INSURANCE.
THE Board of Trade is working the Life-Assurance Com- panies Act of 1870 in a manner that cannot fail to prove highly beneficial to the community. One of the sections of the Act, as the reader may remember, requires the Companies, at certain intervals, to cause an investigation to be made-into their financial condition by an Actuary, and to send to the Board of Trade an Abstract of the Actuary's Report, drawn up in a prescribed form. The greater number of the 125 British Com- panies have now complied with this requirement, and the whole of them have sent in revenue accounts and balance- sheets. Upon the information thus supplied, Messrs. Malcolm and Hamilton, Assistant-Secretaries to the Board, have drawn up a Report which, for the first time, enables an ordinary man, in choosing an office in which to insure his life, to exercise an intelligent judgment. The importance of the service thus ren- dered to the public it needs no argument to prove. The grand defect of the English and the Irish populations is want of thrift, and the failing is by no means confined to the poor. How often do we see men with fair incomes, and men, too, who work hard, and are by no means bad fathers, leave their families almost totally unprovided for ! Now, the number of persons, not engaged in business, who know how to invest with- out gambling is wonderfully small, and the wastefulness whiehis our national bane will not be checked by the interest yielded by the funds. If, then, the duty of providing for children is to be universally observed, it seems clear that the habit of insuring life must become universal also. But hitherto it has been practically impossible for ordinary people to select an office intelligently, while the cruel suffering inflicted by such failures as the Albert and the European spread a feeling wide through society that insurance, after all, was little safer than dabbling in the shares of
bubble Companies. Of course, to render Insurance perfectly safe and practically universal, the business must be undertaken by Government. But -that is an enterprise of the future. In the meantime, while the public is being educated to see its necessity, much may be done, and the Report of Messrs. Malcolm and Hamilton prepares the way for its accomplishment. In the Report itself they explain the principles upon which alone an insurance business can be safely conducted, and they subjoin an Appendix containing a list of all the Companies, with the information as to each bearing on the points to which attention has just been -called. It will be seen that a study of this document will enable any intelligent person to choose an office for himself; and in- directly the Report can hardly fail to have a still more important effect, —that of compelling such of the imprudent Companies as can still be saved to alter their mode of business before it is too late.
We have said that the Board of Trade has now received from most of the Companies Abstracts of the Acturial Reports --on their financial condition. How far from satisfactory these Reports too often are may be gathered from the remark of the Assistant-Secretaries to the Board, that "a cursory examina- tion would convince any person acquainted with the theories of valuation of the necessity of calling attention to the ele- mentary principles involved in such processes." And the authors of the Report then go on to point out that the cir- -cumstances on which the estimate of the liabilities of a Com- pany under its policies almost entirely depend are three :— (1) The rate of mortality ; (2) the rate of interest at which its investments are calculated to accumulate ; (3) the portion of the premium income reserved in the valuation for future expenses and profits. The valuation of the investments of the Company is also, of course, most important in determining its financial position. But that, it will be seen, is not peculiar to Insurance. Every company, of whatever nature, that contracts to make future payments is equally bound to place its investments pru- dently. With regard to the first of the three points peculiar to Insurance it ought, perhaps, to be mentioned that rates of mor- tality are of two kinds,—trne and hypothetical ; the true pro- fessing to be founded on actual observation, and the hypothetical being avowedly fictitious. Although Actuaries differ as to the -comparative mexits of these two sets of Tables, it ought -to be clear that the true alone are justifiable. Being founded -on actual rates of mortality, they show the annual premium necessary to cover the policy, and thus almost compel a calcu- lation of the expenses and profits. It should be observed, how- ever, that there are several so-called true tables, differing appre- ciablyamong themselves, and in the opinion of the authors of the Report, apparently only two of these, the "combined experience -of seventeen offices" and the new "Institute of Actuaries," both records of the experience of insurance offices, are really deserving of confidence. Another remark to be made is that a hypothetical table may require a larger fund to be kept in hand to meet poli- cies than a true tablet and thus by a kind of blunder may secure to the office extraordinary prosperity. It is, we believe, to the use of such a table that the splendid success of the Indian 1.1n- covenanted Service Fund is due.
