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Shaped by Risk: The American Fire Insurance Industry, 1790–1920

Published online by Cambridge University Press:  18 February 2015

Dalit Baranoff
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Type
Dissertation Summaries
Information
Enterprise & Society , Volume 6 , Issue 4 , December 2005 , pp. 561 - 570
Copyright
Copyright © The Author(s) 2005. Published by Cambridge University Press on behalf of the Business History Conference. All rights reserved.

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References

1. Lyrics from a parody (undated, author unknown) of “A Hot Time in the Old Town” by Joe Hayden and Theodore Metz (1896).

2. Recent investigations of the O’Leary legend casts doubt on the story that the cow started the fire, instead suggesting that Mrs. O’Leary was the victim of anti-immigrant, anti-Catholic sentiment. For details, see “The O’Leary Legend,” Chicago Fire and the Web of Memory (Chicago: Chicago Historical Society, 1996)Google Scholar; viewed 12 Sept. 2005. URL: http://www.chicagohs.org/fire/oleary/.

3. The only catastrophic fires occurring in the United States today are wildfires, that burn property at the edge of suburban areas. While wildfires were also a significant problem in the nineteenth century, rural and wildland fires are beyond the scope of this work. For a detailed account of the subject, see Pyne, Stephen J., Fire in America: A Cultural History of Wildland and Rural Fire (Seattle, Wash., 1982)Google Scholar.

4. In 2001 there were 396,500 fires in residential structures in the United States. The chance that any single household would experience a fire that year was 0.34 percent, or 1 chance in 300, with an average loss of $14,000 per fire. Karter, Michael J. Jr., Fire Loss in the United States during 2001 (Quincy, Mass., 2002)Google Scholar; U.S. Bureau of the Census, United States Census, 2000 (Washington, D.C., 2000).Google Scholar

5. The equivalent fire loss figures in year 2000 dollars are as follows: in 1866, $656 million; in 1880, $1.3 billion; in 1900, $3.5 billion. National Board of Fire Underwriters (NBFU), Pioneers of Progress: 1866–1941 (New York, 1942), 156–57Google Scholar; U.S. Bureau of the Census, United States Census, 1880, 1900 (Washington, D.C., 1880, 1900).Google Scholar

6. NBFU, Pioneers of Progress, 156–57; U.S. Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970 (Washington, D.C., 1975), 231–32Google Scholar. Original data is found in Kuznets, Simon, Capital in the American Economy: Its Formation and Financing (New York, 1961)Google Scholar.

7. The $14 billion of property insured in 1900 is equivalent to $305 billion or $4,007 per capita in year 2003 dollars. Premiums taken in that year are equivalent to over $3 billion or $45 per capita in year 2003 dollars. Dean, A. F., Philosophy of Fire Insurance, 3 vols. (Chicago, 1925), 2:218Google Scholar; Bureau of the Census, Historical Statistics of the United States, 231–32.

8. This is known as the law of large numbers, which “holds that as a sample of observations is increased in size, the relative variance about the mean declines.” Baranoff, Etti G., Risk Management and Insurance (New York, 2003) , 16.Google Scholar

9. Knight, Frank H., Risk, Uncertainty and Profit (1921; New York, 1964), 197.Google Scholar

10. Baranoff, Etti G., Risk Management and Insurance, 12Google Scholar; Pritchett, S. Travis et al., Risk Management and Insurance (New York, 1996), 5.Google Scholar

11. Baranoff, Etti G., Risk Management and Insurance, 17–18.Google Scholar

12. Traditionally, economic efficiency occurs when no more satisfaction is possible from a given amount of resources. The ideal of efficiency is a central focus of neoclassical economics, which posits that (under perfectly competitive markets) efficiency is achieved when no further satisfaction can be achieved by producing more of one good and less of another. Many economists consider efficiency an economic goal, although they may differ on its definition and how it can be achieved. A less concrete definition may be simply that which equates efficiency with value or the maximization of some specific goal (such as profitability, or a certain level of growth). Efficiency can be applied to both economies and to individual firms. In transaction-cost economics, firms exist because they are more efficient than the market.

13. In The Visible Hand: The Managerial Revolution in American Business (Cambridge, Mass., 1977)Google Scholar, Alfred D. Chandler, Jr., shows how the modern large corporation took shape during the late nineteenth and early twentieth centuries. At the heart of his argument is the superior efficiency of administrative coordination over market coordination.

14. Scranton, Philip, Proprietary Capitalism: The Textile Manufacture at Philadelphia, 1800–1885 (Philadelphia, 1983)Google Scholar; Scranton, Philip, Figured Tapestry: Production, Markets, and Power in Philadelphia Textiles, 1885–1941 (New York, 1989)Google Scholar; Scranton, Philip, Endless Novelty: Specialty Production and American Industrialization, 1865–1925 (Princeton, N.J., 1997)CrossRefGoogle Scholar.

15. Transaction-cost economics involves the study of organization based on the transactions that occur between different parties. According to Oliver Williamson, internalizing functions within a firm (through managerial coordination or vertical and horizontal integration) reduces the uncertainty and costs inherent in market transactions. He argues that whenever transaction costs are high, internalization offers an advantage. According to Williamson, Chandlerian firms succeeded because they were able to overcome the information problems that plagued their predecessors by internalizing procurement, manufacturing, and distribution. Williamson’s theory allows for intermediate forms of coordination in cases where internalizing certain functions does not provide a transaction advantage. See Williamson, Oliver, Markets and Hierarchies: Analysis and Antitrust Implications: A Study in the Economics of Internal Organization (New York, 1975)Google Scholar; and Williamson, Oliver, The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting (New York, 1985)Google Scholar.

16. Lamoreaux, Raff, and Temin’s synthesis grew out of a series of conferences held at the National Bureau of Economic Research, the results of which were published in Temin, Peter, ed., Inside the Business Enterprise: Historical Perspectives on the Transformation and Use of Information (Chicago, 1992)Google Scholar; Lamoreaux, Naomi and Raff, Daniel, eds., Coordination and Information: Historical Perspectives on the Organization of Enterprise (Chicago, 1995)CrossRefGoogle Scholar; and Lamoreaux, Naomi, Raff, Daniel, and Temin, Peter, eds., Learning by Doing in Organizations, Markets, and Nations (Chicago, 1999)Google Scholar.

17. Lamoreaux, Naomi, Raff, Daniel, and Temin, Peter, “Beyond Markets and Hierarchies: Toward a New Synthesis of American Business History,” American Historical Review 108 (April 2003): 404–33.CrossRefGoogle Scholar

18. It should be noted that this focus on risk aversion to explain structure is not entirely new, nor was it unfamiliar to Chandler. In the 1950 and 1960s, when Chandler formulated his thesis, he was reacting against an existing industrial organization literature that looked to risk aversion to explain horizontal combination. For a review of the state of business history in the late 1960s, see Galambos, Louis, American Business History (Baltimore, Md., 1967)Google Scholar. Also useful is McCraw’s, Thomas biographical review of Alfred Chandler’s career, “The Challenge of Alfred D. Chandler, Jr.: Retrospect and Prospect,” Reviews in American History 15 (March 1987): 160–78.Google Scholar

19. In Paul v. State of Virginia, 75 U.S. 168 (1868), the U.S. Supreme Court ruled that insurance was not interstate commerce and not subject to federal regulation. Therefore, federal antitrust laws did not apply to insurance. Laws outlawing collusion had to be passed on the state level.