Annals, Anecdotes and Legends: A Chronicle of Life Assurance

by of the Bank of England John Francis

The wise provisions of the Banking Act of Sir Robert Peel in 1844 are a proof that our Legislature does interfere in financial affairs, and life assurance is only an extended form of banking; the joint-stock banking company receiving deposits and paying them back, with interest, on demand; the joint-stock assurance company receiving deposits and paying them back, with interest, at death. If it were thought desirable for the Bank of England to publish a weekly statement of its financial position, it is equally desirable, in many respects, for a life assurance company,—the argument being, in both cases, the general good.

An examination of the accounts returned by the various offices gives us some startling facts. Twenty-five of these, the average term of whose operations has been three years and three-fifths, have expended in that time 375,328l. out of 462,032l., great part of which they have received for policies granted and annuities promised. Nine of them have spent all their premiums and 30 per cent. of their capital besides. Mr. Labouchere distinctly stated his opinion that many were insolvent; and “My impression,” says Mr. Christie, “nay, my entire conviction, as to others, notwithstanding the flaming accounts of their prosperity contained in reports and speeches at annual meetings, is, that they are rotten, and are in effect, though not in design, fraudulent.”

Such statements as these being publicly made, there appears some ground for examining the question, and for quieting the minds of those who may have entered into engagements with the junior offices, so far as a fair and rational consideration will do so. It may be assumed that none of the offices now in existence have been opened with a fraudulent intent; but the necessity which exists of spending their money liberally, and almost lavishly, to procure business, is almost as pernicious. It is but just to say that an examination of the tables of the new offices does not show a low rate of premium; not lower, perhaps, than the increased value of life will allow, and certainly not lower than the old offices could well afford to charge.

One unfortunate tendency of the new companies is to give life assurance a speculative character, when nothing is less speculative in reality. Yet the extraneous temptations and collateral advantages promised by most are very mischievous. Men now sometimes insure their lives with a vague belief that in a few years they will have no more premium to pay; they quarrel with the fair divisions of old offices, and taunt their managers with the advantages to be derived from the new. As an example of the language that is sometimes indulged in, one modern office promises to set apart a portion of its future profits, whether such should amount to thousands or to tens of thousands, to hundreds of thousands or to millions, for the support and future provision of any person in decay who shall have once, for however brief a space of time, held a single share in such company. “To become a shareholder,” says the prospectus, “is as it were to effect at once and for ever a policy of assurance against want.” The reader is left to judge for himself of this singular specimen of assurance.

But, independently of the expenses which eat up the premiums, it may be feared that in an anxious search after business, the examining physician may not be so rigid in his report as those of the older established companies; the lives admitted by the directors, therefore, not being so good as they should be for the ultimate safety of the office. It has been added, in support of this, that in some of these companies the mortality has been 40 per cent. more than it should have been, had proper care been taken. But are we not very ignorant of the laws which govern disease? It is well known by physicians that the chances of life in individuals are constantly changing. Mr. Gompertz, the father of our actuaries, has expressed a belief that it would be difficult to pick out 10 per cent. of really uninsurable lives from the entire population. Those which are now doubtful, or even diseased, to-morrow become sound and insurable; while those accepted with gladness at the ordinary rates of to-day, become in almost the same proportion ailing and uninsurable afterwards. The chances of individual health, be it sound or unsound, are as uncertain as those of individual life, and no effort having hitherto been made, excepting by Mr. Neison, to discover the law which governs disease in its relation to life, it follows that any argument against the new companies based on the low character of the lives which they assure, may prove, however specious in theory, very unsound in practice. And the mode adopted by the old offices of conducting their business has certainly, up to the present time, been too much in their own favour. By well-grounded tables they establish the fact that out of 1000 lives, taken at random among the diseased as well as the healthy, a certain number will die each year, until all are extinct. But though on this they found their rates, they are much too shrewd to take their lives at random. They pick the strongest and healthiest, rejecting all else, and make them pay premiums founded on the contingency tables of mixed lives. This, therefore, is also somewhat in favour of the calculations of the new companies. But there is another important item to be regarded;—the value of money. The funds of all the offices from 1760 to 1815 were bought when Consols were low, and the price of the Three per Cents. ranged from 47 1/4 to 97. During the war there was an eager demand for money. Exchequer bills, mortgages on large landed estates, allotments of new loans, were all favourable modes of investment. Even since money has been plentiful, the large capital of the old offices has enabled them to gain a higher interest, because money lent in large sums for a lengthened period will always command a higher rate of interest than small sums for a short period. Thus one old office announces, in its balance-sheet, that it is receiving 4 1/2 per cent. on its investments; and probably other offices, with similar funds, are similarly fortunate.

