The Evolution of Insurance: From Hammurabi’s Code to the Affordable Care Act

Thank you, risk management. We slippery humans appreciate you more than you may realize.

Photo by Micheile on Unsplash

Unforeseen tragedies, illnesses, setbacks — we all know what it’s like to be disturbed by loss. As long as humans have been wary of risk, insurance has been around.

Our social environment has necessitated risk management as early as the first agricultural revolution in 10,000 BC which introduced the notion of food storage and private property.³ Since then, we have developed into a densely populated democratic republic that values specialized labor with more efficiency and complexity in our social structures than ever before and it has regularly demonstrated the necessity of risk management. I am of course speaking from a viewpoint of a citizen of the United States who has grown up around western social norms and belief systems which may have influenced which aspects of history I have found most notable to include in a survey of how insurance originated and evolved. The history of insurance regulation demonstrates how our highly individualist society depends on the collective — at the individual level risk is not fungible but among a large group risk is transferable.³

Some consider the ancient Babylonian monument the Code of Hammurabi as the earliest instruction of risk management in a society.² Issued roughly around 1771 BCE, this legal text stated in one of its written laws that debtors were exempt from paying loans to the government in the event of a calamity. This law informed insurance transactions in bottomry contracts, or maritime settlements which were used by shipowners to finance lengthy voyages and to protect them from being liable for repayment of a loan in the event of a shipwreck and loss of possessions. Bottomry contracts were used among Babylonian merchants as early as 4000 BCE, Hindus as early as 600 BCE, and Greeks around the fourth century BCE. Some speculate that ancient Chinese civilization concurrently developed their insurance regulation as Babylonians. By the fifteenth century, marine insurance became much more institutionalized.

Shipowners doubtful of their chances of smooth sailing would spread their risk by transporting their goods in more than one vessel. Merchants would back their bottomry contracts with additional fees to their lender in order to ensure that their loans were cancelled in the event of losing their goods.¹ In exchange for an insurance premium, an investor could indemnify shipowners. The invention of these operations would inform the activity of joint stock ventures which were stocks sold to investors that promised a lot of money and little risk, as well as a collaboration among merchants.

Because Romans apparently believed that an improper burial could provoke hauntings from “unhappy ghosts”, military leader Gaius Marius and his troops created a “burial club” which allowed group members to share the responsibility of paying and planning funerals.¹ Group coverage was also used in the Middle Ages by craftsmen participating in medieval guilds which allowed masters to use the guild funds to cover their losses from any robbery, disability, or death.² This incentive likely informed the growth of mercantilism. Similarly, in exchange for protecting civilians, the Achaemenian monarchs of Persia received many gifts from their subjects. These arrangements are some of the earliest practices of life and health insurance in Europe.

A catalyst to the development of fire insurance in England was the Great Fire of London in 1666 which destroyed over 13,000 buildings.⁶ Before municipal fire departments there were no legitimate district lines — whichever firefighter got to the accident first would be the one responsible for dousing it.⁴ The development of fire departments was in part due to insurance carriers who would issue “fire brand placards” to those with insurance coverage — the presence of a placard promised a certain prestige and reliability. One year after the fire incident Dr. Nicholas Bardon founded The Insurance Office which would somewhat formalize the responsibilities of fire departments.³ Initially fire insurance was reserved for private homes but eventually businesses would be included in the jurisdiction of fire departments — a change that posed some challenges to underwriters who assessed risk premiums before new new risk categories were introduced to help businesses dealing with the most dicey operations.

During this era, two important insurance companies — the London Assurance Corporation and the Royal Exchange Assurance Corporation — were founded, however, many others were “fraudulent, get-rich-quick schemes” that posed as property and liability insurance.⁵ Many groups simply didn’t have the resources to succeed and their soundness would be tested during any severe economic depressions. Aggressive marketing and advertising during this period would also go a long way in spreading information about the utility of insurance.

