Death and the salesmen looks at how changes in longevity are leading to new financial instruments — but longevity and finance go way, way back together:
The uncertainty about life span has existed since the start of modern finance. The very first time that the British state issued a bond — back in the 17th century to fund a war against France — it did so using a longevity gamble. Tucked in a glass case in the corridors of the Debt Management Office, the branch of the British government that sells national bonds, stacks of old leather files detail these bonds, known as “tontines” after a Lorenzo Tonti, a Neapolitan economist who first devised the scheme. “These were the first government bonds issued anywhere in the world,” says a senior DMO official, who has spent hours reading these dusty files, with all the passion of an amateur historian.By modern standards, the structure of these tontines was macabre. The government raised money by selling a bond, and then paid bondholders a lump sum each year, divided among the investor pool. So far, this looks similar to how modern bonds work. However, there was a crucial catch: tontines had to be held by a single, named investor — and these instruments expired when that person died. So bond payments were divided each year among the remaining tontine holders, ceasing when the last tontine holder died. Whoever lived longest collected most money — subsidised by the dead.
The government issued the first tontine in 1693, and it proved so popular that they were soon being sold across Europe. Geneva had a particularly lively tontine market. However, as the tontines piled up, they became more controversial. One problem was that they provided an incentive for murder or fraud. And while historians have not found any tangible cases of this happening, the theme permeated 18th- and 19th-century literature and lore — even providing the plot for Robert Louis Stevenson’s The Wrong Box.
A second, more important, problem was that the government kept getting its estimates of longevity wrong. When it sold the first issue of tontines in 1693, it apparently expected tontine holders to live just a few decades. That seemed a reasonable bet at the time, and the dusty leather-bound files show that the early tontine holders included men and women of all ages. But by the middle of the 18th century, investors had become more canny, with the record showing most tontines being bought in the name of girls, usually around five years old. That was because girls lived longer than boys, and because there was a high level of infant mortality until about age four.
This produced great results for the tontine holders, some of whom kept collecting money until their nineties. But it was disastrous for government finances. And eventually, the tontine scheme became so costly that the government abandoned it.
In the 19th century, the word tontine vanished from popular use. But the issue of longevity and mortality risk did not die away. Nor did some of the principles behind the first tontines. They resurfaced in the new concept of life insurance, which paid out a lump sum when policyholders died.