A Brief History

Most developed and developing countries have life insurance companies and pension funds operating within their economies. Both types of institution perform a social role whatever the pervading political ideology, affording a level of financial assistance additional to that which the apparatus of the welfare state provides. Of these two institutions insurance companies are older, their origins on both sides of the Atlantic dating to the 18th century. Pension funds developed on a large scale only during this century (Sankey [1996]).

According to Geisst [1988, pp.1-3] the social reasons for the development of life insurance companies can be traced to the Industrial Revolution. As more and more of the rural populace moved to urban areas, social welfare practices that had originally been attended to by the extended family, such as care of the elderly, became interrupted by this migration and its accompanying breakdown of the large family unit. The social pressures caused by urbanisation required those who could afford protection to provide some level of coverage to maintain their families after the wage-earner's death. A form of wealth other than transfer of land could thus be achieved.

Social and economic developments are cited as the main reasons for the development of life insurance companies. However, they could not have emerged successfully unless financial markets were simultaneously developing. These provided a suitable investment environment in which to seek a rate-of-return adequate to cover future demands of the newly insured.

Life insurance companies and pension funds are amongst the largest financial institutions, and thus some of the largest institutional investors in the capital markets. Besides providing a valuable welfare role, they offer financial intermediation to specific sectors of the market, which in turn aids government funding of debt and provides the private sector with debt and/or equity capital. The main financial characteristic they share is their natural preference for long-term financial assets, which distinguishes them from many other financial institutions. Their respective portfolio preferences are unique among financial intermediaries because of the financial and social roles they perform.