Part I - Insurance and a Dozen Eggs

In order to attempt a comprehensive understanding of how anything will develop in the future, it's wise to retrace the steps back to the origin to track its evolution and determine the what, why, and how it progressed. From there, we can try to intelligently predict future trajectories rather than making under-informed gambles.

In this three-part series, we take a look at insurance - past, present, and future with a focus on the personal products that are commonplace today.

Antiquity

Taking shape in different forms, we know quite a bit about the aversion of risk dating back to at least 3,000 BC when Chinese merchants would pool collectively to protect commercial shipments of goods. During the 2nd millennium BC, Babylonians, Phoenicians, and other Mediterranean societies had developed the same into written legal instruments such as Hammurabi's Code and the Rhodian Sea Law.

Modernity

As we understand it today, modern insurance got its start in London. Nicholas Barbon, an economic theorist whose works influenced many future political, economic, and social thinkers, spearheaded the first successful fire insurance company called the "Insurance Office for Houses" in 1681. A few years later, around 1688, Edward Lloyd's infamous coffee house was where investors and merchants would gather and pool funds to protect ships and their cargo. These businessmen would indicate the value of the risk they were assuming on paper and write their name and the percentage they were insuring for under the description of what was being protected - hence the term 'underwriting.'

Soon after in 1693, Sir Edmund Halley gathered some of the first mortality and life expectancy tables in Europe. In 1752, Benjamin Franklin established insurance for well-constructed and maintained homes in and around Philadelphia.

Fast forward a few centuries to after the Great Depression where citizens demanded progressive social reforms which produced a boon for an industry that matured into a stable, profitable, and high-employment industry with products that transformed from a luxury for the few to a necessity for the masses. From the late 1930s through the dot-com era especially, the profession of insurance agents and brokers as trusted advocates developed into white-collar professions. 

Having spent 5 years as a young insurance agency owner, I've listened intently to dozens of stories from some of my oldest clients of their insurance agents during these golden years. Their stories are of agents as a community-person whom they knew from their local place of worship, their child's school, or other community associations. Agents would frequently walk down the street on a monthly basis collecting premiums - some as small as $0.25. Often, the agent would come and spend time with their family, enjoy a cup of coffee in their living room talking about current events, local news, and business.

They were, and still are, in the business of protecting their clients and providing peace of mind both for the uncertainties that any 'tomorrow' would bring and the potentially life-altering uncertainty should a tragedy occur should they not have a risk aversion plan. Agents listen to the concerns of their clients, take it back to the insurance corporations they represented, and provide solutions to ease the angst of their clients.

Rapid Progress

The most comprehensive and overlooked progress to the supply-chain occurred in the 1970s and 1980s with the establishment of organizations such as the Insurance Services Office (ISO), the Association for Cooperative Operations Research and Development (ACORD), and consumer protection-focused government regulation. These factors began to quasi-commoditize the standard, personal insurance product to further establish the industry, policy, and coverages as we know them today.

While insurance is most certainly not a commodity in the real sense of the word, the standard, admitted, and well-rated carrier's personal lines core product purchase is generally the same - if not similar enough. This is referred to as the spectrum of commoditization where insurance is slightly commoditized, and goods such as electricity, eggs, and paper have significant fungibility. With the former, even the relatively small amount of standardization that occurred paid off substantial societal dividends for insureds.

Prior to this, attorneys, judges, and insurance adjusters would have to manually review the exact language of the specific policy from the company they were working with to figure out the coverages in place. The first thing many people learn about legal matters is that a single word can mean all the difference in a contract. Imagine when every company had even slightly different wording in their policy contracts that would need to be reviewed during each claim and lawsuit! Before this standardization, many insureds would have to purchase multiple policies to cover different perils just to protect their home.

While your home insurance policy is not nearly as fungible as a dozen eggs, the maturation in the late 20th century of the industry brought about enough fundamental standards to place that policy on the lower end of the commodity spectrum. This relatively minor progress gave consumers, businesses, and courts trust in the standard provisions of these contracts.

Today, we can trust that most of the base policy language is uniform. For example, a standard Homeowners' Policy (ISO HO-3) covers the same things from carrier A to carrier B if it is written on a current ISO policy form. The frills of the policy may be different just as your eggs and milk may or may not be organic, natural, grass-fed, or cage-free. To many, the difference between a dozen eggs is the price. To others, the difference is the quality.