A Brief History of Life Insurance

Life insurance is now widely regarded as one of the cornerstones of financial security for families. But, believe it or not, the origins of life insurance go back centuries. And, the concept of insurance goes back even further. Today, however, the life insurance industry is a juggernaut. 

According to S&P Global Market Intelligence, the U.S. insurance industry’s net premiums written in 2020 were $1.28 trillion, with property-casualty (P/C) insurers getting 51 percent of the premiums and life insurers getting 49 percent, respectively. In this next section, we’ll explore where life insurance got its start and how it became mainstream. 

King Hammurabi’s Code and Early Insurance 

A Babylonian monument with what’s known as Hammurabi’s code carved into it is believed to have featured the earliest written insurance policy.  In addition, Hammurabi’s Code, which is dated from around, 1750 BC was one of the first laws to be written. It contains 282 laws that cover matters of public life, citizenship and ensuring the fairness of the Babylonian court system. 

Most of the ancient laws were far-reaching. As an example, if an engineer/builder fails to construct a home correctly, and it collapses and kills the homeowner, then the engineer should be executed. However, there was a law that provided basic insurance for any hardship or personal circumstance that made repaying the debt impossible that was caused by an inability to work, death, or flooding. 

As Eric Marsden notes in Risk Engineering, “several aspects of the code are remarkable, and quite modern,” such as;  

  • In place of a mysterious system that would limit the understanding of the law code to a few elites, the law code is intended to be understood by everyone. 
  • In the code, the principle of equality of people before the law is explicitly recognized. In fact, many believe that it includes the first declaration of human rights in history: “To cause justice to prevail in the land […] that the strong may not oppress the weak […]”.
  • Risk is explicitly addressed by several laws.

While Hammurabi’s code doesn’t solely focus on life insurance, it does illustrate that we’ve long taken into consideration what would happen to our loved ones if we could no longer work or when we die.

Life Insurance’s Origins In Ancient Greece And Rome

When it comes to life insurance specifically, it can be traced back to ancient Greece and Rome around 600–100 BCE. A variety of insurance was provided to some citizens of these early societies. And, this included both health and life insurance.

Gaius Marius, an early Roman military general, allegedly came up with the idea of a “burial club.” The idea was that surviving soldiers would pay for one another’s funeral expenses should a member die in war. While the initial application was limited to soldiers, the concept spread throughout ancient Rome. Eventually, it became popular among ordinary citizens. 

This concept was expanded by these small groups by offering financial assistance to the families of those who have fallen in battle. 

Around 700 BC, someone in ancient Rome had a great idea. Every week, if everyone contributed a few coppers to a “Casket Kitty,”, there would be enough money to cover this funeral expense. Just as they are now, funerals were expensive then, as well as unexpected. If they are unexpected, they are sometimes accompanied by medical expenses that drain a family’s funds.

Sometime after that, someone realized that if each person contributed a little more each week, there would be something left over for the widows and children. As such, life insurance is around 2,000 years old. 

Life Insurance Pioneers

“Life insurance policies have been around for a few centuries, and it is hard to know for sure exactly when the first such policy was written,” writes  Ronald Kessler in The Life Insurance Game. “We can, however, state definitively the information on the oldest policy for which we have surviving evidence”. 

“The year of this oldest policy was 1583, adds Kessler. Specifically, on June 18, 1583, in London, England. The insured was named William Gybbon. His job was to preserve meat and fish using salt, aka he was a salter. A policy was purchased by Richard Martin,  a citizen and alderman of London, whose relationship with the beneficiary is unknown, though the Thirteen merchants of London.

Martin received a written promise (the “policy”) for 30 pounds sterling that if Gybbon died within a year he would receive 400 pounds as a death benefit. 

“The policy was written as a one-year term,” Kessler states. And, as luck would have it, Gybbon passed away just before the end of the year. The underwriters refused to pay Martin, claiming the contract was for a lunar year. . “A year means 12 lunar months of 28 days each,” they claimed. “Gybbon died just after the lunar year was up.”

It is not known how Gybbon exactly died. However, the story is probably accurate. Why? The Annals of the American Academy of Political and Social Science published a paper on it in September 1905.

It was another Englishman in the 1600s who finally figured out how big the kitty should be, as well as how much you to charge for a life insurance policy.

Originally from London, John Graunt is widely considered as the first actuary. John’s real job was as a haberdasher. In other words, he sold buttons and bows for a living. But, his real contribution came from reviewing church records. By examining these records, which had dutifully recorded births and deaths, he was able to calculate average lifespans.

Graunt also created the world’s first mortality tables, according to historians. He died just before his 54th birthday in 1674. We do not know, however, if John Graunt had gotten life insurance before he died.

