So, in order to make insurance work it takes a lot
of developments and it's not easy and obvious.
The concept of insurance, as we pointed out,
goes back to ancient Rome but it doesn't seem to have taken over.
It wasn't managing most risk.
It was a narrow scope of risk.
If you look at the history of insurance,
insurance developed because of
specific technical advances like the development of actuarial theory.
So it was in the 1600's that they produced the first life tables.
And what they were, it showed the probability of dying at each age.
That's what you need to know if you're doing a life insurance policy.
What is the probability that the insured will die?
And they didn't, nobody had any statistics anywhere in
the world on that until the 1600's.
So they started doing life insurance but it didn't take off well.
And fire insurance, it wasn't widely accepted.
The people mistrusted it and didn't understand it.
Even in my family,
my grandfather who owned a farm in Michigan,
lost their house to a fire and they weren't insured.
So this is part of our family.
My family moved into the chicken coop, lived there,
because they came home one day,
they were on an outing and they came home and the house was gone.
It completely burned down when nobody was there.
So there are some milestones in
insurance history about how we can get things going so that it works.
In 1840, Morris Robinson who is the head of the Mutual Life of New York,
a mutual insurance company,
got the idea that what insurance company really needs is insurance salesman.
And these had to be pillars of the community type people.
And so they had to be paid very well.
So the idea it was, he was going around hiring exemplary men,
I assume they were all men in those days,
and he had to make a door to door call.
It's unusual you get a man that looked like someone you'd
heard of as a pillar of the community coming to your house.
Maybe they would do it through your church or somehow get introduced.
But you needed salesmen because people resisted the idea of paying
for something like insurance which seems abstract and you can easily forget the risks.
It turned out that you had to pay these guys a lot.
They had to keep coming back and re-affirming.
They had to pay another visit to you because you would tend to stop
paying on the insurance after some years when you hadn't had a claim.
Then Henry Hyde in the 1880's discovered having
the sales appeal of having insurance with a large cash value.
So, if you stop paying your insurance,
you lose the cash value.
And it's also a saving vehicle as well.
Why combine insurance with savings?
Well, because it seems to affect the psychology of the purchase.
And Viviana Zelizer, who is a sociologist at Princeton,
did a big study of how insurance was marketed in the 19th century.
And she said that,
talking particularly about life insurance,
women were the main beneficiaries of life insurance because men were the breadwinners,
are earning an income and they tended to die young in those days.
But women seemed to be,
according to her studies,
objecting to life insurance saying,
"No, I don't want that."
So why would a woman say that in the 19th century?
Well, partly because Viviana Zelizer concludes,
they were Fundamentalist Christians and they believed in the power of prayer.
And they thought, women thought that insurance was some crazy gimmick scheme.
And they wanted to trust in the Lord rather than in some thing that looked like gambling.
So one woman said, apparently, "You know,
this insurance policy it looks like I'm making a bet that my husband will die."
And she said that will encourage God's wrath.
I should stay out of that because
I'm challenging God to take my husband and I should not do that.
So they developed a different sales pitch and the new sales pitch was,
don't try to explain probability theory.
Don't try to explain how this business works.
You come to the wife and you tell her,
"I have a mission, okay.
My mission is to help your husband protect you from beyond the grave.
If God forbid something horrible were to happen to your husband,
you know he would love and protect you if he could.
I'm making it possible."
And that, that seemed to work and women went along with it.
So these are, these are little inventions,
they're marketing inventions, but they're important.
Now we don't need life insurance as much because people live longer.
Really life insurance is to protect families against
the death of a father or mother while young.
Advantage of insurance might
be that it has an information value that, if like you were saying earlier,
if I look up the growing premium on an insurance for insuring some flood on
the other side of the country, then, I look at the price.
It is going up, then all of a sudden i'm inferring something [inaudible].
Right.
So that has other [inaudible]?
Yeah. If they didn't have the insurance then the seller of
the property has no incentive to tell you about the flood that we had 20 years ago.
You know you can't see the damage anymore so you might not know, there's no incentive.
But if, if, if you are looking to
buy insurance and then you see they want a thousand dollars a month for insurance,
what are we talking about here?
This is crazy.
Why is that?
Then, yeah it makes an impression on people.
You know, I talk a lot about human psychology and
human failures but there is a certain element of
rationality and that moment happens when you're
about to sign the papers for your insurance and you say,
"Wait a minute.You want me to pay a thousand dollars a month
just for the flood insurance add on?"
Then it makes you think and most people will make somewhat rational response to that.
What do you think about the ---.