ASSURANCE COSTS TOO HIGH, SAYS ACTUARY

Star (Christchurch), Issue 17877, 19 June 1926, Page 19 (Supplement)

ASSURANCE COSTS TOO HIGH, SAYS ACTUARY

EXPENSES AMOUNT TO TWO-THIRDS OF PREMIUM. Each life assurance premium contains a proportion for the assuring company’s ! expenses, but the proportion is not G 6 ! per cent, or even bait tnat. Arguing , that the expenses of some Australian j companies are on this scale, the president of the Actuarial Association of Australasia calls public attention to the matter, and holds that, the point of justification has been passed. In Australia company* law differs in the different States, and appears to be particularly weak in New South Wales. In the matter of life assurance, there is no comprehensive Federal law, and the States have been going their own several ways. Much criticism is being directed at younger life insurance companies, particularly in New South Wales. Some of the criticisms are so pointed that the Federal Government is likely to be forced into legislation .to control companies, including insurance bodies. The latest criticism comes from no less an authority than the president of the Actuarial Association of Australasia, Mr J. S. Wilson, F.1.A., of Melbourne, In public addresses, Mr Wilson has pointed out the heavy postwar birth-rate -of insurance companies. In 1917, 17 ordinary life offices were listed ; in 1924 there were 30. Ho divides these companies into two groups. In No. 1 group the companies had in six year's collected in ordinary premiums ±'51,076,000, and had paid away £8,949,000, or rather more than 17$ per cent. In the same six years companies in No. 2 group had collected £4,082,000, and paid away in expenses £2,723,000, or more than 6G per cent of the premium. INTANGIBLE ASSETS. Again, in group 2 intangible assets amounted to the enorfhous sum of £897,000, listed as “goodwill,” “organisation account, etc.” These facts, said Mr Wilson, were not in themselves conclusive, because presumably the extraordinary* high expenses rate of 66 per cent of the premiums was being met out of shareholders’ capital, and any loss involved would fall upon them. ‘They were however, sufficiently alarming to warrant the notice of responsible officials, both Government and other. It should be necessary for an actuary to certify that in his opinion the item goodwill, etc., was of the value stated in the bal ance-sheet, and he should give reasons for his opinions. In proprietary* companies the item should have some defined limit in respect to paid-up capital. Presumably the money shewn represented cash spent in anticipation of future profit, but w*as there justification for capitalising £897,000 as an asset. Shares in other companies was another asset, the valuation of which required full explanation, because the company in which the shares were held might have goodwill items. If so, the intangible assets came in with double effect.- Details of the item deposits were needed, as money might be deposited by a company with another company, and be used by the second organisation to buy out the first. In the case of an amalgamation a thorough and complete control by the Courts should be provided, so as to protect policy-holders. “FROM SHAREHOLDERS’ CAPITAL.” Judging by remarks that one read in various chairmen’s addresses, there seemed sometimes to be an almost complete ignorance (continued Mr Wilson) of the elementary principles underlying the business of life assurance. A large portion of each life assurance premium was required to b<2 set aside and invested each year tc build up' the fund to meet claims as they arose. If that were not done it. would only be a question of time be

fore the organisation would become insolvent. In other words, life assurance. premiums were in the nature of deposits in a bank, the greater part of them with interest, and they had to be returned some day to the policyholder or his representative. Each premium contained a sum for expeuses, but it was not 66 per cent of the premium, or even half that. The posi-.icn was that some companies were spending far more than was available in the premiums. Presumably the extra money was being taken from shareholders’ capital as subscribed, and \Vas entered in the balance-sheet on the assets side as a goodwill account. Up to a point that was justifiable, but that could not go on indefinitely. It was his opinion that in some instances “the justifiable point” had been passed. SECURITY NO LONGER. Life assurance companies were the custodians of the people’s savings, and might represent the only saving a man engaged in for his family or his own old age. By reason of the past history of Australian life assurance companies, those insured had come to regard the policy contract as absolutely safe as long as they could keep up their premiums. That feeling of security no longer existed in certain directions in the minds of some of them, and so the time had come to consider when measures could be taken to re-establish the position. It might not be possible tc overtake what had been done without loss to some, but it should be*possible by Federal legislation to safeguard the future. A satisfactory valuation of 'the liabilities should be made by a fellow or associate of the institute or faculty of actuaries, or by such an actuary as might be approved by a responsible body. Under the Industrial Assurance Act of England a commissioner might reject any account, return, or balancesheet, or any. valuation. He also had limited powers to present a petition for winding-up. That, with ordinary life business, might be too great a power of interference, but.it might be the less evil. ...To, require that the actuary making the valuation should approve of the basis of T'aluation and methods might go lar to forest: 11 and prevent a weak valuation of liabilities: