In order to cover all the ground, I think it will be best if I try to give you my line of thought in dealing with a large Industrial Company desirous of establishing a Contributory Pension Fund, but in this connection I shall not discuss formulae or the construction of Valuation Factors.

I do not propose to dwell at length on Schemes under what is known as the “Money Purchase Plan” or, in other words, a series of deferred Annuities, where each Contribution purchases a definite amount of deferred Annuity. Except in the case of a very small Staff or a group of small Staffs where the numbers are few and where the salaries cover a wide range, such a Scheme does not meet the needs of the Staff and moreover, it is very inflexible. In fact, it is impossible to form a Scheme on this basis where the Pensions are to be calculated as a percentage of the retiring salary or wages or an average of the salary or wages received during the five or seven years prior to retirement. Further, no provision is made for Incapacity Pensions and, if Contributions are fixed, no definite relation can be established between Pension and retiring Salary or Wages.

In dealing with the selection of lives we leave the actuarial idea of selection and come down to the practical consideration of the individual. The actuarial student is accustomed to dealing with select lives and we want to find out how these lives are classified. In this practical sense there are two types of selection, medical and non-medical, the latter referring not to a non-medical scheme of assurance but to the points arising from the papers and circumstances of the case apart from the medical report.

It is proposed to consider both these aspects and to show that the actuary can take his part in the selection just as much as the Principal Medical Officer. Some considerations need the actuary alone, others the P.M.O. alone, and the best results can only be obtained by whole-hearted co-operation between the two. No attempt is made to discuss extra risks, this being outside the scope of the paper, and we shall merely examine the various phases of the selection and outline points which the actuary must be ready to detect so that he can assist the P.M.O. as far as possible.

Attention has recently been drawn to the legal aspects of Children's Deferred Assurances by the decision In re Englebach to which reference is made later on in this paper, although that case introduced no new principle of law and strictly followed the lines of earlier decisions.

There are those who think that the legal aspects of life policies from the Proposer's point of view are matters for his own attention on which he should be advised by his own Solicitor, and that from the Assurance Office's point of view they are matters for the attention of the Solicitors to the Office. In other words, they think that the Proposer must protect his own interests.

There are others who do not subscribe to that view. They think that the Office should give the Proposer a detailed and lucid explanation of every important phase of any policy which it offers to the public and that the Proposer ought to be able to enter with complete confidence into any contract for a policy in the ordinary form of the Office without having to take the advice of his own Solicitor.

It has now become very generally recognized, I think, that finance is decidedly the most important factor in the conduct of life assurance business. This subject does not appear to have received, in earlier times, the intensive study which its significance deserved; latterly, however, it has attracted steadily increasing attention and now occupies a very prominent position in the transactions of our Institute.

It is probably true to say that in accordance with a fairly generally accepted principle the investment programme during recent years has been largely confined to securities of what may be called the “semi-trustee” type, i.e., those which are cheaper than statutory trustee securities though not very greatly inferior in quality. Usually a small proportion only of the programme has been devoted to a rather limited range of 2nd grade or high-yielding investments, and in our discussions at the Students' Society comparatively little has been said about these. I propose, therefore, in the present paper to state the case in favour of this latter type of security and to put forward the suggestion that the time has arrived when a quite considerable proportion of our new investments might with advantage be selected from this category.

The subject of Surrender Values is a wide one and it will be impossible in the course of these remarks to give more than an outline of a few of the points which arise. I shall, therefore, deal in the main with broad general principles and leave the lesser details untouched.

The scales of surrender values actually allowed by offices in this country differ widely, and an examination of the figures indicates that some offices still retain the view that a policyholder who surrenders his assurance should be fined heavily. It is difficult to reconcile this view with present-day ideas, for if a policyholder is so unfortunate as to be unable to continue his premiums owing to financial or other reasons, it is surely harsh treatment on the part of the company to impose a heavy fine, the whole, or practically the whole, of which merely goes to swell the bonuses allotted to those more fortunate individuals who are able to continue and who could well dispense with this additional benefit.

The scope of Insurance has within the past few years widened to such an extent that it is no longer sufficient for a member of the profession to be an expert in his own particular section. By the process of amalgamation the modern Composite Company has come into existence, and the time is past when a keen member of the Staff of a large Insurance Company is content to sit in the self-contained section of his Office—Life, Fire, or Accident—and not to know what is going on outside his own water-tight Department.

