The history of mutual insurance

The history of mutual insurance

Mutual insurance is a well established model in today's world and includes everything from farm, to auto, to home, to personal insurance. To truly appreciate where the industry currently is, it helps to take a look at where it came from and how it changed over time.

The first insurance
The first mutual insurance was not established in Canada, but in London. In 1666 the Great Fire of London started in the house of the King's baker and destroyed 3,000 homes and 100 churches according to Regulator Watch. The catastrophe prompted the first insurance companies to form and eventually led to the creation of The British American Assurance Company, a stock company that provided insurance in London and North America. Shortly after, Benjamin Franklin established the first successful mutual insurance company in America, followed by the introduction of legislation in Canada permitting the establishment of mutual companies in 1836.

Fire prompts insurance creation
Fire remained the most common threat to farms made of mostly wood buildings. Including the many fires across Ontario, Quebec was hit twice, with over 2,000 properties lost in 1845. To prevent fires from spreading rapidly and requiring massive payouts to members, insurance companies started their own fire departments until 1866, when that responsibility was passed on to local governments.

Figuring out mutual insurance
While mutual insurance provided assurance to community members, it also came with it's own set of difficulties. In Canada, 14 farmers met up in the mid-1850s and decided to pool their money and insure one another if anyone suffered a barn fire. That agreement eventually formed Ontario Mutuals, which is now one of the strongest financial networks in the world. As mutual insurance flourished, farmers realized both the commercial and communal benefits of such agreements, according to The Atlantic. Profits were distributed as dividends to members which provided a small source of income, and the pool of money available during emergencies ensured the economic strength of the community as a whole by preventing farms from permanently collapsing after a disaster. However, it wasn't always an easy path.

Early mutual insurance agreements were created without any financial models or teams of actuaries assessing risk like we have now. Instead, farmers and their families had to determine effective rates and guess how often fires might occur. One company in London rather arbitrarily decided 1 in 200 houses would burn down every 15 years and adjusted premiums accordingly. Another company went with a flat percentage rating systems charging brick houses 2.5 percent of the annual rent for the property and wood buildings 5 percent of the annual rent.

Today's mutual insurance still provides the same benefits to communities and farmers, although it has now grown into a much bigger industry and can serve the needs of many different populations. In Ontario alone, there are 40 independent insurance companies in the Ontario Mutual Insurance Association, providing benefits to members throughout the province.