These returns show that of these companies only twenty-three now compute reserves upon a rate as high as 3½%, while forty-four assume 3% and seven a still lower rate. But in America, when the business first became important 6% was a more frequent rate of investment than 5%, and the laws of New York and of many other states countenanced the confident expectation of a permanent yield of at least 4½%. The rate of 4% adopted by the principal companies, and by the law of Massachusetts from 1861, was regarded as highly conservative. But as early as 1882 one important company began to reserve upon new business at 3%, and since 1895 there has been a gradual change by the leading offices to 3½%, and in a few instances to 3%, as the basis of premiums and of reserves upon new policies. Serious efforts have been made to induce legislation which will gradually establish one of these rates as a test of technical solvency.
These returns show that of these companies only twenty-three now compute reserves upon a rate as high as 3½%, while forty-four assume 3% and seven a still lower rate. But in America, when the business first became important 6% was a more frequent rate of investment than 5%, and the laws of New York and of many other states countenanced the confident expectation of a permanent yield of at least 4½%. The rate of 4% adopted by the principal companies, and by the law of Massachusetts from 1861, was regarded as highly conservative. But as early as 1882 one important company began to reserve upon new business at 3%, and since 1895 there has been a gradual change by the leading offices to 3½%, and in a few instances to 3%, as the basis of premiums and of reserves upon new policies. Serious efforts have been made to induce legislation which will gradually establish one of these rates as a test of technical solvency.
There are not wanting, however, indications that the protracted decline in rates of interest in the world’s markets may have been checked, and even that a reverse movement has begun. Rates of discount everywhere, interest on government loans except in America, and on mortgage loans in Europe, have on the whole advanced, the minimum average rates having been reached, after twenty-five years of gradual reduction, in 1897. These facts are entirely consistent with the conclusions suggested by the history of the subject. No uniform or secular tendency to reduction in the average rate of interest, which is the index of the average productiveness of capital, not of its amount, can be found to have prevailed. Fluctuations in the average rate are found, quite independent of the local and temporary fluctuations, which are often extreme; and these long tidal waves of change have at times, for generations together, risen and fallen with some approach to periodicity. The prevailing rate has been a littlelower on the average in the 19th century than in the 18th, but was lower through the middle decades of the 18th century than through those of the 19th. On the whole, it seems clear that the accumulation of wealth in itself has no necessary tendency to diminish the productiveness of capital; that this productiveness, on the general average, has not materially varied in many generations; but that the promise and expectation of productiveness which prompt the demand for its use depend upon the activity of enterprise, growing out of the prevailing spirit of hope; upon the rapidity with which new inventions are made, industries extended, and floating or loanable capital expended in permanent works. These conditions are subject to fluctuations extending through considerable periods, so that for a number of years the rate may be higher, and then for a similar series of years lower than the normal rate, determined by average productiveness, but always tending to return to this normal rate, as the tide-swept surface of the ocean to its normal level.
While the excess of the average yield of capital in America, above that of the older nations, is diminished as the facilities of transfer and exchange increase, there is no reason to conclude that it will disappear for generations to come. It seems, therefore, that the general assumption of 3% for the valuation of British offices, and that of 3½% which is becoming the accepted standard for the companies of the United States, should command unquestioned confidence.
While the excess of the average yield of capital in America, above that of the older nations, is diminished as the facilities of transfer and exchange increase, there is no reason to conclude that it will disappear for generations to come. It seems, therefore, that the general assumption of 3% for the valuation of British offices, and that of 3½% which is becoming the accepted standard for the companies of the United States, should command unquestioned confidence.
The business of life insurance being founded on well-ascertained natural laws, and on principles of finance which in their broad aspect are of the simplest description, there exists no necessity for frequent close scrutiny of the affairs of anAssets and reserve.insurance office, in so far as the maintenance of a mere standard of solvency is concerned. We have seen that the premiums charged for insurances are based on certain assumptions in regard to (1) the rate of mortality to be experienced, (2) the rate of interest to be earned by the office on its funds, and (3) the proportion of the premiums to be absorbed in expenses and in providing against unforeseen contingencies. If these assumptions are reasonably safe, an insurance office proceeding upon them may be confidently regarded as solvent so long as there is no conspicuously unfavourable deviation from what has been anticipated and provided for, and so long as the funds are not impaired by imprudent investments or otherwise. The ascertainment and division of profits, however, require that the affairs should be looked into periodically; but the fluctuations to which the surplus funds are liable within limited periods of time are generally regarded as furnishing a sufficient reason why such investigations should not take place too frequently. Accordingly in most offices the division of profits takes place only at stated intervals of years—usually five or seven years—when a complete survey is taken of the whole engagements present and future, and of the funds available to meet these. The mode in which the liability of an office under its current policies is estimated requires explanation.
All statistical observations on the duration of human life point to the conclusion that, after the period of extreme youth is past, the death-rate among any given body of persons increases gradually with advancing age. If, therefore, insurance premiums were annually adjusted according to the chances of death corresponding to the current age of the insured, their amount would be at first smaller, but ultimately larger, than the uniform annual payment required to insure a given sum whenever death may occur. This is illustrated by the following figures, calculated from the HMmortality table at 3% interest. In column 2 is the uniform annual premium at age thirty for a whole-term insurance of £100. In column 3 are shown the premiums which would be required at the successive ages stated in column 1 to insure £100 in the event of death taking place within a year. Column 4 shows the differences between the figures in column 2 and those in column 3.
