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Insurance History – And Maybe Some Myths and Legend

Author: Chris Boggs

Insurance History – And Maybe Some Myths and Legend

"Insurance" was not the original term used to describe what we narrowly understand as insurance today. "Assurance" was originally used to speak of the modern concept of insurance according to the February 2009 issue of Reinsurance News published by the Society of Actuaries.

Assurance, as stated in this 2009 article, A Brief History of Reinsurance, is Italian in origin, thus it is no surprise that the oldest studied insurance (assurance) policies - or policies containing insurance-type protections - are from Italy. The Federation Francaise des Societes d'Assurance cited a life insurance policy written in Florence dated April 2, 1329. An October 29, 1298, policy reportedly covers a shipment to Bruges from Genoa. The first reinsurance-like contract dates from July 12, 1370; it was written in Latin and covered the cargo of a ship sailing from Genoa to Sluis.

Insurance (or assurance), as we understand the concept today, is more than 700 years old. But what events shaped our modern world of insurance? Following are some interesting facts, myths, and legends that helped mold the current insurance world in America.

  1. Lloyd's of London. Although the first informal gatherings of shippers and investors in 1688 were not intended to produce an insurance mechanism, Edward Lloyd's coffeehouse on London's Tower Street witnessed the first days of what has become the world's best known insurance underwriting society. The first "official" committee of subscribers did not meet until 1771. The first 100 years of Lloyd's were somewhat "unofficial," operating on trust among the insureds and the underwriters. Three insurance legends surround Lloyd's of London.
    1. A sticking point during discussions surrounding America declaring its freedom from England was insurance. The vast majority of insurance covering interests in America was provided by Lloyd's and other British-based insurers. Imagine that, we almost didn't declare independence because of insurance.
    2. Following the Great 1906 San Francisco Earthquake, legend states that Lloyd's contacted its representative in San Francisco and said, "Pay the claims, we'll figure out if there is coverage later."
    3. In 1955-56, a replica of the Mayflower was built, the Mayflower II. Allegedly the owners contacted Lloyd's to provide coverage and the underwriter said, "Hold on, let me see what we charged last time." (Obviously this is myth or legend since the Mayflower sailed to America in 1620, but it is a good story).

      Lloyd's of London is a pilgrimage site for all insurance geeks.
  2. The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. Founded by Benjamin Franklin and several prominent business associates in 1752, The Contributorship, as it is now commonly called, 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. This was one of the first insurance carriers to enact loss control standards. In an "official" operating capacity, The Contributorship is older than Lloyd's.
  3. The Friendly Society for Mutual Insurance of Houses Against Fire. The Friendly Society predates The Contributorship by 16 years and was the first insurance company founded in America. It was founded in Charles Towne (Charleston), South Carolina in 1736. In November of 1740, "The Great Fire of 1740" bankrupted the company after only four years.
  4. The Oldest Active Reinsurance Companies. CologneRe is the oldest specific-purpose, continuously active reinsurance company founded April 8, 1846. SwissRe opened in 1863.
  5. Workers' Compensation. Prior to workers' compensation laws, workers injured on the job were required to seek recovery through the court system. In court, 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.

