History of insurance
||The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject. (January 2012)|
History of insurance refers to the development of a modern business in insurance against risks, especially regarding ships, cargo, and buildings ("property" and "fire"), death ("life" insurance), automobile accidents ("auto"), and the cost of medical treatment (health insurance). The industry has been profitable and has provided attractive employment opportunities for white collar workers. It helps eliminate risks (as when fire insurance companies demand safe practices and the availability of fire stations and hydrants), spreads risks from the individual or single company to the larger community, and provides an important source of long-term finance for both the public and private sectors.
The first methods of transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively. Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing. The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c. 1750 BC, and practiced by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen.
Achaemenian monarchs were the first to insure their people and made it official by registering the insuring process in governmental notary offices. The insurance tradition was performed each year in Nowruz (beginning of the Persian New Year); the heads of different ethnic groups as well as others willing to take part, presented gifts to the monarch. The most important gift was presented during a special ceremony. When a gift was worth more than 10,000 Derrik (Achaemenian gold coin) the issue was registered in a special office. This was advantageous to those who presented such special gifts. For others, the presents were fairly assessed by the confidants of the court. Then the assessment was registered in special offices.
The purpose of registering was that whenever the person who presented the gift registered by the court was in trouble, the monarch and the court would help him. Jahez, a historian and writer, writes in one of his books on ancient Iran: "[W]henever the owner of the present is in trouble or wants to construct a building, set up a feast, have his children married, etc. the one in charge of this in the court would check the registration. If the registered amount exceeded 10,000 Derrik, he or she would receive an amount of twice as much."
A thousand years later, the inhabitants of Rhodes created the 'general average', which allowed groups of merchants to pay to insure their goods being shipped together. The collected premiums would be used to reimburse any merchant whose goods were jettisoned during transport, whether to storm or sinkage.
The ancient Athenian "maritime loan" advanced money for voyages with repayment being cancelled if the ship was lost. In the 4th century BC, rates for the loans differed according to safe or dangerous times of year, implying an intuitive pricing of risk with an effect similar to insurance.
The Greeks and Romans introduced the origins of health and life insurance c. 600 BC when they created guilds called "benevolent societies" which cared for the families of deceased members, as well as paying funeral expenses of members. Guilds in the Middle Ages served a similar purpose. The Talmud deals with several aspects of insuring goods. Before insurance was established in the late 17th century, "friendly societies" existed in England, in which people donated amounts of money to a general sum that could be used for emergencies.
Medieval and Early modern
In 12th Century, after the establishment of Seljuk state in Anatolia, Seljuk Sultan Ghiyas ad-Din Kaykhusraw I, introduced a form of state insurance which reimbursing the traders for their loss from the state treasury, if they would be robbed within the Seljuk territory.
Separate insurance contracts (i.e., insurance policies not bundled with loans or other kinds of contracts) were invented in Genoa in the 14th century, as were insurance pools backed by pledges of landed estates. The first known insurance contract dates from Genoa in 1347, and in the next century maritime insurance developed widely and premiums were intuitively varied with risks. These new insurance contracts allowed insurance to be separated from investment, a separation of roles that first proved useful in marine insurance. The first printed book on insurance was the legal treatise On Insurance and Merchants' Bets by Pedro de Santarém (Santerna), written in 1488 and published in 1552.
Insurance became far more sophisticated in post-Renaissance Europe, and specialized varieties developed. The will of Robert Hayman, written in 1628, refers to two policies he has taken out with a wealthy Londoner: one of life insurance and one of marine insurance. Toward the end of the 17th century, London's growing importance as a centre for trade increased demand for marine insurance. In the late 1680s, Mr. Edward Lloyd opened a coffee house that became a popular haunt of ship owners, merchants, and ships’ captains, and thereby a reliable source of the latest shipping news. It became the meeting place for parties wishing to insure cargoes and ships, and those willing to underwrite such ventures. Today, Lloyd's of London remains the leading market (note that it is not an insurance company) for marine and other specialist types of insurance, but it works rather differently than the more familiar kinds of insurance.
Insurance as we know it today can be traced to the Great Fire of London, which in 1666 devoured 13,200 houses. In the aftermath of this disaster, Nicholas Barbon opened an office to insure buildings. In 1680, he established England's first fire insurance company, "The Fire Office," to insure brick and frame homes.
In the late 19th century, "accident insurance" began to be available, which operated much like modern disability insurance. This payment model continued until the start of the 20th century in some jurisdictions (like California), where all laws regulating health insurance actually referred to disability insurance.
