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Homeowners Insurance in the United States - A Brief History

August 26, 2011

Modern home insurance policies provide compensation from every imaginable catastrophe for a stipulated premium. Homeowners insurance has evolved from a framed paper to a multi-paged legally binding contract with inclusions, and exclusions that provide compensatory damages and monetary remuneration as protection against the varied acts of nature and the unnatural acts of man. Like many modern contracts, homeowner's insurance policies have experienced a metamorphosis and have consistently changed to accommodate modern life.

For centuries, in American homes, there was a document called the "Himmelsbrief" or "Letter from Heaven" that was usually framed and affixed to the wall. It purportedly was an inutile form of insurance; it did not provide compensation for damages. The document was considered sacrilegious by local clergy because the letter of protection against flood, pestilence, and fire was supposedly posthumously written by the arisen Jesus Christ. It was especially favored by the Pennsylvania Dutch.

Fire Prevention ( Credit to U.S.History.org )

Franklin continued his civic contributions during the 1730s and 1740s. He helped launch projects to pave, clean and light Philadelphia's streets. He started agitating for environmental cleanup. Among the chief accomplishments of Franklin in this era was helping to launch the Library Company in 1731. During this time books were scarce and expensive. Franklin recognized that by pooling together resources, members could afford to buy books from England. Thus was born the nation's first subscription library. In 1743, he helped to launch the American Philosophical Society, the first learned society in America. Recognizing that the city needed better help in treating the sick, Franklin brought together a group who formed the Pennsylvania Hospital in 1751. The Library Company, Philosophical Society, and Pennsylvania Hospital are all in existence today.

Fires were very dangerous threat to Philadelphians, so Franklin set about trying to remedy the situation. In 1736, he organized Philadelphia's Union Fire Company, the first in the city. His famous saying, "An ounce of prevention is worth a pound of cure", was actually fire-fighting advice.

Those who suffered fire damage to their homes often suffered irreversible economic loss. So, in 1752, Franklin helped to found the Philadelphia Contribution for Insurance Against Loss by Fire. Those with insurance policies were not wiped out financially. The Contributionship is still in business today.

Eventually other small homeowners insurance companies were formed that would provide home insurance quotes for indemnification against damage. The legal statues in the country which allowed diversified policies to be written legalized homeowner's insurance coverage in the 1940s. There were separate policies (monoline) for fire, flood, hail, or vandalism prior to 1950.

The first authentic homeowners insurance policy was instituted in September of 1950, although, as previously stated there were other companies who were providing homeowners insurance. Standardization became such a significant issue that in 1971 the Insurance Services Office (ISO) was formed to establish and formulate risk data and create a simplistic and generic homeowners insurance policy.

Credit to: EH.net

Fire Insurance in the United States

Dalit Baranoff

Fire Insurance before 1810

Marine Insurance

The first American insurers modeled themselves after British marine and fire insurers, who were already well-established by the eighteenth century. In eighteenth-century Britain, individual merchants wrote most marine insurance contracts. Shippers and ship owners were able to acquire insurance through an informal exchange centering on London's coffeehouses. Edward Lloyd's Coffee-house, the predecessor of Lloyd's of London, came to dominate the individual underwriting business by the middle of the eighteenth century.

Similar insurance offices where local merchants could underwrite individual voyages began to appear in a number of American port cities in the 1720s. The trade centered on Philadelphia, where at least fifteen different brokerages helped place insurance in the hands of some 150 private underwriters over the course of the eighteenth century. But only a limited amount of coverage was available. American shippers also could acquire insurance through the agents of Lloyds and other British insurers, but often had to wait months for payments of losses.

Mutual Fire Insurance

When fire insurance first appeared in Britain after the Great London Fire of 1666, mutual societies, in which each policyholder owned a share of the risk, predominated. The earliest American fire insurers followed this model as well. Established in the few urban centers where capital was concentrated, American mutuals were not considered money-making ventures, but rather were outgrowths of volunteer firefighting organizations. In 1735 Charleston residents formed the first American mutual insurance company, the Friendly Society of Mutual Insuring of Homes against Fire. It only lasted until 1741, when a major fire put it out of business.