The new offices may find a difficulty in this which they have not estimated, and which may materially interfere with their profits; although it is more than probable that even this objection is over-rated, because there are principles which govern the interest of money, quite as certain as those which govern life, and because the rate of discount of the Bank of England is no safe criterion to those who are out of the money market. Their anxiety to forward their interests will also induce them to exert themselves, and the activity which pervades business when discounts are low, may more than compensate for a diminished interest. There is, however, another feature which must always act somewhat in favour of the old offices, and that is, their liberality in peculiar cases. Rich and well-established companies do not always confine themselves to arithmetical calculations, and they often employ the rule of right in paying demands which no court of law could compel; partially, it may be, from proper feeling, but principally from an “enlightened selfishness.”

If it be thought that life assurance offices should, for the sake of the public and of themselves, be interfered with by Government, the next step is to discover the simplest and the least vexatious mode of dealing with them. And here at once arises the question whether some difference should not be made between the mutual and the proprietary company. Assuming that the mutual system possesses every essential element of safety, it is equally true that there are hazards in the path of any company depending merely on its premiums, which do not attend a company with a respectable proprietary. Hundreds were once ruined by a mutual fire-company; and had the cholera, in 1849, fallen on the class which does insure as much as on that which does not insure, none can say to what extent the new and untried companies would have suffered, or whether they could have paid the policies which became due. And there is another point which materially affects an office with a small business. In the first few years of its existence the estimated mortality will probably ensue. But let us imagine, for a moment, this mortality seizing those who are insured for large amounts, instead of those who are insured for small sums; might not the demands be too great for its capital, even with no excess of mortality, especially when it is remembered that the expenses of establishing the society would necessarily have decreased its resources? A company with a subscribed and paid-up capital may fairly pay largely for advertisements; but a mutual company, without any independent funds, has scarcely the right to use their premiums for any other purpose than to decrease the annual payments or add to the policies. As mutual offices, therefore, have no other security than their premiums, these would require to be looked after more circumspectly and closely than where a capital and a proprietary are answerable to the insured. The mode in which the funds are invested by mutual offices might be a fair subject for publication; nor would this be an invidious distinction, as an irresponsible office has less claim to an equal latitude of investment, and less right to keep their secrets than a responsible company.

One element in the success which the old mutual offices have experienced is attributable to the high rates they charge. Thus, the premium of an old mutual company at the age of thirty is 2l. 13s. 6d.; while that of an old proprietary company is 2l. 2s. There may be an ultimate equivalent to the mutual insurer, if he live, in either a reduced premium or an increased policy; but as the former is too frequently accepted instead of the latter, the family of the insured do not receive the same benefit at his death which they would have done, had he paid the same sum to a proprietary office, and kept up the premiums as he would have been compelled to do.

A life assurance office with a respectable proprietary and a paid-up capital, is by virtue of the English law of unlimited partnership as safe as any company can be, so far as the assured is concerned; and as the chief end and aim of government interference would be the safety of the policy-holder, it follows that new legislation on this subject should in fairness only affect new proprietary companies, to prove the reality of their capital, and so protect the public from such men as those who have lately been unkennelled. But though a marked difference may be claimed by the respectable proprietary companies, and though a distinction might perhaps in strict justice be drawn betwixt those with a subscribed capital and those which have only their first years’ premiums, less their expenses, to pay the claims against them, it would perhaps be politic on the part of government to include all; and it would be still more politic on the part of the old proprietary offices to state their readiness to concur in any plan which might be for the benefit of the body corporate, because any legislative measure, to be effective as well as protective, must be general. While it must be such as will be readily acquiesced in by the older offices, it must not be made unpleasant to the new: it must be at once general in its application and strict in its inquiries. If it appear inquisitive, it must not be inquisitorial; and, if possible, the common consent of all should be obtained. The actuaries, who are intelligent and accomplished gentlemen, must be propitiated, for they are in possession of a somewhat occult science, having justly the ear, the confidence, and the respect of their directors. And when it is borne in mind that these directors embrace, as a body, the first men in the city of London, that they possess a commercial, social, and, not seldom, a political consideration, it follows, that to conciliate them is as necessary to the well-being of any measure, as to conciliate the actuary is necessary to the co-operation of the directors. There is no profession in which subordinates are so respectfully regarded, for the actuary is master of a science in which the director is generally deficient; and knowledge, in this case, as in others, is essentially power.

If then it would be wise and prudent for government to interfere with all, and at the instance of all, the next consideration is how to produce the greatest amount of good with the least amount of evil: and one of the essential conditions is, the clearest information published in the briefest form to give a correct estimate of the position of an office. Tabular statements may prove whatever the actuary pleases, and may be made to mean anything and mystify anybody. One concise form, therefore, so clear that he who runs may read, a form which can deceive no one and which all can understand, will be necessary.