What is a tontine ?
A tontine is a scheme for raising capital which combines features of a group annuity and a lottery. Each member in the group puts an agreed upon sum into a pot, and upon the death of every other member, the last person remaining collects the pot.
The scheme is named after Neapolitan banker Lorenzo de Tonti, who is generally credited with inventing it in France in 1653.
Each indigenous investor pays a sum into the tontine. Each investor then receives annual dividends on his capital. As each investor dies, his or her share is reallocated among the surviving investors. This process continues until only one investor survives. Each subscriber receives only dividends; the capital is never paid back. The proceeds of the subscription were used to fund various private or public works projects. These sometimes contained the word “tontine” in their name, as did the Tontine Coffee House on Wall Street in New York City. Built in 1792, it was the first home of the New York Stock Exchange. In a later variation, the capital would devolve upon the last survivor, effectively dissolving the trust and usually making the survivor very wealthy; it is this version that has often been the plot device for mysteries and detective stories.
In Edinburgh, Scotland, Fortune’s Tontine Tavern was built in 1796 on Princes Street. It was Edinburgh’s first proper hotel. Matthew Fortune’s father John had previously run Fortune’s Tavern in Old Stamp Office Close in the High Street in the Old Town, a favourite of the upper classes. The tontine which owned this moved the business to the newly created and fashionable New Town. The five star Balmoral Hotel, built in 1902, sits on the site today.
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 and is lent the kitty in turn. They are wound up after each cycle of loans.
Financial inventions were patentable under French law from January 1791 until September 1792. In June 1792 a patent was issued to inventor F. P. Dousset for a new type of tontine in combination with a lottery
Louis XIV first made use of tontines in 1689 (after Tonti’s death) 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, the widow, 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. However, tontines soon caused problems for their issuing governments, as they would increasingly underestimate thelongevity of the population. At first, tontine holders included men and women of all ages. However, by the mid-18th century, investors had caught on how to play 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 to produce great returns for the holders, but it proved to be quite costly for the governments. As a result, the tontine scheme was eventually abandoned, and as of the mid-1850s, the tontines had been replaced by other investment vehicles such as “penny policies“, a predecessor to the 20th-century invention of the 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 have been banned in Britain and many jurisdictions in the United States, because many of these schemes were little more than swindles. Geneva, in Switzerland, was known for its active market in tontines in the 17th and 18th centuries. Nevertheless, there are underground organizations in the US that still use the tontine. The First Life Directive of the European Union specified tontines as a class of insurance business to be underwritten by authorised and regulated companies, but that part of the regulations was not enacted in the United Kingdom.
