Facts and Legends of Insurance Industry History

January 10, 2011

Benjamin Franklin founded America’s oldest, continuously active insurance company in 1752. Franklin and several prominent business associates established the Philadelphia Contributorship for the Insurance of Houses from Loss by Fire. The Contributorship, as is now its common reference, was a proactive insurance carrier refusing to provide coverage to houses and other structures that were not constructed according to strict building standards. During the British occupation of Philadelphia in 1777, the Contributorship hired a chimney sweep to maintain the chimneys of insured houses that were still occupied by the insureds. (www.ushistory.org/tour/tour_contrib.htm and www.contributionship.com/)

Lloyd’s of London had its start in a coffee shop. Although the first informal gatherings of shippers and investors around 1688 were not intended to produce an insurance mechanism, Edward Lloyd’s coffeehouse on London’s Tower Street witnessed the first days of what was to become the world’s best known insurance underwriting society. Financial protection contracts initially emanating from Lloyd’s coffeehouse were dedicated to ships and their cargo.

Before a merchant or other financially-interested party would entrust his goods to a sea captain, he wanted to assure that there would be some financial guarantee if the cargo ended up at the bottom of the ocean. Investors visiting the coffee shop would contractually agree to indemnify the owner if the goods didn’t make it to their destination because of the ravages of the sea — in exchange for a premium.

If nothing happened to the ship, the investor/guarantor kept the premium. When ships and cargos were lost, the investor had to make good on his promise and pay the “assured.”

No single investor was willing to insure the total value of a ship and its cargo. A detailed description of the ship, its captain, the cargo, its route and destination was prepared and circulated among the participating investors. Each investor indicated how much of the total value of the risk they were willing to “insure” by writing his name and the percentage under the description — thus the creation of “underwriters.” (From www.Lloyds.com and other sources.)

Sir Edmund Halley (yes, of comet fame) constructed and published the first known mortality tables in 1693. Data used to develop the tables were taken from a very small sample, a small town in eastern Germany (now a part of Poland). It is unlikely that his findings could be considered “actuarially accurate;” but it was the first step in applying probability to estimate human life. Insurance companies and governments would not make use of such life-expectancy tables for at least another century. (Taken from “Against the Gods: The Remarkable Story of Risk.”)

Fire insurance carriers were an impetus for the modern fire department. Prior to the creation of municipal fire departments, volunteer fire departments, having no clear district lines, “competed” with one another to extinguish fires — the department that arrived first and successfully doused the flames got paid.

As the number of fire insurance companies grew so too did the competition among fire departments. Insurance carriers would supply insureds with “fire brand” placards to attach to the building to indicate that there was insurance coverage and which carrier provided the protection. Fire departments knew that if insurance coverage was in place they would get paid more and more quickly than by just billing the building’s owner.

Fire insurance companies, looking for a better way to protect their investments, eventually formed their own fire brigades. When a fire alarm sounded all the local fire departments would respond (volunteer and insurance company departments); if the insurance carrier’s brigade arrived first but did not find their fire brand on the building, allegedly they would watch it burn, leaving the fight for the next department that arrived. If you’re not going to get paid, why fight the fire? (Compiled from multiple sources and accounts.)

Workers’ compensation laws were first introduced and implemented between 1881 and 1884 in Germany by the “Iron Chancellor,” Otto von Bismarck. The U.S. did not attempt to join this social revolution until the early 1900’s. Maryland, Massachusetts, Montana and New York each introduced workers’ compensation statutes between 1902 and 1910, but all four laws were struck down under constitutional challenge as violating “due process.” Wisconsin in May 1911 became the first state to effectuate an ongoing workers’ compensation program that survived legal challenge.

Prior to the enactment of these laws in America, workers injured on the job had to seek recovery through the court system. To gain recovery, they had to prove their employer was negligent in causing the injury. Many did not have the funds to wage this fight leaving injured workers without income and somewhat destitute. Legends exist that workers injured in coal mines would be carried home and placed on their doorstep. (Taken from, “The Insurance Professional’s Practical Guide to Workers’ Compensation.”)

Topics Carriers Workers' Compensation Market

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Insurance Journal West January 10, 2011
January 10, 2011
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