The insurance business, one of the oldest in America, has its roots in the early years of the Republic, when the nation's business was carried on primarily in
seaport coffee houses, the gathering point for sea captains, merchants, and bankers. Marine and fire insurance were the earliest forms of the property and liability branch of the insurance business; later additions include inland marine, aviation, workers' compensation, automobile, multiple-line, and suretyship insurance. Marine insurance has been a necessary
adjunct to commerce, and insurance against losses from frequent fires in colonial seaports also had a colorful history.
The other major branches of insurance, life and health, did not assume importance until the 1840s, when the Industrial Revolution created a need for security that land had traditionally given to a nation of farmers. The Mutual Life Insurance Company of New York, which began writing policies in 1843, was the first commercial life insurance company making policies available to the general public. Health insurance began as accident insurance about 1850.The first auto insurance was issued in 1898.
Marine Insurance
The first marine insurance policies sold in America were contracted through the local agents of English under-writers in the coffee houses of American seaports. Always a necessary adjunct to commerce, forms of marine insurance were known in the times of the ancient Babylonians, Phoenicians, Greeks, and Romans, as well as the Europeans of the fifteenth and sixteenth centuries. Modern marine insurance had its origins in England in the seventeenth century, and American marine insurance owes its beginnings to the English marine underwriters of that era.
By 1741
Philadelphia was the most important city in the colonies, outranking Boston in volume of shipping and commerce and serving as the country's political center; it also emerged as the center of the early development of American insurance. By 1760 the insurance center of Philadelphia was the London Coffee House of Philadelphia, in which the Old Insurance Office was maintained by the Philadelphia underwriters during regular hours. The English underwriters also met there. The rival of the Philadelphia underwriters—the New York Insurance Office—maintained an office next door.
During the Revolution City Tavern in Philadelphia became the gathering place of soldiers, statesmen, and important merchants, superseding the London Coffee House as the headquarters for marine
underwriting. As the headquarters of the marine underwriters, it was also the place where plans were later made for the formation of the Insurance Company of North America, founded in 1792—the first stock insurance company in the nation and the first American company capable of writing
satisfactory marine contracts. Since fire insurance was already being written by two companies in Philadelphia, and since the subscribers already had considerable experience in marine underwriting, a decision was made to concentrate on that form of insurance. American marine underwriting contributed directly to the growth and prosperity of the shipping trade in the new nation. Managed well, it was successful as a stock company and paid regular dividends; it has thrived for nearly two hundred years.
In the 1840s and 1850s the revolutionary design of the American clipper ship inaugurated one of the most prosperous eras in American shipping and American marine insurance, for marine insurance kept pace with the increased prosperity of ocean commerce. Between 1840 and 1861, the combined value of American exports and imports more than doubled, while marine premium receipts tripled. This prosperity lasted until the 1890s, when the British steamship made the
clipper ship obsolete. Then, in the early twentieth century, the Panama Canal under-cut the clipper ship's role in the growing trade between the Atlantic coast and California.
After the depression of 1893, Congress limited U.S. coastal trade to U.S. ships, a boon to domestic ship-owners. New ships were built, and American marine underwriters found their business increasing again. But the greatest growth came with World War I. Although the outbreak of war created unstable conditions in the quoting of marine insurance rates, the Bureau of War Risk Insurance—created by Congress in 1914—made it possible to quote stable rates. The great increase in the volume of shipping boosted demand for marine insurance, the value of vessels and cargoes soared, and freight charges increased, leading to millions of dollars worth of insurance orders and the revitalization of American marine underwriting. The gross
tonnage of ships built jumped from 316,250 in 1914 to 3,880,639 in 1920, the value of cargo carried reached $12
billion, and the demand for insurance coverage created the first major expansion in the marine insurance market since the clipper-ship era. Between the end of World War I and the beginning of World War II, the large number of new companies entering the field caused an excess capacity in marine underwriting that resulted in intense competition and lower underwriting profits.
Congressional encouragement of risk-spreading through syndicates in World War II made underwriting insurance on merchant vessels possible in the period between the Neutrality Act of 4 November 1939 and April 1942, when the government requisitioned all American vessels. At the request of the Maritime Commission, the American Hull Syndicate wrote war risk insurance on hulls, and the American Cargo War Risk Exchange made vital shipping possible by creating a market large enough to spread insurance coverage among many marine underwriters.