Fast forward to 1756 where an English mathematician and Fellow of the Royal Society named James Dodson tried to apply for life insurance coverage from the Amicable Society — which offered insurance chartered by Queen Anne in 1706. Due to his old age, however, he was denied coverage.

In his research, Dodson showed that an insurer could charge a monthly premium regardless of the age of the customer. How so? They had to charge correctly in order to reflect the individual’s mortality risk. Several years later, the Equitable Life Assurance Society was founded in 1762 by an English scholar named Edward Rowe Mores. Although he wouldn’t live to see its charter, Dodson created what is regarded as the world’s oldest mutual insurer. 

Lloyd’s Of London

Several years later, 1688 to be exact, ship captains, ship owners and merchants, and the like met in a small coffeehouse in London to get the latest news and purchase insurance. 

This popular gathering place was Edward Lloyd’s establishment. And, these conversations among sailors were the precursors to the Society of Lloyds (then called Lloyd’s of London), a formal insurance association. 

The notoriously dangerous marine and trading industries were underwritten by underwriters, who were usually wealthy members of society. Later, in 1774, the Society merged its business with the royal exchange, formalizing what was previously an informal organization. 

The Life Assurance Act was also passed in Great Britain in the same year as a precaution against insurance agents committing acts of corruption against their clients. Today, Lloyd’s of London is one of the most well-known insurance companies in the world. 

The First Life Insurance Entity

 

In Great Britain, life insurance caught on quickly, but in other countries, it took much longer. Despite the enthusiasm for insurance, there was a moderate amount of religious opposition. Primarily the belief that betting on death was inappropriate. They believed that the timing of death was God’s domain, which is why life insurance was condemned by religious leaders condemned the practice completely.

Even today, remnants of this initially religious fervor survive. It is not uncommon for jurisdictions to require “insurable interest” – or an agreement to financially benefit from the survivor – to form a new policy. This just means that you can’t take out life insurance on a complete stranger.

Interestingly, the first term insurance entity turned out to be funded by the Presbyterian Synod of Philadelphia.

 

 

According to official records, the Presbyterian Ministers’ Fund was founded in 1759 and eventually became the first life insurer in the United States. Initially, a fixed sum was initially paid by members, whose widows and children collected the dividends when they passed away. 

 

The clergy, however, had an underlying tension about how the life insurance industry essentially managed risks, arguing that it was a form of gambling. Furthermore, there was a misconception about life insurance at the time that prevented its development. Many saw it as putting a monetary value on someone’s life rather than assisting surviving family members financially

 

In addition, legal restrictions limited the industry’s overall growth. Contracts were not allowed for women in many states. Moreover, they were not allowed to legally inherit estates. So the wife would not be able to collect from the life insurance policy of her husband.

 

Likewise, insurers place several restrictions on policyholders. For instance, health and character checks were regularly conducted and they could not travel outside of healthier regions of the country. And, they were not permitted to drink alcohol.

 

The Panic of 1837 and Life Insurance

 

As part of American history itself, life insurance has also been historically linked to the nation. There have been numerous events in our nation’s history that have contributed to the evolution of life insurance as it is today. And, most infamously, “The Panic of 1837.”

 

During his presidency, Andrew Jackson believed that the Federal Reserve monopolized the credit and economic opportunities that were available to average Americans during his presidency. In response, he moved federal funds to smaller state banks. But, this ended up harming the Second Bank of the United States. Eventually, this lead to a finanical crisis that lasted into the mid-1840s.

 

During Van Buren’s tenure as president, who was Jackson’s successor, state banks had printed more money than they could afford, leading to bank failures, business failures, and property losses.

 

Life insurance companies started to become mutualized after the crisis of 1837. In the years 1838 to 1849, there was only one life insurance company that raised capital through stock. In the same period, 17 mutual institutions were chartered, requiring little initial capital.

 

In other words, insurance companies weren’t able to raise enough capital to form stock companies following the Panic of 1837. Their solution was to create “mutual companies” instead of private companies owned by stockholders. Using the plan, policyholders could claim dividends and reduce premiums if they wanted to become part owners of the company.

 

This resulted in a surge of interest, as well as an influx of new insurers. Increasing competition led to an increase in fraudulent activity. By 1849, the state of New York instituted capital stock regulations and depository regulations to deal with this issue. Almost all states developed some form of insurance regulation by the early 1870s.

 

Other developments, such as gender discrimination and a shift away from preachers who demonized life insurance, also contributed to the boom in the sector. New York Life, MassMutual, John Hancock, and MetLife are some of the largest life insurers today that emerged during this period.

 

The Life Insurance Industry Grows in Scale…and Falls

 

A Supreme Court decision in Paul v. Virginia put insurance in the state’s hands in the late 1860s. In response to this decision, state-to-state regulation became necessary. We now know the National Association of Insurance Commissioners originated from the National Insurance Convention of 1871.

