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terms on which life insurance is ordinarily granted, no ownership on the part of the policy-holder in the reserve is recognized; nor is any legal right to withdraw any part of it recognized. The policy-holder is entitled to a performance of the stipulations entered into with him by the Company, and to that only. This will be changed upon the new plan. The contract entered into with its policy-holders by a Company that has adopted the Savings Bank plan, is different in substance from that entered into by an ordinary Company, and the change which will be introduced, if the new plan is generally adopted, will be a very material one. No doubt this change is designed for the benefit of the public.
This is by no means one of the schemes which have been invented for the mere purpose of securing new business. On the contrary, the motives from which its adoption has been urged are of the purest and most disinterested character. The object of the plan is to give the policy-holder a legal right, on the surrender of his policy, to receive from the Company its full value. But its acceptance is properly a matter for agreement between Companies and their policy-holders, precisely as is the case with the adoption of any of the various new methods of declaring dividends.
Before deciding on the adoption of the Savings Bank plan, it may perhaps be well for Companies and the public to consider, in the first place, whether upon this plan Companies will be protected in the full enjoyment of all the advantage to which they render themselves entitled by a judicious selection of the lives insured ; and, in the second place, whether the proposed change in the character of life insurance, would, on the whole, be for the better. As at present constituted, Life Insurance Companies are not subject to the runs to which Savings Banks are at times exposed. Hence, their is to some extent a difference in the character of the liabilities for which the two institutions are required to make provision, and also a corresponding difference in the class of investments which they seek. Whether it would be well to abolish this distinction, is certainly a question which deserves very serious consideration.
FOUR PER CENT. RESERVE. It is of course well known to most people, that the reserves which Life Insurance Companies keep on hand accumulate at compound interest. In ascertaining the amount to be reserved, an assumption must be made as to the net rate at which these funds will accumulate, after all allowances for losses. Losses are sustained not only when any of these funds are so badly invested as to be wholly wasted, but also when they remain temporarily idle, or are so invested as not to yield a full rate of interest. It is perhaps needless to remark that if the rate assumed is four and a half per cent. instead of four per cent., the amount of reserve required will be proportionably reduced.
It was in the year 1859, that this State first undertook to calculate the amount of the reserve required to be in the hands of the Companies. In calculating this amount, the Hon. Elizur Wright, who with the late Hon. George W. Sargent then constituted the Board of Insurance Commissioners (Mr. Wright having been actively engaged in securing the establishment of the Massachusetts standard of valuation), assumed that the net rate at which reserves would accumulate after all proper allowances were made, would not be less than four per cent. per annum. They said in their report that this was the rate which was generally deemed safe by the Companies. The Legislature itself, in 1863, adopted that standard by enacting a law (Chap. 148 of the Acts of that year), by which any Company is prohibited from issuing new policies whenever its actual assets are not equal to the amount of its reserve, after providing for all other liabilities. About ten years ago, the four per cent. standard had therefore in this State the sanction of the Commissioners, the Legislature, and the usage of the Companies. A high reserve does no harm in any event, because whenever the accumulation goes on at a greater rate than the one assumed, the excess of such accumulation, as it accrues, is returned to the policy-holders in the form of dividends.
A different standard has, however, been adopted by several of the other States. It is affirmed by the Hon. William Barnes in a paper which he prepared on a Uniform Standard of Mor
tality and Interest, and submitted to the Convention of the Insurance Commissioners of the several States, at their second session in New York in October last, that seven of the States had adopted a four and a half per cent. standard. A resolution in favor of that standard was also passed by that Convention. Since its adjournment, several States have established Insurance Departments and enacted general insurance laws, some adopting the four and a half per cent., and some the four per cent. standard. As the subject, which is one of great and vital importance, is attracting some degree of attention, it may appropriately receive brief consideration in these pages.
In order to arrive at a satisfactory solution of the question, it is necessary to understand precisely its nature. tion properly relates to the rate at which a certain class of funds are destined to accumulate in the future. The object of the Legislature in fixing the amount of reserves at all, is to place them at such sums as will certainly enable the Companies to meet their obligations as they mature. It will be seen that the question does not, strictly speaking, relate to the interest, commonly so called, which will be realized upon capital when productively invested and at the best advantage. The rate, however, at which reserves accumulate depends upon
the rate of interest that prevails, and the rate accruing on capital in general must be the basis upon which a conjecture must be made as to that at which reserves will accumulate. The obligations for which these reserves are intended as a provision, mature upon the average at distant epochs. The rate of interest likely to prevail during long periods in the future, must therefore be taken into consideration in the adoption of a standard for the reserves.
