Hostname: page-component-586b7cd67f-t7fkt Total loading time: 0 Render date: 2024-11-26T02:57:47.734Z Has data issue: false hasContentIssue false
  • English
  • Français

Portfolio choice and longevity risk in the late seventeenth century: a re-examination of the first English tontine

Published online by Cambridge University Press:  22 October 2014

Moshe A. Milevsky
Moshe A. Milevsky*
Affiliation:
York University, Canada
*
M. A. Milevsky is an Associate Professor of Finance at the Schulich School of Business, York University, and Executive Director of the IFID Centre, 222 College St, 2nd Floor, Toronto, ON M5T 3J1, Canada, [email protected]; web page: www.MosheMilevsky.com.
Get access Rights & Permissions [Opens in a new window]

Abstract

Tontines and life annuities both insure against longevity risk by guaranteeing (pension) income for life. The optimal choice between these two mortality-contingent claims depends on personal preferences for consumption and risk. And, while pure tontines are unavailable in the twenty-first century, the first longevity-contingent claim (and debt) issued by the English government in the late seventeenth century offered a choice between the two. This article analyzes financial and economic aspects of King William's 1693 tontine that have not received attention in the literature. In particular, it compares the stochastic present value (SPV) of the tontine vs the life annuity and discusses characteristics of investors who selected one versus the other. Finally, the article examines the issue of whether high reported tontine survival rates should be attributed to anti-selection or fraud. In sum, this article is an empirical examination of annuitization decisions made by actual investors in the late seventeenth century.

Keywords

annuitiespensionsmortality-contingent claims

JEL classification

G10: General
Type
Articles
Information
Financial History Review , Volume 21 , Issue 3 , December 2014 , pp. 225 - 258
Check for updates
Copyright
Copyright © European Association for Banking and Financial History e.V. 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Sources

BRITISH HISTORY ONLINE, available at www.british-history.ac.uk (accessed 19 November 2012).Google Scholar
NATIONAL ARCHIVES (catalogue no. 30/8/277), Chatham Papers.Google Scholar

