The Surprisingly Fascinating History of (U.S.) Car Insurance

The world’s first car accident occurred in 1891 (arguably) and involved 2 Ohioans and a tree, but the world’s first car insurance policy wasn’t written until 1897. That means for 6 (doubtlessly crazy) years, people were driving hither and yon in their fancy new horseless carriages without a drop of coverage. Compound that with the fact that safety measures like, oh, stop signs, right-of-way, and driver training had not yet been invented, and you can begin to imagine the chaos of a world sans car insurance.

It’s not like the idea of insurance didn’t exist. As a concept, insurance had begun long, long before then. But perhaps more than anything, the mass production of the automobile in the early 20th century helped to revolutionize the industry — making it as standard today as that requisite new-car smell.

Legends, licensing, and liability

Since cars first started rolling off Ford’s legendary assembly line in 1903, we’ve been driving them, decorating them, sleeping in them, and, yes, crashing them. But while more and more cars were hitting the road, early drivers were hitting trees, wagons, horses, and inevitably, each other as well.

In 1930, roughly 110 people were killed per day in car accidents. In 2000, with nearly twice the national population, fatalities per day increased by only 4 to 114. That’s approximately 10 times more fatalities per registered vehicle back in 1930.

And while this figure is staggering, it’s not altogether surprising if you consider that most drivers in the early days were untested and virtually untrained. Back then, they didn’t have driving schools, driver tests, or driver licensing laws any more than we have hovercar training today. Massachusetts and Missouri were the first to establish driver licensing laws in 1903, but Missouri had no actual driver exam law until 1952.

In the early days, instead of standing in line for 2 hours at the DMV and taking numerous tests just to wait several weeks for your license to arrive, you could simply walk into your local licensing office, plunk down 50 cents (or so), and walk away the proud owner of a drivers license. Almost as easy as getting one from a Cracker Jack® box.

But as we know all too well, simply having a license doesn’t necessarily make you a good driver. And imagine what the roads must have been like at the turn of the last century. The combination of amateur drivers and unpaved, unmonitored roads proved tragic and highlighted the rapidly growing need for liability insurance.

Paul Revere XII’s fairly tame ride

Sadly, the history of car insurance doesn’t have many dramatic revolutionary moments, so we decided to make one up.

After witnessing a devastating pile-up on Route 0 back in 1927, Paul Revere’s great-times-twelve-grandson had an idea so revolutionary, so inspirational, he raced (at top speeds of 50 mph!) to the capital building of Massachusetts in his trusty Chrysler Imperial to spread his message. Unable to resist his passionate and eloquent speech on the innumerable merits of car insurance
(and this next part’s true), Massachusetts soon became the first state to make liability insurance required by law.

(In an interesting and slightly unrelated twist, Paul Revere and the Raiders produced an album called “Midnight Ride” exactly 40 years later. It was a U.S. top 20 hit in 1967.)

By the 1940s, with the end of WWII and a subsequent surge in automobile production, most states had passed similar laws. Today, New Hampshire is the only state in the union without compulsory liability laws. (The whole “Live Free or Die” thing.)

From the Model T to the dot-com

Since Travelers sold the first policy 113 years ago, car insurance has evolved from simple handwritten contracts to the high-tech global industry that it is today. Here at Esurance, we’re happy to be included in the car insurance history books (all best sellers, by the way) as one of the very first to offer car insurance online, back in 1999.

And since it first hit the Web more than a decade ago, car insurance has continued to innovate and improve (and so have we). Now you can get a quote in just a few minutes, TCOB online, see pics of your car as it’s being repaired, and all kinds of other cool stuff that Gilbert J. Loomis, the world’s first policyholder, could scarcely have fathomed.

So what’s next? Virtual insurance agents? Flying-car insurance? Maybe. Whatever it is, we look forward to being at the forefront of the industry as one of the top names in car insurance. (1.21 gigawatts!)

Miss a class?

Check out our previous lessons on the surprisingly colorful history of insurance.

Insurance BC (From Ancient China to the Greeks and Romans)
Insurance AD (From Genoa to the Renaissance…and beyond!)

