Canadian Direct Insurance - The Role of Insurance in the Economy

Canadian Direct Insurance. What a pain! Your mortgage lender requires that you carry fir and other perils coverage (ie., homeowners) insurance and sometimes even flood or earthquake insurance. Your auto lender requires that you carry physical damage coverage. Under the laws of many states, you are required to carry auto liability and/or no-fault liability insurance, often including uninsured motorist and underinsured motorist coverages.

To many, insurance just represents dollars out of pocket with no benefit. This is an unfortunate attitude. Insurance plays a broad role in the worldwide economy, helping to assure that millions of transactions and other activities, economic and noneconomic, can proceed.

Without insurance, local, state, national, and international business would quickly grind to a halt. Lenders would cease lending for purchases of land, buildings, homes, vehicles, or equipment. Without premises liability insurance, a simple slip-and-fall claim could put a small business owner out of business.

Manufacturers could not sell products without liability insurance to respond in the event a defective product injures customers or other users of their products. Absent product liability insurance, a seller of a defective product who has no role in the design and manufacture of the product, could face a ruinous lawsuit or judgment.

The average individual has similar concerns, What are the consequences of an uninsured liability lawsuit - whether rising from an auto accident or a premises claim arising from homeownership question? The answer is often bankruptcy, which can follow a person for a lifetime It can result in being turned down for a job, being denied credit, or receiving credit only at high interest rates. 

The concept of insurance is really very simple. In exchange for the insured's payment of a relatively small sum of money - the premium - the insurer assumes the risk of financial consequences for the loss of the insured's property (such as a house or car) or the risk of the loss presented by the costs of defending a liability lawsuit (and where appropriate, paying a resulting settlement or judgment). This can provide financial security for the average consumer - that is you - which strengthens our economy as a whole and spurs further growth.

BRIEF HISTORY OF THE BUSINESS OF INSURANCE 

Insurance has been around for a long time and has been a part of the economy of the world and this nation since before it was this nation. Frankly, the United States, as an indirect product of the initial commercial-empire building activities of Great Britain, owes its existence to the business of insurance in large part. 

Great Britain became a major commercial power in the 17th century, based on the risks taken by companies established to capitalize on the demand for spices, tea, sugar, dyes, fabrics, and other desired commodities.
 
The business of insurance as we know it in Great Britain and the United States grew out of what initially was risk-taking participation in the fruits of those commercial enterprises. It evolved to insure the risks of loss of or damage to cargoes.

The insuring entity, known commonly as Lloyd's of London, grew up out of those risky commercial endeavors. Lloyd's of London is an exceedingly complex organism, Lloyd's is not a company, nor is it an insurer, nor a broker.
Eloyd's is an insurance market where persons known as underwriters, or underwriting syndicates, participate in providing imurance for risks presented to them by Lloyd's brokers. 

The Lloyd's brokers in turn have correspondent relations with insurance brokers worldwide. The aspects of commerce out of which Lloyd's grew continue to be a basis for the business of insurance, and the insurance markets in London, including Lloyd's, remain major players in the world's insurance markets.

A second major aspect of the development of the business of insurance found its roots in the growing peril of fire as urban centers developed in Great Britain and later in the American colonies. No running water existed at the time; construction was essentially unregulated. Even a small fire posed the risk of spreading rapidly.

The burden of response to fires and the risks posed by fires in such environments was addressed in a variety of ways. One was the mutual, fire protection societies in given areas of large cit ies. Members maintained fire buckets in their houses and businesses and pledged to assist in fighting fires when they occurred. This included the physical participation in fire fighting--that is, working as part of bucket brigades when fires broke out.

From these societies, two principal offshoots emerged as the world entered the Industrial Age. These were:
1. the growth of volunteer, and later, professional, paid fire departments and
2. the increased growth of these fire insurance societies and later, commercial insurance companies that grew out these societies.

The fire insurance societies evolved from merely providing mutual aid and assistance in the event of fire to providing limited financial protection in the event of a fire loss. However, due to the localized nature of these fire insurance societies, they could not obtain the spread of risk necessary to the financial viability of the concept of insurance. Since all the properties insured were in relatively close geographic proximity to each other, the risk of a single catastrophic fire that could overwhelm the physical ability to combat the fire existed, as well as the financial resources to fulfill the indemnification payment for loss of all members.

Nonetheless, with a number of developments - satisfactory water supplies; improved municipal regulation of construction (such as early set-back laws); regulation of permissible roofing materials; and, more careful risk selection, including the avoidance of insuring too many closely situated properties - the fire insurance business began to grow and flourish. As with so many other aspects of commerce, with the opportunity for profit, new insurers were established to compete for property owners' business.

As the business of insurance in the United States grew, it also diversified. Due to the importance of agriculture to the United States economy - and the fact that in the 19th and first half of the 20th centuries, agriculture was conducted largely by means of family farms lenders required farmers to take out crop insurance when mortgaging their properties to obtain crop loans. This requirement greatly expanded the use of insurance.

Then, as you might expect, some of the biggest boosts to the growth of the business of insurance came with the development of the internal combustion engine, the widespread ownership of cars and trucks, and the risks of loss that operation of these vehicles posed.

There are, of course, other contributing threads. As society and industry grew, so did the risk of industrial injury and the resulting passage of workers compensation laws. When those laws were enacted, commercial insurers entered the market and began providing workers compensation insurance to employers.

The growth of our rail system also spurred growth of the insurance industry. The railroads provided transportation, but their operation created risks of losses due to fires from sparks thrown out of smokestacks of locomotives, and from collisions and derailments.

The business of insurance has continued to evolve. Recent times have seen the development and marketing of long-term care insurance, environmental impairment insurance, and insurance policies aimed at e-business. In e-business, exposures to loss often involve less risk of damage or destruction of tangible property in the commonly understood sense, but rather risks of economic losses as the result of deprivation of service due to the activities of hackers, for example.

As human economic activity evolves, so will the business of insurance. Likewise, while coverage questions arise under existing policies based on the facts of novel claims and courts render decisions, policy language will continue to evolve.

Coverage for some kinds of losses will always be clear it will clearly exist or not exist. Claims in the gray areas will be decided one way or the other and will shape that which the average insurance buyer should or should not reasonably expect to be covered under his or her policies.

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Posted in Canadian Direct Insurance