It is not an easy matter for Life Insurance Companies nowadays to find remunerative investments for their funds, with Income Tax at its present figure, and although large sums are invested in Stock Exchange Securities, which do not come within the scope of this paper, further large amounts are advanced on security of mortgages of property, reversions, life interests, Stocks and Shares, etc., etc., and it is with these advances that I propose to deal.

For some time past there has been a large amount of business transacted by Life Insurance Companies under what is commonly known as the “Super Tax Saving Scheme.”

A person who is liable for super tax effects with an insurance company a whole life or endowment assurance with or without profits by a single premium. The company then advances a large proportion of the single premium to the assured on the security of a first charge on the policy and bonuses, if any.

When a premium on a life assurance policy falls due, a certain time, known as the Days of Grace, is always allowed in which it may be paid without loss or fine. This period is usually 30 days, but a calendar month may be allowed and in one case 15 days only are given. During the days of grace the policy is fully in force and should a claim arise, it would be paid in the ordinary way, the premium that has fallen due merely being deducted.

If the premium is not paid within the days of grace, it is said to be overdue and if the policy has acquired a surrender value the non-forfeiture regulation then comes into operation. The regulations usually apply only to ordinary life business; for special policies special schemes are sometimes in force and in some cases, such as Sinking Fund Assurances, where the office is running no mortality risk, no regulation is called for. These remarks, throughout, will deal only with the ordinary non-forfeiture regulations as applied to Whole Life and Endowment Assurance Policies.

Any mechanical aid which makes it possible to extract records and then analyse them rapidly and economically must command the serious attention of actuaries and attract increasing interest from those intimately connected with progress and development in Industry or Commerce. Powers machines are one of the most important of these mechanical aids and are readily adaptable to the business of Life Assurance. Invented in America, they have been improved and placed on the market in this country by the Accounting and Tabulating Corporation of Great Britain.

The rationale of the Powers System is that many particulars relative to a given contract, such as a policy, may be placed on permanent record by means of punching holes in a card. Then such punched cards can, by entirely mechanical processes, be sorted and duplicated and the information contained thereon tabulated and cast; as a result of which we may collect our desired information in a very much more speedy, economical and efficient manner than was possible under the old clerical system.

It is hardly necessary to remind Members of this Society that little has been written in the Journal of the Institute on this subject.

Annuities are essentially uniform, monotonous things, devoid for the most part of those ingenious gadgets and fascinating sideshows with which we are wont to dress up Life Insurance for the edification of the non-technical public. The annuity, however, for all its smooth exterior, is a thing to be handled with caution. We have always to keep in mind the following obvious but very important facts:—

(a) That the contracts, in most cases, are completed in one transaction, for good or ill;

(b) that, among immediate annuities, there are few withdrawals or alterations;

(c) that the rate of mortality, especially among those female lives which form the bulk of our experience, is always diminishing;

(d) that this diminishing mortality is to the Companies' disadvantage;

(e) that there is nothing which exactly counterbalances (d);

(f) that there are no bonus-sharing annuities, so far as I am aware, which can be utilised to exhibit profit or absorb loss.

An office transacting life assurance relies for its results on the law of averages as revealed by investigation into past experience. Statistics are compiled in order that an estimate of future mortality may be obtained, and i f each assurance accepted were for the same amount, the office could, if it wished, retain for its own account all its business. In practice proposals are received for amounts ranging from the smallest sum for which the company will issue a policy up to hundreds of thousands of pounds, and clearly as the bulk of the business is for small sums assured an office might experience violent fluctuations in financial results if it retained the whole of the large proposals, even if the mortality experience were according to expectations and consistent from year to year.

The following remarks refer to the determination of Non-Profit Whole Life Assurance and Endowment Assurance office premiums; many of the principles raised apply to the premiums for other types of policies.

The office premium depends on the rates of mortality, interest, expense and loading for profit used in its calculation; we shall be concerned mainly to determine what values to give these factors, and the values chosen will form our premium bases. There is no reason to assume that we should give the factors the same values for all policies; for instance we might be justified in taking a lower rate of expense for policies of large sum assured than for policies of small sum assured.

The subject of Disability and Sickness benefits in conjunction with Life Assurance is of recent growth. The only occasions when the Members of the Institute have had the matter before them appears to have been in 1911 when a paper was read by W. C. Fielder before this Society, and in 1924 when a discussion took place at one of the General Meetings of the Institute.

The immense strides that have been made in America in the last five years, and the latent interest aroused in this country, as reflected by the amount which has been written in Insurance publications will, I hope, justify a discussion of the subject once more.

