Have Insurance Companies Forgotten the Meaning of Insurance?

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Liberty Mutual was born to protect ordinary workers. Today, by funneling money from regular families into the hands of executives, it has inverted its very reason to exist. Sadly, this case is not unique.

mutuals body2.jpgFlickr/takomabibelot

A hundred years ago, the factories and shop floors of the United States were home to appalling violence. Machines and tools severed digits, mangled limbs, and, with horrifying regularity, killed their operators. Under the liability laws of the day, only one victim in fifteen received reasonable compensation from his employers. That injustice exacerbated already tense labor relations. In Massachusetts, organized labor pressed hard to establish a new, state-sponsored mutual insurer; the Chamber of Commerce agreed. In 1911, the legislature overhauled workers' compensation, chartering the Massachusetts Employers Insurance Association to mitigate the hazards faced by ordinary workers.

Today, that company is known as Liberty Mutual. Over the last four years, Edmund Kelly, its CEO until last year, cashed in more than $200 million in compensation. That haul places him among the most highly paid executives of any corporation, even in this age of outsized executive pay. But there is a special irony to Kelly's situation. The company he runs is the same insurer chartered by Massachusetts a century ago. Liberty Mutual still spreads risks among its policyholders, but now it also concentrates rewards in the hands of its executives. It has, in effect, inverted the logic of mutuality on which it was founded.

In late medieval Europe, as insurance began to assume a recognizable form, insurers would write policies on anything the traffic would bear. Contracts were sold to mitigate the risks of trade, insuring against the deaths of trading partners, heads of state, or other figures whose dying might have financial consequences. But nothing prevented a man from wagering on any life he chose, could he find an insurer who would accept his bet. Speculative life insurance flourished. Contracts on the life of Admiral Byng saw premiums rise and fall with each day's testimony at his court martial, and paid off handsomely after his execution. When George II took to the field with his army ahead of the Battle of Dettingen, insurers offered 3:1 odds on his survival. In one particularly callous instance, when hundreds of Palatine refugees were stranded and starving on the outskirts of London, Lloyd's sold contracts on the number who would remain alive by particular dates.

It was the invention of mutual insurance that rescued the industry's reputation and enabled its explosive growth, by aligning risk with reward and harnessing financial innovations to serve a public interest. The insurance societies and associations created by English reformers at the turn of the eighteenth century rejected the purely transactional relationships favored by commercial insurers, with individuals placing bets that would pay off in the event of tragedy or misfortune. In their stead, they erected contractual communities, their members pledged to mutual assistance. "Ensuring of Life I cannot admire," wrote Daniel Defoe in 1702, endorsing instead "a Number of People entring into a Mutual Compact to Help one another, in case any Disaster or Distress fall upon them."

Mutual insurers enabled the simultaneous pursuit of commercial and communal advantage. Holding communal mortality low kept benefits high, and profits were distributed among the members in the form of regular dividends, making the good health of the community the surest path to profit. The premiums created a pool of capital that could be deployed to some socially beneficial purpose. Liberty, for example, pioneered workplace safety measures, and then distributed the resulting savings back to its members in the form of dividends. Members took these measures seriously not only for their own sake, but also because they were the ones who stood to profit from the resulting gains. The community governed itself, electing its own directors. The alchemy of mutuality transformed insurers from abetters of private speculation into enablers of public virtue.

The example of mutual insurers profoundly altered public expectations for the entire industry. Over the years that followed, governments enacted a series of measures to distance insurance from gambling, and to force even commercial firms to behave more like public utilities than purely private ventures. In 1774, Britain banned the use of insurance as a vehicle to wager on the misfortunes of others, requiring an insurable interest to be present in any contract. The nineteenth century brought ever tighter regulation, including oversight of premiums.

Mutual insurance flourished, bursting into full flower on our own side of the Atlantic. Hundreds of fraternal and social groups offered a wide array of benefits on the mutual model, as did mutual corporations chartered solely to provide different varieties of insurance. To many Americans, insurance seemed a powerful tool for addressing social inequality and reducing the risks of an unstable and uncertain world, particularly in its mutual form. So it was unsurprising that when, in 1911, Massachusetts pioneered workers' compensation insurance, it settled on a state-subsidized mutual company as its vehicle for the reform.

The act that chartered Liberty Mutual offers a grisly testament to the terrible costs of industrial labor. It specified the benefits to be paid by the new insurer, or by others offering similar policies. "For the loss by severance of both hands at or above the wrist," one clause detailed, "or both feet at or above the ankle, or the loss of one hand and one foot, or the entire and irrecoverable loss of the sight of both eyes," a worker was to receive a bonus of half a week's pay, "but not more than ten dollars nor less than four dollars," and only for the next hundred weeks. That maximum of a thousand dollar payout for a double amputee was a huge advance, but even then, formed a sharp contrast with executive compensation. The Industrial Accident Board, set up to oversee the system, paid its chair an annual salary of $6,500--as much in one year as the lifetime compensation for thirteen severed hands.

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Yoni Appelbaum is a social and cultural historian of the United States. He is a lecturer on history and literature at Harvard University.

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