After World War II Congress again promoted the U.S. marine insurance market with the McCarran-Ferguson Act of 1945, which exempted marine insurance from
antitrust laws and made American marine insurance competitive in world markets. The Ship Sales Act of 1946 required mortgagees of merchant ships to place not less than 75 percent of the required hull insurance in the U.S. market.
From 1965 to 1974, the American marine insurance market grew substantially in relationship to the English market (primarily Lloyd's of London).Ships grew in size and cost, and construction during this decade of huge oceangoing rigs designed for oil drilling and costing tens of millions of dollars created another expansion of the marine market. In the 1980s and 1990s, the introduction of automated handling procedures, satellite tracking, and the use of standardized containers transformed the shipping industry, leading to larger and larger ships and payloads. By the end of the twentieth century, some 60 percent of the world's merchant fleet had moved to countries under open registries such as Panama, Liberia, the Bahamas, and Greece, which have fewer taxes, lower wages, and less regulation.
Inland Marine Insurance
Initially designed to insure cargo on inland waterways, inland marine insurance expanded to include movement on land as the interior of the country developed. Some of the first policies insured the possessions of traveling salesmen. In the twentieth century, bridges and tunnels used for transportation, as well as tourist
baggage and postal shipments, were included.
Aviation Insurance
Aviation insurance covers the hull and liability hazards of both commercial airlines and private aircraft; it does not include accidental injury or death coverage, which companies issue separately. During the 1960s and 1970s, many new companies entered this field, primarily as reinsurers. These companies compete among themselves and with foreign insurance carriers (mainly Lloyd's of London) for both U.S. and foreign aviation business.
One problem associated with aviation insurance is the constant exposure to
catastrophic loss. As speed, size of equipment, fuel load, and passenger capacity continue to increase, the
catastrophe hazard grows in direct proportion. There are too few commercial aircraft at risk to allow successful operation of the "law of large numbers," upon which underwriters rely to predict losses. Therefore, aviation underwriters must rely on their own judgments in determining rates.
Fire Insurance
Fire insurance is a direct descendant of marine insurance. It developed in the American colonies from ideas brought by English settlers. American merchants realized the need for protection from loss from fire after the Great Fire of London in 1666 destroyed three-fourths of the city's buildings. Like the first marine insurance company, the first fire insurance company in America began in Philadelphia, and, like the earliest marine companies, that company provided policies based on mutual agreement rather than stock subscription. Largely through the efforts of Benjamin Franklin, America's first fire insurance company and its oldest mutual insurance company formed in 1752—the Philadelphia Contributionship for Insurance of Houses From Loss by Fire. Experiencing difficulty in fighting fires at houses surrounded by trees, the Philadelphia Contributionship decided, in 1781, not to insure houses that had trees in front of them. Out of opposition to this policy grew the Mutual Assurance Company in 1784, popularly known as the Green Tree because of the circumstances of its founding and because of its fire mark. Then, in 1794, the Insurance Company of North America—primarily a marine underwriter—became the first company to market insurance coverage on a building and its contents and to
underwrite fire risk beyond the city limits.
The success of Philadelphia's mutual fire insurance companies inspired the formation of mutual companies in other cities. The history of large fires in the growth of American cities and seaports gave rise to improvements in fire underwriting. The 1835 fire in New York, in which almost the entire business district burned to the ground, ruined most New York companies. Because of state
discriminatory taxes, much of the risk had been underwritten by small local companies that had too little surplus to meet the $18 million loss. Subsequently, the under-writing business grew throughout the nation to spread the risk.
The Factory Mutual Fire Insurance Company made its appearance in New England in 1835.The firm was pioneered by Zachariah Allen, who, along with other mill owners—who had been refused fire insurance for their factories by the mutual companies and found the high premiums of stock companies excessive—formed their own company. Skillful underwriting kept the costs low and, as the system grew, it had an effect far beyond that field, forcing stock companies to reduce their rates. At the same time, the factory mutuals expanded with the growth of American industry until they underwrote the risks of the wide industrial field created by the expansion of American business and extended coverage to include loss from other damage such as lightning. In 1866 the fire companies formed the National Board of Fire Under-writers, which
disseminated information on the compensation of agents, fire prevention, and the discovery and prevention of
arson.
