American Insurance at the Dawn of the Twentieth Century

September 2004

This Risk and Insurance History column looks at the birth of the U.S. insurance agency system and how changes in technology, benefits, business practices, and regulation lead to insurance agent and broker professionalism. With creativity and ingenuity, our forbearers established a tradition of professionalism and devotion to meeting client needs.

by Jack Bogardus and Robert Moore
PMR Communications Group

Just as today's insurance industry faces a rapidly changing socioeconomic and political landscape, our nineteenth century predecessors confronted their own challenges with technology and the marketplace. Revisiting the world of agents and brokers at the dawn of the twentieth century can offer today's insurance professionals an instructive historical perspective.

New Machines

By the late nineteenth century, various business innovations began to contribute to insurance office efficiencies. Shortly after inventing the telephone in 1876, Alexander Graham Bell called Travelers to purchase an accident policy. This is the earliest known business transaction conducted by telephone. The first public phone would appear the following year, and by 1895, 300,000 were installed. Foreshadowing today's reliance on computers, telephones quickly became essential communication tools for agents and brokers.

Typewriters also became indispensable. Detroit's William Burt received the initial patent for his machine in 1829, but a practical unit did not appear until 1874 with the original Remington Rand. Although the Metropolitan Life Insurance Company purchased a Locke & Bates in 1877 for $125, most businesses were slow to embrace typewriters, and just 5,000 were sold before 1880. By century's end, however, this equipment was not only common, it was also highly instrumental in bringing women into the workforce. Certainly, typewriters would prove to be a bonanza for the labor-intensive insurance industry, along with the wireless telegraph that became available in the late nineties.

Diverse Benefits

With innovations contributing to more efficient work, attention also focused on employee welfare, and benefit plans began being offered. American Express introduced an employer-sponsored pension plan in 1875. Benefits from this earliest plan totaled 50 percent of pay averaged over the last 10 employment years, with a $500 annual cap. Later, in 1883, the Denver and Rio Grande Western Railway's Hospital Association adopted the nation's first dental plan.

The integration of leisure with business development also took a noteworthy turn in the mid-eighties when John M. Fox of Philadelphia encountered golf on a Scotland trip, then introduced it to Americans. The first true U.S. golf club opened in 1887 in Foxburg, Pennsylvania, and the earliest 18-hole American course was completed in 1893 in Wheaton, Illinois.

Although the amount of time agents and brokers play golf may be exaggerated, billions of insurance dollars are negotiated directly or indirectly on courses all over the world. In a tongue-in-cheek observation, an Aetna L&C internal publication cites golf courses for "making it possible for insurance agents and doctors to lead fulfilled and happy lives."

Business Expansion and Politics

Congress passed the Sherman Antitrust Act in 1890 to inhibit monopoly formation, but within a decade, huge monopolies emerged. John D. Rockefeller created the Standard Oil Company of New Jersey in 1899 and at one point controlled 85 percent of the nation's oil refining capacity. (Eventually, in 1911, the U.S. Supreme Court ordered Standard Oil to break up into 34 separate entities.) Another major American monolith, the J.P. Morgan banking group, started the U.S. Steel Corporation in 1891, and they ultimately controlled nearly half of America's steel-making capacity.

Despite many acquisitions and failures, the insurance industry remained fragmented in the 1880s and 1890s; nothing resembling a monopoly developed. Far fewer new insurers were launched than in previous decades. Those that were tended to be conservatively capitalized. Chubb & Son was formed in 1882 to manage insurance companies. Initially, it focused on marine risks and specialty areas such as personal insurance for wealthy individuals.

Insurers had considerable flexibility in controlling policy conditions. For example, after discovery of gold in Canada's Yukon Territory led to the Klondike stampede, many life and accident companies said they would invalidate coverage for policyholders who participated in the rush. Conversely, for patriotic reasons during the 1898 Spanish-American War, some insurers suspended policy clauses that precluded military service.

Simultaneously, though, increased state regulation sometimes resulted in conditions which insurers found restrictive and unfair. The "valued policy," which applied to fire insurance, illustrates this problem. Loss in standard policies was based on a property's cash value at the time of fire, i.e., an "indemnity policy." However, beginning with Wisconsin in 1874, several states legislated valued policies, in which coverage value was determined in advance, i.e., a "guaranty policy."

Insurers argued that standard fire policies should be of the indemnity, not the guaranty, type. They were concerned valued policies might encourage arson because a property's insurance coverage could be higher than its actual value. Despite such concerns and the fact that the pioneer state, Wisconsin, ultimately repealed its law due to large numbers of fraudulent claims, insurers did not prevail. By 1915, 22 states had adopted valued policy laws.

