Insurance

D

Old-Age and Unemployment Insurance

Old-age insurance policies pay out funds after a person retires. Most people’s insurance protection for loss of income in their old age comes from annuities, policies that pay out regular monthly amounts for many years. In Canada and Australia, annuities are sometimes called superannuation policies.

Unlike annuities, life insurance protects policyholders and their families against the loss of income that can result if the insured person dies before retirement. Annuities, on the other hand, protect policyholders against outliving their financial resources, of which income is a big part.

The U.S. Social Security program, through OASDI, provides old-age insurance along with its disability coverage. Americans usually augment their social security retirement benefits with employment-based old-age pension plans and other retirement investments such as individual retirement accounts (IRAs). Canadians similarly augment their benefits from the Canada Pension Plan (or the Quebec Pension Plan) with employment-based pension plans and retirement investments such as Registered Retirement Savings Plans (RRSPs).

Unemployment insurance provides income to people experiencing periods without paid work. Free-market economies, common to almost all countries today, depend on having a slight surplus of workers—that is, having some level of unemployment. This allows businesses to keep wages from going up too quickly, because unemployed people may be willing to work for fairly low wages. In the strongest economies, unemployment rates may be about 2 to 3 percent, while weaker economies in industrialized countries may have rates well above 20 percent. But even the lowest rates of unemployment indicate that hundreds of thousands of people are out of work.

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Because unemployment results from government free-market economic policies, affects so many people at any given time, and is so predictably persistent, private insurers do not cover it. Instead, most governments support unemployment insurance programs. In the United States, employers must pay for unemployment insurance. Canadian workers and their employers contribute to a similar government-run system of Employment Insurance (EI). In both countries people can collect unemployment benefits on a regular basis for specified periods of time if they lose their jobs for reasons out of their control, provided that they continue to actively look for work.

XI

Government Regulation of Insurance

The insurance business in many countries comes under some degree of government regulation. Insurance is complex, takes in money for something not delivered at the time of sale, and is poorly understood by many consumers. Regulation assures that insurers deal fairly with clients and can actually pay out on all valid claims.

Insurance is one of the largest U.S. industries, in terms of revenues, to come under regulation by individual states. Each state has an insurance commissioner who issues licenses to sellers of insurance, oversees the financial stability of the state’s insurance companies, and assists in resolving consumer complaints. The National Association of Insurance Commissioners, which coordinates insurance laws and regulations among all U.S. states and territories, makes it easier for insurers and clients to conduct business across the country.

In Canada, an insurance company chooses to be regulated either by the federal government or by one of the provincial governments. The Canadian federal government oversees the operations of most of the country’s large insurance companies.

The U.S. insurance industry also works with government regulators to protect purchasers of insurance. Together they have established a system of safeguards to assure that policyholders receive most of their benefits for valid claims, even if their insurance provider becomes unable to pay.

Most state governments have two insurance protection systems, known as guaranty funds, one for life insurance and health insurance and one for property insurance and casualty insurance. State governments finance guaranty funds primarily with taxes on solvent private insurers. Canada also has separate systems protecting customers using these two sides of the insurance industry: the Canadian Life and Health Insurance Compensation Corporation and the Property and Casualty Insurance Compensation Corporation.

XII

History of Insurance

A

Early Development

Historians believe insurance first developed in Sumer and Babylonia (both in what is now Iraq) beginning in about 3000 bc. The merchants and traders of these societies transferred and pooled their money to protect themselves from losses of cargo to thieves and pirates.

In the 18th century bc, Babylonian king Hammurabi developed a code of law, known as the Code of Hammurabi, which codified many specific rules governing the practices of early risk-sharing activities. For instance, the code dictated that traders had to repay merchants who financed trading voyages unless thieves stole goods in transit, in which case debts would be cancelled.

Seagoing merchants from Phoenicia (in and around present-day Lebanon) began using a system of insurance known as bottomry about 1200 bc. In this system, backers loaned money to merchants to finance voyages. Merchants offered their ships (the hull was known as the ship’s ‘bottom’) as collateral for such loans. When a trip succeeded, the merchant would pay the trip’s backer the original loan plus interest, the equivalent of a premium. If a ship went down on its voyage, the trip’s backer would cancel the merchant’s loan. Forms of insurance resembling bottomry had spread to other parts of Asia and the Mediterranean by 400 bc.

In the last several centuries bc the societies of Greece and Rome developed some of the earliest systems of life insurance. Greek and Roman citizens formed benevolent societies, organizations in which members paid dues that went toward paying for the burial of members who died. Sometimes these societies also paid for the living expenses of deceased members’ families. During the Middle Ages (5th to 15th centuries ad), workers joined together in craft. Many guilds, particularly in England and Italy, provided benefits to workers and their families in the event of illness or death.

B

Growth of Modern Insurance in Europe

Many modern forms of insurance developed in England between the 16th to 18th centuries. The first known life insurance policy was written in London during the late 1500s. In England, groups called friendly societies gradually assumed many of the functions of guilds, including providing insurance to society members. Workers contributed to a society’s pool of funds. If workers fell ill or died, the society would distribute money to them or their families. However, many friendly societies went bankrupt due to poor management. In response, the English government enacted the Friendly Society Act of 1793, which placed regulations on the societies’ practices.

Also in England in the early 1700s, seagoing merchants and traders began pooling their risks against damage to the goods they transported by ship. Seafarers and people wishing to back their expeditions met informally to make insurance arrangements, sometimes at a pub called Lloyd’s in London. Lloyd’s pub later developed into the formal association of insurance brokers known as Lloyd’s of London. Insurance arrangements such as those negotiated at Lloyd’s were the forerunners of modern marine insurance.

As growing commerce fueled the development of new urban centers, primarily in Europe and North America, new risks also emerged. New forms of insurance developed to manage these risks. In 1666 a fire raged through London for five days and destroyed about 85 percent of the city. The following year, a real estate developer began promising to rebuild any house he sold if it burned down. The idea became so popular that it developed into England’s first fire insurance business. Soon, many more companies formed to offer fire insurance, which became one of the most widely offered forms of property insurance.

The Industrial Revolution, which began in Great Britain in the late 1700s and spread around the world during the following century, brought even more people into cities. These increases in urban population density concentrated the risks of fire and other types of property damage. Between 1640 and 1827, major fires occurred in a number of growing cities, including London; Hamburg, Germany; Paris, France; Saint Petersburg, Russia; and Philadelphia, Pennsylvania, in the United States.

C

In the United States

C

1

Beginnings and Growth

Insurance also developed during the 1700s in the North American colonies. In 1730 Benjamin Franklin helped form the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. The company collected contributions from citizens of Philadelphia, and this money went into an investment fund. Interest on this fund went toward paying for claims on losses from fires and for dividends to those who contributed money.

The Presbyterian Ministers’ Fund of Philadelphia, a church organization incorporated in 1759 and still in existence today, was the first American organization to offer life insurance benefits. It offered coverage only to its members not to the general public.

As the insurance business grew in the American colonies, many insurance companies began selling marine coverage. But British underwriters kept much of the marine insurance business during the 1700s by offering greater coverage and lower rates.

In 1792 a group of American insurers came up with $600,000 to sell competitive marine coverage as the Insurance Company of North America. This company also sold the first publicly offered life insurance policies in the United States. But low demand for life insurance at the beginning of the 19th century kept that business marginal. Marine insurance in the United States, along with maritime trade, remained dominated by Britain through the 1800s and into the 1900s.

The Industrial Revolution in the United States, in the early and mid-1800s, prompted dramatic growth in the insurance industry. During this time, many companies were established to sell life insurance and annuities. Several mutual insurance companies, which shared profits among policyholders, also developed. In addition, some life insurance companies began for the first time to vary premiums according to people’s age and health.