Insurance is such a presence in our everyday lives that it's hard to imagine a time without it. But throughout much of our colonial period, that's just what Americans did. Insurance arrived on the American landscape just about the same time the idea of a single nation—the United States—began to form, and it was ushered in by one of the country's Founding Fathers. Let's take a look at the history of insurance in the U.S.
- The first insurance company in the U.S. dates back to colonial days: The Philadelphia Contributionship, co-founded by Ben Franklin in 1752.
- Throughout U.S. history, the types of insurance offered have expanded in reaction to the new risks of modern life: disability, business, automobiles.
- In the late 19th century, various scandals and dubious practices rocked the young insurance industry.
- Under the McCarran-Ferguson Act of 1945, insurance companies are exempt from most federal regulation and are instead subject to state law.
- Today, the size of insurers continues to increase as companies merge with one another and other financial services firms.
Benjamin Franklin: America's First Insurer
Property insurance was certainly not an unknown concept in the 18th century: England's famed insurer Lloyd's of London had been born in 1686. But it took until the mid-1700s for the American colonies to become prosperous and sophisticated enough to develop the concept. It happened in Philadelphia, at the time one of the largest cities in North America, with 15,000 residents.
The city was haunted by the fear of fires. Much like London in the 1600s, houses at this time were made almost entirely out of wood. Worse yet, the settlements that grew into cities were built close together. This was originally done for security reasons, but as cities grew, developers built homes very close to each other for the same reasons they do today—to fit as many homes as possible on their development plots. Although much of Philadephia was built with wide streets and brick or stone structures, conflagrations were still a concern.
In 1752, Benjamin Franklin and several other leading citizens of the town founded The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, modeled after a London firm. The first fire insurance company in America, it was structured as a mutual insurance company, and Franklin advertised it in The Pennsylvania Gazette (which he owned). Like modern insurers, the company sent out inspectors to evaluate properties applying for insurance, and rejected those that did not meet its standards; rates were based on a risk assessment of the property. The Contributorship issued seven-year term policies, and claims were paid out of a capital reserve fund.
More Types of Insurance
The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire set new standards for construction because it refused to insure houses it considered fire hazards. The criteria used to evaluate buildings would one day be reworked into both building codes and zoning laws.
Seven years later, Franklin was also instrumental in getting the first life insurance company, the Presbyterian Ministers' Fund, off the ground.
The various religious authorities at the time were outraged at the practice of putting a dollar value on human life, but their criticism cooled with the realization that the payment of death benefits worked to protect widows and orphans. The Industrial Revolution then brought the necessity of both business insurance and disability insurance home to companies and individuals alike.
Throughout history, the types of insurance offered have expanded in reaction to new risks. 1864 saw the Travelers Insurance Company sell its first accident policy. 1889 saw the first auto insurance policy. As modern life grew more complicated, variations in insurance coverage kept developing.
Scandal, Fraud, and Regulation
With the explosion in insurance products and insurance issuers in the late 19th century, the young industry was soon wrought with fraud and dubious practices. These scandals ranged from issuing companies without the actual capital to pay claims (operating instead like Ponzi schemes) to insurers demanding unfairly high premiums or forcing out competitors in an attempt to create a monopoly. Many state laws were passed to try and curb the problems, but in the early 1900s things were still unsettled.
In 1935, the Social Security Act went into effect, providing unemployment compensation and retirement benefits. Taking away some of the insurance companies' territory, it sent a clear signal that encouraged the industry to begin regulating itself for fear of more government involvement. World War II brought a wage freeze, and companies, desperate to attract the workers still in the country, started offering group life and health insurance. These big policies tended to be offered through companies large enough to afford them—and to provide a sizeable pool of insured workers.
As a result, the ranks of the big insurers swelled, starving out the little guys, along with most of the fly-by-night rabble. In 1944, the Supreme Court ruled the insurance industry should be federally regulated. However, Congress passed the McCarran-Ferguson Act in 1945, returning oversight to the state level.
The control remains mainly at the state level to this day, but after many insurance companies have been called to task over basing rates on gender, race, and other factors, the insurance industry has become more egalitarian and affordable for the public. It has also become more complex. The size of insurance companies continues to increase as they merge with one another and other giants in the financial industry. Now insurance policies can be found at institutions offering a range of financial services.
Investing in Insurance
Insurance is always in demand because people and businesses are always looking for ways to minimize risk. The demand for and range of coverage available has caused insurance policies to increasingly become investments in and of themselves. Because the concentration of coverage in urban centers could lead to huge losses and industry-wide chaos if a mega-disaster or succession of regular disasters occurred, the insurance industry has begun to repackage its risk in catastrophe-linked securities that trade on the market and mitigate insurers' risk.
The internet changed the insurance industry radically. Now people can go online to find the cheapest rate, even as companies shop internationally for the right coverage. This is one source of motivation for companies to merge with other financial services firms—the increase in size gives them a global market, and the integration of services gives them a domestic advantage with customers who are more concerned with convenience than price.