In regard to probable future rates of interest, various opinions are held. On this subject, an interesting paper, written by Hon. Alexander Delmar, appears in the published report of the last session of the National Insurance Convention. In his discussion of the subject, Mr. Delmar inquires into the principle which governs the rate of interest, and says : " that the net rate of interest realized in a community, State, nation or in the world at large, is necessarily correctly marked by the rate at which the wealth of such community, etc., augments, after
allowance is made for augmentation by removal, emigration, war, or other exceptional, arbitrary, or violent causes. In other words, that in the long run, the annual rate at which the whole mass of capital increases and the average annual rate paid for the loan of any portion of it is necessarily the same.”
Mr. Delmar classifies what is commonly called interest into two parts. One of these, he holds, is merely a charge made on account of risk incurred. The other is the net interest, or interest proper. He is of opinion that the rate of net interest has a tendency to rise. We do not feel ourselves called upon in this connection to attempt to decide whether he is or is not correct in his opinion. We would merely remark in passing, that, assuming the principle which he lays down to be the true one, it would seem that, even if larger and larger additions are made each successive year to the material wealth of a country, the ratio of these additions to the aggregate wealth of that country must after a time tend to diminish. But, however this may be, there is always a certain degree of uncertainty which attaches to everything future. Notwithstanding the view expressed by the writer last quoted, that the rate of net interest has a tendency to rise, he is of opinion that in the United States, investments having fifty years to run, which are perfectly secure, will realize par, provided they yield an interest of at least three and a half per cent., or, in other words, that the net rate of interest which will prevail in this country for the next fifty years will not, upon the average, be higher than three and a half per cent.
We have ourselves been impressed in examining the returns made to this office during the period of our own occupancy, with the difference in the productiveness of various classes of the assets held by Life Insurance Companies. While the assets which have been most productive have realized from five to seven per cent. per annum, and in a few instances perhaps even more, other assets have not yielded nearly as much. Upon
a somewhat careful examination, we have not yet been able to · satisfy ourselves that the reserves, upon a fair average, have
realized more than four and three-quarters or five per cent. net. During the period of our own official administration, there have been no panịcs, monetary crises, or occasions of great financial depression, and yet in casting the horoscope of the future, the
occurrence of such events cannot be deemed so highly improbable, that they may be disregarded. Events which are improbable do sometimes occur. It is only when they are so improbable that their occurrence may be assumed for practical purposes to be impossible, that they are to be wholly neglected. We do not think it can be assumed as absolutely certain, that all the assets of each company that does business within this State will not, for some brief season, at least, in the future, fail to realize a net rate of interest higher than four per cent.
During the period lapsed since this State adopted the four per cent. standard, the finances of life insurance have been favored by circumstances. These circumstances have been exceptional in their nature, and do not in themselves justify a change in the standard. We are assured that many of the Companies do not desire that any change should be made. They realize that ample security is of more importance, both to a Company taken as a whole, and to its policy-holders taken individually, than the precise time when its surplus may be divided. They feel that security should not be sacrificed, in order that dividends may be anticipated and made a little before the proper time for declaring them has arrived.
If the financial prospects of Life Insurance Companies at the present time are compared with their prospects ten years ago, the comparison will not be found to justify a lowering of the reserve. The position of the Companies which were doing business ten years ago, has no doubt materially changed in one respect. Ten years ago, when they were in their infancy, the amount of the reserve called for by the four per cent. rule was small, and the pressure of the rule was unfelt and unnoticed. But, as year after year has rolled silently by, compliance with the rule has become each year more and more difficult, as the absolute amount of the reserve required by it has become larger and larger. The natural effect of this change in the situation of the Companies, is to make them desire a change in the rule. But as this increase in the reserve is precisely what is rendered necessary by the obligations assumed, there would seem to be nothing in this change in the situation of the Companies which should cause the State to lower its requirements. A rule expressly designed for a provision against Death, ought properly to be as inexorable as Fate.