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The Pamphlet Collection of Sir Robert Stout: Volume 54

Theory v. Practice

Theory v. Practice.

The true explanation of this want of harmony between the conclusions of theory and those of common sense is, as suggested above, that the theory is imperfect, inasmuch as it assumes that all persons of the same age are in the same state of health, and subject to the same rate of mortality. Every step that is taken in improving the theory will have the effect of removing some anomalies of this kind, and already considerable progress has been made in this direction. I trust I may be excused if in this connection I mention the labours of our honoured Fellow, Mr. J. A. Higham, and those of the late Mr. Spens. The subject seems to me not to have received the attention which its importance demands; but in saying this I make no confession of a default on my own part, for, as you are all aware, in my paper upon the "Select Mortality Tables," which I submitted to the Institute a few years ago, I claim to have given actuaries a means of obtaining approximately true answers to questions of the kind discussed above. It has been a source of great satisfaction to see that the line of investigation I there indicated has been successfully page 11 followed up in the case of the Government annuitants by a gentleman who will, perhaps, allow me to call him, with every feeling of respect, the hereditary Government Actuary. The same blind adherence to an imperfect theory has led some authorities to insist upon applying the same valuation rules to all companies alike, irrespective of their special circumstances. The theoretical expression for the value of a policy takes no account of the expenses of management, and in adopting this formula as the basis of the valuation of a company, it is assumed that the expenses are in every case less than the uniform loading added to the uniform annual net premium. This is an assumption, however, which is not justified by the facts, both as regards the total business of most young companies, and as regards the new business of most old companies. It is therefore necessary, in order to get an appropriate formula, to introduce into our calculations the amount of expense at which the new business is obtained; and thus, for old and young companies alike, we conclude that the proper reserve to be made for the liabilities is less than that given by the ordinary net premium method of valuation.