Gains from Forfeitures

The great majority of companies, as previously explained, retain all or a portion of the reserves of those policies which are surrendered or lapsed. The sums thus retained have sometimes been regarded as constituting another source of surplus, although, as has been well said, "it seems to be an anomaly that any business should really be the gainer by losing custom". Owing to the large surrender values prevailing at present, however, and the high expense of securing new business, this factor can scarcely be regarded as yielding a profit; furthermore, if any gain should be derived from this source, it is treated usually as an offset to expenses.

Two reasons have been advanced to show that the so-called "gain from forfeitures" is only an apparent and not a real gain. In the first place it is believed that where illiberal surrender values are allowed the apparent gain to the company is offset in part by an unfavorable mortality experience, which is attributed to the adverse selection which it is believed will result from the fact that healthy policyholders will show a greater disposition to discontinue illiberal contracts while those who are failing will remain in the company irrespective of the harshness of policy provisions. But of much greater importance, it is argued, is the expense of replacing the old risk with a new one. Not only did the company incur the heavy initial expense of securing the discontinued policy but in replacing it with a new policy it incurred this initial expense a second time, i.e. it is obliged to make two subtractions from its insurance fund in order to secure one policyholder. Moreover, certain investigations also show that companies with a reputation for liberal surrender values not only secure business at lower rates of commission than those paid by companies pursuing a different course, but also pay the highest dividends to policyholders.