Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

590 Money, Bank Credit, and Economic CyclesIt is clear that insurers’ accounting profit arises from thedifference between revenues (premiums and financialincome) and expenses (operational costs and those resultingfrom increases in mathematical reserves). Insurance companiesusually make a very modest profit which has three possiblesources: claim profit (i.e., the company may overestimatethe number of claims in its calculation of premiums), profitderived from operational, administrative costs (administrativeexpenses included in the calculation of premiums may begreater than the company’s real costs), and finally, financial,profit (financial revenues may exceed the “technical interestrate” used in the calculation of premiums). Furthermore competitionin the market has led life insurance companies to passon a large part of their yearly profits to their policyholders,since life insurance contracts now commonly include profitsharingclauses, which increase customers’ insured capitalannually without increasing premiums. Thus from an economicstandpoint, regardless of its legal status (whether a corporationor a mutual company), a life insurance companybecomes, at least partially, a sort of “mutual company” inwhich the policyholders themselves share in the company’sprofits.The institution of life insurance has gradually and spontaneouslytaken shape in the market over the last two hundredyears. It is based on a series of technical, actuarial, financialand juridical principles of business behavior which haveenabled it to perform its mission perfectly and survive economiccrises and recessions which other institutions, especiallybanking, have been unable to overcome. Therefore the high“financial death rate” of banks, which systematically suspendpayments and fail without the support of the central bank, hashistorically contrasted with the health and technical solvencyof life insurance companies. (In the last two hundred years, anegligible number of life insurance companies have disappeareddue to financial difficulties.)The following technical principles are traditional in the lifeinsurance sector: assets are valued at historical cost, and premiumsare calculated based on very prudent technical interestrates, which never include a component for inflation