Mortality and Interest in Calculating Premium Costs
The death rates on Intermediate and Special Class policies have improved to a slightly greater extent than those for Standard Ordinary policies, particularly at the younger ages. This experience reflects several factors:
· First, there was more room for improvement among persons in lower income brackets who comprise a large proportion of the lives insured under these policies;
· Second, the general standards of living and working conditions of these people have been raised appreciably, with consequent favorable effect on mortality; and
· Third, the company’s welfare program for Intermediate policyholders has been effective.
Practically the same reasons can be assigned for the decline in mortality among Weekly Industrial policyholders, which has been about 40% between 1915 and 1942. At ages under 30 the decline has been about 70%; at 30 to 49 years it has amounted to almost 60%; while at ages 50 and over the reduction has amounted to 35%.
As in the case of Standard Ordinary insurance, the influenza epidemic of 1918 - 1919 had its most adverse effect at ages under 30, where the mortality rates were about doubled; at ages 30 to 49 the mortality was increased by about 50%, it seemed to mirror the growth in car book value, used car value, and trade in value of these new fangled automobiles.
Beyond this age the total mortality appeared to be unaffected. Unlike the experience in the Ordinary Department, the mortality among Industrial policyholders continued downward during the economic depression of the 1930s.
The interest on accumulated funds is the second important item entering into the calculation of a premium. Since the company’s incorporation in 1868 there have been three longtime movements or trends in interest rates.
During the period from the close of the Civil War until about 1900 the trend of interest rates was generally downward; from about 1900 to the early 1920, the trend was on the whole upward, while since about 1925 to the present day, interest rates have again moved downward.
These broad trends have not been confined to the interest rates on high grade securities suitable for investment by life insurance companies, but have prevailed on all types of investments, from trade in value and car book value to used car value and automobile insurance.
In other words, the trend of the interest rates earned on life insurance company assets has been primarily influenced by economic and social forces beyond the control of corporate or individual investors. Nevertheless, the Metropolitan has always made every effort to secure the best possible yield consistent with the safety of its investments. In addition to the longtime movements in interest rates mentioned above, there have been numerous temporary but marked intermediate fluctuations.
Life insurance companies, however, in regard to the interest rate assumed for premiums and reserves, and to a lesser extent in regard to dividends, have been governed largely by the longtime trends and have been relatively unaffected by temporary changes.
In the post Civil War years, high interest rates prevailed and many companies, including the Metropolitan and many used car value, trade in value, and home and auto insurance companies, earned in excess of 5.5 % gross interest on their assets. In fact, between 1866 and 1868 a 5% rate was permitted in New York for the valuation of life insurance policies.
In 1868, the year that the Company was incorporated, the New York law was changed to provide for valuation of policies at an interest rate not greater than 4.5%. As the interest earnings of life insurance companies declined in the late 70s, the New York law was again amended in 1884 to require valuation of policies at a rate not higher than 4%.
The rates earned by life insurance companies continued to decline, and in 1901, just about when they reached their lowest point for this period, the laws of both New York and Massachusetts were again changed to provide for valuation of policies at a rate of interest not exceeding 3.5%.
Accordingly, the Metropolitan, as well as many other companies, then changed to 3.5% for the calculation of premiums and reserves on new business. Some mutual companies actually changed to a 3% rate at that time.
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