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The Basics of Insurance Explained
Insurance is defined as a promise by the insurer to pay the insured for a loss. The details are spelled out in a policy. The policy may cover an individual, a family, or a whole business. People insure themselves in anticipation of something going wrong and valuable property is damaged or they themselves become sick and even die. The more extensive their coverage, the more they have to pay for it. The monthly, quarterly, or annual amount they pay is called a premium. People started looking for ways to be reimbursed for losses fairly early in commercial history.
Some of the first Americans to take out insurance were 1720 shippers. The businesses modeled themselves after the British model that was fully established by then. It was actually the beginnings of the famous Lloyds of London. In America underwriters would insure specific voyages leaving from popular east coast port cities. Americans could use the same services as the British, but it took months for them to be reimbursed for losses. Most of the trade took place in Philadelphia where there were around fifteen brokerage firms. They in turn would contact individuals who were willing to underwrite these commercial sailing ventures.
In the 1780s Benjamin Franklin was instrumental in starting the Philadelphia Contributorship which turned out to be the first successful mutual insurance company. It was known by its symbol name, "Hand in Hand". Earlier attempts at mutual companies failed. They too were based on British models and were formed by volunteer fire fighters for the purpose of insuring private homes against fire. Ironically, the first such association was established in Charleston in 1735, but was burned out of business in 1741.
After the War of Independence joint-stock insurance companies became the norm. They raised money by selling stocks and dividends in their companies, thus giving them capital in addition to premiums for paying claims. They first had to apply for charters from state legislatures to allow them to sell stocks. The first successful joint-stock insurer was the Insurance Company of North America founded in 1792. By 1810 there were 70 of these companies.