Although the Romans had something akin to burial insurance, life insurance as we know it today began around the time of the Industrial Revolution. It got started in London and the first actuarial life table was developed by Sir Edmund Halley, he of Halley’s Comet fame.
The first life insurance company in the United States was started in 1759 and went by the unwieldy name of Corporation for Relief of Poor and Distressed Widows and Children of Presbyterian Ministers. The mid-1800s saw the start of many companies that still survive today: New York Life (1845), Mass Mutual (1851), Northwestern Mutual (1857) and Prudential (1875).
To prevent life insurance from becoming a betting scheme, the concept of insurable interest was introduced. Effectively, that concept means that the owner and/or beneficiary must have a risk of loss should the insured die.
In the 1840s, the relationship of husband and wife (or of parent and child) was not considered an insurable interest. The life insurance companies realized that would limit the growth of the industry, so they lobbied for a change of law, which New York passed in 1840 and other states soon followed.
Elizur Wright, a mathematician employed by New England Mutual (acquired by MetLife in 1996) in the 1840s, devised the first mathematical tables for calculating premiums and reserves. He also helped pioneer the non-forfeiture provision of cash surrender value, that is, giving the owner the reserve if he defaulted on the premium, although it wouldn’t become law until decades later.
Total life insurance in force reached $2 billion by 1871, the result of aggressive marketing by mutual insurance companies and the establishment of state departments of insurance. Those departments inspired consumer confidence by mandating the non-forfeiture provisions as well as policing the companies domiciled in their jurisdiction.
But the Panic of 1873 as well as the generally poor economy of the 1870s saw a number of companies fail at tremendous loss to the consumer. It wasn’t until 1888 that total insurance in force reached the level of 1871.
Growth, however, can also create problems, and in the early 1900s, the Armstrong Committee was established the New York legislature to investigate improprieties in the industry. It found many, including blatant evasion of investment restrictions, unlimited company expenses, rebating (giving a new client a portion of the premium as inducement to buy the policy) and twisting (encouraging a consumer to drop a current policy in favor of a new one).
The legislature responded to the committee’s report by outlawing many of the infractions, thus strengthening the industry while simultaneously renewing public confidence in it. The industry continued to grow up until 1930, when the Depression took its toll.
A future newsletter will review the industry and some of its innovations since 1930.