If at any stage a policy promises a surrender value or other benefit, of a value in excess of the ordinary reserve at that time, a special reserve is charged so as to provide for accumulating such excess guaranty. If the gross pre 140 miums are less than the net, the present value of the de ficiency is charged as an extra or "deficiency" reserve.
Policies with impairment liens are sometimes valued as if there were no such liens; this in effect assumes that the actual cost of insurance for the reduced amount is, and will continue to be at all times, fully equal to the tab ular cost of insurance for the full amount as was antici pated when fixing the amount of lien. Some companies, however, have caused these policies to be valued as in creasing insurances and have used a sub-standard mor tality table.
Policies that are issued at "rated-up" ages, are also valued on the same basis as policies actually issued at those ages, and by the usual standard tables of mortality.
Net premiums due and in course of collection and net deferred premiums, are allowed as resources to offset the full reserve, which is always computed on an annual pre mium basis except as regards weekly premium policies or sometimes monthly premium policies.
At the present time, all departments but one, value policies which are issued with a preliminary one-year term provision, on the basis that the net premium for the first year is the one-year term net premium, and the net premium thereafter is the net level premium called for by the conditions of the contract, applying thereafter. The one department which remains an exception values in that manner certain policies issued by companies that come under a special statute, even though the policies contain no such preliminary term provision, but holds that all policies of companies not coming within the pro visions of the special statute must be valued on the basis that the net premiums are level each year, no 'matter what the terms of the policy, if only the gross premiums are level or practically so. In this construction of the term "net valuation" or "net premium valuation," the depart ment in question is upheld by the opinions of some actu aries that a gross level premium necessarily implies a net level premium. Other actuaries, however, hold the con trary opinion. The issue seems also to involve legal questions, as to the construction of statutes or of policy contracts, or both; which legal questions were determined by the Supreme Court of Vermont in Comrs. vs. Bankers Life Insurance Co., in favor of preliminary-term valua tion.
By all departments, with the same exception, industrial or weekly premium policies are valued as if they were issued on December 31 of the year in which they are written, and at an age one year higher. The effect of this
is to charge a terminal reserve, one year deferred and at an age one year higher, against each policy, and also to get rid of counting deferred premiums as resources. The practice is defended on the grounds, first, that industrial policies do not at once come into full benefit, and, second, that initial expenses absorb the earlier weeks' collections. The one dissenting department values these policies like any other, but modifies the total by certain very conserva tive assumptions concerning discontinuances during the first and second years.
The question whether, in the interest of a further sim plification of the balance-sheets, all loans to policyholders should not be deducted from the reserves and all net un collected and deferred premiums, also, for that matter may be well worth discussing, since the resources in the statements of some companies that have written much of their insurance upon "dated back with lien" plans, are in flated by the liens, and their liabilities are inflated by the corresponding reserves. It seems reasonable that the net reserves should be entered as a liability, with these liens and loans and the net uncollected and deferred premiums and the "present value, premiums receivable," all deducted 142 therefrom in short, with everything deducted that really is an offset.
Elizur Wright refused, however, to eliminate the item of liens created by the "loan-note" plan these did not represent money actually once paid and then borrowed back in his report for 1863, as follows : "It has been objected to our synopsis by some of the companies re ceiving only cash premiums that it is unfair to them in treating premium notes among the assets, the same as cash. They do not pretend that such notes, when the amount given by each policyholder is kept within the net value of his policy, are not as good as cash against any claim which can arise under the policy. Nor do they allege that a company which rigidly limits its premium notes by this rule, and receives as much interest on them as on any of its cash investments, can be less prepared to meet any and all demands upon it than if it received only cash." This is really the whole argument on that side of the case; but it does not appear that diminishing the net re serve liability by these liens and thus causing them to be omitted from the resources traverses these truths in any way. .