history of life insurance in USA
history of life insurance in USA The first American life assurance enterprises are often traced back to the late colonial period. The Presbyterian Synods in Philadelphia and ny found out the Corporation for Relief of Poor and Distressed Widows and youngsters of Presbyterian Ministers in 1759; the Episcopalian ministers organized an identical fund in 1769. within the half century from 1787 to 1837, twenty-six companies offering life assurance to the overall public opened their doors, but they rarely survived quite a few of years and sold few policies the sole early companies to experience much success during this line of business were the Pennsylvania Company for Insurances on Lives and Granting Annuities (chartered 1812), the Massachusetts Hospital life assurance Company (1818), the Baltimore life assurance Company (1830), the ny life assurance and trust corporation (1830), and therefore the Girard life assurance, Annuity and trust corporation of Pennsylvania (1836).
Despite this tentative start, the life assurance industry did make some significant strides beginning within the 1830s life assurance effective (the total benefit payable on all existing policies) grew steadily from about $600,000 in 1830 to only under $5 million a decade later, with ny Life and Trust policies accounting for quite half this latter amount. Over subsequent five years insurance effective almost tripled to $14.5 million before surging by 1850 to only under $100 million of life assurance spread among 48 companies. the highest three companies – the Mutual life assurance Company of latest York (1842), the Mutual Benefit life assurance Company of latest Jersey (1845), and therefore the Connecticut Mutual life assurance Company (1846) – accounted for quite half this amount. The sudden success of life assurance during the 1840s are often attributed to 2 main developments – changes in legislation impacting life assurance and a shift within the corporate structure of companies towards mutualization.
history of life insurance in USA
Married Women’s Acts
Life insurance companies targeted women and youngsters because the main beneficiaries of insurance, despite the very fact that the bulk of girls were prevented by law from gaining the protection offered within the unfortunate event of their husband’s death. the primary problem was that companies strictly adhered to the common law idea of interest which required that a person removing insurance on the lifetime of another have a selected monetary interest therein person’s continued life; “affection” (i.e. the connection of husband and wife or parent and child) wasn’t considered adequate evidence of interest. Additionally, married women couldn’t enter into contracts on their own and thus couldn’t remove life assurance policies either on themselves (for the advantage of their children or husband) or directly on their husbands (for their own benefit). a method around this problem was for the husband to require out the policy on his own life and assign his wife or children because the beneficiaries. This arrangement proved to be flawed, however, since the policy was considered a part of the husband’s estate and thus might be claimed by any creditors of the insured.
New York’s 1840 Law
This dilemma didn’t pass unnoticed by promoters of life assurance who viewed it together of the most hindrances to the expansion of the industry. The ny Life and Trust stood at the forefront of a campaign to pass a state law enabling women to acquire life assurance policies shielded from the claims of creditors. The law, which passed the ny state legislature on April 1, 1840, accomplished four important tasks. First, it established the proper of a lady to enter into a contract of insurance on the lifetime of her husband “by herself and in her name, or within the name of any person, together with his assent, as her trustee.” Second, that insurance would be “free from the claims of the representatives of her husband, or of any of his creditors” unless the annual premiums on the policy exceeded $300 (approximately the premium required to require out the utmost $10,000 policy on the lifetime of a 40 year old). Third, within the event of the wife predeceasing the husband, the policy reverted to the youngsters who were granted an equivalent protection from creditors. Finally, because the law was interpreted by both companies and therefore the courts, wives weren’t required to prove their monetary interest within the lifetime of the insured, establishing for the primary time an instance of interest independent of pecuniary interest within the lifetime of another.
history of life insurance in USA
By December of 1840, Maryland had enacted a uniform law – copied word for word from the ny statute. The Massachusetts legislation of 1844 went one step further by protecting from the claims of creditors all policies procured “for the advantage of a wife, whether effected by her, her husband, or the other person.” The 1851 New Jersey law was the foremost stringent, limiting annual premiums to only $100. In those states where a general law didn’t exist, new companies often had the ny law inserted into their charter, with these provisions being upheld by the state courts. for instance, the Connecticut Mutual life assurance Company (1846), the North Carolina Mutual life assurance Company (1849), and therefore the Jefferson life assurance Company of Cincinnati, Ohio (1850) all provided this protection in their charters despite the silence of their respective states on the difficulty.
