year reserve, surplus, premium) and deducting from it the present value of what is left of that sum at the end of the year. In carrying this suggestion into effect, it will obviously be desirable to avoid complication, and for this reason it may be best to limit the number of examples to five policies of $10,000 each, thus: ordinary life issued at 35, three cases, each renewing Dec. 31, and issued respectively one, eleven, and twenty-one years previously; and ordinary endowment running fifteen years (or such other term as the Convention may select), two cases, each renewing Dec. 31, and issued respectively one and eleven years previously-all applying dividends to payment of cash premium. In each of these five cases the company should be asked to state, in January, 1875, the following particulars: actual reserve assumptions, gross annual premium, dividend in 1874 and in each previous year, undivided surplus of previous premiums, if any, held Dec. 31, 1874, for future division, and the same item (undivided surplus), if any, held Dec. 31, 1873, on the same policy. From these data the commissioner can make up the cost of insurance (1) for the year, and (2) for all previous years of the policy, and these results can be published in eight columns, the names of the companies being given at the side I may be too sanguine in regard to the usefulness of such a table; but my impression is that the tables and ratios hitherto relied on would cease to be consulted by those who candidly look for information, and in all probability would soon be dropped from the annual reports of the several insurance depart ments. The preparation of such columns from the data furnished by the companies would not be troublesome to the departments. There can be no two opinions as to how it should be done, if it be once agreed that the average policy-holder's money is worth in his own hands seven per cent. The only preliminary work required would be the formation of commutation columns (D and N) on the basis of the standard mortality table, at seven per cent. interest. To find the actual cost of insurance, including expense charge, on any policy for the policy year ending Dec. 31, 1874, find the amount in hand from previous premiums at that date (viz., actual reserve, dividend, and undivided surplus if any); calculate, by the standard mortality table at seven per cent. as above, the present value of this sum one year earlier; subtract the value so found from the sum in hand at the beginning of the year (viz., reserve, gross premium, and undivided surplus, if any); the remainder will be the true cost to the policyholder as if paid Dec. 31, 1873, for the ensuing policy year. To find the average actual cost to the policy-holder for the past years of the policy, find the present value, taken at the date of the policy, by the assumptions aforesaid, of all gross premiums paid, and deduct from it the similar value of all dividends, and of reserve and undivided surplus actually held Dec. 31, 1874, from previous premiums; the reainder is the value at date of policy of the actual cost to the policy-holder during the years in question. This sum, divided by the temporary annuity due according to the same assumptions, will give the average annual cost for insurance and expenses. At first glance the reflection may arise: This might be very good and useful information for actuaries, but would the public understand it? I answer, the public could be made to understand it without difficulty. An authoritative statement of actual cost of insurance" will be received by many without inquiry as to how the commissioner arrived at the figures, while for those who prefer to examine the matter to the bottom, the explanation would be very simple. The policy-holder has a certain sum at his credit at the beginning, and another sum at the end, of the policy year. The discounted value of the latter, subtracted from the former, is clearly the cost to him for that year's insurance. once. The utility of the information thus afforded to the public will be apparent at For many years past, the insurance departments have every year carefully compiled columns and even pages of mortality ratios. For what purpose? For no other really valuable purpose than to let the public know which compan es were most carefully managed in regard to the selection of lives and avoidance of unhealthy localities. It is a rough test, indeed, and not an absolutely fair one, in view of the average age of the insured varying in different companies, yet it is, on the whole, one of the most valuable yet introduced. Again, for years the commissioners have got together table after table illustrating the management of the companies in regard to expenses: tables no doubt useful enough in the main, yet unsatisfactory and inconclusive. To this day there is no recognized standard in this regard. Whether such items as taxes and profit and loss should or should not be included under the head of management expenses, and whether these expenses when determined should be compared with premiums or with gross receipts, are questions yet unsettled. And yet again, for years we have had set before the public not, indeed, by the commissioners) numerous comparisons in regard to the rate of interest realized on investments, comparisons either intrinsically unjust or sure to be denounced as such, owing to the uncertainty prevailing as to the correct method of drawing such comparisons. I might go further, and admit, if you please, that in process of time, and after thorough discussion, means might be arrived at for determining these several ratios of mortality, expenses, and interest, to the entire satisfaction of all concerned. What should we have gained? One set of companies would come ont ahead in one respect, and another set ahead in another respect, and there would still be wrangling and confusion; and all this time the public whose interests the departments have in view would remain uninformed as to where it can buy its insurance cheapest. Why should the insurance departments go on collecting unsatisfactory statistics