The concept of transferring or distributing risk has been around since the ancient Babylon, Chinese and Indian traders of the 2nd and 3rd millennia BC.
In our previous article called What is Insurance, we mentioned that the history of the concept of insurance is a fascinating read in itself and deserves an article of its own.
As mentioned before, insurance is the “practice of pooling funds from many insured entities to pay for the losses that some insured entities may incur.” This concept of transferring or distributing risk has been around since the ancient Babylon, Chinese and Indian traders of the 2nd and 3rd millennia BC. These concepts of insurance have been also found in 3rd century BC Hindu scriptures such as Arthashastra, Manusmriti, and Dharmasastra.
The ancient age of insurance
The concept of insurance can be dated back to prehistory as well, even before the presence of monetary economies like the exchange of cash, currency, or valuable commodities and during the presence of barter system economies. Insurance in these economies were agreements of mutual aid in times of crisis. Such economies can potentially foster cooperative societies, and institutions functioning to provide mutual protection and encouragement of mutual survival. If a family’s house gets destroyed, the neighbors would commit to helping rebuild it. Public granaries were also another form of insurance to protect the families against famines.
As mentioned earlier, these concepts started appearing in writing in ancient Babylonian, Chinese and Indian traders to transfer risk in the 3rd and 2nd millennia BC, which is almost 4000 years ago. By some accounts, one of the earliest and longest-lasting pieces of legal text, the Code of Hammurabi also had the earliest written insurance policy. The text had a policy clause that would safeguard a debtor, allowing them to forgive loans if a personal disaster caused defaulting payment.
The said societies also practiced so-called ‘bottomry contracts’, wherein loans were granted to merchants with the advantage that if the shipments were lost due to shipwreck, the loan wouldn’t have to be repaid as the interests could cover the insurance risk.
Maritime troubles and the birth of modern insurance
The first documented instance of marine insurance in Europe was a form signed off by Dinis, the then-king of Portugal in 1293.
As the idea of spreading and transferring risk through insurance kept evolving over centuries, so did society and the evolution of currency. European discoverers started sea routes to various parts of the world and they wanted to trade with the people of these newfound lands. However, maritime travel was still a difficult prospect, and shipowners regularly found their ships attacked by pirates, losing out a lot on economic damages. Seeing an opportunity, Edward Lloyd of London started an insurance scheme for shipowners in his Lloyd’s Coffee Shop, where shipowners could pay a premium to Lloyd’s business in return for compensation in case of damages to the ship. Edward Lloyd calculated that the regular source of revenue in the form of premiums from many shipowners could easily pay for the compensation of a few shipowners. Naturally, this insurance policy cannot save the ships from the pirates, but the compensations could make up for the losses in damage.
Lloyd’s insurance business took off and still exists today in the name of Lloyd’s of London.
The Great Fire of London
From 2nd September 1666 to 6th September 1666, the city of London, which was a major economical hub even back then, saw deadly fires that ended up destroying 13,200 houses, 87 parish churches, the landmark St Paul’s Cathedral, and most of the buildings of the City authorities. It is estimated to have destroyed the homes of almost 90% of London’s 80,000 inhabitants.
Although the loss of lives is estimated to be in the single digits only, the material destruction is said to have sparked the birth of the concept of property insurance. Initially, the concept did not get many customers but by 1681, the “Insurance Office for Houses”, the first property insurance company in England ever, was set up at the back of the Royal Exchange to insure brick and mortar homes, and 5,000 homes were insured initially. The oldest existing insurance enterprise available to the public is based in Hamburg, Germany.
Based on the fundamental concepts that gave birth to property insurance post The Great Fire, various other modes of insurance like life insurance, health insurance, motor insurance, insurance on financial instruments, etc are also serving customers today and is seen as a common practice to have insurance on these important aspects of life.
The presence of multinational insurance companies like Allianz, Berkshire Hathaway, and MetLife may not have existed without the centuries of development in the field of insurance, and possibly without the London fire as well. Like many businesses, the insurance sector was formed to solve a problem and has successfully worked as a neat solution to spread risk for a long time.