Method of Arriving at the Rate of Earnings

Ordinarily the rate of interest on an investment is ascertained by dividing the amount of interest received during the year by the amount invested. In life insurance, however, this simple method cannot be applied since the companies are. constantly increasing their funds during the course of the year, partly because the payments received from policyholders exceed claims and other expenditures and partly because interest earnings are constantly coming in and are immediately reinvested. In other words the funds invested at the end of the year are, as a rule, considerably higher than the funds invested at the beginning of the year, and it is, therefore, necessary to ascertain the rate on the mean invested funds. While there is no one method universally followed by the companies in this respect, the general plan most commonly used has been explained by Mr. Henry Moir as follows:

If the interest earned in any year were divided by the funds invested at the beginning of the year, then those companies which, had a large increase in their funds would appear too favorably in the comparison. On the other hand, if the year's interest were divided by the funds at the end of the year the converse would hold. For measuring the interest earned by life-assurance companies a middle course is usually followed, and the following formula has been suggested as a good basis, namely:

Average rate earned = 2I over A+B-I

In which I represents the total interest earned during the year; A the funds at the beginning of the year; and B the funds at the end of the year.