On the same date, July 20, 1917, the total borrowings of Canada from Great Britain amounted to $317,000,000, of which $107,000,000 has been repaid by the issue of dollar bonds deposited in New York as collateral, and to be disposed of there or in Canada after the war. The borrowings of Britain from the Canadian government were $302,000,000, so that quite aside from the indebtedness to Canadian banks, there was a balance on open account due by Great Britain on this date of $92,000,000— a sufficiently striking change from the former financial relations of Canada and Britain.

The shift of capital sources is made clear by the following table, compiled by the Monetary Times, of Canadian bonds, government, railroad, and industrial, sold in the past twelve years: TABLE 5.-SALES OF CANADIAN BONDS IN CANADA, GREAT BRITAIN AND THE UNITED STATES, 1905-1916.

1 Including internal war loans of $100,000,000 each, issued in November, 1915, and September, 1916. Of the first loan, $25,000,000, and of the second loan, $30,000,000 is estimated to have gone to the United States.

2 Included in this sum are $8,000,000 of a total of $50,000,000 Canadian bonds repurchased in Great Britain since the war commenced. The inclusion of the $42,000,000 of unclassified repurchases brings the total of Canadian bond sales in 1916 to $356,000,000.

In all the financing of the war, a great burden has rested on the Finance Minister, Sir Thomas White, who, before going into politics in 1911 on the anti-reciprocity issue, was general manager of the National Trust Company. Under the Canadian cabinet system, which throws upon a minister legislative as well as administrative duties, and with the preparation of the budget wholly entrusted to him, a greater share of responsibility rests on a minister of finance than on any corresponding official in the

United States. While there is naturally some difference of opinion on policy, it is universally agreed that the administrative tasks have been admirably performed. In this work the Minister of Finance has been greatly aided by the chartered banks. The branch bank feature, and the coördination possible through the Canadian Bankers' Association, have made it possible for the banks to coöperate very effectively in mobilizing the country's financial resources.

The war will leave Canada, in common with the other belligerents, with a heavy burden of debt, but it will leave her also with a fiscal system greatly strengthened by the inclusion of direct taxes, and, more important, with the consciousness of industrial and financial capacities hitherto unrealized.

Queen's University, Kingston, Canada.

O. D. SKELTON.

METHODS OF PROVIDING FOR EXPENSES OF OBTAINING NEW BUSINESS BY LIFE INSURANCE

COMPANIES

It is a well-known fact that new business is obtained by life insurance companies at considerable expense, involving commissions to agents and fees to medical examiners. Attempts have been made to lessen this expense, but are not likely to have a decided effect in the near future. It seems to be good public policy to extend insurance, even at considerable cost, among persons too careless to take the initiative in protecting their dependents. At any rate, it must be expected that the writing of new life insurance business during a year will remain much more expensive than the handling of an equal amount of old business during the same time.

It should perhaps be stated that the term "expense" as used in this paper does not include the payment of death claims, but means the expense of conducting business.

In dealing with the subject of initial expenses, the question at once arises as to the basic principle on which these expenses are to be met. The expense of conducting business is a very different factor from that of insurance risk, where death losses are distributed over a group of persons on certain principles of mutuality. There seems to be a fair consensus of opinion among insurance authorities that, in so far as it is feasible, each policyholder should pay the expense of placing his policy on the books of the company. Indeed, there is sufficient agreement on this point so that it does not seem inappropriate to state in a textbook for beginners in the study of insurance that "an equitable system of loading must require every policyholder to pay the expenses which his policy costs the company, as nearly as this amount can approximately be determined."

