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State Regulation of Investments
Recognizing the vital relationship between the conservative handling of life-insurance funds and the ability of the companies to meet obligations which extend over long periods of time, nearly all the states have undertaken to regulate life-insurance investments in one form or another. Some of the more specific regulations will be referred to in the discussion of the various types of investments. Suffice it to state that most of the legislatures take the position that the companies have undertaken trusts of the greatest importance and that those who are named as beneficiaries thereunder should be protected by law to the fullest extent possible. To this end the several states have enacted laws which require the companies to invest their resources in such securities as will yield a reasonable return and which, as regards both principal and yield, will be so unquestionably safe as to secure policyholders during the many years that may elapse before their contracts mature. While most of the states specify the particular securities which savings banks may invest in, that method has not been followed in the case of life-insurance companies. Instead, the laws are here concerned with classes of investments rather than specific bonds, stocks, and other securities. They either definitely prohibit or approve certain classes of investments. 1 Great lack of uniformity, however, exists in the requirements and restrictions adopted by the different states. All the states permit investments in government bonds. Some limit bond investments and mortgage loans to those of the home state, while others prohibit companies operating within their boundaries from investing in the stock issues of any corporation. A few exclude the securities of all mining and manufacturing companies, and of all corporations that have failed to pay their regular interest and dividends at any time during a designated number of years. While some states specify the margin that must exist in the case of collateral loans, others do not. Real estate mortgages, available for life-insurance companies, are usually carefully defined the value of the property being generally twice the amount loaned. Some of the states have also shown a decided tendency to limit a company's holdings of real estate to what is actually necessary for the convenient conduct of business. Some of the states have also sought to enlarge the field for their own securities by adopting legislation which compels insurance companies to invest a large portion of their reserves in such securities. It is also general to require the companies to make to the insurance department of the state annual statements which give a complete and detailed list of investments, together with such other information as the commissioner may request. Numerous other restrictions have been adopted by various states but only a few need be enumerated for illustrative purposes. Thus it is common to provide that not over one-half of the capital stock of a company may be invested in mortgages on real estate and not over one-tenth in a single mortgage, that no loans on personal security may be made, and that the directors are held personally liable from any loss from investments which are not made according to law. Many of the states also prohibit officers and directors from receiving any commission or profit upon purchases or loans made by the company; while in other states it is provided that companies may not enter into underwriting participations or transactions for joint account. It should also be noted that while some states have enacted practically no legislation for the regulation of life-insurance investments, the insurance commissioners in such states usually possess, discretionary powers in the matter and generally pursue a course along the lines adopted in other states. Footnote 1. The effect of such legislation, generally speaking, is to limit life-insurance investments to the following classes:
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