SOME FEATURES PECULIAR TO LIFE INSURANCE. The contract of insurance is called a policy. The word is from the Italian word for lottery ticket. The monetary consideration for the insurance is called a premium, which word, in Latin, means "bonus" or "prize." The fixing of rates of premium in all branches of insur ance was at first necessarily pure guess-work. In some cases, fortunately, the rates were guessed high enough or too high, in which latter case nothing was required but to adjust the premiums suitably; and in either case there was no interruption of the successful course of the business. In other instances, the first rates were guessed too low, and, such is the perversity of human nature, the displeas ure and distrust of men were visited on those forms of insurance, instead of merely upon the poor guessing. This was because failure attended the first companies that essayed such branches of insurance.
Life insurance premiums, fortunately, were guessed high enough by the first regular company, the "Old Equitable," of London, that undertook whole life insur ance for a level premium. On the contrary, the prices of life annuities were guessed too low; and, if the institu tions guaranteeing them had not been solvent govern ments and life insurance companies which earned on their life insurance policies sufficient profit to offset annuity losses, the sale of annuities would doubtless have been seriously checked. The rates for sickness or health insur ance it is known by both names were also guessed too '9 low at first, and the business has suffered from the results of that circumstance to this day.
In all branches of insurance, it has come to be recog nized, though in some much earlier than in others, that proper rates of premium are to be found by combining statistics and by applying the laws of average.
Variations of the hazard are found in all the subjects of insurance. Thus the hazard of fire varies with exposures, with occupancies, with the seasons of the year. But in most branches of insurance, there is no force or tendency constantly at work to diminish or increase the risk. In this respect, two forms of insurance, life and health, stand alone. The risk of death is great during the first year of life and then subsides slowly. At about the age of puberty it begins slowly to increase, and this rate of in crement itself increases slowly. In extreme old age it
becomes no longer a risk but, instead, a certainty. The time lost by disablement due to sickness tends to vary in a similar manner, also; and, indeed, it is what mathema ticians call a "function" of the mortality that is to say, in some mysterious manner and according to an ill-defined law, the liability to sickness accompanies the risk of death, though low mortality rates and high sickness rates often concur.
Death is a certainty and not a chance. The man would be accounted a fool who should put up a stake with third parties that he would never die; for it would be certain to be lost. Insurance against death, therefore, so far as insurance against its ever happening is concerned, it is plain, would be impossible, were not the company the stakeholder, as well as the bettor on one side.
That death will come within a year, however, is a chance. Against this it is possible to make an insurance, quite as against any other contingency. Insurance may then be furnished for another year if one survives the first, and so on, but not without the limitation that the company must receive an adequate premium for each year's insurance. The risk is an increasing one, converg ingintatai; and, when whatever age is considered the extreme limit of life is attained, the premium must be equal to the amount insured--discounted for one year, if the premium is paid at the beginning of the year and the insurance is treated as if payable at the end of the year.
How, then, can a company supply insurance for the whole of life and for equal annual premiums or 'for premiums limited in number and amount or for a single premium, much less in amount than the sum insured? The explana tion is that the company is the stakeholder as well as one of the bettors. It collects more than is needed to cover the current risk, and it accumulates the remainder. This diminishes the actual amount to be paid at death out of the contributions of other policies; and, when the final age is reached, this produces a sum sufficient at the end of the year to pay the death-loss, deemed then to be certain. This accumulation is known as the reserve because it needs to be reserved in order that the company may fulfill its obligations, and was called the "self insurance fund," a self-explanatory name, by the great actuary, Elizur Wright.