From this table it appears that if a number of persons effect, at the age of thirty, whole-term insurances on their lives by annual premiums which are to remain of uniform amount during the subsistence of the insurances, each of them pays for the first year £1.130 more than is required for the risk of that year. The second year the premiums are each £1.111 in excess of that year’s risk. The third year the excess Is only £1.093, and so it diminishes from year to year. By the time the individuals who survive have reached the age of fifty-four, their uniform annual premiums are no longer sufficient for the risk of the following year; and this annual deficiency goes on increasing until at the extreme age in the table it amounts to £95.207, the difference between the uniform annual premium (£1.880) and the present value (£97.087) of £100 certain to be paid at the end of a year. Now, since the uniform annual premiums are just sufficient to provide for the ultimate payment of the sums insured, it is obvious that the deficiencies of later years must be made up by the excess of the earlier payments; and, in order that the insurance office may be in a position to meet its engagements, these surplus payments must be kept in hand and accumulated at interest until they are required for the purpose indicated. It is, in effect, the accumulated excess here spoken of which constitutes the measure of the company’s liability under its policies, or the sum which it ought to have in hand to be able to meet its engagements. In the individual case this sum is usually called the “reserve value” of a policy.
In another view the reserve value of a policy is the difference between the present value of the engagement undertaken by the office and the present value of the premiums to be paid in future by the insured. This view may be regarded as the counterpart of the other. For practical purposes it is to be preferred as it is independent of the variations of past experience, and requires only that a rate of mortality and a rate of interest be assumed for the future.
According to it, the reserve value (nVx) of a policy for the sum of 1, effected at age x, and which has been in force for n years—the (n + 1)th premium being just due and unpaid—may be expressed thus, in symbols with which we have already become familiar.nVx= Ax+n− Px(1 + ax+n)(1).If we substitute for Ax + nits equivalent Px + n(1 + ax + n) this expression becomesnVx= (Px+n− Px) (l + ax+n)(2);whence we see that the sum to be reserved under a policy after any number of years arises from the difference between the premium actually payable and the premium which would be required to assure the life afresh at the increased age attained. By substituting for Px+nand Pxtheir equivalents 1/(1 + ax+n) − (1 − v) and 1/(1 + ax) − (1 − v), we obtain another useful form of the expression,Vx= 1 −1 + ax+n1 + ax(3).=ax− ax+n1 + ax(4).
According to it, the reserve value (nVx) of a policy for the sum of 1, effected at age x, and which has been in force for n years—the (n + 1)th premium being just due and unpaid—may be expressed thus, in symbols with which we have already become familiar.
nVx= Ax+n− Px(1 + ax+n)
(1).
If we substitute for Ax + nits equivalent Px + n(1 + ax + n) this expression becomes
nVx= (Px+n− Px) (l + ax+n)
(2);
whence we see that the sum to be reserved under a policy after any number of years arises from the difference between the premium actually payable and the premium which would be required to assure the life afresh at the increased age attained. By substituting for Px+nand Pxtheir equivalents 1/(1 + ax+n) − (1 − v) and 1/(1 + ax) − (1 − v), we obtain another useful form of the expression,
(3).
(4).
The preceding formulae indicate clearly the nature of the calculations by which an insurance office is able to ascertain the amount of funds which ought to be kept in hand to provide for the liabilities to the assured. In casesNet liability.other than whole-term insurances by uniform annual premiums, the formulae are subject to appropriate modifications. When there are bonus additions to the sums insured, the value of these must be added, so that by the foregoing formula (1), forexample, the value of a policy for 1 with bonus additions B is (1 + B)Ax+n− P(1 + ax+n). But the general principles of calculation are the same in all cases. The present value of the whole sums undertaken to be paid by the office is ascertained on the one hand, and on the other hand the present value of the premiums to be received in future from the insured. The difference between these (due provision being made for expenses and contingencies, as afterwards explained) represents the “net liability” of the office. Otherwise the net liability is arrived at by calculating separately the value of each policy by an adaptation of one or other of the above formulae. In either case, an adjustment of the annuity-values is made, in order to adapt these to the actual conditions of a valuation, when the next premiums on the various policies are not actually due, but are to become due at various intervals throughout the succeeding year.
So far in regard to the provision for payment of the sums contained in the policies, with their additions. We now come to the provision for future expenses, and for contingencies not embraced in the ordinary calculations. In what is calledProvision for expenses, &c.Net-premium method.the “net-premium” method of valuation, this provision is made by throwing off the whole “loading” in estimating the value of the premiums to be received. That is to say, the premiums valued, in order to be set off against the value of the sums engaged to be paid by the office, are not the whole premiums actually receivable, but the net or pure premiums derived from the table employed in the valuation. The practical effect of this is that the amount brought out as the net liability of the office is sufficient, together with the net-premium portion of its future receipts from policyholders, to meet the sums assured under its policies as they mature, thus leaving free the remaining portion—the margin or loading—of each year’s premium income to meet expenses and any extra demands. When the margin thus left proves more than sufficient for those purposes, as under ordinary circumstances it always ought to do, the excess falls year by year into the surplus funds of the office, to be dealt with as profit at the next periodical investigation.There appears to be a decided preference among insurance companies for the net-premium method as that which on the whole is best suited for valuing the liabilities of an office transacting a profitable business at a moderate rate of expense,Negative values.and making investigations with a view to ascertaining the amount of surplus divisible among its constituents. In certain circumstances it may be advisable to depart from a strict application of the characteristic feature of that method, but it must always be borne in mind that any encroachment made upon the “margin” in valuing the premiums is, so far, an anticipation of future profits. Any such encroachment is indeed inadmissible, unless the margin is at least more than sufficient to provide for future expenses, and in any case care must be taken to guard against what are called “negative values.” These arise when the valuation of the future premiums is greater than the valuation of the sums engaged to be paid by the office, or when in the expression (Px+n− Px) (l + ax+n) the value of Pxis increased so as to be greater than that of Px+n. It is evident that any valuation which includes “negative values” must be misleading as policies are thereby treated as assets instead of liabilities, and such fictitious assets may at any time be cut off by the assured electing to drop their policies.In recognition of the fact that a large proportion of the first year’s premiums is in most offices