Life insurance and annuities have been around for centuries; in fact, basic burial insurance existed even in classical Rome. However, for the majority of this history, insurance contracts only existed as informal arrangements. Even in early modern Europe, though the lingo of modern insurance existed (there were underwriters at work, premiums paid, and indemnities claimed, etc.), the institutionalization of insurance still awaited in the future. It would not be until the early 18th century that the first insurance companies were chartered, something that could only happen after the legal basis and actuarial understanding needed for such institutions became available.
Birth of Modern Insurance
Though insurance had existed for centuries in a less structured form, the industry as it exists today substantially developed in the very late 17th and early 18th centuries. It was in that era that modern insurance was born in England, and more specifically, in English coffee houses. Curiously, many of the earliest insurance organizations were organized in coffee houses in central London, some within a mile of each other.
Consider that the insurance market Lloyds of London, which started writing marine insurance policies in 1686, was founded at Lloyd’s Coffee House on Tower Street. This was conveniently close to the wharfs of the Thames and the city’s customs house, its most important maritime properties. Perhaps the first fire insurance company, the ‘Hand in Hand Fire & Life Insurance Society’ was established at Tom’s Coffee House on St. Martin’s Lane just ten years later. It was followed by another early property insurance company, the Sun Fire Office, in 1710. That firm was founded at Causey’s Coffee House just outside St Paul’s Cathedral.
In existence alongside these early insurance firms were some of the earliest informal insurance organizations, annuity-like schemes called tontines. There was no corporate entity behind a tontine. Rather, members in a tontine paid a fixed sum which was invested by a manager. The income generated by the investment was used to fund annual annuity payments to the members. However, whereas with ordinary life annuities, the payments to a recipient end when they die and no one else has a right to them, in a tontine, payments that would have gone to deceased members are diverted to living ones. As such, recipients could expect their payments to grow as they aged; being the last survivor in a tontine with dozens of initial participants would have been very lucrative.
When it came to insurance protecting against the risk of early death, that too was still in its infancy at the end of the 17th century. Indeed, the very first life insurance contract known to historians today was entered into just a century earlier. The policy referenced the life of a man named William Gibbons in 1583 but was bought by a certain Richard Martin. Underwriting the contract were sixteen individual underwriters; this was still before the existence of insurance companies. One of these underwriting parties was actually the estate of a deceased person, the others were individuals putting their own wealth on the line in this era before limited liability.
The Gibbons contract was a £4800 one-year life insurance policy, which Martin paid £384 for. For the next two hundred years, buying life insurance on other persons, even as a form of gambling, was a common practice in Britain; the practice would only be outlawed in 1774. In the end, Gibbons died just three weeks before the policy elapsed. Although some suspicion is warranted when a third-party stands to benefit financially from someone’s death, the underwriters did not go that far and suggest foul play. Rather, the syndicate of underwriters tried to get out of paying by arguing that the contract only specified twelve months of coverage and that this should be interpreted as twelve lunar months of 28 days each. In the end, a court sided against the insurers and in favor of Martin. This was not an insignificant event in the history of insurance; it was legal precedent like this which helped give insurance a sound basis in law.
With its legal basis established, one of the last hurdles for the growth of life insurance as a ubiquitous financial product was the availability of actuarial data. After all, how could underwriters agree on proper compensation for taking on a risk, and how could insurance firms be sustained, without estimates of death rates of acceptable accuracy? For this, insurance owes a lot to Edmond Halley, the English astronomer and mathematician who, in the 1690s, prepared life tables based on data collected by a German clergyman, Casper Neumann. Halley’s life tables calculated the number of people surviving to any given age from an initial set born in a given year. This tabulation allowed for more accurate pricing of life insurance policies and annuities.
The Amicable Society
With legal and actuarial hurdles successfully leaped, the groundwork was prepared for the birth of the first chartered insurance firms. Though the birth of insurance came far earlier, the early 1700s saw the genesis of formal insurance companies. Rather than insurance contracts being written by multiple underwriters operating in syndicates, policies would be underwritten on a larger and more efficient scale by individual companies with the financial protection that came with limited liability.