Benjamin Franklin was the organizing force behind the next, more successful, mutual insurance venture, the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire 1 , known familiarly by the name of its symbol, the "Hand in Hand". By the 1780s, growing demand had led to the formation of other fire mutuals in Philadelphia, New York, Baltimore, Norwich (CT), Charleston, Richmond, Boston, Providence, and elsewhere. (See Table 1.)

Joint-Stock Companies

Joint-stock insurance companies, which raise capital through the sale of shares and distribute dividends, rose to prominence in American fire and marine insurance after the War of Independence. While only a few British insurers were granted the royal charters that allowed them to sell stock and to claim limited liability, insurers in the young United States found it relatively easy to obtain charters from state legislatures eager to promote a domestic insurance industry.

Joint-stock companies first appeared in the marine sector, where demand and the potential for profit were greater. Because they did not rely on the fortunes of any one individual, joint-stock companies provided greater security than private underwriting. In addition to their premium income, joint-stock companies maintained a fixed capital, allowing them to cover larger amounts than mutuals could.

The first successful joint-stock company, the Insurance Company of North America, was formed in 1792 in Philadelphia to sell marine, fire, and life insurance. By 1810, more than seventy such companies had been chartered in the United States. Most of the firms incorporated before 1810 operated primarily in marine insurance, although they were often chartered to handle other lines. (See Table 1.)

Table 1: American Insurance Companies, 1735-1810

Connecticut
1794 Norwich Mutual Fire Insurance Co. (Norwich)
1796 New Haven Insurance Co.
1797 New Haven Insurance Co. (Marine)
1801 Mutual Assurance Co. (New Haven)
1803 Hartford Insurance Co.(M)
1803 Middletown Insurance Co. (Middletown) (M)
1803 Norwich Marine Insurance Co.
1805 Union Insurance Co. (New London) (M)
1810 Hartford Fire Insurance Co.
Maryland
1787 Baltimore Fire Insurance Co. (Baltimore)
1791 Maryland I. Insurance Co. (Baltimore)
1794 Baltimore Equitable Society (Baltimore)
1795 Baltimore Fire Insurance Co. (Baltimore)
1795 Maryland Insurance Co. (Baltimore)
1796 Charitable Marine Society (Baltimore)
1798 Georgetown Mutual Insurance Co. (Georgetown)
1804 Chesapeake Insurance Co. (Baltimore)
1804 Marine Insurance Co. (Baltimore)
1804 Union Insurance Co. of MD (Baltimore)
Massachusetts
1795 Massachusetts Fire and Marine Insurance Co. (Boston)
1798 Massachusetts Mutual Ins. Co. (Boston)
1799 Boston Marine Insurance Co. (Boston)
1799 Newburyport Marine Insurance Co. (Newburyport)
1800 Maine Fire and Marine Ins. Co. (Portland)
1800 Salem Marine Insurance Co. (Salem)
1803 New England Marine Insurance Co. (Boston)
1803 Suffolk Insurance Co. (Boston)
1803 Cumberland Marine and Fire Insurance Co. (Portland, ME)
1803 Essex Fire and Marine Insurance Co. (Salem)
1803 Gloucester Marine Ins. Co. (Gloucester)
1803 Lincoln and Kennebeck Marine Ins. Co. (Wicasset)
1803 Merrimac Marine and Fire Ins. Co. (Newburyport)
1803 Marblehead Marine Insurance Co. (Marblehead)
1803 Nantucket Marine Insurance Co. (Nantucket)
1803 Portland Marine and Fire Insurance Co. (Portland)
1804 North American Insurance Co. (Boston)
1804 Union Insurance Co. (Boston)
1804 Hampshire Mutual Fire Insurance Co. (Northampton)
1804 Kennebunk Marine Ins. Co. (Wells)
1804 Nantucket Union Marine Insurance Co. (Nantucket)
1804 Plymouth Marine Insurance Co. (Plymouth)
1804 Union Marine Insurance Co. (Salem)
1805 Bedford Marine Insurance Co. (New Bedford)
1806 Newburyport Marine Insurance Co. (Newburyport)
1807 Bath Fire and Marine Insurance Co. (Bath)