    Germany in 1884 was the first country to enact a form of workers' compensation. America did not attempt to enjoin the workers' compensation social revolution in the early 1900s. Maryland (1902), Massachusetts (1908), Montana (1909), and New York (1910) each introduced workers' compensation statutes. 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 challenges. Nine more states adopted workers' compensation laws before the close of 1911. By the end of 1920, 42 states plus Alaska and Hawaii (even though statehood didn't come for either until 1959) enacted workers' compensation statutes. Mississippi was the last state to implement a workers' compensation statute, waiting until 1948.
  6. The 1943 New York Standard Fire Policy. This 165-line document became the basis for nearly all modern property insurance contracts. In several states the attachment of or referral to this policy is still required by statute. Although first adopted in 1918, any current mention of the Standard Fire Policy is a reference to the 1943 edition.
  7. National Flood Insurance Program. Federal flood insurance was proposed as early as the mid-to-late 1930's, when private insurers ceased offering flood coverage; but it wasn't until the National Flood Insurance Act of 1968 was signed into law that federal flood insurance became a reality in the form of the National Flood Insurance Program (NFIP). Although signed into law in 1968, necessary funding was not provided to carry out the mandates of the program until the early 1970's. Although currently troubled by charges of inadequate or incorrect rating information and heavily subsidized rates, creation of the flood policy was an important milestone in insurance history.
  8. Insurance Services Office (ISO). Insurance Services Office (ISO) was founded and created in 1971 by a merger between the Mutual Insurance Rating Bureau and the Insurance Rating Bureau (known as the National Bureau of Casualty Underwriters until 1968). ISO provides statistical and actuarial services, rating information, claims data, standardized policy language, and other relevant industry data. It has one of the largest databases in the world and by far the largest insurance-related databases. ISO is now a wholly owned subsidiary of Verisk Analytics, a publically traded company.
  9. American Association of Insurance Services (AAIS). American Association of Insurance Services (AAIS) was organized in 1975 as a multiline property/casualty advisory organization and as a licensed statistical agent. AAIS is the successor organization of the former Transportation Insurance Rating Bureau, a Chicago-based inland marine rating bureau formed from the merger of two smaller bureaus founded in the 1930s. AAIS promulgates, files, and maintains on behalf of its member companies forms, rules, and rating information for more than 20 lines of personal and commercial insurance.
  10. National Council on Compensation Insurance. Founded in 1922, the National Council on Compensation Insurance (NCCI) promulgates rules, rates, and forms; develops and monitors the work comp class codes; and develops experience modification worksheets (and factors). In addition to these main services, NCCI manages the residual (non-standard) workers' compensation market for many states and provides cost analysis of proposed and enacted workers' compensation legislation.
  11. Surety and Fidelity Association of America. The Surety and Fidelity Association of America (SFAA), founded in 1908 and formerly known as the Surety Association of America, is a fidelity and surety bond advisory rating organization and the statistical agent in all states (except Texas) for the reporting of fidelity and surety experience. In addition to providing advisory loss costs and statistical reporting, the SFAA also promulgates underwriting rules and recommendations, and is involved in governmental affairs as they relate to fidelity and surety bonds.
  12. Automobile Insurance Plans Service Office. The Automobile Insurance Plans Service Office (AIPSO) is a pseudo bureau founded in 1973. AIPSO promulgates loss costs and forms for the management of the residual (high-risk) automobile market, but not necessarily for member companies. AIPSO's "members" are the various state-run residual auto markets. And beyond managing forms and loss costs, AIPSO processes applications for the residual auto market and actually manages the residual auto programs in approximately 39 states. AIPSO acts in more of a servicing capacity than do any of the other bureaus listed, thus its classification as a pseudo bureau.
  13. The Businessowners' Policy (BOP). First introduced by ISO in 1976, this was the first time commercial risks were offered property and liability coverage in the same coverage form without the need to "piece-mill" the parts together in a package. Originally designed for small, "low-risk" operations, eligibility for the BOP has expanded beyond the protection needed.
  14. "Comprehensive" General Liability Policy. The "Comprehensive" General Liability policy was introduced by ISO in 1973 as a replacement for the Owner's Landlord's & Tenant's (OL&T) and Manufacturer's & Contractor's Liability policies. This version of the CGL was the primary general liability form from 1973 until 1986 (when ISO "simplified" all their forms).

    Although this was an improvement over the old forms, it required the attachment of multiple endorsements to achieve the breadth of protection seen in the modern "Commercial" General Liability (CGL) form.

    Coverages contained in today's CGL form which had to be added by endorsement included (not a complete list): Personal Injury and Advertising Injury (now Part B); Blanket Contractual Liability; Broad-Form Property Damage; Host Liquor Liability, and Employees as Insureds. ISO introduced the Broad Form General Liability Endorsement in 1977, to package the "missing" coverages into one endorsement.

    Any contractual reference to an OL&T, "Comprehensive" General Liability, Blanket Contractual Liability or Broad-Form property damage is proof that whoever wrote the contract is either near retirement or plagiarizing.
  15. First Modern Life Insurance Policy. William Gybbons was the named insured on the first modern life insurance policy placed on June 18, 1536; a one-year term policy. Gybbons died within that year on May 29, 1537, after being hit by a bullock cart (no, seriously). The policy was for 400 pounds.

