Annals, Anecdotes and Legends: A Chronicle of Life Assurance

by of the Bank of England John Francis

Many methods by which the safety of the public may be attained have been proposed; but the first to be dealt with are the publication of the accounts, the form in which they should appear, and the mode of determining their correctness.

1st. The publication of the accounts, to be effectual, should be general. Without this the cry of partiality would be raised, and must be fatal to the attempt. As well as general, they should also be uniform, so far as this is possible. They should consist of leading features stated in the simplest and least complex form, admitting, as far as practicable, of only one interpretation. They should be certified by the actuary, examined by the directors, and signed by the chairman, all of whom should be held responsible, under a heavy penalty, for their accuracy.

2d. These returns must give the exact money position of the office, the leading principle being an endeavour to show the funds in proportion to the risks; and as there is a difference in the mode of estimating future chances, the form adopted by each should be one and the same. As each office, also, has business special to itself, with its own peculiarities, its own interests, and its own mode of investment, any detailed statement might be dangerous, and form the groundwork for rivals to copy or to criticise. The points of chief note are the capital, the amount of liabilities, and the annual returns; and if the endeavour were made to show the funds in proportion to the risks, instead of endeavouring to procure a large show of business at any price, the object of ambition would be the accumulation of capital.

3d. The best way of procuring correct information is the next condition. Falsified returns are not impossible. If any office should be failing in its endeavours to keep its business together, having men at its head whose names are unknown save in a petty and obscure locality, a strong check is necessary; and it seems scarcely practicable to avoid the appointment of a competent person as an arbiter of their correctness. Unpopular as this might be at first, were the appointment placed in proper hands and judiciously carried out, it would be of immense benefit. It would indeed be scarcely necessary for the inspector to be a government officer. The established companies might fairly say, that they have done no wrong, and that a close espial by a government agent would be derogatory. But were an inspector of this kind chosen unitedly by the offices, and paid by the State, the companies having no voice in his dismissal, excepting under circumstances which ought to command it, there would be less objection. The necessity for such an officer would arise from the brevity of the accounts to be published. It would be his duty to see that the data from which they were formed was true; that the premiums received were as large as was stated; and that while the investments were as great, the liabilities were not greater than the report asserted. The power to examine and compare these returns with the books of the various companies is a delicate consideration; but as the offices might appoint the inspector themselves, it would, after all, be only an additional check by their own officer on their own affairs. The mode of investing need not be published, as the power of the inspector to demand an examination would be a sufficient check on immorally-disposed offices. Nor is such a case unprecedented, as by a clause in the Bank Charter Act of 1844, commissioners are empowered to search into and examine the books of those bankers who issue notes.[30]

If it be desirable, as it undoubtedly is, that assurance offices should be perfected for the sake of the public, it is doubly so that some check should be placed on annuity companies. It is from them that most mischief has ensued. In a life office the promoters may have to pay claims before they have received sufficient assets to meet them. But an annuity office, where capital is at once placed down for a future, but postponed benefit, may do irreparable mischief in less than a year. In this way the public, and that portion of the public, too, which is the most deserving of care, have suffered, and are likely to suffer. All the new offices grant annuities, and though it is difficult to say the exact amount, (their returns being so cleverly or so clumsily arrayed), yet it is probable that within the last five years more than 100,000l. has been received on the faith of annuities to be paid by them; and it will be no consolation to the annuitant to be told that though his annuity must cease, it is caused by unfortunate calculations and not by fraudulent design. The granting annuities does not necessarily, although it may naturally, enter into the business of a life office. For the first century assurance, and annuities were distinct, and it is somewhat doubtful whether it is quite wise to allow, at any rate it is dangerous to the public to deal in annuities granted by new offices which issue policies of assurance as well as bonds of annuities. The large sums paid down make a show in the assets of a new company, and the fact that hundreds of people for many years rest their entire support on the promises to pay of offices which have been declared by many to be bankrupt, and whose balance-sheets certainly evince an irregularity out of keeping with all propriety, is singularly important. It is a cruel government that will not interfere in an iniquitous system, and the accounts of the annuities, viz. the yearly amounts to be paid, the estimated number of years over which they will extend, and the special capital in hand to meet the demands, should be published separate and distinct from the assurance accounts, as the banking and issue departments of the Bank of England.

Another proposition has been made, to the effect that no company should be allowed without a large paid-up capital. “The public safety,” says the ‘Morning Chronicle,’ “requires that a sufficient capital should be provided;” and this the same article suggests should be 50,000l. “There are special reasons,” adds the writer, “particularly at this time, why new insurance offices should be required to provide a sufficient capital. Causes are in operation which may interfere largely with the rate of interest procurable on first class investments, and it is not to be overlooked that the increasing facilities of communication with distant regions, Australia for example, combined with the wide discretionary powers which it is the fashion for deeds of settlement to confer, may lead to remote and hazardous investments, full of promise when entertained, but liable to great and sudden accidents,—accidents such as insurance offices without any independent resources could never recover.”

In another portion of the very elaborate articles alluded to[31], it is added:—“The only real remedy is to take care that the parties who enter into the several speculations have something considerable to lose, self-interest will then render them infinitely more prudent and vigilant than all the inspections and certifications in the world. With the general requirement, however, of the payment of 50,000l. as capital, might very properly be combined certain improvements on the present law of a minor character.” “It would be proper also to enact that after a specified date all persons whose names are with their consent advertised as patrons, vice-patrons, trustees, or honorary directors, of any insurance company, shall be deemed to be shareholders therein.”

How far the suggestion of no office being allowed without a large capital, should be carried out, is a very serious consideration. A large paid-up capital does not appear an absolute necessity, although the faith engendered by it would probably repay the assured, because the larger the capital, the greater the confidence, and the greater the power of the subscribers to extend the business, as it does not follow that all the profits should go to the proprietors. The money invested would not be idle; it would be the business of the directors to place it in security at a good interest, and the interest would probably be greater than the subscribers could obtain elsewhere for their money.

All the old companies, which were once purely proprietary, divide a portion of their profits among the insured, and nothing can be fairer or better founded than an office which offers the advantage of a large paid-up capital, and divides four-fifths or nine-tenths of the profits among the insured. Still as the entire tendency of the public has been in favour of the mutual system for the last quarter of a century, as all authorities have proclaimed it to be the purest principle of Life Assurance, as innumerable instances of great success are to be found in its ranks, it follows that an attempt to revert to the pure, proprietary system would be worse than useless. But with all the advantages of the mutual system, it is probable that a small paid-up capital, with responsibility to the extent of the proprietor’s fortune, would be sufficient for safety: for there is one more point to be considered relating to the management of a mutual office, which is too often forgotten. In this the policy-holders have a vote; they know not when their lives may fall; they are eager to add to the value of their policies; and the directors feel a pressure from without which sometimes compels them to give a greater bonus than they ought. This is the prevailing tendency of the mutual principle, and argues somewhat against it. In a mixed company, on the contrary, it is the aim of the directors to maintain their investments intact; they know that what will destroy the company will destroy them as partners, and there is a moral power in operation in their case, as there is something very unlike a moral power in operation in the other.

That there are enough and to spare of companies, none can doubt. That some are in a position from which their customers would justly shrink is probable; and that others would be found insolvent if strictly examined, is to be feared. But, with all this, they are indisputably beneficial to the cause they represent, as they are spreading its knowledge, and pressing its necessity, with the earnest spirit of men whose existence depends on the number of their proselytes.