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

594 Money, Bank Credit, and Economic CyclesTHE CORRUPTION OF TRADITIONAL LIFE-INSURANCE PRINCIPLESDespite the above considerations, we must acknowledgethat in recent times, under the pretext of a supposedly beneficial“deregulation of financial markets,” the distinct boundariesbetween the institution of life insurance and the banking sectorhave often been blurred in many western countries. Thisblurring of boundaries has permitted the emergence of varioussupposed “life insurance” operations which, instead offollowing the traditional principles of the sector, have beendesigned to mask true demand-deposit contracts whichinvolve an attempt to guarantee the immediate, complete availabilityto the policyholder of the money deposited as “premiums”and of the corresponding interest. 108 This corruption,of life insurance contracts, have led companies to develop, from a legaland actuarial point of view, a series of contractual clauses (waiting periods,penalty fees in the event of surrender, etc.) which, de facto, have thesame deterrent effect as the receipt of a reduced value at secondary marketprices should the customer terminate the policy during an economicrecession. A summary of the most typical surrender clauses appears inJesús Huerta Ballester, A Brief Comparison Between the Ordinary Life Contractsof Ten Insurance Companies (Madrid, 1954).108 Thus traditional life insurance can also be corrupted, especially whenits basic principles are to different degrees abandoned under the pretextof “financial deregulation” or when an attempt is made to combine theinstitution with a sector as foreign to life insurance as banking. JohnMaynard Keynes provided a historical example of this corruption of lifeinsurance during the years he was chairman of the National Mutual LifeAssurance Society of London. See related comments in chapter 3, footnote48. While chairman, Keynes embraced an ad hoc investment policycentered on variable-yield securities, as opposed to the traditional policyof investing in fixed-yield securities. Furthermore he favored the useof unorthodox accounting principles, e.g., he valued assets at marketprices, not at their historical cost, and he even authorized the distributionof profits to policyholders against unrealized gains. All of these typicallyKeynesian assaults on traditional insurance principles nearly costhim the solvency of his company with the arrival of the Great Depression.The negative influence Keynes exerted on the British life insuranceindustry can still be felt today, and to a certain extent, it has spread tothe American insurance market as well. Those within the sector are nowattempting to free themselves from such unhealthy influences and