absorbed by the expense of obtaining new business, it has been proposed by some actuaries to treat the first premium in each case as applicable entirely to the risk and expenses of the first year. At a period of valuation the policies are to be dealt with as if effected a year after their actual date, and at the increased age then attained.Another modification of the net-premium method has been advocated for valuing policies entitled to bonus additions. It consists in estimating the value offuturebonuses (at an assumed rate) in addition to that of the sum assured andHypothetical method.existingbonuses, and valuing on the other hand so much of the office premiums as would have been required to provide the sum assured and bonuses at the time of effecting the insurance. This tends to secure, to some extent, the maintenance of a tolerably steady rate of bonus.An essentially different method is employed by some offices, and is not without the support of actuaries whose judgment is entitled to every respect. It has been called the “hypothetical method.” By it the office premiums are made the basis of valuation. Hypothetical annuity-values, smaller than those which would be employed in the net-premium method, are deduced from the office premiums by means of the relation P′ = 1/(1 + a′) − (1 − v) and the policies are valued according to the formulanV′x= (P′x+n− P′x) (1 + a′x+n),where P′xand P′x+nare the office premiums at ages x and x+n respectively, and a′x+nis the hypothetical annuity-value at the latter age. Mr Sprague has shown (Ass. Mag.xi. 90) that the policy-values obtained by this method will be greater or less than, or equal to, those of the net-premium method according as the “loading” is a constant percentage of the net premium or an equal addition to it at all ages, or of an intermediate character, its elements being so adjusted as to balance each other.When the net-premium method is employed, it is important that the office premiums be not altogether left out of view, otherwise an imperfect idea will be formed as to the results of the valuation. Suppose two offices, in circumstances as nearly as possible similar, estimate their liabilities by the net-premium method upon the same data, but office A charges premiums which contain a margin of 20% above the net premiums, and office B charges premiums with a margin of 30%. Then, in so far as regards their net liabilities (always supposing the sum set aside in each case to be that required by the valuation), the reserves of those offices will be of equal strength, and if nothing further were taken into account they might be supposed to stand in the same financial position. But it is obvious that office B, which has a margin of income 50% greater than that of office A, is so much better able to bear any unusual strain in addition to the ordinary expenditure, and is likely to realize a larger surplus on its transactions. Hence it appears that in order to obtain an adequate view of the financial position of any office it is necessary to consider, not only the basis upon which its reserves are calculated, but also the proportion of “loading” or “margin” contained in its premiums, and set aside for future expenses and profits.
So far in regard to the provision for payment of the sums contained in the policies, with their additions. We now come to the provision for future expenses, and for contingencies not embraced in the ordinary calculations. In what is calledProvision for expenses, &c.Net-premium method.the “net-premium” method of valuation, this provision is made by throwing off the whole “loading” in estimating the value of the premiums to be received. That is to say, the premiums valued, in order to be set off against the value of the sums engaged to be paid by the office, are not the whole premiums actually receivable, but the net or pure premiums derived from the table employed in the valuation. The practical effect of this is that the amount brought out as the net liability of the office is sufficient, together with the net-premium portion of its future receipts from policyholders, to meet the sums assured under its policies as they mature, thus leaving free the remaining portion—the margin or loading—of each year’s premium income to meet expenses and any extra demands. When the margin thus left proves more than sufficient for those purposes, as under ordinary circumstances it always ought to do, the excess falls year by year into the surplus funds of the office, to be dealt with as profit at the next periodical investigation.
There appears to be a decided preference among insurance companies for the net-premium method as that which on the whole is best suited for valuing the liabilities of an office transacting a profitable business at a moderate rate of expense,Negative values.and making investigations with a view to ascertaining the amount of surplus divisible among its constituents. In certain circumstances it may be advisable to depart from a strict application of the characteristic feature of that method, but it must always be borne in mind that any encroachment made upon the “margin” in valuing the premiums is, so far, an anticipation of future profits. Any such encroachment is indeed inadmissible, unless the margin is at least more than sufficient to provide for future expenses, and in any case care must be taken to guard against what are called “negative values.” These arise when the valuation of the future premiums is greater than the valuation of the sums engaged to be paid by the office, or when in the expression (Px+n− Px) (l + ax+n) the value of Pxis increased so as to be greater than that of Px+n. It is evident that any valuation which includes “negative values” must be misleading as policies are thereby treated as assets instead of liabilities, and such fictitious assets may at any time be cut off by the assured electing to drop their policies.
In recognition of the fact that a large proportion of the first year’s premiums is in most offices absorbed by the expense of obtaining new business, it has been proposed by some actuaries to treat the first premium in each case as applicable entirely to the risk and expenses of the first year. At a period of valuation the policies are to be dealt with as if effected a year after their actual date, and at the increased age then attained.
Another modification of the net-premium method has been advocated for valuing policies entitled to bonus additions. It consists in estimating the value offuturebonuses (at an assumed rate) in addition to that of the sum assured andHypothetical method.existingbonuses, and valuing on the other hand so much of the office premiums as would have been required to provide the sum assured and bonuses at the time of effecting the insurance. This tends to secure, to some extent, the maintenance of a tolerably steady rate of bonus.
An essentially different method is employed by some offices, and is not without the support of actuaries whose judgment is entitled to every respect. It has been called the “hypothetical method.” By it the office premiums are made the basis of valuation. Hypothetical annuity-values, smaller than those which would be employed in the net-premium method, are deduced from the office premiums by means of the relation P′ = 1/(1 + a′) − (1 − v) and the policies are valued according to the formula
nV′x= (P′x+n− P′x) (1 + a′x+n),
where P′xand P′x+nare the office premiums at ages x and x+n respectively, and a′x+nis the hypothetical annuity-value at the latter age. Mr Sprague has shown (Ass. Mag.xi. 90) that the policy-values obtained by this method will be greater or less than, or equal to, those of the net-premium method according as the “loading” is a constant percentage of the net premium or an equal addition to it at all ages, or of an intermediate character, its elements being so adjusted as to balance each other.