The second important development of the 1840s was the emergence of mutual life assurance companies during which any annual profits were redistributed to the policyholders instead of to stockholders. Although mutual insurance wasn’t a replacement concept – the Society for Equitable Assurances on Lives and Survivorships of London had been operating under the mutual plan since its establishment in 1762 and American marine and fire companies were commonly organized as mutuals – the primary American mutual life companies didn’t begin issuing policies until the first 1840s. the most impetus for this shift to mutualization was the panic of 1837 and therefore the resulting financial crisis, which combined to dampen the keenness of investors for projects starting from canals and railroads to banks and insurance companies. Between 1838 and 1846, just one life assurance company was ready to raise the capital essential for organization on a stock basis. On the opposite hand, mutuals required little initial capital, relying instead on the premium payments from high-volume sales to pay any death claims. The New England Mutual life assurance Company (1835) issued its first policy in 1844 and therefore the Mutual life assurance Company of latest York (1842) began operation in 1843; a minimum of fifteen more mutuals were chartered by 1849.
history of life insurance in USA
In order to realize the required sales volume, mutual companies began to aggressively promote life assurance through advertisements, editorials, pamphlets, and soliciting agents. These marketing tactics broke with the traditionally staid practices of banks and insurance companies whereby advertisements generally had provided only the situation of the local office and agents passively had accepted applications from customers who inquired directly at their office.
Advantages of Mutuality
The mutual marketing campaigns not only advanced life assurance generally but mutuality especially, which held widespread appeal for the general public at large. Policyholders who couldn’t afford to have stock during a proprietary insurance firm could now share within the financial success of the mutual companies, with any annual profits (the more than invested premium income over death payments) being redistributed to the policyholders, often within the sort of reduced premium payments. The rapid success of life assurance during the late 1840s, as seen in Figure 3, thus are often attributed both to the present active marketing also on the appeal of mutual insurance itself.
Regulation and Stagnation after 1849
While many of those companies operated on a sound financial basis, the convenience of formation opened the sector to many fraudulent or fiscally unsound companies. Stock institutions, concerned both for the reputation of life assurance generally also like self-preservation, lobbied the ny state legislature for a law to limit the operation of mutual companies. On April 10, 1849 the legislature passed a law requiring all new insurance companies either incorporating or getting to do business in ny to possess $100,000 of capital stock. Two years later, the legislature passed a more stringent law obligating all life assurance companies to deposit $100,000 with the Comptroller of latest York. While this capital requirement was readily met by most stock companies and by the skilled New York-based mutual companies, it effectively dampened the movement toward mutualization until the 1890s. Additionally, twelve out-of-state companies ceased doing business in ny altogether, leaving only the New England Mutual and therefore the Mutual advantage of New Jersey to compete with the ny companies in one among the most important markets. These laws were also largely liable for the decade-long stagnation in insurance sales beginning in 1849
history of life insurance in USA
The war and Its Aftermath
By the top of the 1850s life assurance sales again began to extend, climbing to almost $200 million by 1862 before tripling to only under $600 million by the top of the Civil War; life assurance effective peaked at $2 billion in 1871. Several factors contributed to the present renewed success. First, the establishment of insurance departments in Massachusetts (1856) and ny (1859) to oversee the operation of fireside, marine, and life assurance companies stimulated public confidence within the financial soundness of the industry. Additionally, in 1861 the Massachusetts legislature passed a non-forfeiture law, which forbade companies from terminating policies for lack of premium payment. Instead, the law stipulated that policies be converted to term life policies which companies pay any death claims that occurred during this term period [term policies are issued just for a stipulated number of years, require reapplication on a daily basis, and consequently command significantly lower annual premiums which rise rapidly with age]. This law was further strengthened in 1880 when Massachusetts mandated that policyholders have the extra option of receiving a cash surrender value for a forfeited policy.
history of life insurance in USA
The war was another think about this resurgence. Although the industry had no experience with mortality during war – particularly a war on American soil – and most policies contained clauses that voided them within the case of military service, several major companies decided to make sure war risks for a further premium rate of twenty-two to five. While most companies almost broke even on these soldiers’ policies, the goodwill and publicity engendered with the payment of every death claim combined with a generally heightened awareness of mortality to greatly increase interest in life assurance. within the immediate postbellum period, investment in most industries increased dramatically and life assurance was no exception. Whereas only 43 companies existed on the eve of the war, the newfound popularity of life assurance resulted within the establishment of 107 companies between 1865 and 1870.
