From the life table to the state pension: how did insurance become available to everyone?
A mortality table drawn up by the astronomer Edmond Halley gave life insurance a mathematical basis, and laws passed in Germany in the 1880s turned insurance into compulsory protection for millions of workers.
You can expect a house to burn down, but how do you calculate how long a person will live? This was the hardest question in life insurance. The answer was given not by an insurer but by an astronomer famous for a comet.
How did life insurance come to rely on calculation?
In 1693 Edmond Halley published a paper in the journal of the Royal Society. Using the birth and burial records of the city of Breslau, he drew up a table showing how many of those born in one year survive to each age. With his table Halley also calculated the price of lifetime payments (annuities).
The next important step was the Equitable Society, founded in London in 1762. It set contributions according to a person's age, based on the probability of death. The society's head received the title of "actuary", and the name of the profession spread from here. According to the Institute of Actuaries, in 1776 the society valued its liabilities by the actuarial method for the first time.
How the table works (prepared by the author, hypothetical figures). Suppose 1 000 people aged 40 were observed.
| Age | Survivors | Deaths during the year | Probability of death |
|---|---|---|---|
| 40 | 1 000 | 8 | 0.8% |
| 41 | 992 | 9 | 0.9% |
| 42 | 983 | 10 | 1.0% |
If 40-year-old Rustam wants to take out one-year life insurance for 50 million soum, the "pure" contribution will be about 50 million × 0.8% = 400 thousand soum. As age increases, both the probability and the contribution increase. This was exactly Equitable's idea: not the same price for everyone, but a price matched to the risk.
Why did the state begin to intervene in insurance?
At the end of the 19th century, if a factory worker fell ill or was injured, his family was left without income. Most people could not afford to buy a private policy. Under the German chancellor Otto von Bismarck, a state solution was found:
- 1883: the law on sickness insurance
- 1884: the law on accident insurance (for injuries at work)
- 1889: the law on old-age and disability insurance
The 1889 pension system was built on contributions from workers and employers, and the state added its own share too. As the history page of the US Social Security Administration states, the retirement age was initially set at 70 and was lowered to 65 only in 1916.
This was a new type of insurance: it was no longer a voluntary purchase but compulsory protection by law, covering the majority.
Then and now
| Aspect | 18th–19th centuries | Today |
|---|---|---|
| Price of life insurance | A table drawn up from one city's data | Large population data and actuarial models |
| Who is insured | A small number of customers who can pay | Broad sections of the population |
| Who protects the worker | Mainly the family and charity | Social insurance systems |
| Who does the calculations | A handful of mathematicians | The actuarial profession |
Halley's table and Bismarck's laws led to the same conclusion: if a risk can be calculated in advance, it can also be shared among a large group.
See also
Sources
- E. Halley, "An estimate of the degrees of the mortality of mankind...", Philosophical Transactions, 1693 · a table based on birth and burial data from the city of Breslau
- "Edmond Halley, astronomer and actuary", Journal of the Institute of Actuaries (Cambridge) · Halley's table and calculating the price of annuities
- Institute and Faculty of Actuaries: history of Equitable Life · the Equitable Society founded in 1762, the title "actuary", the actuarial valuation of 1776
- U.S. Social Security Administration: Otto von Bismarck (history page) · old-age insurance of 1889
- U.S. Social Security Administration: "Age 65 Retirement" · the initial retirement age of 70, lowered to 65 in 1916
- Britannica: Social security, Historical evolution · Germany's social insurance system
- Example and amounts · prepared by the author, hypothetical figures