The 18th century was a formative one in the history of insurance. In Britain in particular, insurance was increasingly being sold by specialized firms, rather than by underwriters operating independently or in syndicates. In this way and others, over the course of the century, the industry developed to become more recognizable to modern eyes. In the area of life insurance, one of the most inventive organizations of the period was the Scottish Ministers’ Widows’ Fund. The firm was founded by two Scottish clergymen who happened to have interests in demography that matched their entrepreneurship.
Ministers and Mathematics
Behind the creation of one of the most inventive life insurance operations in history were two Scots, Alexander Webster and Robert Wallace. Both Webster and Wallace were Presbyterian clergymen, active in Edinburgh in the mid-18th century. Their contributions to actuarial science and insurance came at a time when Scottish contributions to the body of scientific and philosophical knowledge were particularly great. Indeed, during the Scottish Enlightenment, Robert Wallace himself was a founding member of a debating society for intellectuals, the ‘Rankenian Club’.
The two ministers were both interested in population statistics. Webster had carried out the first census in Scotland in 1755, which reckoned the population of the country stood at 1.265 million. Wallace was at least equally interested in demography, having previously published a Dissertation on the Numbers of Mankind in Antient and Modern Times, a project which influenced the later and far more well-known work of Thomas Malthus. Perhaps foretelling his future role in creating an insurance firm, Wallace partially blamed the uncertain fate of the wives and children of deceased men as holding back population growth.
The pair’s interest in population statistics made the clergymen well suited to plan the creation of an insurance company. This was an era when insurance was still in its infancy, and life insurance schemes in particular, at least in corporate form, were few. What Webster and Wallace endeavored to create was entirely new, an accumulating insurance fund that would provide annuities to the widows and orphans of fellow clergymen.
The widows and heirs of deceased ministers were at risk of finding themselves in indigent circumstances. The only aid they were entitled to by law was a single payment in the year of the minister’s death equal to one-half year’s stipend and nothing more. A half-year’s stipend could have been as little as £22.5 since annual stipends for ministers in the Church of Scotland started at just £45. For comparison, the annual wages of a relatively unskilled laborer in Britain would have been in the area of £20, though likely slightly less in Scotland than in England.
Still finding this insufficient, the Bishop of Edinburgh set up a supplementary aid program in 1711 funded on a ‘pay-as-you-go’ basis, a form of pension scheme where investment returns do not support the distributions to beneficiaries and instead contributions into the program are the only means of covering outflows which would vary based on the amount of program contributions in any given period.
Insurance and Annuities
Webster and Wallace sought a more permanent and stable solution. Unlike alternative schemes to support widows and orphans, they envisioned a fund that would invest any surplus so that it did not have to rely on further contributions alone to fund annuity payments. However, this introduced a new problem to structuring an insurance program because the inflows into the fund and the subsequent outflows would happen at different points in time; the level of payouts could not simply be adjusted based on available contributions ex post. Thus, setting the proper insurance premium for their product ex ante posed a statistical challenge for Webster and Wallace.
Setting the proper level of the required premium raised several actuarial questions. The pair had to predict how many ministers would die each year, well into the future, and how many of those would leave widows. They also had to predict for how many years the deceased ministers’ widows would outlive them. If they had set the premium too low, funds would be exhausted. If they set them too high then the value of the insurance to the customer would be reduced. Thankfully, though hardly plentiful, there was some data on life expectancies around. The actuarial tables of the mathematician Edmond Halley had been available for fifty years, built from data from Breslau in Germany.
The ministers, together with Colin Maclaurin, a professor of mathematics from the University of Edinburgh, collected and analyzed further data from Scotland. They asked all the presbyteries in the country to submit to them the number of ministers having died in the twenty years ending March 1742 and, if applicable, the status of their widows and children. By their best estimate, of the 930 or so Presbyterian ministers alive, roughly twenty-seven would die annually. Of these twenty-seven, eighteen would leave widows and perhaps some children and five more would leave children without a widow.
