A Guide to Home Insurance & Saving with Online House Insurance Quotes

The History of House Insurance

There may once have existed a world in which if one's house burned to the ground the neighbours could be relied upon to assist in its rebuilding, in the assumption that the favour would be returned. Today we have the modern commercial insurance industry. But how did we get from there to here?

Different ways of spreading risk have been formulated by different societies throughout history. The ancient Greeks and Romans, for example, practised a form of life insurance whereby members of benevolent societies would band together to meet funeral costs and care for families in the event of death. Centuries later, the appropriately-named 'friendly societies' of 17th century England performed much the same task. Of course the history of the first actual insurance 'contract' is tied up with the history of the law itself. Although forms of marine insurance are recorded in thirteenth-century Palermo and Genoa, it is thought that the first distinct insurance contracts were actually drawn up in the Italian city-states some time in the 14th century.

Of course the modern house insurance contract is really a convenient collection of associated insurance policies designed and evolved to protect our homes from a wide variety of threats or risks. The earliest forms of home insurance protected property from specific threats, and fire was the biggest risk. Fire insurance was the first policy to evolve, with accident and theft insurance coming later. The existing principles of marine insurance were by and large applied to fire insurance.

In the insurance industry there were (and still are) two distinct types of company ownership. Mutual or 'friendly' associations acquired funds from the entry and continuing subscriptions of their policy-holders or members. The underwriting profits of mutual life offices were subsequently distributed amongst members as bonuses. In contrast, joint stock companies raised capital through public share offerings and company profits were distributed as dividends.

One man who some consider the modern founder of insurance in England, at least in terms of fire, was the entrepreneur Nicolas Barbon. Barbon was involved in rebuilding work following the Great Fire of London in 1666, and subsequently began arranging insurance against the risk of fire, establishing the Fire Office in 1681. The Fire Office ran a scheme for house insurance effectively backed by what today we might call a property investment fund. Barbon's Fire Office secured ground rents from lands held in trust on behalf of the company, using these funds to meet fire insurance claims. Barbon later founded the London Fire Brigade. In fact, such private insurance companies ran their own fire brigades to protect the houses and property of their members right up until the 1865 Metropolitan Fire Brigade Act. Early fire insurance was financed by mutual subscriptions to 'friendly societies' such as the Friendly Society (1683) itself or the Amicable Contributors for Insuring Houses From Loss by Fire (1696).

According to Cockerell and Green (The British Insurance Business 1547-1970, Heinemann 1976) "The mutual subscription arrangements of the earliest companies prevented them from expanding the fire insurance market outside their own London membership" (p.19). In 1710 the Sun Fire Office sought to expand the market for fire insurance. With the purchase of the successful Exchange House Fire Office, already writing several thousand contracts for the insurance of goods and merchandise, and the engagement of their own fire-brigade for fire-fighting and salvage work, the Sun Fire Office could finance the insurance of both houses and goods from premium income and began insuring property outside London.

At around the same time, one Edward Lloyd was opening a coffee house in London. Popular with merchants and ship owners alike, Lloyds Coffee House became a hub of information on shipping news and the natural meeting place of merchant adventurers and would-be venture underwriters. A merchant seeking insurance would pass round a slip of paper with the details of the voyage, cargo and ship beneath which those wishing to accept a portion of the risk would underwrite their initials (quite literally the 'underwriters'). This insurance marketplace became known as Lloyds of London, evolving and growing over time into the leading market in marine and specialist insurance. The basic principles of marine insurance were subsequently adopted by other types of insurance. Originally backed by wealthy 'Names', Lloyds is today mostly backed by corporations, each with limited liability.

The early fire companies concentrated on the insurance of private houses, and after 1710 household contents. But by the mid-eighteenth century the fire insurance market was evolving exponentially. Major London companies quickly expanded into the provinces by setting up insurance agencies. Agents appointed by London offices took responsibility for writing insurance contracts in a predefined area and collecting premiums.

In addition the industry expanded as new offices opened in the provinces. The first provincial offices were the Bristol Crown (1718) and the Friendly Society of Edinburgh (1720), followed by such as the Bath Fire Office (1767), Bristol Fire Office (1769), Manchester (1771), Liverpool (1777) and the Salop Fire (1780). The insurance market itself was expanding rapidly. Increasingly insurers were required to insure not just houses and shops as before, but now more and more industrial, commercial and agricultural premises. Many of the early industrial processes were inherently hazardous, especially following the introduction of steam power. Fire offices appointed specialist surveyors to assess the risks of such properties. Where the sum insured presented too great a risk for any single fire office, the risk was spread amongst several competing fire offices.