which the public cannot understand, and which insurance men can manipulate ad infinitum, more or less honestly and intelligently, when they can So easily procure and publish the net results which the public so much desire to know? The single page of figures which would be given if my present sugges tion be adopted, would contain the substance of all other possible pages so condensed as to be seen at a single glance, and intelligible to all who are able to read. The information requisite can be obtained from the companies with less liability to mistake or misunderstanding than many items now demanded by the commissioners. The standard of reserve maintained by a company can hardly be misstated, nor could the dividends or undivided surplus on the policies specified be misrepresented without immediate danger of exposure. It may be urged that in many cases the answers given by the companies would have to be hypothetical rather than actual, since it might easily occur that no such precise policies had been issued by the company as those inquired about. To this it may be replied that in such cases hypothetical answers should be requested, and it cannot be doubted that the answers, certified by the company's actuary, would convey true information. As a matter of course, no company would be expected or desired to calculate hypothetical dividends on a policy issued prior to its own organization. I speak of hypothetical" dividends, but there would in no case be much room for the display of imagination on the part of the company's officers. A report as to what the dividend would have been on a $10,000 policy issued December 31, at age 35, can be too easily compared, say, with an actual policy of $5,000 issued July 17, at age 36, to afford much chance for exaggeration, even if any one calling himself an actuary could be found to put his name to mistakes of that nature. It need scarcely be remarked that Tontine and other peculiar policies, and policies increased by dividend additions, should be explicitly and rigorously excluded from these comparisons. It may, however, be found advisable to make a separate inquiry concerning the results on such policies. I may say that while every one of the five cases named would, in my opinion, be absolutely necessary to a fair comparison between companies of different ages and working on different plans of business, there is no reason, except those of simplicity and convenience, to forbid the extension of the scheme to any other cases which it may be desirable to investigate. In view, however, of the novelty of such inquiries, and the practical objections which may be raised, I would urge strongly that the questions adopted by the Convention be few and simple, and when adopted be uniformly and closely adhered to by the various departments. The Special Committee on blanks for annual statements of Life Insurance Companies, appointed at the last session of this Convention submitted the following report, which was read by Mr. Rhodes: The undersigned beg leave to report, that at the last session of the National Insurance Convention held in Boston, in September, 1873, they were, by resolu tion, appointed a special committee to submit to the Life Insurance Companies of the United States, copies of the present Convention blank for annual statements, and of the balance-sheet blank proposed by Mr. Row, with a request that each Company shall, before the first of May, 1874, communicate to the committee their opinion, in detail, as to the respective merits of each form of Statement, suggesting such amendments as may appear necessary; and that said committee present such communications, with their own conclusions thereon, for final action." Your committee fully carried out the instructions of the Convention by sending out in December last, to each of the Life Insurance Companies, specimens of the blanks mentioned, together with a circular calling attention thereto, and requesting such suggestions and criticisms as might seem proper to them, with a view to aid the Convention in adopting a uniform, practical blank. Here follow communications in response to the circular issued by the committee: From the Berkshire Life Insurance Company, Pittsfield, Mass.; Connecticut Mutual Life, Hartford, Ct.; Globe Mutual Life Insurance Company, N. Y.; Home Life Insurance Company, N. Y.; John Hancock Mutual Life Insurance Company, Boston, Mass.; Massachusetts Mutual Life Insurance Company, Springfield, Mass.; Mutual Life Insurance Company, N. Y.; Northwestern Mutual Life Insurance Company, Milwaukee, Wis. ; Travelers' Insurance Company, Hartford, Ct.; and the Washington Life Insurance Company, N. Y. Also articles from the Insurance Monitor and the American Exchange and Review, all favoring the adoption of the "Balance-sheet Blank," but some of them suggesting slight amendments. The Committee then proceed as follows: In presenting the foregoing communications, the committee desire to express their thanks to the persons making them, and their regrets that they are unable to lay before the Convention a larger number of letters of advice from the companies they addressed. In obedience to the latter clause of the resolution under which your special committee was appointed, they respectfully submit herewith their own conclusions on the forms of statement for Life Companies. The consideration of a uniform blank for the Annual Statements of Insurance Companies, was one among the many important subjects that led to the organization of the convention of officers having charge of insurance in the several States. That the Convention Blank now in use has been of much benefit to Company and State, in that the expense and trouble of making annual returns has been measurably lessened, and the condition of the Company more clearly revealed. Notwithstanding the advantages already derived, your committee are decidedly of the opinion that the Convention form of Statement, as to Life, is capable of radical improvement, and that in the light of past experiences of the several Commissioners, changes are demanded which shall