The History of Insurance, AD Edition

Last week, we began following the fascinating, dramatic, and compelling story of insurance from its inception around 3000 BC.

But that was so BC. This week we’re blazing into AD, from the relatively boring (insurance-wise) Dark Ages to the (riveting) mid-14th century, when the makings of modern-day insurance really started to develop.

In case you’re late to the party and missed Part 1, you can check it out here.

Dark Ages — Insurance takes a nap

Recent archaeological and historical research has revealed that the so-called Dark Ages were actually a vibrant, colorful period of history…just not for insurance. No insurance records have been found in or around King Arthur’s Camelot, but that doesn’t mean actuaries stayed at home during jousting tournaments.

1343 — Contract year

Genoa’s famous salami may not have originated in Genoa, but modern maritime insurance certainly did. The world’s first written insurance contract was signed in this seaside city-state, ironically the same year as the devastating earthquake of 1343 near the port city of Naples. (I bet merchants wished they had those contracts a year earlier, eh?) Similar to ancient contracts, it was essentially a promise to loan, with an important clause attached — if the ship sank, the loan was forgiven.

Contracts like this one made it easier to spread risk among multiple investors, which was a crucial development that fueled the expansion of European trade over the next several centuries.

1600s — The Michaelangelos of risk assessment

The Renaissance is most famous for its scientific advances, and the world of insurance had its fair share. In fact, the 17th century marks the golden age of insurance innovations, in which big-time world players like Blaise Pascal and Pierre de Fermat calculated a way to quantify probability (taking some of the guesswork out of risk). And Renaissance man Edmund Halley of Halley’s Comet fame advanced life insurance through the world’s first “mortality table.”

1666–1700 — The City

1665 was a plague year in London, which was bad enough, but 1666 managed to be even worse. Of the half-million people living in the greater London area at the time, roughly 80,000 lived in the City of London, and the Great Fire (which wasn’t that great, by the way) destroyed the homes of around 70,000 of them. The response to the blaze was so slow that the famous diarist (early blogger) Samuel Pepys wrote, “People do all the world over cry out of the simplicity [the stupidity] of my Lord Mayor in general.”

Less simple was Nicholas Barbon, who opened the first fire insurance company in response to the catastrophe. The Fire Office, founded in 1680, specifically insured brick and frame homes and was the first private company of its kind. (But believe it or not, that was only the second-most notable thing about Nicholas If-Jesus-Christ-Had-Not-Died-For-Thee-Thou-Hadst-Been-Damned Barbon. Seriously.)

After recovering from the fire, the London of the 1680s was a booming international center of trade. Where there’s trade, there’s risk, and where there’s risk, there’s insurance. And where there’s insurance, naturally, there’s Mr. Edward Lloyd.

Mr. Lloyd owned a coffee house that was a popular hangout for sailors, merchants, and ship owners. He noticed that his fine establishment was becoming a business destination for those wishing or willing to underwrite cargoes and ships before a journey. Capitalizing on this opportunity, he founded Lloyd’s of London, which is still one of the world’s leading insurance marketplaces.

1752 — Benjamin Franklin (surprised?)

Of course he was involved! The 10th son of a soap maker, Franklin had an unprecedented knack for improving the world around him. When he wasn’t inventing political cartoons, coining phrases (a penny saved is a penny earned), publishing almanacs, launching the first subscription library, inventing a heat-efficient stove, swim fins, and bifocals, discovering electricity through kite experiments, enjoying beer, or helping draft the Declaration of Independence, he founded the Philadelphia Contribution for Insurance Against Loss by Fire, which is still in business.

What have you done today?

1800s — Full steam ahead

The first accident insurance, which insured against railroad and steamboat accidents and injuries, was available through the Franklin Health Assurance Company after 1850.

Twenty-one years later, the Great Fire of Chicago (again, not that great) drained insurance companies of their reserves and ability to pay claims, and so reinsurance was conceived. (As they say, for every insurance, there’s reinsurance.) Reinsurance distributed losses between a number of insurance companies, and quickly became a central component for any insurance business.

