ZRise and Fall of Life Insurance
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| Hammura |
Life insurance was a comparatively late arrival on the insurance scene, and grew out of experience with maritime risk pooling. The first life insurance company was the Presbyterian Ministers Fund, a Philadelphia institution if there ever was one. Only ministers could be insured by this fund, however, and the Insurance Company of North America seems to have been the first company to sell life insurance to all comers. Even the Presbyterians would have to admit that limiting the risks to a particular occupation skirted the present tendency to regard "adverse risk de-selection" as a no-no, excluding as it undoubtedly did, women and blacks. On the other hand, the concept was totally new; no insurance at all would have been attempted if it had been impossible to limit the risk.
Insurance has spread to many other topics, but it remains true that life insurance has one central unique feature. It is absolutely certain that the customer will die, the policy will be cashed in, and the only uncertainty is when it will happen. After a while it became evident that premiums would be collected until the final date, and could be invested until it happens. When the pool of customers gets large enough, there is almost perfect predictability about the average age at death, so the bigger the company the safer it should be.
There is one great flaw in this system, lying in the fact that the person who buys the policy and receives the assurances will not be around to complain about any failures of those assurances at the time the policy is cashed in. The growth of life insurance was therefore slow until the Civil War suddenly convinced people there were unpredictable risks around. Unfortunately, abuses of the system by fly-by-night companies in the last half of the Nineteenth Century led to heavy government regulation of the industry. Philadelphia's reputation for integrity rapidly expanded its dominance of insurance, but could not prevent the heavy hand of regulation from holding it down, particularly after the Populist movement came to recognize the strategic power of the state Insurance Commissioner. The commissioner was originally charged with seeing that an insurance company did not go bankrupt by charging low-ball prices, but in time that mandate gradually changed to holding down the premiums. In the insurance capital of the country, stockholder returns and executive salaries gradually went from too fat to too thin. Insurance companies, one by one, moved to other states or at least to other counties. It is now possible to wander through the abandoned executive suites on the top floors of the former insurance palaces, and feel as though you were at Luxor, wandering through the abandoned Egyptian temples of Karnak.
To be fair about it, it is also possible to have a real estate agent take you through the former estates of life insurance entrepreneurs whose business practices amply justified a regulatory over-reaction. Plenty of old retired lawyers will be glad to tell you of the times they wrote new insurance laws for their insurance client, who just forwarded them to Harrisburg for enactment -- before the Second World War. But the destruction of the industry does no one any good, and it is surely fair to say that excessive profits were the lesser of the two evils.
Setting the regulatory risk to one side, the life expectancy of Americans has dramatically lengthened in the past century, nearly eight years in the past fifty years. Such unpredictable reduction of risk ought to lead to increased profitability for the insurer, but it also leads to a shift to less profitable term insurance. The young buyer can see a period of several decades of dependent children, followed by a long period of life when the death of the client is a less tragic future. Indeed, living too long becomes a concern, outliving the accumulated savings. When the investment manager of the company is faced with a choice of more safety or greater investment return, he must produce a mixture of the two, an impossible assignment. And so, insurance business drops off as clients wander away toward more glowing promises, or at least toward promises unconstrained by the growls of a consumer-driven insurance commissioner. During the Great Depression of the 1930s, only two life insurance companies went bankrupt, so at least the old way of running these companies produced safety. But the 1930s now seem a long time ago.
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