This week’s book learning is part 7 of a 12 part series on The Ascent of Money by Niall Ferguson. (Parts 1, 2, 3, 4, 5, 6)
Insurance was nothing more than a gamble until mathematical innovations like probability, life expectancy, normal distribution came by. Two priests, Webster and Wallace, devised insurance as a way to compensate widows of priests in Scotland. Their basis was as follows.
– The widow will be allowed to have 3 times the amount the priests paid to the insurance company during the course of his life.
– There were about 930 ministers alive at all times
– 27 died yearly, 18 left widows, 5 left children without widows, 2 left widows and children of a former marriage under age 16
– The maximum number of widows was originally assumed to be 279 assuming a constant mortality rate which they later corrected based on experience
They then created a fund with 4 levels of payments from living priests that would be invested. It was calculated in such a way that the interests alone would pay for all annuities, etc., leaving the principle amount untouched. And you know what’s amazing?
Sketch by EB
Wallace and Webster’s initial calculations (done on a piece of paper) were only off by 1 pound! This was the origin of the famous Scottish Widows insurance fund that was later acquired by the Lloyds group. Insurance companies have gone on to become the world’s biggest investors (called institutional investors). Scottish widows alone has more than 100 billion pounds under management.
A Learning a Day 