Insurance: It’s Way Older Than You Think
By Andrew Werts
Did you know that the concept of insurance has been around for over five thousand years? If you work in the insurance industry or have ever used insurance in your life, you are part of a long family tree. The ancient Chinese, Babylonians and Persians each developed their own forms of distributing risk as early as 3000 BC, and the ancient Greeks developed a form of life insurance that can be traced back to 600 BC. They created guilds called “Benevolent Societies,” which paid for the funerals of its members and provided for the families of the deceased.
What’s the risk?
The first insurance contract can be traced to Genoa, Italy in the 1300s. Some merchants were travelling far from shore, while others took less risky routes. The threat of storms and pirates varied all over the world. In order to account for these various risk factors and the likelihood of the wares being delivered, insurers altered premiums and payouts based on the degree of risk associated with each shipment.
Property insurance became popular when the Great Fire of London in 1666 gutted over 10,000 homes leaving thousands of Londoners homeless. Overnight, insurance wasn’t just a luxury, but a necessity. In fact, Christopher Wren, architect and master planner of the rebuilt London, included plans for an “Insurance Office” in his schematic for a new London.
Soon, London was the center of global trade and a hub for global shipping. In the late 1600s, when merchants needed insurance for their trips, they met in a local coffee house owned by a Mr. Edward Lloyd. Soon enough, Lloyd’s of London became the premier insurance marketplace in the world, covering ships, lives, and even Betty Davis’s legs and Bruce Springsteen’s voice!
How did the modern-day notion of insurance come to be?
How did insurance make it to America? Well, one of the founding fathers of the country was also one of the founding fathers of insurance on this side of the Atlantic. In 1752, Benjamin Franklin help found The Philadelphia Contributionship, the first mutual fire insurance company in America. Like London, Philadelphia houses were mostly made of wood and often packed closely together, a recipe for disaster if fire broke out. In order to limit risk, Franklin’s company refused to insure any property they considered a fire hazard, a precursor to the establishment of fire and safety codes. Soon after, Franklin helped found the first life insurance company in America as well, the Presbyterian Ministers fund.
The earliest signs of employer-sponsored insurance began after the Civil War as America expanded and developed westward. Railroads and mining companies deducted small amounts of employees’ wages and, in return, provided doctors and medical services. However, it took another war for insurance as we now know it to come to be.
From wage freezes to a benefits revolution
In the 1940s, our government leaders faced a problem. Well, really, lots of problems. The country was at war and fully mobilizing to fight World War II. Industry was fully directed toward the war effort, producing military goods at the expense of consumer products, threatening scarcity and price inflation of other goods. At the same time, workers were needed for armed service duty and also for manufacturing jobs on the home front, potentially driving up wages due to a limited supply of workers and strong demand. So, to keep the country’s energy and economy focused on the war, and to prevent inflation, the government decided to freeze wages and prices.
In response, many large employers, like General Motors, came up with a pretty smart alternative – what if they offered benefits like health insurance as an add-on to salary to entice the best workers? They could keep salaries steady, in accordance with the government-imposed wage freezes, but could attract top talent with these added benefits. In 1943, the War Labor Board ruled that benefits were exempt from the wage freeze.
When the war ended, so did the wage freezes, but employer-sponsored benefits continued as employees came to expect them and were weary of giving them up. Additionally, Congress legislated that employer-sponsored benefits were tax-deductible for the employer and not considered taxable compensation for the employee, a win-win for both that’s still the foundation of our current system today. Policies for individuals still had to be paid for with post-tax dollars, so employees started to evaluate potential job opportunities, in part, based on the benefits they offered.
From the 1940s until recently, not much has changed in the way that employers offer these benefits. The advent of private exchanges is changing all that, once again, and Liazon has been at the forefront of the latest “benefits revolution” since 2007. To learn more about how Liazon is leading the way, read Our Story.
Andrew Werts manages Liazon’s external marketing efforts. His expertise in insurance began at the early age of four, helping his mother, a broker in the small-group market, run sophisticated pricing analyses on his Etch A Sketch.