Premium Audit History
When did insurance begin?
Year is unknown but probably goes as far back as unrecorded times
The idea of insurance can be traced back thousands of years. From the beginning, human societies sought ways to soften the shocks of existence. The insurance principal of building reserves is illustrated in the Biblical story of Joseph and the famine in Egypt. Joseph ordered grains to be stored during the seven good years to relieve shortages during the seven years of famine.
Due to the junction of two rivers in ancient Babylonia, enterprising merchants sent caravans and ships to trade with all parts of the known world. To reduce the risk of robbery, plunder and capture for ransom, the Babylonians devised a system of contracts in which the supplier of capital for a venture agreed to cancel the loan if the trader was robbed of his goods. The trader who borrowed the capital paid an extra amount for this protection (a premium) in addition to the usual interest. As for the lender, collecting these premiums from many traders made it possible for him to absorb the losses of the few. This arrangement proved to be more appealing and sensible than the earlier one of pledging not only the trader’s ships and other tangible property, but also his life (as a slave), and those of his family as well. Accordingly, the practice was sensibly legalized in the Code of Hammurabi during the 1700’s BC. (This code also made provisions for the indemnification of a family’s home and even for murder or robbery.)
These arrangements became well known to the Phoenicians and to the Greeks, Hindus and Romans. In ancient Rhodes we discover a comprehensive code of sea laws. Such laws of the sea, including Solon’s Greek laws, found their way into early Roman civil codes and into the laws of the Byzantine Empire. In fact, they still exist today as part of our own laws for protection against losses at sea. The very word “insurance” is derived from the Latin word for “security.”
Other forms of insurance terminology are also derived from ancient practices of Mediterranean commerce. The origin of the word “underwriter,” for example, is Italian, from an old system of signing contracts on marine insurance. Those businessmen who had agreed to share in the profit or loss on a certain venture signed their names underneath the contract, writing at the same time the amount of risk assumed by each. It is possible that “policy” is also of Italian origin – derived from “promise” – although other sources have been claimed for this word.
To the Italian city republics of Venice, Pisa, Florence and Genoa, we can track the practice of insurance on a “premium” basis to about 1250 AD. And in the Barcelona of 1435 AD we find the first comprehensive code of insurance laws. Our earliest record of true life insurance with “insurable interest” dates back to 1430 AD in Genoa and, among other things had to do with the lives of pregnant wives.
In 1666, the Great Fire of London finally and forcibly demonstrated the need for fire insurance. The primitive fire-fighting methods of the day were virtually helpless against the hungry flames, which roared unchecked through narrow streets reducing timbered dwellings to ashes. The fire burned for four days and nights. It razed 436 acres, devouring 13,200 houses, 89 churches (including Saint Paul’s Cathedral), the Custom House, the Royal Exchange and dozens of other public buildings. Only six people perished in the flames, but hundreds died from shock and exposure.
Insurance protection as we know it today can be traced to the aftermath of that tragedy and to a man call Nicholas Barbon. Shaken by the Great Fire, Barbon promptly opened an office “to insure buildings.” In 1680 he founded a partnership and established England’s first fire insurance company, The Fire Office, to insure brick and frame houses. The second company to be formed, The Friendly Society, was organized in 1683 incorporating some mutual characteristics. Policyholders had to agree to contribute toward settlement of each loss incurred, although the founders retained a predominant interest in the profits. Other key events during this period are as follows:
1693 — Astronomer Edmund Halley constructed the first mortality table
1696 — The first mutual fire insurance company was established
1704 — The Lombard House inaugurated fire insurance for household and business goods
1762 — The first mutual life insurance company was formed
During the 1750’s — Benjamin Franklin helped found the first fire and life insurance companies in the American colonies
1863 – The first accident policy in the US. It covered a gentleman’s two-block walk from his home to the Post Office. The premium was 2 cents
1897 – First Workers Compensation act instituted by Britain for industrial accidents
1898 – The first automobile policy was issued by Travelers
What year did Premium Audit start?
Which state enacted the first workers’ compensation law?
Maryland and New York were the first states to enact workers’ compensation laws in the early 1900’s, but the courts overturned both. In 1911, Wisconsin became the first state to enact a workers’ compensation law that was allowed to stand in court. Mississippi was the last to enact a workers’ compensation law (in the late 1940’s). HI and AK enacted when they became a state.
In 1902 the Travelers Company recognized the need for accurate premium to be determined. Up until this time, the agent or broker was responsible for obtaining figures for premium determination. The agent was originally considered the best candidate to determine true cost. Unfortunately, agents were not bookkeepers or accountants and were usually not qualified for this procedure, and several in the insurance industry at the time were questioning whether there might be a possible conflict of interest. By 1903, the Travelers Payroll Audit Division was up and running. Originally, they were set up to tabulate and review the agent and the insureds statements. By 1905, they were performing an independent audit of the insured. Another important note to add is that in 1909, the Insurance Institute of America was founded.
