Page:EB1911 - Volume 14.djvu/703

Rh being lower than that provided for by the mortality tables;

(3) from the expenses and contingent outlay being less than the “loading” provided to meet them; and (4) from miscellaneous sources, such as profitable investments, the cancelment of policies, &c.

Supposing a valuation to have been made on sound data and by a proper method, and to have resulted in showing that the funds in hand exceed the liabilities, the surplus thus ascertained may be regarded as profit, and either its amount may be withdrawn from the assets of the office or the liabilities may be increased in a corresponding degree.

Various methods are employed by insurance companies in distributing their surplus funds among the insured. In some offices the share or “bonus” falling to each policyholder is paid to him in cash; in others it is applied in providing a reversionary sum which is added to the amount

assured by the policy; in others it goes to reduce the annual contributions payable by the policyholder. A method of more recent introduction is to apply the earlier bonuses on a policy to limit the term for which premiums may be payable, thus relieving the policyholder of his annual payments after a certain period. Another method is to apply the bonuses towards making the sum insured payable in the lifetime of the policyholder. The plan of reversionary bonus additions is most common, and when it is followed the option is usually given of exchanging the bonuses for their value in cash or of having them applied in the reduction of premiums.

Not only are there different modes of applying surplus, but the basis on which it is divided among the insured also varies in different offices. In some the reversionary bonus is calculated as an equal percentage per annum of the sum insured, reckoning back either to the commencement of the policy in every case, or (more commonly) to the preceding division of profits. In others the rate is calculated, not only on the original sums insured, but also on previous bonus additions. In others the ratio of distribution is applied to the cash surplus, and the share allotted to each policy is dealt with in one or other of the ways above indicated. The following are some of the ratios employed by different offices in the allocation of profits: (1) in proportion to the amount of premiums paid (with or without accumulated interest) since the last preceding valuation; (2) in proportion to the accumulated “loading” of the premiums so paid; (3) in proportion to the reserve values of the policies; (4) in proportion to the difference between the accumulated premiums and the reserve value of the policy in each case.

Some offices have a special system of dealing with surplus, reserving it for those policyholders who survive the ordinary “expectation of life,” or whose premiums paid, with accumulated interest, amount to the sums insured by their policies. This system is usually connected with specially low rates of premium.

In the United States the so-called “contribution plan” has been accepted in theory by many companies, though carried out with many variations in detail by different actuaries. The principle is, that since each of the insured is charged in his premium a safe margin above all probable outlays, when the necessary amount under each head becomes determinate the several excesses should be returned to him. It is therefore sought to calculate what each member would have been charged for net premium and loading had the mortality, rate of interest, and expenses been precisely known beforehand, and to credit him with the balance of his payments. As a corollary of the theory of net valuations, which regards every life insured as an average life until its end, and assumes the rigid accuracy and equity of all the formulas employed to represent business facts, it is consistent and complete. But many minds find it more curious than practical, and prefer to seek equity in faithfulness to contract rights rather than in adjustments which they deem too refined, if not fanciful. The plan has met with little favour in England, where surplus is more commonly distributed on general business principles. Enormous bonuses were saved by the British offices out of the excessive premiums at first collected, and by the American companies during the epoch of high interest rates. But the use of more accurate tables, the decline in interest, and the increased expenses of later years, have vastly reduced the apparent profits. Former methods of distributing surplus, when ascertained, have largely given way in America to novel and more complex plans. The Tontine idea, historically familiar, was for many years imitated by some offices in their insurance contracts. All premiums above outlay, in a company or a class of policies, were accumulated, only stipulated amounts being paid on death claims meanwhile maturing, with no compensation to its members withdrawing, until the end of a fixed term, when the whole fund was apportioned to the survivors. Large returns were sometimes made, but many who could not maintain their policies were dissatisfied. “Semi-tontines” followed, partly meeting the difficulty by pooling only the surplus, and allowing some return in case of withdrawal. But these cruder forms of contract are now largely superseded by various “reserve-dividend,” “accumulation,” “bond,” and “investment” policies, with options at stated periods between cash withdrawals and continued insurance, the simple inducement to provide against death being more or less merged in that of making a profitable investment of capital.

In those branches of insurance where the contract is one of indemnity against loss, the risk remaining the same from year to year—and where the consent of both parties, insurer and insured, is required at each periodical renewal—no question of allowance in respect of past payments

can arise when one party or the other determines to drop the contract. It is quite recognized that the premiums are simply an equivalent for the risk undertaken during the period to which they apply, with a certain margin for expenses and for profit to the insurer, and that therefore a favourable issue of the particular contract supplies no argument for a return of any part of the sums paid. In life insurance, however, we have shown that the premiums contain a third element, namely, the portion that is set aside and accumulated to meet the risk of the insurance when the premium payable is no longer sufficient of itself for that purpose.

When a policyholder withdraws from his contract with a life insurance office, the provision made for the future in respect of his particular insurance is no longer required, and out of it a surrender value may be allowed him for giving up his right to the policy. If there were no reasons to the contrary, the office might hand over the whole of this provision, which is in fact the reserve value of the policy. No more could be given without encroaching upon the provision necessary for the remaining policies. But the policyholder in withdrawing is exercising a power which circumstances give to him only and not to the other party in the contract. The office is bound by the policy so long as the premiums are duly paid and the other conditions of insurance are not infringed. It has no opportunity of reviewing its position and withdrawing from the bargain should that appear likely to be a losing one. The policyholder, however, is free to continue or to drop the insurance as he pleases, and it may fairly be presumed that he will take whichever course will best serve his own interest. The tendency obviously is that policies on deteriorated and unhealthy lives are kept in force, while those on lives having good prospects of longevity are more readily given up. Again, the retiring policyholder, by withdrawing his annual contribution, not only diminishes the fund from which expenses are met, but lessens the area over which these are spread, and so increases the burden for those who remain. Considerations like these point to the conclusion that, in fairness to the remaining constituents of the office, the surrender value to be allowed for a policy which is to be given up should be less than the reserve value. The common practice is to allow a proportion only of the reserve value. Some offices have adopted the plan of allowing a specified proportion of the amount of premiums paid. This plan is not defended on any ground of principle, but is followed for its simplicity and as a concession to a popular demand for fixed surrender values.

Another mode of securing to retiring policyholders the benefit of the reserve values of their insurances is that known as the non-forfeiture system. This system was first introduced in America, whence it found its way to the United Kingdom, where it was gradually adopted by a large

proportion of the insurance companies. In its original form it was known as the “ten years non-forfeiture plan.” The policies were effected by premiums payable during ten years only, the rates being of course correspondingly high. If during those ten years the policyholder wished to discontinue his payments, he was entitled to a free “paid-up policy” for as many tenth parts of the original sum insured as he had paid premiums.