1807

Middlesex Insurance Co. (Charlestown)
1807 Union Marine and Fire Insurance Co. (Newburyport)
1808 Kennebeck Marine Ins. Co. (Bath)
1809 Beverly Marine Insurance Co. (Beverly)
1809 Marblehead Social (Marblehead)
1809 Social Insurance Co. (Salem)
  Pennsylvania
1752 Philadelphia Contributionship for the Insurance of Houses from Loss by Fire
1784 Mutual Assurance Co. (Philadelphia)
1794 Insurance Co. of North America (Philadelphia)
1794 Insurance Co. of the State of Pennsylvania (Philadelphia)
1803 Phoenix Insurance Co. (Philadelphia)
1803 Philadelphia Insurance Co. (Philadelphia)
1804 Delaware Insurance Co. (Philadelphia)
1804 Union Insurance Co. (Chester County)
1807 Lancaster and Susquehanna Insurance Co.
1809 Marine and Fire Insurance Co. (Philadelphia)
1810 United States Insurance Co. (Philadelphia)
1810 American Fire Insurance Co. (Philadelphia)
  Delaware
1810 Farmers' Bank of the State of Delaware (Dover)
  Rhode Island
1799 Providence Insurance Co.
1800 Washington Insurance Co.
1800 Providence Mutual Fire Insurance Co.
  South Carolina
1735 Friendly Society (Charleston) - royal charter
1797 Charleston Insurance Co. (Charleston)
1797 Charleston Mutual Insurance Co. (Charleston)
1805 South Carolina Insurance Co. (Charleston)
1807 Union Insurance Co. (Charleston)
  New Hampshire
1799 New Hampshire Insurance Co. (Portsmouth)
  New York City
1787 Knickerbocker Fire Insurance Co. (originally Mutual Insurance Co. of the City of New York)
1796 New York Insurance Co.
1796 Insurance Co. of New York
1797 Associated Underwriters
1798 Mutual Assurance Co.
1800 Columbian Insurance Co.
1802 Washington Mutual Assurance Co.
1802 Marine Insurance Co.
1804 Commercial Insurance Co.
1804 Eagle Fire Insurance Co.
1807 Phoenix Insurance Co.
1809 Mutual Insurance Co.
1810 Fireman's Insurance Co.
1810 Ocean Insurance Co.
  North Carolina
1803 Mutual Insurance Co. (Raleigh)
  Virginia
1794 Mutual Assurance Society(Richmond)

The Embargo Act (1807-1809) and the War of 1812 (1812-1814) interrupted shipping, drying up marine insurers' premiums and forcing them to look for other sources of revenue. These same events also stimulated the development of domestic industries, such as textiles, which created new demand for fire insurance. Together, these events led many marine insurers into the fire field, previously a sideline for most. After 1810, new joint-stock companies appeared whose business centered on fire insurance from the outset. Unlike mutuals, these new fire underwriters insured contents as well as real estate, a growing necessity as Americans' personal wealth began to expand.

1810-1870

Geographic Diversification

Until the late 1830s, most fire insurers concentrated on their local markets, with only a few experimenting with representation through agents in distant cities. Many state legislatures discouraged "foreign" competition by taxing the premiums of out-of-state insurers. This situation prevailed through 1835, when fire insurers learned a lesson they were not to forget. A devastating fire destroyed New York City's business district, causing between $15 million and $26 million in damage, bankrupting 23 of the 26 local fire insurance companies. From this point on, fire insurers regarded the geographic diversification of risks as imperative.