The other major innovation in life assurance occurred in 1867 when the Equitable life insurance Society (1859) began issuing tontine or deferred dividend policies. While some of every premium payment went directly towards a standard policy, another portion was deposited in an investment fund with a group maturity (usually 10, 15, or 20 years) and a restricted group of participants. The beneficiaries of deceased policyholders received only the face value of the quality life component while participants who allowed their policy to lapse either received nothing or only alittle cash surrender value. At the top of the stipulated period, the dividends that had accumulated within the fund were divided among the remaining participants. Agents often promoted these policies with inflated estimates of future returns – and always assured the potential investor that he would be a beneficiary of the high lapse rate and not one among the lapsing participants. Estimates indicate that approximately two-thirds of all life assurance policies effective in 1905 – at the peak of the industry’s power – were deferred dividend plans.
Reorganization and Innovation
The success and profitability of life assurance companies bred stiff competition during the 1860s; the resulting market saturation and a general economic downtown combined to push the industry into a severe depression during the 1870s. While the more well-established companies like the Mutual life assurance Company of latest York, the ny life assurance Company (1843), and therefore the Equitable life insurance Society were strong enough to weather Depression with few problems, most of the new corporations organized during the 1860 s were unable to survive the downturn. All told, 98 life assurance companies went out of business between 1868 and 1877, with 46 ceasing operations during Depression years of 1871 to 1874 . Of these, 32 failed outright, leading to $35 million of losses for policyholders. it had been 1888 before the quantity of insurance effective surpassed that of its peak in 1870.
Assessment and Fraternal Insurance Companies
Taking advantage of those problems within the industry were numerous assessment and fraternal benefit societies. Assessment or cooperative companies, as they were sometimes called, were associations during which each member was assessed a flat fee to supply the benefit when another member died instead of paying an annual premium. the 2 main problems with these organizations were the uncertain number of assessments annually and therefore the difficulty of maintaining membership levels. As members aged and death rates rose, the assessment societies found it difficult to recruit younger members willing to require on the increasing risks of assessments. By the turn of the century, most assessment companies had collapsed or reorganized as mutual companies.
Fraternal organizations were voluntary associations of individuals affiliated through ethnicity, religion, profession, or another tie. Although fraternal societies had existed throughout the history of the us, it had been only within the postbellum era that they mushroomed in number and emerged as a serious provider of life assurance, mainly for working-class Americans. While many fraternal societies initially issued insurance on an assessment basis, most soon switched to mutual insurance. By the turn of the century, the approximately 600 fraternal societies alive provided over $5 billion in life assurance to their members, making them direct competitors of the main stock and mutual companies. Just 5 years later, membership was over 6 million with $8 billion of insurance effective.
Industrial life assurance
For the few successful life assurance companies organized during the 1860s and 1870s, innovation was the sole means of avoiding failure. Aware that they might not compete with the main companies during a tight market, these emerging companies targeting markets previously ignored by the larger life assurance organizations – looking instead to the instance of the fraternal benefit societies. Beginning within the mid-1870s, companies like the toilet Hancock Company (1862), the Metropolitan life assurance Company (1868), and therefore the Prudential insurance firm of America (1875) started issuing industrial life assurance. Industrial insurance, which began in England within the late 1840s, targeted lower income families by providing policies in amounts as small as $100, as against the thousands of dollars normally required for ordinary insurance. Premiums starting from $0.05 to $0.65 were collected on a weekly basis, often by agents coming door-to-door, rather than on an annual, semi-annual, or quarterly basis by direct remittance to the corporate. Additionally, medical examinations were often not required and policies might be written to hide all members of the family rather than just the most breadwinner. While the amount of policies written skyrocketed to over 51 million by 1919, industrial insurance remained only a fraction of the quantity of life assurance effective throughout the amount .
The major life assurance companies also quickly expanded into the worldwide market. While numerous firms ventured abroad as early because the 1860s and 1870s, the foremost rapid international growth occurred between 1885 and 1905. By 1900, the Equitable was providing insurance in almost 100 nations and territories, the ny Life in almost 50 and therefore the Mutual in about 20. The international premium income (excluding Canada) of those Big Three life assurance companies amounted to almost $50 million in 1905, covering over $1 billion of insurance effective.
