Planet Money
00:06:45 · Julie Rochman, Alexi Horowitz-Ghazi
[00:06:45] S4: So I'm an insurance geek. I always tell people I'm bilingual. I speak insurance and I speak English. [00:06:50] S2: Julie was actually raised in an insurance speaking household where dad was an insurance broker. And after grad school, she moved to DC and ended up falling into the family business. Julie says she was drawn in particular to the property casualty part of the insurance industry, which covers things like commercial and residential property and car insurance. [00:07:09] S4: Property casualty insurance is the oxygen of commerce. Right? We live in an entrepreneurial economy. The whole basis of an entrepreneurial economy is risk taking, and and you have to lay off or spread risk. No one person can handle all of the financial and physical risks involved in most businesses.
00:07:09 · Julie Rochman, Alexi Horowitz-Ghazi
[00:07:09] S4: Property casualty insurance is the oxygen of commerce. Right? We live in an entrepreneurial economy. The whole basis of an entrepreneurial economy is risk taking, and and you have to lay off or spread risk. No one person can handle all of the financial and physical risks involved in most businesses. [00:07:27] S2: The whole modern global economy couldn't have even gotten started without the idea of pooling risk. Julie explains that is when early corporations like the East India Company or Hudson's Bay Company started undertaking these expensive, super risky colonial expeditions across the sea. Investors would front the money to procure ships and fill them with all sorts of goods to trade, but those ships and their cargo went missing or sank pretty often. So a market developed for other investors to assume some of that risk by placing a sort of bet. They would offer to pay a certain amount of money if the ship did sink, and in exchange, they would get a smaller chunk of money if the ship made it. When a ship was slated to set sail, the owners would write up the details on a piece of parchment, and the people who wanted to take on that risk would write their names and the amount of risk they were assuming under the ship's name. This is reportedly where the term underwriters comes from. And all of this business, Julie explains, would be transacted at these bustling coffee houses near the ports, like a place called Lloyd's by the Thames.
00:08:26 · Julie Rochman, Alexi Horowitz-Ghazi
[00:08:26] S4: That's what Lloyd's of London was. It was a coffee house. And so coffee houses where rich people gathered became marketplaces where somebody would say, oh, your ship is leaving tomorrow. What's on it? Oh, it's gold. It's going to the new world to pay for the tobacco and sugar that's coming back. Oh, okay. Some people would insure the gold on the way over. They would share that risk, and then other people might step up, could have been some of the same people, and say, okay. I'll take part of the risk that the products that are coming back make it here safely. And so it was just a way to make sure that everybody, pun intended, stayed afloat. [00:09:02] S2: In The US, Julie explains the modern insurance industry developed around a different kind of risk. [00:09:07] S4: The insurance industry in this country was really born out of fire.
00:09:07 · Julie Rochman, Alexi Horowitz-Ghazi
[00:09:07] S4: The insurance industry in this country was really born out of fire. [00:09:12] S2: Houses in the colonial era were mostly built out of wood. People used fire to cook and light and heat their homes, and it was, as you can imagine, a highly flammable combination. Then one of the first American insurance companies was cofounded by none other than Benjamin Franklin. It was aptly, if a bit windily named, the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. And the basic idea then as now was essentially to pool as much money as possible in order to shield any one person from being financially ruined by a big fire, like a mutual aid agreement. And that was the principle at play as new insurance companies started to pop up around the country, organized around specific regions or communities looking to hedge against the vicissitudes of fate. [00:09:56] S4: Most insurance companies were started as, mutual companies owned by their policyholders. So it was, a county mutual in Indiana or Lutheran Mutual came through a church. I mean, there [00:10:10] S2: were all these specialty companies and then State Farm, Nationwide. I mean, farmers, these were all started by farmers. Julie says these insurance companies, had started as this form of mutual aid, got bigger and bigger as they signed up more and more people paying into a common pool of money. [00:10:26] S4: And then it is that pool of money that the insurers manage. They invest it. They hope that they can grow it because then they will pay out losses with that money.
00:10:26 · Julie Rochman, Alexi Horowitz-Ghazi
[00:10:26] S4: And then it is that pool of money that the insurers manage. They invest it. They hope that they can grow it because then they will pay out losses with that money. [00:10:35] S2: As more and more Americans moved west or into coastal towns and places like the Gulf Coast, so too did the financial liabilities and profit opportunities of the insurance industry. And so insurers started creating new kinds of policies to cover that risk. Things like tornado insurance in the late nineteenth century or earthquake insurance in California in the early twentieth. And in this way, Julie says you can think of the property casualty insurance industry almost like this giant financial mirror, reflecting and responding to whatever forms of peril we all collectively face at any given time. And that peril doesn't just come from natural disasters. It also comes from human innovation. [00:11:13] S4: Once the industrial revolution hit and there were more machines, those machines need to work. And sometimes they injure people, and so workers' comp comes along. And it is just literally... Like, every time there's a new industrial sector or a new product or a new service, we all go back to Lloyd's of London, which is we have to share the risk. Right? We can't allow a person or a company to be destroyed because of an accident.
00:11:13 · Julie Rochman, Alexi Horowitz-Ghazi
[00:11:13] S4: Once the industrial revolution hit and there were more machines, those machines need to work. And sometimes they injure people, and so workers' comp comes along. And it is just literally... Like, every time there's a new industrial sector or a new product or a new service, we all go back to Lloyd's of London, which is we have to share the risk. Right? We can't allow a person or a company to be destroyed because of an accident. [00:11:39] S2: And it was one new technology in particular that inspired the insurance industry to radically rethink its approach to risk, a new approach that would eventually lead to the destruction lab I visited in South Carolina. Julie says it was toward the tail end of the industrial revolution when the insurance industry started banding together to do its own experimental research to figure out not only how to better price risk, but to find ways to actually reduce it out in the real world. [00:12:05] S4: That new technology, Julie explains, was electricity. When electricity went into homes during the Victorian era, the wires were not all that safe. They were cloth wrapped. You know, the switches, the bulbs, everything could explode or overheat and cause fires. And so the industry, the underwriters, the people who bear risk, it got together and created a laboratory in which they could do testing, rigorous, objective testing of these products.