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Mutual Insurance, 1550-2015: From Guild Welfare and Friendly Societies to Contemporary Micro-Insurers

Author(s):Van Leeuwen, Marco H.D.
Reviewer(s):Guinnane, Timothy

Published by EH.Net (May 2018)

Marco H.D. Van Leeuwen, Mutual Insurance, 1550-2015: From Guild Welfare and Friendly Societies to Contemporary Micro-Insurers. Basingstroke, UK: Palgrave Macmillan, 2016. xiii + 321 pp. $120 (cloth), ISBN: 978-1-137-53109-4.

Reviewed for EH.Net by Timothy Guinnane, Department of Economics, Yale University.

The social-welfare state, despite assaults from various quarters, appears to be a durable feature of advanced capitalist societies. Most citizens of wealthy countries do not suffer (at least the entire) financial burden of sickness, accident, old age, or unemployment. The way societies insure against these events differs considerably; to take one example, some countries have effectively turned medical care into a state function, while others rely on a combination of direct state medical care and private entities such as insurance companies.

Any sensible understanding of today’s social-welfare state requires some historical understanding of how these systems evolved. Economists are not alone in viewing the transition to centralized, bureaucratic systems as the “creation” of the welfare state. This approach confuses changes in methods, cost, scope, and coverage with the actual origins of provision for social welfare. (For a good recent example that largely avoids this confusion, see Peter Lindert’s Growing Public: Social Spending and Economic Growth since the Eighteenth Century, Cambridge University Press, 2004). Today’s social insurance schemes largely supplanted earlier forms of support organized and financed by local communities, by religious bodies, or by other private entities. Students of English history, for example, are well versed in the intricacies of its Poor Law, both Old and New. Continental poor relief systems differed from the English in important ways, typically relying less on taxation and more on charity. (For a good overview, see Peter Solar, “Poor Relief and English Economic Development before the Industrial Revolution,” Economic History Review, 1995.) The design of older poor-relief systems matters because when “social insurance” came to be, the new programs often built on or reflected earlier weaknesses in the poor relief system. Britain’s National Health Service, for example, dates in its current form to 1948. State-financed medical care was not new, however; the nineteenth-century Poor Law had provided medical care to ever-larger fractions of the population, including those not eligible for poor relief per se. Other features of the welfare state reflect the older systems’ inability to deal with some new consequences of industrial life. Poor relief systems relied on local taxation or other local resources. Local taxes on dangerous facilities such as factories or mines did not reflect the strain a single disaster could place on the local fund’s resources. German workplace accident insurance (1884) came about in part because of notorious cases where an accident created more widows and orphans than local resources could handle.

The economic history literature gives pride of place to relief systems that relied on explicit taxation or institutional charitable systems such as churches and other foundations. We know, however, that people found other ways to insure themselves against misfortune. Some mechanisms were so informal as to beg the difference between informal mutual insurance and just being a kind neighbor. Some organizations made an insurance function a definite, if usually small, part of their activities. The individual components of this lost world have been the object of scholarly attention, but there has been little effort to put it all together and draw out the lines of historical development. Marco Van Leeuwen’s effort is thus welcome and important. He surveys the world of mutual insurance (as he calls it) in the Netherlands in all its forms from 1550 to the present, stressing both the individual insurance functions and the way they interacted with each other and the growing welfare state.

Guilds are an important part of this story. In much of the urban Netherlands (and the Netherlands was very urban), guilds controlled the ability to produce and distribute a wide range of goods and services. Van Leeuwen devotes considerable attention to guild insurance because for this long period, some two and one-half centuries, guilds consistently (but not universally) tried to find ways to insure their members without going broke. They guaranteed members work and monopoly rents, but some of those rents accrued to members as implicit or explicit insurance. Van Leeuwen documents a range of schemes, including payment for medical costs, support for widows and orphans, and the costs of burials. Some guilds had explicit insurance funds that briefly survived the guilds’ abolition in 1820.

