution of the welfarestate deserve more attention. That fraternal arrangements werein decline before the rise of paternalistic arrangements suggeststhat the welfare state did not quash private initiative.194TABLE 5.1IOOFBC MEMBERSHIP, INITIATIONS AND SUSPENSIONS BY DECADE1874-1951PERIOD(1)# MEMBERS ATBEGINNING OFPERIOD(2)TOTAL # OFINITIATIONS(3)TOTAL # OFSNPD'SSNPDRATE1874-1889 408 1031 354 0.251890-1899 1202 3441 1453 0.311900-1909 3216 3391 1795 0.271910-1919 5309 4761 3208 0.321920-1929 6747 4568 2672 0.241930-1939 7974 1586 3490 0.371940-1951 5335 2163 1987 0.271874-1951 4909' 20941 14959NOTES: Peak membership was in 1928 with 8250 members. SNPD rateis calculated as (3)/((1)+(2)). * indicates IOOFBC membership in1951.195TABLE 5.2IOOF INITIATIONS 1874-1951 AS COMPARED TOCLOVERDALE NO. 15 AND PRINCE RUPERT NO. 63PERIODIOOFNUMBER (% OF 1874-1951)CLOY.^PR.RUP.1874-1951 20,941 (100) 247 (100) 194 (100)1874-1929 17,192 (82) 216 (87) 149 (77)1930-1939 1,586 (8) 18 (7) 14 (7)1940-1951 2,263 (11) 13 (6) 31 (16)Table 5.3DESCRIPTION OF SPELLS STARTEDPERIOD STARTED TOTAL^CHARTER^INITIATION TRANS REINST1891-1980 1044 23 804 124 60(2%) (77%) (12%) (6%)1891-1929 865 23 692 85 41(3%) (80%) (10%) (5%)1930-1939 64 0 41 9 12(64%) (14%) (19%)1940-1980 115 0 71 30 7(62%) (26%) (6%)DESCRIPTION OF SPELLS ENDEDEXITED TOTAL DEATH SNPD WD/TRANS CLOSE CONT1891-1980 1044 159 640 134 97 0(15%) (61%) (13%) (9%)1891-1929 540 55 384 89 0 325(10%) (71%) (17%)1930-1939 247 21 147 9 70 142(9%) (60%) (3%) (26%)1940-1980 257 83 109 36 27 0(32%) (42%) (14%) (11%)197Table 5.4AGE DISTRIBUTION OF INITIATES AT ENTRANCEFOR SPELLS ENDED IN EACH SUB-PERIODAGE 1891-1929 1930-1939 1940-1980[19,25) 0.25 0.31 0.22[25,30) 0.30 0.20 0.24[30,35) 0.22 0.21 0.23[35,40) 0.13 0.14 0.17[40,45) 0.08 0.09 0.08[45,50) 0.02 0.05 0.03[50,55) 0.005[55,60) 0.01[65+) 0.015N 361 190 174Mean Age 29.8 30.2 31.5Median Age 29 29 31(Of the 804 spells started by initiation over the period 1891-1980, 725 had age information. The spells for which age wasunknown for initiates are all for Cloverdale 1891-1904 due to thefire related destruction of records.)Table 5.5AGE DISTRIBUTION OF INITIATES AT EXITFOR SPELLS ENDED IN EACH SUB-PERIODAGE 1891-1929 1930-1939 1940-1980[19,25) 0.06 0.03 0.01[25,30) 0.21 0.09 0.05[30,35) 0.26 0.15 0.12[35,40) 0.18 0.14 0.08[40,45) 0.16 0.15 0.10[45,50) 0.08 0.16 0.09[50,55) 0.03 0.11 0.04[55,60) 0.01 0.10 0.08[65+) 0.003 0.07 0.43N 361 190 174Mean Age 35.2 43.4 54.8Median Age 34 43 55(Of the 804 spells started by initiation over the period 1891-1980, 725 had age information. The spells for which age wasunknown for initiates are all for Cloverdale 1891-1904 due to thefire related destruction of records.)198Table 5.6AGE DISTRIBUTION OF MEMBERS SUSPENDED AT ENTRANCE AND EXIT FORSPELLS ENDED IN THE DEFINED SUB-PERIODAGE^1891-1929^1930-1939^1940-1980EXIT (ENT) EXIT (ENT) EXIT (ENT)(19,25) 0.04 (0.23) 0.02 (0.27) 0.01 (0.19)[25,30) 0.20 (0.30) 0.09 (0.21) 0.07 (0.25)[30,35) 0.28 (0.20) 0.19 (0.20) 0.16 (0.15)[35,40) 0.17 (0.14) 0.12 (0.17) 0.11 (0.15)[40,45) 0.16 (0.09) 0.19 (0.10) 0.16 (0.09)[45,50) 0.10 (0.04) 0.19 (0.04) 0.11 (0.09)[50,55) 0.03 (^--^) 0.09 (0.00) 0.09 (0.03)[55,60) 0.01 (^--^) 0.08 (0.01) 0.07 (0.05)[65+) 0.003 (--^) 0.03 (0.006) 0.22 (^--^)N 296 141 106Mean Age 35.7 (30.4) 42.0 (31.2) 46.2 (33.5)Median Age 34 (29) 43 (30) 44 (31)(The Numbers in brackets correspond to the entrance agestatistics for the spells ended in each period by Suspension forNon-Payment of Dues. Of 640 spells ended by suspension for non-payment of dues 1891-1980, 543 had age information. Spellswithout information are either members who were charter members,transfers into the lodge, or Cloverdale initiates 1891-1903.)199TABLE 5.7ESTIMATED COEFFICIENTS FOR LOG-LOGISTIC DENSITYVARIABLE 1891-1929 1930-1939 1940-1980a=EXP(X0)CONSTANT -2.0857" -1.7534" -1.8828"(0.3664) (0.3559) (0.3559)DCLOV 0.25494 -0.17015 0.10992(0.7182) (0.47112) (0.49112)DsAND 0.54845 -2.8551(0.4423) (2.5128)DCORB 0.43918 -0.57986(0.4357) (0.47771)AGE -0.01726 -0.01619 -0.01272(0.0112) (0.01079) (0.010787)AGE D* cLov -0.0224 0.009313 -0.0243*(0.0245) (0.01423) (0.014229)AGE*Ds 0.00198 -0.00202(0.0135) (0.06208)AGE D* CORB 0.00056 0.041053"(0.0135) (0.014148)TENURE -.00877 -0.05506"(0.014285) (0.014285)TEN* DCLOV -0.01874 -0.02474(0.018603) (0.018603)TEN*Dsvn 0.053415(0.070044)TEN D* CORB -0.05465"(0.02315)B=EXP(ZO)CONSTANT 0.74627" 0.75564" 0.57156"(0.0995) (0.10957) (0.10957)Danv -0.27902 * 0.14525 -0.36383"(0.1697) (0.15852) (0.15852)DsAND 0.070077 -1.1022"(0.1211) (0.36634)DeoRB 0.18081 0.39305*(0.1282) (0.2138)N 722 364 246LLF -1052.322 -498.0903 -443.209NOTES: Standard errors are in parentheses. • denotessignificant at size 0.1, " denotes significant at size 0.05.200TABLE 5.8LODGE SPECIFIC ESTIMATES OF LOG-LOGISTIC PARAMETERSLODGE 1891-1929 1930-1939 1940-1980PR.RUP. a(X) CONSTANT -2.0857" -1.7534" -1.8828"NO.^63 (0.3664) (0.35594) (0.330167)AGE -0.01726 -0.01619 -0.01272(0.0112) (0.01079) (0.008601)TEN -0.00877 -0.05506"(0.014285) (0.012625)B edi 2.10912" 2.128974" 1.771028"(0.20993) (0.233265) (0.173757)CLOY. a(X) CONSTANT -1.83076" -1.92355" -1.77288"NO. 15 (0.61801) (0.297422) (0.649846)AGE -0.03966* -0.00688 -0.03702"(0.021845) (0.008971) (0.01805)TEN -0.02751- -0.0798"(0.01163) (0.023559)B e4' 1.5956" 2.461793" 1.230881**+(0.2139) (0.280568) (0.1739)SANDON a(X) CONSTANT -1.5373" -4.6085*NO.^39 (0.256203) (2.514457)AGE -0.01924" -0.01821(0.00797) (0.062092)TEN 0.044648(0.068636)B edi 2.26221" 0.707824**+(0.170718) (0.249623)CORBIN a(X) CONSTANT -1.64652" -2.33326"NO.^64 (0.2497) (0.311641)AGE -0.01165 0.024862"(0.008035) (0.008949)TEN -0.06342*(0.037435)B ezil' 2.527119" 3.154058"(0.202827) (0.564488)NOTES: Standard Errors are in parentheses. For B=ez4 ,Var[B]=(dB/d0)Var[0](dB/d0). a and B are the parameters of theLog-Logistic density specification given in equation (5.2) in thetext. B=1 indicates a monotonic hazard function. ' denotessignificant at size 0.1; " denotes significant at size 0.05; +denotes that B is not significantly different from 1.201TABLE 5.9PEAK HAZARD RATES FOR EXITING MEMBERSHIP FOR CLOVERDALE NO. 15AND PRINCE RUPERT NO. 63AGE ATJOININGPERIODCLOVERDALEH(t)^(Age at Max.)PR.RUPERTH(t)^(Age at Max.)21 1891-1929 0.057 (31) 0.091 (33)1930-1939 0.158 (30) 0.131 (30)1940-1980 0.059 (25) 0.104 (28)30 1891-1929 0.040 (45) 0.078 (44)1930-1939 0.149 (40) 0.114 (40)1940-1980 0.042 (35) 0.093 (38)SANDON CORBIN21 1891-1929 0.163 (29) 0.195 (29)30 1891-1929 0.137 (39) 0.175 (39)202TABLE 5.10CONDITIONAL PROBABILITIES THAT A JOINER OF AN ODDFELLOWSLODGE WOULD STILL BE A MEMBER AT AGES 45 AND 70CLOVERDALE^PR.RUPERTAGE AT^PERIOD^Prob. stay until^Prob. stay untilJOINING 45^70^45^7021^1891-1929^0.290^0.116^0.158^0.0401930-1939 0.048 0.008 0.075 0.0171940-1980^0.307^0.156^0.124^0.03830^1891-1929^0.606^0.247^0.416^0.0831930-1939 0.161 0.016 0.238 0.0371940-1980^0.543^0.265^0.286^0.066SANDON CORBIN45^70^45^7021^1891-1929^0.045^0.009^0.027^0.00430 1891-1929 0.175 0.022 0.111 0.010NOTES: See text for calculation of probabilities.203*^IPi...^I I:,..,^i'V's 1 A,,-, f- \,^. i7050InitiationsSuspensions—)--No. of LodgesZ 3020100FIGURE 5.1: Average Suspensions andInitiations Per IOOFB Lodge, 1 8 7 4-1 9 5 11874 1884 1894 1904 1914 1924 1934 1944Year204FIGURE 5.2: Hazard Functions for 30Year Old Joiners, Cloverdale 150.160.140.120.10.080.060.040.02 01^6^11^16^21^26^31^41Years in Lodge1891-1929 —+-- 1930-1939^1940-19816 110.120. 