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The Pamphlet Collection of Sir Robert Stout: Volume 54

"Profits" or "Surplus."

page 5

"Profits" or "Surplus."

As another instance of a theoretical view of life insurance which may in certain cases be misleading in practice, I may mention the doctrine that seems to be very popular at the present time, namely, that life insurance offices make no profits, and that the sums distributed by them among their policyholders as bonuses should not be called "profits" but "surplus." This is a doctrine which I have myself never been able to sympathise with, or, indeed, fully to understand. It is quite clear, I think, that when life insurance was principally in the hands of proprietary companies all the surplus payments made by the assured fell into the general "profits" of the companies which were divided as dividend or bonus among the shareholders. When these companies one after the other agreed to give a greater or less share of their profits to the assured, the nature of the surplus was not thereby altered. If it was profit when it was paid to the shareholders, it seems to me that it still remained profit when it was paid to a certain number of the assured; in fact, the only logical position seems to me to be that ordinary life insurance offices are trading bodies which carry on the business of selling life insurance at certain rates calculated to yield a profit, and which take stock from time to time and divide the profits that have been earned among the persons entitled to them according to the partnership contract. This, I consider, is equally true, whether the premiums charged are high or low. In all other trades, the higher the price charged for any commodity, the larger, cæteris paribus, will be the rate of profit on the trading; and the same, in my opinion, is the case with life insurance. And this is true, whether the office is proprietary or mutual. The only exception, I would admit, is those offices which do not declare a bonus out of past profits, but make a yearly estimate of their liabilities, and on the basis of that estimate charge a reduced premium for the ensuing year, calculated so that, as far as can be foreseen, there will be no profit on that year's transactions.