We all die. And we all need to make provisions for that eventuality—especially if we have dependents or goals extending into the future. In traditional societies, those provisions were often handled by the immediate family members. Elders would nurture the young through the risks of infancy and the young in turn would help their elders through the ailments of old age. As populations grew, those obligations continued and extended out to tribal and ethnic groups—a trend that continued into modern times.
In America, these obligations took the form of “mutual aid” societies, which gave immigrant groups a means both to provide a “home” for their values and to address various societal obligations, including those associated with dying. Such societies offered a form of insurance for its members, among other services. The cultural values of the community ensured the fulfillment of the agreed upon duties.
Mutual aid societies expanded rapidly in the late 18th century and dominated many ethnic communities until well into the 19th and early 20th centuries.
The mutual aid approach is partly economic. The insurance scheme must be actuarially sound, but is also partially cultural. Death rituals were cultural, while markets were impersonal. Therefore, it was seen as immoral to move these into the market. And traditional communal rules assured members that the risks of death could be addressed respectfully, that the service providers were trustworthy.
Such a dynamic defined the early days of Ybor City, now a part of Tampa, Florida, where mutual aid societies were organized along communal lines—Cuban, Spanish, and Italian.
These organizations pooled risks, but only within their respective communities. That limited their ability to diversify risk by spreading it over as large a pool as possible—a key element of modern insurance. Yet, at the same time, knowledge within the community limited the problem of adverse selection by ensuring that making it harder for irresponsible members to become a burden on the others. Cultural values softened the economic aspects of these arrangements. One wasn’t “profiting” from death, but participating in the shared ritual of caring for the deceased and their families.
Modern funeral insurance arrangements, therefore, had to overcome the widespread view that any profitable enterprise based on death was immoral. Cultural and religious communities found this stigma easier to address. Thus, the transition from tribal and cultural insurance to the impersonal and economic type was not an easy one. It required a willingness to abandon the traditional, communal ways of death, and to trust that the efficiency of markets would not undermine the cultural values of one’s immediate community.
This challenge was met early on by insurance firms who worked diligently to note the morality of a more robust and affordable insurance scheme. They effectively noted that communally based mutual aid societies left out those who were outsiders. Yet, persuading people to allow the money metric into the realm of death and accept that monetary compensation for the loss of a husband or father was appropriate was a challenge. These factors slowed the acceptance of life insurance over communal forms of managing the risks of death.
Scholars have researched the early voluntary mutual aid insurance schemes and have found much to commend in their methods. Members, for example, were expected to attend the funerals of fellow members. The late economist Elinor Ostrom received a Nobel Prize for her research in how strong cultural enclaves address a broad array of functions handled in the modern world via economically motivated market entities.
The move from a voluntary, non-monetary exchange to economic transfers was also the theme of Richard Titmuss’s classic study, The Gift Relationship: From Human Blood to Social Policy, in which he argues against buying and selling of blood supplies. His argument is that making such transfers blurs the boundaries between the traditional and the market. Opposition to life insurance was based in large part on similar arguments.
Despite the advantages offered by mutual aid societies, American consumers came to realize the value of entrusting their family’s financial future to industry professionals rather than to their extended family and fellow immigrants. From a policy perspective, the question of how such a tribal arrangement evolved into the realm of the market is particularly important. The shift is not only economic, but also cultural, given that the market alternative must gain societal legitimacy.
Much of the distaste that people feel toward free markets generally stems from the failure to gain such legitimacy. Economic factors alone rarely suffice. Lower premiums, higher payouts, and assurance that reserves will prove adequate are all valuable, but more is needed. Nobel laureate economist Friedrich Hayek long ago noted that the challenge of civilization was to obtain for the impersonal market the moral legitimacy long enjoyed by tribal alternatives. Many sectors of the economy are still struggling with that challenge today.