Policy Loan Interest Rates: A Critical Evaluation: Comment

Abstract

In their most timely paper on policy loan interest rates, Professors Wood and Rottman reach the conclusion that the policy loan interest rate should be a variable one, determined at the time of the loan, and that this variable rate should be related in one way or another to the prime rate of interest.' Supporting their analysis in chart form is a contribution by Sandra Illies in the letters column of The Actuary, stating that a correlation coefficient of .89 was calculated between the average prime interest rate during a calendar year and the policy loan cash flow during the same calendar year for each of the six years 1964-1969.2 If quarterly figures had been available, this correlation might well have been even higher. But just what is the prime rate? The authors suggest the possibility of more than one prime rate prevailing at the same time. Indeed that has occurred in the same city. There could be no looseness in the policy contract definition of the prime rate. A very precise statement would be absolutely essential. A very small difference in total indebtedness as of a given date may determine whether a policy is actually in force on the date