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Moral Hazard and the Assessment of Insurance Risk in Eighteenth-and Early-Nineteenth-Century Britain

Published online by Cambridge University Press:  13 December 2011

Robin Pearson
Robin Pearson
Affiliation:
ROBIN PEARSON is senior lecturer in economic and social history at theUniversity of Hull, England.
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Extract

Insurance is a business in which trust is the corollary of risk taking. One problem for the insurance industry in eighteenth and early nineteenth-century Britain was how to bridge the gap between the world of business based upon personal trust, and the emergence of new commercial relations where moral hazard was mass produced and where a commanding knowledge of personal reputations was virtually impossible. This paper examines the imperfect methods devised by early life and fire insurance offices to assess both physical and moral hazard and postulates a relationship between the two. The responses to two particular moral hazard “problems” identified by contemporary underwriters–insurance by the Jews and the Irish–are explored.

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Articles
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Business History Review , Volume 76 , Issue 1 , Spring 2002 , pp. 1 - 35
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Copyright © The President and Fellows of Harvard College 2002

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References

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20 In Britain, the term “assurance” was usually reserved for life assurance, while “insurance” referred to all branches of non-life business. In practice, however, the terms are increasingly used synonymously.

21 Knight, Risk, Uncertainty and Profit, 214–50.

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23 I am grateful to a referee for the following point.

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29 Hald, History of Probability, 139.

30 Drew, Bernard, The London Assurance: A Second Chronicle (London, 1949), 61Google Scholar. The London Assurance also occasionally issued polices for longer terms, up to two or three years.

31 There is an interesting parallel here between the standard insurance company view that directors, rather than medical men, could, by mere observation, perceive the state of a person's health (and character), and the contemporary belief in physiognomy, which held, for instance, the idea that portraiture should capture and instruct the viewer about the “frame of mind” of the subject in the painting. Nenadic, Stana, “The Enlightenment in Scotland and the Popular Passion for Portraits,” British Journal for Eighteenth Century Studies 21 (1998): 175–92CrossRefGoogle Scholar. See also note 1 above.

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34 Cowdray's Manchester Gazette and Weekly Advertiser, 1 May 1824.

35 Cowdray's Manchester Gazette and Weekly Advertiser, 18 Dec. 1824; Guildhall Library, London, 16222/2–3, Manchester Fire & Life Assurance, Directors' Minutes, 1825–6. The Manchester company had only sold twenty-five life assurance polices by the end of 1824.

36 Law Life Assurance, Prospectus (1823). Many offices charged extra for those who had not had the pox or for those who suffered from gout. Cf. Guildhall Lib., London, 16222/4, Manchester Fire & Life Assurance, Directors' Minutes, 22 Oct. 1828.

37 Thus 10 s percent, or ten shillings premium for every £100 insured, was charged by the Law Life for assurances of less than seven years' duration, 15 s percent for policies to run over seven years, and 20 s percent for whole life policies, while the Pelican charged 10 s percent for one-year term policies, 15 s percent for policies over one year and under seven years, and 20 s percent for whole life assurances. Law Life Assurance, Prospectus (1823); Pelican Life Office, Prospectus (1826).

38 Drew, London Assurance, 656.

39 Guildhall Lib., 21484/1, Law Life Assurance, Directors' Minutes, 24 May, 13–27 June 1823.

40 Law Life Assurance, Prospectus (1828).

41 Drew, London Assurance, 70–1; Guildhall Lib., London, 16222/3, Manchester Fire & Life Assurance, Directors' Minutes, 29 Mar. 1827.

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44 These tables were used in Baily, Francis, The Doctrine of Life-Annuities and Assurances (London, 1810), xiv–xxv, xlGoogle Scholar, and by some of the new life offices founded after 1800. Cf. Supple, Royal Exchange, 130–4.

45 Only about £10 million was insured on lives by 1800, over half of this in the Equitable, compared with £206 million insured against fire. Pearson, Robin, “Thrift or Dissipation? The Business of Life Assurance in the Early Nineteenth Century,” Economic History Review 43 (1990): 236–54CrossRefGoogle Scholar; Robin Pearson, Insuring the Industrial Revolution: Fire Insurance in Great Britain, 1700–1850 (forthcoming), ch. 1; Trebilcock, Clive, Phoenix Assurance and the Development of British Insurance: vol. 1, 1782–1870 (Cambridge, 1985), 578nGoogle Scholar.