Scottish Ministers’ Widows’ Fund
Armed with this data, and their entrepreneurialism, Webster and Wallace went about forming their insurance fund. The Scottish Ministers’ Widows’ Fund was established in 1748 as the ‘Fund for a Provision for the Widows and Children of the Ministers of the Church of Scotland’ by an Act of Parliament passed four years earlier. Wallace himself went to London to marshal support for the bill. The company began with a fund of £18,620 at inception and began to offer annuities of £10 a year to widows in exchange for annual premiums of just 2.5 guineas (£2, 12 shillings, 6 pence).
The company offered additional insurance; up to £25 annual annuities could be secured for beneficiaries. Children of ministers leaving no widow would receive a lump sum of ten times the annual annuity payment. Their data allowed Webster and Wallace to predict the future with astounding accuracy. They forecast that by 1765, the fund would have grown to £58,348; when that year came around, their forecast wound up being just £1 too high.
The accumulating fund was the feature that made the Scottish Ministers’ Widows’ Fund so novel. Surplus funds were invested, including in the form of loans to the insured ministers. Indeed, when the firm was founded, members were required to accept a £30 loan at 4% interest to help put the monies to use. Under the legislation, the fund was allowed to accumulate £35,000 in assets outside the almost £30,000 that would be held in the form of loans to members. Any excess funds would be paid as an additional benefit to the children of insured members. Participation in the insurance program was made optional for existing ministers but was required of new clergymen.
As a life insurer with a reserve fund, the Scottish Ministers’ Widows’ Fund was among the first modern life insurance firms in the world. There were older life insurance firms in Britain; however, they operated on a ‘pay-as-you-go’ model with no accumulation of funds. One of these was the ‘Amicable Society for a Perpetual Assurance Office’ which, at the end of each period, split premium collections amongst the heirs of deceased members. This meant that payments to beneficiaries would vary based on the amount of that period’s premium collections.
The Scottish Ministers’ Widows’ Fund proved very successful. Though optional for existing clergy, the vast majority chose to buy insurance; 827 of a possible 962 opted to participate. The early success did not stop with the Church of Scotland; every Scottish university then in operation also voluntarily joined the insurance scheme. At the time, many professors at the likes of the universities of Saint Andrews, Glasgow, and Edinburgh were ministers in the Church of Scotland anyway.
The model of the Scottish Ministers’ Widows’ Fund was also copied elsewhere, including with the Presbyterian Ministers’ Fund of Philadelphia and the English Equitable Company, both in operation by the 1760s and surviving to this day in one form or another. They were inspired by their Scottish predecessor. The famous London minister Dr. Richard Price, in addition to his many other activities, was also a consultant to the English Equitable Company and corresponded directly with Webster on the Scottish company’s experience and helped to share knowledge of it more broadly.
Insurance was not new in the 18th century, but the insurance firm was still a relatively novel concept. Though it was not the first insurance firm, the Scottish Ministers’ Widows’ Fund was perhaps the first to look similar to a modern insurer, with both underwriting and investment income contributing to the financial capacity of the company. Because word of the fund spread outside Scotland, it influenced the creation of other early life insurance firms, making the Scottish Ministers’ Widows’ Fund not just one of the most inventive, but also one of the most influential, insurance operations in history.
More from the Tontine Coffee-House
Read about other early life insurers, the Presbyterian Ministers’ Fund in America and the Amicable Society in England. Life insurance schemes helped provide capital to projects, including the construction of London’s bridges and the coffeehouse that served as the first indoor location of the New York Stock Exchange. Also, consider subscribing to this blog’s newsletter here.
1. Dow, J. B. “Early Actuarial Work in Eighteenth-Century Scotland.” Transactions of the Faculty of Actuaries, vol. 33, 1971, pp. 193–229.
2. Ferguson, Niall. “Chapter 4: The Return of Risk.” The Ascent of Money: A Financial History of the World, The Penguin Press, 2008, pp. 176–229.
3. Harari, Yuval Noah. “Chapter 14: The Discovery of Ignorance.” Sapiens: A Brief History of Humankind, Harvill Secker, 2014.
4. Nagai, Yoshio. “Robert Wallace and the Irish and Scottish Enlightenment.” The Rise of Political Economy in the Scottish Enlightenment, 2003, pp. 55–68.