Insurance Academy

Insurance and the Local Economy

By Patrick Wraight | February 20, 2019

February is Insurance Careers Month and since insurance has been so good to my house, I feel compelled to participate. To paraphrase an old comedian, “If it hadn’t been for insurance, I would be in insurance today.”

Our friends at Insurance Career Movement (www.insurancecareerstrifecta.org) have been beating this drum now since 2015. They are asking participants to write about insurance and how we impact the world. This week’s focus is about philanthropy and economic impact. Because of that, I think its time for a history lesson because we need to be reminded just how important this industry is to the rest of the economy. I may have a simple view of things, but the insurance industry impacts economies all over the world, but our primary impact is in the local economy.

A brief history of insurance

The concept of insurance dates back thousands of years and while the forms of insurance change over time and the written contracts change as well, the idea has remained the same.

The ancient Babylonian king Hammurabi recorded one of the earliest forms of insurance in his code of laws in the 18th Century BC (for those keeping score, that’s over 3800 years ago). The code stated that when someone rented a field to farm it, if there were extreme weather conditions (draught, flooding) or great sickness that caused a failure of the crops or the inability to harvest them properly, the rents on that field were to be forgiven for that year.

Let’s fast forward to a time that many of us are already aware of. If you’ve done any kind of study of insurance history, you know Edward Lloyd. You probably don’t need me to tell the whole story, so I’ll skip to the gist of it. By establishing his coffee house where he did and being willing to move it into the heart of the maritime industry, he created conditions where the basics of ocean marine insurance could be created and flourish.

We could tell insurance history stories all day, including how our old friend Ben Franklin established a pattern of fire insurance and fire protection that still exists today. We could talk about the Buffalo, NY doctor who bought the first recorded true automobile policy in 1989. We could even talk about how in 1929 a group of Texas teachers were able to contract with Baylor University hospital to provide them with pre-paid health care services.

What do all of these moments in history have in common?

  • A farmer can’t work his fields.
  • A shipper seeks help from “names” to underwrite the risk of his shipment.
  • A group of people gather together to agree to protect one another against the risk of fire by forming a fire company and an insurance company.
  • Teachers seek help paying for the medical care that they might need.

In all of these cases, we are talking about people coming along side people and creating economic stability and opportunity in their communities. How does the insurance world support economic health?

Insurance reduces risk in commerce

If you’ve ever applied for a loan, you know that banks like to loan money when they think that they will be repaid. If you’ve ever been refused for a loan, or been asked to find a co-signatory, you can bet that the bank looked at your information and decided that the likelihood was that you wouldn’t repay that loan.

One of the risks that a bank has is that something will happen to the item that the loaned money for. Bankers actually fear that something will happen to your car or your home. They fear that if your car is wrecked or your house burns, and you don’t have insurance on it, you’ll stop paying for it. That kind of makes sense in a way. I mean, who wants to make payments on a wrecked car that’s sitting in a part yard?

In order to let them sleep at night, they require insurance on those big purchases before they write the loan. That way they can rest, knowing that if something happens, you’ll keep paying. It makes writing loans easier for them and keeps the wheels of commerce moving.

Insurance reduces risks in community

Imagine that you and you family just went out to watch a movie. On your way home, three fire trucks speed past you. You think little of it until you realize that they’re on your street. They’re not just on your street, but they’re in front of your house and a cascade of water is spraying from the top of one truck. By the time they’re done, the smoke still billows in spots; rivulets of water sprinkled with half burnt pictures wander down your driveway; you hold your dear ones, trying (uselessly) not to cry; and wonder what you are going to do tomorrow.

Now imagine that 2 months ago you wrote the check that paid off the mortgage and you called your insurance agent. She begged you not to cancel your homeowners’ policy, telling you that it covers more than just the house, but you were looking to save $3,000 next year. Besides, when was the last time a house burned down around here?

The family in this story needs clothes and food. They need a place to stay. They need someone to help them figure out which way is up so that they can find normal again and find it soon.

The homeowners’ policy that they used to have included coverage so that they could get a place to stay while they assess what’s next. It included coverage for some new clothes so that they aren’t washing the same pair of jeans and underclothes every day. It included coverage to get a company out to clean up the rubble of their home and start the process of rebuilding it.

Without insurance, they don’t have the money to get the debris removed so the city has a new hazard that they have to deal with. The neighborhood has a problem because the burnt house down the block drives property values down. Some neighbors want to move, but they can’t sell their homes with that over there.

We haven’t even mentioned that with insurance, communities can have public parks and fun things for the kids to do. Insurance policies protect fire departments from the possible claims that could come against them.

Oh. Did I mention that insurance companies hire people who buy things and drive our economy forward? The insurance industry supports my local economy because I’m about to go get some groceries.

About Patrick Wraight

Patrick Wraight, CIC, CRM, AU, is director of Insurance Journal's Academy of Insurance. He can be reached at pwraight@ijacademy.com.

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