Past is prologue: the early American insurance marketplace had its own version of Sept. 11, and there is no doubt that the industry will survive future challenges, just as it has overcome obstacles in the past

Risk & Insurance, Oct 1, 2003 by John A. Bogardus, Jr.

In developing the book, Spreading the Risks Insuring the American Experience, as an American business story, I wanted to take into account the social, political and economic factors that influenced the industry's expansion. Early American insurers were invariably undercapitalized, usually relying on investors who often defaulted on their posted capital notes. If claim reserves were even established, they were frequently inadequate. Underwriting was often confined to a limited geographic area, with a narrow spread of risk and no practical rating system. Horrific fires between 1835 and 1875 highlighted weaknesses and ultimately brought about remedies.

While many of the formative developments and challenges for the insurance industry occurred during the 18th and 19th centuries, none placed it at the center of the American consciousness as did the terrorist attacks of Sept. 11, 2001. The unanticipated, enormous losses produced by the attacks rocked the global insurance market and created an uncertain future for institutions and businesses worldwide.

Despite the industry's shock over potential claims and the considerable loss of life, its response to the attacks was immediate. In a matter of weeks, mostly through new Bermuda-based reinsurance companies, it raised in excess of $25 billion of additional capacity to offset much of what had been lost. Industry members also worked with the U.S. government to develop a market for terrorism insurance coverage. Reacting to a crisis of unimaginable proportion, the industry responded resourcefully and creatively.

Even so, the industry's most daunting challenges may lie ahead. Complex risks generated by national and global transformations, increased concentration of risk and aggregation of exposure, the impact of international terrorist networks, and unforeseen catastrophic liabilities will shape its future.

Having risen to meet the challenges of nearly three centuries, it is likely the insurance industry will meet future needs as well--but it cannot be taken for granted. This industry is an interdependent global system. Virtually every major social, political and economic upheaval triggers vibrations that have an impact on the entire system. Coping with tomorrow's risks will require focus, energy, creativity, cooperation and wisdom from old and new industry thinkers, clients and government.

History suggests that our industry will continue to adapt to new challenges in its efforts to serve the public good. We think history will be proven right.

Fire insurance in the colonies did not develop until the 18th century. Widely scattered and mostly agrarian, the colonists assisted each other in repairing fire damages and replacing losses. In Boston, New York, Philadelphia and other enterprising cities, authorities mandated elementary safety measures. As early as 1632, Boston prohibited thatched and wooden roofs. Then, after a devastating fire in 1653, the town lathers ordered:

That thear be a ladder or ladders to every house within this town, that shall rech to the ridg of the house, which every houshowlder shall provide for his house. . That every houshowlder shall provide a pole of about 12 feet long, with a good large swab at the end of it, to rech the rufe of his house to quench fire; that the seleckt men shall provide six good and large ladders for the towns use, which shall hang at the outside of the meeting house....

In the area that became New York City, Dutch governor Peter Stuyvesant required regular chimney cleaning and inspection by the mid-1600s. And, by 1696, Philadelphia authorities did not permit smoking in the streets; further, households had to have a 12- to 14-foot swab and a bucket. Early versions Of fire engines also were acquired. Boston had one in 1653. Philadelphia purchased one in 1718; but 13 years later, when it dealt inadequately with a blaze, the city purchased two new English pampers. New York also received a hand-pumped English model in 1731..

By the mid-1700s, there were more than 2,000 houses in and around Philadelphia--none insured for fire--probably reflecting the difficulty of arranging London-based coverage. The challenge of long-distance communications made it inevitable that local competition would be preferable.

American initiatives often were based on British formats. For example, in 1752, Ben Franklin and others founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. It came to be known as Hand-in-Hand and issued policies for seven-year terms. Hand-in-Hand adopted the rules and practices of England's Amicable Contributionship, one of that country's oldest fire insurance companies. The company became America's first successful fire insurance firm and continued as the only one for 32 years. (Incorporated in 1768, the Hand-in-Hand is still going strong and offers perpetual insurance for brick and stone buildings in Philadelphia and its surrounding area.) ...

Between 1800 and 1810, more than 50 charters for American insurers were issued; and in the 19th century's first decades, hundreds of other insurers formed. Most failed, leaving policyholders and investors high and dry. Although causes of failure varied, the new companies shared underlying weaknesses. Often, they were undercapitalized, and individual investors defaulted on their posted collateral notes. Many companies did not establish sufficient reserves for paying claims. Most insurers focused on limited geographic areas and, consequently, were especially vulnerable to local fires, storms and other catastrophes. Further, it would be years before logical rating systems developed to assist in establishing adequate prices..