This independence of audits led to the start of independent auditing services. In 1915, the first of this type of service was E.C. Preston and Company, opened in Philadelphia, PA. Another prominent independent audit service company, Atwell, Vogel & Sterling, Inc. opened in 1919. Many companies today have ties to AV&S. Most insurance companies used independent auditing services instead of their own staff in the early days.
The Way We Were:
In the early days, premium auditors were called “Figure Takers”. For obvious reasons, this was later changed to “Payroll Auditors”.
Most of the early auditors traveled by train to the insureds or they had insureds meet at a central location or the agent’s office. It would be many years before an automobile became commonplace for the auditor.
There few (if any) women in the premium audit world until many years later.
In the 1940’s, gas prices were at an all-time high of 18 cents a gallon.
All audits were performed on paper and by longhand. As a result, it took many months to complete audits.
In the early 1900’s, auditors were paid an average of $14 a week ($700 a year). Keep in mind that this amount had to help take care of an average family of four.
Weekly cost of living for a family of four in the early 1900’s averaged around $9: $2 for rent for a three room flat, $6 for food, 15 cents for electric and 6 cents for fuel.
Carfare was 5 cents and postage was 2 cents per ounce for first class.
Auditors had to always be prepared for a bribe. Before there were state and federal enacted uniform rules in the accounting profession, two sets of records were very prominent.
Gambling and prostitution was high on the list of crimes committed in the early 1900’s but very few crimes were considered worse than “drinking alcohol on Sundays”.
Stories from The Auditor and Inspector published by AV&S in 1940:
“Speaking of nice trips and unusual territories, JW Peterson left Dallas on January 25th for a trip into West Texas, which took him 13 weeks to complete. During this time he never backtracked and never visited the same city twice, was in West Texas the entire period and had no unusually large cases or heavy amount of work in one town.”
“Swanson picked up $180 in additional premiums due to his diligence in scrutinizing very carefully the clerical office payroll. He found that only $606 out of $3417 should have been assigned to 8810. Good Work!”
“Due to the recent hurricane and electrical outage, Ed was reminded of his early days of auditing having to work up his audits by candle light.”
In 1944 AV&S charged $3.25 per audit up to 2.9 hours. An extra $1.75 per hour for audits over 3.0 hours.
What year did the first local auditor association start?
In 1952 in Philadelphia
What year did the first regional auditor association start?
Officially in 1967 the Southwest region started. Several regions were meeting informally in the early 60’s.
In the 1950’s, there were no schools, no courses and no text dealing with insurance auditing. Auditors needed to exchange knowledge and information, therefore, they started reaching out to one another to learn more about their industry. Many local auditor associations began during the 1950’s and 1960’s.
In 1967, The Insurance Auditors Association of the Southwest was formed and held their first meeting in Many, Louisiana.
Unofficially, the Insurance Auditors Association of the West began meeting in November 1963 in Fresno, California. Their first meeting was on the same day that JFK was assassinated.
The Insurance Auditors Association of the Southeast was formed in 1970 as well.
In 1973, The Insurance Auditors Association of the Central States was formed and held their first meeting in Chicago, Illinois.
Two regional associations were also formed in the Northeast in 1973. They eventually formed into one and now know as the Northeast Regional Insurance Auditors Association.
Regional affiliation greatly improved insurance auditor knowledge and education through annual seminars along with the many local associations. But, was an awareness that more was needed beyond local and regional associations.
Dana Sparrow, Assistant V.P. with Firemans Fund Insurance, had long been an advocate for a national association. He traveled to many of the local and regional meetings seeking support for such an organization. In 1974, he formed a steering committee of twelve member – two from each of the (then) 6 regional auditors associations. On October 25, 1975, the National Society of Insurance Premium Auditors filed its Articles of Incorporation in Missouri. Over the next few years, NSIPA worked closely with the Insurance Institute of America. The IIA committed itself to develop specialized courses for the premium auditor. In May 1977, NSIPA held their first annual educational seminar in Des Moines, Iowa with the Central States region.
In 1978, the American Insurance Association created Premium Audit Advisory Service (PAAS).
In 1979, NCCI reactivated their Premium Audit Committee.
Also in 1979, NSIPA adopted the Code of Professional Ethics at their third annual meeting. This advanced the status of the premium auditing profession immeasurably.
In 1981, the IIA gave the first test for the Associates in Premium Auditing program. The first test in PA 91 had 523 pass it.
In October 1982, 66 designees received their APA. After 80 years, the insurance industry had educationally certified premium auditors.