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"proof, though it would not entitle the policyholder to full pay
ment, would yet be taken into consideration by the Court, as “affording evidence of the value of the life at the time of taking " in the claim."*
On the other hand, Lord Cairns, after objecting that upon his construction of Bell's case, the mode of valuation involved the question, what another Company would think of the health of the assured, observed, “ Now, in the first place, that raises the inquiry, “not merely of what the state of health of the person is, but
retrospectively what the state of health of the person now to be “ examined was at a period nearly two years past and gone, as to “ which the state of health of any person must be merely a matter “of speculation and conjecture. Further than that, it introduces “ not merely opinion evidence as to the state of health, which is
never satisfactory, but opinion evidence of the worst possible kind, “ because it is to be the opinion evidence of another Company, or “the officers of another Company, who are not going actually,
or may not be going, to insure the life; for there is to be no “ obligation after all upon the other Company to insure the life, " and no obligation upon the person making the claim to insure " himself in the other Company. It is opinion evidence, again, “ which you have no means of checking, because the inquiry proposed by the Court is, what would another Company do if it
were asked to insure the life. The only answer to that can be " from the other Company, that they would either insure the life
or not, or would insure it for such an additional sum, and from “ the very nature of the case that is evidence which cannot be
controverted, because it is not evidence of a fact, but evidence
merely of a speculative opinion.” His Lordship then in effect decided that the question of health could not be taken into consideration.
It certainly does not appear to the writer of this paper that the Lord Justice ever proposed that the condition of health should be decided by another Company, but, on the contrary, that you should ascertain what other Companies in the like position with the Albert, except as regards solvency, would charge for insurances at the ages attained, on the assumption that the lives were insurablethe bargain being, it will be observed, "a wholesale bargain"--and then, that any claimant might prove special damage arising from uninsurability. The reference to the other Office seemed simply another mode of speaking of the market price of the property to be valued, since here we find the only mart for the sale de novo of insurances on lives.
* Bell's case, p. 721. † Albert Arbitration, Minutes of Proceedings, p. 681, Lancaster's case.
As a matter of abstract justice, then, when you have ascertained the market price of the insurable life, there does not appear any sufficient reason why you should not allege, and prove, if you can, the additional value arising from uninsurability. This is not a collateral damage personal to the claimant, but arises upon the policy itself, which would be undoubtedly appreciated thereby. Everybody knows that, as a matter of fact, the health of the assured is the principal element to be considered in valuing a single policy, and that a dangerous accident or illness, which has prostrated the strength beyond recovery, may so enhance the value as almost to reduce the insurance money into possession. The true objection to permitting proof of uninsurability appears to be the difficulty of proof which must rest upon opinion alone, not of a rival Office, but of medical witnesses for the claimant, or, at least, of an independent referee. It may well happen that the cost, trouble, and uncertainty of the proof may justify its rejection; but if so, it is submitted that it must be rejected upon the very words of the statute, which requires a just estimate as far as is possible of the value.
Leaving this point then for the decision of the Court of Chancery, we come to the general question of the measure of value or terms of valuation, on the assumption that all the lives are of an average value. And here the limits of valuation, for the purpose of this present discussion, appear to be found in what are known to actuaries as pure or net and gross premium valuations respectively. It does not of course follow that either is to be accepted as necessarily correct, and it may well happen that the truc measure is to be found in some mean between the two. It is also here proper to premise that in all these liquidations we have to determine the relative shares of individual claimants in a limited fund, since, as a rule, the rights of claimants, in consequence of the form in which policies are all but universally issued, are limited to the funds and capital alone. It has been decided over and over again that profit policyholders are not co-partners; that they, except in a Mutual Insurance Office, separately contract with the Company alone; and that they have no express privity of contract with each other. But, on the other hand, Courts of Equity recognise that in one sense mutual insurance is at the base
(7.) And lastly, since the policyholder is entitled to bring in of every Insurance Company, and that there is a quasi co-partnership, at least, in interest; and hence, upon a liquidation, all must be held to be affected by any general principles of equity which we can discover as governing the subject.