Insurers sought to enter new markets in order to reduce their exposure to large-scale conflagrations. They gradually discovered that contracting with agents allowed them to expand broadly, rapidly, and at relatively low cost. Pioneered mainly by companies based in Hartford and Philadelphia, the agency system did not become truly widespread until the 1850s. Once the system began to emerge in earnest, it rapidly took off. By 1855, for example, New York State had authorized 38 out-of-state companies to sell insurance there. Most were fewer than five years old. By 1860, national companies relying on networks of local agents had replaced purely local operations as the mainstay of the industry.

Competition

As the agency system grew, so too did competition. By the 1860s, national fire insurance firms competed in hundreds of local markets simultaneously. Low capitalization requirements and the widespread adoption of general incorporation laws provided for easy entry into the field.

Competition forced insurers to base their premiums on short-term costs. As a result, fire insurance rates were inadequate to cover the long-term costs associated with the city-wide conflagrations that might occur unpredictably once or twice in a generation. When another large fire occurred, many consumers would be left with worthless policies.

Aware of this danger, insurers struggled to raise rates through cooperation. Their most notable effort was the National Board of Fire Underwriters. Formed in 1866 with 75 member companies, it established local boards throughout the country to set uniform rates. But by 1870, renewed competition led the members of the National Board to give up the attempt.

Regulation

Insurance regulation developed during this period to protect consumers from the threat of insurance company insolvency. Beginning with New York (1849) and Massachusetts (1852), a number of states began to codify their insurance laws. Following New York's lead in 1851, some states adopted $100,000-minimum capitalization requirements. But these rules did little to protect consumers when a large fire resulted in losses in excess of that amount.

By 1860 four states had established insurance departments. Two decades later, insurance departments, headed by a commissioner or superintendent, existed in some 25 states. In states without formal departments, the state treasurer, comptroller, or secretary of state typically oversaw insurance regulation.

State Insurance Departments through 1910
(Departments headed by insurance commissioner or superintendent unless otherwise indicated)

Source: Harry C. Brearley, Fifty Years of a Civilizing Force (1916), 261-174.
Year listed is year department began operating, not year legislation creating it was passed.

1852
  • New Hampshire
  • Vermont (state treasurer served as insurance commissioner)
1855
  • Massachusetts (annual returns required since 1837)
1860
  • New York (comptroller first authorized to prepare reports in 1853, first annual report 1855)
1862
  • Rhode Island
1865
  • Indiana (1852-1865, state auditor headed)
  • Connecticut
1867
  • West Virginia (state auditor supervised 1865 until 1907, when reorganized)
1868
  • California
  • Maine
1869
  • Missouri
1870
  • Kentucky (part of bureau of state auditor.s department)
1871
  • Kansas
  • Michigan
1872
  • Florida
  • Ohio (1867-72, state auditor supervised)
  • Maryland
  • Minnesota
1873
  • Arkansas
  • Nebraska
  • Pennsylvania
  • Tennessee (state treasurer acted as insurance commissioner)
1876
  • Texas
1878
  • Wisconsin (1867-78, secretary of state supervised insurance)
1879
  • Delaware
1881
  • Nevada (1864-1881, state comptroller supervised insurance)
1883
  • Colorado
1887
  • Georgia (1869-1887, insurance supervised by state comptroller general)
1889
  • North Dakota
  • Washington (secretary of state acted as insurance commissioner until 1908)
1890
  • Oklahoma (secretary of territory headed through 1907)
1891
  • New Jersey (1875-1891, secretary of state supervised insurance)
1893
  • Illinois (auditor of public accounts supervised insurance 1869-1893)
1896
  • Utah (1884-1896, supervised by territorial secretary. Supervised by secretary of state until department reorganized in 1909)
1897
  • Alabama (1860-1897, insurance supervised by state auditor)
  • Wyoming (territorial auditor supervised insurance 1868-1896) (1877)
  • South Dakota (1889-1897, state auditor supervised)
1898
  • Louisiana (secretary of state acted as superintendent)
1900
  • Alaska (administered by survey-general of territory)
1901
  • Arizona (1887-1901 supervised by territorial treasurer)
  • Idaho (1891-1901, state treasurer headed)
1902
  • Mississippi (1857-1902, auditor of public accounts supervised insurance)
  • District of Columbia
1905
  • New Mexico (1882-1904, territorial auditor supervised)
1906
  • Virginia (from 1866 auditor of public accounts supervised)
1908
  • South Carolina (1876-1908, comptroller general supervised insurance)
1909
  • Montana (supervised by territorial/state auditor 1883-1909)

