Fire consumes a ship in the mid-Atlantic, costing the lives of 456 people.
battles, but hostile juries and a due respect
for securing future business made many
eager to settle claims amicably. In 1854,
for example, New Castle Mutual in Delaware informed John H. Barr that it did
not have to honor his claim because “the
property had been used for other purposes
than that for what it had been insured.”
Nevertheless, the company was “disposed
to make a fair and equitable settlement”
and chose appraisers to ascertain “what
sum would place the property in as good
condition as before the fire.” It ended up
paying Barr $417.81.
Insurers were well aware of the concepts of “adverse selection” and “moral
hazard” even though those terms were
not in general use until the late 19th century. In 1852, for example, the Kentucky
Mutual Insurance Company reminded its
agents about adverse selection by pointing out that “in receiving applications
for insurance, great caution is necessary,
from the fact that persons in impaired
health, or who have fears as to the permanency of their health, are naturally
more likely to apply for insurance than
those in the possession of perfectly sound
health.” Like many life insurers, Kentucky
Mutual relied on independent examiners
to reduce adverse selection by certifying
the health of applicants.
Antebellum insurers also worked to
reduce risks by offering premium reductions to policyholders that enacted safety
practices. For example, they offered discounts for employing a night watchman
or utilizing the best anti-fire or anti-theft
technology available. Fire insurers worked
hard with policyholders to make buildings
more fire resistant. Marine insurers overcame free-rider problems to provide public and club goods, including lighthouses,
buoys, rescue boats and the like, and also
urged the adoption of safer ship designs
and nautical practices. Life insurers could
48 Financial History | Spring/Summer 2011 | www.MoAF.org
not prevent death, but they did help people take steps to prolong their lives and
by educating people about the risks of
unexpected or premature death and pushing for the reform of outdated debt and
coverture laws they helped improve the
lives of widows and orphans.
The managers of some insurers, however, expropriated policyholders and/or
stockholders, turning their companies into
the financial equivalent of undercooked
pork larded with trichinosis. At various
times and places, they colluded to fix premium levels above the market rate, a boon
to themselves and stockholders but bad
news for their customers. The managers
of other insurers, by contrast, issued risky
policies at cut rates to friends. “Experience
shows,” a stockholder in a particularly
poorly-governed insurer argued, “that
vessel owners ought not to be Directors
in Insurance Companies — their interest
is at variance with the interest of the