Historical Development of Insurance
Merchants and traders, until well into the Middle Ages, had to borrow funds to finance their trade or to secure goods on consignment from producers or suppliers. As security for the loans or for the goods of their trade, the merchants pledged not only their ships or other tangible property but also their lives (as slaves) and those of their families as well. Babylonia, in 2000 B.C., was the center of trade with caravans transporting goods to all parts of the known world.
To reduce the risk of robbery and capture for ransom, the Babylonians devised a system of contracts in which the supplier of capital for the trade venture agreed to cancel the loan if the merchant was robbed of his goods. An extra charge was added to the usual rate of interest as a premium for the creditor, to whom the risk of loss by robbery was transferred. The Code of Hammurabi legalized this practice. (This code also provided for the indemnification, by the state or the temple, of a person whose home was destroyed by fire and for murder or robbery.)
These arrangements were later known as bottomry contracts (where the ship is security for the loan) and respondent contracts (where the cargo is the security). Knowledge of these arrangements was transmitted through the Phoenicians to the Greeks, Hindus, and Romans. The Rhodians established a comprehensive code of sea laws, including the principle of "jettison" or "general average," which provides that if goods are thrown overboard in order to lighten the ship, what is sacrificed for the common benefit should be made good by a common contribution. The sea laws, including the Greek laws of Solon and the Rhodian sea law, were absorbed in the early Roman civil codes and in the laws of the Byzantine Empire in 533 A.D., and they are a part of today's laws.
Life and Health Insurance
The beginnings of life and health insurance are traced to ancient practices in the Greek thiasoi and eranoi and the Roman collegia, from about 600 B.C. to the fall of the Roman Empire. These associations or guilds began as purely religious groups but gradually became more utilitarian. Funerary benefits were the first established. The early guilds in Italy and England, which were the successors to the Roman collegia, had some of the characteristics of trade associations, unions, and fraternal societies.
The practice of insurance on a "premium" basis is said to have originated in the Italian city republics of Venice, Pisa, Florence, and Genoa about 1250 A.D. The first such insurance contract was dated 1347 in Genoa. The Barcelona Ordinance of 1435 A.D. was the first comprehensive code of insurance laws. The first record of "true" life insurance with "insurable interest" was dated 1430 in Genoa and concerned the lives of pregnant wives and slaves.
The English "friendly societies" gained prominence with the decline of the guilds, most of whose mutual benefit and social functions they assumed. These societies were generally local groups of working people paying regular weekly or semiweekly contributions into a common fund administered by elected officers. The assessments or contributions were established without regard to age or insurability of the members, and many of the early societies failed due to a lack of financial and administrative know-how, waste, and fraud. Government control was minimal until the first Friendly Society Act oM793 passed.
The early "collecting" friendly societies evolved into the "industrial life insurance system", so called because its appeal was almost exclusively to industrial workers or low-wage earners. The Prudential of England was the first to evolve from a collecting friendly society to a modern industrial life insurance organization. The enactment of social insurance laws in England decreased the attractiveness of the friendly societies.
Annuities were known to the Romans in the 1st century A.D. Roman law (the Falcidian Law) required that not more than three fourths of a person's estate could go to those not on the prescribed list of legal heirs. This law contained a table of life expectancy to calculate the present value of life rents or bequests (annuities), but it was unsatisfactory. In about 225 A.D., Ulpian compiled a more accurate table of life expectancy, and it was still used in Tuscany in the 18th century. Edmund Halley's table in 1693 was the first improvement in actuarial tables after Ulpian's. Others established the theories of probability and laid the mathematical basis of modern insurance.
Other Early Insurance
Early in the 19th century, marine insurers recognized the need for protection of goods and property in transit other than by water. This new class of transportation insurance was named "inland marine" to differentiate it from "ocean marine." Inland marine insurance covers moving or movable property and the facilities for transportation, such as docks, ships, bridges, tunnels, and warehouses. It also deals in "all risk" coverage such as the jewelers and furriers block policies and personal effects floaters. Urbanization and industrialization gave rise to the need for protection against theft, industrial and transportation accidents, and third-party liability. The new class of insurance devised to meet these needs was casualty insurance.
The great London fire of 1666 greatly increased interest in fire insurance, and the first fire assurance office was established in London in 1667 by Nicholas Barbon. Plate glass coverage was first offered in England in 1850 and steam boiler insurance in 1854. Other "firsts" in England were employer's liability insurance in about 1880, automobile liability insurance (on an electric cab) in 1895, and collision insurance in 1899.