The Supreme Court affirmed state supervision of insurance in 1868 in Paul v. Virginia , which found insurance not to be interstate commerce. As a result, it would not be subject to any federal regulations over the coming decades.

1871-1906

Chicago and Boston Fires

The Great Chicago Fire of October 9 and 10, 1871 destroyed over 2,000 acres (nearly 3/12; square miles) of the city. With close to 18,000 buildings burned, including 1,500 "substantial business structures", 100,000 people were left homeless and thousands jobless. Insurance losses totaled between $90 and $100 million. Many firms' losses exceeded their available assets.

About 200 fire insurance companies did business in Chicago at the time. The fire bankrupted 68 of them. At least one-half of the property in the burnt district was covered by insurance, but as a result of the insurance company failures, Chicago policyholders recovered only about 40 percent of what they were owed.

A year later, on November 9 and 10, 1872, a fire destroyed Boston's entire mercantile district, an area of 40 acres. Insured losses in this case totaled more than $50 million, bankrupting an additional 32 companies. The rate of insurance coverage was higher in Boston, where commercial property, everywhere more likely to be insured, happened to bear the brunt of the fire. Some 75 percent of ruined buildings and their contents were insured against fire. In this case, policyholders recovered about 70 percent of their insured losses.

Local Boards

After the Chicago and Boston fires revealed the inadequacy of insurance rates, surviving insurers again tried to set rates collectively. By 1875, a revitalized National Board had organized over 1,000 local boards, placing them under the supervision of district organizations. State auxiliary boards oversaw the districts, and the National Board itself was the final arbiter of rates. But this top-down structure encountered resistance from the local agents, long accustomed to setting their own rates. In the midst of the economic downturn that followed the Panic of 1873, the National Board's efforts again collapsed.

In 1877, the membership took a fresh approach. They voted to dismantle the centralized rating bureaucracy, instead leaving rate-setting to local boards composed of agents. The National Board now focused its attention on promoting fire prevention and collecting statistics. By the mid-1880s, local rate-setting cartels operated in cities throughout the U.S. Regional boards or private companies rated smaller communities outside the jurisdiction of a local board.

The success of the new breed of local rate-setting cartels owed much to the ever-expanding scale of commerce and property, which fostered a system of mutual dependence between the local agents. Although individual agents typically represented multiple companies, they had come routinely to split risks amongst themselves and the several firms they served. Responding to the imperative of diversification, companies rarely covered more than $10,000 on an individual property, or even within one block of a city.

As property values rose, it was not unusual to see single commercial buildings insured by 20 or more firms, each underwriting a $1,000 or $2,000 chunk of a given risk. Insurers who shared their business had few incentives to compete on price. Undercutting other insurers might even cost them future business. When a sufficiently large group of agents joined forces to set minimum prices, they effectively could shut out any agents who refused to follow the tariff.

Cooperative price-setting by local boards allowed insurers to maintain higher rates, taking periodic conflagrations into account as long-term costs. Cooperation also resulted, for the first time, in rates that followed a stable pattern, where aggregate prices reflected aggregate costs, the so-called underwriting cycle.

(Note: The underwriting cycle is illustrated above using combined ratios, which are the ratio of losses and expenses to premium income in any given year. Because combined ratios include dividend payments but not investment income, they are often greater than 100.)

