If you’ve ever owned or leased a car, bought or rented a place to live, received any medical care, or considered the effect a loss of property or life could have on your family, there’s a good chance you’ve encountered some form of insurance. You can insure just about anything: life insurance, health insurance, disability insurance, auto insurance, homeowner’s insurance, renter’s insurance, and property insurance (for various types of property) are among the most common forms of insurance in America.
You might be surprised to learn that insurance as an industry – insurance as we know it in modern times – has strayed quite far from its humble roots. The first concepts of insurance had little to do with the convoluted policies, deceptive fine print, copious paperwork requirements, and arbitrary decisions that characterize modern insurance. They were, quite simply, forms of risk-management.
Insurance is not new, as this contract from 1796 illustrates – but the way the modern insurance industry works is new, and the change isn’t for the better. Photo Credit: Wikimedia Commons (public domain).
Ancient Risk-Management and Insurance in Early America
From the beginning of time, life has been full of risks. Sure, modern risks differ sharply from the risks our ancestors face. Where centuries or even millennia ago, traders feared losing all of their merchandise during shipments, modern technology has made transportation by sea much less risky. Likewise, people who lived thousands of years ago didn’t have to worry about things like car crashes, which are among the most common causes of insurance claims (consider their central role in auto insurance claims, as well as the impact they can have on health insurance and even life insurance claims). Medical care was at once less expensive and less advanced in the past, and lifespans were decades shorter, so there was less need for health insurance as we know it.
Yet no matter how modern or how antiquated a risk is, managing that risk – and minimizing the negative consequences that result from it – has always appealed to human nature. As long ago as approximately 3000 B.C., merchants in China feared that their ships bearing goods to be traded would sink in the treacherous waters they crossed. For these traders, a loss of goods wasn’t a mere inconvenience, but a potential catastrophe. There were no financial safety nets to fall back on. Losing everything in a shipment really meant losing everything – including any chance to provide for one’s family or even an entire community. A single shipment of goods might be all the family or community had to use to buy basic necessities, like food or supplies for building or maintaining shelters. If that ship sunk during the course of its voyage, it could mean that a family or a whole village would starve to death.
In light of this fear, these traders developed what’s considered the earliest method of risk management. Instead of packing a single ship full of goods, they spread out their goods over a number of ships. That way, if one or even a couple of those ships capsized, they would lose only a fraction of their wares. Though still costly, the damage was minimal compared to how severe it would be if nothing was done to manage and mitigate the risk. In later variations of this type of risk management, multiple traders shipped goods together with the understanding that they would all bear the risk if one trader’s goods were lost.
About a millennium later, traders in Babylon took risk management a step further by writing their policies toward risk-management in the Code of Hammurabi (as a side note, the penalties for numerous infractions listed in the Code of Hammurabi was death). In another millennium, traders from the Mediterranean island of Rhodes began paying to ship their goods together, taking on the collective risk that the group would reimburse a trader whose wares were lost at sea. Through the centuries, insurance as a concept continued to develop for various purposes, from marine insurance to property insurance to accident insurance.
Early America’s best-known form of insurance came in the form of Benjamin Franklin’s Philadelphia Contributionship, according to PBS. Franklin, a firefighter, first established the Union Fire Company and then started the first mutual insurance company in 1752, though it bore little resemblance to today’s insurance companies. Every member paid equal dues for protection from a property fire, and when the seven-year policy ended, contributors – policyholders, by modern language – were reimbursed any remaining money.
Franklin’s famous quote, “An ounce of prevention is worth a pound of cure,” reportedly referenced firefighting, but the statement also gives insight into his support of insurance as a concept. Photo Credit: Wikimedia Commons ( United States public domain).
“Pure” Forms of Insurance
You could say that these original forms of insurance represented a purer, simpler time. Many of the oldest forms of insurance were created as a closed community. Within a community, whether a religious community or a group of a town’s property owners, the group of people involved share risks. An instance of a pure, closed-community type of insurance is the Amish example. Even today, Amish communities avoid modern insurance policies backed by massive corporations in favor of a closed-community version of risk sharing. All community members contribute to a fund that is used to pay for community members’ losses. Unlike the commercial insurance system with its fragmented types of insurance, this community self-insurance operates more simply. If a contributing community member becomes ill, the community fund pays for medical care. In the case of a fire, the same fund will be used to help the community member rebuild. There are no lengthy descriptions of “covered risks” or fine-print exclusions. In this system, the purpose of insurance is simple: helping community members when they need it.
For most of the country, though, insurance has evolved – or, more accurately, devolved – from a pure concept of community involvement and mutual risk-sharing into a commercial enterprise. How did the system fail to the point that it became our modern, much-hated insurance industry? Check back soon for the next installment of Insurance Industry: The Perversion of a Great Idea.