# **e. Jife Premiums and Policy Reserves**

Premiums on life insurance policies are not directly regulated by the state authorities, but the regulation of reserve liabilities provides an indirect regulation of premiums charged to the consumer. States typically prescribe the basis for calculating minimum reserves, in terms of mortality tables to be utilized, maximum interest rate assumptions, and the valuation method to be used. Regulation is aimed primarily at the adequacy of reserves, and companies are allowed to adjust their reserve calculation to provide higher reserves, so long as the minimum reserve standards are satisfied.

Statutory requirements for reserve calculations, along with statutory limits on commissions and expenses on new policies, are generally seen as ensuring that adequate premiums are charged, while it is felt that competition among companies provides a safeguard against excessive premium rates. The net cost of insurance is also dependent on the level of policy dividends paid on participating policies of stock companies and on all policies of mutual insurance companies. Such dividends are paid to policyholders when investment income and mortality experience generate an excess in company earnings; to ensure such payouts, some states have surplus limitation laws designed to prevent the accumulation of excess earnings by the company beyond certain levels.

To assist consumers in comparing costs of similar policies offered by different life insurance companies, many states require that buyers be furnished with indexes showing the surrender value of different policies at a future date and the death benefit payable at an assumed point in time. These interest-adjusted cost comparison data have been distributed in "buyers' guides" for life insurance products since the mid-1970s, but there continues to be concern about the adequacy of consumer information for the average buyer.

In-urers are allowed, within limits, to classify policy applicants by risk and to charge different premiums accordingly. The age of the applicant is an obvious variant which requires a higher premium at higher ages because of life expectancies. Since women have longer life expectancies on average, rates charged to them are typically lower than for men, though at least one state (Montana) requires unisex rates to avoid such discrimination. Many states permit lower rates for non-smokers. Those in high-risk occupations or with risky avocations such as airplane piloting can be charged higher premiums. Applicants with known health problems can be required to pay higher premiums by reason of known risk factors. Also, policies in some states can contain a war-risk clause, waiving death benefits if death results from war, since life expectancies cannot be factored in to mortality calculations in such an event.

On the other hand, many states prohibit risk classification arising from race, religion or national origin. A current controversy relates to an insurer's right to test applicants for the AIDS virus, which many companies insist upon to protect against adverse selection by those who foresee imminent death from that disease.

# **f.** Regulation **of** Investments

Illustrations of the investment laws governing life insurance companies have been given in the earlier section on company activities in the capital market, but a few general observations may be in order at this point.

The general philosophy behind the state investment laws is that insurers must remain in sound financial condition, to protect the interests of the insurance buying public. Toward this end, safety of 26