Agents and Brokers

Between 1880 and 1900, brokerages multiplied and became more distinguishable from agencies. Although America had 218 licensed brokers in 1882, this number grew rapidly over the next few years. Nevertheless, it was dwarfed by the number of insurance agents—INA alone boasted 2,200 in 1884.

While most insurers preferred dealing directly with their own agents, they ultimately conceded that brokers were an important and inevitable force. Nonetheless, this acknowledgement would fluctuate. As David Schiff has pointed out, in the mid-1800s and later, large companies sometimes lost sight of their brokers' critical role and considered them to be unnecessary and greedy. In fact, representatives of 26 insurance companies signed an 1868 circular that passionately articulated such beliefs and charged:

• The insurance brokerage system is, in the judgment of the undersigned, an evil to both Insurance Companies and their customers, with little compensating good…. Customers can place their own insurance better than brokers can.

Interestingly, most who signed the circular were out of business by 1908, while brokers generally prospered. Charles Platt, INA's president from 1879 to 1908, addressed the issue of brokers' and agents' commissions, and defended 15 percent commissions to INA agents even though many other insurers paid less:

• In the large cities of New York, Philadelphia, Boston, New Orleans, Pittsburgh and some others there is a class of men known as Brokers or Middlemen, through whose hands a very large proportion of the business of Fire Insurance passes. These men by active personal solicitation secure the control of the business of most of the large Manufacturing Concerns and Mercantile businesses and it is now the exception to a rule when such risks are placed directly by the assured with the Companies. The reason is a plain one. When large amounts of insurance are required and any one Company will not assume more than a limited line it becomes a very troublesome business and requires constant attention. Brokers are now the recognized medium and must obtain licenses from the State Authorities. Why not do away with this system? The reply is that no one Company can safely move in this direction for the result would be the alienation of the large portion of its business derived from Brokers.

The brokerage commission rate, 15 percent in Philadelphia, ran as high as 25 percent in New York City. Rates were volatile, however, and by 1886, the average New York Rate had receded to 10 percent.

Growing Professionalism

While larger brokerages advertised themselves as brokers, the line between agent and broker remained somewhat blurred. However, when vital industry matters were at stake, there was little distinction. Leading broker and agency executives collaborated to promote industry safety issues. When the 1893 Chicago World's Fair was launched, an auxiliary committee formed to minimize the fire risk of inflammable structures. The committee consisted of people such as W.A. Alexander, R.S. Critchell, Fred. S. James, and R.A. Waller—all men in firms that became major Chicago agents or brokers.

Starting in the early eighties, insurers developed a keen interest in electrical inspections, and in 1893 on behalf of the World's Fair, the committee hired W.H. Merrill, an industrial engineer. Merrill established a Chicago testing facility to evaluate the use of Thomas A. Edison's illumination. Interestingly, The Mutual Life Insurance Company of New York had excluded death by electricity from a policy written for Mr. Edison.

Subsequently, The Underwriters Laboratories organization was established with manufacturers paying for product testing. Products passing the tests received seals of approval. The Underwriters Laboratories later became part of the National Board of Fire Underwriters.

Conclusion

As our industry confronts unique and unexpected challenges during this first decade of the twenty-first century, it is useful to remember that our forbearers successfully overcame multiple challenges. Through creativity and ingenuity, they not only established a tradition of professionalism but also developed a sophisticated ability to meet client needs.

Robert Moore has worked with Jack Bogardus for a quarter of a century. Mr. Moore worked for Alexander & Alexander from 1977 to 1995 and served as a senior vice president of Alexander & Alexander Services Inc., as well as chairman and president of A&A Government and Industry Affairs Inc. In 1985 he was elected president of the National Association of Insurance Brokers, and from 1989 to 1993 he served as chairman of that organization’s Past Presidents’ Advisory Council. He has written and spoken extensively on corporate issues. As The Conference Board’s emerging issues coordinator, he identified and responded to the business community's public policy concerns. He is coauthor of School for Soldiers: West Point and the Profession of Arms, which was selected as a New York Times “Noteworthy Book.” Mr. Moore earned a bachelor’s degree from Davidson College, a master’s degree from the University of North Carolina, and a doctorate from the University of Wisconsin. Commissioned a U.S. Army officer, he taught at the Military Academy at West Point and was an associate professor on the graduate faculty at the University of Maryland. He can be reached at 703-759-0233 and through the Web site www.spreadingtherisks.com.

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