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Published online by Cambridge University Press: 07 November 2014
The increasing importance of institutional investors in the provision of private and public long-term credit has focused the attention of economists on the activities of these investors in the saving-investment process in the economy. Institutions have become crucial factors in the determination of the nature and the extent of the expansion that takes place in industry and business, and of the nature and extent of credit supplied, including the relationship between equity and debt in the capital structure of corporations. In addition, they are important suppliers of public credit, particularly in time of heavy government borrowing, as in wartime. Also, from the point of view of government policy, they are important in determining the nature and types of credit controls needed in inflation and deflation.
The life insurance companies merit particular attention not only because of the size but also because of the nature of the funds under their administration. Their funds, amounting to some $6 billion, represent almost 50 per cent of institutional funds, excluding those administered by the banks. The assets of these funds comprise approximately 20 per cent of the total long-term public and private debt, including mortgages, in Canada. In contrast to other institutions, life companies acquire their funds as the result of contractual saving on the part of millions of policyholders. Thus their funds exhibit, and will continue to exhibit, a sustained growth. Since they are the result of personal saving, the income arising from their investment is important to a large segment of the economy, and the way in which they are invested is important for the nation as a whole.
This paper was presented by O. W. Main at the annual meeting of the Canadian Political Science Association in Montreal, June 7, 1956. It is the result of work done in collaboration with Wm. C. Hood.
1 A detailed statement in mimeographed form of the methods used in making the split between domestic and foreign operations may be obtained from the authors. Since 1953, the Bank of Canada has published a monthly series of investment transactions of twelve life insurance companies. Its figures are not comparable to the figures presented because it does not include all the Canadian life companies, and does include two foreign companies operating in Canada.
2 Clarke, H. G., “A Broad Analysis of the Problem of the Investment of Life Funds,” Journal of the Institute of Actuaries, LXXX, 1954, 338–9.Google Scholar Cf. also: Anderson, W. M., “The Long View of Life Insurance Investment,” Proceedings, American Life Convention, 1954, 355–72Google Scholar; Pegler, J. B. H., “The Actuarial Principles of Investment,” Journal of the Institute of Actuaries, LXXIV, 1948, 179–95Google Scholar; Haynes, A. T. and Kirton, R. J., “The Financial Structure of a Life Office,” Transactions of the Faculty of Actuaries, XXI, no. 195, p141–97Google Scholar; Kirton, R. J., comments on Penman, W., “A Review of Investment Principles and Practice,” Journal of the Institute of Actuaries, LXIV, 1933, 387.Google Scholar
3 Some companies have been able to avoid, to some extent, the dangers of short-term investment by including in their portfolios United States railway bonds with very long maturities.
4 The forward commitments made by life insurance companies both in direct lending to corporations and in mortgage lending have implications for the exercise of monetary control by the central bank. To the extent that forward commitments are, in fact, kept, there must be a lag in the impact of restrictive measures by the Bank of Canada on the extension of these kinds of credit.
5 The life companies have a legal loop-hole in the valuation of assets in that when values are unduly depressed, the Minister of Finance may authorize values to be used in statements. However, this is not very comforting to the individual insurance company, since it would not wish to be dependent upon the Minister for its statement of solvency.
