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The Future. As modern medical science conquers more and more of mankind's ailments, the odds the Prudential sets for its policyholders will inevitably improve. Yet before it can knock any big dent in insurance rates, it must first lick the same problem that every U.S. businessman faces today: rising costs. The fact is that the steady increase in U.S. life expectancy, through antibiotics and other advances, has been just about matched by the rising costs of operating insurance companies. Thus the companies have not been able to give policyholders the cheaper insurance everyone wants and expects. The only immediate solution to the problem, says Shanks, is for the industry to increase the return it gets on its investments. What worries him is that too few insurance companies are using all the tricks in the financial bag to lessen the effects of inflation by making their dollars work harder. He argues that many companies could invest their huge wealth to get a bigger return on their money.
In 1956 the average net return after taxes on investment for U.S. insurance companies was only 3.33%; the Pru itself had to settle for 3.47% v. 4.9% in 1931. Too much money goes into prime big-company bonds and notes, with their relatively low interest rates, too little into mortgages and smaller loans. In 1956, while Metropolitan had put $353 million into eight huge housing projects in four cities (including Manhattan's Peter Cooper Village and Stuyvesant Town), 62.9% of its total assets was in bonds, stocks and notes. Equitable Life Assurance, which has lent Eastern Air Lines $40 million for new jet planes, and Real-Estate Man William Zeckendorf $40 million to buy New York City's Chrysler and Graybar Buildings, has 62% of its assets in securities, only 29.3% in mortgages. John Hancock has 66.6% of its assets in securities of various kinds, Aetna 65.1%. By contrast, the Prudential had only 45.9% of its assets in securities, put a big 43% of its funds into mortgages, which pay top interest rates of 5% to 5½%.
Even securities investments themselves need a thorough overhaul. Metropolitan Life puts less than 1% of its money into preferred and common stocks. Not so, Shanks. The Pru has 2.2% of its money in the stock market, figures to profit not only from generally higher yields but also from capital gains as prices rise. Soon Shanks hopes to increase the percentage to 5% or even 10%.
To a traditionally conservative industry, Prudential President Shanks's ideas sometimes sound like the rankest kind of heresy. Yet he is convinced that insurance men must change their, thinking if they hope to serve the expanding U.S. population successfully. They must find new and exciting approaches to spur mass insurance sales, ways of cutting the costs of insurance. The price of failure, says Shanks, is the specter of Government encroachment on the industry.