The Birth of Actuarial Science and Life Insurance, Pt. 1

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Speaker 1: Welcome to Stuff You Missed in History Class, a production of iHeartRadio. Hello and welcome to the podcast. I'm Holly Frye and I'm Tracy V. Wilson. So insurance is part of daily life for most people. You use it to help you manage financial laws, at least theoretically. You pay an insurance company for a policy. If something bad happens, that policy pays you out again. All of this theoretically and ideally one can hope that right policy will pay out right. The insurance company, in broad terms, makes money by pooling that money of its policyholders that it collects. It creates an investment portfolio, and then they use that to make money. Both sides of this arrangement are trying to manage their risk throughout, which brings us to actuarial science, which is of course all about calculating risk, risk of injury, illness, death, risk of life, market shifts, and financial outcomes. And I find actuary science fascinating, although sometimes slightly depressing, because it kind of takes all of the rich tapestry of life and boils it down to numbers and tables and formulas. But our reality is so deeply shaped by these things. So it got me thinking recently, where did these practices start? Because it's the beginning of the year. A lot of people's insurance. If you're like covered by group insurance with your work, sometimes those change at the beginning of the year, or your policy just changes, even if it's like with the same company. And I just have been thinking lately about it sounds so simple, like, wow, who does all the math on this? Yeah? Right, But somebody has to do all the math on that. So we're talking about actuary science and insurance and where these things kind of got their start in the sense that we know them today, and just as a level set, we're doing a two parter, but it's still just raising the surface of all of this. If you start looking for information on actuarial science history or insurance history, you will realize they are about two kajillion papers written every year about it's that's the real number. I just made up, two kajillion. So we're trying to like just kind of touch on an idea of how we got to the point that we're at today, and we'll talk about some of the more interesting jumps forward as well as some stumbling blocks to this whole thing. That is so much of a part of our lives. And before we even get started, we have a brief note about vocabulary because the words assurance ass you are a NCEE and insurance I N s U are a ncee both come up in this episode. A lot of times these are used interchangeably. I like people use the word insurance for both of these a lot of the time. But there are differences, Yeah, there are differences between these two. Primarily, assurance deals with something that is definitely going to happen, like death. We're all eventually going to face that moment, except nandor. Insurance, on the other hand, deals with things that might happen, like a car crash or flood damage. So insurance also covers a term, and that's why you have to renew your policy, say once a year or every six months or at some other interval. The generalized usage of these words has made this distinction really fuzzy, like in the case of whole life insurance. Because whole life insurance includes a cash savings element that the policyholder can use before their death, it is called insurance even though there is also a payout portion of the policy that happens when the inevitable end of the policyholder's life arrives, so that might be considered assurance with an A if the policy weren't set at a specific term, And in casual conversation today, most people would probably use the word insurance, as I said, even when talking about things that are technically assurance. So we wanted to just level set a little bit because most of the policies and organizations that we're talking about today are really focused on what we would probably called life insurance, but in the historical record they are called assurance with an A. Yes, and some of that is we'll talk about assurance societies and how those are a little bit different. But London is generally recognized as the place where life insurance was born, and from there it spread throughout the globe via trade. But even before there was insurance or actuary tables, there were bills of mortality and these were weekly reports issued by parish clerks in London that list, most did the numbers of deaths in a given perish and their causes, and this practice began in the sixteenth century as a way to track disease. In sixteen sixty five, John Bell Clerk to the company of parish clerks compiled a book titled London's Remembrancer, or a True accompt of every particular week's Christenings and mortality in all the years of pestilence, within the cognizance of the Bills of Mortality, being eighteen years taken out of the Register of the Company of Parish Clerks of London, and together with several observations on the said years and some of their precedent and subsequent years, published for general satisfaction and for prevention of false papers. And in this he wrote about the Bills of Mortality quote, the Bill of Mortality is a very great use and necessity, and therefore not to be slighted, since it so much conduceth to the health of the city and preservation of the members thereof, in that it giveth the general notice of the plague