Life Insurance and Wealth: Evidence From Ontario, 1892 and South Australia,

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1 Department of Economics Discussion Paper Life Insurance and Wealth: Evidence From Ontario, 1892 and South Australia, J. C. Herbert Emery Department of Economics University of Calgary Calgary, Alberta T2N 1N4 and L. Di Matteo Department of Economics Lakehead University Thunder Bay, Ontario and Martin P. Shanahan School of International Business University of South Australia Adelaide, Australia Department of Economics University of Calgary Calgary, Alberta, Canada T2N 1N4 This paper can be downloaded without charge from

2 LIFE INSURANCE AND WEALTH: EVIDENCE FROM ONTARIO, 1892 AND SOUTH AUSTRALIA, Livio Di Matteo b J.C. Herbert Emery a, and Martin P. Shanahan c a Department of Economics, University of Calgary, Calgary Alberta, Canada b Department of Economics, Lakehead University, Thunder Bay, Ontario Canada c School of International Business, University of South Australia, Adelaide, Australia ABSTRACT Using probate records for Ontario from 1892, Di Matteo and Emery (2002) demonstrate a negative correlation between the level of personal wealth and the demand for life insurance suggesting that self-insurance was a substitute for market purchases of life insurance. They also show that the demand for insurance was lower in rural economies and those dominated by primary production and increasing in economies where human capital investment was increasing.this paper analyses a sample of succession records from a rural economy, geographically and culturally distant from Ontario; South Australia (SA). The available data cover the period from 1905 to 1915 and permit a comparison with the Canadian findings. We find a similar relationship between life insurance demand and wealth in South Australia and Ontario, and that for most wealth leavers in both places the demand for life insurance fell as wealth accumulated. INTRODUCTION Research on the emergence of insurance markets over the later half of the nineteenth century has focused on developments in North America. That work has traced the impact on insurance and insurance demand, of the shift from rural to urban economies; from reliance on capital in land to capital embodied in humans and the impact of the male-breadwinner family form, in increasing incentives to insure. Never-the-less, the question of how households and individuals mitigate risk and their response to changes in institutional structure remains relatively unexplored, especially in other regions. Di Matteo and Emery (2002) examine the role of life insurance in household portfolios by examining micro-data sets of the wealth holdings of 2660 males whose 1

3 estates were probated in Ontario in Their work demonstrates that for all but the wealthiest men, there was a negative correlation between personal wealth and the demand for life insurance, consistent with self-insurance being a substitute for market purchases of life insurance. Households tended to demand life insurance when they lacked accumulated resources for self insurance, often early in the life cycle. They also observed that the growth of the insurance industry was propelled in part by the increasing importance of cities, industrial and urban work and the rise of single income households (p.464). This paper extends this analysis by analysing a sample of succession records from a rural economy geographically and socially distant from Ontario; South Australia. This allows the insights obtained from the Ontario (1892) based data to be compared with the insights available from South Australia of roughly the same period ( ). In particular, such a comparison allows a re-examination of the influence of trends in human capital investment, the relative importance of the rural economy and urban settlement and the effects of the life cycle on life-insurance. Like Ontario, early in the 20 th century, South Australia was a young, rural based economy. The state s total population of 409,000 in 1911 was relatively urbanised, with the capital city of Adelaide accounting for around 50 percent of the population. 2 It was geographically distant from the Atlantic economy, but culturally and historically linked to England. Although distant from either the centre of world financial markets of London, or the newly emerging industrial strength of North America, it still felt itself to be part of, and integrated with, the modern industrial world. As in the Atlantic economies, the life insurance industry was expanding rapidly (Gray 1977). This micro analysis of wealth and insurance and the comparison with Canadian findings permits a unique perspective on the state of the insurance market in two different regions of the world at an important stage in their development. 1 In 1891, Ontario's population was 2.1 million and accounted for 44 percent of Canada's population. By the late 19 th century, Ontario was undergoing a process of industrialization and urbanization though a large share of the population remained rural. 2 In 1911 the population of Adelaide was just under 190,000, representing 46.4% of South Australia s population. Equivalent figures for 1871, 1881, 1891 and 1901 are 33.8%, 37.6%, 42.2% and 45.3%. By 1921 the percentage was 51.6 % (Hirst, 1973, pp 227). Ontario had a more dispersed urban settlement pattern. In 1891, Toronto - Ontario's largest city - had a population of 181,000 which represented less than 10 percent of the province's population. In 1891, only 35 percent of Ontario's population could be considered urban - that is living in centers of 1000 or more. 2