The Dutch also had friendly societies. These voluntary organizations provided sociability and a sense of local status. They also insured their members (and in some cases, members’ survivors) against sickness, as well as burial insurance. The insurance functions were an outgrowth of the sociability; when a member was ill, fellows visited, and when a member died, fellows provided a decent burial. English friendly societies famously neglected actuarial principles in the later nineteenth century, charging ever-higher fees that discouraged younger and healthier individuals in an effort to cover the mounting costs of benefits to their older members. (For an economically sound discussion of this issue for friendly societies in a Canadian context, see Herbert Emery, and George Emery, A Young Man’s Benefit: The Independent Order of Odd Fellows And Sickness Insurance in the United States and Canada, 1860-1929, Montreal and Kingston: McGill-Queen’s University Press, 1999). As the membership became ever older and sicker, the only apparent solution was to raise fees even more, thus exacerbating the problem. The resulting adverse-selection death spiral played some role in the United Kingdom’s Old Age Pensions Act of 1908. Van Leeuwen documents similar problems in Dutch friendly societies, but notes (as some have for England) that declining mortality rates offered some respite for organizations that ignored their actuaries.

Trade Unions existed to increase their members’ bargaining power in labor markets, but they also offered insurance benefits. Van Leeuwen notes that the trade union enjoyed some advantages as an insurer; the commitment that brought someone to organized labor might induce them to refrain from abusing benefits and to report fellow-members who did. On the other hand, requiring insurance might discourage membership and thus frustrate the Union’s core mission. Perhaps a greater advantage was the trade union’s size, geographic scope, and bureaucratic infrastructure, which provided much of the conditions for low-cost insurance.

Guilds, friendly societies, and trade unions provided insurance as a benefit of membership in an organization whose primary goal was something else. Van Leeuwen also documents a long history of “pure” insurance schemes organized on a mutual or, later in the nineteenth century, for-profit basis. Many of these paid for the cost of a funeral, sparing the insured’s family this burden (which usually came with other financial stress, such as the loss of wages) and avoiding the indignity of a pauper’s funeral. Burial insurance is relatively simple; death is observable, and burial costs are a fixed, one-time expense. Insurers taking advantage of the life tables available from the early nineteenth century could price this coverage to break even (for a mutual insurer) or, later in the nineteenth century, to make a profit. Not all insurers priced their coverage appropriately and thus failed.

Today insurance is among the most highly-regulated of businesses. This regulation reflects, in theory, a need to ensure companies that can pay the promised benefits. Van Leeuwen’s examples point to a different interest for the state: people who relied on unsound mutual-insurance promises would turn to the poor relief system. In some cases, governments subsidized insurance schemes in the hope the insurance would reduce reliance on poor relief.

The book is entirely about the Netherlands, with a few welcome but brief comparative asides, usually limited to Britain. This focus on a single country is understandable, given the work’s scope. We know, however, that the Netherlands differed in important ways from other societies; a relatively small and highly urban population speaking a funny dialect of German might seem the ideal place for mutual insurance to thrive. Van Leeuwen’s work raises a host of comparative question, and one of this book’s virtues is that it implicitly calls for similar works on other societies.

Van Leeuwen achieves a nice balance between analytical care and respect for the evidence. An insurance provider faces the problems of adverse selection (the insurance program may attract only relatively risky, and thus costly, individuals); the insurance might induce the insured to take more risk (moral hazard); and for some types of insurance, the provider might have to pay out many claims at once. This correlated risk would face a life insurance company, for example, if epidemics caused spikes in deaths among the insured. Van Leeuwen bears these problems in mind when discussing the strengths and weakness of the various schemes. Sometimes economists looking at historical institutions pay more attention to their models than to the evidence, and see in any mention of a rule or practice indications of an appreciation for the niceties of mechanism design. Van Leeuwen is more cautious; he notes, for example, that burial insurance schemes ordinarily imposed a period between when an individual joined and when they would first pay out, to discourage opportunism by those on death’s door. He refrains from claims about the insurance providers offering an optimal contract, and stresses the ad hoc and often puzzling ways insurers dealt with a mismatch between assets and liabilities.

