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The Canada Lancet

VOL. XXXVIII.

SEPTEMBER, 1904

No. I

THE INFLUENCE OF THE PLAN ON THE ACCEPTANCE OF RISKS FOR A LIFE INSURANCE COMPANY.

BY PERCY C. H. PAPPS, A. I. A.

Actuary of the Manufacturer's Life Insurance Company.

R. President and Gentlemen: In the early days of life insurance the acceptance of risks lay almost entirely with the Board of Directors. It is said that the old test of the fitness of an applicant was a walk around the board-room table. If the directors considered the applicant to be a healthy-looking individual, his application would generally be accepted.

In course of time the board of directors called in the assistance of the medical directors, who eventually relieved the board of practically all responsibility in regard to the acceptance of risks. The medical directors, in their examination of cases laid before them, often feel that an applicant can hardly be accepted on the plan of insurance applied for, but believe that he would be safely insurable on some other plan. It is then that the actuary is called upon to combine his knowledge. with that of the medical directors, in order that the combination of medical and actuarial knowledge may determine the terms upon which the insurance may be granted.

Needless to say, it is not my purpose to try to tell a body of medical men anything about the acceptance of risks from a medical standpoint, but I will endeavor to give a brief account of the acceptance of risks from the standpoint of an actuary.

In order to understand the effect of the plan of insurance upon the acceptance of risks, it is necessary that we should know something of the fundamental principles of insurance. I am aware that the medical

directors and many of the local medical examiners have a very fair knowledge of insurance; but, in order to be on the safe side, I will endeavor to explain, as briefly as possible, some necessary points.

* Read at the Ontario Medical Association, June, 1904.

Insurance may be granted under what is known as a yearly renewable term policy. Under such, the insurance is granted from year to year at a constantly increasing premium; each premium being ju-t sufficient to cover the cost of the insurance during the twelve months following the payment of the premium. The premium will be comparatively small when the insurance is first effected, but it will increase each year, so that, if the life lives to old age, the premiums will eventually become prohibitory.

A more popular plan is what is known as the whole life policy. Under this plan, premiums are payable each year, during the life of the insured, and the insurance becomes payable upon his death. The premiums in this case are level premiums, that is they do not increase or decrease, During the early policy years the premiums paid are more than sufficient to pay for the cost of carrying the risk, and the balance is each year set aside and forms what is known as the "reserve.

There are several ways of looking at the question of what this reserve is. For our present purpose I would ask you to consider that, when the first premium is paid, a portion of that premium is set aside towards reserve, so that the amount at risk the first year is the difference between the amount of the insurance and the reserve. When the second premium is payable the reserve is increased, and consequently the amount at risk is diminished. In this way, although the cost of providing a certain amount of insurance. increases as the life gets older, the otherwise steadily increasing cost is kept down, owing to the fact that the increasing reserve reduces the amount at risk. This reserve, under a whole life policy, increases with the age of the policy, finally, if the life lives to the oldest age shown by the mortality table, the reserve equals the amount of the policy.

The reserve varies greatly according to the plan of the policy. A one-year term policy provides insurance for the year only, and there is consequently no reserve. The reserve on a five-year term policy only amounts to a few cents per thousand insurance the first year, increases to a maximum at the third year, and vanishes at the end of the fifth year. On the other hand, the reserve on a ten-year endowment insurance, increases each year and amounts to the full face of the policy at the end of the ten years.

This short account of what is meant by the reserve on a life insurance policy will enable us to understand, that the amount which a life company has at risk under any policy is not the face value of that policy, but the difference between the face value of the policy and the reserve on it; and, since the reserve depends upon the plan of the insurance, the amount at risk does also.