When the net-premium method is employed, it is important that the office premiums be not altogether left out of view, otherwise an imperfect idea will be formed as to the results of the valuation. Suppose two offices, in circumstances as nearly as possible similar, estimate their liabilities by the net-premium method upon the same data, but office A charges premiums which contain a margin of 20% above the net premiums, and office B charges premiums with a margin of 30%. Then, in so far as regards their net liabilities (always supposing the sum set aside in each case to be that required by the valuation), the reserves of those offices will be of equal strength, and if nothing further were taken into account they might be supposed to stand in the same financial position. But it is obvious that office B, which has a margin of income 50% greater than that of office A, is so much better able to bear any unusual strain in addition to the ordinary expenditure, and is likely to realize a larger surplus on its transactions. Hence it appears that in order to obtain an adequate view of the financial position of any office it is necessary to consider, not only the basis upon which its reserves are calculated, but also the proportion of “loading” or “margin” contained in its premiums, and set aside for future expenses and profits.
Valuations may be made on different data as to mortality and interest, and the resulting net liability will be greater or less according to the nature of these. Under any given table of mortality a valuation at a low rate ofEffects of different data.interest will produce a larger net liability—will require a higher reserve to be made by the office against its future engagements to the insured—than a valuation at a higher rate. The effect of different assumptions in regard to the rates of mortality cannot be expressed in similar terms. A table of mortality showing a high death-rate, and requiring consequently large assurance premiums, does not necessarily produce large reserve values. The contrary, indeed, may be the case, as with the Northampton Table, which requires larger premiums than the more modern tables, but gives on the whole smaller reserve values. The amount of the net liability depends, not on the absolute magnitude of the rates of mortality indicated by the table, but on the ratio in which these increase from age to age.
If the values deduced by the net-premium method from any two
tables be compared, it will be seen thatV′x>, =, or
If the values deduced by the net-premium method from any two tables be compared, it will be seen that
V′x>, =, or according as i.e.as (1), or as (2); where the accented symbols throughout refer to one table and the
unaccented symbols to the other. We have thus the means of ascertaining whether the policy-values
of any table will be greater or less than, or equal to, those of another,
either (1) by calculating for each table separately the ratios of the
annuity-values at successive ages, and comparing the results, or (2)
by calculating at successive ages the ratios of the annuity-values
of one table to those of another, and observing whether these ratios
decrease or increase with advancing age or remain stationary throughout.
The above relations will subsist whatever may be the differences
in the data employed, and whether or not the annuity-values
by the different tables are calculated at the same rate of interest.
When the same rate of interest is employed, any divergence in the
ratios of the annuity-values will of necessity be due to differences
in the rates of mortality. A prevailing fallacy in the popular mind, which has grown
out of the practice of net valuations, is the inference that the
average technical reserve represents the value of the
individual policy. Each risk is properly assumed atFallacy of single-policy reserve.its probable or average value at the time. But from
that moment its circumstances are constantly changing
in directions then unforeseen, and the expectation that such
changes will occur is the motive for insuring. To treat them
singly as unchanged in value at any later time is as illogical asit would be after some have matured. The actual value of any
one risk borne by a company is indeterminate. It may become
a claim to-morrow, or not for a generation to come. In the
former case the company must now hold funds to pay in full;
in the latter, the future premiums will perhaps more than suffice,
so that no present reserve is needed. An entire reserve for the
whole body of risks is essential, and its amount is definite,
upon the reasonable assumption that the general average remains
undisturbed by individual changes. A distinct reserve
for a single policy is inconceivable. To recognize it is to deny the
first principle of insurance. The average amount by which the
reserve of a company must be increased, because of the existence
of policies of a given class, is to the actuary an important fact,
and is commonly accepted as his best guide in the distribution
of surplus. But a popular theory has seized upon the assignment
of this average sum to each policy, in the technical shorthand
of the actuary, and holds that it is in each case the special
property of the owner of that policy. The practical consequences
are serious when, as often, many of the insured cease to pay
premiums, and each demands the amount of the supposed
individual reserve. His right to claim it is countenanced by
a widespread public opinion, which has inspired statutes in
Massachusetts and some other states, requiring companies to
redeem all policies lapsing after the first two or three years of
insurance at a price founded on the technical reserve. Yet, in
by far the majority of instances, the lapse of policies is of itself
a loss to the company. It is deprived of business secured at
much expense before it has derived any of the advantage expected
from the accession. It is compelled to pay numbers of its profitable
contributors for ceasing to contribute. The burden falls in
a mutual company upon the insured who fulfil their contracts.