In 1909 Kansas responded to the widespread belief that fire insurance companies were making excessive profits by enacting a law that gave the state insurance commissioner power over rates charged by fire insurance companies. In 1910 the New York legislature responded to the same belief by appointing a joint committee, under state senator Edwin A. Merritt, Jr., to investigate the insurance companies. The Merritt committee's recommendations for sweeping changes in the industry produced a number of key reforms that served as models for other states.
Fire insurance continued to grow steadily during the twentieth century. In 1948 almost $1.3 billion in premiums were written ($9.7 billion in 2002 dollars); $8.4 billion ($8.7 billion in 2002 dollars) in premiums were written in 2000.Since its beginning in the early 1950s, the trend toward multiple-line coverage and packaging of property and casualty lines in either
indivisible or divisible premium contracts has been gathering momentum, both in the growth of homeowners policies and in commercial packages.
Workers' Compensation Insurance
Federal and state laws requiring workers' compensation insurance have created the market for this form of liability insurance, which is sold by property and liability insurance companies. Prior to the development of workers' compensation, an injured worker's legal rights were based upon common law. As the cost and
inequity of the common law created public
dissatisfaction, changes gradually took place.
Between 1909 and 1913, thirty-one investigatory commissions were established; nine more were set up during the next six years. The consensus from this research was that employers' liability legislation should be replaced with what would become state workers' compensation laws. These laws derived from an entirely new legal concept—liability without regard to fault. Indus-trial accidents and disease have traditionally fell under the theory of occupational risk. Workers' compensation legislation provided for prompt payment of medical and disability benefits and thus eliminated the cost of
litigation and encouraged the employer to promote safe working conditions.
Before 1908 a few states had passed narrow compensation acts with low benefits. The first major law, the federal Employee's Compensation Act of 1908, provided benefits for civil employees of the federal government and public employees of the District of Columbia. Ten states passed workers' compensation laws in 1911; all but six states had followed suit by 1920.The trend has been toward more comprehensive coverage for a larger group of workers. In 1934 only 33 percent of the total
workforce was covered by workers' compensation; by 1957 the figure had grown to 62 percent. By the mid-1970s about 75 percent was covered. Workers' compensation, the third largest individual line of insurance, had premiums of $23.2 billion in 2000.
Automobile Insurance
The first automobile insurance policy was issued by the Travelers Insurance Companies in 1898, and since then more and more of America's 120 million motorists have recognized its value. In 1973 automobile insurance premiums reached $17.15 billion ($69.46 billion in 2002 dollars) and accounted for 42.3 percent of total property-liability premium volume. Because of inflation, increasing claims frequency, and larger claim settlements, automobile premiums have increased rapidly, and, in 1973, were more than double those of 1965.By the end of the 1970s, most states had made the purchase of automobile insurance by car owners compulsory.
Following consumer unhappiness over automobile insurance rates in the late 1980s and 1990s, some states instituted no-fault automobile insurance to reduce litigation. Typical state no-fault insurance laws permit accident victims to recover such financial losses as medical and hospital expenses and lost income from their own insurance companies and usually place some restrictions on the right to sue.
Life Insurance
Early colonists were skeptical of life insurance. Benjamin Franklin said that men were willing to insure their homes, their goods, and their ships, yet neglected to insure their lives—the most important asset to their families and the most subject to risk. Many considered life insurance a form of gambling and therefore against their religion. As late as 1807, the Massachusetts legislature argued against the morality of life insurance.
The earliest life insurance policies in America were written as a
sideline by marine underwriters on the lives of sea captains for the duration of a voyage. The tontine, a life insurance lottery, formed by a group who insured themselves together, first appeared in 1790.When one died, the others divided his assets. Subscribers to the Universal Tontine used their funds to form an insurance company in 1792; the
tontine policy was not used again until 1867.
The great expansion of the American economy from 1830 to 1837 made Americans more dependent on financial institutions. The prosperity engendered the founding of large stock insurance companies, but the
recession after 1837 gave impetus to the mutuals because the shortage of capital during the depression years made it difficult to sell stock in life insurance companies. Four great mutual companies were founded during that period. The first, the Mutual Life Insurance Company of New York founded in 1843, is the oldest commercial life insurance company in continuous existence.
In 1855 Massachusetts became the first state to establish an insurance department. Elizur Wright, insurance commissioner of Massachusetts from 1858 to 1867 and often called the father of legal reserve life insurance, developed the first American table for establishing policy reserves. By 1890, most states had established insurance departments; by 1940, insurance departments were regulating the business in all states. State regulation of life insurance was firmly established by the
Supreme Court in Paul v. Virginia (1868), which declared that life insurance was not interstate commerce and not subject to federal jurisdiction.