116^21^26^31Years in Lodge0 1"414(R)10041360.08Li 0.062a.0.040.02FIGURE 5.3: Hazard Functions for 30Year Old Joiners, Pr.Rup. 631891-1929 —1— 1930-1939^1940-1981CHAPTER 6THE END OF IOOFBC SICKNESS INSURANCE6.1 INTRODUCTIONThe IOOFBC withdrew from the field of sickness insuranceafter the Depression. From 1931 to 1945, many of the Oddfellowslodges in British Columbia reduced the length of time benefitscould be collected; imposed a one or two week waiting periodbefore brothers could collect sick benefits; and in a growingnumber of cases, stopped providing benefits altogether. In 1939,44 of the 58 IOOFBC subordinate lodges reported sick benefitspaid. By 1945, only 32 of 57 IOOFBC lodges reported sickbenefits paid. By 1950 IOOFBC leaders were calling for theelimination of the sickness benefits which "in this day and ageare so meagre and insufficient to meet the needs and necessitiesof the day as to render them almost a travesty of the termIBenefitsf." 157This development may seem surprising given that Chapter 4revealed that the IOOFBC lodges were financially viable assickness insurers at the end of the Depression. The analysis ofChapter 4, however, implicitly assumed that the underlying claimsprocess faced by a lodge (hence lodge liabilities) was unchangedthroughout the Depression. Thus, Chapter 4 establishes thatfraternal lodges were not inherently non-viable, and that had the157"State of the Order," Proceedings of Special Session of theGrand Lodge of British Columbia I.O.O.F. (1950), 8588-8589.207Depression not happened, they would not have had any significantfinancial problems.The economic conditions of the Depression, however,drastically changed the claims process faced by IOOFBC lodges.Fraternal beneficial systems had always relied on the attractionof new members to keep the costs of providing benefitsmanageable. After 1929, very few men joined the IOOFBC. Thus,between 1929 and 1945, the average liabilities of lodgememberships had doubled as lodge members in 1945 were generallymuch older than the members had been in 1929. This aging of themembership meant that if lodges were to continue to pay pre-Depression values of sick benefits in return for $12 of dues,they would have to run down lodge funds and assets to meet theirliabilities. Thus, IOOFBC subordinate lodges had three options;they could do nothing and wind up the lodge, paying the samebenefits and operating until all funds, revenues and assets wereexhausted; or, they could adjust their prices and benefits toensure the continued payment of sickness benefits; or, they couldstop providing sickness benefits altogether. In most cases thesubordinate lodge memberships chose to do nothing or to abolishthe sick benefits altogether.The IOOFBC leaders did consider revamping the Order'sbeneficial systems centralizing beneficial funds and operationsin the 1940s, but they ultimately decided that such reforms werenot worthwhile. Three factors contributed to this choice.First, after so few joiners since 1929 and the aging of members208who remained in the organization, reforming the beneficialsystems was declared by IOOFBC leaders to be prohibitively costlybecause of the increased average liabilities of the membership.Second, IOOFBC leaders were pessimistic about the prospects oftheir beneficial system attracting new young members even if itwere revamped. Third, the members who remained in the IOOFBCmembership appear to have had little interest in continuing thebeneficial functions of the subordinate lodges.6.2 DEPRESSION, AGE AND THE COST OF INSURANCEIn addition to the quantitative devastation of the IOOFBCmembership (described in Chapter 5), the Depression hadqualitatively altered the membership. By 1945, there had beenfew joiners since 1929, and as a consequence, the IOOFBC memberswere collectively much older than the membership had been at thestart of the Depression. This development had the consequence ofdramatically increasing subordinate lodges' average sick benefitliabilities. While young joiners could have improved thissituation, IOOFBC leaders were pessimistic about new youngmembers being attracted to any IOOFBC benefit system.Fraternal lodges relied on the continued attraction of newmembers to keep the average sickness liabilities, hence costs ofproviding insurance, manageable for lodge resources. As we haveseen in Chapter 5, most men joined the Oddfellows before age 30and on average, remained in the lodge membership less than 5years. With a stream of joiners, the turnover in the membership209had three effects. First, as the majority of expected sicknessexperience came after age 45, young joiners and members, who wereunlikely to be sick and draw on lodge funds, balanced theliabilities to lodge funds represented by older members. Newjoiners also brought revenue to the lodge by way of initiationand degree fees which could be invested or used to meet currentlodge expenses or benefit claims. Third, and most important,members who left the membership by age 45 took their expectedliabilities from later in life with them. Once they exited thelodge membership, they rarely returned and as such, the lodgebenefitted by having received their dues and initiation fees butnot their liabilities expected after age 45.Many IOOF (and other fraternal organizations) insuranceactivities were explicitly predicated upon the continuedattraction of new members. For instance, in examining whether ornot the Grand Lodge of British Columbia should assume control ofthe IOOF Funeral Aid Association in 1939 the followingobservation was made:The whole basic structure for the continued successfuloperation of an Association such as the I.O.O.F. Funeral Aidis entirely predicated on the assumption that, year by yearsufficient new members will be enrolled at the younger agesto keep the average age of the membership at a level wherethe mortality ratio would not be excessive. It is notnecessary for us to elaborate on the fact that for quite afew years past this has been impossible, owing to suchvastly changed economic conditions. 15818Annual Proceedings of the Grand Lodge of the IOOFBC, 1939,p. 7316. The Funeral Aid Association was a voluntary associationof members of Subordinate and Rebekah Lodges of the Order. Thesubordinate lodges did pay funeral benefits of $30 to $100.210The IOOFBC Grand Lodge was also pessimistic about the Funeral AidAssociation's likelihood of attracting new members:The factor of Group Life Insurance was unknown on thisContinent until slightly over 25 years ago. ThisInstitution has now reached stupendous proportions wherethere are over seven million persons insured under the planwith a volume amount of insurance in force exceeding tenbillions of dollars. This plan insures groups of employeesand in the Province of British Columbia the majority of suchgroups are on a contributory basis whereby the Employer andEmployee share the cost. In no event, in this province, isan Employee permitted to pay more than sixty cents per monthper One Thousand of insurance. This plan is well known anddefinitely mitigates against the attractiveness of anAssessment Benefit Association to the person in the youngerage category. The factor also of Life Insurance in generaland Social Legislation has vastly changed in recent years,this however needs no comment.Through the 1930s, commercial insurers prospered as more workersthan ever before had no coverage, and governments enacted labourand tax legislation that encouraged employers and employees toarrange for group coverage through commercial insurers. 159Typically, these plans involved compulsory participation ofmembers of a designated group of employees. Thus, unlike theMembership in this Association was purchased in addition to lodgemembership if the member chose to do so. Of 8,869 Oddfellows andRebekahs in British Columbia in 1937, 1,850 belonged to theAssociation. The Funeral Aid Association was organized to "paysubstantial funeral benefits to Beneficiaries." It was explicitlystated that the IOOF Funeral Aid Association was "not an insuranceorganization, and does not guarantee continuity or amount ofFuneral Benefit that might be paid in future years, as its reserveis not set up on an actuarial basis." It was recommended to putthe Association "on a first class actuarial basis" at the presenttime lest in a few years time "it would be out of the question,unless members in the younger age category can be enrolled in tomembership in the Association in mass numbers in order to keep theaverage age at a favourable ratio."159Life insurance premiums were tax deductible from 1942 to1948. See Chapter 2.211situation in the 1930s where commercial insurers benefitted fromthe vast numbers of workers who were displaced from fraternalcoverage, or who were never in a financial position toparticipate in the fraternal system in the first place, after theDepression, the IOOFBC and other organizations faced thesituation that many prospective members already had insurancecoverage through the workplace.IOOFBC lodges that continued to provide sickness benefitsthrough the Depression faced a similar problem to that of theFuneral Aid Association. Before 1930, when fraternal insurersdominated the provision of sickness insurance, the organizationscould count on young workers without fraternal coverage beingattracted to the fraternal beneficial system. After 1939, youngworkers had alternative sources of insurance to consider, and inmany cases, coverage was an automatic benefit through theworkplace.The aging of the IOOFBC membership may have also providedyoung workers an additional disincentive to join. Gosden (1961)suggests that younger workers would not join English friendlysocieties where calls on society funds increased due to the agingof the members. He argues that many societies were dissolved forthat reason.If Gosden's (1961) story is consistent, then it is not hardto see why young workers were not attracted to the IOOFBC forinsurance after the Depression. In 1909, IOOFBC Cloverdale Lodgeno. 15 had operated for 18 years and the average age of the212lodge's 38 members was 37.1 years old. By 1919 the average ageof the lodge's 50 members was 40.4; by 1929 the average age of113 members was still 40.4. The maintenance of the average agereflected both the turnover in the membership and the attractionof new members throughout the pre-Depression period. Thedistribution of ages reveals a similar pattern. In 1909, 79% ofthe 38 members were under 45 years of age, hence in the lowexpected sickness period of their lives. By 1919, the proportionof members under 45 years of age had fallen to 66%, and by 1929the proportion under 45 had actually risen to 74%. Thisindicates that for each "old" member who had heavy expectedsickness in 1929, there were three "young" members paying duesand contributing little in the way of immediate liabilities.The snapshot of Cloverdale's membership in 1945 graphicallyshows the change in the Order's condition. After 15 years of nonew blood, there were 68 members with an average age of 52.2years. Only 30% of the members were under 45 years ageindicating that for every "young" member, there were two "old"members with high expected sickness benefit claims. Thus, beforethe Depression, the IOOFBC lodges had been successful inmaintaining a manageable average age. In the 20 years between1909 and 1929, the average age of the membership increased from37 to 40. From 1930 to 1945, this average age had increased from40 to 52.To examine the cost implications of this development, theages of members in Cloverdale 15 in 1929 and 1945, and sickness213data for 22,669 Ontario Oddfellows for the year 1896, were usedto calculate hypothetical expected sickness benefits for themembers of Cloverdale 15 in 1929 and 1945. 160 An interestingpoint to note about these two years, is that where the lodges hadnot reduced the prescribed value of weekly sickness benefits,such as Cloverdale 15, the real values of weekly benefits werethe same. m To calculate these benefits, the sickness relateddata for the Ontario Oddfellows for 1896 (See Chapter 3, Figures3.1 and 3.2) are used to estimate the expected probability ofsickness by age, and the expected length of sickness by age.The probability that a member of age A would be sick andclaim benefits was estimated first. The number of OntarioOddfellows of age A who were sick in 1896 was divided by thetotal number of Ontario Oddfellows who were of age A in 1896 tocalculate a claim rate C for each age. The logarithm of theclaim rate was then regressed on age yielding the followingestimated claim rate equation:mThese expected values are hypothetical because the sicknessexperience of Ontario Oddfellows may not reflect sicknessexperience from 1929 to 1945. The data are useful however, forillustrating the impact of an aging membership upon lodge costs ofproviding sickness benefits.lmThe Consumer Price Index for Canada reported as Series K8 inThe Historical Statistics of Canada 2nd ed. indicates that the CPIin 1945 was 43.5 (1971=100). The value of the CPI was also 43.5 in1925, 43.6 in 1930. Prior to 1945 the highest value of the CPI was54.3 in 1920. This peak was not surpassed until 1948 when the CPIreached 56.3.214log(C) = -2.6046 + 0.033707*(A-21)(0.065)^(0.00243)n=50^R2=0.8005(Standard errors are in parentheses) 162Next the expected duration of sickness for a member of age Awas estimated. The dependent variable was the logarithm of theaverage number of weeks of sickness experienced by sick OntarioOddfellows of each age. If TW was the total weeks sickness for NOddfellows of age A, and k of them were sick, then the averageduration of sickness is:Ww= 7Regressing log(w) on A resulted in the following estimatedequation:log(w) = 1.2065 + 0.01911*(A-21)(0.065)^(0.00229)n=50^R2=0.5918(Standard Errors are in Parentheses) 163The ages of Cloverdale 15's members in 1929 and 1945 wereused in these estimated equations to predict each member'sexpected sickness experience. The expected annual sickness162The age covariate was normalized by subtracting off theminimum observed age in the data. The estimated specification isconsistent with the expected sickness probability for a member ofage A being generated by either a Poisson or Binomial process. SeeChapter 4 for the moments of the Poisson distribution.163This specification is consistent with sickness duration beinggenerated from an exponential distribution. Again, see Chapter 4for the moments of the exponential distribution.k215experience for a member of age A is:E[^CAAThis value was then multiplied by 7 dollars, the value ofCloverdale 15's weekly IOOF sickness benefit to obtain themember's expected sick benefit claim.The distributions of expected sickness benefit claims arepresented in Table 6.1. The average of the hypothetical expectedannual sickness claims for the 113 members in 1929 was $5.94. 