SELLING FIRE INSURANCE IN A VOLATILE COMMUNITY
Howard frequently discussed the stock market, grain prices, land deals, the insurance industry, and politics with his father.41 These conversations undoubtedly influenced Howard's thinking about risk, management, and regulation.
In the 1920s, the American economy was in the midst of a critical transition that had begun well before World War I. New technologies and organizational strategies enabled a great merger movement that concentrated economic power.42 Giant corporations like Standard Oil, United States Steel, American Telephone & Telegraph, and American Tobacco—known to many as “the trusts"—employed thousands of workers and made millions of dollars in profits. Populists resisted this economic power and called for trust-busting and regulation. Under Presidents Theodore Roosevelt, William Howard Taft, and Woodrow Wilson, the federal government's role in the economy grew significantly. In various state capitals, new regulatory commissions and agencies proliferated to protect consumers and stabilize chaotic markets.43 Fire insurance, like virtually every other industry, was affected by the increasing scope and scale of business activity and government's growing role in managing the economy.
Fire insurance companies started as mutual or cooperative organizations, and this heritage was important to the way they operated and were regulated. It would also be important to the first fortune that Howard Ahmanson would make in the insurance industry and to the second fortune he earned in savings and loans. The first associations were created after the Great Fire in London in 1666, when property owners banded together to provide financial protection to one another in case of fire. Their “mutual” property insurance concept was replicated in the American colonies by Benjamin Franklin, who organized the first association in 1735.
With a mutual, risk was managed by familiarity. Members knew one another and the properties they were covering. Excess profits were returned to the members, so the insured was less inclined to worry that shareholders or owners were exploiting the policyholder. These associations—along with savings banks and building and loan associations—were part of a fabric of cooperative community institutions that proliferated in the United States in the eighteenth and nineteenth centuries.
The success of the mutuals attracted entrepreneurs who understood that insurance companies amassed enormous quantities of capital that could be invested. Earnings on this capital that exceeded the costs of paying policy-holders’ claims could be pocketed by shareholders. Success depended on making smart investments and limiting insurance risk—especially catastrophic risks like the Chicago fire of 1871 and the San Francisco earthquake and fire of 1906.
Large insurance companies enjoyed a competitive advantage in insurance. With greater numbers of policyholders and accurate statistics, the number of claims was much more predictable. By developing networks of agents and offices in the age of the telegraph, some insurance companies enjoyed the kind of economies of scope and scale associated with large industrial companies like railroads, power, and telegraph companies at the end of the nineteenth century.44
BOOM TIMES IN AMERICA
Will Ahmanson's career developed in tandem with the insurance industry in the United States. Omaha became a major insurance center—a kind of Hartford of the Midwest.45 Most of the fire insurance companies were stock companies. By 1913, these for-profit enterprises covered nearly 93 percent of the $790 million in fire and property insurance written in the state.46 These were profitable businesses. The combined income of all Omaha insurance companies topped $23.5 million in 1917.47
In a regional center like Omaha, leading insurance men often worked as agents or managers for several companies. Will Ahmanson's various affiliations between 1906 and 1919 reflected the fluidity of the business. Between 1906 and 1914, he was the assistant secretary of the Nebraska Underwriters Insurance Company, worked for the State Insurance Company of Nebraska (which was acquired by the National Fire Insurance Company of Hartford in 1912), and then joined Columbia Fire Underwriters in 1913.48 He was also the assistant manager of the German Fire Underwriters of Omaha.49 All of this movement reflected the still-unsettled state of the industry as consumers, companies, and politicians sought to use government to strengthen their respective positions in the marketplace, ensure “fair” treatment for everyone involved, and forge a political consensus.
REGULATING FIRE INSURANCE
Like businessmen in many industries, fire insurance agents tested their relationship with government on many fronts. On the one hand, they resisted proposed laws that were at odds with the fundamental economics of their industry. On the other hand, they turned to government to stabilize their business environment.50 Thus insurance leaders exhibited the same conflicted perspective on regulation that characterized many industries at the beginning of the twentieth century.
Reckless competition posed the biggest threat to the stability of the fire insurance business. Upstanding companies were often undersold by naive or fraudulent firms that didn't have the means to pay claims if disaster struck. These “wildcatters” sparked rate wars. Although established insurance companies promoted their stability and trustworthiness to counter the wildcatters’ price competition, customers had little ability to discern what fair rates for fire insurance should be and often selected companies on the basis of the price of their premiums rather than their reliability.
Incumbent insurance companies responded to this market competition by lobbying for limited regulation. They urged state governments to require new companies to post bonds, but these efforts to create state-sanctioned barriers to entry were largely unsuccessful in the late nineteenth century.51 Insurers also tried self-regulation or cartelization.52 In various states and nationally, they created underwriting boards to collect data and assess the level of risk associated with different kinds of buildings and uses. They then established systems of uniform rates. The best-known of these organizations, the National Board of Fire Underwriters, was launched after the Civil War by seventy-five companies from the East and the Midwest.53
Cooperative rate setting, however, prompted an outcry from customers. Some states accused the underwriting boards of violating state and national antitrust laws. In Nebraska, the legislature passed a law in 1897 barring insurance companies from combining to set rates or commissions paid to agents.54 Although these efforts to apply antitrust laws to insurance were generally unsuccessful in the courts, state legislators introduced bills banning insurance compacts in thirty-three states between 1885 and 1900, and in sixteen states these bills were adopted into law.55
Frustrated, some customers turned to government. In 1909, Kansas adopted a law giving the state superintendent of insurance the power to approve rates. Insurers challenged the law, but in 1914, in German Alliance Ins v. Lewis, the U.S. Supreme Court upheld the state's authority.56 Many other states followed Kansas. In Nebraska, the legislature passed a “New Insurance Code” in 1913 to establish comprehensive insurance regulation. The new structure withstood both judicial and electoral challenges in part because of an emerging consensus that regulation was a reasonable means to avoid various scenarios that would put the government in control of the marketplace as an agent of either labor or corporate interests.57
Even as they resisted efforts to bar them from collaborating and fought state rate regulation, fire insurance companies saw how they could benefit by working with government. Research developed by the fire insurance underwriting boards led to the development of model building standards and codes that lowered the risk of fire. Insurers pressured communities to adopt these standards and to develop and maintain fire departments. Where cities fell behind on their investments in fire departments, the industry raised rates or threatened to withdraw altogether. Will Ahmanson served on the Nebraska State Committee in 1918 as a volunteer building inspector looking for potential fire hazards.