Life Assurance in Troubled Times—Safety for Savings
How will the holders of life policies be affected by the present crisis in international affairs, through the reactions of that crisis on business, on the financial markets, and on the insurance companies themselves? This is a question which is exercising many minds today. Some people have already answered it, as is evident from the fine figures of the amount of new policies effected with the great life assurance companies over a period in which Stock Exchange investment business has been reduced to a very low level, lower in fact than many of the most experienced members of the Stock Exchange can recollect.
Yet even life assurance has not been entirely immune from the effects of the crisis, for after making new high records year by year the aggregate amount of new life assurance policies effected last year with first class British Life offices showed a moderate decline. It was not, there- fore, a case of the diversion of a greater amount of savings from the Stock Exchange to the channel of life assurance, but merely that life assurance was affected in less degree than Stock Exchange businesss. Were the merits of life assurance as a means of saving fully appreciated, it is safe to say that the conditions under which we have been living in the past two years or so would have been reflected in a still larger flow of savings to life assurance and not in any reduction.
WHY BRITONS ARE UNDER-INSURED Taken as a whole, and over the community at large, there is no room for doubt that the amount of life assurance carried by the average person in this country is woefully inadequate. Its merits are appreciated by some, but not by nearly enough people, a result in the main, of lack of sufficient knowledge on the part of the ordinary man of what life assurance can do in the way of providing safety for savings, provision for later years, and, at the same time, protection for dependants unobtainable by any other means.
For this lack of knowledge the life offices themselves can- not be held entirely blameless. They are content on the whole to wait for the uninsured population to come to them or to their agents, instead of making the benefits of life assurance more widely known by means of direct appeal to the public. The present provides a wonderful opportunity for widening this knowledge, for as the new business figures for last year plainly indicate, the public is much more dis- posed to turn to life assurance than to the Stock Exchange as a channel for the investment of its savings.
Most people who have trusted to the investment market find that their securities have depreciated in capital value, and if they have been in the least degree adventurous in their investment policy the interest income may have ceased or at least have become of doubtful continuance. Yet life assurance can offer a return well in excess of what can be secured from those investments where the income is safe beyond all question, in combination with a far greater degree of security for capital value.
WHERE LIFE INSURANCE BONUSES COME FROM
In a previous article (The Spectator Banking and Insurance Supplement, March 3rd, 1939) I have shown that, thanks to the income tax rebate allowed in respect of life-assurance premiums, and the freedom from tax of the benefits, a simple with-profits endowment-assurance policy can be expected to give the policy-holder the equivalent of an investment of his savings at 5z per cent. compound interest, even allowing for some reduction in the rates of bonus which may be declared by life offices in the future.
Even under the non-profit contracts, where the amount to be paid on the maturity of the policy is a guaranteed sum, the return on the money invested by the policy-holder comes to nearly 3 per cent. per annum compound interest.
What chance, the prospective policy-holder will inquire, is there that something may occur to upset such an attrac- tive prospect? First, it must be granted at once that the bonuses on with-profit policies come out of the profits made by the office. These are derived from three main sources, first, the extra premium charged for such policies over and above the rates for non-profit policies which have no right of participation in profits, second, favourable mortality, that is, fewer deaths among policy-holders than the office has reckoned upon, and third, the earning of a higher rate of interest from the invested funds than has been assumed in calculating the premium rates and deter- mining at each valuation how much should be in hand by way of reserves to cover the prospective liability represented by the policies on the books.
All these factors are important, but not all of them are variable. The amount by which the premium exceeds the sum required mathematically to meet the risk is deter-
mined in advance. The rate of interest earned on the funds is subject to the fluctuations of the market from time to time, and to the rate of income tax, for life assurance com- panies are taxed on their gross interest income, notwith- standing the fact that the larger part of that income is not profit by any means, but is a necessary contribution to the covering of the liability under the policy. The companies are given a rebate in respect of expenses, however, a pro- vision which does not work too equitably, since it gives the greater relative advantage to the office which may not be so economically managed as another. Then there is mortality, and while this factor may vary, it has varied over a long period in favour of the companies. Each such suc- cessive investigation has shown an improvement in mortality, and even the casualties of the Great War imposed no undue strain, although British offices worthily upheld their traditions and honoured every contract on a soldier's life. Incidentally this is a further point in favour of insurance today, when policies may stiP. be obtained free of all restriction on residence or occupation, and some offices will even grant policies on the lives of serving soldiers and sailors without extra charge, though, of course, in the event of hostilities, restrictions would be imposed as regards persons then desirous of taking out policies.
PARTICIPATING IN WELL-INVESTED FUNDS
The rate of interest is perhaps the factor which is most likely to affect bonus rates, apart from any untoward happening such as war, the effects of which today are incalculable. Interest rates, until lately, have been falling, while income tax has risen. Even so the leading life offices are still earning nearly 4 per cent. net, after meeting income tax and N.D.C., and this is equivalent to a gross tate of approximately 51 per cent. Interest rates are now inclined to rise again and, in any case, the effect of the fall has been very much minimised in the case of old offices with large invested funds. The fall has, of course, affected only the amount of new money coming to hand to be invested each year. Funds previously invested in sound stocks have still yielded high rates on book cost. By effecting a policy with such a company, therefore, the policy-holder obtains in effect a participation in a fund already invested and yielding a rate well above that cur- rently obtainable on first-class security. Many leading life offices' investment funds are still worth kr,o0o,000 or more, over and above the figures at which they stand on their books, for which excess they take no credit. Such reserves are a safeguard against interference with bonuses through depreciation of security values. This latter is a point which has greater weight than should attach to it. For though it is the income from a life-office fund which really determines whether it will have a large or a small surplus on its operations, it must, at its periodical valuations, set the present value of the liability under its policies against the value of the funds actually in hand. So long as its business is not declining, forcing the invested funds to be realised to meet policies as they fall due, the investments need never be disturbed, and it is in fact anomalous that fluctuations in the market value of the securities should exercise so great an influence upon surpluses available for bonuses. A simple example will make this clear. An office may have on its books a 3 per cent. Government stock, quoted in the market, which perhaps falls to per cent. in value in a bad year. It may also have a 3 per cent. loan to a first-class borrower, in mortgage form, unquoted in any market. In the latter case, knowing the borrower to be thoroughly sound, it will leave the value unaltered, yet the Government stock, even if repayable at par at some future date, in the same way as a mortgage, must of necessity be written down to market value.
A CASE FOR " GUARANTEED " BONUSES With the fall in security values which has occurred lately, it is natural, therefore, that there should be a little uncer- tainty as regards maintenance of bonus rates. But British life offices have come through many crises in the past, with no impairment of strength over a period, and there is no reason to fear that they will not do so in the future.
All the same, it is the bonuses on with-profits policies, although not guaranteed in any way, that make a with- profits policy so attractive an investment because of its gradually increasing character, even allowing for any likely reduction in the bonus. This suggests that there is room for a cimilar type of policy, really a non-profit policy, with guaranteed annual additions. Such " guaran- teed bonus " policies were offered at one time, and just one or two offices still quote for them, but they have been overshadowed by the exceptionally fine bonus results under ordinary policies of late years. Now, it would seem, there is a strong probability that they would prove very popular as offering a very fine investment of guaranteed character. They are in reality " increasing assurances " from the point of view of the office issuing them, and offices should be very willing to quote for them because they carry higher premiums in relation to the risk than does the ordinary non-profit policy. I believe that policies on these lines, especially if combined with the now popular "family income " system of payment of the benefit over a period, instead of in a lump sum, would attract a large
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