Equity Investment and Participating Life Assurance

Extract

1.1. The most significant development in the last decade so far as participating life assurance in the U.K. is concerned has been the increasing proportion of the funds invested in equity investments, i.e. ordinary shares and property, and the marked rising trend in the income from such investments associated with an even greater overall rise in their market values although there have of course been periods during which market values have fallen substantially. The fact that overall there has been a much greater rise in market values (as measured in the case of ordinary shares by Stock Exchange prices) than in dividends reflects the change from the situation up to 1959 when the dividend/price ratio of ordinary shares was greater than the yield on long term gilt-edged securities, the difference being regarded as a risk premium to cover the possibility of the current level of dividends not being maintained. Since that time the position has been reversed, the dividend/price ratio being less than the long term gilt-edged yield; this difference, known as the ‘reverse yield gap’, arises because the market value discounts expected future increases in dividend.