Life insurance and income growth: the case of Sweden 1830–1950

Abstract

In this paper we provide an analysis of the life insurance market in Sweden from the early nineteenth century to the mid-twentieth century. We consider determinants put forward in the financial history literature to explain the growth of life insurance. The paper shows that income elasticity of demand gives a fairly good approximation of the development in the twentieth century, while the development of risk and insurance innovation among other things need to be taken into account to explain the growth of life insurance in the nineteenth century. The price of life insurance, measured as the overhead-to-premium-income ratio, remained fairly constant during the second half of the nineteenth century, while the risk, as indicated in terms of crude mortality rates and its volatility, did decline. This probably improved the return on life insurance savings and further helped the entry of new firms. The average premium size was reduced to enable the diffusion of life insurance to workers.

Keywords:

• insurance history
• insurance
• financial revolution
• Swedish economic history
• household budget survey
• historical national accounts

Acknowledgements

The authors thank Mike B. Adams for his comments and assistance. We also thank two anonymous referees and the discussants at the Swedish Economic Historical Meeting in Stockholm in 2007, especially Anders Ögren and Mikael Lönnborg, for useful comments. However, the normal disclaimer applies. Support from the Swedish Research Council (Vetenskapsrådet) and the Bank of Sweden Tercentenary Foundation (Riksbankens Jubileumsfond) and Svenska Handelsbankens forskningsstifelse is gratefully acknowledged.

Notes

1. Richard Sylla, ‘Financial Systems and Economic Modernization’, The Journal of Economic History 62, no. (2002) 277–92; Peter L. Rousseau and Richard Sylla, ‘Financial Revolutions and Economic Growth: Introducing this EEH Symposium’. Explorations in Economic History 43, no. 1 (2006): 1–12. A. Ögren, ‘Financial Revolution and Economic Modernisation in Sweden’, Financial History Review 16, no. 1, (2009): 47–71; M. Lindmark and L.-F. Andersson, ‘All Fired Up: The Growth of Fire Insurance in Sweden 1830–1950’, Financial History Review 17 (forthcoming).

2. Robin Pearson, ‘Fire Insurance and the British Textile Industries during the Industrial Revolution’, Business History 34, no. 4 (1992): 1–19; Robin Pearson, ‘Taking Risks and Containing Competition: Diversification and Oligopoly in the Fire Insurance Markets of the North of England in the Early 19th Century’, Economic History Review 26, no. 2 (1993): 39–64; Robin Pearson, Insuring the Industrial Revolution: Fire Insurance in Great Britain, 1700-1850 (Aldershot: Ashgate, 2004); Bruce D. Smith and Michael J. Stutzer, ‘A Theory of Mutual Formation and Moral Hazard with Evidence from the History of the Insurance Industry’, Review of Financial Studies 8, no. 4 (1995): 545–77.

3. Philip Arestis and Panicos Demetriades, ‘Financial Development and Economic Growth: Assessing the Evidence’, The Economic Journal 107, no. 442 (1997): 783–99.

4. Lars G. Sandberg, ‘The Case of the Impoverished Sophisticate: Human Capital and Swedish Economic Growth before World War I’, Journal of Economic History 39, no. 4 (1979): 225–41.

5. Anders Ögren, ‘Free or Central Banking? Liquidity and Financial Deepening in Sweden, 1834–1913’, Explorations in Economic History 43, no. 1 (2006): 64–93.

6. Sylla, 'Financial Systems’, 280.

7. Charles P. Kindleberger, ‘Sweden in 1850 as an ‘Impoverished Sophisticate’: Comment’, Journal of Economic History 42, no. 4 (1982): 918–20.

8. Livio di Matteo and Herbert J.C. Emery, ‘Wealth and the Demand for Life Insurance: Evidence from Ontario, 1892’, Explorations in Economic History 39, no. 4 (2002): 446–69. Note that self-insurance means not insuring with insurance companies.

9. Monica Keneley, ‘Adaptation and Change in the Australian Life Insurance Industry: An Historical Perspective’, Accounting, Business & Financial History 14, no. 1 (2004): 91–109.

10. Michael Beenstock, Gerry Dickinson, and Sayaj Khajura, ‘The Relationship between Property–Liability Insurance Premiums and Income: An International Analysis’, Journal of Risk and Insurance 55, no. 2 (1988): 259–72.

