A 17th-Century Game of ‘Survivor’
WHY YOU SHOULD CARE
Because why shouldn’t a life insurance policy be a wager on life rather than a hedge against death?
A tontine sounds like a haircut you might give a teenage monk. But for hundreds of years it was a popular, albeit macabre, form of investment used to finance everything from personal retirement to a monarch’s wars. In its purest form, the tontine was sort of a cross between an annuity, the lottery and an Agatha Christie novel. By pooling your money in a tontine with fellow investors, you were placing a bet on your own life, wagering that you would outlive your co-investors, growing your share of the pie as each one bit the dust, hoping you would be the last one standing to collect the massive pool of capital as the lone survivor.
Needless to say, the tontine provided enterprising crime novelists with a devious new motive for knocking off characters, and it has given countless actuaries something titillating to discuss at parties. But the antiquated investment device had a surprisingly lengthy run, and some scholars argue there are good reasons to bring it back … in a less morbid form.
If necessity is the mother of invention, war is its demanding father. In the wake of the Thirty Years’ War and numerous popular revolts in the mid-1600s, the treasury of King Louis XIV needed a more reliable source of income than its porous taxation system to support France’s large standing army. An ambitious Italian political exile and visionary named Lorenzo de Tonti, for whom the tontine is named, came forward with an innovative idea in 1653 based loosely on a system Italian fathers used to pool resources for their daughters’ dowries. “A gold mine for the king, a treasure hidden away in the realm,” was how de Tonti pitched it.
Sophisticated investors soon poured into the tontine market.
De Tonti proposed inviting citizens to make contributions into a central fund, which would pay out a regular age-dependent dividend to each subscriber (or their nominee) during their lifetime, with the payout increasing with the death of each fellow subscriber until, in de Tonti’s original version, the remainder eventually reverted to the French Treasury, rather than the final surviving subscriber. From the state’s perspective, if well-invested, it was pretty much like getting a long-term, no-interest loan, which ultimately was not even a loan but theirs to keep.
It may have taken decades for the French court to embrace de Tonti’s idea, as Kent McKeever, director of the Diamond Law Library at Columbia, chronicles in “A Short History of Tontines,” but by the mid-18th century, the concept had caught on across Europe in a number of forms. Some allowed subscribers to peg their dividends to the lives of famous individuals, which proved an advantageous strategy with King George III of England, who lived to 81, and rather unfortunate with Marie Antoinette, guillotined at 37.
Sophisticated investors soon poured into the tontine market, figuring out ways to game the system: for example, by nominating young girls from families with histories of longevity and forcing the state to pay out yearly dividends for decades. Speculators in Geneva even created a derivatives market for hedging one’s tontine exposure. These developments, combined with the administrative nightmare of validating deaths in the face of rampant forgery, eventually led to the demise of the state-run tontine. But smaller-scale tontines, including those in which the final subscriber rather than the state kept the remaining capital, would continue to be used throughout the 19th century as instruments for estate planning, project financing and burial societies.
The tontine model came to America’s burgeoning life insurance industry shortly after the Civil War. Sometimes referred to as “deferred dividend” policies, they provided for a “tontine period” of five to 20 years in which no dividends were initially paid out. The result? Life insurance companies were soon swimming in accumulated capital with little in the way of payout obligations, which promptly triggered a political backlash, not to mention concerns over the exploitation of policyholders. Tontines, as McKeever puts it, offended many “delicate sensibilities” as their beneficiaries were seen as “directly profiting from other people’s economic misfortunes.”
In 1906, the state of New York, which governed about 95 percent of the U.S. life insurance industry, outlawed the tontine over these concerns — and the swindling and violence it encouraged. More recently, however, the disgraced investment device has experienced something of a resurgence, at least in theory. Scholars have proposed modified tontines, including tontine pensions, which would have the potential to grow bigger as the retiree gets older and provide individuals who start saving late in life added security should they live long enough to need it. Or the tontine health insurance pool, which would encourage society’s young invincibles to bet on their own health by purchasing a health insurance policy that rewards them with a payout if they remain as healthy as they believe themselves to be.
Will these bold reform proposals eventually die out as well? As with the original tontine, it’s all a matter of waiting to find out.