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47 Ibid., 12–13. On Morgan's “statistical inference” that the differential between the mortality in Northampton and the mortality of the Equitable's members was due to the preferential selection of the latter, see Elderton, W. P., “William Morgan, FRS 1750–1833,” Journal of the Institute of Actuaries 64 (1933): 364–5Google Scholar.

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49 There is as yet no comprehensive history of British life assurance for this period, so this statement of trends remains tentative. There were only ten life offices in existence around 1800. That number had doubled by 1815, but by 1853 a further 165 had been founded. For indications of falling income and profit margins, see Trebilcock, Phoenix Assurance, 539; Supple, Royal Exchange, 168–71.

50 This preceded, by a few years, the great expansion of statistical science in Britain during the 1830s and the rapid growth of interest in insurance among probability theorists; see Porter, Theodore M., The Rise of Statistical Thinking, 1820–1900 (Princeton, 1986), 30–6, 71–88Google Scholar.

51 Trebilcock, Phoenix Assurance, 579–84.

52 Jellicoe, Charles, “On the Rates of Mortality prevailing amongst the Male and Female Lives assured in the Eagle Insurance Company during the 44 Years ending 31 December 1851,” Assurance Magazine 4 (1854): 199–215CrossRefGoogle Scholar. There remained a tension between the drive for professionalization and actuaries' resistance to standardization and attempts to reduce their science to mere quantification; see Alborn, Timothy L., “A Calculating Profession: Victorian Actuaries among the Statisticians,” in Power, Michael, ed., Accounting and Science: Natural Inquiry and Commercial Reason (Cambridge, 1994), 81–119Google Scholar; Porter, Theodore M., Trust in Numbers: The Pursuit of Objectivity in Science and Public Life (Princeton, 1995), 101–13Google Scholar. I am grateful to an anonymous referee for the latter references.

53 The following is based upon an analysis of the records of nearly fifty British fire insurance offices between 1700 and 1850. This represents most of the surviving archives of this industry, and accounts for about 30 percent of the total number of offices founded during this period. See Pearson, Insuring the Industrial Revolution.

54 Supple, Royal Exchange, 85.

55 Trebilcock, Phoenix Assurance, 368, 387–8.

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58 New estimations with the limited data available suggest that “economic profits” in fire insurance–net of the opportunity cost of investing in an alternative investment, consols were generally modest, between 1 and 4 percent, but that dividend levels were relatively high compared with other sectors of business. This generosity to shareholders was largely funded by dipping into premium surpluses at the expense of building up premium reserves. See Pearson, Insuring the Industrial Revolution, ch. 9.

59 Guildhall Lib., 14022/4, Union Assurance, Directors' Minutes, 25 Sept. 1728.

60 For evidence of underinsurance and capacity constraints in insuring industrial property, see Pearson, “Fire Insurance and the British Textile Industries.” Reinsurance was the “laying off” of unwanted portions of risks by insurance offices to other insurers (reinsurers). For its early history in fire insurance, see Pearson, Robin, “The Development of Reinsurance Markets in Europe during the Nineteenth Century,” Journal of European Economic History 24 (1995): 557–72Google Scholar.

61 Guildhall Lib., 12160A/1, Imperial Insurance, Directors' Minutes, 3 Aug.–28 Sept. 1803.

62 Guildhall Lib., 14116, Sun Fire Office, Simplified Profit and Loss Accounts.

63 Guildhall Lib., 8746A, London Assurance, Fire Assurance Annual Accounts. “Apparently” is a necessary qualifier because the random nature and incompleteness of record survival makes such judgments about what contemporaries had at their disposal always uncertain.

64 I am grateful to an anonymous referee for this point and for the formulation presented here.

65 Most insurance agents, upon appointment, had to provide their offices with sureties for sums roughly equating to the expected annual income of their agency, but these were intended mainly as a guarantee against default or fraud, rather than as a hedge against poor underwriting.

66 Guildhall Lib., 16222/4, Manchester Fire & Life Assurance, Directors' Minutes, 31 Dec. 1828.

67 See, for example, the cases of William Chamberlayne, John Lowry, and a Mr. Bowker, Guildhall Lib., 16222/3, 5, Manchester Fire & Life Assurance, Directors' Minutes, 25 May 1826, 9 May 1827, 1 Nov., 22 Nov. 1832.