German and British government programs
Germany built on a tradition of welfare programs in Prussia and Saxony that began as early as in the 1840s. In the 1880s Chancellor Otto von Bismarck introduced old age pensions, accident insurance, medical care and unemployment insurance that formed the basis of the modern European welfare state. His paternalistic programs won the support of German industry because its goals were to win the support of the working classes for the Empire and reduce the outflow of immigrants to America, where wages were higher but welfare did not exist.
Benjamin Franklin helped to popularize and make standard the practice of insurance, particularly Property insurance to spread the risk of loss from fire, in the form of perpetual insurance. In 1752, he founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. Franklin's company was the first to make contributions toward fire prevention. Not only did his company warn against certain fire hazards, it refused to insure certain buildings where the risk of fire was too great, such as all wooden houses.
The sale of life insurance in the U.S. began in the late 1760s. The Presbyterian Synods in Philadelphia and New York founded the Corporation for Relief of Poor and Distressed Widows and Children of Presbyterian Ministers in 1759; Episcopalian priests created a comparable relief fund in 1769. Between 1787 and 1837 more than two dozen life insurance companies were started, but fewer than half a dozen survived.
Most insurance companies operated locally. The ambitious ones expanded geographically in the 1830s, such as the New York Life Insurance and Trust Company in upstate New York, and the Baltimore Life Insurance Company in the Mid-Atlantic and Upper South. They built a network of agents to develop markets in different cities. The goal was to only insure people "of sound health, and of sober habits, without hereditary disease, and not belonging to families remarked for short lives." The company had to judge the reliability of agents, who sought out clients, canceled dubious policies, and judged the health of potential customers. The agents were not medical men, but they were instructed to ask applicants some standard questions:
- "Is he now in good health, and does he usually enjoy good health, or how otherwise? . . . Has he at any time been afflicted with gout, asthma, consumption, scrofula, convulsions, palsy, or any other disease likely to impair his constitution? . . . Has he been vaccinated, or had the small pox? . . . Is he of a sedentary turn, or accustomed to much exercise? . . . Do you know of any circumstance which renders an insurance on his life more than usually hazardous?"
A better solution came late in the 19th century when the companies employed doctors who used standardized criteria.
Moral hazard is the change in behavior of the insured party who may take greater risks, or consume higher levels of insured services, because they know they are covered by insurance. The insurer may have to pay more claims than expected. The more insurance claims are made however, the higher premiums become. Insured parties might set fires to collect property insurance—or even commit suicide or murder when life insurance was involved. From the opposite angle, religious people refused to consider insurance against God's decisions. Fraud was also a problem, as people lied on applications, broke policy restrictions, or falsified their own deaths so their family could collect. Mark Pauly's article entitled The Economics of Moral Hazard is one of the most influential papers in the health economics literature. Pauly argued that "health insurance results in a moral hazard welfare loss that, if large enough, could inhibit some consumers from purchasing insurance." Suppose there are no significant income effects on the individual’s demand for medical care resulting from his payment of a lump-sum premium for insurance.(Pauly & 1968 534) The loss of disposable income from the premium payment has no effect on health care spending. The moral hazard is the increase in consumption of medical care that occurs when one becomes insured.
Prior to the Civil War (1861–65), some insurance companies in the South insured the lives of slaves for their owners. In response to bills passed in California in 2001 and in Illinois in 2003, the companies have been required to search their records for such policies. New York Life for example reported that Nautilus sold 485 slaveholder life insurance policies during a two-year period in the 1840s; they added that their trustees voted to end the sale of such policies 15 years before the Emancipation Proclamation of 1863.
Until the passage of the Social Security Act in 1935, the federal government had never mandated any form of insurance upon the nation as a whole, but this program expanded the concept and acceptance of insurance as a means to achieve individual financial security that might not otherwise be available. That expansion experienced its first boom market immediately after the Second World War with the original VA Home Loan programs that greatly expanded the idea that affordable housing for veterans was a benefit of having served. The mortgages that were underwritten by the federal government during this time included an insurance clause as a means of protecting the banks and lending institutions involved against avoidable losses. During the 1940s there was also the GI life insurance policy program that was designed to ease the burden of military losses on the civilian population and survivors.
During the 1970s and 1980s there was a growth in support for the requirement for drivers to have insurance as a means of proving financial responsibility since it was recognized that the automobile, in the case of an accident, could cause significant collateral damage. It soon followed that car insurance became a mandatory requirement for all drivers.
