Honest Protection
When people hear the word “insurance” for the first time, they put on a clever face and start reeling off words: policy, premium, insured event, actuary. I’ll put it more simply. An insurance company is protection that learned to count. It learned three hundred years before Don Vincenzo took his first street under his word, and he still had to learn every lesson all over again, with his own money. The Don didn’t read books.
London, 1666
In September 1666 a bakery in London caught fire, and in four days most of the city burned down: thousands of houses, churches, warehouses. The damage was later put at ten million pounds. For those days it was unimaginable. A man went to bed owning a house and a shop, and in the morning he stood on the ashes with nothing.
In 1680 an enterprising Englishman called Nicholas Barbon opened an office that, for a small yearly fee, promised to replace your house if it burned down. An insured house got a metal plaque with the office’s emblem on it: the streets weren’t numbered yet, and somebody had to know whose house was whose. Soon the insurers worked out that putting fires out was cheaper than rebuilding, and they got firemen of their own. There’s a legend that the firemen would turn up, look at the plaque, and leave other people’s houses to burn. In fact the offices quickly agreed to put out everything and pay each other back. Fire doesn’t read plaques. The house next door burns, and the insured one goes up too. They knew how to count.
Recognise it? It’s protection. You pay a little at a time, not so that nothing ever happens to you. You pay so that if something does happen, someone comes and puts it right. One of ours stands at the door, the plaque hangs on the wall, and you pay a little so you don’t have to pay a lot. What made Barbon’s office different from what our streets know? One thing. It kept its word by the tables, not by its mood, and if it broke its word, it got dragged into court.
The Tables
The tables took a long time to work out. How many houses burn in a year? How many people die at each age? What is a house really worth, so the owner doesn’t insure a shed like a palace? How much do you keep in reserve for a bad year, and who checks that the reserve hasn’t been lost on the horses? Simple questions. The answers cost money.
In 1762 a society called the Equitable opened in London. It was the first to charge life insurance premiums by age, using mortality tables: the young pay less, the old pay more. The head of the society was called the actuary, and the word stuck. Before that everybody paid the same, and the insurer guessed. Now he counted.
Two hundred-odd years later the same Equitable promised its clients fixed payouts and didn’t stop to think how it would pay if interest rates fell. Rates fell. In 2000 a court ordered the company to keep its promises, the hole grew to about one and a half billion pounds, and one of the oldest life insurance societies closed its doors to new clients. Tables don’t save you from pride. They just make it visible.
Don Vincenzo Pays for His Lessons
Don Vincenzo knew none of this. When he was young, the shopkeepers on his streets put money into a common fund, and he simply counted how many shops burned in a year. Two or three. They took a little from each, paid out calmly to whoever got burned, and everybody was happy.
Then came a hot night, and a whole block burned down. Twenty shops at once. There was enough in the fund for four. To the rest the Don spread his hands, and half the street went over to other people.
First lesson: don’t count a shared disaster as separate ones. Two shops at opposite ends of town each burn for their own reasons, and the average figure is enough: two or three a year. Twenty shops in one block burn from one spark. That isn’t twenty cases, it’s one, and a reserve for an average year won’t survive it. You can insure that kind of thing, just differently. Don’t take all your clients from one block. Keep a reserve for the worst night, not for the ordinary year. Hand part of the risk to someone whose shops are in another town. The big insurers do exactly that, and we’ll get there. But if all your clients sit in one place, fear the same thing, and your fund is built for an average year, you’re not an insurer. You’re a gambler who’s put everything on one card.
The second lesson came cheaper. The owner of a rotten furniture shop, nicknamed Footstool, suddenly started paying like a model citizen: in advance, with a smile. Three months later the shop burned down along with all its rotten furniture, and Footstool came for his money. Whether he set the fire himself or just stopped being afraid of fire, the Don didn’t bother to find out. He drew a rule from it: a man insured for the full value stops taking care. From then on the fund paid back only part of what burned. Let the man keep a reason to stub out his cigarettes.
Insurers call this moral hazard. And in New York at the start of the century Morello’s people made a trade of it. Dash says insurance fraud was one of their favourite lines. Frightened shopkeepers were talked into buying an expensive fire policy, then the shop was torched, and most of the payout went to the gang. The man who ran it was Antonio Cecala, a relative of Lupo’s, who called himself a barber. The funniest part is that Cecala complained: this was one of the gang’s least profitable rackets. He was poor, as Dash tells it, because he hadn’t learned fast enough how the Society made its money. Even the arsonist knew an honest fund pays better.
The Don learned the third lesson when he noticed who came to him first. The man whose wiring sparked. The man whose neighbour drank. The man whose shop had already been burgled twice. Charge everyone the same and you’ll collect the riskiest clients in town and go broke on them. So you have to know who’s come to you, and charge each one by his risk. The London offices kept assessors for that. The Don kept old Signora Rosa. She knew more about every shopkeeper than his wife did.
Will He Pay
Insurance has one big question the advertising keeps quiet about: will they pay you when trouble comes?
Gambetta cites historians of Sicily. Sicilian merchants, the historians say, always preferred to insure abroad, with companies that had a name for paying at once, without going to court. And the foreign insurers didn’t trust the Sicilians and charged them a high premium. Trust turned out to be expensive on both sides.
What do you really pay an insurer for? Not the policy. For the certainty that the money will come on the day everything else you own has burned. Regulators demand reserves, rating agencies hand out grades, and all that dull bureaucracy exists to answer one question: “Will he pay?”
Now compare: here’s how you insure without tables and reserves. Dash tells how the Morello gang at the start of the century improved on the old extortionists’ methods. They stopped demanding one huge sum from a victim in one go. They took a little, but every week and from everybody, from rich shopkeepers to street pedlars. Joe Valachi, who grew up in East Harlem, remembered that his father, a poor vegetable seller, paid a dollar a week for “protection”, or his cart would have been smashed. In form it’s an insurance premium: you pay little and often. In substance you’re paying not to be touched by the collector himself. No reserves, no tables, no payouts. And you won’t go to court. Try it.
Protection for Everyone
Two hundred years after Barbon, the state took up insurance. In Germany Bismarck brought in compulsory insurance for workers: in 1883 for sickness, in 1889 old-age pensions. The pension was paid from the age of seventy, and in those days not many people lived to seventy. The Iron Chancellor could count as well as the Don.
The Family had its own social insurance too, only nobody called it that. When Morello went away for a long stretch in 1910, the Terranova brothers, Dash writes, out of compassion granted his wife Lina an allowance of four and a half dollars a week. The woman with her children still went to work in a mattress factory. Compassion without a fund came out very modest. Then again, there’s also such a thing as a fund without compassion. It’s called bureaucracy. But four and a half dollars for a husband put away for twenty-five years speaks for itself.
The Bottom Line
Buying insurance? Check three things that Don Vincenzo paid to learn himself. Will the insurer burn down on the same day you do, because all his clients sit in one block and his reserve is built for an ordinary year? Does he have a reserve for a bad year, and does he pay without a court case? And have you insured yourself so well that you’ve stopped taking care?
And if one day someone offers you protection with no tables, no reserve and no court, know this: that’s not insurance, that’s protection. It works too. Until the first hot summer.