CHEAP MONEY

Evening Post, Volume CXXXII, Issue 37, 12 August 1941, Page 6

CHEAP MONEY

DIMINISHED VALUES

SOMEONE PAYS

LIFE COMPANIES'

INCOME

Lowering of bank interest rates, reduction in rates of interest on Government loans, municipal loans, and other borrowings, no doubt relieve the borrowers, but inevitably at the expense of someone else. Whom? The lender or creditor or other holder of interestbearing securities. Among the larger, perhaps the largest, investors in Government loans are life assurance organisations—companies or mutual institutions —also friendly societies, all of them seeking investments which are usually described as "gilt-edged"; in other words, safe; that is to say, not subject to violent fluctuations in market values and as certain, as anything can be certain. to be repaid when due. As such they can be bought and sold with confidence and facility. From interest received and from earnings made in the buying and selling of such securities, life insurance companies and societies derive their profits for distribution among their policy-holders, at the same time holding in these securities something to sell which somebody wants and is prepared to pay for at the ruling price of the day. All this may read like a passage from a primary school book, but, an extraordinary characteristic of human nature is its easy forgetability, its blindness to the obvious, its curt dismissal of elementary but nevertheless stubborn facts set out in elementary school books—sometimes to its own undoing. PROFITS REDUCED. , For instance, while there is no doubt whatever of the great financial strength of the British insurance companies and societies, nor of that of the great friendly societies and orders, such organisations exercise the utmost care in the investment of funds collected by them by way of premiums or lodge contributions, always, of course, with an eye to their return by way of interest, but always putting safety before interest. Recent British experience is that insurance companies are now feeling the pinch of cheap money, and are therefore no longer able to distribute profits among policy-holders on the former liberal scale. Mr. Nornian Crump a well-known British economist, in referring to the diminished income of British life assurance companies, directly attributable to cheap money and accentuated by increased taxation, observes that actuarial calculations behind the cost of life assurance depend on the net rate of interest earned by a company on all its assets, after deducting income tax. Thus a fall in interest rates and a rise in taxation are both serious for such companies or societies. He finds that cheap money and war taxation between them have reduced the net average rate earned by British assurance societies and companies. BONUSES DEFERRED. The British companies to. which Mr. Crump referred have still, he says, a margin in hand, but the decrease in their earnings is sufficient to affect their past generous treatment of their policy holders. Indeed, some British companies are deferring payment of general bonuses to their policy holders, confining themselves to interim bonuses on policies which give rise to claims by death on maturity. Premiums on new policies have also been increased During 1914-18 British insurance companies displayed similar caution, but the result then was that they were able to accumulate good reserves and to make generous distributions by way of bonuses in the years succeeding. But, in Mr. Crump's view, "it would be optimistic to look forward to similar good fortune after the present war, for during 1914-18 interest rates were considerably higher and taxation less severe than it is today." An important point that emerges from this reduced income by way of interest earned and higher taxation paid by insurance companies and societies is that their contributors or premium payers have not* only to meet direct individual taxation themselves," but to receive reduced returns (if any) by way of bonuses as a result of the cheapening of money and at the same time meet indirect taxation collected from the institution entrusted with their savings.