The History of Insurance in America

Insurance was a latecomer to the American landscape, largely because there were just too many known risks, and even more unknown ones. When it finally did make it over, it was supported by one of the most famous Americans in history. Let's take a look at the history of insurance in the U.S.

Not content with the titles of statesman, scientist, inventor or author, Benjamin Franklin added insurer to his collection. In 1752, the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire became the first mutual fire insurance company in America. Much like London in the 1600s, houses at this time were made almost entirely out of wood. Worse yet, the settlements that grew into cities were built close together. This was originally done for security reasons, but as cities grew, developers built homes very close to each other for the same reasons they do today—to fit as many homes as possible on their development plots.

The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire set new standards for building houses because it refused to insure houses they considered fire hazards. The criteria they used to evaluate buildings would one day be reworked into both building codes and zoning laws. Seven years later, Franklin was also instrumental in getting the first life insurance company, the Presbyterian Ministers' Fund, off the ground. (For more, see: How Much Life Insurance Should You Carry?)

The various religious authorities at the time were outraged at the practice of putting a value on human life, but criticism cooled when it was seen that insurance worked to protect widows and orphans. The Industrial Revolution then brought the necessity of both business insurance and disability insurance to the forefront.

Throughout history, the types of insurance offered have been expanded in reaction to new risks. 1864 saw the Travelers Insurance Company sell its first accident policy. 1889 saw the first auto insurance policy. As time progressed, new types of insurance were being offered to keep up with the risks of an increasingly modern life. (For related reading, see: Five Insurance Policies Everyone Should Have.)

With the explosion in insurance products and companies issuing them, the young industry was fraught with fraud and scandal. These ranged from issuing companies without the actual capital to pay claims running instead like fragile Ponzi schemes, to insurers demanding unfairly high premiums or forcing out competitors in an attempt to create a monopoly. Many state laws were passed to try and curb the problems, but in the early 1900s things were still unsettled. (For related reading, see: What Is a Pyramid Scheme?)

In 1935, the Social Security Act came into effect, providing unemployment compensation and retirement benefits. This took away some of the insurance companies' territory and it sent a clear signal that encouraged the industry to begin regulating itself for fear of more government involvement. World War II brought a wage freeze, and companies, desperate to attract the workers still in the country, started offering group life and health insurance. These big policies went to companies large enough to handle them. This swelled the big guys and starved out the little guys, along with most of the fly-by-night rabble. In 1944, the Supreme Court ruled insurance should be federally regulated, but Congress passed the McCarran-Ferguson Act in 1945, returning control to the state level.

The control remains mainly at the state level to this day, but after many insurance companies have been called to task over basing rates on gender, race and other factors, the insurance industry has become more egalitarian and affordable for the public. It has also become more complex to respond to the needs of the business. The size of insurance companies continues to increase as they merge with one another and other giants in the financial industry. Now insurance policies can be found at institutions offering a range of financial services.

Insurance is always in demand because people and businesses are always looking for ways to minimize risk. The demand and range of coverage available has caused insurance policies to increasingly become investments in and of themselves. Because the level of insurance concentrated in urban centers could lead to huge losses and chaos in the insurance industry if a mega-disaster or succession of regular disasters occurred, the insurance industry has begun to repackage its risk in catastrophe-linked securities that trade on the market and mitigate insurers' risk. (For related reading, see: The Financial Effects of a Natural Disaster.)

The internet changed the insurance industry by blowing the field wide open. Now people can go online to find the cheapest rate, even as companies shop internationally for the right coverage. This is one source of motivation for companies to merge with other financial services—the increase in size gives them a global market, and the integration of services gives them a domestic advantage with customers who are more concerned with convenience than price.

(For related reading, see: 15 Insurance Policies You Don't Need.)