CHAPTER XIII.

STATE SUPERVISION AND ANNUAL STATEMENTS.

The business of life assurance is unlike any ordinary commercial business. In one sense it is purely commercial in that it consists in buying and selling, the commodity being policies of assurance. But the purchase price is paid by instalments over a number of years, and the payment, made by the company in exchange for that purchase price, is deferred for a long period of years. In the early days of life assurance this peculiar condition led to gross frauds upon the public by irresponsible companies, who, after receiving and dissipating premiums, were in no position to pay the sums assured when the policies matured. Accordingly it became necessary to regulate the business and protect the public against fraudulent companies; otherwise such companies had the appearance of prosperity for many years without any sound foundation.

Supervision In nearly all countries where life assurance is in practiced, some Government regulations have been General. imposed, making it necessary that this business be carried on under stricter rules than those which govern ordinary commercial enterprises. The first and most obvious precaution is that the companies must publish statements of their affairs at periodic intervals, and the second that they should make accurate calculations showing the reserve liability under the policies necessary to secure payment of the sums assured. The great principle of Government supervision therefore has been to insist upon the publication of annual accounts and the rendering

of valuation statements at such intervals as may be determined. In other respects, the management is frequently left unhampered by regulation on the ground that competition will cause each company to render the best possible returns to its patrons and policy-holders.

This mild and necessary form of supervision has been replaced in many instances by careful regulation of the business itself, on the ground that life assurance companies constitute what might almost be called a "public trust". In most countries a standard of solvency is prescribed, and if a life assurance company does not have assets of sufficient value to meet its ascertained liabilities by the statutory standard, it must then cease to do business. In fixing a standard of solvency, it is necessary to prescribe (1) the rate of interest to be used in the calculations, (2) the table of mortality, and (3) the method of valuation, that is, whether by net premiums, by modified gross premiums, or by the actual gross premiums themselves.

The variation arising from the use of different mortality tables in temperate countries is not very great, but very different results are obtained according to the rates of interest which may be prescribed. In the United States these rates of interest generally vary from 31% to 4%, and in most States companies are permitted to use a stricter mode of valuation if they prefer to do so. In New York and Massachusetts the companies have to value all business written after 1900 at 31%, with permission to use not less than 3%, although the average rate of interest earned is well over 4%.

Strict The principles of supervision have been made Regulations. much more strict in the recent laws of New York. The methods of conducting the business have been placed within definite limits in such matters as the expense which can be incurred for writing new business, the kinds of policies which companies may issue, and even the amount of business which a large company may write. Companies may not issue both participating and non-participating policies, and when participating policies are issued they must provide for the annual distribution

of surplus. Mutual companies cannot issue non-participating contracts, except annuities. The method of voting for directors in mutual companies has been completely changed, and policyholders in stock companies are eligible as directors whether stockholders or not. Many other regulations have been introduced, dealing with the management; and these are based upon principles of State Regulation which had never before been tried.

These regulations have not been generally adopted by other Legislatures throughout the United States where the same questions have been considered. In particular, a commission appointed by the Governor of Massachusetts reported to the Legislature that a limitation as to the amount of expenses is inadvisable, that the restriction of investments would be likely to prove harmful, and that they would not recommend for adoption laws similar to those in New York, permitting policy-holders to vote for directors by mail and necessitating the publication of lists of policy-holders of mutual companies.

Efforts A strong effort has of late been made to secure at greater uniformity in the laws regulating life assurUniformity. ance, but this effort seems to have received a check by the radical changes hurried through the New York Legislature in 1906, and which, as above indicated, other States will not follow. The Insurance Commissioners of the different States meet annually in convention, and these meetings tend towards harmony, because questions on the welfare of life assurance throughout the whole country are then discussed. Opinions are freely exchanged and deference shown to the wishes of the majority.

Particular reference may be made to the work of securing uniformity in the statement blanks which the companies have to use in making their annual returns to Insurance Departments. Each company has to file with the Commissioner of each State in which business is being done, an annual report, showing the receipts and disbursements of the company during the preceding year, its assets and liabilities itemized, particulars of the new

business written during the year, the business terminated, and the amount remaining in force, all by classes of policies.

Uniform Each State had formerly its own schedule of quesStatement tions, and much confusion arose as to the manner in Blank. which certain questions should be answered. In many cases the difficulty was caused by different wording of a question intended to elicit the same information. The convention of Insurance Commissioners has recommended for general use a uniform blank, but has no power to insist on this being used. Nevertheless it has been adopted by nearly all the States, and much trouble is avoided thereby, while the public are better informed, finding that the reports to different States agree with one another. Without entering into all the details of the uniform blank, a brief outline of the principal items and information elicited is as follows:—

LEDGER ASSETS.

LIABILITIES.

Book Value of real estate, $.... Reserve for policies and annu

Following the above statements there is an "Exhibit of Policies" showing the business in force by kinds at the beginning of the year, the new policies written, those terminated, and the business remaining in force at the close of the year. All this information is given by sums assured and with further details as to kinds of policies written, and modes of termination. Detailed information is included in regard to the assets, with schedules of individual investments in real estate, in mortgages, in bonds and stocks; and full particulars have to be supplied in lists showing:(1) All legal expenses;

(2) Names of officers and directors with compensation to each;

(3) Death claims resisted or compromised with reasons for special treatment;