1"Given annual membership dues were $12 from 1891 to 1981, in 1929an average of only one half of membership dues was expected to bespent on sickness benefits. By 1945 with the significantly oldermembership, the average of annual expected sickness claims hadroughly doubled to $12.19, 19 cents more than members paid indues. Older members whose expected annual benefits exceededtheir annual membership represented an unambiguous deficiency tolodge funds. In 1945, 36% of the members had expected annualsickness claims of over 12 dollars, more than they paid in to thelodge in a given year. In 1929, only 10% of members representedthis complete deficiency to the lodge funds.By 1945, on average, membership dues would not be adequate1"In 1929, of Cloverdale's 113 members, 23 members claimedbenefits for a total of 109 weeks. Sickness benefit payments tothese members totalled $635, roughly $5.60 per lodge memberexpended on sick relief. Given that Cloverdale had a prescribedsickness benefit of $7 for each of the 2nd to 26th weeks ofsickness, the hypothetical average expected claim of $4.25,evaluated at $5 per week of sickness, is a reasonable estimate ofthe lodge's expected average liabilities.216to meet expected sickness benefits. This would have been aproblem since the lodge also had to meet operating expenses.In 1929, with an average of $5.94 expected sickness benefits permember, Cloverdale's average cost per member for "currentexpenses" was only $4. Consistent with the findings of Chapter4, dues of $12 were adequate on average to meet their expectedfinancial obligations. By 1945, the average cost per member of"current expenses" was $8.48 per member. The average total costper member for "current expenses" and expected sickness benefitpayments would have been $21.36, almost twice the amount a memberpaid per year in dues if the lodge continued to pay sicknessbenefits as it had before the Depression.6.3 DEPRESSION AND SOCIAL TRANSFORMATIONTwo high liability old members to each young low liabilitymember, limited prospects for new members, and alternativesources of coverage, were not the only reasons that subordinatelodge memberships chose to stop providing sick benefits topreserve their lodges' assets. The role of sickness benefits asa fraternal function, and how they should be provided, had been asource of contention for many fraternal memberships (See Chapter1). In 1934, IOOFBC Grand Master Turner expressed his feelingsabout the provision of sickness benefits:The results of reducing Benefits, will, I believe,prove beneficial instead of wrecking the Order as someseem to think. It is true Oddfellowship was built upby the payment of Benefits to our Sick Brothers, butthe conditions of today are vastly different. Let uscontinue to provide for those who need monetary217assistance, but not to all and sundry whether they needit or not. 165Up until 1930 the IOOF had a system of compulsory benefitswhere the Constitutions and By-Laws of the organization legallyrequired all subordinate lodges to provide stipulated, or stated,sickness benefits. Any member who was sick and unable to work,received the same benefit regardless of his personalcircumstances or need of the benefit. In 1931 the IOOFBCinvestigated the relationship between membership and stipulatedsick benefits. In "The Report of the Special Committee onStipulated Benefits", published in the 1931 Annual Proceedings ofthe Grand Lodge of the IOOFBC, the Committee came to theconclusion that too great a stress had been placed on thebeneficial side of the Order's activities, rather than thefraternal, in its appeal for members.As a result of the recommendation of the Committee onStipulated Benefits, the IOOFBC adopted an optional benefitsystem where the payment of stipulated benefits was left to thediscretion of the subordinate lodges. 166Changes to a lodge's By-laws and Constitution, like thediscontinuance of stipulated sick benefits, had to be put to a165Grand Master Turner, Annual Proceedings of the Grand Lodgeof the IOOFBC (1934), 6550.166The IOOFBC had corresponded with thirty other North AmericanIOOF jurisdictions. Of the thirty, twenty jurisdictions allowedoptional payment of stipulated benefits by subordinate lodges,three had compulsory abolishment of stipulated benefits and sevendid not respond.218vote amongst the lodge's membership. The British Columbia"Societies Act" of 1920 required that a subordinate lodge have a75% majority to carry any "extraordinary resolution". 167Several IOOFBC lodges took advantage of the 1931 legislativechange and reduced their benefits, some by as much as 50%. 168Some lodges, like IOOFBC Prince Rupert Lodge no. 63, abolishedsickness benefits altogether. Thus, in those cases where lodgesstopped providing sickness benefits, at least three-quarters ofthe membership had to favour the abolition.The timing of this development reflects that membersattracted primarily for the economic benefits of membership weremore likely to have exited the membership in the Depression thanmembers who joined primarily for social reasons. As incomes fellthrough the 1930s, members who placed a higher value on thesocial interactions associated with membership would have beenmore willing to bear the higher real cost of membership thanmembers attracted primarily for the sickness benefits. Whenmembers were unemployed, they were also ineligible for benefitsso unemployed members who placed little value on the social sideof membership would have had little incentive to remain with the167I0OFBC Annual Proceedings (1920), 4329. Prior to this Act,the IOOFBC Constitution and By-Laws required only a two-thirdsmajority.mIn the 1930s, many lodges reduced the nominal value ofsickness benefits, introduced one or two week waiting periods forsickness benefits and imposed maximum claims durations of one year.In addition to reductions in the nominal value of sicknessbenefits, inflation following World War II eroded of the real valueof the weekly benefit which had been fixed in nominal terms.219organization. That major changes to the IOOFBC's sicknessbenefit system occurred only after 1930 reflects that theDepression altered the balance of power between the pro- andanti- benefit factions of the organization.The distinction between economic and social members alsoinfluenced who remained in the membership through the 1930s inanother way. In 1934 emergency legislation was passed by theIOOF Sovereign Grand Lodge that allowed subordinate lodges toremit, or cancel, dues in arrears of unemployed IOOF Brothers tostem the loss of membership. The number of Brothers who hadbenefitted from this legislation was reported in the 1934 AnnualProceedings. 51 of 63 IOOFBC lodges filed reports concerningtheir use of the emergency legislation. For those 51 lodges,there were 3,973 members in good standing; 790 members whose dueswere more than 12 months in arrears; 575 Brothers who had theirdues remitted; and 227 Brothers who had their dues cancelled. 