1900s — On the road to Esurance

So, there you have it. Take a deep breath, and revel in your newfound wealth of insurance knowledge. Now that you have the Insurance BC and AD highlights, tune in next week for the amazing true story of car insurance — from the first handwritten auto policy to online quoting and purchasing.

The History of Insurance, BC Edition

Believe it or not, insurance can trace its roots all the way back to the beginning of civilization itself. We’ve come a long way from hunting mammoths, but the basic principle of insurance — the transfer of risk in exchange for money (or mammoth hides) — remains the same.

And while you might be thinking, “Deductibles and date lines? Snooze-fest!” the history of insurance is surprisingly colorful once you start digging. Armed with this knowledge and very little else, we decided to trace it back some 5,000 years. And yes, that’s definitely as ambitious as it sounds. But with the help of Esurance Vice President of Sales Thomas Capp, we conquered!

Now that we’ve got you on the edge of your seat, let’s dig in.

3000 BC – Insurance is born

Like spaghetti and gunpowder, modern insurance can trace its origins all the way back to ancient China. Early Chinese merchants relied on sailors to navigate dangerous and unpredictable waters with their precious cargo, but shipwrecks were still common.

So one day, these ancient entrepreneurs gathered near the town square, cooked spaghetti (probably not), and strategized ways to reduce each individual’s shipping risks.

The solution, like so many other society-transforming ideas, was simple. By evenly distributing each merchant’s goods to all of the ships, they could safely reduce their individual levels of risk. It was agreed and from then on, a shipwreck became a collective downer rather than an individual catastrophe, a tenet of insurance even today.

1790 BC – Getting to the bottom of bottomry

Fast forward to Babylon, the civilization that mastered cuneiform script and brewing. With established trade routes stretching from the Mediterranean to the Persian Gulf, caravans and boats transporting goods faced a myriad of obstacles, from bandits and pirates to rough waters and inclement weather.

The risks of shipping began to outweigh the rewards. But shortly after 1800 BC, Hammurabi, the first Babylonian king, popped a cold one (probably), grabbed his stone tablet, and carved out a rather novel idea: If merchants took out loans for each shipment, they could repay the loan with interest once the shipment arrived safely at its destination. But if the shipment wasn’t delivered, the loan would be forgiven. For the merchants, it was simply a matter of hedging their bets. For the lenders, it was a low-risk gamble that could net them significant profits.

This system, known as bottomry, put the minds of the merchants at ease and guaranteed lenders a profit so long as the shipment arrived safely.

800 BC – Cutting your generally average losses

More than a thousand years later, Rhodes, a small island in the south of Greece, had established itself as a major trading power in the Mediterranean with colonies in modern-day Spain, France, and Italy.

In order to minimize the risk of shipping goods and to help settle trading disputes, the Rhodians developed the earliest form of maritime law and adopted the principle of general average (which to this day, remains a fundamental insurance principle).

Here’s how general average worked: When a ship was in danger of sinking, the captain was sometimes forced to chuck cargo overboard to lighten the load. Such a move could save the ship; but what about the poor guy who owned the sacrificial freight? In essence, his sacrifice benefited everyone else.

Knowing this could happen to anyone, merchants paid to insure their goods so that “what is sacrificed for the common benefit should be made good by
a common contribution.”

Sounds like the work of a few Rhodes scholars.

600 BC – Insurance comes to life…literally

Known for their forward thinking, the Greeks and Romans established guilds known as “benevolent societies” or “burial clubs” that paid for funeral expenses and cared for each member’s family afterwards.

Everyone in the club paid a weekly amount that went toward a common treasury. When a member died, a previously agreed upon sum was taken from the treasury and used to pay for proper funeral rites and the burial. And thus, the first life insurance policies were sold.

If Horace had written “carpe diem” a half a millennium or so sooner, it would have made for a great life insurance ad.

0 – Our last stop

To paraphrase the great Isaac Newton, if we at Esurance have seen further it is only by standing on the shoulders of Chinese, Babylonian, Rhodian, Greek, and Roman giants. (Which is not nearly as catchy as we had hoped.)

Tune in next week for the next installment on the history of insurance, when we play three degrees of separation with the Great Fire of London, Benjamin Franklin, and Esurance.