Life Insurance

Premiums, Reserves and Bonus Distribution.—Although in practice his functions are much wider, the primary business' of the actuary of a life insurance company is to calculate premiums, value risks, and deal with the distribution of profits. The basis of an office's tabular premiums is a pure or net premium, "loaded" to provide for expenses, and, in the case of with-profit premiums, for bonus additions also; the margin for contingencies is, from the nature of things, larger for non-profit than for with-profit premiums. The annual premium for a whole life or endowment assurance is, owing to the fact that the risk increases from year to year, larger at first than is required to meet the bare risk (i.e., the policy's contribution to the claims expected in the year) and from this there arises the necessity to set aside and invest the balance; the amount so accumulated is called the reserve. The excess interest earned, and the saving of mortality and expenses (relatively to the assumptions on which the premiums are based), provide the main profits ; to these there may be added certain extraneous profits, such as those arising from non-profit business. The different methods of allotting surplus have already been described, and there are various plans for dealing with bonus which is distributed by the reversionary bonus method, that is to say by way of additions to the sum insured. The principal of these are :—(i) The simple bonus plan, which provides additions at a given rate for each f Too of original insurance and each year (within the valuation period) of duration; (2) the compound bonus plan, providing additions at a given rate to the sum assured and previously declared bonuses; (3) various contribution plans, which aim in theory at a return to the insured of the surplus actually contributed. The tendency is for the valuation period to shorten; prior to the Act of 1909 the maximum was seven years, but that Act reduced it to five, and there is a growing inclination towards triennial and yearly distributions. It is ob vious that while in non-profit business the rate charged is the main consideration, with-profit rates should be judged in relation to prospective bonus results, and that a high rate for a with profit premium is not necessarily an uneconomic one.

Finance and Investments.

The investment of the funds of a life insurance office is one of the most important duties of its administration, and it is on the successful accomplishment of this function that its bonus earning power, and, in the long run, its general prosperity, depend. The primary essential is security of the capital, and, subject to this, the earning of the highest rate of interest practicable. Formerly it was held that a life insurance company should keep a small proportion of its assets in readily convertible securities, but under normal conditions this is not really necessary, as the income of a progressive company exceeds its outgo and it is moreover in a position to obtain without difficulty all the credit it is likely to require to enable it to meet an individual emergency or to take advantage of an investment opportunity. In this respect its position differs from that of a bank and also from that of a fire office, which must always be in a position to meet the loss occasioned by a big conflagration, such as the San Francisco fire of 1906. The analogy in the case of life insurance would be an epidemic comparable to the plague, a negligible risk.

Mortgages are highly suitable investments and generally absorb on the average rather more than a quarter of the funds. British government securities also account (1927) for about a quarter of the funds of all companies combined, but this is largely a result of the war and the proportion is diminishing. Home railway de benture and preference stocks are much favoured and sound industrial debentures are also bought to a certain extent. There are, moreover, certain types of security which give little or no immediate yield from interest but are certain to appreciate in value, such as low yielding redeemable stocks standing at a heavy discount, and reversionary interests : these are unsuited to the private investor, but thoroughly adapted to the needs of a life insurance office. As the funds commonly run to many millions of pounds, those responsible for their investment are of course able to effect the saving which arises from being able to under write new issues, and to take up large lines of stock on preferen tial terms. Ordinary stocks and shares are engaging a certain amount of attention but only figure to a modest extent in life office balance sheets.

Amalgamations.

The amalgamation and transfer of British life insurance business is regulated by legislation. The tendency of recent times has been for companies not to absorb other con cerns but rather to secure control of them by acquisition of shares and so to avoid the amalgamation procedure necessary under the Act of 1909. A provision of the Insurance Undertakings Bill is that investments in and loans to controlled companies must be shown separately in the balance sheet; the sanction of court must be obtained for any fresh purchases of insurance stock or shares.

Expenses.—The expenses of a life insurance company are usually measured by comparing them with the annual premium income. The percentage thus arrived at is the expense ratio and it is generally in the neighbourhood of 15%. The expense ratio may be unduly lowered when the year's income includes a large proportion of single premiums, or where bonuses are used exten sively to reduce premiums ; on the other hand, a high expense ratio, where business is large and increasing, does not necessarily indicate extravagance. To avoid misleading comparisons, allow ance should therefore be made for these factors.

Life Insurance and Income Tax.—Formerly a distinction was made between the method of taxing a purely life office and that of taxing the life insurance section of a composite office, but in 1915 this was altered, and the basis is the interest earned, less expenses. Should the profits exceed this they become the basis of assessment, but this is rarely the case.

A policy-holder is entitled to a rebate on the premiums paid by him on a life insurance policy. The scale of rebate depends on the date of the policy, e.g., on insurances effected up to June 22, 1916 (inclusive), if the income does not exceed LI,000, half the standard rate; if the income exceeds LI,000 but does not exceed £2,000, three-quarters of the standard rate ; if the income exceeds £2,000, the full standard rate. As regards insurance made after June 22, 1916, for all incomes subject to tax, half the standard rate. The proportion of the premium subject to rebate is limited to one-sixth of the income and 7% of the amount guaranteed by the policy to be paid at death.