4 THE DATA The new data were constructed by obtaining a random, stratified sample of probate records from the South Australian probate courts. Probate records do not include everyone who died. Generally only those who left wealth, or who were thought to have left wealth, or who were economically active were probated. In South Australia about 39 percent of all adults were probated, with the proportion among males being closer to 50 percent. 3 The probated were on average older and wealthier than the living population. The South Australian data are derived from probate and succession duty documents which are constructed after the death of an individual. Essential to the legal transfer of assets, these represent consistent, well-monitored information on personal wealth. Probate records contain papers filed to the court by the administrators of an estate including a copy of the testator s will, the executor s oath, correspondence with the court etc... The records contain information on the testator s name, address, occupation and a sworn estimate of gross wealth; but no list of assets, the age of the testator, and other family details. To obtain this information it was necessary to match the probate records with two other sources; the individual s death certificate and succession duty records. The death certificate contained information on the testator s age and cause of death as well as providing a cross check for recorded occupation. Between 1905 and 1915 the state levied succession duty on all estates and this process produced a succession file which contained a full inventory of the assets of the deceased, their heirs and the duty payable on each inheritance. The succession duty process required an independent appraiser estimate the market value of each individual piece of property, which may include assets as trivial as salt and pepper shakers or as large as pastoral stations or manufacturing businesses. Between 1905 and 1915, a total of 12,475 people were probated in South Australia. The top one percent of wealth leavers held approximately 30 percent of the wealth and the top 10 percent, 70 percent of the wealth. Such a distribution was similar to the distribution of wealth in New Zealand at the same period and to that of the United States in It was far more equal than the distribution of wealth in the United 3 See Smith (1975) or Shanahan (2001) for a more detailed discussion. 3

5 Kingdom at the same time where probate records suggest the top 1 percent held twothirds of all wealth, and the top 10 percent held 90 percent of the wealth. 4 For the purposes of constructing a data set from the probate data, four strata were selected. A one percent sample of estates between 0 and 500; a two percent sample for estates between 501 and 2500; a five percent sample of estates between 2501 and 20,000 and the complete population over 20,000. Records of a total of 337 individual estates were recorded. THE QUESTIONS Economic development and the accompanying changes in human capital and real income have been well documented for both Canada and the United States. 5 Contemporaneous with the shift to fewer, better educated breadwinners per family was the rise in formal institutions such as insurance contracts, to mitigate risk (Horrell and Oxley, 2000). Despite the emergence of new institutions, however, comparatively little is known about the factors associated with the uptake of products such as insurance contracts and the alternative strategies used by families and individuals to mitigate risk. Di Matteo and Emery (2002) in their study of Ontario in 1892 found a negative correlation between personal wealth holdings and life insurance, with self-insurance (as a by-product of wealth accumulation) substituting for market purchases of life insurance. They suggested that households tended to demand life insurance when they lacked accumulated resources for self-insurance; something that occurred early in the life cycle. Their findings were also consistent with the hypothesis that the demand for insurance was likely to be lower in rural economies and those dominated by primary production (where investment in human capital was likely to be lower and the loss caused by the death of a single bread winner less than in the city) and increasing in economies where there cities were becoming more important and individuals human capital investment was increasing. 4 These comparisons, while all based on probate records, are fraught with danger, given differences in the age structure, data coverage, estimation techniques etc. They should be regarded as indicative rather than exact. For a more complete discussion see Shanahan (1995). As a further example, estate multiplier estimates for Wentworth County, Ontario, between 1872 and 1902 show the top 10 percent of the distribution owned from 83 to 92 percent of the wealth. See Di Matteo and George (1992). For South Australia between 1905 and 1915, multiplier based estimates of wealth distribution suggest the top 10 percent held percent of the wealth. 5 See Di Matteo and Emery (2002) for a discussion. 4

