Page 9 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Insurance Laws and Practices

Notes prevention. Not only did his company advise/warn against certain fire hazards, it refused to
insure certain buildings where the risk of fire was too great, such as “all-wooden” houses.
As other needs for insurance arose in the 1830s, the practice of classifying risks had begun. The
insurance companies had a rude awakening in 1835 when the New York fire struck. The losses
were unexpectedly high and they had no reserves prepared for such a situation. As a result of
this, Massachusetts leads the states in 1837 by passing a law that required insurance companies
to maintain such reserves. The great Chicago fire in 1871 reiterated the need for these reserves,
especially in large, dense cities.

Did u know?
A South African soap maker insured Princess Diana for two months back in the early
1990s, but she probably never knew anything about it. The soap maker invested
R400,000.00 into an eight-week ad campaign that used a Diana look-alike. If anything
would have happened to the real Diana, the company worried it would have to pull
its ads and would lose its investment, and such risk was insured.

In 1901, the first car insured at Lloyd’s was covered by a marine policy. Cars were
such a novelty that specific policies did not yet exist, so the marine underwriter
wrote a normal marine policy for the car on the basis that it was a ship navigating on
dry land.
Insurers basically earn their profit from – (a) underwriting (the process by which
insurers select risks to insure and decide how much in premiums to charge for
accepting those risks), and (b) investing premiums collected from policyholders.
The investment component (albeit risky in itself) is a major component of the business
of insurance, and often more profitable (and absolutely necessary in times of volatile
claim-periods) than underwriting.
The industry was growing into massive scale, carrying equally massive risk, and – although
competitors – to find a solution to the challenge of large losses they worked together to create
systems that could be used throughout the industry. Reinsurance – whereby losses can be
distributed among many carriers – was devised, a plan not unlike the Chinese farmers’ solution
a thousand years earlier. This system is now commonly used in all types of insurance.
The first American life insurance association was sponsored by a church – the Presbyterian
Synod of Philadelphia – and set up for the benefit of their ministers and their dependents.
Although there was initial religious objection against the practice of insurance by a church, after
1840 life assurance simply boomed as people used the opportunity to protect themselves against
major losses. Insurance had become accepted practice. Farmers wanted crop insurance. Travellers
wanted travel insurance. Everybody turned to insurers to buy peace of mind.
Mechanically propelled vehicles were not used on the roads of the UK to any great extent before
the beginning of the 20th Century and, consequently, car insurance is of more recent origin than
fire, theft and general liability insurance.
The early underwriters tended to adapt the practices of these existing insurance departments to
the requirements of car insurance, and placed more emphasis on the car for rating purposes,
than they did upon the driver. The increase in road traffic after 1918 and the rise in the number
of occasions when members of the public were injured, led to the introduction of the Road
Traffic Act 1930. This Act was imposed for the first time in the U.K. a statutory obligation on the
users of all cars to provide security against their legal liability for death of or bodily injury
caused to third parties.

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