Insurance in the United States
A monopoly granted in 1720 to two English corporations (London Assurance and Royal Exchange) prevented the organization of corporate insurers in the American colonies. Individuals could engage in the business of insurance, but the colonies lacked individuals of wealth and knowledge to compete with such insurers as Lloyd's of London.
The first mutual fire insurer started in 1735 as the Friendly Society of Charleston, S.C., but it was bankrupted in 1740 by a bad fire. Many early fire insurance groups in the colonies started as combination volunteer fire companies and insurers. One of the first, and still in existence, was the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, organized in 1752. Benjamin Franklin was one of its organizers.
The first permanent life insurer established in the colonies was the Corporation for the Relief of Poor and Distressed Presbyterian Ministers and for the Poor and Distressed Widows and Children of Presbyterian Ministers, organized in 1759. The first capital stock insurance corporation, The Insurance Company of North America, was chartered on April 14, 1794, by the Pennsylvania Assembly.
The first American casualty policy was dated 1832, the first fidelity bond 1840, and the first health insurance policy 1847. The country's first accident insurance is considered to date from the organization of the Travelers Insurance Company in 1863. Steam boiler insurance and plate glass insurance in the United States both date from 1867. The first burglary policy was written in 1885, and Travelers introduced the automobile (bodily injury) policy in 1898.
Innovations in the 20th century include the first group life insurance policy in 1910, the first insured pension plan in 1921, and the first group credit plan in 1928.
Although the U.S. government had established hospital expense benefits for merchant seamen in 1798, the first hospitalization insurance plan is dated 1921. Group hospitalization and medical insurance received its real start in 1936, when the American Hospital Association appointed a commission that later set up the Blue Cross and Blue Shield plans.
Fraternal associations and fraternal insurance were popular among the early colonists and later immigrants, and in the late 19th century they were strong competitors to the corporate life insurers. These fraternals, which furnished life and health insurance protection, had a stronger social and fraternal character than the English friendly societies, but they suffered from the same actuarial and administrative faults and many failed. The Prudential Insurance Company, in 1875, pioneered industrial life insurance in America.
Introduction of Social Insurance
The country's first social insurance legislation came in 1911 in state workmen's compensation laws. In 1935 the Social Security Act was passed by Congress. It provided grants of money from the federal government to the state for assistance to the needy old, the blind, and orphans. It also established two insurance systems, one a federal-state system of unemployment compensation and the other a plan of old-age benefits. Since then survivorship benefits (1939), disability benefits (1956), and medical care for the aged (1965) have been added. Other government insurance activities include life and health insurance programs administered by the Veterans Administration and the federal crop insurance program.
The American colonies and, later, the states chartered and regulated the early U.S. insurers. The early regulations were incorporated into the company charters and, later, in the requirement for annual reports, licensing, and audits. Massachusetts (1855) and New York (1859) led the states in enacting comprehensive state insurance regulations. Modern state regulation is usually associated with the appointment of Elizur Wright, in 1858, as insurance commissioner of Massachusetts.
In the Paul v. Virginia decision in 1896, the U.S. Supreme Court declared that insurance was not commerce and therefore not subject to federal law. In 1944 the Supreme Court, in the case of United States v. South-Eastern Underwriters Association and others, reversed itself, declaring that insurance was commerce and, when conducted across state lines, was subject to federal control. In 1945, Congress enacted the McCarran-Ferguson Act, allowing the states to retain control and regulate the business of insurance so long as they did so to the satisfaction of Congress.
State regulation is still the primary regulatory force applying to the business. Increasingly, however, federal government agencies such as the Federal Trade Commission and the Securities and Exchange Commission have an interest in and effect on insurer operations. There is also continuing interest in Congress, in the form of investigation, as to the adequacy of state regulation.
Ending of Monoline Limitations
Early American insurers were small and usually specialized in one class of insurance. In time, state regulations froze this trend into what came to be known as the "American System" of monoline insurance. (In England, an insurer was permitted to write all lines of insurance). Some U.S. insurers, in order to meet the needs of the public better, formed fleets or groups of companies to get around the limitations provided by the monoline legislation. In 1944 an all-industry committee headed by John Diemand of the Insurance Company of North America recommended that non-life insurers be permitted to write all lines of insurance except life insurance and annuities and that life insurers also write health insurance and annuities. All states now have adopted these recommendations. Package policies such as the "homeowners" and the "family automobile" policies were made possible by this change in the laws.