Such laws favour those who withdraw after few payments at
the cost of those who maintain their insurance to the end, or for
many years. The American companies formerly yielded to the
pressure of a mistaken public sentiment, and competed for
favour by promising excessive values in case of surrender.2Similar conditions exist in Switzerland, Austria, and other
countries in which the business is minutely regulated by government
bureaus. But in Great Britain the companies are largely
free from such influences, while an open market exists for policies
which have a commercial value, with results on the whole more
satisfactory to all parties interested than any rule of compulsory
purchase which could be enforced on the companies. A special form of life insurance, which has wonderfully
developed, is the family insurance of the labouring people by
the so-called industrial companies. Until recently this
class of people had no satisfactory share in the benefitsIndustrial Insurance.of insurance, although the friendly societies in Great
Britain, and many forms of beneficial associations in the
United States, were attempts, often in part
successful, to provide for special wants, mainly
for maintenance of the sick and for the costs
of burial. Most of them, however, lacked a
scientific basis and an efficient and permanent
organization, while thousands of them were
grossly mismanaged. In Germany an elaborate
scheme of compulsory insurance for labourers
was established by a law of the empire in 1883,
and extended in subsequent years; and similar
legislation has been enacted in several other
countries, most thoroughly in Switzerland and
Austria. The ultimate value of this great social experiment cannot
yet be determined. That it relieves much want and does a great
service in preventing pauperism is not disputed; but that it also
undermines the independent spirit of the people, and that it
imposes a burden upon the national industry, which not only
hampers it in the world’s competition, but reacts with special
injury upon the class it aims to benefit, are criticisms not
satisfactorily answered. No scheme of government insurance,
certainly, is adapted to a people impatient of paternalism in its
rulers and thoroughly habituated to voluntary association for
all common interests. The solution of the great problem, how
to apply the insurance principle to the most pressing needs for
protection of the class supported by the wages of labour, is now
sought in Great Britain and America mainly in the universal
offer to them of industrial insurance. The Prudential Assurance
Company of London was the pioneer in this work, beginning it
experimentally in 1848, but gradually adapting its methods
to the new field, until a generation later they showed themselves
so efficient that an extraordinary growth resulted, and has continued
without interruption. This company and others upon a
similar plan insure whole households together for burial expenses
in case of death, and a small provision for dependants or for old
age, charging as premiums small fractions of a day’s wages,
which must be collected weekly. The great difficulties encountered
were the cost of small and frequent collections, and
the high rate of mortality, which is from 40 to 90% more than
that in the experience of the older companies. This high death-rate
is due not so much to the fact that life is shorter in the
labouring class as to the lack of efficient medical selection,
which would be too costly. The premiums, at best, must be
made higher than in offices insuring for annual payments, but
the demand for insurance extended as rapidly as the system could
be explained, and the Prudential is said to have now in force
some 12,000,000 policies, with an average premium of twopence
a week, secured by an accumulated insurance fund of £17,000,000.
It has superseded a host of petty assessment societies of various
classes without scientific basis or business responsibility, which
deluded and disappointed the poor. The British government
in 1864 undertook to administer a plan for the insurance of working
men, but in thirty years accomplished less than the work
of one private company in a year. In addition to the many
insurance companies which transact industrial business in the
United Kingdom, a large number of friendly societies have
adopted similar plans. The system of industrial insurance was introduced into the
United States in 1876. Its growth, though much more rapid than
in Great Britain, was at first slow compared with that of later
years. The following table, condensed from the Insurance Year-Book
for 1900, is an interesting exhibit of the character as
well as of the extent of this form of insurance among working
men:—Industrial Insurance in the United States.Year.No. ofCos.Insurancewritten.Policies inforce 31stDecember.Insurance inforce 31stDecember.Premiumsreceived.Lossespaid.18761$400,0002,500$248,342$14,495$1,9581880334,212,131228,35719,590,7801,155,360430,6311884389,150,3021,076,422108,451,0994,486,6121,499,43218887161,260,3352,788,000302,033,06611,939,5404,162,745189211276,893,9235,118,897582,710,30924,352,9008,847,322189611360,852,4587,375,688886,484,86940,058,70113,420,336189916519,789,08510,048,6251,292,805,40256,159,88917,023,485It is remarkable that the average weekly premium in the United
States appears to be about 10 cents, or two and a half times as
high as in Great Britain. The average policy is also proportionally
larger, and the progressive increase in its amount deserves notice.
At the rate at which the practice of insurance is extending among
working men, it would require but few years for it to become as
universal in these countries as any paternal government has aimed
to make it by compulsion. The system of industrial insurance was introduced into the
United States in 1876. Its growth, though much more rapid than
in Great Britain, was at first slow compared with that of later
years. The following table, condensed from the Insurance Year-Book
for 1900, is an interesting exhibit of the character as
well as of the extent of this form of insurance among working
men:— Industrial Insurance in the United States. It is remarkable that the average weekly premium in the United
States appears to be about 10 cents, or two and a half times as
high as in Great Britain. The average policy is also proportionally
larger, and the progressive increase in its amount deserves notice.
At the rate at which the practice of insurance is extending among
working men, it would require but few years for it to become as
universal in these countries as any paternal government has aimed
to make it by compulsion. There are various sources from which a surplus of funds may
arise in an insurance company: (1) from the rate of interest
actually earned being higher than that anticipated in the
calculations; (2) from the death-rate among the insuredDivision of surplus.being lower than that provided for by the mortality tables;
(3) from the expenses and contingent outlay being
less than the “loading” provided to meet them;
and (4) from miscellaneous sources, such as profitable
investments, the cancelment of policies, &c. Supposing a valuation to have been made on sound data and
by a proper method, and to have resulted in showing that the
funds in hand exceed the liabilities, the surplus thus ascertained
may be regarded asprofit, and either its amount may be withdrawn
from the assets of the office or the liabilities may be increased in
a corresponding degree. Various methods are employed by insurance companies in
distributing their surplus funds among the insured. In some
offices the share or “bonus” falling to each policyholder
is paid to him in cash; in others it is appliedBonuses.in providing a reversionary sum which is added to the amount
assured by the policy; in others it goes to reduce the annual
contributions payable by the policyholder. A method of more
recent introduction is to apply the earlier bonuses on a policy
to limit the term for which premiums may be payable, thus
relieving the policyholder of his annual payments after a certain
period. Another method is to apply the bonuses towards making
the sum insured payable in the lifetime of the policyholder.
