The first problem, then, in placing the principles of insurance into practice is to select suitable lives for insurance. By selection is ordinarily selection meant that examination of applicants by Defined - competent physicians in order to exclude all whose present or prospective physical conditions or mental characteristics are below the standard required by
the insurance societ}’. This medical examination is, then, one of the methods devised to prevent adverse selection, that is, the conscious or unconscious attempt to secure insurance by persons who are undesirable risks. Another method used by the company to prevent adverse selection is the incorporation of certain protective clauses in the contract, such, for example, as the suicide clause which frees the company from liability if the insured commits suicide within a certain period, usually one or two years. Adverse selection is again illustrated in the tendency of individual poor risks to select the cheaper plans of insurance, and again in the case of those seeking to defraud the company. Anything which adversely affects the company’s interest in so far as it is interested in securing a group of individuals who will experience the normal experience is adverse selection. That is to say, the effort on the part of the company is to secure a group of persons who will have equal chances of risk and benefit from insurance. The lives thus chosen by the company through its agents, who are supposed to exercise good judgment in soliciting applicants, and the medical examiners, who carefully examine them, are called select lives. It has been found from long experience in insuring lives that the rate of mortality among the recently insured is lower than among the. general population or among a noninsured group of equal ages which has healthy and unhealthy individuals among it. Not only is this true, but it has been found that an insured group recently selected has a lower mortality rate than a group of insured lives of equal age but of longer duration of insurance. For example, 1000 individuals insured at 30 years of age would show for a period of about five years thereafter a lower mortality than the mortality shown for the next five years of 1000 individuals, insured at 25 years of age, but now 30. This temporary Selection advantage to the company is called the benefit of selection. This advantage enables a company to use as expenses or as dividends, which may be used to reduce the premiums, the funds
thus saved, since this selection means the actual losses will be below the calculated. It is the experience after five years which is used as a basis for operating the company. This favorable mortality on recently insured lives also explains why newly formed companies or companies which are increasing their numbers rapidly have frequently such a low percentage of actual to xpected mortality.