As the industry grew after the
Civil War, it became more and more important to ensure the mortality experience on which rates were based. Sheppard Homans published the first mortality table, based on the experience of insured lives in America, in 1868.Other developments included the requirement of nonforfeiture provisions under state statues and the growing employment of full-time agents. The fervor for expansion during the period following the Civil War was characterized by extreme competition between companies—particularly proprietary stock companies and mutual companies—and influenced all aspects of the business. Quality was frequently sacrificed for quantity, and the
dividend policies of the companies eventually led to abuse.
Competition also encouraged strong leaders and the control of large life insurance companies by powerful executives rather than by owners or investors. For example, although Henry B. Hyde of the Equitable Life Assurance Society had appointed a capable president to succeed him, the controlling stock passed at Hyde's death to his son. His son so misused his control as to bring about much
unfavorable publicity and the ultimate transformation of the company into a mutual. In the case of the mutuals, interlocking directorates led to investments in syndicates and in entrepreneurial activities that did not always serve the best interests of the policyholders. Life insurance companies ultimately invested in every phase of the economic expansion of the United States and became competitors of investment bankers.
The climate in which the life insurance business operated between 1890 and 1905—the peak of the trust-busting period—was one of severe public criticism of business and finance. New York legislators could not ignore the dubious practices any longer. In July 1905 the Assembly and Senate concurred in a resolution directing a committee to investigate and examine the business and affairs of life insurance companies operating in the state. With Sen. William W. Armstrong as chairman and Charles Evans Hughes as counsel, the committee issued its report in 1906.Although it declared the life insurance business to be fundamentally sound, it brought to light numerous practices
detrimental both to policyholders and to the national economy. The committee's recommendations led to state legislation prohibiting these practices and strengthened the industry.
The professional approach to life insurance was important to its growth. Between 1890 and 1906, several professional associations were formed, including the Actuarial Society of America, the
National Association of Life Underwriters, the American Life Convention, and the Association of Life Insurance Presidents. Ownership of U.S. government life insurance by young men entering the military service in World War I caused their families to
reappraise their own need for life insurance and
stimulated sales—a situation that repeated itself during World War II. The
Great Depression of the 1930s also favored the growth of life insurance, and American insurance companies outperformed most businesses during that time.
In the late 1930s the Temporary National Economic Committee's investigations into the sources of economic power in the country endorsed the soundness of the life insurance industry and disclaimed any
disposition toward governmental regulation of the industry. However, in United States v. South-eastern Underwriters Association et al. (1944), the Supreme Court held that no commercial enterprise that conducts its business across state lines is wholly beyond the regulatory power of Congress. Subsequently Congress passed the McCarran-Ferguson bill in 1945, which stated that continued regulation and taxation of the insurance industry by the states was in the public interest and that silence on the part of Congress did not stand as any
impediment to state regulation. The bill thereby strengthened state regulation and helped to guarantee more qualified insurance management.
Entry into mutual funds and
variable annuities by life insurance companies made them subject to the federal securities laws, since these products are considered securities. Agents for the
variable annuity and mutual funds must meet the requirements of both state and federal regulation. Simultaneously, changes in financial enterprises began affecting the marketing of life insurance products. Members of the Midwest stock exchange began selling life insurance in 1970, and other exchanges permitted their members to follow this lead. Thus, large life insurance companies began to enter the property and liability insurance field.
Liability insurance became a political issue in the 1980s, when businesses, manufacturers, and physicians fought to reform liability laws to reduce what they considered extensive jury awards. Life insurance also under-went a major change. Once sold only to wage-earning males to provide comfort to would-be widows, new-style life insurance policies became opportunities to accumulate tax-free savings, causing life and
annuity insurance sales to boom from $63.2 billion ($137.78 billion in 2002 dollars) in 1980 to $216.5 billion ($277.12 billion in 2002 dollars) in 1992.Brokerage houses began selling life insurance with good returns and long-term growth, attracting money from banks and savings and loans. In 1995 the Supreme Court agreed with the position of the U.S. comptroller of the currency that annuities were investments rather than insurance, opening the door to bank participation in the $72-billion-a-year annuity market.
