Table 19-1 (at the end of this chapter) illustrates the relationship between surrender values, asset shares, and reserves, both level premium and modified. This table presents an asset share calculation for a participating ordinary life policy issued at age 32.

Death rates are based on varying percentages of the rates of tabular mortality. Specifically the rates assumed in table 19-1 for the first 6 policy years are 42, 52, 60, 66, 70, and 72.5 percent of the corresponding rates in the 1980 CSO Male Table. From age 38 the mortality rate is assumed to increase one-half percentage point for each year of attained age after that, reaching 79.5 percent of 1980 CSO male rates at the 20th policy year. After the first 5 years, these are the same mortality rates used in calculating dividends for this policy, the details of which are given in table 20-1 (see page 501). Mortality rates for the first 5 years below those in the dividend formula reflect the influence of selection. The rates used in calculating dividends usually do not reflect the savings from selection. Instead the savings are applied to amortize excess first-year expenses.

Withdrawals shown in table 19-1 approximate those in a study of ordinary insurance conducted by the Life Insurance Marketing Research Association (LIMRA) in the United States from 1983 to 1987. Combined with the assumed rates of mortality and applied to a radix of 10,000 insureds at age 32, these withdrawal rates determine the number of living and persisting policyowners shown in column (2).

A gross premium of $13.01 per $1,000 of coverage is assumed for $100,000 of insurance. This is the net premium, based on the 1980 CSO Male Table and 5.5 percent interest, loaded by 16 percent plus $2.50. Expenses are assumed to occur as shown in table 19-1. The effective first-year premium is �$566.12. The effective premium for the 2d through the 10th policy years is $1,164.93. Table 19-1 reveals that the only expenses after the 10th year are the premium tax, maintenance expenses, and the cost of settlement. The first two types of expenses occur annually. The cost of settlement is incurred only once per policy and is included in the death claims. These reduced costs mean that for each year after the 10th, the effective premium is $1,234.98.

Effective premiums are assumed to accumulate at the rate of 6.25 percent, a rate that is higher than the rate of interest currently used in premium and reserve calculations, but one that realistically measures the interest being earned on long-term interest-bearing investments.

Cash values are assumed to be the minimum cash values computed on a 5.5 percent interest basis. Dividends are assumed to be paid according to the scale derived in table 20-1 with the full amount of the dividend for any particular year going to all persons who enter that year even if they fail to survive or persist to the end of the year. First-year dividends, however, are assumed to be paid only to those policyowners who either have survived and persisted or have died during the year. In other words, first-year dividends are not paid to those who withdraw during the year.

Column (14) of table 19-1 shows the asset share developed from these assumptions. Note that the asset share is negative the first and 2d years. This is normal for a policy of this type and premium. The asset share is also less than the net level premium reserve until the 8th year. This shows that the company does not recover its acquisition expenses for this group of policies until the 9th year. This is perhaps normal for mutual companies, but stock companies usually amortize their first-year expenses over a shorter period. As can be seen by comparing columns (14) and (15) of table 19-1, the excess of the asset share over the net level premium reserve�an amount that, by the end of the 20th year, amounts to $102.61 per $1,000�-measures the contribution of each $1,000 policy to the surplus of the company. In later years, the asset share can be reduced through an increase in the dividend scale.