Scientific American Supplement, No. 455, September 20, 1884

by Various

(2) Interest realized by the investment of premium while it is in the keeping of a company is an advantage; in every sense so, since it comes wholly from outside sources, and accrues proportionally to all members; it may be called, as above, the investment advantage, and of course justifies some expense to secure it.

Hence the expenses incurred by any company in a given; time must be divided into two parts, one being the expense incidental to insurance, and the other that incidental to investment, which parts are to be compared respectively with the insurance claims met, and interest receipts of the company for the same time; or what is equivalent in the latter case, the net rate of interest earned after deducting the incidental investment expense may be found.

When this process shows that one company has earned a higher rate of interest than another, at the same time that its insurance expenses bear a lower ratio to its insurance claims paid, there is no escape from the conclusion that during the period under observation it has served its policy-holders more economically, and the test is therefore scientific. Though, if one company shows a higher rate of interest, while the other shows a lower ratio of insurance expense, it will still be necessary, to complete the test, to equate either the rates of interest or the ratios of insurance expense (it does not practically matter which), and note how this affects the relation of the duly corrected ratios on the other score.

To be exact, if the average vitality of the members of the two companies differ (other things being equal, it is always cheapest to belong to that company which has the lowest death rate), the ratios of insurance expense to expected, as well as actual, claims of each must be found, and equated.

The science of this procedure, or mode of testing expenses, and also its practical simplicity, may be more clearly perceived by reference to its practical application in the following table:

Table Exhibiting Ratio of Expense, Determined by the New Mode, of Companies Doing Business in Massachusetts during the Year 1883.

Name of Company.	Location.	Death claims paid.	Estimated Premiums. Reservethereon.	Difference or Net insurancefurnished.	Expense on the score ofInsurance.	Expense per $100 of claims paid.		Interest Receipts.	Expense on the score ofinvestment.	Net Rate of interest earned.
						Rate.	Rank.			Rate.	Rank.
Berkshire	Mass.	$208,147	$46,605	$161,524	$122,779	75.4	14	$194,067	$15,809	5.25	16
[[7]]JohnHancock	"	169,604	25,117	144,487	[[8]]228,566	158.2	24	135,597	11,686	3.65	26
Mass. Mutual	"	426,995	86,215	340,780	232,400	68.2	10	428,255	33,176	6.03	7
N. England Mutual	"	1,039,694	235,630	804,064	311,879	38.8	3	995,883	69,908	6.40	4
State Mutual	"	121,969	22,493	99,476	98,839	99.4	19	143,751	13,057	4.51	24
Ætna	Conn.	1,302,807	364,510	938,297	460,014	49.0	6	1,760,372	118,962	6.22	5
Connecticut General	"	87,639	15,624	72,015	46,113	64.0	9	95,580	5,407	7.03	1
Connecticut Mutual	"	2,867,489	881,600	1,985,889	622,941	31.4	1	3,041,125	238,944	5.70	10
Equitable	N.Y.	3,072,232	483,950	2,588,282	1,884,108	72.8	12	2,743,024	216,725	5.42	12
Germania	"	606,072	149,950	456,122	325,662	71.4	11	508,702	47,193	4.85	22
Home	"	205,921	48,603	157,318	155,192	98.6	18	260,506	19,917	4.86	21
Homoeopathic	"	35,610	6,340	29,270	48,734	166.5	25	42,814	2,935	6.20	6
Manhattan	"	687,171	183,450	503,721	266,305	44.9	5	627,628	44,081	5.82	8
[[7]]Metropolitan	"	638,639	18,322	620,317	1,161,893	187.3	26	106,916	9,098	4.90	20
Mutual Life	"	5,172,275	1,407,700	3,764,575	1,480,198	39.3	4	5,042,964	466,739	5.01	19
Mutual Benefit	N.J.	2,160,991	550,890	1,610,101	521,829	32.4	2	2,072,629	169,913	5.61	11
National	Vt.	174,767	29,127	145,640	77,861	53.5	7	149,010	10,100	5.26	15
New York Life	N.Y.	2,408,636	574,150	1,834,484	1,995,102	108.8	21	2,676,592	236,884	5.03	18
Northwest'n Mutual	Wis.	990,692	190,500	800,192	630,582	78.8	15	1,200,001	88,527	5.80	9
Penn. Mutual	Penn.	601,625	107,600	494,025	309,858	62.7	8	463,567	37,131	5.38	13
Provident Life and Trust	"	280,817	49,865	230,952	222,665	96.4	17	340,115	33,294	4.26	25
Provident Savings	N.Y.	24,875	1,828	23,047	51,608	233.9	27	4,955	2,579	1.70	27
Travelers'	Conn.	235,001	42,243	192,758	144,621	75.0	13	331,623	22,476	6.42	3
Union Mutual	Maine	377,547	88,520	289,027	237,913	82.3	16	301,499	28,754	4.66	23
United States	N.Y.	283,304	69,245	214,059	277,919	129.8	23	271,594	23,460	5.09	17
Vermont	Vt.	13,000	1,542	11,458	13,613	118.8	22	12,917	822	5.33	14
Washington	N.Y.	356,289	71,820	284,469	289,461	101.8	20	446,998	32,249	6.78	2
Totals		$24,549,808	$5,753,439	$18,796,369	$12,177,655	64.8		$24,398,684	$1,999,826	5.42
Collective Business ofAssessment Societies Doing Business in the State (excepting SecretSocieties).
46 Societies		$735,383			$237,770	32.3

The figures given in this table are drawn from the last annual report of the Insurance Commissioner of Massachusetts, excepting the premium reserve on death claims, which, as well as the division of the total expenses of each company into insurance and investment expenses, I have estimated on a uniform rule. This was for lack of the actual data in these particulars, which the report did not give, as it is desirable that future ones may.

This, however, does not injure the value of the table for illustrating the mode of procedure, for which purpose mainly it is presented. The companies whose figures I have used, moreover, have no occasion to complain of this, as my estimate certainly gives all ratios of insurance expense lower than they would appear if I had known, and used, the exact actual premium reserve on death claims, and all probably bear nearly the same ratio to each other as they would in that case.

As the object of this statement is to explain the new method, and not to defend my particular estimates in applying it, I forbear to state on what rules I have made them. Expense which is not ascribed to insurance must be ascribed to investment, and as in comparing any two companies, their two ratios of one kind or the other must be equated, to decide the question of economy between them, it may well be left to any company to say what the fair division of its own expenses is.