The sedond point affecting the solvency of a Company is the rate of interest at which, in its valuation, it calculates that its in- vestments will accumulate. If it calculates upon a high rate when in fact, it obtains only a low rate, its funds will not accu- mulate as rapidly as it expected ; and thus it may find itself, after the lapse of years, with insufficient assets to meet its
liabilities. Now, by comparing the total interest realised by all the Companies with the amount of the capital yielding it„ the authors of the Report determine that the rate of interest hitherto made has been about 4.43 per cent., and they justly observe that "it would be unreasonable to adopt for valuation-purposes a rate of interest higher than that so deter- mined, and it would be dangerous to adopt one so high." It is true, of course, that this rate is but an average, and that the suc- cessful Companies probably realised more. But it should never be forgotten that the safety of insurance is a matter of supreme importance. Now, accidents may occur, loans may not be re- paid, and political disturbances or commercial disasters may lower the productiveness of investments generally. A Comngpy is obviously bound to take precautions against all such contin- gencies, and thus not to reckon upon a rapid accumulation of funds. Hence the conclusion dfawn in the Report is, that "a 4-per-cent, valuation should be adopted with great hesitation, if at all." The third condition of good management is, that a sufficient proportion of the premium be set apart to cover the policy. The business of Insurance, the reader will bear in mind, is founded upon the fact that, in the words of the Report, "though there are few things so uncertain as the duration of the life of any one individual, observation has proved that the duration of the collective life of a large number is practically cer- tain." Now this certainty enables the Insurance Company to calculate the premiums which, carefully invested, will pay its policies, defray its expenses, and leave it a fair profit on its busi- ness. A premium, it will be seen, then, consists of four item; :— (1), Net premium, that is, the portion set apart to cover the policy ; (2), agents' commission ; (3), office expenses ; and (4), profit. In estimating the financial condition of an office, it is clear that neither " 2 " nor " 3 " ought to be set down to its credit. The agents' commission does not belong to it, and never, in fact, comes into its hands ; while the office expenses, by the supposition, are spent in the rent of premises, salaries of clerks, &c. A little consideration will convince us, further, that the profits ought not to be taken into account. As the authors of the Report observe :—" If they take credit in their valua- tion for any portion of this amount, they necessarily confer undue benefits upon present members, to the injury of new members ; and the process resembles that of a spendthrift anticipating for present use the income to be derived in future years from a settled estate." Clear as are the principles now pointed out, the authors of the Report yet tell us :—" It will hardly be believed that the Board of Trade could have had submitted to them for acceptance, under the Life Assurance Companies Act of 1870, valuations in which the future profit, future expenses, and even future commission have been turned into present value, and the whole represented as profit. These accounts have been rejected, as being manifestly incorrect and misleading, and amended returns requested. Other Com- panies have treated the provision for future profits, and more or less of the provision for future expenses, as profit. These have been accepted with considerable hesitation, on the ground that an extravagant management in past years may become somewhat more economical in the future. A third class of accounts show that the future profits have been trenched upon, and these the Board of Trade have apparently no power whatever to interfere with." This passage will show how extreme is the mismanagement of several of the Offices. The following extract explains the practical consequences of this mismanagement,—how it encroaches upon, or entirely swallows up, the fund that ought to be accumulating for the payment of policies :—" Of each pound entrusted to them by the assured, some Companies spend as little as is., others spend 2s. 6d., others 5s., others 10s., and others the whole ; and a few not only do this, but get into debt, trusting to be set right by means of future payments from the assured. In some instances, at least, the proportion year by year absorbed is so great, that the Companies can in no sense be said to exist for the benefit of those who insure in them." We would especially invite the attention of our readers to the last sentence in this extract, as raising a very serious question with regard to the duty of the State, in a case of such cruel dissipation of funds placed in trust with the Companies for the benefit of widows, children, and other helpless persons.
The reader will be curious to learn how a departure from the three principles of management to which we have been calling attention will severally affect the financial condition of a Company. - It appears that neglect to set apart a sufficient net premium is by far the most injurious, and fortunately it is precisely the point most s easily determined by ordinary persons. One has only to turn to the Appendix to this Report to find, in any special instance, the propor- tion of the premium income absorbed in expenses and profits. With regard to the exact relative effect in each case, it would seem that, assuming the departure to be to the same extent in all, the taking of an incorrect table of mortality will cause a fund to be kept in reserve about one-tenth too small ; the taking too high a rate of interest will diminish the fund by almost one-thirteenth ; but the spending too great a proportion of the premium in expenses and profits will reduce the fund by one-fourth. "It thus follows that of two Companies, wader exactly the same particulars of business, the one will be cautious, and keep in hand a million to meet its engagements ; the other, perhaps, anxious to distribute large bonuses, will deem it sufficient to keep in hand a fund of 1600,000, and will recklessly publish and divide the remaining 1400,000 as profit."
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