In the mid-19th century, states began to provide protections for consumers of financial products. A heroic figure in that story is Elizur Wright (1804-1885), an actuary who strengthened consumer confidence in financial contracts based on a human life, such as life insurance and annuities. Wright, a colorful character who fathered 18 children, fought for the abolition of slavery, and personally calculated the reserve values for every insurance policy issued in the State of Massachusetts using the Arithmeter he invented (pictured below), became one of the first Insurance Commissioners in the United States.
Often called the “father of life insurance,” Wright campaigned for four decades against abuses in the fledgling American industry. When he began his crusade in the 1840s, families concerned about the untimely death of a wage-earner had reasons to be skeptical towards financial products. In the absence of standards for holding companies accountable, there were obvious frauds, such as unincorporated “wildcat” insurance outfits fronted by “lightning agents” who pocketed premiums on policies and left town before customers knew they had been swindled. A common, unfair business practices was immediate cancellation of policies when a single premium payment was missed, with no recognition of built-up cash surrender value.
Many insurance companies’ business models were not founded on established principles of actuarial science. Honest businessmen could be acting in good faith but with inadequate understanding of how to calculate appropriate reserve funds. Competitive pressure from cut-rate premiums was increasing. Responsible insurers feared that consumers, unable to tell the difference between sound and unsound practices, would shun the purchase of life insurance altogether.
Elizur Wright deserves credit for enhancing American consumer confidence in the security of financial products based on human lives, and for his leading role in constructing a public policy framework. Wright lobbied successfully for legislation in Massachusetts compelling life insurance companies to open their books and be publicly accountable for business practices, and developed standards based on actuarial science that were later adopted by nonprofit charitable gift annuity programs.
He personally calculated the reserve values for every life insurance policy issued in Massachusetts, using a machine he invented called the Arithmeter.