RATE-MAKING PRELIMINARY TERM. What has been said in previous chapters on the gen eral subject of rate-making has been concerned with net premiums only that is, only premiums which will be precisely sufficient, interest and mortality being as as sumed, to enable the company to furnish the promised benefits. Possible deficiencies because of errors in the assumptions regarding mortality or interest, used in com puting these premiums, are not taken into account; neither are possible losses on investments, nor the expenses of carrying on the business. All of these are provided for by means of an addition to the net premium, which is called the loading. The loading and the net premium together compose the gross or office premium.
Life insurance companies have not always made an addition to net premiums for loading, nor do they now in every case. The premiums of non-participating policies, where no part of the gains is apportioned to the insured, are sometimes net or nearly so. This means that the company looks to the margins of interest over the rate assumed, and the salvage on the provision for mortality, to be expected according to the table employed, to cover all expenses and contingencies and produce a satisfac tory profit.
The premiums of policies which grant the insured participation in the profits are always loaded. And, though this loading is also to provide for expenses and contingencies, it is, in large part, a direct provision for 76 dividends for policyholders. The portion for each pur pose is not usually separated from the portion for the other purposes by American actuaries, though in other countries the contrary is sometimes the case. In prac tice here, all is treated as available for any or all of these purposes; and, in fact, as 'will be seen more fully here after, in some companies the expenses more than absorb the loading, as usually computed, for several years.
There are two modes of loading premiums which are frequently and several others that are occasionally em ployed. The plan most commonly used is to add a fixed or varying percentage of the net premium, the loading thus becoming what mathematicians call a "function" of the net premium. Somewhat less common is the addi tion to the net premium of some sum per $1,000 of in surance, no matter what the age or the net premium; this loading is a "function" of the sum insured. A com
bination of the two is also sometimes used, the net pre mium being first loaded a fixed amount per $1,000, in sured, and the sum of these a percentage; or the order may be reversed.
Some have argued that in strict theory the loading ought to be the same amount for all ages, and that the burden of the net premium, increasing inevitably with age, should not be augmented by imposing also a heavier loading. But in practice the apparent necessity for pay ing commissions upon the gross premium has usually out weighed such considerations. Moreover, at best this could apply only to loading for expenses; the same argu ment has no relevancy as regards mortality contingencies, for fluctuations in the mortality would not be the same in value for each age, regardless of the probability of death, but would usually be treated as varying with the tabular mortality rates and proportionately thereto.
In other countries, France and Switzerland especially, 77 efforts have been made to separate loadings into distinct parts, each deemed sufficient for its particular purpose. Expenses might obviously be divided into six classes at least : expense of procuring insurances, medical expenses, expense of renewing insurances, managerial expenses, investment expenses and expense of adjusting claims. Of these, the first two are mainly incurred the first year of insurance, the third wholly after the first year, the fourth and fifth every year, and the last only when in surances are terminated. It is now a common opinion, however, that as the expense of medical selection brings lower mortality for several years, and as expenses of ad justment are incident to paying claims, one or both should be provided for and be met out of the mortality provi sion. In the same way, many think that investment ex penses should be met out of surplus gains on investments over the rate of interest assumed, quite as investment losses are taken care of ordinarily. Managerial ex penses, some maintain, should be provided for by a charge of a certain amount per $i,000 of insurance; in other words, as a function of the sum insured. The expense of renewing insurances is composed chiefly of renewal commissions, and these are usually calculated as percent ages of the gross premiums; in other words, such ex penses are functions of the premiums.