The plan of reversionary bonus additions is most common, and
when it is followed the option is usually given of exchanging
the bonuses for their value in cash or of having them applied
in the reduction of premiums. Not only are there different modes of applying surplus, but
the basis on which it is divided among the insured also varies
in different offices. In some the reversionary bonus is calculated
as an equal percentage per annum of the sum insured, reckoning
back either to the commencement of the policy in every case, or
(more commonly) to the preceding division of profits. In others
the rate is calculated, not only on the original sums insured,
but also on previous bonus additions. In others the ratio of
distribution is applied to the cash surplus, and the share allotted
to each policy is dealt with in one or other of the ways above
indicated. The following are some of the ratios employed by
different offices in the allocation of profits: (1) in proportion
to the amount of premiums paid (with or without accumulated
interest) since the last preceding valuation; (2) in proportion
to the accumulated “loading” of the premiums so paid; (3) in
proportion to the reserve values of the policies; (4) in proportion
to the difference between the accumulated premiums and the
reserve value of the policy in each case. Some offices have a special system of dealing with surplus,
reserving it for those policyholders who survive the ordinary
“expectation of life,” or whose premiums paid, with accumulated
interest, amount to the sums insured by their policies. This
system is usually connected with specially low rates of premium. In the United States the so-called “contribution plan” has been
accepted in theory by many companies, though carried out with
many variations in detail by different actuaries. The principle is,
that since each of the insured is charged in his premium a safe
margin above all probable outlays, when the necessary amount under
each head becomes determinate the several excesses should be
returned to him. It is therefore sought to calculate what each
member would have been charged for net premium and loading had
the mortality, rate of interest, and expenses been precisely known
beforehand, and to credit him with the balance of his payments. As
a corollary of the theory of net valuations, which regards every life
insured as an average life until its end, and assumes the rigid accuracy
and equity of all the formulas employed to represent business
facts, it is consistent and complete. But many minds find it more
curious than practical, and prefer to seek equity in faithfulness to
contract rights rather than in adjustments which they deem too
refined, if not fanciful. The plan has met with little favour in
England, where surplus is more commonly distributed on general
business principles. Enormous bonuses were saved by the British
offices out of the excessive premiums at first collected, and by the
American companies during the epoch of high interest rates. But
the use of more accurate tables, the decline in interest, and the increased
expenses of later years, have vastly reduced the apparent
profits. Former methods of distributing surplus, when ascertained,
have largely given way in America to novel and more complex plans.
The Tontine idea, historically familiar, was for many years imitated
by some offices in their insurance contracts. All premiums above
outlay, in a company or a class of policies, were accumulated, only
stipulated amounts being paid on death claims meanwhile maturing,
with no compensation to its members withdrawing, until the end of
a fixed term, when the whole fund was apportioned to the survivors.
Large returns were sometimes made, but many who could not
maintain their policies were dissatisfied. “Semi-tontines” followed,
partly meeting the difficulty by pooling only the surplus, and allowing
some return in case of withdrawal. But these cruder forms of
contract are now largely superseded by various “reserve-dividend,”
“accumulation,” “bond,” and “investment” policies, with options
at stated periods between cash withdrawals and continued insurance,
the simple inducement to provide against death being more or
less merged in that of making a profitable investment of capital. In the United States the so-called “contribution plan” has been
accepted in theory by many companies, though carried out with
many variations in detail by different actuaries. The principle is,
that since each of the insured is charged in his premium a safe
margin above all probable outlays, when the necessary amount under
each head becomes determinate the several excesses should be
returned to him. It is therefore sought to calculate what each
member would have been charged for net premium and loading had
the mortality, rate of interest, and expenses been precisely known
beforehand, and to credit him with the balance of his payments. As
a corollary of the theory of net valuations, which regards every life
insured as an average life until its end, and assumes the rigid accuracy
and equity of all the formulas employed to represent business
facts, it is consistent and complete. But many minds find it more
curious than practical, and prefer to seek equity in faithfulness to
contract rights rather than in adjustments which they deem too
refined, if not fanciful. The plan has met with little favour in
England, where surplus is more commonly distributed on general
business principles. Enormous bonuses were saved by the British
offices out of the excessive premiums at first collected, and by the
American companies during the epoch of high interest rates. But
the use of more accurate tables, the decline in interest, and the increased
expenses of later years, have vastly reduced the apparent
profits. Former methods of distributing surplus, when ascertained,
have largely given way in America to novel and more complex plans.
The Tontine idea, historically familiar, was for many years imitated
by some offices in their insurance contracts. All premiums above
outlay, in a company or a class of policies, were accumulated, only
stipulated amounts being paid on death claims meanwhile maturing,
with no compensation to its members withdrawing, until the end of
a fixed term, when the whole fund was apportioned to the survivors.
