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c h a p t e r 2 Selecting Risks in an Anonymous World The Development of the Agency System  In the summer of 1832, Levi A. Ward Jr. of Rochester, New York, wrote to President William Bard of New York Life Insurance and Trust Company in New York City requesting an appointment as local agent for the company.1 The firm’s two older rivals—Pennsylvania Company and Massachusetts Hospital Life Insurance Company—rarely sold policies outside their respective home bases of Philadelphia and Boston. Each instead preferred to restrict its sales to individuals whose application responses could be verified by people known and respected by the company’s board of directors and who could be visually examined (in person) by the company’s officers. Furthermore, a company strategy of minimizing risks through strict selection would theoretically help to compensate for the absence of accurate mortality tables by driving the rate of mortality among policyholders well below that of the population as a whole. Since New York was the largest city in the nation, with a population more than 2.5 times that of Philadelphia or Boston by 1830, NYL&T could have pursued a similarly risk-adverse business strategy. Instead, President Bard recognized that “the safety of the Office depends more on the numbers insured”— that prudently spreading the company’s risks across greater numbers of policyholders would actually place the firm in a more secure financial position.2 Thus Ward’s request to expand the geographic reach of the company into this rapidly expanding city in western New York caught Bard’s attention. While NYL&T already had several representatives spread throughout the state— including in Monroe County, where Rochester was located—these agents were mainly charged with assessing the property of rural landowners requesting mortgage loans from the company. Loan agents occasionally forwarded to the head office requests for life insurance, but rural farmers were not the primary target of policy sales. Rather, the company anticipated that middle-income urban professionals (small merchants, lawyers, clerks, store proprietors, teachers, doctors, and clergymen ) would be most interested in its product. This emerging middle class consisted of people with little real estate or investment income whose family livelihood depended instead on the earnings of a single breadwinner and whose economic secu- 48 The Creation of an Industry rity thus would be completely erased with the untimely death of that breadwinner. However, the more disconnected a company was from these applicants, the harder it would be for the firm to obtain the information essential for accurately evaluating the risk of insuring them. As Bard well knew, without a careful selection of lives, even the most accurate mortality table would be rendered useless, since the greatest demand for insurance most likely came from those facing the highest risk of death. When Ward’s letter arrived, the board of directors of NYL&T had just recently “proposed that the Agents of the Company for life insurance should be distinct from the Agents for making loans,” in order to ensure that the agent was in regular contact with the target clientele and that he possessed the necessary capacity for judging applicants.3 Levi Ward would be one of the first people considered for such a position, but the mere desire to represent the company as agent was hardly an adequate qualification. Bard had in mind very particular characteristics for the men who would make up this new agency system, characteristics that would limit the company’s exposure to instances of adverse selection and moral hazard. He sought to appoint highly respected men with extensive connections within their communities , whom the company could trust to make honest and informed evaluations of applicants. Local agents would be obliged to act as the home office’s eyes and ears on the ground; they initially would be charged with weeding out poor risks rather than soliciting new customers. As Bard instructed Ward in response to his initial inquiry: “The Agent has not much to do that is troublesome. He is to see the party applying for insurance & judge from his appearance of his health . . . The point of most importance indeed only importance is his health at the moment of insurance” (emphasis added). In addition to this visual evaluation, directors also expected the agents to possess broad knowledge of the applicants themselves, in order to assess more accurately their health history and habits: “He must not be of a family liable to consumption or other hereditary disease, must be perfectly sober & of sound...

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