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 assured may be expected to end in each succeeding The interest factor. 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 412%, 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 312 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 312%, 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 412%. 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 312%, 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
