For the purposes of life insurance the future of mortality tables looks to less ambitious problems. The business calls for exact equity in determining the value of all life contingencies, and therefore for the most precise forecast attainable of the dates at which the amounts assured must be paid. Some idea of the historical progress of this inquiry may be gathered from the accompanying table, which epitomizes the general characteristics of a number of typical tables of mortality, showing at ages which are multiples of five years the annual death-rate indicated by each of them. The comparison will be found interesting in many ways, most strikingly, perhaps, as suggesting what is confirmed by a detailed examination of the facts, that insured life on the average in Great Britain is decidedly inferior to that in the United States, but superior to that upon the continent of Europe, and especially in Germany. From a careful investigation of the published experience, Dr McClintock concludes: “It is an ascertained fact that after the first five years of insurance the probability of death,” in Great Britain, “is fully one-fifth greater at any given age than the corresponding probability shown by American experience”; while “the average value of assured life in Germany is as much inferior to that shown in the Hm. experience as that in America has been found to be superior.”[1]
Table showing the number of Persons who will die in a year out of 100,000 who have attained the given Age, according to several Tables of Mortality.
| Age. | North- ampton. | Carlisle. | Seventeen Offices. | Institute of Actuaries. | Institute of Actuaries. | American Experience. | Thirty American Offices. | Twenty- three German Offices. | Four French Offices. |
| 1780. | 1815. | 1843. | Hm. 1869. | Hm.5 1869. | 1868. | 1881. | 1883. | 1895. | |
| 10 | 916 | 449 | 676 | 490 | 400 | 749 | 648 | .. | 364 |
| 15 | 922 | 619 | 694 | 287 | 325 | 763 | 659 | .. | 515 |
| 20 | 1,403 | 706 | 729 | 633 | 833 | 780 | 676 | 919 | 690 |
| 25 | 1,575 | 731 | 777 | 663 | 1,050 | 806 | 703 | 854 | 628 |
| 30 | 1,710 | 1,010 | 842 | 772 | 920 | 843 | 748 | 882 | 698 |
| 35 | 1,870 | 1,026 | 929 | 877 | 1,000 | 895 | 821 | 999 | 807 |
| 40 | 2,090 | 1,300 | 1,036 | 1,031 | 1,132 | 979 | 936 | 1,176 | 975 |
| 45 | 2,401 | 1,481 | 1,221 | 1,219 | 1,294 | 1,116 | 1,120 | 1,437 | 1,236 |
| 50 | 2,835 | 1,342 | 1,594 | 1,595 | 1,712 | 1,378 | 1,417 | 1,814 | 1,638 |
| 55 | 3,350 | 1,792 | 2,166 | 2,103 | 2,219 | 1,857 | 1,893 | 2,506 | 2,258 |
| 60 | 4,023 | 3,349 | 3,034 | 2,968 | 3,064 | 2,669 | 2,653 | 3,535 | 3,213 |
| 65 | 4,902 | 4,109 | 4,408 | 4,343 | 4,461 | 4,013 | 3,864 | 4,943 | 4,675 |
| 70 | 6,493 | 5,164 | 6,493 | 6,219 | 6,284 | 6,199 | 5,778 | 7,276 | 6,897 |
| 75 | 9,615 | 9,552 | 9,556 | 9,816 | 9,949 | 9,437 | 8,779 | 10,647 | 10,241 |
| 80 | 13,433 | 12,172 | 14,040 | 14,465 | 14,577 | 14,447 | 13,407 | 15,516 | 15,119 |
| 85 | 22,043 | 17,528 | 20,509 | 20,988 | 21,010 | 33,555 | 20,363 | 22,211 | 22,332 |
| 90 | 26,087 | 26,056 | 32,373 | 27,945 | 28,244 | 45,455 | 32,815 | 32,356 | 32,225 |
No final explanation has been given, and there is no proof that the average life in America is longer than in England or Germany. Dr McClintock inclines to believe that one potent cause of the great difference in the insured experience Problems of selection. is that, while European offices have generally awaited applications, which are commonly prompted by some sense of need for insurance, the custom of American companies is actively to solicit business through agents. On the average, lives which are only induced by persuasion to insure are better than those which voluntarily apply. That this suggestion points out a real and perhaps an important differentiating influence upon groups of risks is not doubted, but the measure of its effects has not yet been determined. The question is one of many which yearly assume more prominence, and which, as a class, are conventionally termed problems of selection. Assuming that the general rate of mortality is precisely known, any deviation from it occurring in a special group of insured lives, as the result of some influence peculiar to that group, is called the effect of selection. If insurance were offered on equal terms to all, the feeble and dying would apply in disproportionate numbers, and the mortality would be excessive. To avoid this danger careful medical examinations are required, excluding risks which appear to be impaired; and this selection by the insurer uniformly reduces the mortality below the general average during the earliest years of insurance. During these years large numbers of the insured withdraw, either from inability or from indisposition to pay their premiums, but the motive to do so is weakest with lives which have become impaired. The average vitality is lowered by the loss on the whole of a superior class, and the average mortality of those who persist rises. The extent of this influence varies widely with the proportionate number of lapses and the motives which induce them, increasing in a startling degree when lapses multiply in a discredited company, and remaining small, or even at times doubtful, under very favourable conditions; so that the ascertainment of its amount in different circumstances, and for different groups of the insured, is a problem of extreme complication. Its importance is increased by two tendencies which have