    America's first life insurance carrier is, in a sense, still in existence. "The Corporation for Relief of Poor and Distressed Presbyterian Ministers and the Poor and Distressed Widows and Children of Presbyterian Ministers" was formed in 1759. Eventually becoming known as the "Presbyterian Ministers' Fund," it is now part of Nationwide Insurance.
  16. Creation of Mortality Tables. Sir Edmund Halley (yes, the same one for whom the comet is named) constructed and published the first known mortality tables in 1693. Statistical credibility of the data is questionable because the information came from a very small sample, a small town in eastern Germany (now a part of Poland), over a four-year period. Although it is unlikely his findings could be considered "actuarially accurate," Haley's 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").
  17. Creation of Property Insurance. Modern property insurance was first introduced following the Great Fire of London in 1666. The fire destroyed more than 13,000 homes and 87 churches in the "old" part of London (the part built by the Romans). Thousands were homeless due to the lack of any mechanism available, no financial safety net, to help the property owners pay the cost to rebuild. In 1681, Nicholas Barbon along with several associates established the first fire insurance company, the "Insurance Office for Houses," located on the back side of the Royal Exchange. Initially premiums were based on rents not the value of the houses. Operations appear to have ceased around 1720.
  18. Modern Health Insurance Coverage. The first modern health insurance policy was written for a group of teachers in 1929. Baylor hospital and a group of school teachers contracted for room, board, and medical services in exchange for a monthly fee. Blue Cross and Blue Shield organizations began to appear in 1932.

    World War II saw explosive growth in health insurance. Just prior to and during WWII, the federal government imposed wage restrictions to keep employers from enticing workers away with more money. To get and keep employees, employers began offering health insurance as an employee benefit to offset the inability to pay higher wages.
  19. Paul v. Virginia. From the beginning of insurance in the US, states regulated the industry. There was little or no question that states were and should be the proper regulatory authority – until an insurance agent was arrested for selling "fire" insurance.

    Samuel Paul was arrested and charged with violating Virginia law because he was selling insurance in the state without the proper license. Paul sued the state claiming that insurance was an interstate commerce and thus subject to federal regulation not state regulation. The state supreme court disagreed so the case moved to the US Supreme Court.

    In 1869, the US Supreme Court ruled that insurance was not interstate commerce and was thus subject to state regulation. Paul v. Virginia remained the law of the land for 75 years.
  20. United States v. South-Eastern Underwriters Association. Francis Biddle, the Attorney General of the United States, brought suit against the South-Eastern Underwriters Association (SEUA) in January 1944 charging it with violating the Sherman Anti-Trust Act. His indictment alleged two conspiracies: 1) Restraint of trade and commerce by fixing and maintaining arbitrary and non-competitive premium rates on fire and specified allied lines of insurance in six southern states; and 2) monopolizing trade and commerce in the same lines of insurance. In short, the attorney general claimed that the SEUA was guilty of collusion in setting rates.

