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Risky Business
Everything you ever wanted to know about the history of insurance
(hint: It's a lot more interesting than you'd think)
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Business New Haven
10/19/1998
By:
BNH
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Insurance bills are one of those irritating items we just hate to pay. Life insurance, homeowners', medical and everyone's all-time favorite - auto insurance - just think of the money we'd have to spend if we didn't have to pay out all those dollars to all those darned insurance companies.
On the other hand, writing as a homeowner whose house has been hit by lightning multiple times, insurance can allow us to maintain our lifestyles without losing our shirts in times of disaster.
The concept remains remarkably simple: a group of consumers share risk by taking a small loss rather than one person taking a large one.
Although insurance as we know it today really didn't evolve until the 20th century, the concept goes back several thousand years. Chinese merchants developed a system to protect themselves against losses of ship cargo by spreading their cargo among several ships. The birth of modern insurance can probably be traced to the 1600s and a coffeehouse near the London docks called Lloyd's.
At that time a group of investors got together and began to take a chance in underwriting hazardous trading voyages. That small group grew into Lloyd's of London, an insurance giant that today will insure almost anything. For many years the only insurance available was for ship's cargo but, following the Great Fire of London in 1667, a company was established to provide money for people whose homes were lost in fires.
The biggest risk to landlocked property-owners, of course, was fire - wooden buildings built in close proximity to one another and a dearth of fire departments led to the destruction of countless buildings. With no funds to rebuild, many businesses went under.
The first insurance company to appear in America was founded in 1735 by a group of shop-keepers who chose to share the risk of fires destroying their wooden buildings. It lasted only five years.
Along came that great American creative thinker, Benjamin Franklin. In 1752 he founded the Philadelphia Contribution for the Insurance Houses from Loss by Fire. The company continued to exist as the Insurance Company of North America.
(Acutely aware of the dangers posed by fire, In 1736 Franklin founded the first volunteer fire brigade in America, Philadelphia's Union Fire Company, following a major fire that had destroyed much of the city.)
Other insurance groups soon formed and began to split into various companies such as the Hartford Fire Insurance Company, Aetna Life & Casualty Company and Travelers Corporation. All ended up in Hartford, giving the city the title of Insurance Capital of the United States.
It's unclear today why so many of the insurance companies ended up in Hartford, but one explanation is that Connecticut was a small state, making it easy to cover from a central location. In addition, the state seemed to lend itself to entrepreneurs.
Travelers, for example, was founded in 1864 by James G. Batterson, who was interested in the arts and reportedly connected to the Wadsworth Athenaeum in Hartford. Wishing to provide accident insurance in North America, Batterson sold travel policies to Europe for two Indian-head pennies. If the ship sank, at least the families got some money.
The first insurance company to appear in New Haven was the New Haven Insurance Company, founded in 1797. Approved by the General Assembly, the company's business was restricted to marine insurance.
The company had in fact been in business for some years before, funded by individual underwriters. Elias Shipman was elected president of the board of directors. Selling shares at $15 apiece, in January 1799 the company paid a dividend of $3 per share for the last half of 1798 and $5 per share for the first six months of 1799. Clearly, the company was quite successful in its early days.
New Haven Insurance continued to issue policies for about a third of the 19th century, but then ran into serious financial problems. In 1833 the company fell inactive, but retained its organization due to claims on the United States for French seizures. By that time the company had been unable to pay dividends for six years.
At first management thought it could ride out the problem by suspending business for two years, but this proved to be unworkable. In 1833 the board, sighting “unfortunate circumstances” that made it unlikely that the losses could be made up by continuing to do business, voted to close the company. When it closed in 1833 the company divided its capital among stockholders. The final dividend was $7.25 per share.
Another company specializing in marine insurance was organized two decades years after the formation of the New Haven Insurance Company. The Ocean Insurance Company appeared on the scene briefly, opening an office on Union Wharf in 1819. The company began with operating capital of $60,000, but apparently was faced with the same problems as its predecessor. The company folded soon after opening.
The first fire insurance company in New Haven was the Mutual Assurance Company. An 1801 advertisement stated that “The books are open for subscription at the office of the Secretary of the Corporation.”
Wanting to make it as easy as possible, the company permitted subscriptions to be made by proxy for those living too far to come to the office. The following conditions were outlined: “The terms of insurance are three-quarters of the appraised value of the building, at half of one percent, for the first year; one-third of one percent for the second year; and one-fourth thereafter.” Mutual insurance proved unsuccessful, and in 1815 a stock company was formed.
Other insurance companies came and went, but the Security, chartered in 1841, was one of the notable successes, building a business in both marine and fire insurance. The company began with $200,000 of subscribed capital, with $50,000 paid in.
For the first two years the company operated as a hybrid of stock and mutual systems, but this proved to be unsuccessful and the mutual system was dropped. The change was apparently successful, with a strong fire insurance base in New Haven and maritime insurance in New York.
Interestingly, the term “fire insurance” didn't appear until 1796. Benjamin Franklin's volunteer fire companies, found in nearly every city by 1752, were joined by units paid by the fire insurance companies, hired to protect only the buildings insured by the companies that paid them.
A fire mark, usually a plaque or symbol, was placed on the outside of the building. Numerous stories have been told of men watching a building burn to the ground because it wasn't insured by their company. Many property-owners began to buy fire insurance to have the plaque and fire protection as much as for the fire insurance itself.
In 1861 at the outbreak of the Civil War, New Haven - then the largest city in Connecticut with a population of 40,000 - had five insurance companies. Many came and disappeared so quickly that their names are lost to history.
Today, you can insure your hands, legs or practically anything else your imagination can dream up. Yes, those premiums are painful. But what would we do without it?
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