169The same 51 lodges also suspended 154 members for non-payment ofdues in 1934 suggesting that the emergency legislation was notapplied to all members equally. In particular, it is likely thatmembers who were socially active in the lodge, and popular, wouldbe more likely to have been retained through the emergencylegislation than members who were rarely seen at lodge meetings.Thus, there was likely some non-random retention of "social"members.169Annual Proceedings (1934), 6768.220Even at modest values of the weekly sickness benefits, thelodges faced an increasing operating deficit as the ages ofmembers meant that after operating expenses, the expectedliabilities of the members exceeded the revenues which theybrought to the lodge. The solution to this cost problem proposedand adopted by members who opposed the sickness benefits in thefirst place, was to preserve lodge assets and get rid of the sickbenefits altogether.6.4 THE IOOFBC'S PROPOSED REFORMSWhile subordinate lodges of the IOOFBC abandoned sicknessbenefits, the leaders of the IOOFBC in 1944 investigatedrevamping the Order's sickness and funeral benefit systems bycentralizing the operations and funds. Centralizing sick andfuneral benefits was considered to be an important reform since:individual members and individual lodges should, withoutdifficulty, realize that their obligations are to themembership at large; that equality in material assistance atthe time when needed is as important as the equal status weuniversally recognize in the fraternal relationships of ourOrder. We feel that such a move would materially strengthenour principle of Unity and could place the payment ofreasonable benefits on a sound financial basis.' 7°Centralizing IOOFBC benefits, however, was not straightforward asbeneficial activities were the function of subordinate lodgesunder the Constitution of the Sovereign Grand Lodge.Jurisdictional Grand Lodges did not have the power to create oroperate benefit systems.mAnnual Proceedings (1944), 7976.221In 1943, the Sovereign Grand Lodge of the IOOF authorizedthe jurisdictional Grand Bodies to establish centralized funeralbenefits, but not sickness benefits. The IOOFBC GrandRepresentative to the Sovereign Grand Lodge declared thislegislation as the most important adopted at the Session of theSovereign Grand Lodge since it was "the beginning of the centralfund idea." 171 In 1944 the IOOFBC Special Committee onStandardized Sick Benefits agreed that the centralized funeralbenefits legislation showed that the "trend of opinion is in thisdirection." The Committee on Standardized Sick Benefitsrecommended that the IOOFBC Grand Lodgeavail itself of the authority given by the Sovereign GrandLodge to inaugurate centralized funeral benefits; that aCommittee be appointed to go into the matter fully andreport at the next session on estimated costs per capita andproposed method of administration. Further we recommendthat our delegates to the next session of Sovereign GrandLodge be instructed to petition that Body to grant similarauthority to Grand Bodies to operate a scheme of CentralizedSick Benefits. °2The IOOFBC never implemented a system of centralized sickbenefits. Given that centralized funeral benefits had beenviewed as the start of the centralized fund idea, the rejectionof centralizing funeral benefits by the 1945 IOOFBC Committee onCentralized Funeral Benefits (established based upon the171"Grand Representative's Report," Proceedings of theSeventieth Annual Session of the Grand Lodge of the IOOFBC (1944),7973.172"Report of the Special Committee on Standardized SickBenefits," Proceedings of the Seventieth Annual Session of theGrand Lodge of the IOOFBC (1944), 7976.222recommendation of the 1944 Special Committee on Centralized SickBenefits) also signalled the rejection of centralized sickbenefits. If there was no point in centralizing funeralbenefits, there was no point in lobbying for the power tocentralize sick benefits. The Committee on Centralized FuneralBenefits concluded that the field of funeral benefits was bestleft to anticipated government insurance arrangements:We are limited to Five Thousand Subordinate members in thisJurisdiction, and as the average age of which mayapproximate fifty years, the cost of organizing andmaintaining this fund would be prohibitive. And taking intoconsideration, that the various Health and Insurance schemesas outlined by the Provincial and Dominion Governments, willcover the same field at a much cheaper rate. We recommendthat, in the meantime, the I.O.O.F. Funeral Aid Associationbe taken advantage of, as it provides an excellent workablesolution to the subject under consideration, and is initself a Centralized Funeral Benefit.' 73In the absence of changes in the beneficial system, thedecline of IOOFBC sickness insurance was given a further boost bythe period of inflation after 1945. Inflation quickly eroded thereal value of fraternal sickness benefits and increased lodgeoperating expenses. By 1948 current expenses per member for theIOOFBC were $12.30, 30 cents more than the prescribed membershipdues. Thus, lodges that continued paying sickness benefits wererunning down revenues to pay a benefit that many IOOFBC leadersconsidered to be of little or no real value to the recipient.This state of affairs prompted the Grand Master of the IOOFBC in1950 to express a statement that signalled the end of the173Coramittee on Centralized Funeral Benefits, Annual Proceedingsof the Grand Lodge of the IOOFBC (1945) , 8083-8084.223IOOFBC's sickness insurance function:We are not a "mere beneficial Society" and yet the insuranceangle is still perpetuated by a continuance of stipulatedbenefits which in this day and age are so meagre andinsufficient to meet the needs and necessities of the day asto render them almost a travesty of the term "Benefits". Inorder to qualify for these so-called Benefits we placehandicaps on prospective members by insisting on medicalexaminations, by carrying a scale of charges for initiationwhich apparently indicates that a man who has reached theprime of life and has acquired those ideas and thatstability of mind which our Order so badly needs must pay ahigher initiation fee which, as he continues to grow inexperience and formation of character, will become stillhigher. It would almost appear that we do not wantapplications from those of our fellow citizens who havereached or passed the age of forty, and therefore we askthem to pay the higher entrance fee. I believe that thetime has arrived to eliminate those graduated fees and havea flat initiation fee for all, irrespective of age, and withthe elimination of stipulated Benefits, medical examinationscould also be eliminated and a system of grants to meet theneeds of the case where one of our members is in financialdifficulties through continued illness could be inaugurated,which would not be any more of a drain on our resources thanour present method of stipulated Benefits which have littleor no value in cases of illness or distress. 