In

ordinary way on his life interest in possession a sufficient sum to pay off the company. On the contrary, if y should live to a great age, the company would be bound to continue the policy on the life of x at the agreed rate. Thus, then, if the contract turns out to the disadvantage of the borrower, he would be able to repudiate the agreed terms, while if it turns out to the disadvantage of the company, they would be bound to them. It is therefore necessary to arrange the terms somewhat differently, and the simplest course appears to be to agree that the policy may be continued in force after the death of y by payment of the ordinary premium for a's then age. order to compensate the office for the risk of a being then in bad health, the premium payable during the joint lives should be greater than the premium for a contingent insurance, and might perhaps be taken equal to the premium payable during the joint lives for an insurance of x against y and for 3 years longer. Supposing this arrangement resorted to, the company still runs the risk that the joint lives of x and y may be so long extended that the premium to insure a's life on the death of y would be very large; and the value of his life interest consequently diminished. It is therefore clear that this arrangement could only be resorted to with advantage when the value of the security very ample, and the life tenant is of advanced age.

is

Altho', as we have seen, it is generally the best both for borrower and lender that advances of the kind we are considering should be made by way of reversionary charge, there are sometimes circumstances which render it undesirable. The tenant for life may be in a bad state of health, or what comes to the same thing, the reversioner may believe, if he does not hope him to be so; and in this case, the reversioner will be extremely unwilling to enter into a contract by which, if his anticipations of the tenant for life's early death should be realized, he would be a heavy loser. A second case which may happen is that the reversioner may have an income sufficient to pay premiums and interest without being in a position to charge that income. This may be the case if he, for instance, has a large allowance from his father, or has married a wife with a large income settled on herself, but paid quarterly to his bankers. Another instance which has recently come under my notice, was one where the borrower had a considerable present life interest in foreign securities, which insurance companies do not consider suitable security for a loan, but he had also a reversionary life interest in real property in England, which is considered an unexceptionable security. In such cases as these it is no longer

true that it is best both for borrower and lender that the advance should be made by way of reversionary charge. Probably in almost every case where it is proposed to raise money on the security of a reversionary life interest, the borrower in the first instance protests more or less strongly against an arrangement by which he will be a heavy loser if the life tenant should happen to die early, overlooking the fact that if the advance is made by way of mortgage, and the life tenant should live to an advanced age, he would have to pay ultimately a much larger sum than under the other arrangement. In general, the actuary should disregard these protests, and insist on the advance being made in what he believes to be the best method for all parties; but he should not lay down one inflexible rule. He should rather be prepared to consider each case on its own merits, and to admit of a departure from his general rule when special circumstances call for it.

The skilful actuary will further not content himself with considering every possible way by which he can protect the interests of his company without any regard to the interests of the borrower, as almost appears to be the policy adopted in some instances; but he will, in the first instance, endeavour to ascertain the lowest possible terms on which the transaction can be carried out with advantage to the company. Having ascertained these, it by no means follows that they will be the terms quoted to the borrower, but he will know that everything beyond is clear profit; whereas, if he has simply proceeded on the plan of making the office safe, he will not in the result know what is the real profit on the transaction, and it may happen that the terms quoted by him when examined by an impartial actuary are found so exorbitant as to bring his company into disrepute. The actuary may in fact consider himself to be an adviser to a certain extent in the interest of the borrower; for it will be his aim to quote the lowest terms consistent with a fair remuneration to the company. Applying these principles, now, to the above mentioned cases, it must be admitted that if there is a moral certainty of the borrower being able punctually to pay interest and premiums, he may fairly require the loan to be made by way of mortgage. He may furthermore very fairly object to being charged at once with the premium on the large insurance which we have seen is necessary to make the security saleable in case of his default. That large insurance only becomes necessary when the security has to be sold, nor will it assist matters at all for the insurance to be an increasing one, for so long as the borrower keeps down the payments required of him,

the necessity for an increase of the insurance will not arise, and he may as properly object to pay the premium on the increased insurance as he objected in the first instance to pay a premium on the large insurance necessary fully to protect the security.

We see, then, that the lender requires no increase in the assurance, so long as the borrower pays his interest and premiums regularly. If the borrower should make default and it should become necessary to sell the reversionary life interest, a larger insurance will certainly be required, but in that case we have seen that the larger amount of insurance is not immediately required by the purchaser, and that it would sufficiently well answer his purpose to have an increasing insurance. What is wanted, therefore, is an insurance that shall be capable of increase at the option of the assignee of the policy, subject to such conditions as may be agreed on. This, so far as I know, is an entirely novel mode of carrying out the transaction, but it may interest the members of the Institute to know that it is not a mere theoretical proposal, but that under my advice a considerable loan proposal has been recently carried out by means of it.

