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The roots of insurance might be traced to Babylonia, where traders were
encouraged to assume the risks of the caravan trade through loans that were
repaid (with interest) only after the goods had arrived safely—a practice
resembling bottomry and given legal force in the Code of Hammurabi (c.2100
B.C.). The Phoenicians and the Greeks applied a similar system to their seaborne
commerce. The Romans used burial clubs as a form of life insurance, providing
funeral expenses for members and later payments to the survivors.
With the growth of towns and trade in Europe, the medieval guilds undertook to
protect their members from loss by fire and shipwreck, to ransom them from
captivity by pirates, and to provide decent burial and support in sickness and
poverty. By the middle of the 14th cent., as evidenced by the earliest known
insurance contract (Genoa, 1347), marine insurance was practically universal
among the maritime nations of Europe. In London, Lloyd's Coffee House (1688) was
a place where merchants, shipowners, and underwriters met to transact business.
By the end of the 18th cent. Lloyd's had progressed into one of the first modern
insurance companies. In 1693 the astronomer Edmond Halley constructed the first
mortality table, based on the statistical laws of mortality and compound
interest. The table, corrected (1756) by Joseph Dodson, made it possible to
scale the premium rate to age; previously the rate had been the same for all
ages.
Insurance developed rapidly with the growth of British commerce in the 17th and
18th cent. Prior to the formation of corporations devoted solely to the business
of writing insurance, policies were signed by a number of individuals, each of
whom wrote his name and the amount of risk he was assuming underneath the
insurance proposal, hence the term underwriter. The first stock companies to
engage in insurance were chartered in England in 1720, and in 1735, the first
insurance company in the American colonies was founded at Charleston, S.C. Fire
insurance corporations were formed in New York City (1787) and in Philadelphia
(1794). The Presbyterian Synod of Philadelphia sponsored (1759) the first life
insurance corporation in America, for the benefit of Presbyterian ministers and
their dependents. After 1840, with the decline of religious prejudice against
the practice, life insurance entered a boom period. In the 1830s the practice of
classifying risks was begun.
The New York fire of 1835 called attention to the need for adequate reserves to
meet unexpectedly large losses; Massachusetts was the first state to require
companies by law (1837) to maintain such reserves. The great Chicago fire (1871)
emphasized the costly nature of fires in structurally dense modern cities.
Reinsurance, whereby losses are distributed among many companies, was devised to
meet such situations and is now common in other lines of insurance. The
Workmen's Compensation Act of 1897 in Britain required employers to insure their
employees against industrial accidents. Public liability insurance, fostered by
legislation, made its appearance in the 1880s; it attained major importance with
the advent of the automobile.
In the 19th cent. many friendly or benefit societies were founded to insure the
life and health of their members, and many fraternal orders were created to
provide low-cost, members-only insurance. Fraternal orders continue to provide
insurance coverage, as do most labor organizations. Many employers sponsor group
insurance policies for their employees; such policies generally include not only
life insurance, but sickness and accident benefits and old-age pensions, and the
employees usually contribute a certain percentage of the premium.
Since the late 19th cent. there has been a growing tendency for the state to
enter the field of insurance, especially with respect to safeguarding workers
against sickness and disability, either temporary or permanent, destitute old
age, and unemployment (see social security). The U.S. government has also
experimented with various types of crop insurance, a landmark in this field
being the Federal Crop Insurance Act of 1938. In World War II the government
provided life insurance for members of the armed forces; since then it has
provided other forms of insurance such as pensions for veterans and for
government employees.
After 1944 the supervision and regulation of insurance companies, previously an
exclusive responsibility of the states, became subject to regulation by Congress
under the interstate commerce clause of the U.S. Constitution. Until the 1950s,
most insurance companies in the United States were restricted to providing only
one type of insurance, but then legislation was passed to permit fire and
casualty companies to underwrite several classes of insurance. Many firms have
since expanded, many mergers have occurred, and multiple-line companies now
dominate the field. In 1999, Congress repealed banking laws that had prohibited
commercial banks from being in the insurance business; this measure was expected
to result in expansion by major banks into the insurance arena.
In recent years insurance premiums (particularly for liability policies) have
increased rapidly, leaving unprecedented numbers of Americans uninsured. Many
blame the insurance conglomerates, contending that U.S. citizens are paying for
bad risks made by the companies. Insurance companies place the burden of guilt
on law firms and their clients, who they say have brought unreasonably large
civil suits to court, a trend that has become so common in the United States
that legislation has been proposed to limit lawsuit awards. Catastrophic
earthquakes, hurricanes, and wildfires in late 1980s and the 90s have also
strained many insurance company's reserves.
Bibliography
See R. I. Mehr, Principles of Insurance (1985); E. J. Vaughn, Fundamentals of
Risk and Insurance (1986).
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