Health insurance in the United States
Accident insurance was first offered in the United States by the Franklin Health Assurance Company of Massachusetts. This firm, founded in 1850, offered insurance against injuries arising from railroad and steamboat accidents. Sixty organizations were offering accident insurance in the US by 1866, but the industry consolidated rapidly soon thereafter. In 1887, the African American workers in Muchakinock, Iowa, a company town, organized a mutual protection society. Members paid fifty cents a month or $1 per family for health insurance and burial expenses. In the 1890s, various health plans became more common. Group disability policy was issued in 1911.
Commercial insurance companies began offering accident and sickness insurance (disability insurance) as early as the mid-19th century. The first group medical plan was purchased from The Equitable Life Assurance Society of the United States by the General Tire & Rubber Company in 1934. Before the development of medical expense insurance, patients were expected to pay all other health care costs out of their own pockets, under what is known as the fee-for-service business model. During the middle to late 20th century, traditional disability insurance evolved into modern health insurance programs. Today, most comprehensive private health insurance programs cover the cost of routine, preventive, and emergency health care procedures, and also most prescription drugs, but this was not always the case.
During the 1920s, individual hospitals began offering services to individuals on a pre-paid basis. The first group pre-payment plan was created at the Baylor University Hospital in Dallas, Texas. This concept became popular among hospitals during the Depression, when they were facing declining revenues. The Baylor plan was a forerunner of later Blue Cross plans. Physician associations began offering pre-paid surgical/medical benefits in the late 1930s Blue Shield plans. Blue Cross and Blue Shield plans were non-profit organizations sponsored by local hospitals (Blue Cross) or physician groups (Blue Shield). As originally structured, Blue Cross and Blue Shield plans provided benefits in the form of services rendered by participating hospitals and physicians ("service benefits") rather than reimbursements or payments to the policyholder.
Hospital and medical expense policies were introduced during the first half of the 20th century. During the 1920s, individual hospitals began offering services to individuals on a pre-paid basis, eventually leading to the development of Blue Cross organizations. The Ross-Loos Clinic, founded in Los Angeles in 1929, is generally considered to have been the first health maintenance organization (HMO). Henry J. Kaiser organized hospitals and clinics to provide pre-paid health benefits to his shipyard workers during World War II. This became the basis for Kaiser Permanente HMO. Most early HMOs were non-profit organizations. The development of HMOs was encouraged by the passage of the Health Maintenance Organization Act of 1973. The first employer-sponsored hospitalization plan was created by teachers in Dallas, Texas in 1929. Because the plan only covered members' expenses at a single hospital, it is also the forerunner of today's health maintenance organizations (HMOs).
Employer-sponsored health insurance plans dramatically expanded as a result of wage controls during World War II. The labor market was tight because of the increased demand for goods and decreased supply of workers during the war. Federally imposed wage and price controls prohibited manufacturers and other employers raising wages high enough to attract sufficient workers. When the War Labor Board declared that fringe benefits, such as sick leave and health insurance, did not count as wages for the purpose of wage controls, employers responded with significantly increased benefits.
Employer-sponsored health insurance was considered taxable income until 1954.
In the United States, regulation of the insurance industry is highly Balkanized, with primary responsibility assumed by individual state insurance departments. Whereas insurance markets have become centralized nationally and internationally, state insurance commissioners operate individually, though at times in concert through a national insurance commissioners' organization. In recent years, some have called for a dual state and federal regulatory system for insurance similar to that which oversees state banks and national banks.
- See, e.g., Vaughan, E. J., 1997, Risk Management, New York: Wiley.
- Franklin, J., 2001, The Science of Conjecture: Evidence and Probability Before Pascal, Baltimore:Johns Hopkins University Press, 259.
- Yunus Emre: spiritual experience and culture, 80
- Jonathan Osmond, Power and culture: identity, ideology, representation, 49
- J. Franklin, The Science of Conjecture: Evidence and Probability Before Pascal (Baltimore: Johns Hopkins University Press, 2001), 274-277.
- Franklin, Science of Conjecture, 277
- "And whereas I have left in the hands of Doctor Ducke Channcellor of London two pollicies of insurance the one of one hundred pounds for the safe arivall of our Shipp in Guiana which is in mine owne name, if we miscarry by the waie (which God forbid) I bequeath the advantage thereof to my said Cosin Thomas Muchell...whereas there is an other insurance of one hundred pounds assured by the said Doctor Arthur Ducke on my life for one yeare if I chance to die within that tyme I entreat the said doctor Ducke to make it over to the said Thomas Muchell his kinsman..." Will of Robert Hayman, 1628 (proved 1632):Records of the Prerogative Court of Canterbury, Catalogue Reference PROB 11/163
- Howstuffworks: How Health Insurance Works.
