Insurance is such a presence in our everyday lives that it's hard to imagine living without it. But throughout much of the colonial period, that's just what Americans did. Insurance arrived on the American landscape at about the same time as 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, new types of insurance have evolved as new risks (such as the automobile) have emerged.
- In the late 19th century, scandals and shady practices rocked the young insurance industry.
- Under the McCarran-Ferguson Act of 1945, insurance companies became exempt from most federal regulation and are instead subject to state law.
- In recent years, the internet has had a major impact on how insurance is sold and how insurance companies evaluate risk.
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 was established in 1688. But it took until the mid-1700s for the American colonies to become prosperous and sophisticated enough to adopt the concept. That happened in Philadelphia, which at 15,000 residents was one of the largest cities in North America at the time.
The city was haunted by a fear of fires. Much like London in the 1600s, houses at the time were made almost entirely out of wood. Worse yet, they were built close together. This was originally 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 as possible on their plots of land. Although much of Philadelphia was built with wide streets and brick or stone structures, conflagrations were still a concern.
In 1752, Benjamin Franklin and several other leading citizens 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 inspectors to evaluate properties whose owners were applying for coverage and rejected those that did not meet its standards; rates were based on a risk assessment of the property. The Contributionship issued seven-year policies, and claims were paid out of a capital reserve fund.
New Risks, New Types of Insurance
The Philadelphia Contributionship set new standards for construction because it refused to insure properties it considered fire hazards. The criteria it used to evaluate buildings would one day evolve into both building codes and zoning laws.
Seven years later, Franklin was also instrumental in getting the first life insurance company in the U.S., the Presbyterian Ministers' Fund, off the ground.
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 U.S. history, the types of insurance that companies have offered have expanded in reaction to new risks. For example, in 1897, Travelers Insurance Company sold its first auto insurance policy, and in 1919, its first aircraft liability coverage. As modern life continued to grow more complicated, new types of insurance continued to emerge.
Scandal and Fraud, Growth and Regulation
With the rapid growth of insurance companies and insurance products in the late 19th century, the young industry was soon beset by fraud and dubious practices. Scandals ranged from companies that sold policies without having the capital to pay their claims (operating instead like Ponzi schemes) to insurers that ruthlessly forced out competitors in an attempt to create a monopoly. Many states passed laws to address the problems, but in the early 1900s, abuses remained rampant.
In 1935, the Social Security Act went into effect, providing for old-age assistance and grants to states for unemployment compensation. 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 employers, desperate to attract the workers still in the country, started offering group life and health insurance as employee benefits. These big policies tended to be offered by companies large enough to afford them—and to provide a sizable pool of insured workers.
As a result, the power of the major insurers swelled, starving out the little guys, along with most of the fly-by-night operators. In 1944, the Supreme Court ruled that the insurance industry should be federally regulated. However, Congress passed the McCarran-Ferguson Act in 1945, returning oversight to the state level. Regulatory control remains mainly at the state level to this day.
Meanwhile, the large insurance companies continue to grow in size, particularly as they merge with one another and with other giants in the financial industry. Now many of these companies offer a range of financial services that go well beyond insurance.
Insurance in the U.S. Today
The most profound change in the U.S. insurance industry in recent years has been propelled by the growth of the internet. Insurance buyers increasingly go online to shop for coverage and insurers have changed many of their sales and underwriting practices as a result. The worldwide reach of the internet has also led to further mergers among financial services firms as they compete in what is increasingly a global marketplace.