Let us now suppose a company to be formed for the simple purpose of assuring lives. Their business is to invest the premiums of those who assure with them ; their receipts will consist entirely of current premiums and interest on the investments of the old ones ; and their outgoings will contain expenses of management, payment of claims, purchase of their own policies, and (possibly) losses by had investment.
There is one question which is generally settled at the very outset, namely, whether the company is to be what is called mutual, proprie tary, or mixed.
A mutual company is one in which the members stand bound to each other, and constitute the company themselves. In such a com pany no capital is, generally speaking, raised at the outset, except a small sum for necessary expenses at starting. This however is not necessarily the feature of a mutual company; for if its members choose to constitute themselves an investment company as well as an assur ance company, they May, without losing their mutual character, re quire every assurer to be also a shareholder. In a mutual company the profits of course aro divided among the assured.
A proprietary company is one in which a body of proprietors raise a capital and pledge it. for the payment of claims, in case the premiums are not sufficient : for this security they receive, in addition to the interest of their own capital, the profits of the assurance business. It has long been proved that, with proper tables of premiums, and a fair amount of business at starting, this capital is an unnecessary security ; and the only reason which could now make such an office desirable, would be the lowness of its premiums. Of course it matters nothing to the assured how claims are paid, as long as they are paid ; the capital may be diminished, but the assurer fears nothing except its exhaustion before his turn comes. This must be the sole considera tion with a person who is tempted by low premiums to a purely pro prietary office : the nominal capital signifies nothing ; it is upon the amount of assurance to which it (with the premiums) is pledged that the solvency of the office depends. Generally speaking however we believe it will be found that the purely proprietary offices have not allowed themselves to run much risk.
A mixed office is one in which there is a proprietary company, which does not take all the profits, but a share ; the rest being divided among the assured. The only good effect of the capital upon the condition of the assured in such a company is this ; that the directors, having fixed capital as well as premiums, may justifiably seek for investments which a mutual company must avoid. }laving the capital to make
good purely commercial losses, they may perhaps attempt to get a higher rate of interest, and of course take more risk of loss ; tho assured, who are sharers in the whole of the profits, since the profits of premiums and profits of original capital are not distinguished, cone In for their share of the extra profits of the capital. But no such attempt at gaining higher interest by secondary securities should be made until a sum sufficient (with future premiums) to meet all claims is invested in the very safest securities which the state of society offers.
There is much confusion in the ideas of.many persons about interest, arising from not distinguishing between interest and other returns. The following remarks may serve to explain our meaning : interest is the return which is made for the use of money, when the owner entirely relinquishes its management, and believes he has un doubted security for its return. " Interest," says Mr. 3PC'ullecli, " is nothing more than the net profit on capital." The same author goes on to say, " the rate of interest on each particular loan must of course vary according to. the supposed solvency of the borrowers, or the degree of risk supposed to be incurred by the lender." But here the acute writer from whom we quote, after setting out with the accurate definition of the political economist, proceeds to use the word in the common sense, in which it is no longer the net profit of capital. For this variation in the rate of interest (so called), this addition for pos sible insolvency, is or is meant to be only as much as will make every debtor who does pay contribute towards the bad debts of those who do not.. Nothing then is netted by the increase for suspicion of in solvency, in the long run, and one debt with another; so that, abiding by Mr. M'Culloch's definition of interest as the correct one, we should propose to call the additional ovum debt-insurance. To this we must add, that when a person employs his own money, as in trade or manu factures, he also gains that additional return which a borrower counts upon reserving to himself after paying the interest (and debt-insurance, if any) to his creditor. This is neither interest nor debt-insurance, but LA of the nature of salary, by which name it might be called. Perhaps it would be best to retain the term interest in its general loose signifi cation, and to subdivide it, for accuracy, into pure interest or net profit, debt-insurance, and salary.