LIFE ASSURANCE.—BONUS ADDITIONS.

New Zealand Mail, Issue 55, 10 February 1872, Page 7

LIFE ASSURANCE.—BONUS ADDITIONS.

(From the Edinburgh Review.) One of the most prominent claims put forward by almost every insurance office in soliciting business is its power to produce a bonus. As most of our readers are aware, the source from which the funds necessary to distribute a bonus are derived existsi in the excess of premiums charged upon the policies beyond what is required to meet the sums contracted to be paid and the expenses of management. The extent to which an office can produce a bonus depends entirely upon the scale of premiums it exacts. It is apparently just because most offices have adopted the system of charging high premiums and making a frequent distribution of profits that the public have come to regard it as a safe if not an essential feature in the business of life assurance. Now we suspect there is a kind of delusion in this. The system, we apprehend, cannot import much if any additional safety, since the surplus profits which arise at every investigation are immediately distributed amongst the policy holders in the form of additions to the policies or cash paid away. An office conducted on this system, after growing gradually rich for a few years, suddenly becomes poor, and there is always the danger to be apprehended that too much money may be given away in the Bhape of profits. On the other hand, an office established on the principle of charging moderate premiums, and not holding out the prospect of bonuses, maintains a constantly consistent character. Its financial condition is not periodically disturbed by the distribution of large accumulated profits, and indeed it might fairly be argued that its soundness is less liable to be called in question than that of an office established on the bonus-giving principle. At all events, there are no good grounds for claiming for the latter any superiority in point of stability. It is equally a delusion to suppose that insurers as a general rule, obtain any advantages under the bonus-giving system, and just for the simple reason that what they receive in bonus additions has been previously taken from them in tha shape of excessive premiums. It appears to us that the system of accumulating and distributing great profits out of high premiums imports an element of speculation into a contract of insurauce, and tends to take away from it the fixed and certain character which it ought as much as possible to possess. There is no legal obligation imposed upon the office to pay more than the amount stipulated in the original contract, and bonus additions are made to depend entirely on the results of the management, and may be increased or

diminished just as the operations of the office happen to be successful or the reverse of successful. Farther, the mode in which these bonus additions are generally distributed seems to us to operate unfairly towards those policy-holders from whose contributions the profits really arise. It is made the attractive feature in offices of this kind, that a policy begins to participate in the profits from the very year in which it is effected. Bonuses are added to all policies irrespective of the condition of health and the ages of the insured. The obvious result is that a considerable portion of the profits go to those policyholders who by their untimely death have failed to contribute as much as will pay the fixed amounts stipulated to be paid by their contributions. Those of the insured whose connection with the office has entailed an actual loss thus obtain undue advantages at the expense of the policy-holders upon whom the prosperity of the office really depends. It so hawpens also that somewhat unlooked for results of this unequal system of dividing profits are now being felt in the experience of such offices as have continued it for a long time. It disturbs materially their calculations, and apparently in the lapse of years tends to diminish the rates of bonus additions. On this point the last septenual report of the Scottish Widows' Fund throws some curious light. During the seven years ending with 1866 the number of deaths of the members of that institution was 1398, being seventy-two less than the expectation according to the Carlisle table of mortality. On the other hand, the total amount of chums paid during that period was £2,165,461, being £63,341 in excess of what had been anticipated. When we further mention that of that large amount paid away in claims £591,538 were bonus additions, our readers will at once perceive the cause of the discrepancy between the actual results and the expectation. It is obvious that the system pursued by this office, of giving off bonuses to every policy holder indiscriminately, without respect to age, health, or assurable condition, must be held to be the cause. Apparently the tendency is to develop such a disparity as the society becomes older. In the last year of the septennium —1866 — the number of actual deaths was just the same as the expectation, but the claims paid were £40,900 beyond the estimated amount. Notwithstanding the enormous increase which took place in the business of the society during the last septennial period, and the fact that the average rate of interest realised upon its investments increased from 4 to 4£ per cent., the yearly rate of bonus allocated among the members did not increase, or only very slightly. The actual realised profits were, no doubt, much larger, but the area over which they had to be distributed had just widened in a corresponding degree. Now, if such are the results attending the operation of a society like the Scottish Widows' Fund, which stands in the very front rank of insurance offices in this country, we fear that offices of an inferior grade which pursue a similar system of indiscriminate bonus giving cannot be in a very flourishing condition. We firmly believe that in the course of a very few years this policy will require to be changed. If high premiums are to be charged in order to provide profits for future distribution, the allocation of these profits must be fairly made. No portion of them ought to fall to policy-holders by whose death loss is entailed upon the office, but the whole should be divided among those who have contributed as much as will meet the original sum insured, according to their respective interests.