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Further it appears to me that the rate of
interest laid down is unnecessarily severe for companies
established in the Fast where high interest is obtainable on their funds. A company earning a high rate of interest on its funds does not require to carry such large reserves as a
company earning a lower rate, and to compel a company earning an average rate of interest of say 7% which I believe is not an unusual thing out here, to value at 4% is to apply an unnecessa- -rily severe test and would result in many companies being
declared insolvent which in reality would not only be far from
it but be in a position to declare handsome bonuses to ita
policy holders. It has been established by eminent actuaries that a margin of 1% to 14% between the average rate of
interest earned and that assumed in the valuation is amply
sufficient not only to provide the full amount of reserves
required but also to provide a good compound Reversionary
Bonus. This being so it is manifest that to make the test of
solvency of a company i.e. its ability to pay the face value of
its contracts as they become due, more stringent than is re-
-quisite to pay the policies in full together with a compound
reversionary bonus is not only unnecessary but unfair to all
concerned.
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In Great Britain where the average rate of interest earned by Life Companies is under 4% the average rate
of valuation is 3% though there is a tendency now to reduce this
to 24 or 21%. It would be a dangerous thing however to assume that a company that passed a 4% valuation test was insolvent
unless it could be shown that the average rate of interest
earned for sometime past had fallen considerable below that
figure. Theoretically the correct test would be a valuation
at the actual average rate of interest earned by the company in
the past. Should it then be shown that this rate was unlikely
to be realised in the future, provisions could be rade for
reducing the valuation rate and increasing the reserves for
the future.
In
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