Life
insurance during early colonial times was
purchased chiefly by ship captains and other
ocean travelers, usually in the form of term
insurance covering a specific voyage or a term
of six months or one year. Since no life
insurance company had yet begun operating in
the colonies, coverage was supplied by
individual underwriters. No medical
examination was required and the cost was
high. Stay-at-home farmers felt no need for
life insurance protection. In 1759 the
Presbyterian Synod of Philadelphia established
the Corporation for the Relief of Poor and
Distressed Presbyterian Ministers and for the
Poor and Distressed Widows and Children of
Presbyterian Ministers, which became known
simply as the Presbyterian Ministers’ Fund. It
was the first organization in colonial America
to furnish any form of life insurance, but it
was not a life insurance company offering
coverage to the general public. The
distinction of being the first life insurance
company in the United States belongs to the
Insurance Company of North America. However,
demand for life insurance was still
negligible, and after selling only six
policies in five years the company
discontinued its life insurance business,
resuming it only in 1956. Both the
Presbyterian Ministers’ Fund and the Insurance
Company of North America (now known as INA)
are still in operation today.
With the Industrial Revolution and the
tremendous urban growth of the 19th century
came the maturation of the U.S. life insurance
industry. As late as 1840, there was a less
than $5 million worth of life insurance in
force throughout the country; in 1900 the
figure was $8.9 billion An early leader in the
field was the Pennsylvania Company for
Insurance on Lives and Granting Annuities,
organized in 1809 as a stock company
exclusively devoted to the issuance of life
insurance and annuities. It was the first of
its kind in the United States. The
Pennsylvania Company was also the first to
require a written application and a medical
examination, and to correlate the premium cost
with the applicant’s age – all standard
practices today. During the period of
comparative political stability and economic
prosperity between the War of 1812 and the
Civil War, many new companies entered the
market, but most failed owing to lack of
adequate administration and regulation. Three
noteworthy successes were Girard Life
Insurance and Trust Company of Philadelphia,
the first to grant policyholders a share of
the profits, thus becoming a forerunner of the
mutual companies; New England Mutual Life
Insurance Company, the first mutual company to
be chartered; and Mutual Life Insurance
Company of New York (now known as MONY), the
first mutual company actually in operation.
At that time life insurance policies did not
carry a non-forfeiture clause; policyholders
who could not pay their premiums when due
forfeited all the money they had paid. It was
an American who changed this system. Elizur
Wright, a former mathematics professor and
militant abolitionist, visited an English
insurance auction where policyholders who
could no longer pay their premiums mounted the
block to sell their policies to the highest
bidder (usually for a fraction of their
value). The successful bidder then named
himself as beneficiary and continued to pay
the premiums in anticipation of the insured’s
early demise. Wright was outraged by this
practice, which he compared to a slave
auction. He focused his crusading energy and
mathematical ability on the field of insurance
and came home to lobby the Massachusetts
legislature for a law (adopted in 1861)
requiring nonforfeiture clauses in life
insurance policies. At Wright’s behest,
Massachusetts also passed a law requiring
adequate reserves to meet policy commitments.
He calculated net reserve valuation tables to
show the value of a given policy at any point
in its life and also to help judge the
solvency of companies. In 1858, Wright became
head of the Massachusetts insurance department
where he continued his efforts to improve the
U.S. life insurance industry.
The Civil War halted growth in life insurance
only during the first year, 1861-1862; in each
of the next three years the amount of
insurance in force increased by more than 30
percent and for several years immediately
following the war the rate of increase was
more than 50 percent per year. The resultant
surge of money into life insurance company
coffers proved too great a temptation for many
men. Questionable practices became common, and
unsavory schemes abounded throughout the rest
of the 19th century. By 1905 abuses were so
widespread that the New York state legislature
appointed a commission to investigate life
insurance companies in the state. After four
months of hearings, the Armstrong Committee
issued a report that resulted in the adoption
of the New York Insurance Code of 1906, which
became a model for all state life insurance
regulation. The industry then corrected its
abuses and regained the confidence of the U.S.
public.
With few exceptions, effective governmental
regulation of insurance did not exist in the
United States before 1945. The development of
forceful state control has been one of the
most important occurrences in the modern era
of insurance. The constitutionality of state
regulation was established by the U.S. Supreme
Court in 1869 in the case of Paul v. Virginia.
During the ensuing years, each of the states
adopted regulatory statutes and created
insurance departments to enforce them. In a
1944 ruling, the Supreme Court reversed its
1869 doctrine and instead held that Congress
rather than the states had authority to
regulate the interstate insurance business.
This meant that if it chose to do so, Congress
could replace most state insurance regulation
with federal control, since most insurance
transactions involve interstate commerce.
However, with the passage of the McCarran Act
in 1945, Congress stated that continued
regulation by the states was in the public
interest. Thus until the McCarran Act is
amended or repealed, insurance regulation will
continue to be a task of the state
governments. Congress can always change the
McCarran Act, however, which gives the states
extra incentive to provide strong and
effective regulation, for if state supervision
is found inadequate, federal action is almost
certain to follow.
The late part of 20th century has seen rapid
growth in almost all areas of U.S. insurance.
In 1900, only one in every eight American had
life insurance protection; today two out of
three have policies. Much of this growth has
been in group coverage. In 1950 group policies
accounted for 20 percent of all the life
insurance in force; by 1978 the ratio had
reached 43 percent. The number of people with
group life protection insurance includes more
purchases of term policies, larger average
policy size, and more women buyers (29 percent
in 1978, compared with 22 percent ten years
earlier.
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