Earliest Insurance

Insurance is thousands of years old. The Code of Hammurabi, a collection of Babylonian laws of the 1700's B.C., included a form of credit insurance. A borrower did not have to repay a loan if personal misfortune made it impossible to do so. The borrower paid an extra amount for this protection in addition to the interest.

Ancient Greek and Roman organizations provided their members with old-age pensions and disability insurance and with money for the members' burial. During the Middle Ages, guilds (associations) formed by craftworkers offered the same types of insurance as well as fire and theft insurance to their members.

The Growth of Insurance

Modern marine insurance and the practice of underwriting began about 1690 in a London coffee house owned by Edward Lloyd. Lloyd's was a popular meeting place for shipowners and merchants. A statement of a ship's cargo was recorded on a piece of paper and read by the coffee house patrons. Those willing to share the risk of insuring the cargo signed under the statement and indicated the share of the risk they would underwrite (guarantee).

Earlier in the 1600's, two French mathematicians, Blaise Pascal and Pierre de Fermat, developed the theory of probability, which is now widely used in determining insurance rates. The English astronomer Edmond Halley developed the first mortality table in 1693.

The Great Fire of London in 1666 led a doctor named Nicholas Barbon to open England's first fire insurance office. In 1752, Benjamin Franklin helped found the American Colonies' first mutual fire insurance company, the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. The colonies' first life insurance company was the Presbyterian Ministers' Fund, established in 1759. Both companies still exist.

The U.S. life insurance industry grew slowly in the first half of the 1800's. Many religious leaders condemned life insurance. They believed that insurance companies were wrong in placing a monetary value on human life. In 1840, the total value of life insurance policies in force was less than $5 million. By 1865, the total value was about $600 million.

Other types of insurance also grew rapidly beginning in the mid-1800's. A series of disastrous fires during the middle and late 1800's led to a rapid increase in the number of fire insurance policies. In 1864, the Travelers Insurance Company sold the first accident policy. It covered a Hartford, Connecticut, resident named James Bolter during a two-block walk from his home to the post office. The premium was 2 cents for the walk.

Greater Regulation

During the mid-1800's, many states began to establish insurance departments and to pass laws regulating the insurance industry as a result of dishonesty by some companies. However, insurance laws frequently were not strictly enforced.

During the late 1800's, the industry was plagued by scandals caused by the dishonest and irresponsible practices of many companies. In the early 1900's, many states passed laws that regulated the activities of insurance companies more strictly.

In 1935, Congress passed the Social Security Act to provide old-age benefits and unemployment compensation. In the early 1940's, during World War II, the federal government prohibited wage increases in most industries. Many employers then began to offer their employees various benefits, including group life and health insurance.

In 1944, the Supreme Court of the United States ruled that insurance was interstate commerce and so was subject to federal regulation. However, the McCarran-Ferguson Act, passed by Congress in 1945, left regulatory power to the states.

During the late 1900's, more than 10 states had adopted no-fault automobile insurance plans. Many states also passed laws requiring insurance companies to provide potential buyers with complete information about the costs and benefits of their policies. In addition, companies in some states no longer could use such factors as sex, age, marital status, or place of residence to determine premium rates for certain types of insurance.

In 1996, the U.S. government enacted a law to guarantee workers the ability to get health insurance after they change or lose their jobs. Before the law was enacted, many insurance companies had refused to cover people who already had a health problem. As a result, many people could not get private health insurance, or could not move to a new job without losing their coverage.

The law, which took effect in 1997, also called for raising the percentage of health insurance costs that self-employed people could deduct from their income when figuring their federal income tax. The law provided for raising this percentage from 30 to 80 percent by the year 2006. Despite this law, many millions of Americans still have no health insurance.

Insurance Today

A number of problems involving insurance exist today. For example, new types of policies are needed to cover such risks as accidents in nuclear power plants, environmentally damaging oil spills, the disposal of hazardous wastes, the use of dangerous products, and dependence on computers.

In social insurance, the United States and other countries face severe difficulties in providing future benefits mainly because of large increases in the proportion of elderly people. Rapid rises in the cost of medical care have also been a serious problem in the United States. In the 1990's, increased use of managed care plans dramatically slowed the rising cost of medical care. Nevertheless, the aging of the U.S population probably will put severe cost pressures on both private insurers and government programs, such as Medicare and Medicaid.

Natural disasters such as hurricanes, earthquakes, and tornadoes have caused big losses for both property owners and property insurers. Increased construction in areas where such risks as earthquakes and hurricanes are high has resulted in more extensive losses from natural disasters. State government insurance programs have been established in Florida and Hawaii to respond to hurricanes and in California to respond to earthquakes.

Some of the most significant recent developments in the insurance industry have included movements to combine companies into larger ones, to allow insurance companies to engage in a wider variety of activities, and to enable them to provide their services around the world. As a result of these changes, the trend has been toward fewer but larger insurance organizations. Mergers have taken place not only between two or more insurance companies but also between insurance companies, stock brokerage firms, investment banks, and commercial banks.