6 In his study of life insurance in Australia, Gray (1977) noted In the last quarter of the 19 th century Australasia seems to have led the world in life insurance per head of population. In much the same period Australia gave a lead to the world in the liberality of policy conditions. According to W. Spratt In British insurance circles the phenomenon was recognised for what it was- an insurance revolution. The world revolution may be an overstatement, but at least Australia in this period contributed to the development of life insurance to a degree disproportionate to its population, and unexpectedly for a country so far removed from the major developed areas of the world (p 49). Table 1, provides a comparison of life insurance sums insured per head of population in Australasia (including New Zealand), Great Britain, the USA and Canada in Australian dollars, while Table 2 reveals the average sum insured for those policies in force. Gray also suggests that in 1900 Australasia had an average of 82 policies per one thousand population compared to Great Britain s 43, the USA s 35, and Canada s 46 per one thousand population. Taken together these figures suggest that life insurance was well established in Australasia by 1905 and a comparison between the factors affecting insurance uptake in South Australia and Canada may provide some interesting insights. TABLE 1: LIFE INSURANCE SUMS INSURED PER HEAD OF POPULATION Year 1888* Australasia $A 38 $A 44 Great Britain USA Canada * D.M.Lukie, Government Insurance Commissioner of New Zealand, Annual Report for Coghlan, Seven Colonies of Australasia, NSW Government Printer, 1900, p.102. Source: Tabulation s5.3, Gray (1977) page 50. 5

7 TABLE 2: AVERAGE PER POLICY OF SUMS INSURED IN FORCE Year 1877^ 1888* Australasia $A 638 $A 600 $A 544 Great Britain USA Canada ^ Insurance and Banking Record, 1885, p.28. * D.M.Lukie, Government Insurance Commissioner of New Zealand, Annual Report for Coghlan, Seven Colonies of Australasia, NSW Government Printer, 1900, p.102. Source: Gray (1977) Tabulation s5.4 (page 51). An analysis of wealth and the demand for life insurance in South Australia permits a number of questions to be addressed. First, can the findings of Di Matteo and Emery (2002) be replicated in a rurally based society half-a-world away from the Atlantic economy? Second, while there were similarities in economic structures between the two locations, there were also differences. While Canada and Australia were both members of the Empire, Canada had already achieved dominion status in South Australia had a much more recent connection to the United Kingdom, having only attained statehood in the newly Federated nation of Australia in 1900, whereas Canada was developing closer economic relationships with the United States even in the late 19 th century. MODELS, ESTIMATION AND RESULTS Table 3 presents reveals the holdings of life insurance by age for males in Ontario in As discussed in Di Matteo and Emery (2002) this sample, although containing a relatively high proportion of older males, shows that approximately 12 percent of males held life insurance at death. By comparison, Table 4 reveals the life insurance holding by age for probated males in South Australia between 1905 and There is a marked difference in the proportion of estates leaving insurance, with an average of one third of male estates leaving some form of life insurance. Similar to the Ontario sample, however, the proportion of estates leaving life insurance declines with age, although at a lesser rate. 6

8 An immediate possibility is that differences in extraction methods have resulted in quite different samples being taken from the probate records. In the case of Ontario, 1892, all estates probated during that year were taken down and then manually linked to the 1891 census with a resulting success rate of 83 percent of traceable estates. In the case of South Australia, the stratified random sample of estates was selected from the total population of probated estates. While selecting all estates over 20,000, the processes also identified those leaving little wealth. We conclude that while there may be differences in the proportion of estates of different sizes between the two samples (something that can be corrected), there is no obvious bias in the representativeness of either sample to its relative population. Tables 5 and 6 report the male holdings of insurance for Ontario and South Australia, categorised by wealth deciles. At each and every decile, the proportion of males leaving life insurance is greater in South Australia than in Ontario. For example, whereas 24 percent of the top decile of Ontario wealth holders report life insurance, 33 percent of the top decile of South Australian wealth holders do. Indeed the difference between the Canadian and Australian samples is even starker when one considers the average worth of life insurance as a proportion of total wealth. 6 In the Canadian sample, TABLE 3: MALE LIFE INSURNACE HOLDING BY AGE CATEGORY (ONTARIO 1892) AGE n MEAN MEDIAN MEAN % WEALTH WEALTH LIFEIN WITH ($) ($) ($) LIFEIN> ALL One possibility for this difference may be the result of institutional differences in the probate process. In Ontario, insurance had to be reported for probate if the estate was the beneficiary. Life insurance directly payable to an individual beneficiary was occasionally reported but not always. 7

