Originally published in The Leisure Hour (Religious Tract Society) vol.1 #16 (15 Apr 1852).
One of the most remarkable instances of the benefits which may be secured by the principle of cooperation, when directed to the attainment of proper objects, and developed under the guidance of sound maxims, is furnished by the success of insurance societies, especially as realized in our own country. The subject of insurance, though much more popular than formerly, is yet far from being sufficiently understood and appreciated among the community, more especially the operative portion of it; and we propose giving in the present paper a brief view of its history, nature, actual position, and economical importance.
A large source of the failures which often attend the enterprises of man, is found in those events which, because they lie beyond the reach of human control, are styled contingent. An individual may act as prudently as possible, he may work day and night with an industry which knows no rest, and yet be irretrievably ruined by a single accident. A fire at home, or a storm at sea, may destroy the fruits of many years' toil, and leave him penniless. The magnitude of such a calamity, and the uncertainty which its probable occurrence threw around every undertaking, would naturally rouse at a very early period the ingenuity of a mercantile people, and various plans would be set on foot in order to cover the contingency. Accordingly, we find the principle of insurance acted upon very early in the history of modern Europe.
It is one of the numerous offspring of the commercial spirit which characterized the middle ages. No thorough instance of insurance can be pointed out in ancient times. It is true, government sometimes came forward to guarantee from loss an individual who ventured his property in the service of the public, but this was a political, not a commercial transaction; it did not rest on a simple calculation of profit and loss. It is a matter of dispute what country has the honour of first applying the principle to the chances of commerce, but in all probability it belongs to Spain. An ordinance relating to insurance was issued by the magistrates of Barcelona so early as 1435, but by the commencement of the next century it had spread to Italy, the Netherlands, and Britain. Several articles on the subject, which are still employed on the Exchange at Leghorn, date as far back as 1523, and orders of a similar kind are in existence which were issued by Charles V. to the merchants of Antwerp. Insurance is mentioned in a statute of queen Elizabeth as having been then of immemorial usage, so that we may fairly fix its introduction into this country at the beginning of the 16th century, if not earlier. Thus far the principle had been applied exclusively to marine losses; but about a century and a half ago, its application was extended so as to embrace accidents by fire, and its results under this form have been very extensively beneficial.
A very large proportion of the consumable property of Great Britain is insured; the whole amounting, besides farming stock, to the value of 563,668,571l. A still more useful extension of the principle was made about the beginning of the last century. By a charter obtained from queen Anne, the Amicable Life Insurance Company was established in London, for the purpose of securing, in consideration of certain stipulated premiums, a sum of money to the relations of the parties insured in the event of their death. The example thus set has been extensively imitated; and fresh societies, with new, and in many cases improved, claims, are continually starting into existence. Nearly sixty offices are opened in the metropolis for the transaction of life-insurance business alone; and the whole number of lives insured throughout England, Ireland, Scotland, the British colonies, and the entire continent of Europe, is stated at 250,000.
The foundation on which all insurance societies rest is calculation applied to experience. Let us recur to the occasion which first led to their establishment—the losses which happen at sea. These were much more frequent three centuries ago than at the present time, when voyages are much quicker, and crews are provided with all the aids of recent science. Suppose that a merchant had wished to insure a vessel laden with a rich cargo. The first point would be to ascertain the amount of actual risk, in order to fix the sum which it would be fair for him to pay to the party, whether an association or a single individual, who might think proper to give him the required security. This would be at once ascertained if it were known what proportion of vessels, sailing under similar conditions, actually suffered shipwreck. Suppose this proportion had been fixed, by repeated observation, at one in sixty; the chances then that any particular vessel would meet with a fatal disaster would be as one to sixty, and the proper amount of premium to be paid would be just one-sixtieth part of its value; excluding, of course, the additional sum which would be required to remunerate the insurer for his trouble.
A similar course must be taken in order to ascertain what is equitable for a person, who wishes to insure his life in a certain amount, to pay in the shape of premium. Life insurance may be effected either by the payment of a single sum, or that of smaller sums annually. In both cases, the first thing requisite is to ascertain the average age which is reached by individuals in the same state of life as the one desirous of being insured. Supposing this to be fixed at forty-five, that the sum for which the person is desirous of being assured is 100l., and his present age twenty-five, the premium he would have to pay is just that which, if put out at a certain rate of compound interest, would in twenty years amount to 100l., together with what would be required for profits. The more usual method is, however, to pay smaller sums annually. In this case, the amount of each annual payment must be such that the sum of all for twenty years, calculated at compound interest, would produce 100l., the policy required.
