Every industry has its defining moments—the events that shaped it and formed it into what it is today. In the insurance industry, many of these relate to a fire or natural disasters that prompted people to see the value of insurance. Some also relate to world events and the laws and regulations that changed public perception or the way the industry operated. Throughout its history, insurance has helped alleviate risks, but it has not been an easy history. Consumers’ opinions of insurance have changed dramatically, and as a result, so have policies, companies, and regulations.
Benjamin Franklin and the Philadelphia Contributionship
Benjamin Franklin, known as a pioneer in many disciplines, including government and science, was also a businessperson who organized one of the first fire insurance companies in the United States. In May 1752, the Philadelphia Contributionship began operating. At the time, the word contributionship meant something that is given by several people for a common purpose.
When the Contributionship was first organized, Philadelphia was a small town with 15,000 residents and eight volunteer fire companies. The town had been designed with fire hazards in mind. Streets were wider than in other cities to allow fire vehicles to get through, and the homes were built with brick and stone. Franklin and others interested in establishing the company posted a notice in the newspaper, The Philadelphia Gazette, and soon the Contributionship was able to form a board of directors and begin operations.
The term of the first policies was seven years, after which the premiums were returned to the policyholders. The company wrote 143 policies in its first year. The company's policyholders had an iron plaque they could hang near the front door of their homes so that the fire brigade would be alerted that the home was "insured." Before writing a policy, the Contributionship conducted a survey of each home. This survey provided them with the information they needed to set the rate for the policy. Homes that were all wood were often not insured. In 1810, the Contributionship changed to perpetual policies: the policyholder's insurance remained in effect until canceled by the insured. The policies and principles of the Philadelphia Contributionship set the way for many practices in the contemporary insurance industry.
The Enactment of Social Security
The Great Depression led to another defining moment in 1935, when the U.S. government enacted the Social Security Act. A precursor of this act began after the U.S. Civil War. There were thousands of widows and orphans that needed financial support after the war. The Civil War Pension Program provided a pension to widows, orphans, and disabled veterans of the Civil War. These benefits continued into the early 20th century.
The states and other organizations, including insurance companies, began offering pension funds or programs throughout the early years of the century. However, the Great Depression was especially devastating to the elderly population in the country. According to the Social Security Administration, more than half of the elderly people in the country could not support themselves during the Depression.
On June 8, 1934, President Franklin D. Roosevelt created the Committee on Economic Security and announced his plan to institute a social security program in the United States. The Committee made its report to the president in January 1935 and the Social Security Act was passed into law in August 1935. It included a program to pay workers age 65 or older a continuing income after they had retired. The Social Security Act took away a large segment of the insurance business (pensions for widows, orphans, etc.) by providing government benefits that served the same need, so companies looked for other types of insurance to fill this gap.
Insurance companies read this as a signal that they needed to self-regulate in order to avoid more government intervention. In later years, due to inflation and the uncertainty of keeping Social Security, insurance companies began offering retirement plans and annuities.
Health Insurance Portability and Accountability Act
In 1996, The Health Insurance Portability and Accountability Act was signed into law. The law allows workers to carry health insurance from job to job. The act was enacted to protect consumers' sensitive health information. It provided guidelines that all employers, insurance companies, and medical providers were to follow to protect the health information of their respective constituents.
Although it was enacted in 1996, and most medical providers and insurance companies began operating according to its guidelines, it wasn't enforced until April 2003. One of the biggest concerns with HIPAA for health insurance companies was that HIPAA prohibited all group health plans (insured or self-insured) from denying coverage or charging higher prices based on health status. It also required health insurance companies to guarantee the renewal of all group plans, to both large and small groups. For insurance companies that offered health-care coverage for small businesses (those with fewer than 50 but more than 1 employees), it required that all products be available to every applicant. Under the act, all small groups had to be accepted and all eligible members of a group had to be accepted as well. Some of these concerns were addressed under the Patient Protection and Affordable Health Care Act, which may be revised or repealed/replaced by the Trump Administration.
Response to 9/11
The September 11 terrorist attacks sent shockwaves through the industry, not only costing insurers roughly $23.5 billion in property-related losses and $40 billion in other associated claims, but also causing insurers and re-insurers to take a hard look at how they would handle the risks associated with possible future terrorist acts. The Terrorism Risk Insurance Act (TRIA), signed into law by President Bush in November 2002, aimed to deal with the nearly incalculable risk posed by this threat. Among other things, the law defines a terrorism-related event as one with a minimum of $5 million in damages. It provides for the sharing of risk between private insurers and the federal government over a three-year period, with each participating company responsible for paying a deductible before federal assistance is available. If losses are incurred above the insurer’s deductible, the government is obliged to pay 85 percent. While the measure met with a considerable amount of grumbling from all parties involved, for the most part, the industry acknowledged that the plan at least allows for the potential risk to insurers from terrorism-related disasters to be quantified. The act was extended several times during the 2000s, and in 2015, Congress approved the Terrorism Risk Insurance Program Reauthorization Act, extending the TRIA through 2020.
Patient Protection and Affordable Health Care Act
In an effort to reform the current health-care system in the United States and to ensure that people who do not have health-care insurance benefits through their employer are able to obtain affordable coverage, the U.S. government enacted the Patient Protection and Affordable Health Care Act in 2010. Among its many provisions, the act expands Medicaid benefits to include all individuals and families that receive income up to 133 percent of the federal poverty level. It also guarantees insurance to applicants, preventing insurance companies from denying those with pre-existing conditions. It also guarantees that all applicants of the same age and in the same geographical location will pay the same premium.
It requires all adults not covered by an employer's health insurance plan or Medicaid to purchase health-care insurance or pay a fine through the Internal Revenue Service. It also establishes exchanges for states—online portals where residents can apply for health-care policies. States could either create their own exchange, or opt into a federal exchange.
The act's constitutionality was challenged and its enactment was delayed for two years until the U.S. Supreme Court upheld it in June of 2012. Most of the act’s provisions began taking effect in 2013. After the Supreme Court decision, states had to make the decision about joining the federal exchange or creating their own.
The Patient Protection and Affordable Health Care Act has been controversial for a variety of reasons. The Trump Administration plans to revise or repeal/replace the act, creating uncertainty for health insurance companies until the final plan is released.
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