The American Insurance Market History
The
American Insurance Market History
The
formation of a domestic market was restricted as a result of the dominance
of
the English underwriters despite
patriotic
behavior of businessmen to buy their coverage in the local market.
Fire
insurance evolved at an early date because of the exposure of the small,
wood-constructed
towns with lack of fire prevention facilities. Disastrous fires
in
Boston in 1630, in Philadelphia in 1730, created an awareness of the need for
some
kind of protection. Fire insurance was still in its infancy when it was
transplanted
to America. The first company was organized in Charleston,
South-Carolina
in 1735 as a friendly society but failed after the disastrous
Charleston
fire in 1741. In 1752 Benjamin Franklin organized and promoted the
Philadelphia
Contributionship for the Insurance of Houses from Loss by Fire. It
was
modeled on the Amicable Contributionship, known as the Hand-in-Hand
Office
in London, and adopted its name, plan, seal and badge: four hand's
clasped.
It
was not until 1770 that there was even an attempt to organize a fire
insurance
company in the city of New York. The first company was organized
under
the name of the Mutual Insurance Company and later incorporated under
the
name of Knickerbocker Fire Insurance Company. The industry was small
and
the principle obstacle to its expansion was its inability to underwrite large
risks
in the domestic market. During the revolution war, the economic
blockades
made it mandatory that the industry grow to sufficient size and it
became
an important economic goal of the period (Pfeffer and Klock, 1974,
p.33).
The
first stock insurance company was chartered in 1792 as the Insurance
Company
of North America. At the beginning of the nineteenth century in the
United
States of America, 30 charters for insurance companies had been
granted,
most of them being for marine and fire insurance. They were
incorporated
in the following states:
Maryland
(7), Massachusetts (6), New York. (4), Pennsylvania (4), Connecticut
(3),
South Carolina (2), Rhode Island (2), New Hampshire (I), Virginia (1).
The
Industrial Revolution
In
North America, the "New Orleans" was the first steamboat to run from
New
Orleans
to Pittsburgh at the beginning of the 19th century followed by the
development
of railroad transportation. Steamboat and train accidents soon
became
common and opened a new field of activities for insurance companies.
In
1849 the Railway Passenger Assurance Company had been founded in
London
to provide insurance against injuries resulting from railroad accidents
21
and
it was followed in 1863 by the establishment of the first insurance company
in
the United States to sell accident insurance, The Travelers Insurance
Company
of Hartford.
Casualty
insurance developed during the nineteenth century. Until the
1850s
no company would underwrite a policy covering windstorm or theft. By
the
end of the century specialized insurance business for industrial and
commercial
risks had been established. In 1865, the first contract for breakage
of
glass was subscripted with the Guardian Plate Glass Insurance Company in
Dublin.
In 1866, the Hartford Steam Boiler Inspection and Insurance Company
is
the first company to insure against Boiler and Machinery breakdowns.
In
1880, The Employers Liability Assurance Corporation was created in
England
to cover the civil responsibility of employers. In 1889, The Mercantile
Accident
Insurance Company of Glasgow issued the first theft insurance
contract.
The
introduction of railways and mechanically driven machinery increased
the
risk of loss of property and of bodily injuries. It is interesting to remember
the
early opposition to the automobile by the public in Europe as well as in
North
America. The first automobile insurance policy was written about 1888 as
an
extension of the forms used for the protection of owners of horse drawn
carriages
(Pfeffer and Klock, 1974, p. 38). By the end of the century automobile
insurance
had just began its long and rapid history of growth.
The
Development of Mathematical Concepts
Burial
societies, known as "Eranoi" and " Thiasoi " , existed in
Greece for the
purpose
of providing prepaid burials for members, but the Romans provided
more
elaborate burial and benevolent services through their "Collegia".
The
Collegia
provided limited pensions for disability owing to wounds and
retirement
benefits for men upon reaching the end of their military careers. The
annuity
concept appears to have been comprehended by the Romans because
they
apparently solved the problem of valuation. An annuity value table
developed
by Domitius Ulpianus in year 230 was apparently used as late as the
nineteenth
century by the Government of Tuscany (Pfeffer and Klock, 1974, p.
10).
Credit
for the development of actuarial science belongs to Blaise Pascal in
his
correspondence with the mathematicians Pierre de Fermat and Christiaan
Huygens
in the 1650s. He established the basic theorem of probability by
counting
all of the alternatives in equiprobable situations. Huygens published
the
first treaty on probabilities "De Ratiociniis in Lurura-Leae". In
1662 Graunt
published
"The Natural and Political Observations of the London Bills of
Mortality"
and developed tables that could be used as a basis for calculating life
expectancies
and premiums.
Jan
De Witt presented in 1671 a report (De Vardye van de Lif Renten) to
the
Government of the Netherlands in which he argued that the price to be paid
for
an annuity contract should be equal to the expected present value of the
22
TIlEORY AND PRACTICE OF INSURANCE
payments.
His conclusion became known as the "principle of equivalence" and
is
the foundation of modem actuarial calcnlations. In 1693, the astronomer
Edmond
HaUey published what is probably the first mortality table but it
remained
largely ignored.
In
1713, the basis ofthe modern mathematical probability theory developed
by
Jacob Bernoulli in "Ars Conjectandi" is published (eight years after
his
death)
in Basle. In 1738, Daniel Bernoulli published his answer to the game
known
as the St. Petersburg Paradox. His approach led to the concept of utility.
It
is surprising that economists did not apply the ideas of Bernoulli on risk
aversion
and expected utility before it had been proved as a theorem by Von
Neuman
and Mortgenstern in 1947. 3
In
1756 Richard Price published the first edition of "Observations on
Reversionary
Payments" which was used for the frrst time by the newly created
Society
for Equitable Assurance for Lives and Survivorships, known today as
the
Old Equitable Life Insurance Company and which is the oldest life insurance
company
in the world. In 1783 Richard Price published the "Table of
Northampton"
which was replaced later by the "Carlisle Table" published by
John
Heysham. By the middle of the nineteenth century the mathematical
techniques
of life insurance and annuities had become quite sophisticated. The
first
Actuarial Society is created in London in 1848, followed by France in 1890
and
Switzerland in 1906.
Although
games of chance appear to be as old as man, it is surprising that
the
mathematical concepts of probabilities only developed in the 17th century.
Several
tentative explanations have been offered, none of which is entirely
satisfactory.4
It has been argued, (1) that mathematical probability theory may
have
developed in response to the specific needs of the mercantilism
economists,
(2) that prior to the 17th century mathematics was not sufficiently
conceptualized,
(3) that it corresponds to the emergence of a modem scientific
approach
in all the fields, and (4) that it is linked to the evolution of the Catholic
Church
which prohibited usury until the 16th century.