A significant development of marine insurance in Europe apparently occurred in the seventeenth century with Lloyd’s of London, a coffeehouse started by Edward Lloyd that accommodated underwriters. Initially, shippers and investors would gather here for reasons unrelated to finances but with the growing demand for ship and cargo insurance, the shop would transform into a popular insurance underwriting society.⁴ (The term underwriting alludes to the literal practice of investors writing down their name and the amount of risk they were willing to cover under an insurance proposal.) The formation of this group allowed investors to share the responsibility of insuring a ship and its cargo through financial risk diversification. In fact, the publication Lloyd’s List began with his recordings of shipping information for customers that sought to assess marine risks such as the weather, the reputation of the captain, and the kind of ship. Later, Lloyd’s of London would start to issue fire and property insurance.⁵ Estimating human life expectancy with mathematical probability became a more refined practice (in Europe) with astronomer and mathematician Sir Edmund Halley who created the first known mortality tables in the 1690s.⁴

During the early seventeenth century while European insurance companies grew to prominence, the United States was overrun with starvation and disease that killed “almost three out of every four colonists in the Jamestown settlement between 1609 and 1610”.² The first insurance company in the colonies, the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, was started by Ben Franklin in 1752.⁴ Soon afterwards the Corporation for Relief of Poor and Distressed Widows and the Children of Presbyterian Ministers’ Fund would start up in 1759.⁷ By 1820, New York housed roughly seventeen life insurance companies.⁵ The workers’ compensation laws in U.S. developed as a result of those first enacted in Europe between 1881 and 1884 but the first states to introduce workers’ compensation insurance — Maryland, Massachusetts, Montana, and New York — were all charged with violating “due process”. Wisconsin became the first state to pass a workers’ compensation law in 1911 while Mississippi was the last one in 1948.⁴ Insurance regulation streamlined the process of how injured workers could recover from illnesses and injuries without plunging into costly expenses.

The nationalization of insurance in Eastern Europe and Japan follow a slightly different story. The Gosstrakh is a Soviet organization that issues domestic insurance while the Ingosstrakh issues insurance on foreign risks. These were the primary insurance institutions of the Soviet Union after the Russian Revolution in 1917, however, since perestroika, or the reformation of its political and economic system in the latter half of the twentieth century, roughly 230 more insurance companies have been founded.⁵ In Japan, insurance companies have historically been handled as a “private enterprise”, however, the government has shared responsibility in writing “crop, livestock, forest fire, fishery, export credit, accident and health, and installment sales credit insurance as well as social security”. Under Japanese law and government supervision, voluntary rating bureaus controlled insurance premiums. The growth of insurance institutions boomed after World War II and Japan would account for 25% of all insurance premiums worldwide.⁵

Like many other industries, insurance companies grew to prominence by learning from their mistakes. The earliest companies failed due to “speculative investments, poor management, and inadequate distribution systems”.⁵ City-wide life-threatening catastrophes — like the 1871 Great Chicago Fire and the 1906 San Francisco fire and earthquake — demonstrated the weakness of certain organizations who were unable to efficiently respond and regulate based on reliable statistical data. Between 1870 and 1872, thirty-three life insurance companies failed. Between 1873 and 1877, another forty-eight would dissolve. However, today the 1850s are remembered as the years in which life insurance sales would climb to new heights, “to almost $200 million by 1862 before tripling to just under $600 million by the end of the Civil War”. It would reach a new peak in 1871 with $2 billion in sales.⁷ A big reason for this surge was the Civil War which introduced clauses on insuring war risks in existing policies. Between 1865 and 1870, the number of insurance companies would increase from a mere forty-three to just over a hundred. War risk insurance would only continue to grow in popularity — all military personnel from October 1917 were eligible for low-cost life and disability insurance without medical examination. The popularity of life insurance during wartime would lead sales to reach over $40 billion by 1919.⁷ In the aftermath of World War I sales would decline to just under $3 billion as military personnel sought insurance plans from stock and mutual companies instead of government plans.

During the mid-nineteenth century, the Mutual Life Insurance Company of New York (1842), the Mutual Benefit Life Insurance Company of New Jersey (1845), and the Connecticut Mutual Life Insurance Company (1846) would receive recognition as top three insurance insurance companies in the country.⁷ From 1910 to 1990, the annual insurance growth rate was 8.4%.⁵ The success that the insurance industry experienced in the U.S. during these years was mainly due to legislation that encouraged mutualization and broadened the accessibility of insurance.⁷

The twentieth century meant a rapid growth for the market of insurance for firms that would expand their underwriting and brokerage services worldwide. The rise of worldwide insurance programs meant the concurrent rise of reinsurance — when several insurance companies share risk in order to curb the chances of serious financial disasters.⁵ The growth of self-insurance programs owned by captive companies and the increasing use of mergers between brokerage firms and insurers were also global trends in the orb of insurance. By 1987, the globalization of insurance institutions would lead U.S. underwriters to pen 37% of all premiums in the world.⁵ However, this swift rise also meant occasional cases of malpractice and thus stricter regulations and frequent investigations.