and a particular act of the places which are therewith infected, to the end such places may be shunned and avoided. So the years of the publications of these they were not unbroken, but they were issued into the mid nineteenth century by some of the parishes. But though these were counts, they didn't really analyze the information in any kind of way, and things like ages and sex weren't usually included. Additionally, they came under a lot of criticism due to how they were collected and how the data was collected. This job normally fell to elderly ladies who were willing to help out the parish clerks, and while Bell defended this practice due to the fact that the women were selected by men of good judgment, there's some layers of bias here, but this does mean that they're just There wasn't really a strict methodology in place for how this data was gathered, so the numbers cannot be counted on to be accurate. Yeah, it's kind of like if someone told Tracy and I both like, hey, go through your neighborhood and get account of how many people died this year. The odds are really good. We would approach that a little bit differently. And so even though you may have these like two numbers or even numbers with notations that you combine, they don't necessarily refer to the same things. So it's a little bit tricky. You could have a whole group of competent, detail oriented people not doing the thing the same way, right, and one of the earliest steps in the development of actuarial science is from what to me was a somewhat surprising source. That's a man more associated with astronomy, and that is Sir Edmund Halle. Halle has come up on the show before, so we're not going to rehash all of his details, but in brief, he was born on November eighth, sixteen fifty six, and he was still a child when Charles the Second granted the charter that established the Royal Society, So he grew up in kind of an interesting time Scientifically, he attended Queen's College and he was encouraged into astronomy through astronomer Royal John Flamsteed. Hallie published his Star Catalog in sixteen seventy eight and was elected into the Royal Society that same year. He famously identified the cycle of a comet that would eventually bear his name. Within the Society, he became close friends with Robert Hook and Christopher Wren, and he also began his association with Isaac Newton. He later edited Principia for Newton. The work, though, that makes him Germaine to today's topic is his Population Table, which was published in sixteen ninety three. This table was made using data from the city of Breslau, Germany. Today that's in Poland, in the city now known as Vortslav, And it's a little more than three hundred and fifty kilometers or two hundred and twenty miles west of Warsaw. This table is sometimes called a life table. It's sometimes called a death table. I feel like modern scientists and researchers have all agreed that it really should just be called a population table. It gathered together the simple information based on parish records of how many people were alive at each age. Hallie gives specific numbers of people for ages one to eighty four, and then for people eighty five to one hundred years old. He kind of lumps them in as one group in a summary column, and that groups all of the population of the city by seven, So you'll have the group that is ages one to seven, eight to fourteen, fifteen to twenty one, et cetera. And this basic table shows exactly what you would think. As the number related to age advances, the number of people surviving at that age goes down. So while the Breslau record shows one thousand infants under the age of one. It shows a total of one hundred seven people living that year between the ages of eighty five and one hundred altogether, and the total samples the population was thirty four thousand. So if you're wondering why a London based mathematician and astronomer was using data from a German city, uh, it's because they were a lot more mediculous with the record keeping than most other European cities were. Additionally, this is a place with low rates of immigration and immigration, so it was a good model of population over time for this one particular group. Part of that degree of isolation came from the fact that Breslau had a primarily Lutheran population at a time when it was under the rule of the Habsburg monarchy, which was Catholic, So it makes sense that the community there just it kept mostly to itself. We're going to pause here for a quick sponsor break, and when we're back we'll talk about the ways that Hallie thought that his table could be used. So Hallie's table, as we described it may sound pretty basic, but Hallie used this data to make some important determinations. For one, he noticed that the numbers of births and deaths were pretty comparable in each year that he looked at, which ranged from sixteen eighty seven to sixteen ninety one. He also showed various ways that such a table could be useful in the paper that he wrote to accompany it, in the Royal Society's publication Philosophical Transactions. He noted that if you subdivide the population information by gender, you can assess how many men might be available to fight in military conflicts, taking into account their age, although he just divided by two to estimate the number of men versus women. Again, this sounds pretty simplistic and it is. But a paper on Halle's tables by James E. Sieka, which I hope I'm pronouncing