more perfectly reveal the actual premium and interest income of the Company from year to year; and, in short, present in a concise form the different sources of actual income and actual disbursements, and the character of the realized assets in possession to balance. The Convention early recognized the propriety of avoiding all useless interrogations, and aimed to perfect a uniform blank, which, while demanding of the Company its true condition, should not impose unnecessary burdens. Pursuant to such a policy, and at the first Convention in May, 1870, the blanks in use by the different States were carefully compared, the best features of each retained, and a new form adopted, in harmony, so far as possible, with then existing laws. As legislation changed, in accordance with recommendations of the Convention, this compromise blank was modified more or less at each of the two succeeding sessions of the Convention in New York. The committee is satisfied that further improvement is demanded and can be made. The Balance-sheet Blank is designed to show the condition of the Company, and at the same time compose a balance of the net or realized assets. Its departure from the Convention Blank consists mainly in a rearrangement and transposition of the interrogatories, as to Income and Disbursement, and a separate classification of the net or realized assets of the Company, which form the actual ledger balances, distinctly separating such realized or net assets from those items which have not passed through the channel of actual income, but which are in expectancy and yet unrealized. It is further designed to correct the following among other erroneous practices, which have obtained with some Companies in keeping their accounts, viz. : 1st. Charging up and reporting as annual income amounts of uncollected, unreported, and deferred premiums. 2d. Charging up and reporting as actual income, unpaid and accrued interest. Such a system of accounts is apt to lead to grave irregularities, and withal absolutely prevents any true computation of ratios of expense to income. Moreover, any system of manipulating the interest accounts by charging up interest as received which has not been collected and paid in, confuses and blinds the chart by which the reckoning of true progress in a life insurance company can be determined. This Balance-sheet Blank is designed not only as a check to the income and disbursement accounts, but as a delineator of the bona fide realized assets composing the net balance. There is a wide difference between the assets of a Company which are in possession and those in expectancy. In this form of statement the expectant assets which have not passed through income are denominated" other assets," in contradistinction to those forming the net balance. The other assets," such as interest due but not paid, accrued interest and rents, market value of assets over cost, uncollected and deferred premiums, etc., are legitimate assets, but are yet in expectancy, and hence form no part of a true net balance. For instance, the amount of unreported or deferred premiums on the last day of the year is a large item in the statements of most Companies. If these are counted as actual income, and are sworn to as having been actually received, but from lapses or other cause are never realized, the income account is in confusion, and cross entries must be made to offset. Such a method lumbers up the books with fictitious figures, and prevents a simple, straightforward statement, which Companies ought to be able to give. The same contingency of collection which is inherent in an uncollected premium does not attach with equal force to the items of accrued interest or interest due and unpaid; but the practice of making oath that such interest has actually been received and is a part of cash income is reprehensible, morally, and cannot be defended as in harmony with a correct system of accounts. There are other contingencies, besides non-payment by the mortgagor of interest due, in the way of its actual receipt by the company, which readily suggest themselves. The testimony concerning the desirability of a balance is abundant. Space will not permit any extended quotations, but reference is made to the report for 1869, of the Hon. John E. Sanford, ex-Insurance Commissioner of Mass. ; to the reports of Hon. G. W. Smith, Insurance Commissioner of Ky., and to other State Insurance Reports. Also to the writings of D. Parks Fackler, of N. Y., in the August number of the Spectator for 1869. Your special committee understand that this Convention is fully committed and on record concerning the necessity of requiring a balance-sheet, as a part of the annual statement of a Company. It seems to us that the main question for the Convention now to settle is,shall the balance be shown on the basis of net assets or on the basis of gross assets? Or, in other words, shall a line of separation be drawn between actual bona fide possessions and those items which are in expectancy? At the first session of the Convention in New York, a schedule balance-sheet was appended to the Convention Statement, in form as follows: This form of balance is predicated upon the gross assets, that is, those which have been received and invested, and those which are yet to be realized. We are of opinion that such a system of balance is no real check upon the income or disbursement accounts, and that the summary of figures presented does not reveal the true progress of a company, nor the hardpan facts as to its true condition. A balance predicated upon the net or realized assets, is shown by the following illustration. (Balance-sheet Blank.) Balance of net assets Dec. 31, 1872.. Total actual income of 1873.. Total.... Disbursements of 1873.. Balance Dec. 31, 1873... Invested in the following assets, as per ledger accounts, viz. : $240,347 20 4,750 00 1,000 00 4,341 25 56,006 29 35,184 31 21,583 83 1,028 35 9,305 37 $373,546 60 OTHER ASSETS. Interest due, $1,462 50, and accrued, $7,846 56 on bonds and mortgages.. Interest accrued on bonds and stocks. $9,309 06 |