Signor Tonti's Tontines An article examining the history of the tontine, and its inventor Signor Tonti. Introduction Question:  What do the following have in common - Naples, Louis XIV, the Nine Years War, the Bastille, Sheridan's School for Scandal, Robert Louis Stevenson and surrender value calculations? The answer - pretty hard to guess from the title - is the tontine, or rather, the inventor of the tontine, Signor Lorenzo Tonti. The tontine is, to many, no more than an obsolete word describing an obsolete concept, occasionally encountered in insurance company regulations and actuarial course notes, if only as a dusty foot-note.  In this article I should like to explore the history of the tontine, looking also at its influence on the development of our insurance culture. Definition An erudite starting point is the definition given in the Oxford English Dictionary: A financial scheme by which the subscribers to a loan or common fund receive each an annuity during his life, which increases as their number is diminished by death, till the last survivor enjoys the whole income; also applied to the share or right of each subscriber.  A description of more panache, albeit of less accuracy, is given by R.L. Stevenson in his novella The Wrong Box, of which more later: "A number of sprightly youths (the more the merrier) put up a certain sum of money, which is then funded in a pool under trustees; coming on for a century later, the proceeds are fluttered for a moment in the face of the last survivor, who is probably deaf, so that he cannot even hear of his success--and who is certainly dying, so that he might just as well have lost. The peculiar poetry and even humour of the scheme is now apparent, since it is one by which nobody concerned can possibly profit; but its fine, sportsmanlike character endeared it to our grandparents." Although charming in its way, Stevenson's description fails in one important respect.  The great advantage of the tontine, and one of the reasons for its popularity, was that there would normally be an annuity benefit.  A typical tontine scheme would start with a fund equal to the total premiums of the 'tontiners', and pay out some pre-defined income from this fund - for instance 4% - this income being shared among all survivors; thus the last survivor would enjoy a munificent income.  However, any capital remaining on extinction of all the tontiners would usually become the property of whatever body had organised the tontine. Signor Tonti and the birth of the tontine Signor Lorenzo Tonti was a neopolitan of whom relatively little is known.  Born around 1620, by 1650 he had left his homeland and achieved a position of political influence in the courts of Paris.  His 'sponsor' in that world was Cardinal Mazarin, successor to the famous Cardinal Richelieu of Three Musketeers renown.  Mazarin's responsibility was the financial health of France, a country whose finances were in a dire state.  An inefficient and inadequate taxation system, in conjunction with the need to support one of Europe's largest armed forces, created the need for some new method to raise money.  Attempts to raise taxes in the late 1640's had resulted in widespread and long-lasting rebellions, the so-called frondes of the history books. In stepped Tonti, with his intriguing idea.  "A gold mine for the king . . . a treasure hidden away in the realm" was how he described it.  The state would invite contributions from the people, who would be given their share of the resulting fund's income while they lived, and cease to have any fund rights on death.  On extinction of the group, the capital would revert to France.  The idea was not entirely his own - there already existed in Italy a vaguely similar system, the montes pietatis, by which anxious fathers could subscribe to some communal arrangement to finance their daughters' dowries.  However, his vision was an advance on that idea, and he had also thought about the basic aspects of equity that would entail some subdivision by age.  The word tontine derives directly from his name. Decline and fall  Although Louis XIV was eager to go ahead with this idea, the French parliament was not - they were ambivalent about a scheme based on gambling with the lives of others (although it was precisely their speculative nature that would make tontines appeal to the public).  As a result, it was not until 1689, when France was engaged in the Nine Years War, that France's first tontine got under way (in fact they had been beaten to it - the Netherlands had taken the idea and started a tontine in 1670).  This tontine collected an impressive 3,600,000 livres  - actually only one-fifth of the hoped-for amount - to help in her prosecution of the war against Britain, the Netherlands and the Austrian Habsburg Empire.  The war ended in defeat for France, and marked the end of Louis XIV's foreign expansion; Tonti had already suffered a similarly ignominious fate.  He was cast into the Bastille in 1668, having incurred the wrath of Louis XIV; no specific reason for his imprisonment was ever revealed.  He emerged seven years later, bereft of any influence on affairs of state.  Lorenzo Tonti died in 1684, never living to see France adopt his beloved tontine. The wax and wane of the tontine After France's experiment with the tontine (strategic military defeats notwithstanding), various other countries tried the approach.  Different countries had very different levels of success; for instance, England's first tontine, in 1693, raised only around 10% of the target amount, while England's next tontine raised just 1% of the intended capital.  Government tontines were sufficiently widespread in Ireland in the 1770's for Sheridan to mock them in his comedy School for Scandal: "I hear he pays as many annuities as the Irish tontine". More significant than its use by governments was its use by small associations as a means of raising capital to finance building projects.  Many buildings, or blocks of houses, were constructed with such a background, and many a building, street or square still boasts the word tontine in its name. The most natural evolution of the tontine idea was its adoption by life insurance companies.  Its proliferation had a large part to play in the promulgation of the life annuity as the standard way of providing retirement income.  The proliferation of tontines was also important in spurring increased attention to mortality investigations, because achieving adequate equity required a reasonable idea of the tontiners' expected mortality.  However, continued concerns about its moral implications, and aspects of equity and "policyholder protection", led to its demise.  By the beginning of the twentieth century, the tontine had largely disappeared, at least in its basic form. Tontines in the twentieth century From the construction of buildings, the tontine moved to an exciting new area: the construction of detective stories.  The tontine revolves around increased personal wealth resulting from the death of others - a useful system on which to base a murder story.  Robert Louis Stevenson's tale The Wrong Box is one such example, albeit atypically well written. But even ignoring crime fiction, the tontine is still with us.  If we define a tontine in a more general way than the strict dictionary definition above, for instance defining it as: "a scheme whereby those members of a group who survive or persist receive a future benefit at the expense of those who die or leave" then we see that any system of life policies whereby lapsing policyholders are underpaid to the advantage of policyholders with maturing policies is a form of tontine.  And of course, any annuity where the benefit of survivorship is spread among several persons is a tontine. Two situations of interest involving this general tontine concept are the underpayment of surrendering with profits policies in the UK to boost maturity payouts for survivors (coincidentally, the policies that would be highlighted in inter-company product comparisons), and the "lapse-supported pricing" phenomenon of the Canadian life insurance industry. Here, the most relevant product was the "Term-to-100", a term insurance sold with a term that would take the policy cover to age 100.  These policies offered very low premium rates as a result of combining no (or very low) surrender values with a significant lapse assumption in the pricing basis (typically 5-7% pa lapses).  This led to two problems for the industry - a PRE problem, when thousands of surrendering policyholders realised that their surrender values (if anything) were but a small fraction of premiums paid, and an under-reserving problem for many companies.  Lapse rates turned out to be much lower than those assumed by some companies in their pricing and reserving bases; adjusting the reserving bases in the light of experience caused reserves to shoot up.  It was an embarrassing time for the industry.  Some companies were sold as a direct result. Last words Perhaps we can finish with another excerpt from Stevenson's tontinesque tale, in which one of the characters describes their eccentric uncle; was he an actuary, one wonders? "[He is] a man with a solid talent for being a bore; rather cheery, I dare say, on a desert island, but on a railway journey insupportable.  You should hear him on Tonti, the ass that started tontines.  He's incredible on Tonti."