The argument in favour of the pure or net premium valuation appears to take the following form. “The assumed premium pay“able” —the words are those of the arbitrator—" is divisible into “two parts. The first, the part which it is calculated will provide “ for the risk, called the pure premium; and secondly, the addition “ for Office expenses and other charges, which is sometimes called “ the loading. The pure premium only is to be taken into account.” It is commonly argued that this loading in an Office properly managed is never valued, or a reserve is made which is an equivalent to it, and hence the sum which the Office ought to have in hand for every policy is the reversionary value of the sum assured, less the value of the pure premium only. If then this is the sum which the Office ought to have in hand upon sound principles of finance, it is surely, it is said, the measure of damage to the assured. Again, it is assumed that every policyholder is a loser by the insolvency although he may have paid but a single premium, and that every policy must have a value; and it is argued that it is by a pure premium valuation alone, or its equivalent, that this can be the case. By valuing the gross premiums, it is urged, recent policies become not liabilities, but assets; and it is absurd when you are seeking the measure of damage for an admitted wrong to be told—and this would be the result of a gross premium valuation—that you had suffered nothing, had no cause of complaint, and were to think yourself very lucky if you got off with nothing more to pay. It is also thought that as between profit and non-profit policies, the system is a just one, for the value of the risks is reserved apart from the question of loading, and the profit policyholder losing the excess which he has paid in past years, claims equally with the non-profit policyholder upon the insurers. He sacrifices the excess of loading which he has paid, for the hope of profits in the past; and since the prospect of profits for the future has passed away, and is absolutely lost, he pays such excess no longer, and in all things there is an equality. There are also arguments in favour of this system, on the consideration that it admits of one scheme of valuation to the extreme liniit of life, and is therefore less arbitrary at the higher ages than what is called the reinsurance system ; that it may be applied without inconvenience, whatever the
principle on which the tables of premiums have been constructed; that it estimates with an equal measure the liabilities of all Companies, and is—but this last is I think here a worthless argument—in common use with very many. It must not however be supposed that it is used universally. It is only one mode of valuing out of many, and, in proof of its partial acceptance, is not adopted by the Equitable, Law Life, Atlas, Rock, Amicable, London Life, and many other foremost Companies. The writer does not doubt but that it is an admirable system for a going
The contention is that it is not of universal application, and is, for reasons which we shall next consider, inappropriate upon an insolvency.
If this is a fair statement of the argument in favour of the pure premium system of proof, we will now proceed to consider the objections to it. These are
(1.) That it depends entirely upon an arbitrary assumption which has no existence out of the mind of the actuary. It would be imagined by a layman, from the language of the arbitrator, that the pure premium was a distinct entity, well known and readily distinguished, and to be valued by the 17 Offices' Table; but actuaries are aware that it is the mere child of an hypothesis and an afterthought, the device of Epimetheus and not of Prometheus, represented by one scale under the 17 Offices’ Experience, by another under the Carlisle, and so on through the whole list of actuaries' tables.
(2.) That there is no contract, express or implied, for its use, and that it is probably incoisistent with the past theory and practice of the Company. If it can be proved that the tables were constructed in the manner suggested, by ascertaining the pure premiums and adding a loading to them, and that a pure premium valuation was part of the contract, there would be an end of all controversy ; but in fact it can rarely, if ever, be proved that tables were so constructed, or that, if they were, there was any partnership rule or express or implied agreement for a pure premium valuation for the future. In the Albert case the elements of the pure premium valuation were settled to be the 17 Offices' Experience and 4 per cent, interest, but it is almost certain that not one of the amalgamated Companies, either in the Albert or European, had their tables of rates calculated upon any such base, and still more so, that there was in no case any express or implied contract for a pure premium valuation upon it in the conduct of the business. The rule then is wholly arbitrary unless it can be supported upon some irrefragible scientific principle, which is violated by a departure from it.
(3.) The reservation of the entire loading in the case of an insolvency is unnecessary and inconsistent with the object of its imposition, which is to provide for expenses, commissions, fluctuations and profits. The principle of the purc premium valuation is to reserve this fund intact for the future. This may be sound finance for a going concern, but is it necessary or proper for an insolvent one? We admit as of course that a provision must be made for expenses, but commissions now cease to be payable. The loading is added for fluctuations, and the fluctuations have happened; why should it not be applied to the very purpose for which it was intended ? In very recent policies, it may be said, you cannot count upon it as you cannot compel the payment of premiums for the future, but in a pure premium valuation the Office debits itself with the entire capitalized value of this fluctuation fund, and by so doing alone brings out its liability. A still further portion of the loading, indecd the whole, if we take it to measure the bonus expectations of the public, is intended for profits. But here the argument laid down in Bell's case comes with crushing force. The assured contracted for profits, and he contracted during life to pay an advanced rate above the non-profit scale for the privilege of sharing in the profits. He has made a bad bargain, for there are no profits; but because the speculation has turned against him, he cannot complain and ask for an alteration of the terms of his contract, that is to say, that his policy should be calculated as if he had agreed to pay a lower rate of premium only.
(4.) The pure premium valuation has, then, in our particular case, this inherent vice, that it alters the contract contained in the policy. That, as regards the future, it reduces the premium which the assured has agreed to pay, and gives him a benefit at the expense of the other classes of insurers or creditors who look for payment to a limited fund, or for a dividend out of it. The fact that the assured has in past time paid an increased premium seems to avail nothing, for this was part of his contract; and here it is to to be observed, that up to the time of the stoppage an insolvent Office does generally give bonuses. These, as a rule, cannot be rescinded, and the insured has had all that he bargained for. The truth is, that such part of the loading as can be proved to have been added for the purpose of giving profits belongs to the creditor, and by striking it out of the calculation he is defrauded. But it is said the claimant, even if a policyholder of the most recent date, is