At this time different fire offices had different methods of risk assessment. Generally, the agent or surveyor accepting orders for fire insurance would be required to assess each risk in order to quote a rate and premium for insurance; the inspection allowed them to accept or adjust the stated value of a property. An inspection would involve detailed measurement and reference to the prevailing local 'going rate'. As is widely the case today, insured property was valued at replacement value rather than historic cost or current value. Fire policies indemnified claimants against the cost of clearance and replacement (rebuild). In terms of stock or goods (contents) damage (claims) would be assessed by local agents, builders, or qualified third parties whose estimates were to take account of depreciation. Today house insurance is underwritten similarly either on a 'like for like' or 'new for old' basis.

Eighteenth century fire insurance claimants would be required not only to outline the circumstances of the fire damage but also to submit certificates of good character from local clergymen.The sworn statements would be sent to the fire insurance offices with an inventory of the claimants costs arising from the fire damage.

From around 1800 competition in the insurance market increased rapidly with the formation of other provincial insurers such as Norwich Union (1797) and West of England (1807) and in London the Globe (1803). At this time increased competition had the welcome effect of reducing premiums. The nineteenth century also began to see a period of consolidation in the insurance industry with London based firms taking over provincial offices. In around 1825 insurers began sharing risk assessment information, a process which lead to the setting up of common tariffs or premiums for certain classes of insurance. Increased co-operation also lead to the creation of the London Fire Engine Establishment in 1832 (which was itself replaced by a municipal London fire brigade in 1866).

Following a large Thames-side warehouse fire known as the Tooley Street Fire of 1861, the tariff offices raised commercial insurance premiums significantly. The Commercial Union and Mercantile were formed in opposition, though both later joined the tariff. The rating work of The London Wharf and Warehouse Committee (1872) on behalf of the tariff offices "rapidly improved the standard of mercantile risks by specifying new safety and building requirements" (Cockerell and Green, 1976, p.23). The increased sharing of underwriting information including ratings of new industrial processes, maps and plans, and general expertise paved the way for the subsequent rapid expansion of the British fire insurance market, and its growth into overseas territories such as Europe, America, India, Africa, the Far East and Australia. Towards the end of the nineteenth century fire insurance was becoming universal. The tariff system itself gradually faded as competition increased.

The need for insurance cover against loss by theft was not met as quickly as the need for cover against fire. From the point of view of potential insurers, there was an absence of data on which to base premiums, a fear of fraudulent or less than honest claims and a great degree of difficulty in investigating claims and tracing missing property. The concept of burglary insurance was developed in Scotland by such as the General Accident Fire and Life Assurance Corporation (1885). In around 1887 a broker at Lloyd's announced that his firm would offer insurance against the risks of loss by theft or robbery, with or without violence, and burglary. Other specialist insurers offered theft insurance for specific trades like jewellery or fine art, or on the itemised contents of particular houses. Not until the early twentieth century did policies evolve to include 'all risks' to cover property universally.

Today, liability to cover accidents to third parties whilst at your home is standard in all policies but historically was fairly late to develop.The Guarantee Society established in 1840 was the first venture to establish a permanent market for accident insurance. Awareness of personal accidents increased with the expansion of the railways in the 1840's. Yet it was not until the mid-twentieth century that general public liability policies were widely held.

From its beginnings after the Great Fire of London fire insurance had been based on marine insurance. In the Marine Insurance Act 1906 the standard Lloyd's marine insurance policy was adopted as the statutory form and the basic principles of insurance law were codified. In general, the law governing non-marine insurance (including house insurance) is today based predominantly on case law, though statutory laws also apply.

After 1912 the London and Midland insurance company offered 'all-in' policies on private houses and their contents, including fire and theft cover and additional covers such as public liability, accidents to domestic servants, and personal accident benefits. By 1920 the tariff companies introduced 'comprehensive' household insurance policies and shortly after seperate policies for fire and theft were obsolete. Modern house insurance was born.

Over time and after much industry consolidation the financial resilience of the large multinational insurance companies has grown not only through traditional insurance revenue (premiums) but also increasingly through investment income. Investment strategies followed by insurance companies to preserve and augment their capital reserves have adapted to changing historical circumstances. Government-backed securities have always been an important component, particularly during and after the First and Second World Wars, as have loans, mortgage and property investments as well as quoted stocks and bonds. At the same time, greater actuarial expertise has helped to mitigate the ever-present requirement for liquid assets to meet the cost of claims.

From its early beginnings in fire insurance, via a sequence of small evolutionary steps, has evolved the modern commercial insurance contract which we are inclined to take for granted today yet rely on so much for the protection of our homes and contents.

Acknowledgements: Cockerell, H. & Green, E. The British Insurance Business 1547-1970 Heinemann 1976

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