Distribution Of Risks In Life Insurance Companies

In Life Insurance Companies, for example, there are a number of categories or divisions, into which the risks are distributed before the innumerable lives to be insured are poured into them wholesale. There are divisions into good, medium, indifferent, and bad "lives," and these are represented in the reports of the medical examiners of the Company by such complex conditions as the hereditary predisposition to disease of the applicant, his family longevity, his existing constitution, the nature of his business, whether dangerous or otherwise, the climate of the country he inhabits, and the like.

Different Classes Of Stocks Lie In A Hierarchy

Now, corresponding to these definite divisions in Insurance risks, we have in a Geographical Distribution of Capital the parallel fact that the different classes of stocks - Government Stocks, Corporation Loans, Industrial Monopolies, Banks and Insurance Companies, Railway Debentures, Industrial Debentures, and the like - also lie in a hierarchy, and have, as we saw in former chapters, different natural values attached to them. In themselves these natural divisions are quite as definite as the good, medium, bad, or indifferent categories of lives in Insurance Companies; but over and above these, we have in a Geographical Distribution of Capital a number of definite points of principle, which play through the natural values of the different stocks, and make their future course still more amenable to scientific calculation.

Definite Points Of Principle In Geographical Distribution Of Capital

One of these is the definite effect which the Government Stocks of any given country have in raising or depressing the market value of all other stocks in the same country. Another, as we have seen in a former chapter, is the effect of the state of the Money Market of the country over the rise or fall of all the shares and stocks of that country, especially of those which, like Debentures, come into it for loans. Of the same nature, again, is the calculable effect on the present and future of these stocks, of the activity or slackness of the Stock Exchanges which control particular descriptions of stocks in the country in which they are mostly dealt in. Besides these, there are the definite effect of the state of Trade in one country on that of a country with which it directly deals, and the like.

Now, these all help to give definiteness to the elements of the problem involved in a Geographical Distribution of Capital among the stocks of different nations; and, so far, have a scientific advantage over the fewer, rougher, and vaguer categories of risks in Insurance Companies. But by themselves they are not enough to give Geographical Distribution an all-round advantage over Insurance Companies; and something more therefore is necessary. For Insurance Companies, as we have seen in a former chapter, rest frankly on the impersonal Law of Probabilities, and this is itself a tremendous asset in their favour. For, however crude and vague their divisions of risks may be, there can be no doubt that such as they are, when innumerable lives of men are flung into them pell-mell, as it were, the risks will work out in proportion to the numbers thrown in, with a great measure of scientific accuracy. Geographical Distribution of Capital, on the other hand, although a form of insurance, has none of that impersonal character which in Insurance Companies works out its scientific averages quite independently of the discretion and judgment of men in the selection or rejection of its individual units. Its separate lists would, even in the largest single investments, not comprise more than twenty or thirty separate items in different parts of the world; and these are not sufficient in number in any given case to allow the Law of Probabilities scope for exercise. It would require something nearer 2,000 different investments than twenty or thirty, to give the law a chance; and that is, of course, practically an impossibility. Besides, these few investments have, in the last resort, to be selected by some one individual's judgment; and this is to infringe the cardinal principle on which all Insurance Companies are based - the purely impersonal Law of Averages and Probabilities.

Advantage Of Geographical Distribution Of Capital Over Insurance Companies. Geographical Distribution Of Capital A Form Of Insurance. A Rival In Steadiness To Insurance Companies

It is evident, therefore, that if the Geographical Distribution of Capital is to rival the steadiness and sureness of Insurance Companies as a principle of investment, it will have to make good its deficiency in this respect by some principle as good, if not better, to take its place; and the question is whether such a substitute is anywhere to be found. I think it is; but it is not a single principle, but rather the resultant of a complex of several separate but all-important facts and principles.