Local boards helped fire insurance companies diversify their risks and stabilize their rates. The companies in turn, supported the local boards. As a result, the local rate-setting boards that formed during the early 1880s proved remarkably durable and successful. Despite brief disruptions in some cities during the severe economic downturn of the mid-1890s, the local boards did not fail.

As an additional benefit, insurers were able to accomplish collectively what they could not afford to do individually: collect and analyze data on a large scale. The "science" of fire insurance remained in its infancy. The local boards inspected property and created detailed rating charts. Some even instituted scheduled rating - a system where property owners were penalized for defects, such as lack of fire doors, and rewarded for improvements. Previously, agents had set rates based on their personal, idiosyncratic knowledge of local conditions. Within the local boards, agents shared both their subjective personal knowledge and objective data. The results were a crude approximation of an actuarial science.

Anti-Compact Laws

Price-setting by local boards was not viewed favorably by many policy-holders who had to pay higher prices for insurance. Since Paul v. Virginia had exempted insurance from federal antitrust laws, consumers encouraged their state legislatures to pass laws outlawing price collusion among insurers. Ohio adopted the first anti-compact law in 1885, followed by Michigan (1887), Arkansas, Nebraska, Texas, and Kansas (1889), Maine, New Hampshire, and Georgia (1891). By 1906, 19 states had anti-compact laws, but they had limited effectiveness. Where open collusion was outlawed, insurers simply established private rating bureaus to set "advisory" rates.

Spread of Insurance

Local boards flourished in prosperous times. During the boom years of the 1880s, new capital flowed into every sector. The increasing concentration of wealth in cities steadily drove the amounts and rates of covered property upward. Between 1880 and 1889, insurance coverage rose by an average rate of 4.6 percent a year, increasing 50 percent overall. By 1890, close to 60 percent of burned property in the U.S. was insured, a figure that would not be exceeded until the 1910s, when upwards of 70 percent of property was insured.

In 1889, the dollar value of property insured against fire in the United States approached $12 billion. Fifteen years later, $20 billion dollars in property was covered.

Baltimore and San Francisco

The ability of higher, more stable prices to insulate industry and society from the consequences of citywide conflagrations can be seen in the strikingly different results following the sequels to Boston and Chicago, which occurred in Baltimore and San Francisco in the early 1900s. The Baltimore Fire of Feb. 7 through 9, 1904 resulted in $55 million in insurance claims, 90 percent of which was paid. Only a few Maryland-based companies went bankrupt.

San Francisco's disaster dwarfed Baltimore's. The earthquake that struck the city on April 18, 1906 set off fires that burned for three days, destroying over 500 blocks that contained at least 25,000 buildings. The damages totaled $350 million, some two-thirds covered by insurance. In the end, $225 million was paid out, or around 90 percent of what was owed. Only 20 companies operating in San Francisco were forced to suspend business, some only temporarily.

Improvements in construction and firefighting would put an end to the giant blazes that had plagued America's cities. But by the middle of the first decade of the twentieth century, cooperative price-setting in fire insurance already had ameliorated the worst economic consequences of these disasters.

1907-1920

State Rate-Setting

Despite the passage of anti-compact legislation, fire insurance in the early 1900s was regulated as much by companies as by state governments. After Baltimore and San Francisco, state governments, recognizing the value of cooperative price-setting, began to abandon anti-compact laws in favor of state involvement in rate-setting which took one of two forms: set rates, or state review of industry-set rates.

Kansas was the first to adopt strict rate regulation in 1909, followed by Texas in 1910 and Missouri in 1911. These laws required insurers to submit their rates for review by the state insurance department, which could overrule them. Contesting the constitutionality of its law, the insurance industry took the State of Kansas to court. In 1914, the Supreme Court of the United States decided German Alliance Insurance Co. v. Ike Lewis, Superintendent of Insurance in favor of Kansas. The Court declared insurance to be a public good, subject to rate regulation.