9 the average value of insurance held, as a proportion of average wealth left at death, increases slowly across the lower decile groups, being at their highest in the seventh decile. Canadian males who died ranked in the seventh decile (average wealth $2350) left, on average life insurance worth $236. By contrast, in the South Australian sample, life insurance as a proportion of wealth was its highest for those in the lowest decile (average wealth 182 with an average life insurance value of 57). The results for different deciles are summarized in Figure 1. TABLE 4: MALE LIFE INSURANCE HOLDING BY AGE CATEGORY (SOUTH AUSTRALIA ) AGE n MEAN MEDIAN MEAN % WEALTH WEALTH LIFEIN WITH ( ) ( ) ( ) LIFE IN Age missing ALL At first glance, this would suggest males leaving lesser amounts of wealth in South Australia are relying on life insurance far more than their Ontario counterparts of the 1890s. It also suggests that poorer probated South Australian males possibly could afford, or chose to mitigate risk through the formal mechanism of life insurance more than their Canadian counterparts. 8

10 TABLE 5: MALE LIFE INSURANCE HOLDINGS BY WEALTH DECILE (ONTARIO 1892) DECILE MEAN PERCENT MEAN MEDIAN LIFEIN LIFEIN WEALTH WEALTH ($) >0 ($) ($) FIRST SECOND THIRD FOURTH FIFTH SIXTH SEVENTH EIGHT NINTH TENTH TABLE 6: MALE LIFE INSURANCE HOLDING BY WEALTH DECILE (SOUTH AUSTRALIA ) DECILE MEAN LIFEIN ( ) PERCENT LIFEIN >0 MEAN WEALTH ( ) MEDIAN WEALTH ( ) FIRST SECOND THIRD FOURTH FIFTH SIXTH SEVENTH EIGHT NINETH TENTH

11 FIGURE 1: AVERAGE LIFE INSURANCE AS A PROPORTION OF AVERAGE WEALTH, ARRANGED BY DECILE GROUPS FOR MALES IN ONTARIO (1892) AND SOUTH AUSTRALIA ( ) Average life insurance/average wealth, by decile groups for males in Ontario in 1892 and South Australia average value of life insurance /avergae wealth holding Decile group Ontario S.Australia A number of issues need to be considered when comparing South Australia and Ontario in order to understand why insurance holding may be higher in the South Australian data. First, Maddison (1995) presents per capita income estimates for countries relative to the U.S. base of 100. During the period of our paper, Australia's income declined relative to the U.S. whereas Canada's slowly rose. In 1890, Australia's per capita GDP is 40 percent above the U.S. whereas Canada's is about 30 percent below. By 1910, Australia's is only 10 percent above the U.S. whereas Canada's is only 20 percent below. Given the higher level of per capita income in Australia relative to Canada, the higher values of insurance held by Australians may reflect that there was more "human capital income" for Australians to insure. 7 Gray's (1977) study of life insurance in Australia also contains a number of points that are pertinent to this paper. Gray finds that life insurance was more prevalent in Australia than Canada in the 19 th century and that Australian insurance companies 10