Group Insurance
Group insurance is a phenomenon of the twentieth century. The Equitable Life Insurance Company issued the first group life insurance policy, covering employees of the Pantasote Leather Company, in June 1911.Since then group insurance has expanded rapidly. By the end of the twentieth century, low-cost group life, health, and disability coverages were available through companies with twenty-five or more employees and through many professional associations. More than two-thirds of all employed persons in the United States are covered by some form of group insurance.
Health Insurance
Health insurance had its start in the mid-nineteenth century. Accident insurance came first, and then the policy-holder began to be protected against loss of income from a limited number of diseases. Although stemming from accident insurance, life insurance companies are the primary marketers of modern health insurance. These companies are committed to group life insurance, which pairs naturally with health insurance.
Rail and steamboat accidents in the mid-nineteenth century
precipitated the first demand for an insurance policy to protect against loss of income because of accident. The Franklin Health Assurance Company of Massachusetts is credited with being the first insurer to write accident insurance in America in 1850.However, the Travelers Insurance Company, founded in 1863, was the first company in America to write health insurance, providing a schedule of stated benefits
payable to the insured for each illness or injury. The Fidelity and Casualty Company of New York issued the first contract to protect against loss of income from accident and from certain diseases (1891).
Workers' compensation laws, first effectively enacted by the federal government in 1908, stimulated an interest in group health insurance contracts for illness and non-work-related injuries not covered by the law; in 1914 the Metropolitan Life Insurance Company issued the first group health contract, covering its home office employees. The economic depression of the 1930s engendered a wide concern for individual and family security, stimulating group health insurance sales. What became Blue Cross in 1948 began when a group of schoolteachers entered an agreement with Baylor Hospital in Dallas, Texas, to provide hospital care on a
prepayment basis. In response, traditional insurance companies also developed
reimbursement policies for hospital and surgical care.
During World War II the fringe benefit became a significant element in
collective bargaining, and group health insurance became an important part of fringe-benefit packages. Sharply escalating costs for health care after the war prompted continued improvement of health insurance. Perhaps most significant was the development of major medical insurance in response to the family's need for protection against serious and prolonged illness. During the 1970s, health insurance companies developed dental insurance plans that provided scheduled benefits for various types of dental surgery. Some companies added payments during the 1980s and 1990s for routine dental checkups or teeth cleaning.
Health insurers found themselves embroiled in a major debate after the 1992 election, when the administration of President Bill Clinton argued that the insurance industry's practices harmed the medical community. President Clinton and First Lady Hillary Rodham Clinton favored a competitive model generally known as managed competition, but the insurance industry mobilized a successful television campaign against it. Large insurers, meanwhile, responded by developing health maintenance organizations to manage care and costs and halt the year-to-year double-digit rise in medical costs.
A string of catastrophic claims in the 1980s and 1990s resulting from major natural disasters threatened the industry far more than any possible federal regulation. Hurricane Hugo caused $4.2 billion in insured losses in 1989—the first hurricane to cause more than $1 billion in losses—and three years later Hurricane Andrew produced $16.5 billion ($21.12 billion in 2002 dollars) in insured losses. Altogether, the insurance industry counted thirty-six catastrophes in 1992, resulting in $22.9 billion ($29.3 billion in 2002 dollars) in losses. An earthquake in California in 1989 and riots in Los Angeles in 1992 incurred insured losses of $1.1 billion ($1.41 billion in 2002 dollars).Flooding of the Missouri and Mississippi rivers and tributaries caused another $1 billion in privately insured losses.
Despite these challenges, during the late 1980s and early 1990s the industry proved itself
durable and adaptive, and greatly expanded the risks that individuals or businesses can insure against: automobile, home, life, health, annuities, disability, workers' compensation, nursing home, flood, earthquake, and numerous specific liabilities. As the industry has grown, insurance has become a major expense for most Americans. U.S. households in 1992 spent 6.3 percent of their income on automobile, home, health, and other forms of insurance coverage. The United States is the largest insurance market in the world, accounting for almost one-third of all insurance expenditures. In 1994, premiums totaled $561.7 billion ($678.93 in 2002 dollars)—$316.8 billion for life and health and $244.9 billion for property and casualty, a total equal to Spain's annual economic output.
Insurance companies invest billions of dollars in credit and equity markets and employ nearly 2.2 million people in 4,000 companies. The collapse of several major national companies, including the $18 billion Executive Life, prompted calls for federal regulation that the politically powerful insurance industry successfully opposed.