11. Sigma, 'World Insurance in 1997. Booming Life Insurance Business, but Stagnating Fire Business’, Swiss-re (1999).

12. Angus Maddison, The World Economy: Historical Statistics (Paris: OECD Development Centre, 2003).

13. Mark V. Pauly, Kate H. Withers, Krupa S. Viswanathan, Jean Lemaire, John C. Hershey, Katrina Armstrong, and David A. Asch,Price, Elasticity of Demand for Term Life Insurance and Adverse Selection (NBER Working Paper, no. W 9925, 2003).

14. Barry Supple, The Royal Exchange Assurance: A History of British Insurance, 1720-1970 (Cambridge: Cambridge University Press,1970).

15. Magnus Lindmark, Lars Fredrik Andersson, and Mike B. Adams, ‘The Evolution and Development of the Swedish Insurance Market’, Accounting, Business & Financial History 16, no. 3 (2006): 341–70.

16. Försäkringsväsendet i riket år. Kongl. Civildepartementet, 1887–1910; Sveriges Officiella Statistik, Enskilda försäkringsanstalter, 1912–1950

17. Mats Larsson, Den reglerade marknaden – svenskt försäkringväsende 1850-1980, Stockholm, SNS, p. 39 1991; Framtiden, livförsäkringsaktiebolag, De förenade, Framtiden, Victoria, Minnesskrift, Stockholm 1972, p. 122; Svensk författningssamling, 1928. Nr 370 19§.

18. Sandberg, ‘The Case of the Impoverished Sophisticate’, 232.

19. Mokyr, Joel, ‘The Intellectual Origins of Modern Economic Growth’, Journal of Economic History, 65, no. 2 (2005); Mokyr, Joel, The Gifts of Athena: Historical Origins of the Knowledge of Economy (Princeton: Princeton University Press, 2002). Note: useful knowledge can, according to Mokyr, also be knowledge regarding insurance marketing and other kinds of economic and financial knowledge, e.g. about rates and price.

20. A similar methodological approach (the equations 1–6) is similar to that employed in M. Lindmark and L.-F. Andersson, ‘All Fired Up’.

21. Dora L. Costa, ‘Estimating Real Income in the United States from 1888 to 1994: Correcting CPI Bias Using Engel Curves’, Journal of Political Economy 109, no. 6 (2001): 1288–310; Bruce W. Hamilton, ‘Using Engel's Law to Estimate CPI Bias’, The American Economic Review 91, no. 3 (2001): 619–30.

22. Melissa Thomasson, ‘From Sickness to Health: The Twentieth-Century Development of US Health Insurance’, Explorations in Economic History 39, no. 3 (2002): 242–3

23. Sveriges Officiella Statistik, Socialstyrelsen. Levnadskostnaderna i Sverige 1913-1914. (Les budgets de ménage en Suède en 1913–1914) (Stockholm, 1919); Sveriges Officiella Statistik, Socialstyrelsen, 1923. Levnadskostnaderna på landsbygden i Sverige vid år 1920. (Les frais d'existence à la campagne suédoise en 1920), (Stockholm, 1923); Sveriges Officiella Statistik, Socialstyrelsen, Levnadskostnaderna i städer och industriorter omkring år 1923 (Les budgets de ménage dans les villes et dans les agglomérations industrielles vers 1923). Sveriges Officiella Statistik, (Stockholm, 1929); Sveriges Officiella Statistik, Socialstyrelsen Levnadskostnaderna i tätortshushåll år 1948. Sveriges Officiella Statistik, Stockholm 1953; Sveriges Officiella Statistik, Socialstyrelsen, Levnadskostnaderna på landsbygden år 1951 (Family expenditure in rural districts, 1951) Sveriges Officiella Statistik, (Stockholm, 1955).

24. Olle Krantz and Lennart Schön, Swedish Historical National Accounts 1800–2000, Lund Studies in Economic History, 41 (Lund: Almqvist & Wiksell International, 2007).

25. Lennart Schön, Historiska nationalräkenskaper för Sverige: Utrikeshandel (Historical National Accounts for Sweden: Foreign Trade) (Mimeo, Lund: Ekonomisk-Historiska institutionen, 1984).