- "Encarta: Health Insurance". Archived from the original on 2009-11-01.
- See California Insurance Code Section 106 (defining disability insurance).  In 2001, the California Legislature added subdivision (b), which defines "health insurance" as "an individual or group disability insurance policy that provides coverage for hospital, medical, or surgical benefits."
- E. P. Hennock, The Origin of the Welfare State in England and Germany, 1850–1914: Social Policies Compared (2007)
- Hermann Beck, Origins of the Authoritarian Welfare State in Prussia, 1815-1870 (1995)
- Bentley B. Gilbert, British social policy, 1914-1939 (1970)
- J. Owen Stalson, Marketing Life Insurance: Its History in America (Harvard U.P. 1942)
- Sharon Ann Murphy, "Selecting Risks in an Anonymous World: The Agency System for Life Insurance in Antebellum America," Business History Review, Spring 2008, Vol. 82 Issue 1, pp 1-30, quote on p. 6
- Murphy, "Selecting Risks in an Anonymous World: The Agency System for Life Insurance in Antebellum America," p. 6
- "Economics A-Z terms beginning with M". The Economist.
- Sharon Murphy, "How to Make a Dead Man: Murder, Fraud and Life Insurance in 19th-century America," Financial History, Spring 2010, Issue 97, pp 28-39
- Pauly, Mark V. (June 1968). 1. "The Economics of Moral Hazard: Comment". The American Economic Review (American Economic Association) 58 (3): 531–537.
- Portrait and Biographical Album of Mahaska County, Chapman Brothers, Chicago, 1887; pages 522-523
- Fundamentals of Health Insurance: Part A, Health Insurance Association of America, 1997, ISBN 1-879143-36-4.
- Davis W. Gregg & Vane B. Lucas, editors, "Life and Health Insurance Handbook," Third Edition, Richard W. Irwin, Inc., 1973, ISBN 0-256-00169-3, p. 276
- Thomas P. O'Hare, "Individual Medical Expense Insurance," The American College, 2000, p. 7 ISBN 1-57996-025-1
- Davis W. Gregg & Vane B. Lucas, editors, "Life and Health Insurance Handbook," Third Edition, Richard W. Irwin, Inc., 1973, ISBN 0-256-00169-3, p. 413
- Margaret E. Lynch, Editor, "Health Insurance Terminology," Health Insurance Association of America, 1992, ISBN 1-879143-13-5
- Employer-Sponsored Health Insurance and Health Reform at National Bureau of Economic Research.
- Managed Care: Integrating the Delivery and Financing of Health Care - Part A, Health Insurance Association of America, 1995, p. 9 ISBN 1-879143-26-7
- Primary sources
- Prudential Insurance Company of America, ed. The Documentary History of Insurance, 1000 B. C. - 1875 A. D. (1915)
- Secondary sources
- Alborn, Timothy. Regulated Lives: Life Insurance and British Society, 1800–1914 (U. of Toronto Press, 2009)
- Buley, R. Carlyle. The American Life Convention, 1906–1952: A Study in the History of Life Insurance (1953)
- Dickson, P. G. M The Sun Insurance Office, 1710-1960;: The history of two and a half centuries of British insurance(1960)
- Feldman, Gerald D. Allianz and the German Insurance Business, 1933-1945 (2006)
- Keller, Morton. The Life Insurance Enterprise, 1855-1910: A Study in the Limits of Corporate Power (1999)
- Kingston, Christopher. "Marine Insurance in Britain and America, 1720–1844: A Comparative Institutional Analysis," Journal of Economic History, June 2007, Vol. 67 Issue 2, pp 379–409
- Murphy, Sharon Ann. Investing in Life: Insurance in Antebellum America (Johns Hopkins University Press; 2010) 416 pages.
- Murray, John E. Origins of American Health Insurance: A History of Industrial Sickness Funds (2007)
- Pearson, Robin. The Development of International Insurance (2010)
- Pearson, Robin. Insuring the Industrial Revolution: Fire Insurance in Great Britain, 1700-1850 (2004)
- Raynes, Harold E. A History of British Insurance (1948),
- Stalson, J. Owen. Marketing Life Insurance: Its History in America (Harvard U.P. 1942)
- Zelizer, Viviana A. Rotman. Morals and Markets: The Development of Life Insurance in the United States (1979)