Insurance
• THE SECURITY OF LIFE ASSURANCE.
WnEN an investment yields a high rate of interest there is generally something lacking in the way of security, and in return for unimpeachable safety we are often content with a small yield. It is true that in the financial conditions of recent years these ideas have in some measure been upset, but generally speaking it remains true that abundant security and a high rate of interest are not found together.
' One conspicuous exception is life assurance. There are convincing reasons for both the security and the high rate of interest obtained. The latter is largely, though not entirely, due to the remission of Income Tax on premiums, the normal allowance being at present 2s. for each 11 paid in premiums. It is manifest that since we can obtain for 190 a year an investment that is a good return for £100 a year, we are likely to fare exceedingly In life assurance, so far from there being any conflict between profitableness and security, the exceptional condition prevails that, where the security is greatest, the profit is apt to be largest, because the two things arc the result of the same causes.
Ultimately, the security of policy holders depends upon the assets in the possession of the life office. As we discovered some years back, securities may depreciate in value, and the necessity for writing them down to their market price decreases the amount of surplus available for distribution to policy holders. Even with Stock Exchange securities, however, life offices have the best advice at their disposal, and are able to spread their investments over a number of different securities. They are consequently able to do better for their assured than the policy holders could do for themselves. Investments of other kinds than Stock Exchange securities are avail- able for life offices, from many of which no depreciation is to be anticipated.
Apart from these considerations, the nature of life assurance affords an exceptional measure of security. The policy holders pay premiums to the life office, which, after paying expenses, returns the money to the policy holders when the policies become claims. The law of average, and extensive experience of mortality among assured lives, indicate within comparatively narrow limits the amount of the claims that will have to be met in any year. There is practically no possibility of anything equivalent to a "run" upon a life office, such as might happen to a bank, and the payments under a large number of policies will not have to be made until a future that is more or less remote.
Calculations have to be made as to the money it is necessary to have in hand now for meeting these future liabilities. These calculations involve, among other things, assumptions as to the rate of mortality, and the rate of interest that will be earned upon the funds. All the mortality tables in use indicate a higher mortality than is likely to be experienced, with the result that the calculations show that the claims by death will occur at an earlier date than that at which they will actually happen.
The calculations assume that the funds will grow slowly at some low rate of interest, such as 3 or 2i per cent., whereas, as a matter of fact, they will probably grow quickly at a much higher rate. Clearly the present liability is smaller if the funds are to increase rapidly to a given amount at a future date, than if, they increase slowly. Hence the liabilities of a life office are very substantially over-estimated by the calculations made for a valuation. In addition, the assets of most life offices are stated at a smaller sum than they are worth.
The difference between the stringent assumptions in regard to mortality and interest leads to the existence of a surplus at each valuation which is the source from which bonuses are derived, and which constitutes a large margin of security. Much more might be said about the subject, but this is sufficient to show how it is that security and a high yield are combined in life assurance in an exceptional way, WILLIAM SCHOOLING.
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