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Section 2
THE EARLY HISTORY OF ANNUITIES

Not surprisingly, since uncertainty about length of life is a ubiquitous source of risk, financial contracts similar to annuities have a long history. James (1947) reports that ancient Roman contracts known as annua promised an individual a stream of payments for a fixed term, or possibly for life, in return for an up-front payment. Such contracts were apparently offered by speculators who dealt in marine and other lines of insurance. A Roman, Domitius Ulpianus, compiled the first recorded life table for the purpose of computing the estate value of annuities that a decedent might have purchased on the lives of his survivors.

Single-premium life annuities were available in the Middle Ages, and detailed records exist of special annuity pools known as tontines that operated in France during the 17th century. In return for an initial lump-sum payment, purchasers of tontines received life annuities. The amount of the annuity was increased each year for the survivors, as they claimed the payouts that would otherwise have gone to those who died. When the second-to-last participant in a tontine pool died, the sole survivor received the entire remaining principal. The tontine thus combined insurance with an element of lottery-style gambling.

During the 1700s, governments in several nations, including England and Holland, sold annuities in lieu of government bonds. The government received capital in return for a promise of lifetime payouts to the annuitants. Murphy (1939) provides a detailed account of the sale of public annuities in England in the 18th and early 19th centuries. Annuities initially were sold to all individuals at a fixed price, regardless of their age or sex. As it became clear over time that mortality rates for annuitants were lower than those for the population at large, a more refined pricing structure was introduced.

In the United States, annuities have been available for over two centuries. In 1759, Pennsylvania chartered the Corporation for the Relief of Poor and Distressed Presbyterian Ministers and Distressed Widows and Children of Ministers. It provided survivorship annuities for the families of ministers (see James 1947). In Philadelphia in 1812, the Pennsylvania Company for Insurance on Lives and Granting Annuities was founded. It offered life insurance and annuities to the general public and was the forerunner of modern stock insurance companies.

During the 19th century, the market for annuities grew slowly while that for life insurance grew quickly. This disparity in part reflects the different risks that these insurance products address. Individuals who, if they died unexpectedly, would leave dependents in need of income support provide the traditional market for life insurance. Individuals who have no dependents or relatives to provide support if they outlive their resources provide the natural market for annuities. Extended families, common in the 19th century, provided an informal alternative to structured annuity contracts. The falling incidence of multigeneration households in the early 20th century contributed to the growing demand for annuity products. The role of families and other informal arrangements in insuring longevity is noted by Murphy (1950).

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