correctly, published in the Journal of Legal Economics in two thousand and eight, noted that Halle came up with the number of zero point two six as the proportion of the Breslau population that could potentially serve in the military, and that if you use that same calculation with the population of the US when that two thousand and eight paper was written, the number doesn't come out all that different. It's zero point two four. Because Halle was mathematically establishing some pretty basic truths about the makeup of human population groups. His table has remained relevant in some uses into the twenty first century. Halle also calculated survival odds at various ages of life, as well as chances of survival past certain ages, and then he makes the important note that he suggests that life insurance could be regulated based on these statistics. In nineteen forty four, statistician Irwin Ferrin called Halle's table quote the first real step in the art of life measurement. There had been another simpler table recorded before Halle's. This was compiled by statistician John Grant in sixteen oh six. Writing about Grant's table in nineteen thirty eight, statistician and epidemiologist Major Greenwood summarized its existence and lack of detail in the Royal Society Journal of the History of Science, as follows quote in the first edition of Grant's famous Natural and Political Observations, mentioned in a following index, and made upon the Bills of Mortality, Grant included a short table reporting to give the survivors of one hundred quick conceptions at the end of six sixteen, twenty six, thirty six, forty six, fifty six, sixty six seventy six and eighty six years. The bills of mortality in Grant's time did not record the ages at death, and he reached the second industry at in his table, that is sixty four survivors at the age of six, by a rough classification of the named causes of death into those which wholly affected children thrush, convulsion, rickets, et cetera, and those which he thought about half small swinepos et cetera. Affected children below the age of six. The remaining figures are conjectural. Some statisticians hold that Grant had discovered the principle that, under certain conditions, a survivorship table could be computed from a summation of deaths and age groups. Others believe that the table is a mere guess, and not even Grant's, but a contribution to his book from his friend William Petty. There is no doubt that as an instrument of computation, the table is of little value. So while Grant was onto the idea of measuring mortality, he wasn't really rigorous enough about the data to create something that had the kind of longevity that Hallie's table did. Hallie's table has been studied and analyzed and written about for centuries, including reconstruction of the methods that researchers believe he used to compile it. It never seems to stop fascinating statisticians, in part because Halle manipulated some of the numbers in ways that were intended to smooth out the data for easier consumption by non mathematicians and also just make it all work a little better. So this included things like rounding numbers. Since he was using an average of data collected from a five year period, there would be times where the average would come out to include decimals, and you can't have zero point five of a person, so Halle rounded out. In twenty ten, David R. Bellhouse noted in his paper A New Look at Halle's Lifetable that this need to round may explain why Halle grouped people in seven year increments, because the numbers just worked out best that way. But those roundings and the logic of the groupings isn't included in Halle's writings. He hasn't really notated why he did things or when he did them, so the granularity of the data is lost unless someone goes back to the letters from Breslau, which included the population data which some people have done. Life insurance was already in play well before Hallie made this table. In eighteen eighty four, Carnelius Walford, who was an actuary and historian of the field, wrote a paper on the history of life assurance in the UK, and that paper's opening summarizes the evolution of the field to the time of his writing, and it lays out the phases that assurance had been through in its development. Quote. Life assurance is the compound growth, first of our commercial necessities, aided largely by a love of speculation, and later of our progressive civilization. For the former, rough and ready means of estimation were resorted to. For the latter, a long and elaborate course of progressive investigation was needed. The development of the business has extended over some three or four centuries, perhaps more. It has passed through three distinct phases. One the experimental period, two the speculative or transitional period, three the period of scientific exactitude. These periods, of course more or less overlap each other, but they each possess very marked distinctions. So there is a little bit of speculation about types of insurance or assurance that could or could not be considered life insurance, going all the way back to ancient Greece and Babylon, although such things are mentioned in writing. Ever since money entered into the human timeline, people have sought ways to deal with the problem of that money running out, specifically when a family breadwinner passed. This issue was sometimes addressed as a public responsibility through things like charitable funds that were