To these ends, the Amicable Society for a Perpetual Assurance Office was established in 1705 by a bookseller on London’s Fleet Street named John Hartley. The former building of one of London’s inns of court was converted to serve as the company’s headquarters. Almost immediately, the Amicable Society had illustrious supporters and investors. One was William Talbot, the Anglican Bishop of Oxford. That a notable bishop backed the enterprise was quite significant. The sanction of an ecclesiastical leader was helpful in an era when many opposed life insurance on theological grounds, insisting that it was a form of gambling based on events that were in God’s domain, namely the timing of death.
Once again, the Amicable Society was not the first insurance ‘society’ but became the first chartered life insurance company when it was incorporated in 1706. The charter, issued in the name of Britain’s monarch, Queen Anne, lists the initial members of the Amicable Society, one-by-one. The list revealed a cross section of London’s professional class and its resident aristocracy, including the inventor of the steam pump, Thomas Savery, famous medical physicians James Drake and Robert Conny, the oculist to the Queen, William Read, and no shortage of baronets and dames.
As a chartered company, the Amicable Society had the rights of a natural person; it could own property and use the courts as any person could. It was not merely a collection of individuals underwriting life insurance policies together under one roof, as at Lloyds of London, but was a single economic entity. In this way, it differed from past insurance and annuity arrangements, including the tontine schemes. That said, the firm operated as a mutual insurance company; members bought insurance from the company but also received some of its investment income.
The similarities to tontines do not end with the mutual nature of the organization. The product offered by the Amicable Society was still tontine-like in many respects. Though, to be more precise, it was the inverse of the annuity-like tontines, working instead as a ‘mortuary tontine’. The Amicable Society required its members to pay premiums annually which would be passed along in lump sums to the heirs of members who had died that year. Despite the superficial similarity, it differed somewhat from how life insurance works today.
Essentially, the Society allowed up to two-thousand members when it was launched, all between the ages of 12 and 45. Each member paid six-pounds four-shillings (£6 4s) in annual premiums for each share they owned in the Society, up to a limit of three per member. At the end of each year, the collections were split amongst heirs of deceased members in proportion to the shares those members owned. In this way, the actual death benefit varied based on available collections and the number of members dying in any given year.
Nonetheless, the Society targeted an average death benefit of at least £150 and succeeded in achieving this rate and often exceeded it. To achieve the £150 target, no more than 4% of the membership could die in a single year if each paid their full premium. This arrangement reduced the underwriting risk of the organization by making benefits variable. With this feature and with life tables in hand, the Society was able to price its policies effectively.
Of course, the organization still needed to be well managed. Investments needed to be selected and new members approved or rejected. Regarding the latter, the directors of the Society were reasonably discerning of potential customers. They expected to meet prospective members in person before entry into the Society in order to inspect their health for themselves. In other cases, such as where prospective members lived far from London, they required letters of reference testifying to a member’s health and sobriety. The high cost of the insurance meant that the vast majority worked in skilled professions like law, trade, or public service and therefore about two-thirds of the Amicable Society’s members lived in or near London.
As a mutual organization, members were also shareholders with voting rights and thus had a fractional interest in the Society’s investments. While seemingly egalitarian, the mutual structure combined with the limited membership meant that prospective members could only gain entry if they acquired shares from other members. These were not inexpensive; in the early years, the Amicable Society’s shares traded for as much as £50 each, just for the privilege of paying the £6 4s annual premiums from then on.
That said, the eventual goal for the Society was that investment income would replace premium income so members could benefit from the insurance without having to continue making annual contributions. For this, the company depended on its investing acumen, which did not succeed in saving it from poor investments.