Another development in insurance is companies are less likely to exercise sexism in their decisions of who is eligible for coverage. In the mid-nineteenth century married women needed their husband’s approval to obtain a life insurance policy. The husband had to obtain the policy on his own and then he could designate his family as beneficiaries. This would change in 1840 when the New York state legislature passed a law that allowed women to enter into insurance contracts on their own.⁷ In the following years other states would follow by enacting the same law and even additional measures that supported gender equality.

Life insurance, disability insurance, pet insurance — you name it — has demonstrated its success in helping people protect their assets. The earliest use of insurance used probability without sound statistics yet intuition, estimation, and thorough record-keeping were all useful strategies in risk mitigation that would only become more polished with the rise of global insurance markets.

Today, when we think of insurance in the United States we probably immediately think of the Affordable Care Act (ACA) — how it protects people with preexisting conditions, insured millions of Americans, raised premium rates, normalized high deductibles, and stirred a lot of controversy among legislators and voters. Even before I understood what insurance was I knew about the Affordable Care Act — maybe not what it meant as a tiny fourth grader but just how it revolutionized healthcare for Americans. In its original form in 2010 before revisions, the law mandated insurance coverage for every single American who didn’t want to face a tax penalty. We’ve come a long way from the times that insurance was only reserved for the merchants, craftsmen, ship owners, and members of the burial club. While the individual mandate was repealed from the Affordable Care Act, in other aspects it strives to create a society that allows each person to access and afford the services that will better their quality of life. Who could argue against universal healthcare? The problem with the ACA is that while it makes insurance more affordable to those most likely to receive a pricey medical bill, it disadvantages healthy people with high incomes who are unqualified for financial assistance.

I acknowledge that this report on the evolution of insurance carries a Western bias as I have chosen to include mainly the insurance histories of Western Europe and the United States while only briefly spotlighting the experiences of Russia and Japan. Frankly, I did not know much about this subject beforehand — or rather I did not know that what I learned in my younger years about mercantilism was actually very relevant to the rise of our modern global financial institutions — and reading about the popular narratives on insurance history that depict Europe as the originator felt like a safe choice for structuring this essay. I hope that in a future writing expedition I can counter this Eurocentrism on the evolution of insurance in order to credit sources and biographies that are less likely to be consumed by readers but are just as true and important.

As insurance continues to grow in scope and availability, the industry has only become more important to the prosperity and growth of the economy. For example, J. Francois Outreville found in his research that in certain developing countries the insurance premiums and gross domestic product per capita have a positive relationship integral to the economy’s success.³ Insurance has proven to diminish the impact of unexpected and unwelcome events. By allowing a group of people to pour their savings and transfer risk to meet specific qualifications for finances, insurance conveniently allows people to save for retirement.

From tracing the history of insurance from its origins we can tell how it has evolved in response to the needs of a population, how insurance companies have evolved to be more equitable and accessible, as well as how our modern global financial institutions kind of owe their success to meager trades and accidents from centuries ago.

Sources:

  1. Anscombe, Vicky. “A Brief History of Insurance Throughout the Ages.” Columbus Direct, 24 Feb. 2016.
  2. Beattie, Andrew. “The History of Insurance.” Investopedia, 27 May 2021.
  3. Buckham, David, and Stuart Rose. “The Evolution of Insurance.” Executive’s Guide to Solvency II, edited by Jason Wahl, SAS Institute Inc., 2010, pp. 1–10.
  4. “Facts and Legends of Insurance Industry History.” Insurance Journal, 10 Jan. 2011.
  5. Greene, Mark Richard. “Insurance”. Encyclopedia Britannica, 20 Dec. 2019.
  6. “Insurance Handbook: Brief History.” Insurance Information Institute.
  7. Murphy, Sharon Ann. “Life Insurance in the United States through World War I.” The Economic History Association.

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