intended to be dispersed to the bereft right, so think things like widow's funds or even poorhouses or orphans funds, But those were obviously less than ideal and often stigmatized. But people who provided for their families eventually started to want to take a more proactive approach to ensuring that their responsibilities were taken care of, even after they had gone those with the means to accrue savings, they could easily just leave that to their loved ones. But for people who didn't have a lot of extra money, or had some but not what they felt like was enough, that wasn't really feasible. So various deals have been made throughout history to try to set up some sort of safety net. So we're talking primarily about life insurance today, but of course, in a lot of cases insurance was not about people's lives but the loss of goods. These arrangements originated primarily in maritime scenarios where the risk of losing cargo was high. There are references to arrangements that might be considered maritime insurance, going all the way back to Babylon's Code Haimarabi. The oldest insurance policy on goods that we know of was made in thirteen fifty and was financed by a man named Leonardo Cataneo to cover a shipment of wheat that was traveling from Tunis to Sicily. Cadineo would pay out if the goods were lost at sea, but that if they made to port as planned, he would be repaid the value with interest. So he was basically getting paid to assume the risk of losing money, and that arrangement was like a lot at the time, made between individuals. There weren't any assurance societies or insurance companies. Yet there've also been insurance arrangements that were made to cover the loss of enslaved people by their enslavers, although those arrangements were more about recovering the value of humans who were perceived as property rather than lives, so they aren't generally classified as life insurance. Marine insurance on cargo was pretty common by the fifteen hundreds, but life insurance is a little harder to establish because there are just a lot more variables. So the Walford paper that we mentioned a moment ago makes the case that the experimental phase of life assurance, which we don't really have a lot of primary sources for, would have tied into the marine industries, just as insurance on cargo had. Walford explains, would make assurance deals quote against death or captivity during the prosecution of their voyage, in ensuring merchants against captivity by pirates, for in early times merchants accompanied their maritime ventures. The mode of undertaking these risks was by individual underwriters taking certain defined portions thereof at so much percent premium. There were also types of insurance that benefited not a person's next of kin should they die at sea, but their creditors. Sometimes those were taken out by the creditor. On the flip side of that, sometimes travelers lent money that they would not need on their travels to people at their point of origin. And that money would be collected with interest when they returned, but then if they didn't return, those loans became sort of a payout. The first life insurance policy that's normally cited as such was a term life insurance policy taken out to cover the life of Willie Gibbons on June eighteenth, fifteen eighty three. So he paid a small sum, reportedly thirty pounds on a policy that would pay four hundred pounds if he died within twelve months of issue. Gibbons's age at the time the policy was issued is not known, but he died on May twenty ninth, fifteen eighty four. The underwriters, who were a group of businessmen who thought they would win what was essentially a bet, tried to argue that a month is twenty eight days, and then, using that calculation, Gibbons had lived for twelve months. That argument did not fly in court, and the group was ordered to pay. The business community got a little trepidacious about life insurance for a bit after this. Yeah, there were still deals being made, but it had this gone the way that those underwriters wanted, there probably would have been a bigger explosion in life insurance earlier on the first line of that policy contract on William Gibbons, had read Richard Martin, Citizen and aldermen of London, doth make assurance and causeth himself to be assured upon the natural life of William Gibbons, Citizen, Insulter of London. Four and during the space of twelve months next ensuing after the underwriting hereof by the assurers, hereafter subscribed fully to be complete and ended. If you're wondering where the idea came from for a one year term for the policy on William Gibbons, it was from the rules set forth by the Office of Assurances at the Royal Exchange in London. That office was established in fifteen seventy five as a place where people could engage in what were called public assurances, meaning that the agreements were made there on the premises and paperwork was filed so that if there were any arguments about how the business went, it could be legally contested. And the office's regulation stated that you could only insure a person's life for one year at a time, and part of the reasoning was that up to that point, mutual contribution societies which anyone could pay into and have some sort of payout to their next of kin when they died. Were operating in a really precarious manner where all members, no matter how old or young, were being admitted under the same agreements. So if a lot of elderly people joined