68 Hoppit, Julian, Risk and Failure in English Business, 1700–1800 (Cambridge, 1987), 135, 171–5CrossRefGoogle Scholar; Anderson, Olive, Suicide in Victorian and Edwardian England (Oxford, 1987), 122Google Scholar; Bailey, Victor, “This Rash Act”: Suicide across the Life Cycle in the Victorian City (Stanford, 1998), 171–2, 183, 198–9Google Scholar. The estimate of the growth in bankruptcy is calculated from the figures in Hoppit, Risk and Failure, 46, table 1, and Marriner, Sheila, “English Bankruptcy Records and Statistics before 1850,” Economic History Review 33 (1980): 351–66CrossRefGoogle Scholar, table 1, col. 4.

69 On the suicide clause, see Anderson; Suicide, 266–9. After long debate, the London Assurance introduced such a clause in 1769; Drew, London Assurance, 67. For a later example with a reference to dueling, see Guildhall Lib., 16222/3, Manchester Fire & Life Assurance, Directors' Minutes, 15 Mar. 1827.

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72 Ryan, Roger, “The Early Expansion of the Norwich Union Life Insurance Society, 1808–37,” Business History 27 (1985): 166–96CrossRefGoogle ScholarPubMed; Supple, Royal Exchange, 177–8.

73 Guildhall Lib., 16170/3–4, Atlas Assurance, Directors' Minutes, 12 Dec. 1816, 3 June 1824.

74 Cited by Moss, Michael, The Building of Europe's Largest Mutual Life Company: Standard Life, 1825–2000 (Edinburgh, 2000), 43–4Google Scholar. Modern historians have agreed with this and other contemporary opinions about the poor quality and lack of Irish parochial records.

Ó'Gráda, Ireland, 5; S. J. Connolly, “Illegitimacy and Pre-Nuptial Pregnancy in Ireland before 1864: The Evidence of Some Catholic Parish Registers,” Irish Economic and Social History 6 (1979): 5–23CrossRefGoogle Scholar.

75 Guildhall Lib., 16222/7, Manchester Fire & Life Assurance, Directors' Minutes, 28 Mar. 1839,19 Sept., 26 Sept. 1839.

76 The following rests upon the account given by Trebilcock, Phoenix Assurance, 565–9, supplemented by additional research in the archives of the Pelican and other offices.

77 Cambridge University Library, Phoenix Assurance Archives, Pelican Life Office, Directors' Public Minutes, 18 July 1820.

78 Cambridge University Lib., Phoenix Assurance Archives, Pelican Life Office, Directors' Public Minutes, 15 Feb., 12 May 1825; Guildhall Lib., 12162A/1, Alliance Assurance, Directors' Minutes, 26 Apr., 6 Sept. 1826. Unfortunately the contents of the Alliance report have not survived.

79 Cited by Trebilcock, Phoenix Assurance, 566.

80 Cambridge University Lib., Phoenix Assurance Archives, Pelican Life Office, Directors' Public Minutes, 12 Dec. 1826; Trebilcock, Phoenix Assurance, 566.

81 Trebilcock, Phoenix Assurance, 567.

82 Cambridge University Lib., Phoenix Assurance Archives, Pelican Life Office, Directors' Public Minutes, 1 Sept. 1829.

83 Guildhall Lib., 16170/4, Atlas Assurance, Directors' Minutes, 1 Jan. 1828, Ansell's report has not survived; Cambridge University Lib., Phoenix Assurance Archives, Pelican Life Office, Directors' Public Minutes, 26 July 1827.

84 For example, in 1830 the Imperial Life Office and the Alliance Assurance unsuccessfully challenged in the Dublin courts claims, which they deemed fraudulent, lodged by the widow of a Dublin attorney who had died of a tumor shortly after taking out large polices on his own life. Harrison, Irish Insurance, 26–8.

85 There were contemporary parallels in the celebrated case of a fraudulent insurance on the life of the Duke of Saxe-Gotha, which involved several English life offices in 1826 and led some of them to abandon German life assurance. Campbell-Kelly, Martin, “Charles Babbage and the Assurance of Lives,” IEEE Annals of the History of Computing 16 (1994): 5–14CrossRefGoogle Scholar. My thanks to an anonymous referee for this reference.

86 Griffin, Daniel, “An Enquiry into the Mortality occurring among the Poor of the City of Limerick,” Journal of the Statistical Society of London 3 (1840): 305–30CrossRefGoogle Scholar.

