Despite receiving scant scholarly attention, the creation of a domestic insurance sector was an important factor in the commercial and economic development of the early United States. The first and most consequential form of insurance in the period between 1750 and 1830 was marine insurance, developed after 1720 in colonial port towns by American merchants who sought to lower the risk of their growing overseas commerce and benefit from a financial intermediary that could mobilize capital and spur greater economic development. The first fire and life insurance enterprises appeared in the 1750s and 1790s respectively, but they remained less important (and profitable) than marine insurance until after 1815, when the centrality of overseas commerce to the U.S. economy declined and American cities began growing more rapidly. Along with commercial banks, insurance companies represented a significant source of capital accumulation and credit for early American entrepreneurs and also, because of generally low share prices and strong returns, an accessible and reliable investment opportunity for both small and large investors.
In the early eighteenth century, American merchants purchased marine insurance largely from British sources, most frequently from agents of Lloyd's of London, who set up shop in American ports. However, the difficulties of obtaining insurance from foreign sources—the high commissions paid to agents and the problems of providing proof of loss and collecting claims—convinced colonial merchants that they needed their own sources of insurance. All the early American firms operated along the same principles as Lloyd's. A broker drew up policies for shippers and a variety of local underwriters were invited to subscribe for whatever portion of the policy they wished. Insurance firms employing this model appeared in Boston (1724), Charleston (1739), Philadelphia (1748), and New York (1759). Prior to the American Revolution this type of private, informal, and unregulated insurance expanded the supply and lowered the cost of insurance for small shippers and provided more established merchants an important investment opportunity—though British sources of insurance remained important for American shippers into the early nineteenth century.
The Revolutionary War, however, deeply disrupted American shipping, raised insurance rates exorbitantly, and made British insurance nearly impossible to obtain. The war experience convinced American merchants that they needed to develop additional domestic sources. Moreover, the problems associated with private insurance—the ease of fraud, the low capital reserves of individual underwriters, and the need to launch multiple lawsuits when underwriters refused to fill claims—led merchants to develop the corporate form of insurance. The first such U.S. company was Philadelphia's Insurance Company of North America, established in 1792 and incorporated by the Pennsylvania legislature in 1794. The key figure in the creation of this company was Samuel Blodget Jr., an inveterate entrepreneur and early statistician. He began the enterprise as a tontine association—that is, a scheme in which all subscribers received an annuity during their lives, with the last survivor enjoying the whole income—but when it failed to attract enough investors, the cash raised provided the capital for the new insurance company.
Despite these inauspicious beginnings, incorporated marine insurance companies began appearing in every major U.S. port. In 1800 there were eleven such firms in the United States, and in 1809 the chairman of Lloyd's of London estimated that there were forty-four marine insurance companies in America. Their creation was largely in response to the Napoleonic Wars (1799-1815), which provided lucrative opportunities for neutral American merchants who shipped goods to Europe and the West Indies. The era's conflicts, however, also posed great hazards to American shippers as both British and French vessels attacked U.S. merchantmen with impunity. Indeed, so great were the risks that during the War of 1812 a number of American insurance companies ceased issuing policies. Nonetheless, marine insurance played an important role in the economic development of the early Republic. It helped stabilize the commercial environment and permitted direct access to overseas markets for American commodities, thereby sparking increased domestic production. Equally significant, it supplied a regular source of credit to merchants because premiums did not have to be paid until after the voyage was complete, and most companies possessed the power to lend—though this aspect of their business has remained murky. Finally, marine insurance companies invested their assets heavily in the stocks of other financial intermediaries such as commercial banks, providing capital that fueled economic growth.
The Napoleonic Wars had a second important impact on the insurance business: they convinced many firms to concentrate more heavily in the field of fire insurance. The nineteenth-century growth of U.S. towns and cities had a similar effect. Though early attempts were made to establish fire insurance associations in Boston (1728 and 1748) and Charleston (1736), the first enduring firm, the Philadelphia Con-tributionship for the Insurance of Houses from Loss by Fire, appeared in 1752, with the support of Benjamin Franklin.
Like early marine insurance efforts, the Contri-butionship was based on English models, and Philadelphia merchants Joseph Saunders and John Smith, who were heavily involved in marine insurance,played key roles. In 1768 the Contributionship was incorporated by the Pennsylvania legislature, but heavy losses in the early years resulted in slow growth, and the expansion in the fire insurance business did not occur until after the Revolution. Between 1786 and 1800 some twenty firms were incorporated by the states, and in 1804 Samuel Blodget Jr. estimated that there were forty insurance firms of all types in the new nation, with capital in excess of $10 million. In subsequent years the number and size of insurance companies continued to rise rapidly; by 1830, for example, New York City alone had twenty-eight insurance firms with capital in excess of $10.8 million, $7.8 million of which was in fire insurance.
In contrast, life insurance foundered in the early Republic. Noah Webster noted that some financial intermediaries were authorized to insure lives, but the "business . . . is novel in this country and of small value to the insurers." For instance, when chartered in 1794 the Insurance Company of North America was empowered to insure lives and the company appointed a committee to establish a business plan. However, the firm seems to have drawn up only a few short-term policies, usually for the life of an individual during the duration of a voyage. Slow growth continued throughout the period. By 1814 there were only four active life insurance companies in the United States, a number that had risen to only seventeen (with a total capital of $2.8 million) in 1836. Not until the 1840s would life insurance be come an important part of the insurance business in the nation.