The Armstrong Committee Investigation
In response to a mess of newspaper articles portraying extravagant spending and political payoffs by executives at the Equitable life insurance Society – all at the expense of their policyholders – Superintendent Francis Hendricks of the ny Insurance Department reluctantly conducted an investigation of the corporate in 1905. His report substantiated these allegations and prompted the ny legislature to make a special committee, referred to as the Armstrong Committee, to look at the conduct of all life assurance companies operating within the state. Appointed chief counsel of the investigation was future us Supreme Court judge Charles Evans Hughes. Among the abuses uncovered by the committee were interlocking directorates, the creation of subsidiary financial institutions to evade restrictions on investments, the utilization of proxy voting to frustrate policyholder control of mutuals, unlimited company expenses, tremendous spending for lobbying activities, rebating (the practice of returning to a replacement client some of their first premium payment as an incentive to require out a policy), the encouragement of policy lapses, and therefore the condoning of “twisting” (a practice whereby agents misrepresented and libeled rival firms so as to convince a policyholder to sacrifice their existing policy and replace it with one from that agent). Additionally, the committee severely chastised the ny Insurance Department for allowing such malpractice to occur and recommended the enactment of a good array of reform measures. These revelations induced numerous other states to conduct their own investigations, including New Jersey, Massachusetts, Ohio, Missouri, Wisconsin, Tennessee, Kentucky, Minnesota, and Nebraska.
history of life insurance in USA
In 1907, the ny legislature skilled the committee’s report by issuing a series of strict regulations specifying acceptable investments, limiting lobbying practices and campaign contributions, democratizing management through the elimination of proxy voting, standardizing policy forms, and limiting agent activities including rebating and twisting. Most devastating to the industry, however, were the prohibition of deferred dividend policies and therefore the requirement of normal dividend payments to policyholders. Nineteen other states followed New York’s lead in adopting similar legislation but the dominance of latest York within the insurance industry enabled it to say considerable influence over an outsized percentage of the industry. The state invoked the Appleton Rule, a 1901 administrative rule devised by ny Deputy Superintendent of Insurance Henry D. Appleton that required life assurance companies to suits ny legislation both in ny and altogether other states during which they conducted business, as a condition of doing business in ny. because the Massachusetts insurance commissioner immediately recognized, “In a particular sense [New York’s] supervision are going to be a national supervision, as its companies do business altogether the states.” The rule was officially incorporated into New York’s insurance laws in 1939 and remained both in effect and highly effective until the 1970s.
history of life insurance in USA
Continued Growth within the Early Twentieth Century
The Armstrong hearings and therefore the ensuing legislation renewed public confidence within the safety of life assurance, leading to a surge of latest company organizations not seen since the 1860s. Whereas only 106 companies existed in 1904, another 288 were established within the ten years from 1905 to 1914 life assurance effective likewise rose rapidly, increasing from $20 billion on the eve of the hearings to almost $46 billion by the top of war I, with the share insured by the fraternal and assessment societies decreasing from 40% to but 1 / 4
One major innovation to occur during these decades was the event of insurance. In 1911 the Equitable life insurance Society wrote a policy covering the 125 employees of the Pantasote Leather Company, requiring neither individual applications nor medical examinations. the subsequent year, the Equitable organized a gaggle department to market this new product and shortly was insuring the workers of Ward Company. By 1919, 29 companies wrote group policies, which amounted to over a half billion dollars worth of life assurance effective.
War Risk Insurance
Not included in Figure 5 is that the War Risk insurance issued by the us government during war I. Beginning in April 1917, all active military personnel received a $4,500 policy payable by the federal within the case of death or disability. In October of an equivalent year, the govt began selling low-cost term life and social insurance, without checkup, to all or any active members of the military. War Risk insurance proved to be extremely popular during the war, reaching over $40 billion of life assurance effective by 1919. within the aftermath of the war, these term policies quickly declined to under $3 billion of life assurance effective, with many servicemen turning instead to the entire life policies offered by the stock and mutual companies. As was the case after the war, life assurance sales rose dramatically after war I, peaking at $117 billion of insurance effective in 1930. By the eve of the good Depression there existed over 120 million life assurance policies – approximately like one policy for each man, woman, and child living within the us at that point.