grown stronger in the practice of recent years: first, to permit at all times the withdrawal by any policyholder of a substantial part of the technical or average reserve upon his assurance, a privilege which legislation and public opinion in the United States have extorted from the companies; and, secondly, the extensive introduction, under competition for public favour, of forms of policies which grant the option, at fixed dates in the future, between withdrawing the entire “accumulations,” or technical reserve and surplus, and continuing the insurance. It is well known that at the maturity of these options the motive is strong for impaired lives to remain insured, and that the cash withdrawals are so largely of superior lives that the subsequent rate of mortality is much increased. Other problems in selection arise from varieties in the forms of policies. It is commonly recognized that there are general and marked differences between the mortality experienced upon assurances issued at low and those at high premium rates. Policies for short terms, on which the computed net rates are the lowest, have been found so unprofitable to the insurers that they are rarely granted, and only with a very heavy loading of the tabular value. Upon those insured for life, with annual premiums, there is a large and constant excess of death losses above the endowment assurances, while groups of policies with tontine or cumulative features or reserved bonuses, available only after surviving a term of years, uniformly experience a low mortality.
It is also to be remarked that it is found in general that the average amount of policies matured by death is higher than the average of all policies in force; and some actuaries incline to believe that tables of pecuniary loss might, for practical use, take the place of tables of mortality, since the actual claims are in units of money, not of lives. The vast field of inquiry opened to actuaries by these and many more special questions of selection promises to engross more and more of their attention and labour. The technical methods of reducing and treating the data of mortality have been brought to a high degree of perfection, but the necessity for a better classification of the data themselves, with reference to special groups of lives or policies, differentiated by social or local circumstances, by business methods, by forms of contract, by race or personal characteristics, must assume ever greater prominence. It is conceivable that, at some period hereafter, the practical reliance of the offices will be more upon tables to be computed for such special groups, from select experience, than upon those drawn from vast aggregates without discriminating among their somewhat incongruous divisions.
The mortality tables in common use, however, have been proved by a vast experience to furnish a safe and fairly equitable basis for the business of assuring lives. Assuming that the table shows how many of a large group now The interest factor. assured may be expected to end in each succeeding year, the present value of the claims upon them depends exclusively upon the rate of interest at which funds will accumulate. Exact foresight of this rate being impossible, the insurer must assume a rate which can with certainty be realized. The difficult problem of determining the limits of safety in this assumption attracts the more attention now, because of the recent persistent decline in the average productiveness of invested capital. The actuary is forced to observe that the interest factor in his calculations is much less definitely fixed by known facts than the mortality factor. The longer a contract has to run, the greater the effect of the difference in rate. The value of a payment to be made in thirty years is greater by above one-half with interest taken at 3% than at 4½%, and one to be made in thirty-six years is more than twice as great. Hence the most careful study of the forces determining for long periods the average rate of interest is fundamental in life insurance. The tendency of opinion is to hold that a progressive lowering of interest rates must result from the accumulation of wealth. In support of this belief it is pointed out that from 1872 nearly to the present time there has been a general and somewhat uniform decline in the yield of invested capital, as represented by government stocks, mortgage loans, savings bank deposits and discounts in all commercial nations. The movement has been disguised by wide fluctuations, temporary or local, but has been on the whole world-wide and continuous, when great masses of capital, such as the investments of life companies, are kept in view. The fall has been greatest, too, in countries where rates were formerly highest, suggesting that as the great financial markets of the world become more intimately connected the normal rate of interest assumes a more cosmopolitan character, with an increasing tendency to equality among them. These considerations have had an important influence upon the computations of life insurance companies. In Great Britain, and commonly in continental Europe, the leading offices from the first assumed lower rates of interest than those in America, usually 3½ or 3%; and the reductions in their estimates have as yet been moderate, only thirty-one out of seventy-four British offices having lowered the interest basis in their valuations reported to the Board of Trade.
