Today water heaters are predominately insulated with a heater wrap.  Back before the 1980s most water heaters were not insulated.  The water in the tank would cool very quickly from temperature changes in the environment around the water heater.  This combination of exposure and lack of insulation results in high heating bills and a lack of hot water.  Also, since new water is added to the system, sediment deposits would collect much quicker than a post 80s water heater system.   Also with this exposure to the elements, there is always a danger of fire or explosion.  Wind blown leaves or a stong gust that would blow out the pilot light are all dangers of the exposed fire heater.  In 1994, 21,031 water heater incidents in the United States resulted in 15 injuries and $34.15 worth of damage.  Virtually all of these incidences were preventable with proper yearly inspections.