The Origins of an Industry [Life Insurance]

 Brian Anderson is Editor of Life Insurance Selling.

Everybody knows the Roman Empire was a remarkably advanced society. They built aqueducts and roads; the Roman Legion was perhaps the most formidable military force in history; and the Romans made big advances in language and judicial law, just to name a few significant achievements.

But while researching the History of Life Insurance timeline project (see the pullout poster at right), I have to admit I was surprised to learn that the very origins of life insurance as we know it can be traced all the way back to burial clubs in ancient Rome. Talk about being ahead of your time — by well over 1,000 years.

Back around 100 B.C., these burial clubs started springing up around Rome with the purpose of pooling resources to pay funeral expenses in case of the unexpected death of a club member. While it is impressive that they came up with this concept, the reason why it was necessary — and even encouraged by government and the military — seems a little more in line with the time.

The ancient Romans believed that anyone who was improperly buried would become an unhappy ghost, so they held a deep conviction that it was absolutely essential for every person — regardless of social standing — to be buried properly and avoid such a fate. Problem was, Roman society had a sizable gap between the rich and the poor. Many soldiers in the Roman Legion did not have the resources to afford such a burial. So burial clubs were born, and the instances of unhappy ghosts were presumably greatly minimized.

From the time these clubs first started appearing until the fall of the Roman Empire in 450 A.D., they evolved to include providing a stipend to survivors of the deceased. These concepts bear strong resemblance to the tenets of modern life insurance.

Forming insurance companies
When the Roman Empire fell, the burial club concept fell with it. In my research, I could find little mention of anything resembling life insurance surfacing again until the middle of the 17th century. In 1662, a London draper conducted a study that became the basis for the original life table, and 30 years later, astronomer Edmond Halley  — best known for computing the orbit of the comet that bears his name  — constructed the first mortality table, which could be used to provide a link between a life insurance premium and the average life spans based on statistical laws of mortality and compound interest.

As European civilizations progressed and depended more heavily on shipping for trade, guilds formed to protect their interests from loss due to shipwrecks, fire and even pirates. Marine insurance became an industry, and in 1688, Edward Lloyd’s Coffee House, a small shop on London’s Tower Street, became known as the prime gathering place for ship captains, ship owners and merchants. The shop earned a reputation as the place to go for the most up-to-date shipping news and, eventually, marine insurance. It was where the modern concept of an insurance company came into being.

While Edward Lloyd died in 1713, leaving the coffee house to his son-in-law, Lloyd’s continued to grow its reputation as a hub of shipping news and marine insurance. By 1769, “a breakaway group of professional underwriters established New Lloyd’s Coffee House … one of the first — and most important — steps to making Lloyd’s  what it is today,” according to Lloyd’s  of London’s own website.

But this was a decade after the Presbyterian Synod of Philadelphia sponsored the first life insurance company in America in 1759 for the benefit of Presbyterian ministers and their dependents. While history tells us the first insurance company in the American colonies was formed in Charleston, S.C., in 1735, that company offered fire insurance and didn’t add life insurance until 1760.

Coming to America
While fire and flood insurance businesses generally flourished from the start, life insurance faced a significant challenge that kept it from gaining momentum for decades. This challenge came in the form of religious leaders who termed it “wicked” and likened purchasing life insurance to gambling — and “betting against God.” The connection between gambling and life insurance meant the concept offended numerous denominations, and they were unified in their opposition. Their views were often supported and promoted by the savings bank industry, which viewed life insurance as potential competition.

It wasn’t until almost the middle of the 19th century that life insurance was able to get past this objection, as cultural changes made gambling more acceptable to Americans (and the connection to life insurance less toxic) and life insurers began to appeal to the “moral duty” of husbands to provide for their families in the event of premature death.

The infamous New York fire in late 1835 drew people’s attention to the need to provide for sudden and large losses, and the financial panic of 1837 spurred a move toward mutualization for upstart life insurance companies. By the mid-1840s, life insurance was beginning to experience its first boom period, with many companies still around today first surfacing within a 30-year period. The company that would become New York Life was started in 1845; same for National Life Insurance Company in 1848; MassMutual in 1851; Northwestern Mutual in 1857; Equitable (now AXA Equitable) in 1859; Guardian Life in 1860; John Hancock in 1862; MetLife in 1864; Union Central in 1867; Pacific Life in 1868; Genworth Financial in 1871; and Prudential in 1875.

The boom cooled considerably during the depression years of 1871-1874, with 46 life insurance companies ceasing operations. But growth continued after that, buoyed by the fact that Congress exempted life insurance when it created the income tax in 1913, largely because it was seen as providing a safety net for citizens. Life insurance sales rose dramatically following World War I, and by the eve of the Great Depression, there were more than 120 million life insurance policies — roughly equivalent to one for every person living in the United States at that time.

More life insurance companies emerged following World War II, and the number eventually peaked at 2,343 in 1988. It has fallen steadily since, primarily due to mergers and acquisitions. With an aging sales force and a penchant for targeting the affluent market at the expense of a neglected middle market, the U.S. life insurance industry currently finds itself trying to reverse a scary trend. LIMRA’s well-publicized 2010 report revealed that only 44% of U.S. households have individual life insurance coverage — a 50-year low.

In its more than 250 years in America, the life industry has had to overcome a number of serious challenges. Among them: the insurance of slaves prior to the Civil War; an outright refusal to insure some segments of the population and areas of the country; the folly of deferred dividend or “tontine” policies; race- and gender-based premiums; internal and external fraud; wars and health epidemics; market crashes; and tax and regulatory challenges.

The next chapter of the industry’s history will answer questions about that gap in insurance coverage, as well as some serious challenges on the legislative horizon. Will there be continued attacks on life insurance’s favorable tax status in the wake of the industry’s increased focus on the affluent market? Is a universal fiduciary standard on the way, plus a possible switch from state to federal regulation of the insurance industry?

Stay tuned. In the meantime, we hope you enjoy our pullout History of Life Insurance timeline poster in this issue, and remember to check out the expanded online version by clicking here. It includes links to videos and company history timelines. While we have tried to be comprehensive, certainly we have not been able to round up all worthy inclusions. But as the online History of Life Insurance timeline is a living, breathing document, we can add to it.

Click on the link below to view the complete interactive timeline

Timeline: The History of Life Insurance 

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