While the case was pending, New York entered the rating arena in 1911 with a much less restrictive law. New York's law was greatly influenced by a legislative investigation, the Merritt Committee. The Armstrong Committee's investigation of New York's life insurance industry in 1905 had uncovered numerous financial improprieties, leading legislators to call for investigations into the fire insurance industry, where they hoped to discover similar evidence of corruption or profiteering. The Merritt Committee, which met in 1910 and 1911, instead found that most fire insurance companies brought in only modest profits.

The Merritt Committee further concluded that cooperation among firms was often in the public interest, and recommended that insurance boards continue to set rates. The ensuing law mandated state review of rates to prevent discrimination, requiring companies to charge the same rates for the same types of property. The law also required insurance companies to submit uniform statistics on premiums and losses for the first time. Other states soon adopted similar requirements. By the early 1920, nearly thirty states had some form of rate regulation.

Data Collection

New York's data-collection requirement had far-reaching consequences for the entire fire insurance industry. Because every major insurer in the United States did business in New York (and often a great deal of it), any regulatory act passed there had national implications. And once New York mandated that companies submit data, the imperative for a uniform classification system was born.

In 1914, the industry responded by creating an Actuarial Bureau within the National Board of Fire Underwriters to collect uniformly organized data and submit it to the states. Supported by the National Convention of Insurance Commissioners (today called the National Association of Insurance Commissioners, or NAIC), the Actuarial Bureau was soon able to establish uniform, industry-wide classification standards. The regular collection of uniform data enabled the development of modern actuarial science in the fire field.

1920 to the Present

Federal Regulation

Through the 1920s and 1930s, property insurance rating continued as it had before, with various rating bureaus determining the rates that insurers were to charge, and the states reviewing or approving them. In 1944, the Supreme Court decided a federal antitrust suit against the Southeastern Underwriters Association, which set rates in a number of southern states. The Supreme Court found the SEUA to be in violation of the Sherman Act, thereby overturning Paul v. Virginia . The industry had become subject to federal regulation for the first time.

Within a year, Congress had passed the McCarran-Ferguson Act, allowing the states to continue regulating insurance so long as they met certain federal requirements. The law also granted the industry a limited exemption from antitrust statutes. The Act gave the National Association of Insurance Commissioners three years to develop model rating laws for the states to adopt.

State Rating Laws

In 1946, the NAIC adopted model rate laws for fire and casualty insurance that required "prior approval" of rates by the states before they could be used by insurers. While most of the industry supported this requirement as a way to prevent competition, a group of "independent" insurers opposed prior approval and instead supported "file and use" rates.

By the 1950s, all states had passed rating laws, although not necessarily the model laws. Some allowed insurers to file deviations from bureau rates, while others required bureau membership and strict prior approval of rates. Most regulatory activity through the late 1950s involved the industry's attempts to protect the bureau rating system.

The bureaus' tight hold on rates was soon to loosen. In 1959, an investigation into bureau practices by a U.S. Senate Antitrust subcommittee (the O'Mahoney Committee) found that competition should be the main regulator of the industry. As a result, some states began to make it easier for insurers to deviate from prior approval rates.

During the 1960s, two different systems of property/casualty insurance regulation developed. While many states abandoned prior approval in favor of competitive rating, others strengthened strict rating laws. At the same time, the many rating bureaus that had provided rates for different states began to consolidate. By the 1970s, the rates that these combined rating bureaus provided were officially only advisory. Insurers could choose whether to use them or develop their own rates.

Although membership in rating bureaus is no longer mandatory, advisory organizations continue to play an important part in property/casualty insurance by providing required statistics to the states. They also allow new firms easy access to rating data. The Insurance Services Office (ISO), one of the largest "bureaus", became a for-profit corporation in 1997, and is no longer controlled by the insurance industry. Still, even in its current, mature state, the property/casualty field still functions largely ac


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