 

By regulating life insurance companies, consumers gained more confidence. After that, as already discussed, new legislation resulted in even more positive changes. For instance, women were able to own and purchase life insurance policies as well as to become entitled to the proceeds of those policies.

 

In addition to propelling industry expansion, these changes also made life insurance more accessible to everyone.

 

But, what goes up must come down.

 

During the depression years of 1871-1874, 46 life insurance companies ceased operation, including 32 that folded completely. In the end, policyholders suffered a $35 million loss.

 

There was a silver lining, however, in 1875 with the funding of the Widows and Orphans Friendly Society in Newark, N.J. At the time, it offered a single product: burial insurance. For the first time in America, working-class people could purchase life insurance. Ultimately, this company became Prudential.

 

Life Insurance In The 20th Century

 

Despite this, the industry continued to thrive. An insurance company, AXA Equitable, drafted the first group life insurance policy for Pantasote Leather Company’s employees in 1911. Additionally, Equitable established a department in 1912 to promote group coverage and soon insured Montgomery Ward employees.

 

Immediately following World War I, life insurance sales skyrocketed, reaching $117 billion in force in 1930. The number of life insurance policies in the United States in the 1930s was well over 120 million – one per adult, child, and youngster living in the country at the time when the country was struck by the Great Depression.

 

A high rate of fraud and deception resulted from the boom in insurance firms and the establishment of dozens of companies. The most common cases were charging clients exorbitant premiums and not paying the claim. Overall, the industry was largely unregulated at this point in its history, and some insurers benefited from any lack of oversight.

 

Upon the enactment of the Social Security Act in 1935, Americans were provided with a safety net for the first time in history. Consequently, as the government became more involved, life insurance had to lose some market share. As a result, the Supreme Court ruled in 1944 that the insurance industry should be regulated federally. But, this was short-lived. After the passage of the McCarran-Ferguson Act in 1945, the states gained control of it. As of today, state oversight remains in place.

 

Members of the armed forces on active duty can obtain life insurance through the Serviceman’s Group Life Insurance Act, which was enacted into law in 1965. The administration expenses and added costs resulting from increased military risk are covered by the federal government, while a pool of commercial insurers underwrites the insurance.

 

Following the end of World War II, sales of life insurance soared in the United States due to an economic boom. In fact, during the mid-1970s, 72 percent of all adults in the United States owned life insurance. And over 90 percent of all married couples owned a life insurance policy.

 

A variety of whole life products were introduced in the 1970s and 1980s, including universal life insurance and variable universal life insurance. Even throughout the 1990s, the universal life insurance option was widely popular. Unfortunately, hefty life insurance premiums because of dwindling interest rates have lead to the failure of many of these policies

 

Life Insurance Today…and Tomorrow

 

The life insurance market in the United States has grown enormously in the past 150 years. In the United States, 54 percent of the population is covered by some form of life insurance, according to LIMRA’s 2020 Insurance Barometer Study. Although the life insurance industry market penetration has declined over the past decade, it’s fairly stable on a yearly basis.

During the first half of 2020, LIMRA further reports, the industry grew by at least 2 percent. A heightened number of people applied for life insurance due to the pandemic in the latter half of 2020, even though exact data is not available. 

“Since the onset of the pandemic, we’ve continued to see an increase in interest in life insurance across the industry as Covid-19 has put the question of mortality front and center for many,” Salene Hitchcock-Gear, Prudential Individual Life Insurance president, told Investopedia.

With economic conditions slowly improving following the vaccine and consumers becoming “more confident in their financial outlook, we believe life insurance sales will begin to rebound in 2021 and return to pre-pandemic growth levels in 2022,” Maureen Shaughnessy, an actuary with LIMRA Insurance Research, predicted in a November 2020 forecast.

In a survey conducted by Lincoln Financial Group, more than a third of consumers said that life insurance “is more important to own now due to the pandemic, while a third also said they have or are planning to purchase new or additional life insurance as a result of the pandemic,” notes Stafford Thompson, Jr., head of life product management for Lincoln.

Additionally, the COVID-19 pandemic, as well as being able to apply online, has changed how life insurance is bought and sold. In fact, 98% of respondents from financial services companies report that their customers are want to shop online and use video engagement tools. Among consumers surveyed for the LIMRA/Life Happens 2020 Insurance Barometer Study, 50% say they are more likely to buy life insurance that is automated or simplified than traditional underwriting that’s often more time-consuming.

It may be for the reasons above that life insurance policy sales have reached a record-breaking pace, with the most rapid growth since 1983. But, will this boom continue?

 

“We expect this growth to continue through 2021 based on both life insurance applications—perhaps the best leading indicator of future sales—and increased consumer demand that history tells us will likely persist for at least several years following the pandemic,” says David Levenson, president and CEO, LL Global, LIMRA and LOMA. 

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