Fixed Annuities

Although fixed annuities may seem like modern financial instruments, they have actually existed for millennia. According to the author of “The Early History of the Annuity”, Edwin W. Kopf, annuities were in use as far back as 2500 B.C. in Babylon. Here is some information about this topic:

Pseudo Annuities in Babylon and Assyria

Edwin W. Kopf’s book states that the Babylonians and Assyrians had a pseudo annuity practice. Unlike modern annuity contracts, the Babylonians and Assyrians granted periodic payments secured by property, land, or any other form of acceptable asset. During this era, there were financial institutions operating in Babylon, which offered loans to traders, merchants, as well as the manufacturers of various goods.

Annuities in Egypt

According to Kopf, archeologists who have examined ancient Egyptian legal codes have found evidence of annuity practice. In fact, they have unearthed evidence showing that Hepd’efal, an Egyptian prince who ruled during the Middle Empire, purchased an annuity.

Annuities in Rome

Scholars have unearthed a lot of evidence showing that the Romans, too, bought and sold annuities. However, it is important to note that the insurance investment contracts that the Romans, Egyptians, and Assyrians bought or sold would be considered crude when compared to their modern equivalents. Nonetheless, in Rome, for example, the use of arithmetic calculations such as algebra was quite prevalent in business circles. In fact, researcher Theodor Mommsen found that Romans who lived during the second and third centuries A.D. outperformed Europeans of the 16th century on the arithmetic front. What’s more, the aforementioned Romans were well versed in various aspects of business including buying/selling goods and services on installments, giving discounts, and bookkeeping.
Edwin W. Kopf refers to Lex Falcidia (published around 40 B.C.), which had provisions for the distribution of a deceased person’s estate to his/her heirs. It is important to note that heirs could not receive less than one¬¬ fourth of the testator‘s estate. However, distributing the estate of a testator who had left behind a life annuity presented challenges because there was no system governing the capitalization of such contracts. As a result, Emelius Macer published a table showing how to capitalize annuities. Pretorian prefect Ulpanius also published a table showing values for an annuity of one person per year (about 225 A.D.).

Church’s Position on Fixed Annuities

When the Roman Empire fell, most of its financial systems and practices vanished mainly because the church, at that time, opposed businesses that gave out loans and charged interest on the same. In fact, the Council of Celchyth (A.D. 816) issued an edict stating that church lands should not attract fees/charges that exceeded the term of the single life. Other prominent people who adopted a similar stance included Cardinal Henricus and Kenulf, King of Mercia.

Emergence of Modern Annuity Practices

Edwin W. Kopf argues that modern fixed annuity practices started in Flanders and Brabant. He states that records from the Town Hall of Tournai show that annuity sales were common as far back as 1228. For example, records from the city show that annuity rates for the years 1304, 1323, and 1325 ranged from 11¬¬-14 percent. From 1396¬-1445, annuities had rates of about eight percent. For example, Robert Norman and his son Baudoin, residents of Utrecht, had an annuity contract worth 400 Parisian Livres. In fact, this contract had terms that would not be out of place in modern insurance circles. It stipulated that if the value of the Parisian Pound fell, future payments would revert to the currency of Tournai (the Sou) at a ratio of 50 Tournaise Sous to 43 Parisian Livres.

17th Century Annuities

In the 17th century, Lorenzo Tonti created an annuity that people at the time called a tontine. In an effort to create the annuity, Tonti made a proposal to Cardinal Mazarin to create a fund worth 25 million Parisian Livres. The fund would pay interest at a rate of 4.1 percent to subscribers. The fund’s contribution limits and interest rates varied depending on a subscriber’s age. Unfortunately, this proposal never saw the light of day because of differences of opinion between the French king and the members of parliament. Nevertheless, this was not the end of Tonti’s idea. The city of Kampen (Denmark) issued 400 tontine certificates worth 250 florins each in 1670. The interest rates for the certificates were set at zero percent for the first 24 years, 32% after 36 years, 400% after 73 years, and 1,600% interest after 80 years. The city of Amsterdam followed suit with an issue of 200 tontine certificates worth 250 florins each in 1671. In 1674, the city of London issued tontine annuities in units of £20.

Edmund Halley

Scholars and researchers such as Edwin W. Kopf agree that Edmund Halley was the first person to create an annuity table based on the life expectancy of actual people. Halley created the Breslau Life Table using sound statistical and actuarial science principles. In 1698, the Mercers Company started selling annuities in London that paid out £30 for every £100 invested.

Fixed Annuity contracts in the 18th century

During this century, fixed annuities became more widespread. Businesses and people with an interest in these contracts also started using statistical methods to create annuity tables. For instance, Smart’s interest tables were published in 1707 with a second edition printed in 1726. In 1726, Richard Hayes published “A New Method of Valuing Annuities Upon Lives”. Other people who made significant contributions on the annuity valuation front included Weyman Lee (“Essay to Ascertain the Value of Leases and Annuities”) and Benjamin Webster (“The Complete Annuitant”).

Annuities in America

According to Kopf’s book, fixed annuities in America can be traced to the Presbyterian Ministers Fund, which was formed on January 11, 1759 in Philadelphia, Pa. The primary aim of this fund was to take care of “distressed ministers, their widows, and orphans.” However, the later specialized in annuity contracts. In 1794, the first insurance company to operate in America got a charter and started operations in Pennsylvania. Although it ceased operations soon thereafter, other insurance companies such as New York Life (1830), and New England Mutual Life (1835) quickly filled the void. By 1910, American annuity premiums stood at $6 million. This figure rose to $11 million in 1926, $108 million in 1930, $200 million in 1932, $400 million in 1939, $22.5 billion in 1980, and about $240 billion in 2011, according to LIMRA.
In conclusion, annuities have existed for millennia. In fact, according to historians, some of the powerful ancient civilizations and empires that used annuities include the Roman Empire, the Egyptian civilization, and the Assyrian empire.

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