To carry out this principle requires careful consideration of methods of loading, and of computing the reserve liability of a company; for the ideas back of level net premium reserves ignore the condition that expenses are higher in the first policy year than in subsequent years. This fact was emphasized by the statements of eminent American actuaries as early as 1904, to the effect that level net premium valuation laws had strangled young companies

1 S. S. Huebner, Life Insurance (Appleton, 1915), p. 214.

that might have become good companies, and that the older companies today would not be in existence if the level net premium reserve had been required by law from the first few years of their existence.2

While there is fair agreement as to the principle stated above in regard to the allocation of the expense of new business, there is considerable diversity in the methods in use in different countries, and in the different states of the United States in putting the principle into practical operation. In the United States, the methods of loading for the expenses of new business that stand out most prominently are closely associated either with the modified preliminary term method of valuation, or with the select and ultimate method. The merits and demerits of these methods have been the subject of lively debate by both European and American actuaries. While it does not seem possible in brief space to give a satisfactory summary of the points made in these debates, it may be said that Mr. M. M. Dawson presented a paper in 1908 before the Institute of Actuaries advocating the select and ultimate method. He had previously presented the method before the Actuarial Society of America (1903), but without especially advocating it. The discussion of these papers, to which reference is made above, brought out the opinions of leading actuaries on the subject and showed that in a comparison of the two methods there were some good arguments for each of them. Both methods. have, with limitations, the approval of high actuarial authorities, and the weak features of both have been pretty ably set forth, so that knowledge exists as to where safeguards should be provided. In the textbook from which the principle stated above is quoted, there are given1 some criticisms of the preliminary-term and modified preliminary-term methods of valuation and a defense of the select and ultimate method. As certain of these criticisms are likely to give an incorrect notion of the operation of these methods, they call for some comment.

Before proceeding to examine the views expressed in these criticisms, it should perhaps be pointed out that there is some danger of confusion in the use of the term "reserve" when employed as it is in the discussion on which it is proposed to com

2 D. P. Fackler, Transactions of the Actuarial Society of America, vol. VIII (1904), p. 78; Emory McClintock, ibid., p. 80.

3 Journal of the Institute of Actuaries, vol. 42 (1908), pp. 425-472; Trans. Actuarial Soc. Amer., vol. VII, p. 418; ibid., vol. VIII, pp. 67-83.

4 Loc. cit., pp. 222-226.

ment. On the one hand, we find for a definition of the term "reserve," on page 193, the statement that "the word 'reserve,' however, has come to have a technical meaning in life insurance, due to the fact that most of the states have passed laws requiring some definite method of valuing this fund, and when the term is now used this technical or legal reserve is ordinarily meant." On the other hand, the illustrative calculations shown in the book in the development of the reserve idea treat of the level net premium terminal reserves. One thoroughly familiar with the subject before reading the book has perhaps little or no doubt that the term "reserve" as used on pp. 222-223 means "level net premium terminal reserve," but the discussion would be clarified by the simple statement that the term "reserve" is being thus used in this connection. With this meaning, the reader very naturally asks himself why the author specifies, on page 226 in his defense of the select and ultimate method, that this method permits the company to borrow from "full net premium reserve" instead of using simply the term "reserve" as he did in the criticisms. It is obviously very important in such a criticism not to confuse the use of the term "reserve" to mean "level net premium reserve" and to mean something else, such as legal reserve, for it is a serious matter if legal reserves or if adequate reserves are not being held as a liability, but it is not necessarily a reflection on the soundness or efficiency of a company that level net premium reserves based on certain tables of mortality and certain rates of interest are not being held as a liability.

5

Limitations of the use of level net premium valuations are well recognized by insurance authorities. It may be worth while saying at this point that level net premium reserves may be in a certain sense a mechanical or mathematical ideal for a hypothetical company operated without expense, but they are not properly looked upon as an ideal when we are seeking a true valuation as a test of solvency for the actual company that must pay the expenses of conducting business as well as death claims. Bearing on this point, Mr. Fackler made the following statement: "We all know that the true system is a carefully modified gross valuation, in which not alone the savings in the earlier year's mortality but also the unequal distribution of expenses should be con

5 Nichols, "The Limitations of a System of Net Valuations," Transactions of the Second International Congress of Actuaries, p. 161; Moir, "Valuation and Distribution," Trans. Actuarial Soc. Amer., vol. X, p. 179..