THE ALBERT FAILURE

The Failure of the Albert Insurance Company, Economist, 28 August 1869, pp. 101314. An Insurers Grievance, London Times, 25 August 1869, p. 10.

Between the Independent West Middlesex scandal in 1840 and the crash of the Albert in 1869, dozens of English life insurance offices failed but nearly all of these had only been in existence a few years and had generated minimal business. Their failure, furthermore, was not nearly as damaging to their customers as the parallel case of a bank failure, since instead of losing potentially their life savings, all these customers lost was a year or two in premiums, and in most cases they could buy a new policy from a different concern at only a slightly higher price. Since the liabilities of failed mushroom insurance companies were also minimal, their shareholders likewise suffered relatively little pain. The Alberts failure and that of the European, which followed suit in 1872, were different matters altogether. Both were relatively old companies that grew between 1850 and 1870 by recklessly absorbing the business of firms that were on the verge of insolvency. They furthermore threw good money after bad by paying exorbitant fees for this new business (274,152, in the case of the Albert), and sealed their fate by paying their managers excessive salaries. Legal fees in the wake of the failures ate up another 360,000, as shareholders from the various absorbed firms sued to get out of covering the losses. Although their more recently insured customers could switch companies, both the Albert and European had many policyholders on their books who had been with them (or an absorbed company) for decades, and could not switch to a new company without a major sacrifice. These people had to accept scaled-back benefits, which, depending on how deep their original companys shareholders pockets were, ranged from five shillings in the pound to twenty, although even in those cases they forfeited any bonuses that might have accrued.1 Several more British life insurance offices failed after 1870, most notably the Great Britain Mutual in 1880 and the Briton, Medical and General in 1886.
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Both had pursued business models in the 1860s that were similar to the Albert and European, and both limped through the 1870s before finally shutting their doors. The major difference from the earlier failures lay in the fate of their policyholders. The Life Assurance Companies Act of 1870 (discussed elsewhere in this volume) included provisions that made it easier for solvent life offices to take over customers policies, which generally translated into larger benefits than would have resulted from liquidation.2 The Act also rendered it much less likely that newly formed insurance companies would repeat the same blunders, with the result that the Britons demise would be the last major life insurance failure in Britain for nearly a century. Notes
1. 2. Alborn, Regulated Lives, pp. 613. Ibid., pp. 679.

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The Failure of the Albert Insurance Company, Economist (1869)

Some months since there was a good deal of discussion as to Insurance Companies, of which the real cause was not told to those who read it. It could not be written, though it was well known that at least one large Insurance Office, the Albert, was insolvent; that it could not long continue to pay claims; that unless it was belied it already paid claims with difficulty. This was the real reason why those conversant with the subject selected it, though it would have been a libel to say why they did so. But now the calamity has come. The real state of the Albert office is known, if not accurately, at least sufficiently and approximately. Two actuaries of eminence1 have made a rough estimate, pending a more elaborate investigation, the result of which is this:
Liabilities. Present value of liabilities on policies (after giving credit for the value of premiums) . . . . . . . . . . . . . . . . . . . . . . . 1,147,487 Present value of liabilities on annuities . . . . . . . . . . . . . . 150,445 Claims admitted and general debts . . . . . . . . . . . . . . . . 110,000 Assets. Funds in hand. . . . . . . . . . . . . . . . . . . . . . . . . . . Uncalled capital estimated to yield . . . . . . . . . . . . . . . . Deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271,500 150,000 421,500 986,432

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1,407,932

The deficiency is nearly a million, and it might be made easily worse, for what we have called funds in hand are not all really so; they include loans on policies, reassurances, and such things. Still nothing need be added to the bare statement that a deficit of more than a million exists in this office; and that even if it went on, got in all its premiums, and paid everybody, the policy holders, those who had paid money to it for years and invested their savings in it for years, would lose this great sum. But something must be added. The real truth is worse than this. If the office stop now, if it is not left to wind itself up gradually, if those who have claims will want to be paid all there is, and those who have premiums to pay will not be
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ready in paying them and this will happen if a complicated arrangement is not agreed to the result will be far worse. It is conjectured to be more like this:
The claims of the policy holders, assuming that they could prove for the full amount of premiums paid . . . . . . . . . . . . . . 3,000,000 150,000 Annuities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000 Claims admitted, &c . . . . . . . . . . . . . . . . . . . . . . . .