In order to secure the stability of any association established for the purpose of insurance, it is of the first necessity that the facts which it assumes should be correct. If, for instance, the proportion of casualties at sea, which is adopted in framing its scale of charges, should be less than the real average, it will, in all probability, be soon overwhelmed with very severe losses. If the number of vessels lost amounts to one in forty, instead of one in sixty, the calculation on which it is based will be wrong to the extent of one-third. By assuming a proportion higher than the real average, a similar wrong would be perpetrated upon the assured. In order to escape both evils, it is requisite to make our observations wide enough. Here statistics appear pre-eminently as a branch of the inductive sciences. To establish any scientific truth, it is well known that we must interrogate nature by examining facts; and those principles are the best proved which have been gathered from an observation of the greatest number. If we draw our conclusions from single facts, or from a very few, or even from many in the same circumstances, we might overturn some of the best-established truths in the range of experience. If we confined our attention, for example, to the phenomena of the torrid zone, we might easily prove that water is incapable of being congealed, and it would be only by examining a greater number and variety of instances that we should discover our error.
If, during the past year, a single house had been destroyed by fire in a town containing a thousand houses, it would be premature to conclude that fires happened in the proportion of one a year, or that one in every thousand would represent the amount of risk which an insurer would incur. But if the same were found to hold good during a course of fifty years, there would be sufficient reason for assuming it as the proper ratio. By watching a thousand lives we might come to the conclusion that one individual out of every three arrives at the age of fifty; this, however, would afford very unsafe data for our calculations: but if, on extending our observations to five hundred thousand or a million, and carrying them a century back, we find, with proper allowances, the same rule apply, we may be entitled to regard it as sufficiently correct for all practical uses. On this score the public need anticipate little danger. Tables of mortality have been constructed with so much care, that events which seem to happen in obedience to no law, are characterized, as a whole, by all the certainty of science. A change in-the ratio of mortality may be expected in the future, but it will be one for the better. As the improvements which have taken place in medical science, and the sanitary regulations of towns, have issued in a marked prolongation of human life beyond the average term of two centuries ago, we may expect, from the same cause, a progressive diminution of disease, and increase of longevity. Now this will evidently tend to enlarge the profit of societies, which have been established on the supposition that the existing rate of mortality will continue, and must ultimately result in a lowering of the scale of premiums.
When once an insurance society is based on sound principles, the greater the number of its members the safer and more profitable will it become. Among a few there is no room for the development of the law of compensation, by which a loss in one direction is made up by a gain in another. The wider the range of operations, the more perfect will be the balance between the occurrences of all kinds. If the members of an insurance society did not exceed fifty or a hundred, and dwelt chiefly in the same locality, an epidemic disease might sweep all away in the course of a single year; but if they amounted to five or ten thousand, and were distributed all over the country, the superior healthiness of another neighbourhood might make up for any loss incurred, and render it almost imperceptible.
Though the fundamental principles of every insurance society must be the same, yet considerable variation may be permitted in point of constitution. In this respect, existing companies may be distinguished into three kinds:—The Proprietary, the Mutual, and those which, partaking of the peculiarities of the two former, may be termed the Mixed. On the proprietary system, a number of persons subscribe as shareholders to a common fund, which is invested, as a guarantee to the assured that the amount of every policy shall be duly paid. In return for this guarantee, they appropriate the profits of the entire concern, binding themselves simply to meet the stipulated demands of the assured as they become due. On the mutual system, no fund whatever exists apart from that which is formed by the premiums of the assured; the latter are themselves the shareholders, upon whom the entire control and responsibility of the institution devolve, and they divide among themselves the aggregate profit or loss. Those societies which are called "mixed," consist of a body of shareholders distinct from the assured, who appropriate, not the whole of the profits, but a certain share; while the rest is divided, in accordance with specified rules, among the insured. While the entire question of life insurance was an experiment, it was natural that the proprietary form should be preferred, but at the present time a large proportion of existing insurance societies adopt the mutual system, and many of these, though presenting as low a scale of premiums as others which rest on a proprietary basis, give every indication of success. The fact is, that the tables of mortality most commonly employed, having been compiled chiefly by gentlemen connected with the business of insurance, err, as it is quite likely they should, on the safe side; and, in addition to this, a considerable allowance is often made, so as to place the stability of an association beyond all doubt. Hence, in the ordinary course of things, very considerable profits may be expected; amply sufficient, as some think, to dispense with the guarantee afforded by the creation of a separate fund, and to render the principle of mutual assurance quite adequate to any exigency which may arise. It is asserted also, that societies on the purely mutual system can boast, not only of having distributed among the assured the largest amount of profits, but of being in possession of the largest accumulated funds. On the other hand, we notice that one society which has adopted a mixed constitution, deems a moderate paid-up fund preferable to the mutual principle, but thinks that "a capital of a quarter of a million of money divided into 25,000 shares of 10l. each, will be quite sufficient for every purpose, whether as affecting the efficiency of their operations, or enabling them promptly to meet all their engagements and liabilities."