26. Östen Johansson, The Gross Domestic Product of Sweden and its Composition 1861–1955 (Stockholm: Stockholm Economic Studies, 1967).

27. Using import statistics from 1924, we have divided the agriculture goods and foodstuff between investments, intermediate consumption and final consumption. The share of final consumption is 24% for agricultural goods and the share of final consumption is 54% for foodstuff. We assume that the share of final consumption is constant during the period 1830–1950.

28. Olle Krantz, Historiska nationalräkenskaper för Sverige: Privata tjänster och bostadsutnyttjande 1800-1980 (Historical National Accounts for Sweden. Private Services and Housing 1800–1980) (Lund: Studentlitteratur, 1991).

29. Bengt Bergander, Försäkringsväsendet i Sverige 1814–1914 (Lund: Wesmanns Skandinaviske Forsikringsfond, 1967), table 4, 369.

30. Bengt Bergander, Försäkringsväsendet i Sverige 1814–1914 (Lund: Wesmanns Skandinaviske Forsikringsfond, 1967), 286–92, 367–69.

31. Änke- och Pupillkassan (Archive) Allmänna Änke- och Pupillkassans i Sverige Arkiv (Riksarkivet) (Huvudböcker) (The Central Swedish Archive of the Public Widows and Orphans Fund (Main Books)), Archive Reference: SE/RA/730005/730005.01/G I: Stockholm.

32. Sveriges Officiella Statistik, Enskilda Försäkringsanstalter (Swedish Official Statistics Private Insurance), periodical (Stockholm, 1912–1950).

33. Thomasson, ‘From Sickness to Health’, 246.

34. Di Matteo and Emery, ‘Wealth and Demand’, 464.

35. Bruce D. Smith and Michael J. Stutzer, ‘Adverse Selection, Aggregate Uncertainty, and the Role of Mutual Insurance Contracts’, Journal of Business 63, no. 4 (1990): 493–510; . Bruce D. Smith and Michael J. Stutzer, ‘A Theory of Mutual Formation and Moral Hazard with Evidence from the History of the Insurance Industry’, Review of Financial Studies 8, no. 4 (1995): 545–77.

36. Joseph E. Stiglitz, ‘Risk, Incentives and Insurance: The Pure Theory of Moral Hazard’, Geneva Papers on Risk and Insurance: Issues and Practice 8, no. 26, (1983): 4–33.

37. Smith and Stutzer, ‘Adverse Selection’; Smith and Strutzer, ‘A Theory of Mutual Formation and Moral Hazard’.

38. Robin Pearson, ‘Towards an Historical Model of Services Innovation: The Case of the Insurance Industry 1700–1914’, Economic History Review 50, no. 2 (1997): 235–56.

39. Thomasson, ‘From Sickness to Health’, 233–53.

40. Ordinary companies comprises of: Skandia; Svea; Skåne Thule; and Svenska Lif; ndustrial companies of: Trygg; De Förenade; and Framtiden.

41. Measured as the standard deviation in mortality with respect to a five-year moving average.

42. Sören Edvinsson and Hans Nilsson, ‘Urban Mortality in Sweden during the 19th Century, in Population Dynamics during Industrialization, ed. A. Brändström and L. G. Tedebrand (Umeå: Umeå University, 2000), Report 13, Demographic Database; Puranen Britt-Inger, ‘Tuberkulos: en sjukdoms förekomst och dess orsaker : Sverige 1750–1980’ (diss. Umeå : Universitet, 1984).

43. Svenska Lifförsäkringsanstalten Trygg 1899-1909(Swedish life insurance company Trygg) (Stockholm: Iduns Tryckeri Aktiebolag, 1910), 42, 119.

44. Bergander, ‘Försäkringsväsendet’, 341–5.

45. Diane M. Dewar, ‘Do Those with More Formal Education have Better Health Insurance Opportunities?’, Economics of Education Review 17, no. 3 (1998): 267–77

46. Di Matteo and Emery, 'Wealth and Demand’, 460.

47. Thomasson, ‘From Sickness to Health’, 244–5.

48. Lars Pettersson, Läs- och skrivkunnighet och jordbruksomvandling: om skånska bönder under skiftenas tid. (Lund: Lund University, 1996).