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The ancient Greeks insured their warriors against sickness. They also established a plan where a Mariner who became ill during a voyage was sent to shore and given food and services until he recovered. This was disability insurance that rather than providing an indemnity provided services until recovery. In the 1600s, the Dutch developed "loss of use" benefits that are found in many disability insurance policies today. The soldiers were insured against loss of sight, hands, feet, arms or legs. Later the English provided the first accident and sickness protection plans. In 1757, the British Parliament enacted legislation providing for sickness coverage for stevedores. The English bought the concept of disability insurance to colonial America. The Massachusetts health insurance company was the first to offer a disability income policy and the Franklin health insurance company offered the first accident policy.
Modern individual disability insurance policies in the United States began to appear in the 1890s. Prior to that time there were very limited policies available and they typically only offered protection in the event of accidents. Even during the 1890s and early 1900s disability insurance contracts remain limited with respect to the amount of the benefit and the duration or benefit period. These contracts were neither noncancelable nor guaranteed renewable. This meant that the companies could either terminate the coverage or increased premiums relatively easily. In the early 20th-century the guaranteed renewable contracts began to appear. As is the case today, these policies could not be canceled or terminated by the insurance company during the stated term of the policy. Also, as is the case today, the premium of these policies could only be increased with specific classes of insureds and requires prior notice.
As was true with life insurance, the Armstrong investigation, which was authorized by New York legislature in 1905, had a significant effect on the disability insurance industry. The Armstrong investigations were initiated as New York's attempt to deal with the serious abuses in the industry with respect to sales, investment and management practices. Ultimately recommendations were implemented by New York and created strong standards for the insurance industry. The impact of the Armstrong investigations was so great that the ultimate effect was to position the state of New York as the leader with respect to insurance regulations and this seems to be the case even a full century later.
In 1911 the first health insurance regulations with respect to policy provisions was legislated and this, too, was a result of the Armstrong investigation. It was referred to as the Uniform Standard Provisions Law and also governed disability insurance.
In 1916, the first noncancelable and guaranteed renewable disability insurance policies came to the marketplace. For the first time the insurance policy was guaranteed to continue for the duration of the policy (up to about age 60) and also guaranteed that the premium would not change during that time.
At the end of the First World War, the disability insurance industry experienced dramatic growth and many insurance companies began offering these policies. Serious financial losses also began to appear as a result of the highly favorable (to the policyholder) definitions of disability. A lot of these losses were related to disability benefits on life insurance. Unfortunately many of the companies offering these types of disability benefits or not to nearly as skilled in underwriting disability as they were in underwriting life insurance policies. This resulted in provisions that became very expensive to the insurance companies. For example, certain benefits would increase as an individual was disabled for longer periods of time. This had the effect of making being disabled more attractive and reduced the motivation for an individual to recover.
The underlying principle that became apparently clear with respect to disability insurance was that policies needed to be designed in such fashion as to not interfere with an individual's desire to go back to work.
During the Depression, the disability insurance industry suffered greatly along with the rest of the American economy. It should come as no surprise that during the Depression the number of claims and the average length of those claims increased dramatically. As if the highly favorable definitions previously issued in disability insurance policies weren't bad enough for the industry, the great increases in claims during the Depression severely compromised many insurance companies financial positions. This resulted in some companies collapsing, while other companies got out of the disability insurance business and the remaining companies that did underwent dramatic renovations to the policies that they offered. Some companies were able to survive the Depression. However the lesson was quite clear: disability insurance demands extensive management and resources if a company is going to be successful offering this line of insurance. In order to manage and be profitable in the disability insurance business, a company needs to continually evaluate its policies and monitor claims activity as social and economic conditions continue to change and have a direct impact on upon disability insurance.
During World War II and through the end of the '40s, disability insurance started to become popular again. During this time, there was little change in the policies themselves and the underwriting of them. The largest policies offered approximately $200 a month with benefit periods of several years. The policies were essentially "any occupation" which meant to that order to become disabled one could not be able to do any reasonable occupation. Companies had little incentive to make changes or become more aggressive in their offerings because of the damage that had been done during the Depression.
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