The insurance industry developed over centuries as people realized that there was a need to reduce risk. They realized that if a group of people each chipped in money that was held by someone they trusted then the money could be used to cover any losses that one of them might incur. Many of these early insurance organizations were considered clubs, and only their members received the benefits. The earliest known insurance organization was developed by merchants in ancient Babylonia. In 2100 B.C., it insured shippers against theft and other potential threats. Merchants shipped their wares to distant cities in caravans, which were vulnerable to thieves, breakdowns, and weather-related disasters. To protect against the financial loss associated with one of these events, the merchants contributed money that went to a member to reimburse him for the loss of his shipment if something happened to it.
The Romans were the next civilization to incorporate a form of insurance into society. The Roman people believed that people who didn’t receive a proper burial would come back after death and haunt their fellow citizens. Soldiers in the Roman army first created life insurance, and their superiors encouraged it. Lower-ranking soldiers were not paid enough to cover burial expenses, so life insurance was seen as a necessity.
The first insurance contract was signed in Genoa, Italy, in 1347. Participants, either individuals or groups, wrote their names and the dollar amount they were willing to risk at the bottom of the insurance policy document. They were called underwriters, which is where the term originated.
In 1667, after the Great Fire of London, a law was enacted that created the Fire Office, an organization that indemnified losses due to fire.
One of the oldest insurance markets still in operation today is Lloyd’s of London, formed in 1688. Lloyd’s began life as a coffee house, where shippers could get the latest shipping news. Most shipping personnel went to Lloyd’s to do business or get the latest news in the local shipping industry. Because of the great distances that many of these ships traveled, the high rate of shipwrecks that occurred, and attacks by pirates, ship owners needed to minimize their risks. Investors that also frequented the coffee shop offered ship owners a guarantee that they would cover their losses in the event of a shipwreck in exchange for a fee or premium. If the ship arrived safely, the investor was able to keep the premium. This first began in 1688, and continued and expanded into other forms of insurance.
In 1693, the first mortality table was developed by the astronomer Edmond Halley, famous for computing the orbit of Halley’s Comet. It was the first table created as a basis for underwriting life insurance. He created it by combining statistical laws of mortality with the principle of compound interest. Its biggest drawback was that it used the same rate for all ages. In 1756, Joseph Dodson adjusted the table and made it possible to scale the premium rate to age.
In the United States in the mid-1700s, one of the biggest threats to residents and businesses was fire. There were no government-run fire departments at the time, only volunteer fire brigades. One of the first insurance organizations that formed to provide fire insurance was created by Benjamin Franklin in May 1752, called the Philadelphia Contributionship. One of the first life insurance companies formed in the early 1800s. The Presbyterian Synod of Philadelphia created it for its ministers and their dependents. By the 1830s, citizens recognized the value of insurance and began looking at other risks where it could provide value. That’s when classifying risks began. Ironically, although the first life insurance company was developed by a religious organization, many Christian denominations viewed insurance as gambling and advised their church members not to take part. After 1840, however, it gained in popularity as life insurers marketed their policies to husbands as the moral, responsible thing to do. It was also about this time that the New York Fire of 1835 paved the way to states requiring that insurance companies have enough cash reserves to cover such huge losses. The state of Massachusetts was the first to pass this kind of law.
The turn of the 20th century led to more developments in the insurance industry. In 1910, the catalog merchandiser Montgomery Ward & Co. was the first employer to offer a form of group health insurance to its workers. The London Guarantee and Accident Co. in New York wrote the plan and it covered illness and injury. In 1935, during the Great Depression, the U.S. government passed the Social Security Act. Insurance companies saw this as a signal that they needed to self-regulate in order to avoid more government intervention. The states were given formal control of regulating the insurance industry in 1945 under the McCarran-Ferguson Act. Medicare and Medicaid were signed into law during President Lyndon B. Johnson’s presidency in 1965. It became part of Social Security benefits, and its aim was to ensure that elderly citizens received a form of health insurance.
By the end of the 20th century, the government had initiated several forms of insurance, such as unemployment insurance, that took pressure off the insurance companies, but which also took away some markets. An increasing number of natural disasters also began taking its toll on the insurance industry, and several companies went out of business because they lacked the funds to cover claims. Reinsurance, a process in which insurance companies pool their resources to help each other when these kinds of natural disasters occur, has helped to diminish, but not totally overcome, this issue.
The insurance industry is in a state of flux. The Patient Protection and Affordable Health Care Act, which began taking effect in 2013, allowed 15 to 20 million Americans who were previously uninsured to become insured, but rising insurance premiums, insurance companies leaving the program, and other issues have made it a controversial law. The Trump Administration plans to revise or repeal/replace the Act, and there’s uncertainty in the industry about these potential changes. Additionally, many companies have increased premiums for home and property coverage to exorbitant levels in some areas of the country that are prone to tornadoes, hurricanes, floods, fires, and earthquakes, resulting in many poor or economically challenged homeowners going uninsured. Web aggregators, fintech companies, direct sellers, and social brokers have begun to sell insurance policies and offer other insurance-related products—causing the industry to lose market share. The industry faces many challenges, and it is clear that continued changes and regulations are ahead.
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