History tells us that something like an insurance mechanism was recorded more than 2,700 years ago in ancient Babylon. Did the merchants of that time and place check with local insurance agents to get quotes? Probably not, but insurance agents and brokers have been around for most of the modern insurance era.
Initially, insurance underwriters (so-called because they signed their names under the insurance agreements) also sold their contracts. However, as demand increased and the risks grew more sophisticated, this became impractical. Underwriters lacked the time to both properly analyze risk and effectively sell protection. Necessity became the mother of insurance distribution systems.
Benjamin Franklin founded a mutual property insurance company in 1752, the oldest carrier still in operation. However, the creation of the first stock insurance company in 1792, Insurance Company of North America, launched the agency system. In 1795, Davis & Reid, the first U.S. insurance agency, opened in Charleston, South Carolina. Carriers began to hire sales agents on a part-time basis to sell their products locally.
In 1835, a large fire destroyed New York City’s business district and drove 23 of 26 fire insurance companies out of business. This impressed upon surviving insurers the wisdom of geographic diversification. Large insurers found that they could spread their risks by contracting with agents in other cities to produce business. For example, in 1834 Gurdon Hubbard became the first insurance agent in the city of Chicago, representing the Aetna Insurance Company of Hartford, Connecticut.
It took some time, but in the decade before the Civil War the agency system became widespread. Whereas before the New York City fire state legislatures had discouraged out-of-state insurers from entering their markets, by 1855 New York State had authorized 38 out-of-state insurers. By 1871, the year of the Great Chicago Fire, this city alone had 129 insurance companies, only 14 of which were local. These carriers were represented by networks of agents, with each agent assigned to a specific geographic area. Branch offices run by general agents managed the agency forces.
At first, carriers paid agents on a fee-for-application basis. As the agency systems developed, they began paying agents’ commissions as a percentage of premiums.
From the earliest days, a dual system of insurance distribution developed. Some carriers employed agents who sold only their own products (“captive” agents,) while others hired the services of agents who sold for multiple companies (“independent” agents.)
In addition, brokers representing insurance buyers entered the business. The first was Johnson & Higgins, founded in New York City in 1845. There were a few hundred licensed brokers operating by 1882, a fraction of the number of agents. Still, the development of brokers was controversial. In 1868, 26 carrier representatives signed a letter stating that “The insurance brokerage system is an evil to both Insurance Companies and their customers, with little compensating good.” The insurance-buying public disagreed; by 1908, most of those who signed the letter were out of business and brokers were prospering.
Both agents and brokers grew in professionalism. Independent agents and brokers formed trade associations in the late 19th century to promote their interests. They were also instrumental in the creation in 1894 of what became known as The Underwriters Laboratories, which set safety standards for electrical equipment. Carriers, agents and brokers collaborated to form The Association for Cooperative Operations Research and Development (ACORD) in 1970 to promote standardization of application and loss reporting forms and data formats.
Today, families needing home, auto and life insurance, and businesses needing coverage to enable their growth look to the local agency in the shopping plaza, the office complex, or around the corner from the public library. Insurance agents have persevered despite constant predictions of their demise. As long as they provide services that insurance buyers and carriers value, they will remain an essential part of the insurance marketplace.