Effect Of Law Of Probabilities On Insurance Companies. Risks Of Insurance Companies. How Panics May Be Averted. Risks Of Banks Compared With Insurance Companies

And the question arises whether banks have any set-off in the future which will balance this progressive advantage on the side of the insurance companies. Yes, if the probability of a higher moral standard in the management and administration of banks in the future may be relied on to lessen the risks of panics. All the foremost nations of the world become, as time goes on, more sensitive and morally responsive to the necessity of keeping their assets in such securities only as can be converted into money on the shortest notice, as well as making their advances to customers only on such collateral as can be so converted, besides being sufficient in amount. In this way the danger from panics, which rarely arise except from suspicion of carelessness or unscrupulousness, would be reduced to a minimum or altogether averted; whereas, in insurance companies neither honesty nor industry will probably ever avail to anticipate or prevent destructive fires like those of San Francisco or Messina. These could, of course, be provided against in a measure by special reserves set aside for the purpose, or by greater combinations and sharings of risks among the different companies; but all this adds to cost, and so far throws back the advantage in yield, as well as in stability, on to the side of the banks again. It would seem as if panics lay, as it were, outside the circuit of a bank's natural risks, and were rather a matter of personal prudence and character in the administration of them than inherent in their essence; whereas in insurance companies, especially those providing against accidents from fire or flood or storm, the risks are inherent, natural, and proper to the business itself.

Yield Of Long-And Short-Time Investments

Again, the investments of Banks are either in gilt-edged securities, the most easily convertible into cash, or in those which run their course in such short periods of time that they can scarcely in the intervals of renewals, with their various endorsements or acceptances, get far out of hand without detection and the prevention of loss; whereas in the long-time investments of Insurance Companies, the directors may be condemned to stand and look on while their securities slowly become worthless. It is true there are possibilities of gain in the longtime investments of the Insurance Companies which are not open to Banks doing a legitimate business, and which are confronted with the dangers of panic on any failure to meet their deposits on demand; and these may well reverse the relative status of the Insurance Companies and the Banks, inasmuch as they will not only command a greater yield of income, but one which in the future may be expected to rest on a basis of equal stability and security. This, I believe, will eventually be the case if the principle of the Geographical Distribution of Capital, which this publication is intended to support, can be worked out into a true scientific demonstration. Any risks which investments on this principle may run, when compared with the gilt-edged securities of the bankers' operations, would be balanced by the advantages possessed by the Insurance Companies in the length of time given them to negotiate the sale of their securities to the best advantage. The element of time enters into the relative status of Banks and Insurance Companies in other ways, but mainly through the effects of the Money Market on profits and stability.

How Bank Rate Fluctuations Affect The Yield Of Bank Stock

The profits of Banks vary with the fluctuations of the Bank rate; when the Bank rate is low, and money in consequence is cheaper, the yield is less than when it stands at medium rate between high and low. Provided that the state of trade and business in general remains steady, a high Bank rate restricts the demand for bank accommodation, although the profits of the bank are high on each transaction. A low rate, on the other hand, stimulates the demand, but the profits in each transaction are small; it is the medium, or average, rate which gives, perhaps, the most satisfactory returns. On Insurance Companies, on the other hand, with their investments resting largely on long-time engagements, and with no pressing necessity of payment on demand, the temporary fluctuations of the Money Market have less influence. It is only long-time or permanent changes in the value of money that can have much influence on the yield from their investments, and this can be largely neutralised and averaged, as we shall see later, by a geographical distribution among the Money Markets of different nations; and then the yield from the Insurance Companies' investments would be larger than those from the Banks.