    The Supreme Court agreed with the attorney general and on June 5, 1944, published its decision stating that insurance and the business of insurance was subject to the Sherman Anti-Trust Act and thus could be regulated by Congress. This remains the common law of the land today.
  21. The McCarran-Ferguson Act. Following and in response to the US v. SEUA decision, Congress passed the McCarran-Ferguson Act into law on March 9, 1945. The act did not legislatively overturn the common law arising out of the SEUA ruling; neither does it prevent the federal government from regulating the insurance industry. The Act simply grants states very broad authority in the regulation of the insurance industry. Basically, the law keeps the federal government out of insurance regulation as long as it feels the states are properly regulating the industry.
  22. The Yonkers Case. Officially listed in court records as National Fire Insurance Company v. Sullard, this was the keystone case regarding who owned policy "expirations," the independent agent or the insurance carrier. The New York Appellate Court reversed a lower court decision to solidify what all independent agent's already believed, that the information in and rights to the book of business written by that agency belonged to the agency. The National Association of Independent Agents, which ultimately became the Independent Insurance Agents and Brokers of America (The Big "I"), was instrumental in garnering the financing for the appeal. Without this appeals case, independent agents may have lost the rights to the business they wrote.
  23. Formation of the NAIC. The National Association of Insurance Commissioners (NAIC) is a non-regulatory body established in 1871 to develop minimum standards and model laws individual states can elect to enact or not. Additionally, the NAIC awards accreditation to states that comply with specific financial regulation standards.
  24. The Sanborn Map Company (1867-1970). The Sanborn Map Company developed maps used by the insurance industry for the underwriting purposes. Sanborn maps provided much of the detail underwriters needed to provide coverage include: construction (based on the colors used), size (provided measurements and number of floors), the year built, the occupancy of a particular building, water supplies, and the surrounding exposures. Surveyors mapped every structure in a particular town and compiled the information in book form for use by insurance carriers. In addition to the great amount of useful information they provided, Sanborn maps gave underwriters the opportunity to view the number of risks insured in a specific area so that they could adequately spread their risks, a proper activity. Stories are told that the Sanborn map surveyors were so well trained they did not need measuring tapes or wheels; they could accurately "walk off" a building with incredible accuracy.
  25. ISO's Policy Form Simplification – 1986.
  26. Compulsory Insurance Laws. The US Supreme Court cleared the way for compulsory insurance laws in 1917. In New York Central Railway Co. v. White the US Supreme Court ruled that compulsory insurance requirements (at the state level, not the federal level) were not a violation of due process. This cleared the way for compulsory workers' compensation laws and auto liability laws.
  27. Terrorism Risk Insurance Act (TRIA). As a result of the terrorist attacks of September 11, 2001, President George W. Bush on November 26, 2002, signed into law the Terrorism Risk Insurance Act of 2002 (Pub. L. 107–297, 116 Stat. 2322). TRIA created a temporary federal program that provides for a transparent system of shared public and private compensation for certain insured losses resulting from a certified act of terror. The Treasury Department administers the program. The law has been extended several times: 1) December 22, 2005: the Terrorism Risk Insurance Extension Act of 2005 (TRIEA) extended protection through December 31, 2007; 2) December 26, 2007: the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA 2007) further extending protection through December 31, 2014; and 3) January 12, 2015: the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA 2015) amended the expiration date of TRIP to December 31, 2020. 
  28. Eliot Spitzer and Bid Rigging. Eliot Spitzer, former New York Attorney General, sued Marsh & McLennan Cos. on October 14, 2004, for supposed bid rigging and other misdeeds and misinformation. This suit led to laws requiring insurance agents and brokers to disclose who they represent (the carrier or the insured), the sources of income, and sometimes the amount of income. Currently only 15 states have these laws on the books.
  29. Professional Employer Organizations. Tax Equity and Fiscal Responsibility Act of 1982 cleared a path for the creation and expansion of PEOs. Between 700 and 900 professional employer organizations operate in all 50 states. According to the National Association of Professional Employer Organizations (NAPEO), between two and three million employees work under a PEO arrangement and PEOs as an industry earned $92 billion in gross revenues in 2012 (gross revenues are the total payrolls plus the fees charged by the PEO).
  30. Federal Crop Insurance. Congress first authorized Federal crop insurance in the 1930s along with other initiatives to help agriculture recover from the combined effects of the Great Depression and the Dust Bowl. The Federal Crop Insurance Corporation (FCIC) was created in 1938 to carry out the program.
