The History & Evolution of Business Insurance


If someone says to you the word "insurance," things like claim forms, procedures, protocols, and TV commercials probably come to mind. Perhaps you think first of the most common types of insurance, like auto insurance, health insurance, or business insurance. In general, it's a structured industry that most of us are familiar with. It has a defined approach to business and a set way of getting things done.

But how did insurance first come into being? What's its history? You might be surprised to learn that insurance as a concept goes about as far back as civilization itself. In "the old days," if a house burned to the ground, your neighbors would (hopefully) aid you in rebuilding and getting back to normal. Or, when merchants sailing with their wares across the seas found themselves face to face with pirates, other merchants and sailors would collaborate on ways to help minimize their risks and come to each other's aid in the event of an unfortunate disaster or attack.

Basically, like most things in society today, insurance as we know it has evolved and become much more complex over time. Nonetheless, it remains rooted in the simple need for smart solutions to everyday risks. It might be easy to forget this, since insurance has become so much more structured over time than many other industries. But the basic tenets behind it are all just common sense: stuff happens, and people can come together and create ways to mitigate risks and respond to problems when they do come up. Nothing complicated about that!

Naturally, as industries develop and their problems become more complex, those unspoken contracts of friends helping out other friends, or business associates being counted on by other business associates, aren't always going to cut it. The risks associated with running a business in today's world are much greater and more diverse than ever before, so the need to protect businesses against those risks also becomes greater, more complex, and more diverse. Hence, the development of a structured business insurance industry.

The Birth of Formalized Insurance

Insurance as a formalized structure perhaps first occurred in Great Britain, when merchants transporting their goods abroad came together to finance their often dangerous overseas voyages. They wagered that, by underwriting their business property through a central organization and sharing the burden communally by each contributing fees, they could minimize the risks of sailing overseas for everyone involved. Thus, those of you who are more familiar with auto or health insurance may be surprised to know that insurance actually originated within the context of business insurance.

For these British merchants, their plan proved to be a great solution to the problems of piracy, inclement weather and other sailing hazards. Their businesses came with great risk, but also with the potential for great rewards. New opportunities for expansion and profit came with unexpected dangers, but finding a way to protect their assets from these dangers was a no-brainer. Underwriting risks simply made good economic sense.

In the early days of insurance, underwriters thus not only began to perfect the art of offering different types of insurance, but they also found themselves the ones responsible for selling it. As the industry developed, however, they started to find a need for greater specialization. No longer could underwriters do their job in writing policies well while being in charge of selling it to individuals or businesses. This gap in the industry made it necessary to have additional agents in charge of sales and customer service. We've had agents as part of the insurance industry ever since.

The First Insurance Company

It wasn't until the year 1667, after the Great Fire of London, that the first official insurance company was formed. Remember how we established that, the greater the stakes, the higher the need for smart ways to mitigate risk? It shouldn't surprise you, then, that it took a disaster the magnitude of the London Fire to spark the official formation of what we would consider an insurance company in the contemporary sense. The city was, at the time, one of the world's greatest centers of commerce, culture, and more. The idea that so much of this old city could simply go up in smoke from a random disaster was too much to handle for London's brightest financial minds. The newly heightened complexity of how people conducted business called for newly enhanced ways of protecting it.

This is why a British gentleman known as Nicholas Barbon formally opened what he called "The Fire Office" in order to insure homes from fire damage – thus codifying what is essentially modern Property Insurance. To this day, is there any Business Owners' Policy (BOP) complete without fire insurance? (Answer: no.)

Insurance Comes to the USA

Even if you're not an American history buff, you're surely familiar with the name Benjamin Franklin. What you may not know is that Ben was the first person to start an insurance company stateside. He called his firm "The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire." While that name doesn't exactly roll off the tongue, it does give you a good sense of what the company did.


Insurance Evolves, but the Basis Stays the Same

The development of the insurance industry as we know it is pretty simple. Things go wrong. Importantly for our insurance forefathers, fires make things go wrong. All kinds of people – business owners included – thus need a way to protect themselves from loss in case they face crippling damage and expense from a fire.

When we talk about business insurance in particular, the story is much the same, but simply applied with an even higher level of specialization, acknowledging that the extent of potential damage and loss for a business owner with multiple buildings is much greater than that of a single homeowner with one house. As you probably remember, the first types of formal insurance were, indeed, a type of formal business insurance. Most companies, large or small, have at least some form of physical property that is critical to their business and needs to be safeguarded against loss or damage. Property Insurance meets that need. The development of insurance as a whole, then, is neatly intertwined with the development of what businesses need in general.

Further Developments and Specialization

So what happened next? Business ventures become even more complex, and insurance does too in order to keep pace. As business risks diversified, so did the types of insurance products offered to business owners. Where once the top priority was simply keeping business buildings safe from fire damage, now it might be equally as important for a business to keep its data safe within computer systems, to insure its workers so they're protected in the event of an on-the-job accident, or to get insurance that will pick up their legal bills if a client claims negligence and sues them.