12 marketed quite aggressively. Gray also claims that life insurance was aggressively sold to lower socio-economic groups in part because of the high risk of death by accident. Indeed, industrial life insurance was often sold door to door. For example, by there were 464,089 ordinary life insurance policies in Australasia, with an average value of 224, while there were almost the same number of industrial policies 422,899, with an average value of 21 (Gray 1977, p. 98). Third, a non-forfeiture system, whereby a policy could not lapse and be forfeited while there was sufficient available from the surrender value to pay the premium, was introduced into South Australia as early as The 1892 Ontario data is skewed more towards smaller estates, whereas the South Australian data tends to have some very large and very wealthy estates. To compare across the South Australia and Ontario samples, the 1892 Canadian Dollar figures for the Ontario sample are converted to Pound Sterling in 1900 using Allen s (1994) inter-temporal inter-urban price indexes for Sydney and Toronto (Manchester 1896 base) and, from Eh.Net, the exchange rate of 4.87 USD for one pound sterling that prevailed in This exchange rate was 4.76 in (In 1913, the Canadian and American dollars had an exchange rate with each other of one). Figure 3 shows the wealth distributions for probated South Australians , the sample of these records used in our analysis, and Di Matteo s and Emery s (2002) sample from their analysis of Ontario male probated decedents from There are some key differences between the samples; the SA male sample that we have to use, oversamples the very wealthy SA decedents and there are no comparably wealthy decedents in the Ontario sample; Ontario s sample has substantial numbers of observations in the pound sterling interval and less of its distribution below 500 pounds sterling than the SA estates. This could reflect that SA has a much more unequal distribution of wealth than Ontario had, or that there was a higher propensity for lower wealth decedents to be probated in SA than in Ontario. Table 7 shows that in the SA sample, decedents were more likely to have life insurance at the time of death and would appear to have held larger amounts of life insurance. A comparison of the SA sample with net worth less than Pounds Sterling and Ontario decedents with a net worth of less than $50,000 reveals that the 7 Given the popularity of Cricket in Australia and the incomprehensibility of the rules of Footie to non- Australians, we are skeptical that this is in fact a good explanation. 11

13 value of life insurance held is comparable in value in SA and Ontario. Ontario decedents still have a lower frequency of holding life insurance than the sample of SA decedents, but this could be an artefact of the under-representation of low wealth estates in the detailed SA sample that we are using. It could also reflect cultural differences (e.g. attitudes towards insurance) between the two societies or differences in the relative stage of development of the insurance industry in the two economies or across time (1892 versus ). Figure 4 provides the most intriguing evidence that the basic determinants of life insurance holding in both South Australia and Ontario were the same but that there was an exogenous upward shift in Australian insurance holding due to aforementioned factors. Simple LOWESS profiles of the life insurance ownership are plotted against net wealth but only for those individuals whose estates are less than 10,000 pounds sterling. This deals with the fact that the South Australian sample seems to have a larger share of its decedents with very large estates. The results clearly indicate that there is a similar overall trend with respect to insurance holding relative to wealth levels (not controlling for any other variables) but that overall, the incidence of South Aurstralian life insurance holding is greater. As a result it should be possible to model the determinants of South Australian and Ontario life insurance holding using similar models. TABLE 7: PROPORTION OF SAMPLES WITH LIFE INSURANCE AND SUMMARY STATISTICS ON THE AMOUNT OF LIFE INSURANCE HELD Prob Mean LI Min LI if Max LI if Currency LI>0 if LI>0 LI>0 LI>0 SA Pounds SA < Pounds ONT Dollars ONT Pounds ONT < Dollars $50000 ONT < Pounds 12

14 FIGURE 2: DISTRIBUTION OF NET WEALTH IN SOUTH AUSTRALIA AND ONTARIO Distributions of Net Wealth, SA Probates Overall, SA Sample and 1892 Ontario Sample (converted to Pounds Sterling in 1900) % 30 SAPop Sasample Ont1892sample ,000-2,499 2,500-4,999 5,000-9,999 10,000-14,999 15,000-24,999 25,000-49,999 50,000-99, , , ,

15 FIGURE 3: LOWESS PROFILES FOR LIFE INSURANCE FOR ESTATES BELOW POUNDS STERLING IN ONTARIO 1892 AND SOUTH AUSTRALIA Lowess Profiles for Prob. of Having Life Insurance versus Level of Wealth, Ontario 1892, South Australia (Bandwidith=0.3) SA Ontario Wealth ($) Further insights are permitted by following that approach of Di Matteo and Emery (2002). They modelled life insurance as a function of a vector of socio economic variables such as wealth, age, occupation, marital status, gender and number of children. To investigate the role of life insurance in the portfolios of South Australians and Ontarians, we use probit estimation methods to estimate the effect of wealth and age on the probability that an individual would choose to hold life insurance. We restrict our estimations to the over-lapping ranges of the net wealth distributions shown in Figure 4. Ostensibly, we are excluding the wealthiest individuals from the estimation sample and using the 118 SA decedents with less than pound sterling in net wealth, and the 2591 Ontario decedents with less than $50000 (10000 pound sterling) in net wealth. We also estimate probit models using observations with decedents with net worth over 2500 pound sterling ($12,170). The estimated coefficients are shown in Table 8. The purpose of estimating the models with these sub-samples is to compare estimates within comparable levels of wealth of decedents. 14

