A Short History of Tontines

Abstract

... [T]he tontine is perhaps the most discredited financial instrument in history. A tontine is an investment scheme through which shareholders derive some form of profit or benefit while they are living, but the value of each share devolves to the other participants and not the shareholder's heirs on the death of each shareholder. The tontine is usually brought to an end through a dissolution and distribution of assets to the living shareholders when the number of shareholders reaches an agreed small number.3 If people know about tontines at all, they tend to visualize the most extreme form - a joint investment whose heritable ownership ends up with the last living shareholder. The all or nothing nature ofthat form is memorable. The last survivor principle has been the basis for a number of dramatic works whose plots hang on the machinations of a tontine participant to murder his co-investors to insure the core property reverts to him.4 In fact, tontines are far more innocuous and served as an important step both in developing modern insurance plans and providing some of the earliest reliable actuarial data on which the later insurance plans could be developed. Since tontines have been neglected for many years, this Essay is primarily concerned with providing background information. It covers the history of their development and the broad variety of uses they have served from the 17th to the early 20th centuries. It concludes with a brief exploration of the revival of the tontine as a possible addition to the range of modern financial tools. EARLY HISTORY The word 'tontine' is derived from the name of Lorenzo de Tonti, an Italian political exile living in France. He proposed the original tontine to Jules Cardinal Mazarin in the early 1650's as a means for French King Louis XIV to raise revenue. The French treasury, battered by the Thirty Years War and the rebellions within France known as the 'Fronde,' needed to raise money.5 The tontine scheme reputedly evolved from similar offerings in Italy, albeit on a smaller scale, to raise income from a broad spectrum of the population.6 As envisioned by de Tonti, tontine subscribers would buy a special kind of annuity at 300 livres a share. Investors could name a third party, often referred to as the nominee, as the life in interest for their stake in the tontine. Participation was structured in groups of equal size according to the age of the nominees: e.g. 0 to 7, 8 to 14, all the way through the age of 63. 7 Each beneficiary was to receive an annual payment based on the interest earned by the combined initial capital contributed of investors in the applicable age cohort. The rate of interest increased with the age of the nominee. As nominees died, the share related to that nominee became worthless and the payments based on each of other surviving nominees would increase. The subscriber represented by the last nominee in each group would get all the interest generated by the capital within that band. On the death of the last subscriber, the capital would revert to the government.8 Neither de Tonti's original 1653 proposal nor a Danish proposal of the same year ever got off the ground.9 The first operating tontine was established by the city of Kampen in Holland in October, 1670. The cities of Amsterdam and Groningen followed within the same year.10 There were almost 200 local Dutch tontines offered by 1700. CityStates in a still un-unified Germany followed suit.11 While de Tonti's original proposal had royal support, it was not registered by the Parlement of Paris, a court-like institution, which had the effect of killing the proposal.12 Undeterred, de Tonti continued to press his tontine idea and various other grand schemes such as a national lottery. At some point, de Tonti offended someone in power. French Finance Minister Jean-Baptiste Colbert, the successor to Mazarin as de facto Prime Minister of France, possibly issued the 1668 royal warrant which sent de Tonti to the Bastille. …