References

ANONYMOUS (1749). A List of the Names of the Several Nominees with their Ages Subscribed, England Laws and Statutes, VIII. British Library reference no. 213.i.1.106.Google Scholar
Alter, G. (1983). Estimating mortality from annuities, insurance and other life contingent contracts. Historical Methods, 16(2), pp. 45–58.Google Scholar
Alter, G. (1986). How to bet on lives: a guide to life contingent contracts in early modern Europe. Research in Economic History, 10, pp. 1–53.Google Scholar
Benartzi, S., Previtero, A. and Thaler, R. H. (2011). Annuitization puzzles. Journal of Economic Perspectives, 25(4), pp. 143–64.Google Scholar
Cannon, E. and Tonks, I. (2004). UK Annuity prices series, 1957–2002. Financial History Review, 11(2), pp. 165–96.Google Scholar
Ciecka, J. E. (2008a). The first mathematically correct life annuity valuation formula. Journal of Legal Economics, 15(1), pp. 59–63.Google Scholar
Ciecka, J. E. (2008b). Edmond Halley's life table and its uses. Journal of Legal Economics, 15(1), pp. 65–74.Google Scholar
Compton, C. (1833). A Treatise on Tontine: In which the evils of the old system are exhibited and an equitable plan suggested for rendering the valuable principle of tontine more beneficially applicable to life annuities: with an account of the successful operation of the General Annuity Endowment Association. London: J. Powell.Google Scholar
Deparcieux, A. (1746). Essai sur les probabilités de la durée de la vie humaine. Paris: les Frères Guérin.Google Scholar
Dickson, P. G. M. (1967). The Financial Revolution in England: A Study in the Development of Public Credit, 1688–1756. London: Macmillan.Google Scholar
Finkelstein, A. and Poterba, J. M. (2002). Selection effects in the United Kingdom individual annuities market. Economic Journal, 112, pp. 28–50.CrossRefGoogle Scholar
Finlaison, J. (1829). Report of John Finlaison, Actuary of the National Debt, on the Evidence and Elementary Facts on which the Tables of Life Annuities are Founded. London: House of Commons.Google Scholar
Grellier, J. J. (1810). The History of the National Debt from the Revolution in 1688 to the Beginning of 1800: With a Preliminary Account of the Debts Contracted Previous to that Era. Reprinted New York: Burt Franklin, 1971.Google Scholar
Haberman, S. and Sibbett, T. A. (eds.) (1995). History of Actuarial Science, vols. I–X. London: William Pickering.Google Scholar
Hald, A. (2003). History of Probability and Statistics and Their Applications before 1750. Hoboken, NJ: Wiley.Google Scholar
Halley, E. (1693). An estimate of the degrees of the mortality of mankind, drawn from the curious tables of the births and funerals at the city of Breslaw. Philosophical Transactions, 17, pp. 596–610.Google Scholar
Hargreaves, E. L. (1930). The National Debt. London: Frank Cass.Google Scholar
Heyrick, R. (1694). Accompt of the Moneys Paid into the Receipt of the Exchequer Upon the late Million Act for the benefit of Survivorship containing the Names of several Nominees, their Ages, Places of Abode, the Sums Paid upon each Nominee's Life. Printed for Samuel Heyrick at the Grays-Inn-Gate in Holbourn. British Library reference no. 514.k.2.23.Google Scholar
HISTORY OF PARLIAMENT TRUST (2013). Member Biographies 1690–1715, based on History of Parliament Publications 1386-1832. Maintained by the Institute of Historical Research. Available from Boydell and Brewer and Cambridge University Press.Google Scholar
Homer, S. and Sylla, R. (2005). A History of Interest Rates, 4th edn.Hoboken, NJ: Wiley.Google Scholar
HUNTINGTON (1792). A list of the nominees appointed by the contributors to the tontine of the year 1789, in pursuance of an act of parliament made and passed in the twenty ninth year of the reign of our most gracious sovereign King George the Third. Exchequer: Tontine Office, Reproduced from the Huntington Library.Google Scholar
Jennings, R. M., Swanson, D. F. and Trout, A. P. (1988). Alexander Hamilton's tontine proposal. William and Mary Quarterly, 45(1), pp. 107–15.Google Scholar
Jennings, R. M. and Trout, A. P. (1982). The Tontine: From the Reign of Louis XIV to the French Revolutionary Era. Pittsburgh, PA: S. S. Huebner Foundation for Insurance Education, University of Pennsylvania.Google Scholar
JHC (1803). An account shewing the total number of nominees of life rents. Journal of the House of Commons, vol. 25, 17 October 1745 – 22 November 1750. Reprinted by Order of the House of Commons.Google Scholar
KING (1730). A List of the Surviving Nominees on the Fund of Survivorship at Midsummer 1730 and their Descriptions to that Time. Printed by Henry King at the Three Crowns in Grace-Church-Street, London. British Library reference no. 8285.ee.48.Google Scholar
Kopf, E. W. (1927). The early history of the annuity. Proceedings of the Casualty Actuarial Society, 13(28), pp. 225–66.Google Scholar
Lange, A., List, J. A. and Price, M. K. (2007). A fundraising mechanism inspired by historical tontines: theory and experimental evidence. Journal of Public Economics, 91(9), pp. 1750–82.Google Scholar
Leeson, F. (1968). A Guide to the Records of the British State Tontines and Life Annuities of the 17th & 18th Centuries. Isle of Wight: Pinhorns.Google Scholar
Lewin, C. G. (2003). Pensions and Insurance Before 1800: A Social History. East Linton, East Lothian: Tuckwell Press.Google Scholar
Milevsky, M. A. (2013). Life Annuities: An Optimal Product for Retirement Income. Charlottesville, VA: Research Foundation of the CFA Institute.Google Scholar
Milevsky, M. A. and Salisbury, T. (2013). Optimal retirement tontines for the 21st century: with reference to mortality derivatives in 1693. Social Science Research Network. Available at http://ssrn.com/abstract=2271259.Google Scholar
Murphy, A. L. (2005). Lotteries in the 1690s: investment or gamble? Financial History Review, 12(2), pp. 227–46.Google Scholar
Murphy, A. L. (2009). The Origins of English Financial Markets: Investment and Speculation before the South Sea Bubble. Cambridge: Cambridge University PressGoogle Scholar
Poitras, G. (2000). The Early History of Financial Economics: 1478–1776. Cheltenham: Edward Elgar.Google Scholar
Poterba, J. M. (2005). Annuities in early modern Europe. In Goetzmann, W. N. and Rouwenhorst, K. G. (eds.), The Origins of Value: The Financial Innovations that Created Modern Capital Markets. New York: Oxford University Press.Google Scholar
Raithby, J. (1819). William and Mary, 1692: An Act for granting to Their Majesties certain Rates and Duties of Excise upon Beer Ale and other Liquors for secureing certain Recompences and Advantages in the said Act menc[i]oned to such Persons as shall voluntarily advance the Su[m]me of Ten hundred thousand Pounds towards carrying on the War against France [Chapter III Rot. Parl. pt. 2. no. 2.]. Statutes of the Realm, vol. 6: 1685–94, pp. 372–8. British History Online. 27 August 2013. www.british-history.ac.uk/report.aspx?compid=46372Google Scholar
Ransom, R. L. and Sutch, R. (1987). Tontine insurance and the Armstrong investigation: a case of stifled innovation, 1868–1905. Journal of Economic History, 47(2), pp. 379–90.Google Scholar
Roseveare, H. (1991). The Financial Revolution: 1660–1760. London: Longman.Google Scholar
Rothschild, C. (2009). Adverse selection in annuity markets: evidence from the British Life Annuity Act of 1808. Journal of Public Economics, 93(5–6), pp. 776–84.Google Scholar
Tonti, L. (1654). Edict of the king for the creation of the Society of the Royal Tontine. Trans. Gasseau-Dryer, V., reprinted in Haberman, S. and Sibbett, T. A. (eds.), History of Actuarial Science, vol. V. London: William Pickering, 1995.Google Scholar
Wagstaffe, T. (1674). Proposals for subscription of money. Reprinted in Haberman, S. and Sibbett, T. A. (eds.), History of Actuarial Science, vol. V. London: William Pickering, 1995, p. 19.Google Scholar
Walford, C. (1871). The Insurance Cyclopaedia, vol. 1. London: Charles and Edwin Layton.Google Scholar
Weir, D. R. (1989). Tontines, public finance, and revolution in France and England. Journal of Economic History, 49(1), pp. 95–124.Google Scholar
Wennerlind, C. (2011). Casualties of Credit: The English Financial Revolution 1620–1720. Cambridge, MA: Harvard University Press.Google Scholar
Wrigley, E. A. and Schofield, R. S. (2002). The Population History of England from 1541–1871. Cambridge: Cambridge University Press.Google Scholar
Yaari, M. E. (1965). Uncertain lifetime, life insurance and the theory of the consumer. Review of Economic Studies, 32(2), pp. 137–50.Google Scholar