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David Roodman's Microfinance Open Book Blog

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I've just revised chapter 3 in the same manner as I did chapter 2.

I did make one significant addition to the text (.docx, .pdf): coverage of "industrial life assurance"---life insurance for the working classes---starting in 19th-century Great Britain. Before, there was almost nothing on insurance. I really like the richness this brings. I came to appreciate that Britain gave the world two major innovations in financial services to the masses in the 19th century: savings banks (postal and otherwise) and life insurance for regular folks. These contrast with microfinance today, with its emphasis on credit. It makes me wonder if there isn't huge, exploitable potential for life insurance in developing countries now. Here are the main relevant sections (see documents linked to above for footnotes):

Britain’s second great achievement in financial services for the masses was establishing “industrial life assurance.” While savings banks arose from a charitable impulse, the sellers of life insurance to working-class people were motivated by profit from the start (if also a sense of mission). The Joint Stock Companies Act of 1844 made it much easier to start companies and sell shares to the public—perhaps too easy. The financial industry saw dozens of start-up in the 1840ss, many short-lived and no more deserving of public trust than the worst friendly societies. Historian Laurie Dennett describes the scene:

In the field of life assurance [unsound companies] seemed to succeed one another with exceptional rapidity. The Post Magazine and Insurance Monitor…, a weekly paper founded in 1840 to act as a reporter on the assurance industry and exposer of its abuses, certainly found numerous subjects for dissection….The editor on one occasion referred to an entity “brought into existence under the facilities for forming such companies by the [Act]…whose robberies amounted to £60,000,” another “composed of a low set of vagabonds, whose signatures as shareholders were procured at a pot-house for pints of beer,” and finally, one which “at the end of three years, had only £14,512 left in every shape and form out of £45,081 received in solid cash…” Charles Dickens’ “Anglo-Bengalee Disinterested Loan and Life Insurance Company” had plenty of prototypes in life, as did its dissolute President, Tigg Montague, alias Montague Tigg.

Yet from this pond scum higher life evolved. In 1852 was founded the British Industry Life Assurance Company and Family Friendly Society. Its object was to combine for the first time the retail techniques of friendly societies, especially the practice of taking weekly payments, with the scientific rigor of modern life insurance, which calibrating premiums to estimated probabilities of death at various ages. (Many friendly societies, in contrast, charged a person the same whether he was 20 or 40.) British Industry reported issuing an impressive 12,837 policies in its first half year, for an average of less than £14 each.

It appears that little information has been preserved about how British Industry marketed so effectively to the masses; perhaps it sold through existing friendly societies. More is known about the company that would soon overtake it, then take it over. The Prudential Mutual Assurance, Investment, and Loan Association was founded in the same burst of corporate creativity, in 1848. Initially its goals were to sell “ordinary assurance”—life insurance for the upper classes—and make loans to similarly situated people. As a mutual association, all clients were also required to buy shares. But then a parliamentary study committee praised the success of British Industry in 1853 and got Prudential intrigued. In 1856, the company’s new director, the young Henry Harben, went after the market with all his ambition. Spending three days a week travelling the country on its new rail network, talking to agents, and studying successes and failures, Harben refined and streamlined his business model. Here too the history would feel familiar to modern microfinance managers. One key was selling policies and collecting payments door-to-door. Being illiterate, poor people could not be expected to read advertisements; being busy and lower class, perhaps ashamed of their ragged clothes, they could not be expected to find the time and courage to visit branch offices. Agents would be paid on commission. Selecting agents was critical: they needed energy and intelligence but not condescension, willing to spend their days walking through crowded slums. Careful recordkeeping must have been essential to prevent fraud among agents, as was aggressive prosecution to deter it. The company prided itself on rapid payment in the event of death but avoided the more transaction-intensive and fraud-prone disability insurance business. A final secret was covering whole families. Prudential at first resisted insuring children under 10 for fear of the (at least perceived) incentive for infanticide. But the discovery that one his most successful agents was breaking this rule changed Harben’s mind. At a time when one in five infants died in their first year, Harben came to understand, parents were “anxious to insure their children, as in the event of death they found the funeral expenses press very hard upon them, and gladly welcomed the aid which a Society afforded.” And parents who insured their children with Prudential were more likely to insure themselves as well.

This system of operation turned Prudential into a juggernaut. By 1881, it insured an eighth of the population of the United Kingdom; by 1886, a fifth; by 1891 a quarter, and by 1900 a third, or about 13 million people of all ages.

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In the mid-1870s, a man named John Dryden created the Prudential Insurance Company in Newark, which was entirely inspired by its British namesake. Dryden spent time with Henry Harben at the British Prudential studying the company’s methods in detail. His rival across the Hudson in New York, Metropolitan Life, had built a business selling insurance through German fraternal societies, with the societies doing the weekly premium collection. Eventually, Metropolitan too decided to copy British Prudential system for direct retail. It made up for its slower start by importing hundreds of British Prudential agents. Soon it became the market leader.

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