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The earliest forms of insurance in the Western world date back to medieval times, when guilds organized mutual aid societies designed to insure workshops that had burnt down, and provide compensation and benefits to widows and orphans.  While these conventions are now anachronistic, they are most similar to modern insurance co-ops.

The first modern insurance company, The Fire Office, was formed in London by Nicholas Barbon in 1680 as a reaction to the great fire of 1666 that burnt most of the houses to the ground.  Because homes at this time were made almost entirely of wood and did not yet have the modern fire-prevention mechanisms we have today, fire posed the greatest risk to tangible capital at the time.  America’s first fire insurance company was set up in Charleston, South Carolina in 1732, but credit for this is more often given to Benjamin Franklin, who create the Philadelpia Contributorship, which introduced the concept of both perpetual insurance (which guaranteed protection to the property for life for a fee approximately ten times the cost of an annual premium), and took steps to increase fire prevention.  (This is partially because the company refused to insure wooden houses, which posed a great risk, especially in the still very unknown and rapidly developing American society). 

Barriers to entry for insurance companies at this time were quite different from modern insurance companies.  Capital existed more in the form of savings than credit, so the financing options like start buisiness loans that we have today did not exist; entrepreneurs had to go out and seek the aid of friends, family and fools.  However, because the nominal costs of capital were less, there was less to insure and thus lower startup costs.

It was the industrial revolution and progressive era, however, that helped create the markets for the insurance products we know today.  Shortly after the first automobile rolled out of the shop, the first auto liability insurance policy was purchased in 1897.  The changing, industrial workplace created new and dangerous conditions for the workers, who were suffering greatly from mistreatment by their employers and an unfair court system.  In 1911, the state of Wisconsin introduced the workman’s compensation act, which required all employers to cover injuries and lost work time to employees, and started the market for business insurance.

As society progresses and capital expands, financial options become more numerous to consumers and investors.  The phenomenon of widely available insurance, investment opportunities, personal financing options and start business loans is basically a creation of the twentieth century.

This Business article was written by Mark Karavan on 10/31/2009

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