Tontine

A tontine [ton-teen] is an investment plan for raising capital, devised in the 17th century and relatively widespread in the 18th and 19th. It combines features of a group annuity (recurring payments) and a lottery. Each subscriber pays an agreed sum into the fund, and thereafter receives an annuity. As members die, their shares devolve to the other participants, and so the value of each annuity increases. On the death of the last member, the scheme is wound up. In a variant, which has provided the plot device for most fictional versions, on the death of the penultimate member the capital passes to the last survivor.

The investment plan is named after Neapolitan banker Lorenzo de Tonti, who is credited with inventing it in France in 1653, although it has been suggested that he merely modified existing Italian investment schemes. Tonti put his proposal to the French royal government, but after consideration it was rejected by the Parlement de Paris. The first true tontine was therefore organized in the city of Kampen in the Netherlands in 1670. The French finally established a state tontine in 1689 (though it was not described by that name because Tonti had died in disgrace, about five years earlier).

The English government organized a tontine in 1693. Nine further government tontines were organized in France down to 1759; four more in Britain down to 1789; and others in the Netherlands and some of the German states. Those in Britain were not fully subscribed, and in general the British schemes tended to be less popular and successful than their continental counterparts. By the end of the 18th century, the tontine had fallen out of favor as a revenue-raising instrument with governments, but smaller-scale and less formal tontines continued to be arranged between individuals or to raise funds for specific projects throughout the 19th century, and, in modified form, to the present day.

Louis XIV first made use of tontines in 1689 to fund military operations when he could not otherwise raise the money. The initial subscribers each put in 300 livres, and, unlike most later schemes, this one was run honestly; the last survivor, a widow named Charlotte Barbier, who died in 1726 at the age of 96, received 73,000 livres in her last payment. The British government first issued tontines in 1693 to fund a war against France, part of the Nine Years’ War.

Tontines soon caused problems for their issuing governments, as the organizers tended to underestimate the longevity of the population. At first, tontine holders included men and women of all ages. However, by the mid-18th century, investors were beginning to understand how to game the system, and it became increasingly common to buy tontines for young children, especially for girls around the age of 5 (since girls lived longer than boys, and by which age they were less at risk of infant mortality). This created the possibility of significant returns for the shareholders, but significant losses for the governments. As a result, tontine schemes were eventually abandoned, and by the mid-1850s tontines had been replaced by other investment vehicles, such as ‘penny policies,’ a predecessor of the 20th-century pension scheme.

Tontines became associated with life insurance in the United States in 1868 when Henry Baldwin Hyde of the Equitable Life Assurance Society introduced tontines as a means to sell more life insurance, and meet the demands of competition. While once very popular in France, Britain, and the United States, tontines are presently banned in Britain and many jurisdictions in the United States, because many of these schemes were little more than swindles. Geneva, Switzerland was known for its active market in tontines in the 17th and 18th centuries. The First Life Directive of the European Union specified tontines as a class of insurance business to be underwritten by authorized and regulated companies, but that part of the regulations was not enacted in the United Kingdom.

In Francophone cultures, particularly in developing countries, the meaning of the term ‘tontine’ has broadened to encompass a wider range of semi-formal group savings and microcredit schemes. The crucial difference between these and tontines in the traditional sense is that benefits do not depend on the deaths of other members. As a type of rotating savings and credit association (ROSCA), tontines are well established as a savings instrument in central Africa, and in this case function as savings clubs in which each member makes regular payments. They are wound up after each cycle of loans. Informal group savings and loan associations are also traditional in many east Asian societies, and under the name of tontines are found in Cambodia, and among emigrant Cambodian communities.

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