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Surplus How and when Apportioned

SURPLUS HOW AND WHEN APPORTIONED. There have been many different methods of distributing the surplus earnings of participating policies. A com mon method in Great Britain, where, as has been said, the loading is frequently computed with a view to re turning part of it in bonuses or dividends, is to divide the surplus earnings aside from excess interest over the rate required to maintain the reserves, in proportion to the loading on the premiums; or, if the loading is a uniform percentage of the premium, then in proportion to pre miums. Another method, also at one time somewhat common, was to divide the surplus in proportion to sums insured. And there have been all sorts of variations of these.

In 1863, Sheppard Homans, then the actuary of the Mutual Life Insurance Company of New York, brought to the attention of actuaries and other life insurance men a system of apportioning surplus, devised by himself and David Parks Fackler, then the assistant actuary of that company. To this method was given the name "Con tribution Plan"; it is succinctly and accurately described in the following extract from a communication by Mr. Homans to the "Journal of the Institute of Actuaries" : "Credit each policyholder, first, with the amount actu ally reserved at the last preceding distribution of surplus, as the then present value; and, second, with the effective (or full) premiums paid since that time, both sums be ing accumulated at the actual current rate of interest to the date of the present distribution; and charge him, first, with the actual cost of the risk to which the com pany has been exposed during the interval, determined by means of a table representing the rates of mortality and interest actually experienced; and, second, with the amount now reserved as the present value of the policy. The difference between the sum of his credits and the sum of his debits determines the overpayment or contribution from the policy proper." This formula neglected to provide for charging for expenses. Mr. Homans at that time found it possible to pay all expenses out of gains from forfeitures. The prac tice, however, has been to charge the expenses and credit gains for forfeitures.

The idea of apportioning the surplus in cash dividends is an old one, dating back, indeed, to the foundation of the Equitable Society in 1762; for in its deed of settle ment appeared the following: "That, when and as often as it shall appear to a Gen eral Court of the said Society that the Stock of the said Society arising from premiums is more than sufficient to pay the claims made or liable to be made, upon the said Society, then and so often the said Society shall, in a General Court, declare a dividend of the surplus or of such part thereof as shall, by the said General Court, be thought and judged convenient, amongst the members of the said Society who shall be assured with the said So ciety upon (and for the whole continuance of) their re spective lives."

Instead of cash dividends as contemplated, the actual division was made in the form of additions to the sums payable at death; the actuary puts it thus : "By extend ing the allowance to Claimants after a certain rate to be computed upon the sums assured, for every year's pre mium paid upon their respective Policies prior to a certain day in such several Orders specified." 107 It has more than once happened since that time that actuaries have in learned and obscure language concealed departures from what was promised.

These additions to the sums insured were called "bonuses," and accordingly that name, instead of "divi dend," became, and yet remains in Great Britain, the com mon expression for apportioned surplus which is usually in the form of paid-up additions. When the surplus is thus applied to increase the insurance it is called in Great Britain a "reversionary bonus," and, when paid in cash, a "cash bonus"; while, when paid in cash, it bears in America the name "dividend," and when applied to in crease the insurance, "dividend additions." The system contemplated by the Equitable's Deed of Settlement was to divide the total surplus so that one part was given for one premium paid, two parts for two premiums, etc. The same system was employed in de termining the "reversionary bonuses," first declared by that company i. e., one whose policy was ten years old got ten times as much bonus as one whose policy was only a year old.

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