The birth of life insurance

  • In 1744, two Presbyterian clergymen, Alexander Webster and Robert Wallace, decided to set up a life-insurance fund that would provide pensions for the widows and orphans of dead clergymen
  • Each of their church’s ministers would pay a small portion of his income into the fund which would invest the money
  • If a minister died, his widow would receive dividends on the fund’s profits – this would allow her to live comfortably for the rest of her life
  • But to determine how much the ministers had to pay in so the fund would have enough money to live up to its obligations, they had to predict how many ministers would die each year, how many widows and orphans they would leave behind, and by how many years the widows would outlive their husbands
  • So they contacted a Colin Maclaurin, Professor of Mathematics at the University of Edinburgh – and the three of them collected data on the ages at which people died and used these to calculate how many ministers were likely to pass away in any given year
  • They employed Jacob Bernouilli’s Law of Large Numbers which said that, whilst it may be difficult to predict with certainty a single event, such as the death of a particular person, it was possible to predict with great accuracy the average outcome of many similar events – and thus, how many ministers in Scotland would almost certainly die next year
  • Their predictions were that, of the 930 living ministers:
    • An average of 27 would die each year
    • 18 of whom would be survived by widows
    • Five of those that did not leave widows would leave orphaned children
    • Two of those survived by widows would also be outlived by children from previous marriages who had not yet reached the age of sixteen
  • They also computed how much time was likely to go by before the widow’s death or remarriage (when pension payments would cease)
  • These figures enabled them to determine how much money the ministers who joined their fund had to pay in order to provide for their loved ones
  • By contributing £2 12s 2d a year, a minister could guarantee that his widow would receive £10 a year – a hefty sum in those days
  • They also calculated that, by 1765, their fund would have capital totalling £58,348 – and when that year arrived, the fund’s capital stood at £58,347 – amazing!
  • The fund is now known as Scottish Widows and is one of the largest pension and insurance companies in the world, with assets worth over £100 billion

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.