These returns show that of these companies only twenty-three now compute reserves upon a rate as high as 3½%, while forty-four assume 3% and seven a still lower rate. But in America, when the business first became important 6% was a more frequent rate of investment than 5%, and the laws of New York and of many other states countenanced the confident expectation of a permanent yield of at least 4½%. The rate of 4% adopted by the principal companies, and by the law of Massachusetts from 1861, was regarded as highly conservative. But as early as 1882 one important company began to reserve upon new business at 3%, and since 1895 there has been a gradual change by the leading offices to 3½%, and in a few instances to 3%, as the basis of premiums and of reserves upon new policies. Serious efforts have been made to induce legislation which will gradually establish one of these rates as a test of technical solvency.
There are not wanting, however, indications that the protracted decline in rates of interest in the world’s markets may have been checked, and even that a reverse movement has begun. Rates of discount everywhere, interest on government loans except in America, and on mortgage loans in Europe, have on the whole advanced, the minimum average rates having been reached, after twenty-five years of gradual reduction, in 1897. These facts are entirely consistent with the conclusions suggested by the history of the subject. No uniform or secular tendency to reduction in the average rate of interest, which is the index of the average productiveness of capital, not of its amount, can be found to have prevailed. Fluctuations in the average rate are found, quite independent of the local and temporary fluctuations, which are often extreme; and these long tidal waves of change have at times, for generations together, risen and fallen with some approach to periodicity. The prevailing rate has been a little lower on the average in the 19th century than in the 18th, but was lower through the middle decades of the 18th century than through those of the 19th. On the whole, it seems clear that the accumulation of wealth in itself has no necessary tendency to diminish the productiveness of capital; that this productiveness, on the general average, has not materially varied in many generations; but that the promise and expectation of productiveness which prompt the demand for its use depend upon the activity of enterprise, growing out of the prevailing spirit of hope; upon the rapidity with which new inventions are made, industries extended, and floating or loanable capital expended in permanent works. These conditions are subject to fluctuations extending through considerable periods, so that for a number of years the rate may be higher, and then for a similar series of years lower than the normal rate, determined by average productiveness, but always tending to return to this normal rate, as the tide-swept surface of the ocean to its normal level.
While the excess of the average yield of capital in America, above that of the older nations, is diminished as the facilities of transfer and exchange increase, there is no reason to conclude that it will disappear for generations to come. It seems, therefore, that the general assumption of 3% for the valuation of British offices, and that of 3½% which is becoming the accepted standard for the companies of the United States, should command unquestioned confidence.
The business of life insurance being founded on well-ascertained natural laws, and on principles of finance which in their broad aspect are of the simplest description, there exists no necessity for frequent close scrutiny of the affairs of an Assets and reserve. insurance office, in so far as the maintenance of a mere standard of solvency is concerned. We have seen that the premiums charged for insurances are based on certain assumptions in regard to (1) the rate of mortality to be experienced, (2) the rate of interest to be earned by the office on its funds, and (3) the proportion of the premiums to be absorbed in expenses and in providing against unforeseen contingencies. If these assumptions are reasonably safe, an insurance office proceeding upon them may be confidently regarded as solvent so long as there is no conspicuously unfavourable deviation from what has been anticipated and provided for, and so long as the funds are not impaired by imprudent investments or otherwise. The ascertainment and division of profits, however, require that the affairs should be looked into periodically; but the fluctuations to which the surplus funds are liable within limited periods of time are generally regarded as furnishing a sufficient reason why such investigations should not take place too frequently. Accordingly in most offices the division of profits takes place only at stated intervals of years—usually five or seven years—when a complete survey is taken of the whole engagements present and future, and of the funds available to meet these. The mode in which the liability of an office under its current policies is estimated requires explanation.