It does not fall within our province to decide upon the respective merits of these rival systems; but the following facts, which are stated on good authority, will be interesting to our readers, as showing the large profits which well-conducted insurance societies can realize. An office established in the year 1806 has declared, as arising from the profits of forty-four years, 743,000l. Another, established in the year 1821, has declared, as arising from the profits of twenty-eight years, 770,0002. Another established in 1834, announces as the profits of sixteen years, 207,000l.; while three others, established in the years 1823, 1824, and 1825, declared in 1849, as the profits of the five years immediately preceding, sums amounting in the aggregate to 597,000l. These profits arise from the proper investment of the deposits of the shareholders, and the premiums paid by the insured. In the use of this money, the directors act just as private individuals possessed of the same amount would act; always aiming to make it bear the highest rate of interest which can be secured with safety. It is understood that some of the London insurance offices are among the largest purchasers of the encumbered estates of Ireland.
It is astonishing to what a variety of uses an insurance society can be applied. The advantages they offer to persons in every grade of life have only to be understood, to multiply the number of their members a hundred-fold. Its most beneficent application is that which enables a father of a family to provide for his wife and children in the event of his death. To how many cases is such an application appropriate. Take that of a person moving in the higher walks of professional life. He has, perhaps, no private fortune, but secures by his profession an income of 1000l. a year. If Providence spared his life, he might in time lay by sufficient to make a permanent provision for his family; but then life is most uncertain, and his premature removal would leave them destitute. By means of a comparatively small annual payment to an insurance office, such a person may insure his relatives at his death, whenever it happens, a sufficient sum to maintain them in comfort. This plan is equally appropriate to those whose income may not amount to more than a tenth of the above. A hundred pounds would place the widow and family of a working man in a position of virtual independence; and yet this may be secured at an outlay, if he begin at one-and-twenty, of about eightpence a week, a sum which might easily be saved by laying aside a single luxury. If it is preferred to have the benefits of insurance during life, with the design of softening the ills of declining age, this may be done by a trifling addition to the annual premium. Should a person be in circumstances which necessitated the borrowing of a sum of money—say 500l., he may provide, by means of the insurance office, for its repayment in case of death, without burdening his relatives, simply by insuring his life to that amount. In the same way, a nobleman whose estates will pass by entail to his eldest son, may secure the payment of large sums of money to the younger or female members of his family, or may provide for the extinction at his death of a mortgage with which his property may be burdened. A creditor may avail himself of life insurance to screen himself from total loss on the death of his debtor. He may feel morally certain that in a few years the latter will be able to repay him; but what will he do in the event of his death? An arrangement, by which the debtor should pay some three per cent. annually upon the amount of his debt into an insurance office, and place the policy in the hands of the creditor, would meet the case.
But the advantages of life insurance are most apparent in connexion with the provision which they enable us to make for the comfort of surviving friends. Providence charges every man with the temporal welfare of those who are bound to him by ties of blood. It is impossible for him to enter into the relation of husband and parent without increasing his responsibility; and, if we exclude the obligation of moral culture, the most important item in his account of duty is that which binds him to secure, in the event of his own decease, the comfort of those he may leave behind. How distressing the thought on a dying bed, that those whom we have been the means of bringing into existence should be left, through our want of forethought, to the scanty aid of willing but crippled friendship, or turned out as paupers upon the world. In this, as in every other matter, we have no right to calculate upon the help of Providence, unless we first make use of the various means which he has placed within our reach for helping ourselves.
In concluding these remarks, we shall be pardoned for reminding the reader that, as an immortal being, he requires assurance of a higher kind than that which merely guards him from present misfortune. As sinful creatures, we need an assurance of our interest in that blessedness which will endure for ever. Happy is it that he who only can grant us such a boon, is always willing to bestow it on those who seek it in the manner pointed out in the divine word. This assurance may be gained "without money and without price," while the prize insured is no less than eternal life through Christ Jesus.