YEAR OF IN

SURANCE

reserve than required by law but it means also that they are operating on a very safe basis and an unusual reduction in their interest earnings must occur before the failure of actual interest earned to equal expected interest income would render such companies insolvent.

TABLE V

COMPARISON OF TERMINAL RESERVES ON DIFFERENT POLICIES American Experience 3 Per Cent., $1,000 Insurance. Age: 45.

reserves on different Single- and annual

kinds of policies issued at the same age. premium reserves have already been compared1 but no reference has been made to reserves on limited-payment life, endowment or term policies. Column 3 of the table shows that the reserves on a life policy paid for by twenty annual premiums increase much more rapidly than in case of premiums paid continuously throughout life, and in the twentieth year of insurance the reserve on the limited-premium policy is identical with the single-premium reserve. This is necessary, of course, since the insured cannot be required to make further premium advances after this date, and to guarantee solvency 1 Page 203.

the reserve must, therefore, be of an amount sufficient in itself to pay all future claims accruing against the policy. The reserve on the twenty-year endowment insurance is largest of all and becomes $1,000 at the end of the twenty years.

This shows how it is possible under such a policy to guarantee to pay the face value whether the insured be living or dead, for at the expiration of the designated endowment period an amount equal to the face value of the policy stands to the credit of the insured. The reserve on the twenty-year term policy is at all times small, and reaches its maximum at the end of the twelfth year; thereafter it decreases until at the end of the twentieth year it is entirely exhausted. interesting contrast is thus afforded between the term and the endowment policies. The latter guarantees to pay the face value of the policy at some time and therefore, in case death does not occur before the twenty years have elapsed, accumulates the amount payable. The term policy on the other hand promises the face value only in case of death within the twentyyear term and at the close of this period the policy value is entirely exhausted and nothing will be paid to the policyholder.

BIBLIOGRAPHY

FACKLER, EDWARD B.: Notes on Life Insurance, chap. 4.

(Probably the best adequate presentation of the subject for the beginner.)

CHAPTER XVII

THE GROSS PREMIUM-LOADING

By

BRUCE D. MUDGETT

In Chapter XV premiums were classified in one case as net or gross. The net premium, or that portion which cares for policy claims was analyzed at length. The gross, or office, premium includes the above plus an amount called loading, the purpose of which is to pay for expenses incurred in writing and caring for insurance policies and to provide a margin for possible contingencies. Chief among the latter are errors in the net premium, due to failure to realize expected mortality or interest, losses arising from forfeitures, and the creation of a fund from which dividends may be paid. The practice of paying dividends has become so firmly established that the loadings on participating policies are almost invariably made with the further idea of creating a surplus for future dividends.

The subject of loading shares with that of distribution of surplus the distinction of furnishing insurance actuaries some of the most difficult problems with which they must contend. This is due to the complexity of the expense item and the difficulty of charging it proportionately against any policyholder in such a way as to obtain substantial equity. With the enormous size attained by many of our largest life-insurance companies, with the various activities carried on by them, with agency organizations covering the entire United States and in many cases European countries as well, the aggregate of expenses incurred within a single year totals to a vast sum. This money, of course, must come from the policyholders through their yearly contributions of premiums. The prob

lems arise in large part through the difficulty of determining what portion of particular items of expense shall be charged against one policyholder as compared with another.

Classification of Expenses. Many classifications of lifeinsurance expenses have been made, often in a more or less formal way or with no other purpose than to abbreviate a long and complex list of items. But classifications of any sort can be justified only on the ground that they serve to clear up points at issue, and the purpose of a classification of life-insurance expenses should be a clear statement of the problems of loading. The following division of expenses into five groups was made by an actuary 1 and based on a scrutiny of companies' statements:

1 WHITING, Wм. D., "Provision for Expenses," Yale Readings in

Insurance, Life, 176-177.