The economy of the expense of any transaction, or work, can only be intelligently judged by the value of the result.  This truth is too well recognized to need illustration, and it only needs to be called to mind, to perceive both the error of ratios of expense based on premium, which is not the result but the raw material, so to speak, of insurance transactions; and what, on the contrary, the true basis is.

It is thus clear that in insurance the economy of expense must be judged, not by comparison with the premiums paid, but by comparison specifically with the resulting advantages in fact secured by such payments.  Now these are of two kinds:  which may be called the insurance advantage and the investment advantage.

(1) Each death claim paid is an insurance advantage, though it is so only to the extent of the excess of the amount of the policy which has become a claim over its premium reserve, or value, for the latter being the balance (with interest) of the policy holder’s own premium money, could have been left or secured to his representatives without the intervention of the policy and company.

It is true that the advantage or benefit of insurance does not consist in adding anything to the wealth of a company, but only consists in drawing from the premiums paid into its treasury by the policy holders generally, to meet each death claim which arises; or can only be called an advantage of distribution, or process of collecting aid from the living members, to assist the representatives or dependents of the deceased ones; but it is not the less on this account an advantage worth same expense in securing.

(2) Interest realized by the investment of premium while it is in the keeping of a company is an advantage; in every sense so, since it comes wholly from outside sources, and accrues proportionally to all members; it may be called, as above, the investment advantage, and of course justifies some expense to secure it.

Hence the expenses incurred by any company in a given; time must be divided into two parts, one being the expense incidental to insurance, and the other that incidental to investment, which parts are to be compared respectively with the insurance claims met, and interest receipts of the company for the same time; or what is equivalent in the latter case, the net rate of interest earned after deducting the incidental investment expense may be found.

When this process shows that one company has earned a higher rate of interest than another, at the same time that its insurance expenses bear a lower ratio to its insurance claims paid, there is no escape from the conclusion that during the period under observation it has served its policy-holders more economically, and the test is therefore scientific.  Though, if one company shows a higher rate of interest, while the other shows a lower ratio of insurance expense, it will still be necessary, to complete the test, to equate either the rates of interest or the ratios of insurance expense (it does not practically matter which), and note how this affects the relation of the duly corrected ratios on the other score.