Capital Idea!

These days, two of the biggest targets of social criticism are financial institutions and religious institutions. People are quick to blame “corporate greed” for the sorry plight of the “little guy”. They demand the government takeover of banks and insurance companies to “avoid economic disasters” and make sure disadvantaged people get the benefits to which they are “entitled”.

People also heavily condemn “organized religion” for many of society’s ills. They point to the sex scandals that take place. They claim that more wars have been waged in the name of religion than for any other reason. Here again the government is held as the true “savior” of mankind and the only one who could really provide proper “cradle to grave” care.

In my opinion, these claims have everything to do with ideology and very little to do with facts, history, and the core values of our nation. More than that, they ignore the dynamics that really make religion and finance work! Sure these institutions can be dysfunctional and in need of reform; but, once you gain perspective, you can identify the fantastic contributions they have made towards reducing human suffering. These success stories can serve as building blocks for progress.

Here is an example. Do you know where the modern life insurance industry was born? Scotland. Do you know when? The 1740’s. Do you know by whom? Calvinist Ministers. Do you know why? To take proper care of their widows and orphans. Do you know how? Through free market innovation.

Historian Niall Ferguson tells this fascinating tale in his best-selling book, “The Ascent of Money”. (1) Here are the highlights:

1) Ministers Robert Wallace and Alexander Webster, along with their mathematician friend Colin Maclaurin, created the first modern insurance fund, based on correct actuarial and financial principles (rather than mercantile gambling);
2) The stimulus was their sense of the frailty of the human condition. (The average life expectancy at that time was under age 40!);
3) The also recognized that the Church of Scotland did not provide adequate support for the widows and orphans of ministers, so these survivors ended up in extreme poverty;
4) They devised a model through which premiums paid by ministers to care for their families when they died, could be pooled into a fund and invested. This way benefits would be paid out from the returns, and not from the premiums themselves;
5) Their model used extremely precise actuarial calculations, and so generated sufficient capital to cover all obligations;
6) This “Scottish Ministers’ Widows Fund” became a model for similar funds that quickly spread throughout the English-speaking world.

Mr. Ferguson points out that this expansion included Napoleon’s army. “A soldier’s odds of being killed at Waterloo were roughly 1 in 4. But if he was insured, he had the consolation of knowing, even as he expired on the field of battle, that his wife and children would not be thrown onto the streets…” (2)

Life insurance gave peace of mind to these soldiers and you can bet it enhanced their performance. They were liberated from worry and free to give their all to the war effort. The wonderful product that provided this mental freedom – back then, and to this day more than ever – was developed by religious people, based on their natural concern for their family that is promoted by their faith, via a free market mechanism.

(1) Niall Ferguson, The Ascent of Money (New York, New York: Penguin Books, 2008) pp. 191-197
(2) Ibid., p. 196