Page:Encyclopædia Britannica, Ninth Edition, v. 13.djvu/188

176 INSURANCE [LIFE. payment of the sums assured, it is obvious that the deficiencies of later years must be made up by the excess of the earlier payments ; and, in order that the assurance office may be in a position to meet its engagements, these surplus payments must be kept in hand and accumulated at interest until they are required for the purpose indicated. It is, in effect, the accumulated excess here spoken of which constitutes the measure of the company s liability under its policies, or the sum which it ought to have in hand to be able to meet its engagements. In the individual case this sum is usually called the "reserve value" of a policy. In another view the reserve value of a policy is the difference between the present value of the engagement undertaken by the office and the present value of the premiums to be paid in future by the assured. This view may be regarded as the counterpart of the other. For practical purposes it is to be preferred, as it is independent of the variations of past experience, and requires only that a rate of mortality and a rate of interest be assumed for the future. According to it, the reserve value ( M V^) of a policy for the sum of 1, effected at age x, and which has been in force for n years the (7i + l)th premium being just duo and unpaid may be expressed thus, in symbols with which we have already become familiar. v a =A* +ll -p a (i +,+) (i). If we substitute for A x + n its equivalent P z + n (l + a + M ) this expres sion becomes V x = (P I +-P z )(l+a I +) (2); whence we see that the sum to be reserved under a policy after any number of years arises from the difference between the premium actually payable and the premium which would be required to assure the life afresh at the increased age attained. By substituting for P x + n and PZ their equivalents (1 - v) and - - (1 - v), obtain another useful form of the expression, l+a x (3) (4). Net lia- The preceding formulae indicate clearly the nature of the bility. calculations by which an assurance office is able to ascertain the amount of funds which ought to be kept in hand to provide for the liabilities to the assured. In cases other than whole-term assurances by uniform annual premiums, the formulae are subject to appropriate modifications. When there are bonus additions to the sums assured, the value of these must be added, so that by the foregoing formula (1), for example, the value of a policy for 1 with bonus additions B is (1 + B)A a+n - P(l +a x+n ). But the general principles of calculation are the same in all cases. The present value of the whole sums undertaken to be paid by the office is ascertained on the one hand, and on the other hand the present value of the premiums to be received in future from the assured. The difference between these (due provision being made for expenses and contingencies, as afterwards explained) represents the " net liability " of the office. Otherwise, the net liability is arrived at by calculating separately the value of each policy by an adapta tion of one or other of the above formula. In either case, an adjustment of the annuity-values is made, in order to adapt these to the actual conditions of a valuation, when the next premiums on the various policies are not actually due, but are to become due at various intervals throughout the succeeding year. Provision So far in regard to the provision for payment of the for ex- sums contained in the policies, with their additions. We ? ens now come to the provision for future expenses, and for contingencies not embraced in the ordinary calculations. In what is called the "net-premium" method of valuation, this provision is made by throwing off the whole " loading" in estimating the value of the premiums to be received. That is to say, the premiums valued, in order to be set off Net against the value of the sums engaged to be paid by the nui office, are not the whole premiums actually receivable, but n " the net or pure premiums derived from the table employed in the valuation. The practical effect of this is that the amount brought out as the net liability of the office is sufficient, together with the net-premium portion of its future receipts from policyholders, to meet the sums assured under its policies as they mature, thus leaving free the remaining portion the margin or loading of each year s premium income to meet expenses and any extra demands. When the margin thus left proves more than sufficient for those purposes, as under ordinary circum stances it always ought to do, the excess falls year by year into the surplus funds of the office, to be dealt with as profit at the next periodical investigation. There appears to be a decided preference among assurance companies for the net-premium method as that which on the whole is best suited for valuing the liabilities of an office transacting a profitable business at a moderate rate of expense, and making investigations with a view to ascertaining the amount of surplus divisible among its con stituents. Under certain circumstances it may be advis able to depart from a strict application of the characteristic feature of that method, but it must always be borne in mind that any encroachment made upon the " margin " in valuing the premiums is, so far, an anticipation of future profits. Any such encroachment is indeed inadmissible, unless the margin is at least more than sufficient to provide for future expenses, and in any case care must be taken to guard against what are called "negative values." These Ne arise when the valuation of the future premiums is greater val than the valuation of the sums engaged to be paid by the office, or when in the expression (P x+n P x ) (1 +a x -^ n ) the value of P z is increased so as to be greater than that of P x+n . It is evident that any valuation which includes "negative values" must be misleading, as policies are thereby treated as assets instead of liabilities, and such fictitious assets may at any time be cut off by the assured electing to drop their policies. In recognition of the fact that a large proportion of the first year s premiums is in most offices absorbed by the expense of obtaining new business, it has been proposed by some actuaries to treat the first premium in each case as applicable entirely to the risk and expenses of the first year. At a period of valuation the policies are to be dealt with as if effected a year after their actual date, and at the increased age then attained. Another modification of the net-premium method has been advocated for valuing policies entitled to bonus addi tions. It consists in estimating the value of future bonuses (at an assumed rate) in addition to that of the sum assured and existing bonuses, and valuing on the other hand 80 much of the office premiums as would have been required to provide the sum assured and bonuses at the time of effecting the assurance. This tends to secure, to some ex tent, the maintenance of a tolerably steady rate of bonus. An essentially different method is employed by some Hy offices, and is not without the support of actuaries whose the judgment is entitled to every respect. It has been called the ln "hypothetical method." By it the office premiums are made the basis of valuation. Hypothetical annuity-values, smaller than those which would be employed in the net-premium method, are deduced from the office premiums by means of the relation P = --,-(!-#), and the policies are valued according to the formula Vi~(Pi+--Pi)(l + ai+), where P^ and I^ + ,, are the office premiums at ages x and