The principle underlying all Discounted Bonus Schemes is that the ordinary full profit premium is reduced by anticipating future bonuses. These reduced premium policies are then usually allowed to participate in future bonuses but only in so far as the bonus declared exceeds that anticipated.

This class of business was first introduced in 1854, and eventually became popular with a section of the assuring public to whom the benefit of a with-profit policy at a minimum cost made a strong appeal. In the first instance the Discounted Bonus policy made its appearance in connection with a compound reversionary bonus system, but as it grew in popularity it was adopted by other offices and combined with the various methods of bonus distribution.

Exchange is, in effect, a system of perfected barter, not of goods but of their equivalent in currency, payments in one place being exchanged for payments in another. Since, however, in actual practice the total payments in the two places do not exactly balance, there arises the complication of exchange, which has been described as the price of monetary claims on distant creditors. The balance of indebtedness is either retained, at interest, to meet future liabilities, or remitted in coin, the choice of alternatives being determined by the rate of interest ruling, and the cost of remitting coin. Other things being equal, credits will be retained where the rate of interest is highest, but, where one or other of the currencies is in an unsatisfactory condition, a considerable element of speculation is introduced, while, in ordinary circumstances, exchange will only fluctuate between fixed limits, viz., those at which it becomes profitable to transmit coin, or bullion, in either direction. Apart from the differences between the respective currencies involved, these limits vary according to the distance between the respective countries, the cost of freight, commission, packing, and insurance against the risks incurred in the transmission, and the local rates of interest.

The intention of these remarks was to deal with the financial and actuarial basis of the 1918 Act with particular reference to the various funds set up under that Act.

The 1918 Act, however, did not create an entirely new financial basis to replace that of the original (1911) Act, but rather introduced important modifications in the financial structure of that Act, chiefly by the setting up of protective funds. In order, therefore, fully to understand the present position it was considered desirable to give a short sketch of the position under the 1911 Act and the circumstances which led to the passing of the 1918 Act and the creation of these protective funds.