Equitable Life Assurance Society of the United States et la naissance de tontines (1868)


The year 1868 was an important one in American life insurance history. First, it marked the introduction of a mortality table based upon Amer­ican experience. This table, compiled by Sheppard Homans, Mutual’s Actuary, was designated by the New York Legislature as the minimum standard for calculating reserves and was the most widely used by American companies for this purpose until the 1940’s. It came to be known as “The American Experience Table.” Second, the Supreme Court of the United States in Paul v. Virginia decided (December term) that “issuing a policy of insurance is not a transaction of commerce,” and such contracts were not interstate transactions. This decision rather effectively blocked the existing movement for federal regulation of life insurance for more than a generation. And diird, on December 31, 1868, The Equitable announced to its agents the new “Tontine Dividend Life Assurance Policies.”

The reason for the new policies was explained in a pamphlet signed jointly by Sheppard Homans and Actuary George W. Phillips. These policies were intended primarily to accommodate those "assurants” who felt that they were destined to be long-lived and were willing to pass up immediate dividends for much larger benefits at the end of a period of years. Four ‘classes' of policies were to be issued. Under the main one, issued at ordinary life or endowment rates, no dividends were to be paid until the premiums, compounded at 10 per cent interest per annum, equaled the face value of the policy. At that time — estimated at fifteen and four-tenths years for a life policy at age thirty-five — the dividends would be applied to the reduction of subsequent premiums; and the surplus to the purchase of an annuity to continue to the termination of the policy by death or maturity. If the policyholder died before that time was reached the face value of the policy would be paid, but no dividends. Dividends of the deceased, plus all forfeitures from lapses — there were no surrender values — would be shared by the surviving policyholders. It was estimated the dividends in this class might be three times as great as previously paid by American com­panies; policyholders surviving to the dividend period would probably receive dividends sufficient to pay all future premiums and have a comfortable annuity besides.

 

The tontine idea was not new. In the 1680s, when the government of Louis XIV was desperately in need of funds, Lorenzo Tonti, an Italian physician and banker, presented a plan for a government loan under which the government would not promise to pay the principal but only interest; the subscribers to the loan were divided into classes and the survivors of each class would inherit the interest of the deceased members of that group. Thus the last survivors were handsomely rewarded. Not only France but Holland and England floated tontine loans.

Though the Equitable claimed that the tontine method was one "which has never before been practiced by any life assurance company,” the deferred divi­dend feature had been used by some British companies, including the Equitable of London, and advertised in the United States by the American Tontine Life and Savings Insurance Company of New York earlier in 1868. But giving the policyholder the entire reserve on his policy and a full share of the profits was new. And Equitable was the first company to feature the new plan in a big way. It received wide publicity in the insurance press and in the newspapers. Superintendent William Barnes of the New York Insurance Department said: “The scheme seems to be so natural and applicable to certain classes of policy­holders, that like many important discoveries in science and art, the wonder is how could it have remained so long dormant and undiscovered."

Though Sheppard Homans was joint author of the new plan, his company, Mutual, was not at first interested in it. David P. Fackler, Homans’ assistant, called the system "speculation in forfeitures,” and Elizur Wright, though admitting the mathematical soundness of the plan, said that it was designed to make the richer portion of the policyholders richer by making the poorer part poorer, and called it “life insurance cannibalism.”

The Tontine Dividend Policies were Henry B. Hyde’s answer to Mutual's “annual dividends ’; it was a major coup. Here was a system under which those who retained their policies would reap a large reward; a system under which one could win by living rather than by dying. It far overshadowed in its appeal the talking points of competing companies such as premium notes, “rock-bottom rates” and annual dividends. The gauntlet of challenge had been flung with a flourish, and Henry B. Hyde must have taken peculiar satisfaction from the fact that Sheppard Homans’ name had been attached thereto. The Tontine wars were on — to cause a great stir in the life insurance world, and some trouble.

Equitable’s tenth anniversary was well publicized by the press. Vice-President Hyde had attended to that. The newspaper stories emphasized not only the rapid growth of the Society but went into some detail in regard to the methods of its operation. The World said that Equitable was writing more new business an­nually than all the leading British companies combined, and probably more than any other company in the world. The last part of this statement was corroborated by the Society’s report at the end of the year, which showed $51,021,141 of new business written in 1869, or more than any other company had written. Insurance in force stood at $134,223,861, which elevated the Society to third place, behind only the older Mutual and the Connecticut Mutual. Though Equitable had readied first rank in new business in ten and a half years, almost seventeen years more would be required to place it first in total insurance in force.

 

Extrait de Carlyle Buley, The Equitable Life Assurance Society of the United States, New York, Appleton-Century-Crofts, 1959, p. 27-29

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