Large returns were sometimes made, but many who could not
maintain their policies were dissatisfied. “Semi-tontines” followed,
partly meeting the difficulty by pooling only the surplus, and allowing
some return in case of withdrawal. But these cruder forms of
contract are now largely superseded by various “reserve-dividend,”
“accumulation,” “bond,” and “investment” policies, with options
at stated periods between cash withdrawals and continued insurance,
the simple inducement to provide against death being more or
less merged in that of making a profitable investment of capital. In those branches of insurance where the contract is one of
indemnity against loss, the risk remaining the same from year
to year—and where the consent of both parties, insurer
and insured, is required at each periodical renewal—noSurrender values.question of allowance in respect of past payments
can arise when one party or the other determines to drop the
contract. It is quite recognized that the premiums are simply
an equivalent for the risk undertaken during the period to which
they apply, with a certain margin for expenses and for profit
to the insurer, and that therefore a favourable issue of the
particular contract supplies no argument for a return of any part
of the sums paid. In life insurance, however, we have shown
that the premiums contain a third element, namely, the portion
that is set aside and accumulated to meet the risk of the insurance
when the premium payable is no longer sufficient of itself for
that purpose. When a policyholder withdraws from his contract with a life
insurance office, the provision made for the future in respect of
his particular insurance is no longer required, and out of it a
surrender value may be allowed him for giving up his right to the
policy. If there were no reasons to the contrary, the office
might hand over the whole of this provision, which is in fact
the reserve value of the policy. No more could be given without
encroaching upon the provision necessary for the remaining
policies. But the policyholder in withdrawing is exercising a
power which circumstances give to him only and not to the
other party in the contract. The office is bound by the policy so
long as the premiums are duly paid and the other conditions
of insurance are not infringed. It has no opportunity of reviewing
its position and withdrawing from the bargain should that
appear likely to be a losing one. The policyholder, however, is
free to continue or to drop the insurance as he pleases, and it may
fairly be presumed that he will take whichever course will best
serve his own interest. The tendency obviously is that policies
on deteriorated and unhealthy lives are kept in force, while
those on lives having good prospects of longevity are more
readily given up. Again, the retiring policyholder, by withdrawing
his annual contribution, not only diminishes the fund
from which expenses are met, but lessens the area over which
these are spread, and so increases the burden for those who
remain. Considerations like these point to the conclusion that,
in fairness to the remaining constituents of the office, the surrender
value to be allowed for a policy which is to be given up
should be less than the reserve value. The common practice is
to allow a proportion only of the reserve value. Some offices
have adopted the plan of allowing a specified proportion of the
amount of premiums paid. This plan is not defended on any
ground of principle, but is followed for its simplicity and as a
concession to a popular demand for fixed surrender values. Another mode of securing to retiring policyholders the benefit
of the reserve values of their insurances is that known as thenon-forfeiture system. This system was first introduced
in America, whence it found its way to the UnitedNon-forfeiture system.Kingdom, where it was gradually adopted by a large
proportion of the insurance companies. In its original
form it was known as the “ten years non-forfeiture plan.”
The policies were effected by premiums payable during ten years
only, the rates being of course correspondingly high. If during
those ten years the policyholder wished to discontinue his payments,
he was entitled to a free “paid-up policy” for as many
tenth parts of the original sum insured as he had paid premiums.The system, once introduced, was gradually extended first to
insurances effected by premiums payable during longer fixed
periods, and ultimately, by some offices, to insurances bearing
annual premiums during the whole of life. The methods of
fixing the amount of paid-up policy in the last-mentioned class
of cases vary in different offices, but the principle underlying them
all is that of applying the reserve value to the purchase of a new
insurance of reduced amount. An office, in entering on a contract of life insurance, does
so in the faith that all circumstances material to be known
in order to a proper estimate of the risk have been
disclosed. These circumstances are beyond its ownConditions of insurance.knowledge, and as the office for the most part (except
as regards the result of the medical examination,
which may reveal features of the case unknown to the proposer
himself) is dependent on the information furnished by the party
seeking to effect the insurance, it is proper that the latter be
made responsible for the correctness of such information. Accordingly
it is made a stipulation, preliminary to the issue of
every policy, that all the required information bearing upon the
risk shall have been truly and fairly stated, and that in case of
any misrepresentation, or any concealment of material facts,
the insurance shall be forfeited. In practice, however, this
forfeiture is rarely insisted on unless there has been an evident
intention to deceive. Other systems and conditions of life
insurance policies may be shortly noticed. The usual division of policies is into “non-participating” and
“participating.” Non-participating policies are contracts for
the payment on death of a certain fixed sum in consideration of
a given premium, and these amounts are not affected by the
profit made by the company. Participating policies entitle
the holders to a share in the profits of the company. These
profits are applied in various ways, as described above. A
policy may be a whole life one, that is, the policyholder may pay
a periodical premium throughout life, or it may be a limited
payment one (the holder paying a premium for a limited number
of years), or an endowment policy, under which the insurer
receives the amount he has insured for at a given age, say fifty-five
or sixty; or if death occur previously, the sum is paid to his
representatives. There are also endowment policies for children,
under which parents or others receive a specified sum on a child
attaining a given age, the premiums being returnable if the child
dies before the specified age. As to Payment of Premiums.—A certain period of grace is allowed,
most commonly thirty days, after each premium falls due. If
payment is not made within that time, the presumption is that the
policyholder intends to drop the contract, and the risk of the office
comes to an end. It may, however, be revived on certain conditions,
usually the production of evidence of health and payment of a fine
in addition to the premium. An impression used to prevail among
the public that the offices were interested in encouraging the forfeiture
of policies. If any such impression was ever shared by the
offices themselves it must have long since passed away, every reasonable
effort being now made on their part, not only to secure insurances
but to retain them, and to afford all the facilities that can
be extended to policyholders with that object.As to Foreign Travel and Residence, and as to Hazardous Occupations.—When
Babbage wrote hisComparative View of Assurance
Institutionsin 1826, voyaging abroad was scarcely permitted under
a British life policy. The Elbe and the Garonne, Texel and Havre,
Texel and Brest, the Elbe and Brest were the limits prescribed
by most of the English offices. Even at a much later period the
extra premiums charged for leave to travel or reside abroad were very
heavy. But improved means of conveyance—in some places better
sanitary appliances, and habits of living more suited to the climatic
conditions—and, more than all perhaps, the knowledge that has
been gained by experience as to the extent of the extra risks involved
and the relative salubrity of foreign climates—have enabled the
offices to modify their terms very considerably. The limits of free
residence and travel have been greatly widened, and where extra
premiums are still required these are, as a rule, much lower than
formerly. The assured are now commonly permitted to reside anywhere
within such limits as north of 35° N. lat. (except in Asia) or
south of 30° S. lat., and to travel to and from any places within those
limits, without extra premium.Military men (when on active service) and seafaring men are usually
charged extra rates, as are also persons following specially dangerous
or unhealthy occupations at home.As to Suicide.—The policies of most companies used to contain a
proviso that the insurance shall be void in case the person whose life
is insured dies by his own hand, but it is now seldom inserted.