  31. Mehr & Hedges. Robert I. Mehr and Bob A. Hedges were the first to consolidate the multi-step risk management process into simple rules. In their 1963 book, "Risk Management in the Business Enterprise," Mehr and Hedges took all the concepts and theories surrounding risk management and the risk management process and combined them into three simple rules still applicable today: 1) Don't risk more than you can afford to lose; 2) Consider the odds; and 3) Don't risk a lot for a little.
  32. Captive Insurance. Fred Reiss, considered the father of modern captive insurance in the US, coined the term "captive" in the 1950s.
  33. Claims Made Liability Policy. Because of the time lag between the wrongful act or error, the resulting injury and the ultimate claim or lawsuit, Joe D'Alessandro in 1964 deduced that there was a better way to insure a "professional." Secondarily, D'Alessandro postulated that there had to be a way to provide greater actuarial certainty that there would be no further claim activity following the close of the policy period (eliminating the "incurred but not reported" (IBNR) problem). This creative thinking led to the development of the first "claims made" policy wording.
  34. Credit Default Swaps. Created by JP Morgan in 1994. Almost destroyed the world in 2008. Arguments and debates persist whether a Credit Default Swap is insurance. In the traditional sense, CDS's are not insurance because the CDS buyer was not required to have ANY interest in the business on which he was buying a CDS. In fact, at the height the notational values of CDS in America was $47 trillion dollars on a total asset value of $27 trillion. In short, more people were hoping for failure than where counting on gain.
  35. The "All Risk" Property Insurance Policy. Introduced sometime in the 1950s.
  36. Creation of the Homeowners' Policy. The first modern homeowners' insurance policy written in America was issued in September 1950.
  37. First Auto Insurance Policy. On February 27, 1898, the first auto insurance policy was sold by Traveler's Insurance Co. to Dr. Truman Martin of Buffalo, N.Y., according to the U.S. Census Bureau. The policy gave Martin $5,000 in liability coverage. At the time, Martin would likely have been more concerned with crashing into one of the country's 18 million horses, rather than another of the 4,000 cars in the U.S.
  38. The First Director's and Officer's (D&O) Policy. Followed the passing of the Securities Act of 1933 and the Securities Exchange Act of 1934. Lloyds offered these policies in the 1930s, but few publically traded companies purchased the coverage.
  39. Independent Insurance Agents and Brokers of America (IIABA). Founded in 1896 as the National Local Association of Fire Insurance Agents. The name was changed to the National Association of Insurance Agents in 1913. To emphasize its members' ability to work with a variety of insurance companies, the organization became the Independent Insurance Agents of America in 1975. And in 2002 the name was changed to the current Independent Insurance Agents & Brokers of America to reflect the diversity of its membership, which includes both independent insurance agents and insurance brokers.
  40. National Association of Professional Insurance Agents (NAPIA). Founded in 1931
  41. Council of Insurance Agents and Brokers (CIAB). The Council was established in 1913, when the National Association of Casualty & Surety Agents formed and held its first convention in Cincinnati to discuss state regulation. The name was changed to the Council of Insurance Agents and Brokers in October 1993.
  42. First State Insurance Department. New Hampshire opened the first department of insurance in 1851.
  43. Property Casualty Insurers Association of America (PCIAA). Formed in 2004 by the merger of the National Association of Independent Insurers (NAII) and the Alliance of American Insurers (AAI). Initial merger talks began in 1999 / 2000 but were not consummated until January 8, 2004. NAII was founded in 1945 and AAI began operations in 1922.
  44. American Insurance Association (AIA). Its beginnings are traced back to 1866 when the National Board of Fire Underwriters (NBFU) was founded. The NBFU, the original AIA and the Association of Casualty and Surety Companies merged in 1964 to form the AIA in operation today.
  45. National Association of Mutual Insurance Companies (NAMIC). Initially operating as the National Association of Co-Operative Mutual Insurance Companies, the first meeting of this association occurred in 1896 in Chicago. The association known today as NAMIC was incorporated in Indiana in 1920. NAMIC is the largest property/casualty insurance carrier trade association serving more than 1,400 property/casualty insurance companies.
  46. Captive Insurance Companies Association. CICA was formed in 1972 to foster and support the development of captive insurance companies around the globe.
  47. Fire Extinguishers. Early fire extinguishers used gunpowder as part of their activation mechanism, this seems rather counterproductive in a fire. Ambrose Godfrey patented the first "extinguisher" in 1723; it used a system of fuses to ignite the gunpowder to scatter the extinguishing solution. What we recognize as a modern fire extinguisher was invented by British Captain George William Manby in 1818; a three-gallon copper container containing potassium carbonate and compressed air.
  48. Sprinkler Systems. The first "sprinkler-type" systems were installed in mostly mill properties from the 1850s to 1880s. These were not automatic systems like are used today, these were simply perforated pipes throughout the building that required human intervention to get the water to the pipes. Not until 1878 was the first automatic sprinkler system installed – the Parmelee sprinkler. 
    First Published: February 17, 2017


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