7/3/2015Copyright macminn.org 1 On the history and importance of life and health insurance Richard MacMinn

7/3/2015Copyright macminn.org 2 Objectives View some of the historical antecedents of life and health insurance View some of the historical antecedents of life and health insurance Consider how an individual benefits from life and health insurance Consider how an individual benefits from life and health insurance Note how the economy may benefit from insurance markets Note how the economy may benefit from insurance markets Consider the benefits of life and health insurance from an international perspective Consider the benefits of life and health insurance from an international perspective Note how economic, demographic, social and political changes affect the operation of insurance markets Note how economic, demographic, social and political changes affect the operation of insurance markets

7/3/2015Copyright macminn.org 3 A brief history of insurancehistory Code of Hammurabi, circa 1780 B.C. Code of Hammurabi Greek societies, circa B.C. Roman collegia, during Roman Republic, B.C.collegia Roman Republic

7/3/2015Copyright macminn.org 4 A brief history Medieval Guilds, circa 5-14 A.D. – This is the period from the fall of the Roman Empire to the Renaissance – In England guilds covered perils such as death, illness, capture, shipwreck, fire, etc.guilds English Friendly SocietiesFriendly Societies

7/3/2015Copyright macminn.org 5 A brief history Early European Insurers – The first mutual was the Life Assurance and Annuity Association, 1699 – The Society for Equitable Assurances on Lives and Survivorships was formed in 1765Equitable – The Globe was organized as a stock insurance company in 1803Globe – The Compagnie d’Assurance Generales sur la Vie was the second insurance company founded in France, 1819 It was a stock company as were those that followed. – The Deutsche Lebenversicherungs Gesellschaft, 1828,was the first stock life insurer in Germany Tontines, circa 1689 Tontines – Last survivor scheme for life insurance – Loreno Tonti

7/3/2015Copyright macminn.org 6 A brief history Early North American Life Insurers – The Corporation for the Relief of the Poor and Distressed Presbyterian Ministers and for the Poor and Distressed Widows and Children of Presbyterian Ministers, 1759, Philadelphia This became Provident Mutual Life Insurance Company – The Mutual Life Insurance Company of New York was founded in 1842 – The Girard Life Insurance, Annuity and Trust Company of Philadelphia was established as a stock insurance company in 1836 Girard used a new principle of granting policy owners participation in its profits. Early Asian Insurers – Meiji Life Assurance Company, 1888, was the first life insurance company to open in Japan. – Cho-Sun Life Insurance Company, 1921, was the first company capitalized and owned by Koreans – The Great Eastern Life Assurance Company Limited was founded in Singapore in 1908.

7/3/2015Copyright macminn.org 7 How do individuals benefit from life and health insurance? Life and health insurance assist saving – Insurance provides an immediate benefit if necessary that could not be achieved with saving – Insurance provides a hedge for saving by protecting it from adverse events Life and annuity products provide investment opportunities – Some life and annuity products can be reasonable long-term saving instruments These instruments safeguard death proceeds and values Some may protect against claims of creditors These instruments can provide tax deferral

7/3/2015Copyright macminn.org 8 How do individuals benefit? Annuity products provide assured income – A total saving of $100,000 at retirement could be invested at retirement and at 5% yield $5,000 per year. This of course is subject to being able to continue to invest at the same rate. This method would eliminate the longevity risk if the principal is otherwise protected. – A life annuity will utilize the principal and protect against the longevity risk Life insurance can preserve an estate – Life insurance is a natural means to provide funds to pay estate taxes

7/3/2015Copyright macminn.org 9 How does the economy benefit from life and health insurance? Life and health instruments serve as a substitute for government social security programs As financial intermediaries, insurers mobilize saving and so aide an efficient allocations of capital Insurance provides and effective hedge against adversity for individuals and firms and so promotes economic stability and growth

Insurance from an international perspective The importance of life insurance worldwide – Insurance density is the premium per capita within a country Sigma 4/2007, figure 11 Sigma – Insurance penetration is premium per currency unit of gross domestic product, e.g., total premium dollars divided by the US gross domestic product (GDP) Sigma 4/2007, figure 12Sigma 4/2007 7/3/2015Copyright macminn.org 10

What factors affect the life and health insurance market operation? Price – At least one estimate by Babbel of the price elasticity puts it in the range of.32 to.92 depending on the policy type and the price index used.Babbelprice elasticity Income – This is the most important factor for life and health insurance. – The income elasticity is generally greater than oneincome elasticity Inflation Interest rates 7/3/2015Copyright macminn.org 11

7/3/2015Copyright macminn.org 12 What factors affect the life and health insurance market operation? Demographics – Populations Populations – Aging populations: Aging populations United States United Kingdom Japan – Education – Household structure – Urbanization and industrialization Social environment Political environment Internationalization

7/3/2015Copyright macminn.org 13 Age pyramid for the United States in 2000

7/3/2015Copyright macminn.org 14 Age pyramid for the United States in 2025

7/3/2015Copyright macminn.org 15 Age pyramid for the United States in 2050

7/3/2015Copyright macminn.org 16 Age pyramid for the United Kingdom in 2000

7/3/2015Copyright macminn.org 17 Age pyramid for the United Kingdom in 2025

7/3/2015Copyright macminn.org 18 Age pyramid for the United Kingdom in 2050

7/3/2015Copyright macminn.org 19 Age pyramid for Japan in 2000

7/3/2015Copyright macminn.org 20 Age pyramid for Japan in 2025

7/3/2015Copyright macminn.org 21 Age pyramid for Japan in 2050

7/3/2015Copyright macminn.org 22 Questions The roots of modern life and health insurance are arguably found in Greek societies, Roman collegia, and the guilds of the Middle Ages. Compare and contrast the needs served by these organizations and those served by modern life insurers One life insurance policy can provide a number of benefits to a variety of people. Explain how a number of individuals may benefit from a policy on one individual’s life.individual’s life How might one assess the impact of the life insurance industry on the general economy?general economy Choose two cities in the world and speculate as to how the economic, demographic, social, and political environments are affecting the life insurance markets in those cities.