1746.5 CONCLUSIONSThe IOOFBC withdrew from its insurance function after theDepression as it was not reasonable, or desired by the remainingmembers, to revamp IOOFBC beneficial systems. After 15 years oflittle new blood in the organization, the liabilities of theremaining membership rendered fraternal insurance an impracticalarrangement for insurance relative to the alternatives which hadsprung up since the end of the Depression. At the same time, the174Grand Master James Haslett, Proceedings of Special Sessionof the Grand Lodge of British Columbia I.O.O.F. (1950), 8588-8589.224disruption to the membership led to a social transformation ofthe organization. The voice in favour of providing sicknessbenefits disappeared as members who participated on the socialside of lodge operations were systematically retained. Theirsolution to the emerging cost problems of IOOFBC lodges after1939 was to eliminate sickness benefits altogether.225TABLE 6.1Distribution of Expected Sick Benefit Claims for Membershipsof IOOFBC Cloverdale Lodge no. 15 forExpected Benefit($)1929 and 1945% 1929^% 1945[0,5) 58 24[5,10) 20 34[10,15) 7 21[15,20) 1.5 10[20,25) 2.5 1.5[25,30) 0 4[30,50) 1 4[50+) 0.0 1.5Number of Members 113 68Mean Claim Size 5.94 12.19Max. Claim Size 35.11 81.74226CHAPTER 7CONCLUSIONSTo illustrate the lessons to be learned from this analysisof fraternal sickness insurance, consider the following parableof the development of the welfare state that was included in the1985 Royal Commission on the Union and Development Prospects forCanada (MacDonald Commission):The new economic and industrial order left peopleparticularly vulnerable to the loss of earnings of theprimary breadwinner during periods of unemployment, illness,disability and old age. At the same time, traditionalsocial institutions, such as the family, the church, and thelocal community, were less and less able to cope withCanadians' social needs. The traditions of private charity,which were an important part of the small, stable andclosely knit communities in rural areas and small towns,eroded steadily in the face of a mobile and increasinglyurban population. The intense economic and socialdislocation of the 1930s graphically demonstrated theinadequacies of the traditional welfare mechanisms and theneed for a more comprehensive system of social security...The pressures for social reform thus flowed, in the firstinstance, from economic development ... The twentiethcentury witnessed a growing acceptance of the legitimacy ofsocial security and, more generally, a deepening belief inthe importance of a wider set of social rights which wouldcomplement the legal and political rights alreadyestablished. In the period that followed the Second WorldWar, these ideas were reinforced by the spread of economictheories that were much more compatible with significantincome redistribution than earlier orthodoxies had been ...During the first half of the twentieth century, support forthe welfare state grew steadily. Intellectuals, socialreformers, and the developing profession of social workoften led the way in documenting the severity of socialproblems and outlining blueprints for their solution...Organized labour, which grew rapidly after the mid-1930s,also became a consistent champion of expansion of thewelfare state. In addition to these external pressures,reformist elements developed within the major politicalparties and in part of the senior civil service. Moreover,established political leaders were clearly sensitive to the227broad current of public support for social spending. 15This story of the welfare state's development contains severalkey themes. First, traditional social institutions were alwaysinadequate but it took the Depression to demonstrate the need forbetter, more comprehensive arrangements. Second, the developmentof welfare state institutions is attributed to the enlighteninginfluence of the Depression. The efforts and influences ofpoliticians, unions, social reformers, intellectuals and civilservants are credited as the driving forces behind the creationand establishment of welfare state institutions.The preceding study of IOOFBC sickness insurance provides anew context within which to examine these themes and the accuracyof them. Before 1930 there was an extensive formalized system ofsocial insurance. 13% of the population in British Columbia hadhealth/sickness insurance coverage through membership infraternal organizations. This extent of coverage did not changeuntil the 1930s. Fraternal sickness insurers catered to mobileand urban populations and stable rural populations.As we have seen, fraternal insurance was more than anexperiment in social insurance, and deserving more than afootnote in social insurance history. Up until 1930, fraternalinsurance was one of the most important sources of sicknessinsurance, health insurance and life insurance throughout themCanada, Report of the Royal Commission on the Economic Unionand Development Prospects for Canada, vol. 2 (Ottawa: Departmentof Supply and Services, 1985), 545.228world. Fraternal insurers were able to provide insurance at alower cost than commercial insurers through the use of screeningand peer monitoring to alleviate problems of adverse selectionand moral hazard. Through their non-profit motives, theseorganizations also had lower operating costs than commercialinsurers.Critics of fraternal insurance argued that the fraternalcost advantage was the result of hazardous pricing practices.While they may have had low costs, they led a financiallyprecarious existence. Chapter 4 demonstrated that this is infact not a good explanation of why fraternal insurance declined.An analysis of IOOFBC lodges for the period 1891 to 1950 revealsthat even with the most hazardous of pricing practices, IOOFBClodges had almost no probability of being bankrupted by highclaims. Early in lodge operations, revenues not spent onoperating costs, or current sick benefit claims, were invested inassets, like the lodge hall, which generated a stream of revenuethat subsidized lodge operations and benefit payments. Thus,while dues revenues alone were not adequate to meet expectedliabilities, dues plus the additional revenue generated byinvested funds were more than adequate.Given that fraternal insurers were viable the questionremained as to why they were not an important source of insuranceafter the Depression, and why commercial and other arrangementsflourished after the Depression. An analysis of the membershiphistories of 1044 members of four IOOFBC lodges revealed that for229the IOOFBC, the 1930s were unlike any period before. The impactof the Depression resulted in more workers than ever before beingwithout coverage as the probability of suspension for non-paymentof dues tripled. In the 1930s, IOOFBC sickness insurance wasworthless for members and prospective members since they wouldhave had little expectation of remaining in the membership longenough to collect sick benefits that were primarily needed afterage 45. These factors created the necessary demand conditionsfor commercial insurers to gain a valuable foothold in the fieldof sickness insurance.Through and after the Depression, the IOOFBC lodgesabandoned their insurance functions for two reasons. First,memberships had aged so much between 1930 and 1945, that theinsurance that lodges could provide was more costly than thatprovided by commercial and government insurers. If changes werenot made to the IOOFBC subordinate lodges' dues and benefits,lodges would have had to potentially draw on their assets to meettheir obligations. The solution adopted was to abandon sickbenefits altogether as members who had always been opposed to theinsurance function gained control of the organization after 1939.It thus appears that the 1930s purged the Order of membersprimarily interested in insurance, while the more "social" andpopular members were retained through the Depression. Thus, onlyonce the 