A matter of life and death
INSURANCE NICHOLAS DAVENPORT
Like all good causes life assurance can be in- tensely boring. If a man knocks at your door to ask whether you have made provision for your poor wife in the event of your premature death your first inclination is to slam the door. On that particular morning you might have had a domestic tiff and wished that your wife had been sailing with Chichester round Cape Horn. Or you might have heard that she was earning more money than yourself as con- fidential secretary to a business tycoon. The subject is not only boring but intensely com- plicated. There are so many different policies. There is an ordinary life policy with or without 'profits' or an endowment policy for a fixed term with or without 'profits' or a policy linked with a house purchase (on mortgage) or with an equity portfolio or a life policy cum an- nuity (for the very elderly to save estate duties) or a savings policy (for the young) or a group pensions or partnership scheme or any varia- tion of these to suit your individual needs. To make matters more confusing the jargon used by the salesmen is incomprehensible and the mathematics employed understandable only by actuaries. But somehow the boring thing gets done. And howl Last year new annual pre- miums were secured of £204 million (plus single premiums of £101 million) bringing total sums assured to about £35,000 million. The net new savings effected through life assurance were £740 million. Add £350 million for pensions and the total is nearly £1,100 million a year in contractual savings!
My interest in life assurance is biased be- cause as a young man I was elected to the board of a mutual life office of which Keynes was chairman. The idea was apparently to get someone on the board who could answer back when Keynes pontificated but that proved im- possible. Anyone who attempted it was verb- ally massacred. But it proved a fascinating experience. I have been able to watch the re- markable changes in life assurance at close quarters. To begin with, the sources of thrift have been changing. It is no longer the private investor with a large or increasing income who is mainly responsible for what the Government statistician calls 'personal savings.' It is the 'admass'—the millions of salary earners and wage earners from whose marginal income the contributions to life or group pensions are made. As the OECD report on the capital markets said: 'Savings have become a mass phenomenon.' The efficiency of a capital market is now judged to depend on the facilities for collecting house- hold savings on a contractual basis. The life assurance companies and societies are the main collectors.
Next, the development of social insurance, in particular, state pensions through the compul- sory weekly contributions to the Ni-ti fund, has
brought about a fundamental change in the public attitude to thrift. Social insurance is en- joyed by all: private insurance is enjoyed by the select (but now a majority). Each pursues its separate but complementary way without apparent damage to the other. Indeed, since state pensions were introduced there has been an increase in private pension schemes due to employers contracting out of the state scheme. And whenever there has been an upward re- vision in the State scheme there has been an increase in the private pension business. But there is no doubt that the Labour government will be re-examining the whole future of public and private superannuation as soon as it has parliamentary time to give to this study.
Finally, the depreciation in the value of money has made a big change in the approach to life assurance as a long-term investment. The buyer has been demanding 'with profits' policies which, by providing bigger and bigger bonuses, will give the policy holder a handsome enough profit on maturity to compensate for the fall in the purchasing power of his money. The in- surance company or society has been making these additional profits by investing its funds not only in money assets like government bonds, debentures and loan stocks, mortgages and preference shares, but in equity shares and real property. My own society was the first to invest in equity shares—in 1918—and the aver- age percentage of total funds now invested in equity shares by all the life offices is 22 per cent at cost (at market values it would be a much higher percentage). But there seems to be a reluctance to exceed this percentage, the cult of the equity not being what it was in the roar- ing 'fifties. At the same time, what I call 'the rat race' in bonuses is causing some embarrass- ment to offices. A way out of this embarrass- ment is for the offices to offer an endowment policy linked to specified equity shares, such as investment trusts, or to a specified fund instead of the general pool of institutional investments. The unit trusts, which are the latest capitalist instrument devised for collecting small savings on a contractual basis, were quick to develop the equity-linked life policy and, unlike the life offices, they were not averse to advertising the income tax savings. For a subscription of £100 a year, they said, £4 would cover your life assurance, £3 would go for expenses, and after crediting tax relief of £16 10s, you would be buying £93 worth of unit trust equities for only £83 10s. The idea caught on and some of the unit trusts have even set up their own life com- panies—much to the annoyance of the life offices. Indeed, some are offering single pre- mium endowment bonds which appeal to the surtax payer because the interest on the under- lying unit trust securities is invested net of 7s 6d income tax only and the capital plus
accrued interest handed over on maturity free of capital gains tax to the holder.
Mr Ian Lawson, the chairman of the Scottish Amicable Life Assurance Society, in his recent annual report had some pertinent remarks to make about the competition between the unit trusts and the life offices. The claims made for the inflation-proof quality of investment in equity shares are generally based on a retro- spective view of equity prices beginning with the 1950s when a unique and very sharp re- valuation of equity shares took place. Such a boom may or may not recur in the future: cer- tainly, under a Labour regime it is not likely to be seen. We should, therefore, treat all estimates of future appreciation in equity shares or unit trusts, he said, with greater reserve than esti- mates of the maturity value of a `with-profit' assurance policy, although future bonuses can- not be safely predicted. 'It is surely a case,' he added, 'where our two movements—unit trusts and life assurance—should live side by side without attempting to usurp each other's func- tions.' No doubt 'big brother' in the guise of the Minister of Social Security is watching both movements and in due course the Government will lay down the scope for each and the degree of tax relief appropriate to each collector of the national savings. Life assurance is now a vital service in the social welfare state and the providers of it will come to be held account- able to the community as a whole
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