Un-Friendly societies? Social Insurance before the Welfare State

Although sympatric to libertarianism, and somewhat disillusioned with statism, I am not sure I have much time for the friendly societies beloved of some on the right. I will be drawing mostly from this paper (which I have also e-mailed to the ever frenetic DK).

Between the 1880s and the Great Depression, fraternal, friendly, benevolent or benefit societies were the main source of social insurance for workers in the United States, UK and Canada. They provided sick pay, unemployment insurance, some medical services and funeral expenses.

Given the disappearance of cooperative organisations from economic textbooks, it seems incongruent to see cooperatives play such a dominant role in society.

However, friendly societies were so successful in the period because they enjoyed a massive information advantage over private insurers because they were run cooperatively.

Insurers suffer two main problems introduced by asymmetric information between insurers and insured.

  1. High risk people will take out whereas low risk people won’t, this leads to “adverse selection” in which insurers are not covering a cohort of average risk, but one in which risk is elevated.
  2. The other problem is moral hazard, in which insurance prompts those to behave in a more risky manner than they would otherwise choose to do because you are no longer liable for the cost of said actions. Cough bankers, cough cough, wankers. Ahem…where was I? Ah yes…

Cooperative insurers did not charge fees according to risk or age. As this discouraged young, healthier, lower-risk workers from joining, cooperative insurers combined this pricing with a scaled joining fee and other implements to discourage those over 40 and encourage younger people.

After looking at two large samples of workers, it was found that there is little (or occasionally negative) correlation between coverage and risk. This strongly implies information symmetry, or where negative, a slight informational advantage for the cooperative insurer itself.

Given the above, it seems yet more mystifying as to why cooperatives are still little discussed, and a little less mystifying as to why these friendly societies were successful. However, the methods employed in achieving this information symmetry and success are by no means John Lewisesque in their pleasantness.

To ensure that those insured were not unduly risky before joining or excessively risk tolerant after joining, cooperative insurers employed “intrusive monitoring.” This included:

  • Occasionally banning older people from joining
  • Requiring new members to be sponsored by existing members
  • Punishing the provision of false statements by expulsion and denial of services
  • Visits and direct monitoring of those claiming benefits
  • Screening by family history
  • Nebulous “character investigations”
  • …all of that on top of medical examinations.

These innovations, induced by the egalitarian pricing scheme of the cooperatives, allowed the insurers to overcome information asymmetry in choosing who to insure and to avoid inducing moral hazard in those insured. However. these advantages came at a great cost to the autonomy of those insured.

Some of these intrusion can be justified quite easily, and indeed some of them continue in state-sponsored form, but there were major drawbacks to friendly societies in terms of the equity of insurance coverage. Quite clearly the system is inadequate for older people and the disabled, meaning those most in need of help were occasionally excluded.

Likewise, at the time women were significantly underrepresented in the data used by Gottlieb implying a degree of discrimination, and in fact they were often banned outright. Likewise, African-Americans suffered similar discrimination from so-called friendly societies. This discrimination is unlikely to be prevalent today, but other forms are likely to seriously impact the equity of coverage. The state is quite capable of discrimination but currently the coverage provided by the welfare state is superior to that which was offered by friendly societies.

I have argued before that the left remains statist because that is the leitmotif of our intellectual age, but perhaps the left are statist because it can produce the desired results.

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