Life Contingencies in the First Half of the Eighteenth Century (1700-1750)
We now turn again to developments in the British life assurance industry and its institutions. At the start of the eighteenth century, insurance was underwritten by private individuals, partnerships and mutual associations. The vast bulk of insurance activity at this time was in marine insurance. Life assurance was essentially a spin-off activity of the individuals and businesses that were focused on other forms of insurance.
In the early years of the eighteenth century, a number of new insurance ventures emerged. Foreshadowing a trend that was to continue until the final quarter of the century, many of these businesses were ostensibly life assurers, but actually provided a vehicle for speculation on a wide range of contingencies that could occur to third party individuals. The breadth of possible speculations was constrained by an Act of Parliament of 1711 that made insurance of events such as marriages, births and christenings illegal. But the legal concept of insurable interest was not introduced until later in the century and, in the meantime, life assurers continued to provide a vehicle for gambling and speculation on the health or otherwise of (usually famous) other people. In his review of life assurance in the early eighteenth century, Francis notes:
From 1720 much of the legitimate business had been usurped by it, policies being opened on the lives of public men, with a recklessness at once disgraceful and injurious to the morals of the country. That of Sir Robert Walpole was assured for many thousands; and at particular portions of his career, when his person seemed endangered by popular tumults, as at the Excise Bill; or by party hate, as at the time of threatened impeachment; the premium was proportionately enlarged. When George II fought at Dettingen, 25 per cent was paid against his return.
The most notable new insurer to emerge in the period of 1700-1720 was the Amicable Society for a Perpetual Assurance Office (generally known simply as the Amicable), which was founded in 1706. Like the other businesses that emerged around this time and prior to it, the Amicable’s life assurance policies were essentially a form of mutual benefaction rather than insurance. That is, rather than providing a fixed sum assured, the premiums received from all policyholders in a given year were distributed amongst the arising claimants in that year.
The joint-stock company emerged as an increasingly important form of business corporation during this era. Such companies had been formed in Britain in the previous century, mainly for the purposes of funding colonial expansion. The East India Company is perhaps the most famous example. At this time, joint-stock companies could only be established by a Royal Charter of incorporation, and permission for such a charter would usually be granted by an Act of Parliament. Typically, the Royal Charter would grant the joint- stock company some exclusive privileges in exchange for the company making a form of contribution to the state. For example, the East India Company was granted exclusive rights to trade with India in exchange for agreeing to loan the government ?1,662,000.
In 1720, an Act of Parliament gave permission for two new joint-stock companies to be created for the specific purpose of writing insurance. Royal Exchange Assurance and London Assurance were thus founded. The Act of Parliament precluded any other joint-stock company from writing marine insurance. Whilst this seemingly granted the two companies significant market power, it did not prevent private individuals from continuing to write marine insurance. As this was the long-standing practice in the marine insurance market, it did not directly impact on the established marine underwriters’ ability to compete with the new companies. But in return for the exclusive right to be the only joint-stock companies permitted to conduct insurance, the two companies agreed to pay ?300,000 each to the Exchequer. 1720 was also the year of the South Sea bubble. The first half of the year saw much activity in the forming of petitions for various new joint-stock companies amid an atmosphere of stock market speculation. Somewhat ironically, the Act of Parliament that provided the permission for the Royal Exchange Assurance and London Assurance charters was primarily focused on restraining the explosion of new joint-stock companies (it is often referred to as the ‘Bubble Act’). The act went some way to pricking the South Sea bubble, and, as a result, the new insurance corporations were founded at the very peak of a stock market boom.
The total British life assurance market of this time is estimated to have been no greater than a few thousand policyholders. Life assurance was not included in the two new insurance companies’ charters as one of the forms of insurance that the executive privilege applied to: initially, only marine insurance was covered by the charter. In the months following the granting of the charter in June 1720, the two companies’ major preoccupation was with the turbulent stock market and the need to meet scheduled payments of the ?300,000 government donation (Royal Exchange also committed, in addition, to buying ?156,000 of government stock). Following some aborted equity capital issues in the autumn of that year, Royal Exchange failed to meet the scheduled payment dates for their outstanding sum of ?200,000. The companies argued with the Treasury that their ability to pay their government obligations would be materially improved by extending their charter to include fire insurance. Life assurance was then tacked on to this application for an additional charter, and this was granted one year later.
The life assurance business written by the two corporations over the following years was small. Between 1721 and 1783, Royal Exchange Assurance generated an average annual premium income from life business of ?550. In contrast, the fire insurance business generated premiums of ?6,000 in 1730 and ?25,000 in 1780. The life assurance product offering was limited to a one-year term assurance. Though a simple product, it did represent a significant shift in practice from earlier times: the product provided genuine insurance in the sense that a specified fixed sum assured was payable on death—the insurance company now bore the mortality risk. The Royal Exchange Assurance’s pricing approach was very straightforward: a premium rate of 5 % was charged, irrespective of age. This appears to have been the norm of the era. There is no evidence of any market participant (government, corporation, mutual association or individual) directly using Halley’s or anyone else’s mortality tables to price any life assurance or annuity product in the first half of the eighteenth century.
There has been much scholarly debate as to why life insurance practice in the first half of the eighteenth century chose to ignore the developments in mortality statistics of Halley and others that had emerged in the preceding years. There are many practical factors that may have contributed to this:
- • The demand for the only life insurance product in existence at the time (one-year term assurance) appears to have been so small that it failed to provide any incentive to invest significant effort in refining its pricing.
- • In this era, age may not have been the most important factor in determining a fair one-year term assurance price. Individual risk factors such as class, career, location and health may all have been considered by insurers when deciding whether or not to write a life policy.
- • There would have been an intuitive understanding that for mortality statistics to be useful as a set of forward-looking estimates, a temporal stability in mortality behaviour was required that did not match the reality: the era was one where mortality rates could vary significantly from year to year as outbreaks of virulent diseases such as the plague came and went.
- • Even if such stability were present, it should be remembered that the lack of an inferential statistical science meant that there was no understanding of how much confidence could be placed in the estimates derived from limited sample sizes. No one knew how to ask what the standard error was in Halley’s q(60), never mind how to answer it.
Some historians have also argued that the era’s predominant use of life assurance as a form of gambling and speculation was another important factor that delayed the application of actuarial techniques to life insurance business. It is near impossible to apply conventional statistical methods to the analysis of highly specific contingencies such as whether a prime minister’s proposed tax increases will result in him being the victim of a rioting mob, or whether the king will lose his life on a foreign battlefield. Yet it may still appear odd that no attempt was made to distinguish between the typical mortality rate of a twenty year-old and 50 year-old in standard term assurance pricing. We should not, however, lose sight of the fact that, at this time, quantitative statistical data had never actually been used to do anything. The first applications of statistics to scientific problems such as astronomical observation—which arguably were more amenable to quantitative analysis as they had more statistical regularity than social and demographic behaviour—did not fully emerge until the nineteenth century.