Investments
According to its meeting minutes, the investments of the Amicable Society spanned several early 17th century asset classes. Investments included allocations to malt tallies, Mine Adventure bonds, Hollow Sword Blade bonds and tickets in state lotteries. To the modern financial ear, it isn’t immediately obvious what these instruments are; however, to a financier in London in the 1710s, these would all have sounded very familiar.
Some of these instruments were investments in the public debt. For example, malt tallies were government obligations backed by revenues collected from taxes on malt, the brewing input. Tax revenues collected on malt duties were among the first revenue streams hypothecated for the purpose of paying down debt following the wars of Queen Anne and her predecessors, William and Mary. In essence, malt tallies were not unlike today’s municipal revenue bonds in the United States.
Then there were tickets in state lotteries. Starting in the last decade of the 17th century, lotteries began being used to fund English state borrowing. Unlike modern lotteries, these lottery tickets were essentially fixed income instruments. Ticketholders earned a below-market interest rate but also had a chance to win multiple cash prices. After the prizes were awarded, the price of the securities fell and yields rose to be competitive with those on other state borrowings. These investments certainly performed since the British government never defaulted in this period and interest rates fell dramatically during the first few decades of the 18th century, lifting prices of longer-term debt obligations like the state lottery tickets.
However, the Amicable Society also invested in corporate obligations, including the aforementioned Mine Adventure bonds. These were debt securities issued by the Company of Mine Adventures, a mining and smelting company chartered in 1704 and which went bankrupt five years later. The Society also invested in rather strange companies emblematic of the stock market boom underway in the early 1700s. One of these was the Hollow Sword Blade Company, a firm originally chartered by the government to make swords but which was eventually sold to investors who transformed it into a bank, breaking the Bank of England’s scarcely two decade old monopoly. The firm was also responsible for organizing the very lotteries mentioned earlier.
Nonetheless, as the Mine Adventure investments reveal, not all of the Society’s riskier investments turned out well. As it happens, the company also put money to work buying shares in the South Sea Company, the firm at the center of the stock market panic of 1720. The South Sea Company’s share price had risen from around £120 in 1719 before hitting nearly £1,000 each in August 1720. They then crashed to £100 in the span of a few weeks and drifted still lower, falling well below the £100 mark in mid-1721. The Society lost £13,000 in the crash, equivalent to the annual income of perhaps three hundred skilled craftsmen, or the cost of building a 40-gun frigate for the Royal Navy. The sum was also equivalent to one year’s premium collections from the Society’s two-thousand members.
Lesson
In truth, the early 18th century was not an easy time to be an investor. Sure, prospective returns on stocks and bonds looked high, but risks were often underappreciated and, even worse, were frequently immeasurable. Financial markets were still nascent and the availability of quality information was low, to say the least. However, it was also a financial world increasingly conducive to advances in the field of insurance. That said, though the first chartered insurance companies formed in the early 18th century, this could not have happened without the development of the legal basis and statistical sciences required for successful insurance underwriting in the 16th and 17th centuries.
More from the Tontine Coffee-House
Read about other pieces of insurance history, including how insurance built London’s bridges and about how Benjamin Franklin founded one of America’s oldest insurance companies. And don’t forget about Lloyd’s too.
Further Reading
1. “Amicable Society.” Heritage – Our History, Aviva.com, 2019.
2. Brand, Charles. Treatise on Assurances and Annuities En Lives, with Several Objections. W. Owen, 1775.
3. Clark, Geoffrey Wilson. Betting on Lives: the Culture of Life Insurance in England, 1695-1775. Manchester University Press, 1999.
4. Clark, Geoffrey. “Life Insurance in the Society and Culture of London, 1700–75.” Urban History, vol. 24, no. 1, 1997, pp. 17–36.
5. “Some Account of the Corporation of the Amicable Society for a Perpetual Assurance Office.” European Magazine and London Review, July 1801.
6. Walford, Cornelius. “History of Life Assurance in the United Kingdom.” Journal of the Institute of Actuaries and Assurance Magazine, vol. 25, no. 2, 1885, pp. 114–216.