87 Supple, Royal Exchange, 177–8.

88 Pearson, “Thrift or Dissipation?” 247, table 5.

89 Guildhall Lib., 14281/2–3, Guardian Assurance, General Court Minutes, 2 Feb. 1827, 4 July, 1 Aug. 1828; Tarn, A. W. and Byles, C. E., A Record of the Guardian Assurance Company Limited, 1821–1921 (privately printed, London, 1921)Google Scholar.

90 Guildhall Lib., 16222/2, 4, Manchester Fire & Life Assurance, Directors' Minutes, 24 Oct., 17 Nov. 1825, 8 Jan. 1829.

91 Harrison, Irish Insurance, 22.

92 Moss, Standard Life, 43; Pearson, “Thrift or Dissipation?” 247, tab. 5. Even after a thorough review of its Irish business during the Famine, and the dismissal of its Cork agent for fraud, Ireland continued to account for 16 percent of Standard Life's new business in the early 1850s. Treble, J. H., “The Record of the Standard Life Assurance Company in the Life Assurance Market of the United Kingdom, 1850–64,” in Westall, Oliver M., ed., The Historian and the Business of Insurance (Manchester, 1984), 95–113Google Scholar.

93 Guildhall Lib., 16222/8, Manchester Fire & Life Assurance, Directors' Minutes, 24 Mar. 1843.

94 For one of many examples, see Guildhall Lib., 14022/16, Union Assurance, Directors' Minutes, 9 Jan. 1782.

95 4 Geo. III c.14.

96 Calculated from clerks' reports in Guildhall Lib., 8666/24–28, Hand-in-Hand, Directors' Minutes, 1780–1800, passim.

97 Leeds City Archives, acc. 3393, box 41, Leeds & Yorkshire Assurance, Secretary's Letterbook, Jonathan Wilks to Samuel Baines, 24 Mar. 1825.

98 Ibid., Jonathan Wilks to George Phipps, 17 Oct. 1825.

99 The level of underinsurance maintained by the fire offices was usually in the order of about 25 percent of the replacement value of the property. The “average clause” inserted into policies stated that if the value of goods insured in a policy was greater than the sum insured, and the goods were not totally destroyed by a fire, the insurer would only be liable to pay out that proportion of the loss which the sum insured bore to the whole value of the goods at the time of the fire. For an example of this clause, see Guildhall Lib., 8735/6, London Assurance, Fire Committee Minutes, 14 Dec. 1804.

100 Dickson, P. G. M., The Sun Insurance Office, 1710–1960 (Oxford, 1960), 80Google Scholar.

101 For examples, see Guildhall Lib., 14022/12, Union Assurance, Directors' Minutes, 9. Oct., 11 Dec. 1765; Guildhall Lib., 8735/4, London Assurance, Fire Committee Minutes, 11 July 1783. On loss adjustment, see Carter, E. F. Cato, Order out of Chaos: A History of the Loss Adjusting Profession, Part I: Evolution and Early Development (London, 1984)Google Scholar.

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103 Guildhall Lib., 11932/13, Sun Fire Office, Committee of Management Minutes, 12 Oct. 1786; Trebilcock, Phoenix Assurance, 144–5.

104 There were also two widows and a “gentleman.” Details of claimants and sums paid to them from Guildhall Lib., 11932/13, Sun Fire Office, Committee of Management Minutes, Sept. 1786–Jan. 1787 passim.

105 Trebilcock, Phoenix Assurance, 145; Guildhall Lib., 11931/8, Sun Fire Office, General Committee Minutes, 4 Mar. 1802.

106 Some five thousand Jewish households in London c.1800, each insuring a minimum sum of £100 on buildings or goods, would have constituted a sizable market of half a million pounds.

107 Beck, Ulrich, Risikogesellschaft: Auf dem Weg in eine andere Moderne (Frankfurt, 1986), 38–42Google Scholar.

108 Die “Verwissenschaftlichung der Risiken,” Beck, Risikogesellschaft, 73.

109 Beck, Risikogesellschaft, 77, 259.

110 Blunt, H. P., “The Moral Hazard in Fire Insurance,” Journal of the Insurance Institute of Great Britain and Ireland 10 (1907): 97–126Google Scholar, cited by Litton, Crime and Crime Prevention, 104.

111 Litton, Crime and Crime Prevention, 110. For a recent discussion about the rights and wrongs of “moralizing” in underwriting, see the exchange of letters in CII Journal (March 1998): 6–7; (July 1998): 6–7.