one year, it meant that there was a greater likelihood that the funds would significantly be depleted in the following years, and there was not a guarantee that members who joined when they were younger would benefit from their longer membership. This was part of what is considered the speculative or transitional period of insurance. There just wasn't enough scientific data to really assess the situation and make value judgments on the way that benefits were being managed. That one year limit meant that one or both parties could reconsider the agreement and its value and risks regularly, even though they didn't really have the math in place yet. In just a moment, we will talk about the way literal dice rolls played into all of this, but first we will pause for a sponsor break. Several things happened in the gap between the Gibbons Policy and the Hallie Table that started to form a more coherent picture of how insurance could actually work as a business that was a little less like a gamble. For one thing, public sanitation improved, which in turn improved health and life expectancy. The Bills of Mortality started to be seen as a data point for predictability models, although there still weren't any formulas in use to really plug that data into. It's more like just pattern recognition. Definitely more of a ViBe's and forecasting situation at this point. But then a big step forward came once again from a surprising source. A number of mathematicians interested not in life insurance but in games started to develop the laws of probability. As men like Blaise Pascal and Pierre de far Matt and many others started to consider ways to predict the likelihoods of outcomes in dice rolls. They were also advancing the mathematics that the data points held in documents like the Bills of Mortality could be used in This is the start of the phase that Walford called the period of scientific exactitude. Just two years before Hallie's table was published, an early instance of insurance fraud was tried in the London Court of Chancery, and in that case, a man named Thornborough had taken out a year long policy on a man named Edward Harwell, and Thornborough's insurance broker had collected subscriptions to underwrite that policy, with a testimonial from one of Edward Harwell's neighbors that he was in good health. Harwell died not long after the policy was issued, and the court found that Thornborough had taken out the policy on a man he knew was in poor health, and that he had no real connection to Harwill, and that he had duped the subscribers into giving up their money. And it was found to have not been the first time that Thornborough had mounted such a scheme. Remember this story. Will reference it briefly in Part two. In a way more than one hundred years after the death of Gibbons and the subsequent payout, Hallie was offering the business community a way forward that would give them a better method to determine the risks and potential benefits of issuing a policy. And he was working at a time when insurance law, while it had been around for more than a century in England, was still in its infancy. For example, several years after Halle's Table came out, there was a lawsuit that established very specific rules regarding wording in insurance contracts and what they meant. In this case, the playwright Sir Robert Howard had died on September third, sixteen ninety eight, at one a m. The time is important to the case. You have probably seen a portrait of Sir Robert Howard. Flemish painter Anthony van Dyke made a a well known portrait of him. Howard had taken out an insurance policy on September third, sixteen ninety seven, exactly one year before his death, and that policy had a term of one year. The underwriters claimed that the policy had expired when Howard died, making the case that after midnight on the evening of September second, the contract was done, so a one a m. September the third death was not covered in the one hundred pound policy. This led to a pretty fascinating judgment by the court. The phrase quote from the day of the date in the contract, it ruled meant that though it was signed on September third, it didn't go into effect until midnight, starting coverage on September fourth. If the policy had used the language from the date, it would, according to the Court, have meant that the coverage began on the day the contract was signed, and that would have ended at midnight on September second. Additionally, the establishment of timing specifics included a note from the court the days could not be argued fractionally, so the time of the day that he died did not matter. Hallie's table was in regular use less than a decade after he prepared it. The Society of Assurance for Widows and Orphans was formed in sixteen ninety nine. The idea was that its members, of which there could be two thousand at most, would each pay five shillings whenever a member died, and that would mean that the bereft would receive five hundred pounds if everyone paid their portion. And the interest of transparency, the society kept its books publicly. There was one register for the list of members and one that included a list of their family members who would receive benefits. Claims were paid out after they were approved by a group of thirteen trustees who were members who were elected to that committee on a yearly basis. When someone died, the society had to be notified immediately so that one of its members could view the body and confirm