It’s not exactly a burning question and most people never give it much, if any thought. But occasionally someone will ask me how life insurance got started. It being national Life Insurance Awareness Month, I thought I’d briefly share with you what I tell them.
There are several origins, some dating back to the Phoenicians, but one that is certainly a significant part of life insurance history began in this country in the 16th and 17th centuries.
In those days of the early settlers, disease, famine, attacks by Native Americans etc. all took their toll on the villagers. Often the head of a family would die from one of these causes leaving his family with no means of support, food, shelter etc. The other villagers would close around the family and provide support, but it was uneven and a drain on their own meager finances.
So the idea developed that each year all the villagers would deposit some amount of money into a common fund with the expectation that if someone died during the year, some or all of the fund would be paid to his widow and family. If the fund was depleted, the hat would be passed and the fund rebuilt in anticipation of future deaths. It reflected the basic purpose of life insurance that endures to this day – to provide a source of financial support to families if the breadwinner dies prematurely.
Over time the villagers became more sophisticated and began to make some realistic assumptions about how many might die in a given year and later still who might have a greater risk of dying during the year. With those assumptions they began to reflect the risks more accurately in their annual deposit assumptions and charges became more uniform and level as they began to build reserves against any future unexpected increases in deaths.
As time went on some of the villages began to pool their resources and from that trend companies began to emerge with actuaries, claims experts, underwriters etc. doing the work that the villagers had done on scraps of paper.
Soon, of course, investors began to see the profit possibilities of being an insurance company and began to capitalize new companies for the purpose of selling insurance at a profit. But many of those soon found that with inadequate statistical data about deaths they were too often called upon to put up additional capital. And so many that were owned by stockholders began to sell them back to the policyholders. The advantage was that the policyholders participated in any profits, but were limited in their potential losses by the reserves that had been established to provide a buffer against shock losses etc.
The significant fact was that while the motivation of the stockholders had been to make a profit, the policyholder wanted the certainty of the payment of a claim at a reasonable price. The policyholder owned company became the most popular and successful form. Many of the ensuing big names were started as stock companies and became mutual companies. Many of those, of course, have once again reverted to stockholder owned companies in a quest for greater access to capital so they can expand market share and enter into allied financial security ventures.
Over time, naturally, charlatans and unscrupulous profit seekers arrived on the scene. Wherever there is money to be made they will be drawn to it, not always with the best interests of the public in mind. But for each and every action there is eventually an equal and opposite reaction. And so beginning in the late 19th century, states began to regulate the insurance companies in their states. Some states were fairly lax, but others like New York and Massachusetts were quite stringent and began to shape the industry along the very ethical and financially sound lines under which it operates today.
The realities of attracting customers to a company were not much different than they are today. People knew they should have coverage, but would not buy it unless someone met with them, explained the policies and took the order.
Throughout the 20th Century life insurance grew steadily despite occasional slowdowns caused by war, economic conditions etc. The post World War II period right up through the 1970s and 80s saw a huge increase in life insurance purchased. It wasn’t until the huge stock market run up of the 1980s and 90s that sales began to flatten. Although some attribute the slowdown to a “mature market,” others, myself included, believe the market will never mature as long as people get married, have children, start businesses and die before they have accumulated enough money to support their families and businesses.
In the most fundamental way, protection of loved ones left behind, life insurance in the 21st century plays exactly the same role it did in the 1600s. Life Insurance Awareness Month is a reminder of that essential fact.