16 TABLE 8: PROBIT COEFFICIENT ESTIMATES FOR THE PROBABILITY OF HAVING LIFE INSURANCE IN THE PORTFOLIO SA <10000 Ontario<$50000 (10000) SA>2499 Ontario>$12170 Age 3.8 (5.8) 3.0 (1.3)* 2.8 (7.0) 5.5 (4.9) Age^2-4.9 (4.8) -5.5 (3.7)* -3.2 (5.4) -8.7 (4.3)* Net Wealth/ (14.5) -4.2 (1.3)* 0.47 (0.45) 1.2 (0.3)* Net Wealth/ Squared (179) 16.2 (3.7)* -0.2 (0.16) -0.2 (0.07)* Constant (0.3)* -0.6 (2.3) -1.2 (1.4) N Pseudo R^ Net Wealth where Prob(LI=1) minimized 852 $12848 or 2638 Pound Sterling NA NA The estimations reveal remarkable similarity in the determinants of the probability of holding life insurance. For both Ontario in 1892 and SA, , samples of decedents with net wealth less than $50,000 and Pound Sterling, the probability of holding life insurance declines with increases in wealth, albeit at a decreasing rate. The probability of holding life insurance reaches a minimum at 852 pound sterling in SA, and at the equivalent of 2638 pound sterling in the Ontario sample. For South Australia, 85 percent of probated decedents had net wealth below this level, while 95 percent of Ontario probated decedents had net wealth below the Ontario threshold. The wealthier sub-samples show that the probability of holding life insurance increased in both SA and Ontario. Thus, we find that the same relationship between life insurance demand and wealth is found in SA and Ontario, and for the majority of households in both places, the demand for life insurance fell as wealth accumulated. This suggests that self-insurance was potentially an important substitute for market purchases of insurance for estates less than $50,000 and 10,000 Pounds Sterling. To address this issue fully, and in particular which assets were substituted for life insurance, will require further investigation. 15

17 Conclusions South Australia and Ontario were both regions of European settlement with British institutional frameworks. At the same time, there were differences in their rate and level of economic development. Despite the differences in economic structure between Australia and Canada during the late 19 th and early 20 th centuries, when it comes to life insurance holdings there were remarkable similarities in behaviour. We find that the same relationship between life insurance demand and wealth is found in SA and Ontario, and for the majority of households in both places; the demand for life insurance fell as wealth accumulated. More remarkably, this relationship appears despite the apparently higher overall level of life insurance in South Australia. This suggests that self-insurance was potentially an important substitute for market purchases of insurance for most households in more than one country at the turn of the 20 th century. REFERENCES Di Matteo, L. and J.C. Herbert Emery, Wealth and the demand for life insurance: evidence from Ontario, 1892 Explorations in Economic History, 39:4, (October 2002), Di Matteo, L. and P.J. George. "Canadian Wealth Inequality in the Late Nineteenth Century: A Study of Wentworth County, Ontario, ," The Canadian Historical Review, LXXIII, 4, Gray, A.C., Life Insurance in Australia. An Historical and Descriptive Account. McCarron Bird, Melbourne Hirst J.B. Adelaide and the County Their social and political relationship. Melbourne University Press, Melbourne Horrell S., and Oxley D. Work and Prudence: Household Responses to Income Variation in Nineteenth-Century Britain, European Review of Economic History, 2000: 4, Maddison, A. Monitoring the World Economy Paris (OECD), Shanahan M.P. The Distribution of Personal Wealth in South Australia Australian Economic History Review 35 (1995) 35:2, Shanahan, M.P. Personal Wealth in South Australia Journal of Interdisciplinary History, XXXII:I (Summer 2001), Smith, D.S. Under-registration and Bias in Probate Records: An Analysis of Data from Eighteenth-Century Hingham, Massachusetts, William and Mary Quarterly XXXII (1975)