3,260,000 421,000 Less assets as before . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,839,000

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Bank of London . . . . . . . . . . . . . . . . . . . . Anchor . . . . . . . . . . . . . . . . . . . . . . . . . Falcon . . . . . . . . . . . . . . . . . . . . . . . . . . Merchant and Tradesmen . . . . . . . . . . . . . . . Beacon . . . . . . . . . . . . . . . . . . . . . . . . . Family Endowment . . . . . . . . . . . . . . . . . . . Kent Mutual . . . . . . . . . . . . . . . . . . . . . . English Provident (previously United Homopathic) Manchester and London . . . . . . . . . . . . . . . .

In some cases probably the office would be liable for more than the premiums received, because the insured say an old man of 60 may not be able to insure his life anywhere else. The office are bound to make good the loss incurred by the non-fulfilment of their contract, and this is not measured only by the amount paid to it to secure a future benefit. It is measured by the disappointment of that benefit. It is of no use to tell a man whose life is uninsurable to go and insure somewhere else. The office who took his premiums is bound itself to insure to pay him his stipulated sum at death, or to compensate him now for not paying it. But omitting this, and looking only to the premiums paid on the policies, the deficit in this office comes near to three millions sterling. Some discussion is raised as usual as to the personal liability of the directors for these losses, and if absolute fraud can be proved in the management no doubt they would be liable. But though this is a vital matter to the directors, it is of very little importance to the policy-holders. The directors property may not amount to 6d in the on their great debt. Persons who manage other peoples money like this have not often much of their own to lose, and a very tolerable property to live on is lost and comes to nothing in a moment when set against business liabilities of great magnitude. How this great loss has happened we do not yet know, but one item of it explains itself. The Albert, according to a / list published in a contemporary, took off the following offices:
No. of Years Duration. 7 15 2 14 3 26 10 2 9

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The Failure of the Albert Insurance Company London and County . . . . . Oak Mutual . . . . . . . . . . Medical, Invalid, and General National Guardian . . . . . . Official and General . . . . . Preceptors and General . . . . Times Life and Guarantee . . Independent . . . . . . . . . Western . . . . . . . . . . . . Metropolitan Counties . . . . St George . . . . . . . . . . . London and Continental . . .

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6 2 19 6 2 1 8 2 23 14 7 5

Total, 21 offices.

Thus many, if not most, of these offices were just out of their first youth. Almost any insurance office does well for a little while. However low the premiums are, how much soever is spent in advertising, however large a commission be given to agents, however improvident the business may be, and however sure ultimate insolvency, still that insolvency is not immediate. Most persons who insure their lives live for a considerable period after insuring them, and so for some years almost all offices have funds in hand. But as soon as this happy early period is past claims come in thick; and this is the period of amalgamation, when offices try to sell their business, and get out of the liabilities they have incurred as best they may. But it is evident that buying up such concerns is in the last degree dangerous; you are buying what is insolvent, and what is sold because it is insolvent, and in all likelihood you will lose. Very often it appears that the officers of these amalgamated offices were pensioned off too, so that the Albert lost not only the inherent deficit caused by the badness of the office, but an added deficit beside caused by their rewarding and paying the persons who had made it bad. But what is to be done to prevent such calamities, or can anything be done? To this subject we gave our opinion some months since, and we may now shortly restate it. There are two suggestions that are commonly made. First, it is said, and this was the principle of Mr Caves Bill,2 that insurance offices should be compelled to publish certain items of their balance sheets, each of them in the same form. But to this there are fatal objections. Why should the State interfere to help policyholders who will not help themselves? Insurers have the power of enforcing on companies the publication of any accounts they choose. They have money to give away: they have the patronage. Let them say such and such accounts shall be given us or we will not insure, all would be remedied. The only successful offices would be those who gave the returns; all others would fail. But insurers do not say this for the plain reason that they do not understand the accounts when they get them. To form any idea as to the goodness or badness of