It will not be out of place to quote the following from a recent number of The Review:

“The attitude of British Actuaries on this question (Sickness and Disability benefits) is perhaps best described as one of neutrality. Were circumstances to force them to a decision for, or against, it would seem probable that many would be antagonistic. In the meantime, so long as they are not forced into open hostility they are prepared to ignore the business as much as possible. This is, of course, no more than an impression gathered from conversations here and there, and odds and ends of information that have come to hand from time to time. We imagine, however, that it comes fairly near to being an accurate statement of the case. If that be so then we can but regret it. The value of Disability Insurance to the public is so great, the amount of suffering it could eliminate so large that were Actuaries busily engaged in searching for the means of making it universally available the middle classes might look to the future with greater confidence.”

There appears to be very little information, especially of recent date, relating to infantile mortality, in the publications of the Institute, and it is possible that a discussion upon the mortality of very young lives would be of service to those who have to deal with infantile assurances to any great extent.

It is well known that infantile mortality rates have, generally, shown continuous improvement during the present century, and we cannot say that such rates have yet reached their lowest limit. For example, the deaths of males and females respectively during the first year of life as exhibited by successive English Life Tables are:—

The subject can perhaps be treated most effectively by following through the natural sequence of events, starting from the time at which some publicly constituted body of persons, such as a national government, municipal authority or company decides that it desires to borrow money.

It must be explained that I have applied the term “Borrower” both to persons borrowing money by means of bonds and to those raising capital by means of shares.

The first step is to get into touch with representatives of a financial “house” who, as specialists in such matters, will assist in the technical and other problems involved. This brings us automatically and immediately to the question of underwriting which may be denned as the process by which, for a consideration known as the underwriting commission, the requisite subscription to a new issue is guaranteed. It is the process by which the borrower virtually effects an insurance policy, under which the “insurers” or “underwriters” guarantee to subscribe for that part of the issue not applied for by the general public.

Although the title of this paper is “Reversions in Theory and Practice,” the greater part of these remarks will deal with the practical side, as it is essentially a practical subject. Those who deal with reversions will at once agree with the necessity for practical experience, a little of which is worth a great deal of theory. Mr Collins concludes his lectures on reversions with the advice, “Do not flummox yourself with formulae till you can't see the wood for the trees,” but I think that that admirable warning would really form a better preface. A glance through the writings on our subject will reveal at once a lack of complicated formulae. An absolute reversion is valued simply by the appropriate “A” factor and for a contingent reversion, there is merely deducted from the “A,” the cost of providing against whatever contingencies may be involved. Before one gets to that point, however, other considerations are necessary.

The title to this paper deliberately restricts its field. Emphasis is essentially on “The Valuation” and the limitation to Whole Life Policies restricts these notes to the one class to the exclusion of all others, including special policies, which, in any event, would require in the valuation separate treatment. It is not intended to enter into the realms of Industrial Assurance.

Essentially there is no difference between Whole Life and Endowment Assurance Policies, but by restricting the paper to the former it will simplify discussion. It has the advantage also that we have to consider the basic factors—namely, the rates of mortality and interest—in their extreme form, for whereas the terms of Endowment Assurances are comparatively short, thus minimising the effect of error, when dealing with Whole of Life Policies the Actuary has to consider the general trend of mortality and interest rates over a very much longer period, probably fifty or more years.

The superannuation of the employees of local authorities has not, so far as I am aware, been discussed by this Society. The recent publication of a report by a Departmental Committee which was appointed to enquire into the working of the Local Government and other officers Superannuation Act 1922, has drawn attention to the subject, and, in addition to this, it will be remembered that the first quinquennial valuation of the earlier funds established under the Act of 1922 will shortly have to be made. Apart altogether, therefore, from the Committee's recommendations, actuarial activities in this direction are likely to be fairly extensive in the near future.

A bonus reserve valuation may be briefly described as an attempt to approximate to reality in estimating the proper reserves to be held in respect of a life office's participating policies. The usual methods employed by life offices at the present time depart widely from reality in nearly every respect. The rate of interest used is considerably below what is being realised on the invested funds at the moment and what may be reasonably expected to be realised in the future. The mortality table used represents the experience on an average of some forty or more years ago (and occasionally seventy) and in the case of business in this country nearly always considerably over-estimates the mortality experienced. The loading reserved for future expenses frequently bears no definite relation either to the probable rate of such expenses or to the office premium valued, as for example in the case when premiums have been constructed from one table of mortality and the policies are valued by a net premium valuation under another.