It would be objectionable to give the option of increase to the borrower himself, because he would be almost certain to exercise it to the disadvantage of the insuring company in the event of his falling into bad health. It may, of course, still happen, when the option is only given to an assignee, that a collusive assignment may be made by the borrower for the mere purpose of exercising the option, but the risk of this is not so great. The risk of loss to the company through this cause is also greatly reduced by the circumstance of the increase in the sum assured taking place, not all at once, but by stages extending over a series of years, which arrangement, as we have seen, will be a sufficient protection to the purchaser. In the case I have already alluded to, a present insurance of £20,000 was effected by the borrower, which was subject to increase up to £40,000. Two policies for £10,000 each

were

company,

and on

issued, each with an independent option attaching to it, by which means an additional facility would be given to the purchaser of the life interest without any detriment to the each of the £10,000 policies was placed an endorsement to the following effect:

In consideration of the within mentioned annual premium, it is hereby agreed that the X Company will, on the application of any bona fide assignee of the within written policy at any time during the lifetime of A. B., the father of the within mentioned

assured, and during the continuance of this assurance, grant, without further evidence of health, an increasing assurance on the life of the said assured, commencing at the sum of £1000 and increasing at the rate of £1000 a year up to £10,000, the premium on each £1000 of the said assurance being calculated according to the published rate of the said company for an age five years older than that of the said assured at the date of such application, provided that the said company shall not be bound to renew the said increasing assurance from year to year, unless the within written assurance is also continued in force.

For the protection of the offices granting this insurance, more especially considering its novel character, it was thought desirable to limit the option as far as is consistent with its being effectual for the purpose for which it is required, and for this reason it was stipulated that the right of exercising the option shall only continue during the lifetime of the tenant for life. On his death the borrower comes at once into possession of the income, and if it has not been necessary to sell his interest during the lifetime of the tenant for life, the original policy will be amply sufficient to secure the advance after the death of the tenant for life.

When a loan proposal is carried out in this way, it must not be overlooked that every year which passes without the option being exercised, increases the premium that would have to be paid on the new insurance, and consequently diminishes the value of the life interest supposed to be in possession. It is clear, therefore, that this could not be entered into as a permanent arrangement, except in cases where the margin is ample, and the life tenant is advanced in life.

It remains to consider on what terms such a policy might be practically granted by an office. It is clear that as an option is given to the holder of the policy, which option may possibly be exercised greatly to the detriment of the office, it is right that the office should receive a fair equivalent for this option. At present there seems no means of calculating the money value of this option with anything like scientific accuracy, but in the particular case to which I have already referred, it was considered sufficient to charge an additional 5s. per-cent per annum on the amount of the original policy, and on the above terms several first-class offices agreed to share the risk.

The principles here adopted may without difficulty be extended to the case of advances made on contingent reversions, to which many of the preceding remarks apply with very little alteration.

The following account of the discussion which followed the reading of the paper is abridged from the Insurance Record.

Mr. A. H. BAILEY-The council having referred Mr. Sprague's paper to me, I at first thought I had an easy duty to perform-viz., to decide whether it was a suitable paper to be read in this room. I am sure the meeting will be unanimous in their opinion that it is very suitable for discussion by this Institute. But Mr. Sprague has informed me that the duty of referee extends beyond this---that he is expected also to express his opinion upon the paper submitted to him by the council, which adds considerably to the burden of the referee's duty. In turning the matter over in my mind, I have felt that there is a peculiar difficulty in discussing this subject here. Most of the gentlemen in this room are interested in these transactions on behalf of the lenders; and if we could hear counsel for the borrowers, perhaps additional light would be thrown upon the subject. While I agree with Mr. Sprague that transactions of this nature are well suited for the investment of the funds of an assurance company, there are, notwithstanding, some difficulties in the way. One arises from the apparent, perhaps, rather than real severity of the terms on which these transactions are effected. It would be very difficult indeed to persuade any borrower that if, for every £1 he borrows, he has to pay, say, £4, he is not hardly used. The result is that an assurance company, rightly or wrongly, acquires a certain amount of repute for hard dealing. But there is a more serious difficulty, and that is how to deal with these transactions as a matter of book-keeping. If a considerable sum is advanced, a large amount has to be disbursed annually for life assurance premiums, and, as we all know, the value of reversions, looked at in the ordinary way, increases so slowly that it would hardly do not to credit the account with interest; otherwise, if there are many of these transactions, the average rate of interest on the whole funds would apparently be reduced. I believe it is the practice of some offices to credit year by year 5 per-cent on their outlay. they do that, the account in the ledger, in the words of the paper, "accumulates at a truly frightful rate," and the amount apparently advanced on these transactions is considerably in excess of the value by any ordinary estimate. This is an inconvenience for which I have never yet heard any practicable remedy suggested. Still, notwithstanding these difficulties, I am bound to say that I think the balance of advantage is in favour of the assurance companies, and that these are very desirable transactions for them. I cannot think they are equally desirable for the borrower.

If

The case which Mr. Sprague has instanced at the end of his paper, is an interesting, but an extremely rare case. As a rule, reversionary annuitants are in possession of but small immediate means, and it is very seldom indeed that there is any hope that the premiums and interest can be kept down by them. In former times attempts were made to carry these transactions out by way of mortgage, but they almost invariably broke down and proved unsatisfactory. Sometimes efforts were made to give sureties for the premiums and interest, but solvent sureties are not easily found if the borrower is not in a position to keep up the payments himself; and it