The final substantive chapter concerns the period 1965-2015, when the Dutch welfare state had achieved its current form. Some of this discussion concerns efforts to reform (read: “limit the cost of”) that welfare state, and there are some discussions concerning the survival of mutual-insurance schemes. He wisely does not push claims about modern mutual insurance in the modern Netherlands too far. Van Leeuwen appears reconciled to the fact that bureaucratic regulation, the state’s power to tax, and actuarial science have largely put an end to the less formal mutual insurance of friendly societies and the like, at least in wealthy countries.

One of Van Leeuwen’s consistent concerns is the interaction between the private insurance and the relief system. For example, poor Dutch people knew that their widows and orphans could expect modest assistance from local relief, and that the poor law would not support survivors who had assets or flows of payments from an insurance fund. The relief system’s implicit tax thus limited the appeal of private insurance schemes and raised their cost; there was little point in paying to insure one’s widow if the benefits would not appreciably exceed what the relief system would provide. We are accustomed to thinking of the modern welfare state as potentially crowding out private initiative, but the earlier poor relief systems offered their own complications for private insurance.

Van Leeuwen reports careful, if frankly speculative, estimates of the number of people covered by each type of insurance. The figures provide a warning to anyone attempting to read into his discussion claims about a Nirvana on the North Sea. Burial insurance was by far the most common type of insurance. In the period 1800-1810, however guilds covered at most seven percent of the Dutch population this way. Coverage under all burial schemes rose to more than 50 percent by 1890, but this figure dwarfs that for other types of insurance. Insurance against the costs of medical care reached some 16 percent of the populace in that year; insurance against loss of income due to illness reached 9 percent. Old age or widowhood insurance reached at most one percent of the Dutch population.

There is much to admire in Van Leeuwen’s open and frank approach to his material. He resists the temptation to fall in love with the institutions he studies, realizing, for example, that guilds owed their (comparative) success as insurance providers to an ability to restrict entry into their ranks. Guilds could also exploit non-member workers whose comparatively low wages subsidized all the guild’s activities, including insurance. (He does not point out that by allowing widows to operate their deceased husband’s shops, in defiance of the usual rule against female master, the guilds provided a generous form of widow’s insurance.) Similarly, Van Leeuwen approaches earlier historical commentary with appropriate caution. Left-wing historians sometimes dismiss civil-society organizations, and the services they offered, as threats to working-class solidarity. This confuses what civil-society organizations actually did with what today’s historians want. Others view half a loaf as worse than nothing, and convey the false impression that early schemes did not provide services valuable to their members simply because they did not provide the services the welfare state provides today. Van Leeuwen’s historical sensibility keeps him out of these traps.

Mutual Insurance provides a clear-sighted, readable, and comprehensive account of a neglected topic. The book will appeal to anyone interested in mutual organizations or insurance, and should be read by anyone studying the welfare state today or in the past.

Timothy W. Guinnane is the Philip Golden Bartlett Professor of Economic History in the Department of Economics at Yale University. Recent publications include “Sample-Selection Biases and the ‘Industrialization Puzzle’” (with Howard Bodenhorn and Thomas Mroz), Journal of Economic History 2017; “Choice of Enterprise Form: Spain, 1885-1936” (with Susana Martínez Rodríguez), Journal of Law, Economics, and Organization, 2018; “Incentives That (Could Have) Saved Lives: Government Regulation of Accident Insurance Associations in Germany, 1884-1914” (with Jochen Streb), Journal of Economic History 2015; and “The Costs and Benefits of Size in a Mutual Insurance System: The German Miners’ Knappschaften, 1854-1923” (with Tobias A. Jopp and Jochen Streb) in Bernard Harris, ed., Welfare and Old Age in Europe and North America: The Development of Social Insurance.

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Subject(s):Financial Markets, Financial Institutions, and Monetary History
Government, Law and Regulation, Public Finance
Markets and Institutions
Geographic Area(s):Europe
Time Period(s):16th Century
17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII