Historical Evolution of Life Insurance, By NAIC Staff




Life Insurance Industry in its Infancy

The life insurance industry has gone through several periods of transformation, instigated by key historical events and changes in consumer needs. The Presbyterian Ministers’ Fund, established in 1759, was the first life insurance entity in the United States.

1. Although its purpose was to provide life insurance to the widows and orphans of deceased ministers, negative perceptions surrounding assigning a monetary value to one’s life during this time
period stifled growth.




2.Legal restrictions also presented a barrier to life insurance sales during this time. Many states barred women from entering contracts, including insurance policies, or legally inheriting an estate. As such, a wife would not be able to collect proceeds from her husband’s policy.

Furthermore, spousal or dependent relationships alone did not meet the monetary insurability interest requirements insurers of this time period required. In addition to limiting who could take out an insurance policy, insurers also placed stringent requirements on the activities of policyholders. These requirements usually limited travel to healthier regions of the country, required regular health and character checks and prohibited the consumption of alcohol.

3. Economic Turbulence of the 19th Century Complicating things further was a five-year depression brought on by the Panic of 1837. Land speculation (driven mostly by western territory sales) fueled by loose credit from state banks
had created a real estate bubble and high inflation.




4. In response, President Andrew Jackson issued the Specie Circular in 1836, limiting payment of land to gold and silver.

5 The state banks had overextended their lending abilities by printing money beyond their reserves, resulting in
bank and business failures, real estate losses, and record high unemployment levels.

6. These and similar sequences of events would play out several times throughout history, including three more times in the latter part of the 19th century.

State Regulation is Born Insurers, unable to raise sufficient capital to form as a stock company following the Panic of 1837, mutualized instead. A mutual company is owned by its policyholders as opposed to stockholders. Mutual insurers have less stringent capital requirements and higher reliance on premiums from policyholders (also owners) for cash flow. To increase premiums, mutual insurers launched a very successful marketing campaign promoting ownership benefits, essentially policyholders as owners of the company would share in the company’s profits through dividends or reduced premiums.8 The ease of starting up a mutual insurance company, combined with the appeal of policyholder dividends, produced a plethora of new entrants into the marketplace.

Eventually the market became saturated and insurers began using fraudulent activities to increase market share. New York responded to this fraudulent activity by instituting capital stock (1849) and depository (1851) regulatory requirements.

New Hampshire appointed an insurance commissioner in 1850.10 Massachusetts implemented legal reserve principles, and formed a state insurance department to oversee these new laws (1858). Soon other states were following suit, with most states implementing regulatory oversight of insurers by the early 1870s.

In 1868, the Supreme Court decision in Paul v. Virginia securely placed insurance under the supervision of states. Soon after, in 1871, the National Insurance Convention (later known as the National Association of Insurance Commissioners (NAIC)) was formed to address the need to coordinate regulation of multistate insurers.

Although the new state regulations slowed industry growth for the next decade, they also restored consumer confidence. Additionally, legislative changes during this time allowed women access to insurance and instituted consumer-friendly nonforfeiture laws.

Stability returned the growth to the United States economy, which was growing more industrial and prosperous. The resulting rise in demand, coupled with the changes in legislation, insurer structure, and marketing practices, set the stage for future industry expansion.

Insurers, unable to raise sufficient capital to form as a stock company following the Panic of 1837, mutualized instead. A mutual company is owned by its policyholders as opposed to stockholders. Mutual insurers have less stringent capital requirements and higher reliance on premiums from policyholders (also owners) for cash flow. To increase premiums, mutual insurers launched a very successful marketing campaign promoting ownership benefits, essentially policyholders as owners of the company would share in the company’s profits through dividends or reduced premiums.

The ease of starting up a mutual insurance company, combined with the appeal of policyholder dividends, produced a plethora of new entrants into the marketplace. Eventually the market became saturated and insurers began using fraudulent activities to increase market share. New York responded to this fraudulent activity by instituting capital stock (1849) and depository (1851) regulatory requirements.

New Hampshire appointed an insurance commissioner in 1850. Massachusetts implemented legal reserve principles, and formed a state insurance department to oversee these new laws (1858). Soon other states were following suit, with most states implementing regulatory oversight of insurers by the early 1870s.