In practice insurance companies generally compute their legal reserves on a more conservative basis than required by law. Most companies use the same mortality and interest assumptions to compute reserves that they use to calculate premiums. Even though state valuation laws permit the use of a 6 percent interest assumption, the majority of life insurance companies are using a lower interest rate than permitted by law or regulation to value policy reserves for policies currently being issued; some have converted all outstanding policies to that basis, regardless of the assumptions used at the time of issue. Obviously, this provides a margin of safety beyond that contemplated in the valuation laws.

Another margin of safety is provided through the use of net premium valuation. This, however, is a matter of law. Under this method of valuation, it is assumed that only the net premium (whether calculated in accordance with the actuarial assumptions prescribed by law or in accordance with assumptions actually being used by the company) is available year by year, including the first year, for the payment of death claims and that the rates of mortality experienced and the rate of interest earned have been and will continue to be in exact accordance with the assumptions underlying the net premiums. Loading, whether in connection with past or future premiums, is not taken into account.

This has not always been the case. In the early years of insurance in this country, gross premium valuation was the rule. Furthermore, it was customary to ignore future expenses and to assume that the entire gross premium would be available for the payment of claims. The present practice, which is the outgrowth of legislation designed to eradicate the evils of the earlier system, assumes that the whole of the loading will be required for expenses. The truth lies somewhere between these two assumptions. The entire loading is normally not needed for expenses, and the excess portion might well be taken into account in evaluating a company�s financial position. Certainly, that portion of loading in excess of future expense requirements constitutes a source of financial stability.