In a nutshell, businesses today typically have access to insurance policies customized to protect against the varied risks they face. For small-business owners, much of the protection they need comes from two major insurance types: a Business Owners' Policy (which combines General Liability and Property Insurance), and Professional Liability Insurance. While there are potentially hundreds of subcategories within these, the two together basically comprise the two main pillars of what we generally call "business insurance."

The Advent of Workers' Compensation Insurance

By now, the need for business insurance coverage should be obvious. This need only becomes greater the bigger the business becomes. Consider the extent and diversity of the risks that are involved in running a corporation. When sometimes all it takes is one employee's error to cause a scandal and compromise the whole organization, business insurance isn't just a good idea – it is necessary to protect everyone else in the company, as well as the general public. The larger the entity, the greater the global reach, the more serious the risk.

The explosion of industry in the late 19th and early 20th centuries threw this fact into sharp relief. The bigger companies grew and the further they expanded their influence, the more it became evident that insurance was needed to more carefully protect the people within them in addition to their property. In the UK, this necessitated the passage of the 1897 Workmen's Compensation Act. This important act mandated that companies have a means to compensate workers who were injured in an industrial mishap or other on-the-job accident.

Accomplishing this via insurance not only protected the business and the specific worker who became injured, but also everyone else who worked for the company – since one accident wouldn't impact the company to the extent that it would force them to lay off others or even close. Workers' Compensation Insurance created a win-win-win situation where problems that arose could be resolved without undue suffering for any party involved, just by making a monthly investment into a back-up plan for worst-case scenarios.

Business Insurance in Today's High-Stakes World

But the growing need to protect workers from the changing conditions of the Industrial Revolution was not the only development brought on by that era. There was another element that further kicked business insurance into high gear around the advent of the 20th century: the automobile.

You don't have to think hard to remember a recall or lawsuit of some kind happening in the automobile industry. You may remember, for example, a recent class action suit in response to defective tires. Not only did the courts find the company who made the tires liable for millions of dollars in damages, but also several other auto companies that used the faulty tires on cars that were sent to market.

Hopefully this gives you a more detailed picture of exactly why Liability Insurance is so essential. For any business owner, whatever your industry, it is impossible for you to imagine every single way your business and what you do affects other people, in ways both large and small.

This is simply the nature of doing business in a world with people who make mistakes. And though you always do your best at your work, you can never predict the outcome of everything you do. This is why it's important to have insurance in place, in the event that something you or your company does has unintended consequences. Preserving your bottom line is only part of the equation. It's about making sure that people who may be negatively affected by a mistake are taken care of fairly, while also maintaining your organization so that you can keep doing what you do: innovating in the workplace and providing jobs that grow the economy for everyone's benefit.

As a Business Owner, You Need to Cover All the Bases

Whether you're a small business just starting out, or growing into a much larger entity, you need to know what you are liable for and how to effectively mitigate that liability. You can't prevent every mistake or every mishap, but you can reduce how much time and money blunders cost your business.

The extent to which businesses have grown since the industrial revolution, and the massive Enron-type scandals that have sometimes ensued, were another big push towards further developing the insurance industry to keep up with a high-stakes and fast-changing business environment. The corporate climate is not one that easily forgives a business for costing customers millions or even billions because of a mistake, even an innocent one. Insurance companies, too, have to manage their own risks carefully in order to provide their services – so they probably won't be too keen to insure someone who doesn't do all they reasonably can to prevent mistakes.

Public opinion is important, and in today's environment, if a company looks like it's bilking its customers (or in the cases of some companies, even taxpayers), then it is seen as the bad guy. Perhaps it's not always fair, but it's a reality that business owners simply have to deal with in a smart way. Business insurance, then, is not only a way to insure your property and your employees. It's also a critical part of your reputation as an organization.

This is why, from its humble beginnings as a way to rebuild after a fire, business insurance has developed to protect companies from ever-increasing risks and ever-higher stakes. No business nowadays can afford to go without business insurance.

Insurance Protects So Much More Than Just Your Bottom Line

If you're a small-business owner who hasn't yet been convinced that business insurance is an important investment, hopefully this walk down insurance's memory lane helped to give you more context and understanding of why insurance was important enough to develop in the first place. In a world where one mistake can demolish a hard-built company, you need to ensure that you're not left in the cold by having no insurance, not enough insurance, or the wrong kind of insurance for your unique business.

As the world grew, changed, and developed in numerous complex ways throughout history, insurance came into being simply as a means to keep up. While the industry has also grown, changed and developed into something highly specialized and complex (and what many people assume to be downright confusing), the concepts on which it's founded are about as simple as it gets: recognize the volatility of the world we live in, and find intelligent means of investing in a "plan B" for a rainy day.

Whether it's a fire engulfing an entire city, an automobile mishap, or just an unintended consequence of an innocent mistake, stuff happens. Business insurance is here to make sure that when stuff happens, it won't bring down everything you've worked so hard to build.

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