Matthew Edwards follows an intriguing idea from its 17th-century origins to its 20th-century repercussions
Question: What do the following have in common Naples, Louis XIV, the Nine Years War, an iron fist, the founding of Detroit, Sheridan's School for Scandal, Robert Louis Stevenson, the Ford Cadillac, and surrender value calculations?
Answer: Fairly hard to guess from the title, is the tontine; or rather, the inventor of the tontine, Signor Lorenzo Tonti.
The tontine is, to many, no more than an obsolete word describing an obsolete concept, occasionally encountered in insurance company regulations and actuarial course notes, if only as a dusty footnote. In this article I should like to explore the history of the tontine, looking also at its influence on the development of our insurance culture.
An erudite starting point is the definition given in the Oxford English Dictionary:
A financial scheme by which the subscribers to a loan or common fund receive each an annuity during his life, which increases as their number is diminished by death, till the last survivor enjoys the whole income; also applied to the share or right of each subscriber.
A description of more panache, albeit of less accuracy, is given by RL Stevenson in his novella The Wrong Box, of which more later:
A number of sprightly youths (the more the merrier) put up a certain sum of money, which is then funded in a pool under trustees; coming on for a century later, the proceeds are fluttered for a moment in the face of the last survivor, who is probably deaf, so that he cannot even hear of his success and who is certainly dying, so that he might just as well have lost. The peculiar poetry and even humour of the scheme is now apparent, since it is one by which nobody concerned can possibly profit; but its fine, sportsmanlike character endeared it to our grandparents.
Although charming in its way, Stevenson's description fails in one important respect. The great advantage of the tontine, and one of the reasons for its popularity, was that there would normally be an annuity benefit. A typical tontine scheme would start with a fund equal to the total premiums of the 'tontiners', and pay out some predefined income from this fund (for instance, 4% of the fund), this income being shared among all survivors; thus the last survivor would enjoy a bountiful income. However, any capital remaining on extinction of the tontiners would usually become the property of whatever body had organised the tontine.
Signor Tonti and the birth of the tontine
Signor Lorenzo Tonti was a Neopolitan of whose origins little is known. Born around 1620, by 1650 he had left his homeland and achieved a position of political influence in the courts of Paris. His 'sponsor' in that world was Cardinal Mazarin, successor to the famous Cardinal Richelieu of Three Musketeers renown. Mazarin's responsibility was the financial health of France, a country whose finances were in a dire state. An inefficient and inadequate taxation system, in conjunction with the need to support one of Europe's largest armed forces, created the need for some new method to raise money. Attempts to raise taxes in the late 1640s had resulted in widespread and long-lasting rebellions, the frondes of the history books.
In stepped Tonti, with his intriguing idea. 'A gold mine for the king a treasure hidden away in the realm' was how he described it. The state would invite contributions from the people, who would be given their share of the resulting fund's income while they lived, and cease to have any fund rights on death. On extinction of the group, the capital would revert to France. The idea was not entirely his own there already existed in Italy a vaguely similar system, the montes pietatis, by which anxious fathers could subscribe to some communal arrangement to finance their daughters' dowries. However, his vision was an advance on that idea, and he had also thought about the basic aspects of equity that would entail some subdivision by age. The word tontine derives directly from his name.
Decline and fall
Although Louis XIV was eager to go ahead with this idea, the French parliament was not; it was ambivalent about a scheme based on gambling with the lives of others, although it was precisely their speculative nature that would make tontines appeal to the public. As a result, it was not until 1689, when France was engaged in the Nine Years War, that France's first tontine got under way (in fact they had been beaten to it the Netherlands had taken the idea and started a tontine in 1670). This tontine collected an impressive 3,600,000 livres actually only one-fifth of the hoped-for amount to help in France's prosecution of the war against Britain, the Netherlands, and the Austrian Habsburg Empire.
