Endowment policies  and whole-life policies

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Endowment policies and whole-life policies

The effect of these factors emerges only over a long period, and is restricted to two types of policy: those that guarantee the payment of the sum assured at a specific date or on earlier death (endowment policies) and those that guarantee the payment of the sum assured on death whenever this occurs (whole-life policies). Shorter-term protection policies (term assurances), where the sum assured is payable only on death within a specified period with no return to the policyholder on survival, allow the actuary to calculate with greater precision the necessary sums to be accumulated, and therefore the premium rates. The impact of changes in mortality and interest rates is therefore of less significance. In pure protection policies, life insurance works very much as house insurance does, the company calculating the risks and working out the required premium with no allowance for any return to the policyholder if he happens to survive.

Though companies use similar mortality tables and assume broadly similar rates of interest, premium rates do vary considerably. These differences arise as a result of several factors. One is the actual mortality experience of the companies themselves; a company that has suffered lower claims will have acquired larger reserves and be able to quote lower rates. Another is the type of policyholders a company already has: if too many of these fall into one age group it may wish to set its premium rates to attract those from other age groups into becoming policyholders in order to avoid a "bulge" in claims at some date.

Yet another factor is the variations in expenses that different companies have to bear.

These comprise not only staff, rent and rates but the costs of selling new policies and of servicing existing ones.

Thus, one company may have invested substantially in sophisticated computer equipment which cuts down the cost of records and policy handling, while another may still be struggling with more expensive old-fashioned methods.

One may carefully monitor the performance of its sales and marketing personnel to make sure they all earn their keep in generating new business, while another may adopt a more casual and less cost-conscious approach.

One may be expanding rapidly and incurring high initial costs on selling new policies, while another may be selling few policies and thus incurring low sales costs. Such differences mean that life offices have different "expense ratios" - the proportion of the office's total income required for expenses is higher or lower. For the policyholder, in the long run, the lower the ratio the better.

None of these factors is static, and since competition is always active the pattern of premium rates quoted by life insurance companies is continually subject to change.


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Premium Rates

As much of the business taken on by companies was very long-term, they did not need to keep all the reserves in the bank. Investments in Government securities, property and shares were made, and these helped to increase the surplus achieved. As the presence and predictability of the surplus was recognised, companies split their policies into two classes, those participating and those not participating in profits, with different rates of premium. What the companies were saying, in effect, was that according to the necessarily conservative assumptions of the actuary, suchand-such a rate of premium... see: Premium Rates

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