the death. Membership was contingent on certification of the subscriber's age and that he had an affidavit from a qualified person that he had quote not known not any known distemper upon him, and that he was in a very good state of health. A person could be denied membership if the trustees thought they looked sickly or elderly. Over time, additional limitations were placed on membership, including age limits. Both Halle's Table and the Bills of Mortality were used as a foundation of the Society of Assurances workability. The potential mortality rate and potential expense for members was explained in their documentation this way, quote the probable charge of this society may be thus calculated. The number of people within the limits of the Bills of Mortality are supposed by some to be two millions, by others one and a half million, by all to be at least a million. Out of these there die about twenty thousand a year, appears by the general Bill of Mortality et cetera, which is one in fifty. Supposing the number of people to be one million, Now, if but one in fifty dies out of the whole number, including women and children, sickly and infirm people, and such as are ancient and decrepit, we may reasonably calculate that not above one in fifty shall die in our society, which is to consist of such persons as are in health, and of the different ages above mentioned. And this is but forty in two thousand, so that the probable charge, when tis full, will be but ten pounds per annum. And while tis increasing in proportion to what it has hitherto done, the advantage must be very great. So that's it. Everybody gets life assurance. Of course, not not really. At this point the idea of a payment to a person's bereaved dependence was still in a pretty early phase. But that's where we're going to end things for today. On Wednesday will talk about another assurance society and the person who's considered the first actuary, and whether or not insurance is a form of gambling, which is a pretty fun discussion to have. I have a really fun listener mail. Okay, this is from our listener Erica, and it's titled Rue for the Freezer, So you know, I love it. I have to pull up a little thing on my phone because I made ready for this. Erica writes, Hi, there in an episode from like the Summer or Something, Holly mentioned a cookbook had a recipe for a large batch of rue that you kept in the freezer and scooped out as needed, and it came out perfectly every time. I cannot find the episode so I could see if the recipe made it to any show notes. Can you direct me to the instructions? Thank you, Erica, Oh, Erica, I'm here for you. Because one I love to talk about food too. This lets me talk about one of my favorite show topics of all time, Vincent Price Kay because it was his cookbook that he wrote with his wife Mary called A Treasury of Great Recipes, which is a really, really lovely cookbook because it's all of the recipes that they collected from their favorite restaurants and chefs and they put together. But they also have a lot of their good cooking tips. And of course this is a tip I keep on my phone, so I have it ready for you. It's a very short entry from the book, so I'm going to read it. It is rue for the roo. We let one half cup butter soften at room temperature. Then mix this to a smooth paste with one cup flour. The butter absorbs the flour and we end up with one of the third cup's room. This we freeze in a small pot or bowl covered with aluminum foil. When a recipe specifies to stir in one tablespoon flour mixed to a smooth paste with one tablespoon butter, we simply stir in one rounded tablespoon of our frozen room set. Yeah that's great. I will add this is an also on the subject of freezing things. Yeah, someone whose name I sadly did not write down set on our social media that a lot of gaspacho recipes freeze. Well ah, following my discussion of how delighted I was that there was gaspacho in the freezer section in Barcelona grocery stores. So again, it is wintertime. This is not the season for cold soup for me, but this summer I am definitely gonna try freezing some gaspacho. Yumo. That all sounds great? Yeah, uh, that's how you could put your roo in the freezer. I would recommend for me, not foil but an air tight container. Yeah, that would that's what I would do. I usually put mine in a pyrex with a lid, and I will say this, everybody's my lid is going to be different. I get some inflammation from wheat gluten, so I started using coconut flour in mine. That is the most velvety I've ever made, really, but it does have a little bit of a different flavor profile, So keep that in mind. But like for me, that is the one. Yeah, and you can, like I said, that's one tiny, tiny piece of a book that is full of beautiful recipes and really lovely writing and a lot of good cooking tips. So, like I said, any anything that can prompt me to talk about Vincent price, I'm gonna take it. So thank you. If you would like to write to us with questions about Vincent price or cooking that we may or may not have an answer to, or anything, you can do that at History Podcast at iHeartRadio dot com. We're also on social media as Missed in History, and you can find us for subscription in the iHeartRadio app or anywhere you listen to your favorite shows. Stuff you Missed in History Class is a production of iHeartRadio. For more podcasts from iHeartRadio, visit the iHeartRadio app, Apple podcasts, or wherever you listen to your favorite shows.