Some offices, acting on a sound principle, limit its operation to a
fixed period, the extent of which varies in different offices from six
months to seven years from the date of issue of the policy.The practice of rendering policiesindisputableand free from
restriction as to foreign travel or residence, after a certain period,
has tended greatly to simplify the contract between the office and the
insured. A declaration of indisputability covers any inaccuracies in
the original documents on which a policy was granted, unless these
inaccuracies amount to fraud, which the law will not condone under
any circumstances.A remarkable difference in the development of life insurance
between Great Britain and the United States is, that among the
British companies only one-third of the insurances in force is in
purely mutual institutions, while in America the proportion exceeds
four-fifths. In both countries there are also “mixed” companies,
in which policyholders receive a fixed percentage of the realized
surplus, often from three-fourths to nine-tenths of the whole, but the
control and management are in the hands of shareholders. These
form the great majority of the proprietary offices in the United
Kingdom, and the profits of the business have been large. The
amount of capital paid in by shareholders of forty-one joint-stock
companies was £5,931,000, but the capital authorized and subscribed
was much more, and the subscriptions have often been paid,
wholly or in part, by credits from surplus. The shares of these
companies, at market prices, represent a value of at least £50,000,000,
but the dividends upon these shares are drawn largely from other
business, many of the largest and most prosperous corporations
conducting also fire insurance, and some of them marine or casualty
insurance. As to Payment of Premiums.—A certain period of grace is allowed,
most commonly thirty days, after each premium falls due. If
payment is not made within that time, the presumption is that the
policyholder intends to drop the contract, and the risk of the office
comes to an end. It may, however, be revived on certain conditions,
usually the production of evidence of health and payment of a fine
in addition to the premium. An impression used to prevail among
the public that the offices were interested in encouraging the forfeiture
of policies. If any such impression was ever shared by the
offices themselves it must have long since passed away, every reasonable
effort being now made on their part, not only to secure insurances
but to retain them, and to afford all the facilities that can
be extended to policyholders with that object. As to Foreign Travel and Residence, and as to Hazardous Occupations.—When
Babbage wrote hisComparative View of Assurance
Institutionsin 1826, voyaging abroad was scarcely permitted under
a British life policy. The Elbe and the Garonne, Texel and Havre,
Texel and Brest, the Elbe and Brest were the limits prescribed
by most of the English offices. Even at a much later period the
extra premiums charged for leave to travel or reside abroad were very
heavy. But improved means of conveyance—in some places better
sanitary appliances, and habits of living more suited to the climatic
conditions—and, more than all perhaps, the knowledge that has
been gained by experience as to the extent of the extra risks involved
and the relative salubrity of foreign climates—have enabled the
offices to modify their terms very considerably. The limits of free
residence and travel have been greatly widened, and where extra
premiums are still required these are, as a rule, much lower than
formerly. The assured are now commonly permitted to reside anywhere
within such limits as north of 35° N. lat. (except in Asia) or
south of 30° S. lat., and to travel to and from any places within those
limits, without extra premium. Military men (when on active service) and seafaring men are usually
charged extra rates, as are also persons following specially dangerous
or unhealthy occupations at home. As to Suicide.—The policies of most companies used to contain a
proviso that the insurance shall be void in case the person whose life
is insured dies by his own hand, but it is now seldom inserted.
Some offices, acting on a sound principle, limit its operation to a
fixed period, the extent of which varies in different offices from six
months to seven years from the date of issue of the policy. The practice of rendering policiesindisputableand free from
restriction as to foreign travel or residence, after a certain period,
has tended greatly to simplify the contract between the office and the
insured. A declaration of indisputability covers any inaccuracies in
the original documents on which a policy was granted, unless these
inaccuracies amount to fraud, which the law will not condone under
any circumstances. A remarkable difference in the development of life insurance
between Great Britain and the United States is, that among the
British companies only one-third of the insurances in force is in
purely mutual institutions, while in America the proportion exceeds
four-fifths. In both countries there are also “mixed” companies,
in which policyholders receive a fixed percentage of the realized
surplus, often from three-fourths to nine-tenths of the whole, but the
control and management are in the hands of shareholders. These
form the great majority of the proprietary offices in the United
Kingdom, and the profits of the business have been large. The
amount of capital paid in by shareholders of forty-one joint-stock
companies was £5,931,000, but the capital authorized and subscribed
was much more, and the subscriptions have often been paid,
wholly or in part, by credits from surplus. The shares of these
companies, at market prices, represent a value of at least £50,000,000,
but the dividends upon these shares are drawn largely from other
business, many of the largest and most prosperous corporations
conducting also fire insurance, and some of them marine or casualty
insurance. No branch of social statistics has been more diligently studied
than life insurance, and several governments publish classified
accounts of corporations insuring lives within their jurisdiction.
But the reports are not uniform in method and in periods
covered, and aggregates derived from them must be used with
reserve. By the Life Assurance Companies Act 1870, and
amendments made in later years, each company issuing policies
in the United Kingdom must deposit with the Board of Trade
every year its revenue account and balance-sheet for the preceding
year, and must at fixed intervals cause an investigation of
its financial condition to be made by an actuary, and furnish
the public through the Board of Trade with the detailed results,
in forms prescribed by the act. Thus these returns are the
highest authority for the conditions and operations of the
offices, which often supplement or anticipate them by voluntary
publications. In the United States the laws exact still more
minute and much prompter reports to the insurance departments
of the states; and every annual statement is required to show
the results of an actuarial investigation. All these facts are
collected, classified and compared by statisticians for several
standard annuals in both countries, especially thePost Magazine
Almanack,Bourne’s DirectoryandManualand theInsurance
Blue Bookin London, andThe Insurance Year-Bookof the
Spectator Company in New York.
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