1930s had pared down the membership could these membersget the 75% majority support necessary to enact changes to thelodge constitution.230The sum of these findings suggests that contrary to theMacDonald Commission's parable, traditional social institutionswere not "less and less able to cope with Canadians' socialneeds." Instead there was no impetus for welfare stateinstitutions until the severe economic conditions of theDepression devastated the existing institutions and encouragedthe growth of new welfare institutions. Rather than havingdemonstrated "the inadequacies of the traditional welfaremechanisms", the economic conditions of the Depression createdthe necessary conditions for the fraternal system to give way tothe seeds of paternalism which we refer to as the welfare state.Finally, this work establishes that, historically, fraternalmethods of social insurance were workable solutions to theeconomic insecurity of workers. It is natural to extend acounterfactual argument that had the Depression not happened,fraternal insurance may still have been widespread today. Thiscounterfactual, however, is not completely appropriate because somany other factors have changed. 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Winnipeg: Workers Benevolent Association ofCanada, 1972.Zelizer, V.A. Morals and Markets: The Development of LifeInsurance in the United States. New York: ColumbiaUniversity Press, 1979.239APPENDIX 1: I.O.O.F.B.C. Sickness Insurance ArrangementsAdmission fees, dues and benefits were set by individuallodges subject to the guidelines established in the Constitutionof the Grand Lodge. This Appendix presents both the Grand LodgeConstitutional requirements and price/benefit arrangementsobserved in IOOFBC lodges. All information has been gatheredfrom the Constitution, By-Laws and Rules of Order for thesubordinate lodge in question. The date in brackets under thelodge name refers to the year the By-Laws that I had werepublished. Amendments were only noted if the official amendmentwere still on file at the Grand Lodge of the IOOFBC.Grand Lodge Constitutional Guidelines, (1910):Initiation Fees: $10 minimum for initiate of any age.($6 minimum after 1941)Dues:^$12 minimum annual contributions.($10 minimum after 1941)Degree Fees:^$3 for First and Second Degrees.$4 for Third Degree.($3 for Third Degree after 1941)Benefits:^$10 per week max. for each dollar of monthlycontribution for a max. period of 6 monthscontinuous sickness.$7.50 per week max. after 6 months for eachdollar of monthly contribution.$5 per week max. after 12 months for each dollarof monthly contribution.$2 per week min. for first 12 months ofcontinuous claim.$1 per week min. after 12 months of continuousclaim.Lodges could impose a one or two week waiting period forbenefits. Amendments in 1941 allowed lodges to pay no benefitsafter 12 months of continuous claim. As of 1941, lodges had theoption of providing stipulated benefits in accordance with theabove guidelines, or pay no stipulated benefits at all. Prior tothat, all I.O.O.F.B.C. lodges had to provide the stipulatedbenefits.Stipulated Fees and Benefits in Lodge By-Laws:Lodge^Dues^Initiation Fees^Benefits($/year) ($)^Age ($/wk) WeeksWestern Star 12^15 <30^5^firstno. 10^ 15+(age-30)^[30,40)^9 2 to 26(1910) 15+2(age-30)^[40,45)^7^27 to 5215+4(age-30) [45,50)^5 53 +15+5(age-30)^[50+)240(Western Star no. 10 also stipulated $1 per member funeralassessments.)Stipulated Fees and Benefits in Lodge By-Laws:Lodge^Dues^Initiation Fees^Benefits($/year) ($)^Age^($/wk) WeeksCloverdale^12^10 <30^2^firstno. 15 15^[30,40)^10^2 to 26(1910) 15+2(age-40) [40,50)^5^27 to 5215+4(age-40) [50+) 2^53 +(By-laws were amended in 1916 such that only $7 per week was paidfor 2nd to 26th weeks of continuous sickness and $3.50 per weekfor the next 26 weeks. Cloverdale had $1 per member funeralassessments.)Duncan no.^12^10^<26^2^first17^ 10+(age-26)^[26,36)^5^second(1929) 10+2(age-26)^[36,46)^7.50 3 to 2610+5(age-26) [46+) 5^27 to 523^52 +(Amended in 1935 such that no benefits were paid for first twoweeks sickness; $5 per week for the third to 26th weeks; $2 perweek for the next 26 weeks; and no benefits paid after the 52ndweek of continuous sickness.)Slocan no.^12^10^<35^0^1 to 240^ 10+(age-35)^[35+) 6.50 3 to 27(1933) 2.50 28 to 520^52 +(Slocan had $1 per member funeral assessments. These are theschedules for the lodge following amendments in 1933 to theoriginal Constitution and By-laws.)Prince Rupert 12^ no benefitsno. 63^ provided(1941)(The abandonment of stipulated benefits was only legally possiblefollowing the Grand Lodge's legislation and Constitutionalchanges in 1941.)241APPENDIX 2: Data Description for Chapter 4The Constitution of I.O.O.F.B.C. subordinate lodges requiredsubordinate lodges to file Semi-Annual Returns for the termsbeginning on the first day of January and on the first day ofJuly of each year. The Semi-Annual Returns provided to the GrandLodge included the names of individuals initiated, admitted bycard, admitted as an Ancient Odd Fellow, suspended or expelledand the cause thereof, reinstated and deceased. The Semi-AnnualReturns also reported the number of degrees conferred, the totalnumber of members at the end of the term, the amount of percapita tax to be paid to the Grand Lodge for its operations andthe amount of all lodge receipts.Annual Returns were also to be filed with the Grand Lodge atthe end of the second term of each year in January. The AnnualReturn listed the names of members in the lodge as of the end ofthe term ranked according to the degrees attained. The Returnalso listed the number of members relieved in the past year, thenumber of widowed families relieved, the number of membersburied, the number of sisters buried, the amount of money appliedto each of these purposes, and the amount paid for the educationof orphans. Finally, the Annual Returns listed the amount paidfor current expenses and the total value of the assets of thelodge.A.1 SELECTION OF LODGES FOR THE ANALYSIS:The seven lodges used in this analysis were selected becausetheir detailed membership records were returned to the GrandLodge of the IOOFBC following the surrender of their lodgecharters. These lodges had smaller memberships than the IOOFBC,and had lower average revenues from sources other than dues. Itappears that these lodges are representative of small town, orrural lodges that were possibly more prone to financial failurethan the larger urban lodges which on average had "high" surplusrevenues and had higher values of lodge assets.The lodges also closed at different times. Cloverdale no.15 opened in 1891 and closed in 1980; Duncan no. 17 opened in1892 and closed in 1980; Silver City (Sandon) no. 39 opened in1897 was inactive since 1935 but closed officially in 1939 whenthe remaining membership and assets were merged with Slocan no.40; Slocan no. 40 opened in 1897 and closed in 1971; PrinceRupert no. 63 opened in 1910 and closed in 1978; Corbin no. 64opened in 1910 and closed in 1935; and finally, Maple Ridge no.32 opened in 1921 and closed in 1980.A.2 VARIABLES:MEMBERSHIP: The number of members for a lodge in a given year is242the reported number from the Semi-Annual Return filed for theterm July 1 to December 31. Thus, the number of members used inthe analysis is the number of members reported in the lodge inDecember of the year in question. This "stock" variable is theonly membership information used from the Returns. See Table 1for the average memberships and comparison to the I.O.O.F.B.C. ingeneral.REVENUES: Semi-Annual Returns reported the "total amount" oflodge receipts, receipts from dues, from admission and degreefees, rents and interest on invested funds, and from all othersources. All revenues reported are current values. Duesrevenues appear to include revenues from assessments levied onmembers to pay for funeral benefits. Dues typically accountedfor 60% to 75% of total revenues before 1930.SICKNESS RELIEF EXPENDITURE: The number of claims paid, (k inthe Chapter) is reported in the Annual Return as the number ofbrothers relieved. Also reported is the "total No. of weeks forwhich sick benefits were paid". The "total amount paid for therelief of brothers", (which is Z in the Chapter), includes thepayment for stipulated weekly sickness benefits and any othersickness related expenditures. Sickness relief expenditures wereabout 30% of total lodge expenditures and 80% to 90% of totallodge relief expenditures.OTHER RELIEF EXPENDITURES: Also reported in the Annual Returnswere the number of brothers buried, the number of widowedfamilies relieved, the amounts paid for relief of orphans andwidowed families, the amount paid for burying the dead, theamount paid for special relief and the total amount expended forrelief. The amounts expended on widows and orphans tended to beinfrequent and small with only the occasional payment of $25 towidowed families. Funeral benefits accounted for only 5% oftotal lodge expenditures. Special relief payments were small andinfrequent before the depression of the 1930s, but during thedepression, special relief payments to financially distressed OddFellows increased in importance. After 1939, special reliefremains important through contributions to communities and thewar efforts. In the risk loading and Probability of ruinanalysis, these expenditures were treated as part of currentexpenses.CURRENT EXPENSES: The current expenses reported in the AnnualReturns are all lodge expenditures other than on benefits andcharities. Any administrative costs, lodge operation costs likeheating and physical up-keep, and the Grand Lodge per capita taxare included in this variable. These expenditures accounted forabout 60% of total lodge expenditures.ASSETS: The Annual Returns reported a lodge's "Total amount ofassets of all kinds (Real Estate, Stock, Regalia, Furniture,243Money Invested and in Treasury, including Widows and OrphansFund)". Prior to 1926 only this total is reported. This isunfortunate since typically furniture and regalia, and membershipdues in arrears, which is also included, are considered toinadmissable assets for liquidation. Most of the value of lodgeassets was in the lodge hall property, other properties, cash andin Government Bonds. In some cases like Bulkley Lodge no. 30 inSmithers B.C., after 1926 it appears that most of the lodgeassets were held as dues in arrears and regalia. The total isdisaggregated only after 1926. It is not clear how the reportedvalue was calculated by the lodge, other than it may reflect thecumulative purchase prices of property, furniture and regalia,plus bond values and the amount of dues owing plus cash on handand in the bank. There is no explicit depreciation adjustmentsuntil 1948, and it is not obvious if any discounting of assetvalues was made. Finally, it appears that the reported value oflodge assets could underestimate the true value in some cases.When the Maple Ridge 32 lodge hall and property were sold in the1960s, they had asset values of $8,000 reported, but revenues of$30,000 from the sale of the assets. In 1912, the IOOFBC hadtotal reported value of assets of $1,045,198.244APPENDIX 3: Methodology of Follmann, Goldberg and May (1990)Applied to the Estimation of Period Specific Hazard FunctionsConsider the following hazard function for a hypotheticalindividual who joined an Odd Fellows lodge before 1929:h (t)=6 (Y e-Yb)^if Ye<1929,=g (Ye-1929)^if 1930<Y e<1939,^(A.1)=f1(Ye-1939) if Ye>1940.6(t), g(t) and n(t) represent potentially different hazardfunctions. The Overall hazard function h(t) is thus specified by6(t) for the length of time a spell was in progress before 1930;then g(t) for the portion of time the spell was in progress 1930-1939; and finally, n(t) for the length of time a spell was inprogress after 1939. Follmann, Goldberg and May (1990)demonstrate that the overall likelihood function for estimatingh(t) factors into the distinct contributions of the disjointperiods.For a hazard function h(t), the density r(t) and survivorfunction R(t) are given byr ( t) =exp [ -lo th ( u) du] h ( t) ,^R ( t) =exp [ -fo t h (u) du] .^(1)When h(t) has the form given in (A.1), the density and survivorfunction can be rewritten as in Table A.1.TABLE A.1DENSITY AND SURVIVOR FUNCTION BASED ON h(t) OF (A.1)PERIOD^DENSITY, r(t)^SURVIVOR FUNCTION, R(t)Ye<1929^F(t)6(t) F(t)1930<Ye<1939 F(T .)•G(Y2-Y * )^F(T*)•G(Ye-Y*)•A(Ye-YYe>1939^F(Ts)•G(T")^F(T*)•G(T**)•K(Y**e-Y)•K(Ye-Y ** )•fl(Ye-Y ** )Notes: r=MAX(Y b , 1929) ; Y s*=MAX(Yb , 1939) ; T •=MAX(1929-Yb , 0) ; andT • =MAX(1939-Y * ,0). F(t) is R(t) evaluated when h(t)=6(t);G(t) is R(t) evaluated when h(t)=µ(t); and K(t) is R(t) evaluatedwhen h(t)--n(t).Suppose that we have n observations of (t i ,d), i=1,...,n,where t i is length of time until member i's spell ends or iscensored, and d i is a dummy variable equal to 1 if the spellcompletes, and 0 if the spell is censored at length^The n245(Yf-Y ib ,dd(1929-V,0)(1929-V,0)(-,-)(-, -)(-, -)(^-)^( - -)(Yf -1929,dd^(-,-)(1939-1929,0)^(Yf-1929,d1 )(Yf-1929,dd(1939-Yf,0)(-, -)observations of (t i ,dd can be grouped as follows:n 1 observationsn2 observationsn3 observationsn4 observationsn5 observationsn6 observationswherewherewherewherewherewhereYb<1929 and Ye<1929Yb<1929 and 1929<Ye<1939Yb<1929 and Y c>19391929<Y6<1939 and Ye<19391929<4<1939 and Y e>1939Yb>1939 and Ye>1939The likelihood function for the n=n 1+n2+n3+44+n5+n6 observations is:L (8^ca) ,irTn r ti) diR ti) 1-di=Tr r(ti) diR(ti) i-dixTr2 +n, r(ti)^1-di rr+n,+n6^di^1-diR(ti )^x^r(ti)R(ti)i=1^ i=1Substituting for r(t) and R(t) from Table A.1 gives:L (8, , ) =1E1 1 F( ti ) ( ti )^F(T1)'G(Ye-11)1.1(Yie-YDdiXrini3:111/2"6 F(Ti) *G ( T1 * ) *K(Y - yr) .0 ( ye - yziP * ) diFollowing Follmann et al., rearranging and collecting termsyields:Hrini+n,+n, F (wi) .45 (wi) sixrii2.73 +nen5G(ui) (uii=1=Li (a) ..L2 (11)'L3 ( )ft. 3:1125"6 IC(qi) .0 (qiwhere (Wi, Si) , (ui ,s:), and (cli ,s i") are defined in TABLE A.2.TABLE A.2N^INTERVAL^S SAMPLE^g SAMPLE^n SAMPLE(wit Si)n l^Yb<1929ye<1929n2^Yb<19291929<Ye<1939n3^Yb<19291939<Yen4^1929<Yb<1939Ye<1939n5^1929<Yb<1939Y'1939n6^Yb>1939Y > 1939Using the data transformation in TABLE A.2, the overalllikelihood function L(s,A,n) factors into functions of 6, A and nthus, the overall likelihood function can be maximized by246maximizing L 1 (6), I12 (1) and L3 (fl) separately. From the original nobservations three samples have been created; the 1 6' samplecontains n 1+n2+n3 observations of (w; , s ;) are used to estimate 6;the Wsample consisting of n2+n3+n4+n5 observations of (u ; , s;) isused to estimate g; and finally the , n , sample with n3+n5+n6observations of (q ; , s ;") is used to estimate n.247

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