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an insurance office is beyond the powers of almost every one. Each policy must be valued separately. A future liability (to be discharged when death happens) is to be set against an annuity paid by way of premium: few are equal to this process, and not everyone can understand its result. Items out of a balance sheet are of no use except to those who would understand the whole balance sheet. Common insurers do not require the suggested items, and could not use them if the law said they should be published. The remedy of Mr Caves Bill errs both by excess and by defect: it only gives people what they could have now if they chose to ask, and so does too much; and it does not give them enough to be of any use to them, and in that does too little. The second remedy commonly suggested is that the State should, as in America, investigate the solvency of all insurance companies and publish the accounts of them when investigated. But to this there is the common objection to all State interference. If the insurer chooses to go to an uninvestigated company, why should he not go? If he likes to pay a less premium and take his risk, why should he not be allowed to take his risk? He is a fool, it will be replied, for so doing, but is that really so? Is he a fool? at least, is he so necessarily and always? Many of the most considerable improvements in all trades would have been pooh-poohed and forbidden by Government if their leave had been wanted. Life insurance is, indeed, in the main well understood, as regards common middle-class lives in England; but perhaps not well, not equally well certainly, as to inferior lives here, or as to all lives in unhealthy countries. Perhaps, too, the price at which policies might be purchased by the office could be raised; at any rate it is a question worthy of discussion, whether it could or could not be raised. On all these points improvement is possible, and if so it would be dangerous to give a Government officer the power of saying whether it should be done or no. We must not stop the improvement of all companies because of the possible badness of certain companies. But what remains? Is nothing to be suggested? Is there no remedy? Are such frauds as that of the Albert necessary and inevitable evils? We think not. Though Government should not interfere with all insurance offices, there is no reason why we should let alone all insurance offices. It might be possible to have a voluntary audit of suspected companies without having a compulsory audit of all companies. If some large number of policy-holders chose to petition the Board of Trade to examine a company as to which they have doubts, and give security for costs, why should not the Board of Trade examine it?3 This would certainly have stopped the Albert years ago; policy-holders have been doubting it for years, only they have had no resource, they have not known what to do. Such an audit, suggested by suspicion, and to be paid for by those who want it, is very unlikely to stop improvement. Only a long course of bad business engenders discredit, such an amount, at least, of diffused discredit as will reach many

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scattered policy-holders and make them agree to bear the cost of a long and dear inquiry. Policy-holders are too likely to be over fond of new advantages which their office gives though other offices refuse: they are not likely to spend money in mistaken inquiries for that reason. And there can be no doubt that the condition of an insurance office ought to be intelligible and ascertainable. It is not like a bank dealing in bills of exchange and other securities, the goodness or badness of which is a matter of opinion after all. An insurance office deals with securities on properties of known value, and when wanted a good auditor would be sure not to err much in the value of these.

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Notes to pages 25770 Exchequer appoints them to be Crown Steward and Bailiff of the three Chiltern Hundreds, the holding of which position is also against the rules of Parliament, leading to the members seat being revoked.

The Failure of the Albert Insurance Company

1. Two actuaries of eminence: The investigation was performed (using the net-premium valuation method) at the request of the Alberts directors by Charles Jellicoe (180982), who was the Eagle Lifes actuary in 184770 and president of the Institute of Actuaries in 18607, and Arthur Hutcheson Bailey (18231912), who was the London Assurance Corporations actuary in 186195 and president of the Institute of Actuaries in 187882. Mr Caves Bill: Stephen Cave, a Bristol banker and Conservative MP, introduced a Bill in spring 1869 for the regulation of life insurance companies; an Economist column opposed the bill on 13 March of that year, and a week later proposed state certification of actuaries as an alternative. Poor health led Cave to withdraw the bill in July 1869; a revised version passed Parliament in 1870 as the Life Assurance Companies Act. why should not the Board of Trade examine it?: An amended version of Caves 1869 Bill included a clause that would have enabled exactly this sort of audit, whereby twenty or more policyholders could initiate an investigation under procedures outlined in the 1862 Companies Act. In the face of strong opposition from insurance company executives, Cave agreed to remove this clause, which was not reintroduced into the 1870 Act.

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3.

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An Insurers Grievance
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the very eminent member of the legal profession: This most likely refers to William Page Wood (180181), a Vice Chancellor between 1853 and 1868 and Lord Chancellor under William Gladstone from 1868 through 1872; he was listed as Western Lifes Consulting Counsel in the 1840s.

The Absconding Secretary of the Trust Company

1. Two Hundred Thousand Dollars: The final total of Nicolls defalcations, as reported in the North American and Daily Advertiser on 23 August 1844, was $359,606; his whereabouts after 1843 remained unknown. At the time of this incident, the New York Life and Trust dominated the American life insurance market, accounting for more than half of all life insurance in force.

Life Insurance
1. 2. Might be the be-all and the end-all here: William Shakespeare, Macbeth, Act I, scene vii. the risks of another company: In 1872 the Continental absorbed the business of the Empire Mutual Life Insurance Company, which had formed in New York three years earlier with many of the same directors as the Continental; in 1871 Luther Frost had been elected president of the Empire.