The war ended in defeat for France, and marked the end of Louis XIV's foreign expansion; Tonti had already suffered a similarly ignominious fate. He was cast into the Bastille in 1668, having incurred the wrath of Louis XIV; no specific reason for his imprisonment was ever revealed. He emerged seven years later, bereft of any influence on affairs of state. Lorenzo Tonti died in 1684, never living to see France adopt his beloved tontine.
Enrico and Alfonso, I Fratelli Tonti
By now of more interest to history was the contribution being made by his two sons to the development of America, in their positions as French navy officers. His elder son, Enrico, journeyed the Great Lakes and waterways of the north, famous for his iron fist the unfortunate result of a grenade explosion during some minor fracas of 1677. His younger son, Alfonso, carried on this tradition of North American exploration and went on to found the city of Detroit (whose name comes from the French ville d'étroit, the 'town on the narrows'). Alfonso's navy commandant was the French nobleman LeSieur Antoine de la Mothe Cadillac; as Detroit's most prestigious 'ancestor', he provided the name of the city's most famous car. But we digress
The wax and wane of the tontine
After France's experiment with the tontine, strategic military defeats notwithstanding, various other countries tried the approach. Different countries had very different levels of success; for instance, England's first tontine, in 1693, raised only around 10% of the target amount, while England's next tontine raised just 1% of the intended capital. Government tontines were sufficiently widespread in Ireland in the 1770s for Sheridan to mock them in his comedy School for Scandal: 'I hear he pays as many annuities as the Irish tontine'.
More significant than its use by governments was its use by small associations as a means of raising capital to finance building projects. Many buildings, or blocks of houses, were constructed with such a background, and many a building, street, or square still boasts the word tontine in its name.
The most natural evolution of the tontine was its adoption by life insurance companies. Its proliferation had a large part to play in the promulgation of the life annuity as the standard way of providing retirement income. The proliferation of tontines was also important in spurring increased attention to mortality investigations, because achieving adequate equity required a reasonable idea of the tontiners' expected mortality. However, continued concerns about its moral implications, and aspects of equity and 'policyholder protection', led to its demise. By the beginning of the 20th century, the tontine had largely disappeared, at least in its basic form.
Tontines in the 20th century
From the construction of buildings, the tontine moved to an exciting new area: the construction of detective stories. The tontine revolves around increased personal wealth resulting from the death of others a useful system on which to base a murder story. Robert Louis Stevenson's tale The Wrong Box is one such example, albeit atypically well written.
But even ignoring crime fiction, the tontine is still with us. If we define a tontine in a more general way than the strict dictionary definition above, for instance defining it as 'a scheme whereby those members of a group who survive or persist receive a future benefit at the expense of those who die or leave', then we see that any system of life policies whereby lapsing policyholders are underpaid to the advantage of policyholders with maturing policies is a form of tontine. The idea is also found in multi-life annuities, those where the benefit of survivorship is spread among several persons, and may be found in closed with-profit funds.
Two situations of interest involving this general tontine concept are the underpayment of surrendering with-profits policies in the UK to boost maturity payouts for survivors (coincidentally, those policies that would be highlighted in inter-company product comparisons), and the 'lapse-supported pricing' phenomenon of the Canadian life insurance industry.
Here, the most relevant product was the 'Term-to-100', a term insurance sold with a term that would take the policy cover to age 100. These policies offered very low premium rates as a result of combining no (or very low) surrender values with a significant lapse assumption in the pricing basis (typically 5%7% pa lapses).
This led to two problems for the industry a PRE problem, when thousands of surrendering policyholders realised that their surrender values (if anything) were but a small fraction of premiums paid, and an under-reserving problem for many companies. Lapse rates turned out to be much lower than those assumed by some companies in their pricing and reserving bases; adjusting the reserving bases in the light of experience caused reserves to shoot up. It was an embarrassing time for the industry. Some companies were sold as a direct result.
Perhaps we can finish with another excerpt from Stevenson's tontinesque tale, in which one of the characters describes their eccentric uncle; was he an actuary? He is "a man with a solid talent for being a bore; rather cheery, I dare say, on a desert island, but on a railway journey insupportable. You should hear him on Tonti, the ass that started tontines. He's incredible on Tonti".