The History of Insurance

The insurance industry offer protection against financial losses resulting from a variety of perils. By purchasing insurance policies, individuals and businesses can receive reimbursement for losses due to car accidents, theft of property, and fire and storm damage medical expenses; and loss of income due to disability or death.

The insurance industry consists mainly of insurance carriers (or insurers ) and insurance agencies and brokerages. In general, insurance carriers are large companies that provide insurance and assume the risks covered by the policy. Insurance agencies and brokerages sell insurance policies for the carriers. While some of these establishments are directly affiliated with a particular insurer and sell only that carrier’s policies, many are independent and are thus free to market the policies of a variety of insurance carriers. In addition to supporting these two primary components, the insurance industry includes establishments that provide other insurance-related services, such as claims adjustment or third-party administration of insurance and pension funds.

Insurance carriers assume the risk associated with annuities and insurance policies and assign premiums to be paid for the policies. In the policy, the carrier states the length and conditions of the agreement, exactly which losses it will provide compensation for, and how much will be awarded. The premium charged for the policy is based primarily on the amount to be awarded in case of loss, as well as the likelihood that the insurance carrier will actually have to pay. In order to be able to compensate policyholders for their losses, insurance companies invest the money they receive in premiums, building up a portfolio of financial assets and income-producing real estate which can then be used to pay off any future claims that may be brought. There are two basic types of insurance carriers: direct and reinsurance. Direct carriers are responsible for the initial underwriting of insurance policies and annuities, while reinsurance carriers assume all or part of the risk associated with the existing insurance policies originally underwritten by other insurance carriers.

It all started with Property Insurance

Everyone knows what life insurance or property insurance is and usually knows something about how it works but not everyone knows the history and reasons for and behind insurance in general. In the most basic sense, insurance is the compensating of a person or business for a loss. There are many types of insurance to cover any situation including, auto insurance, health insurance, dental insurance, home insurance, personal insurance and even pet insurance.

A type of Property Insurance first became popular about 3000 BC in China. Chinese merchants, as well as their investors, wanted to ensure that they would see a profit from their goods that they shipped overseas. In the event that a ship was lost at sea or pirated, an insuring partner would reimburse the owners of the ship and goods. To pay for the loss the merchant would be sold into slavery to the insurer until the debt was repaid. This was a mutually beneficial arrangement since a merchant could not afford to pay for the lost goods or even to buy a ship unless someone invested. The merchant could become very rich and even own a fleet of ships if he was successful.

Of course property insurance wasn't just available in China. In Babylon merchants and investors devised a system of contracts in which the supplier of money for a trade venture agreed to cancel the loan if the trader was robbed of his goods. The trader who borrowed the money paid an extra amount for this protection in addition to the usual interest. As for the lender, collecting these premiums from many traders made it possible for him to absorb the losses of the few. This arrangement proved to be more appealing and sensible than the earlier one. Later this series of contracts was extended to include provisions for a family's home and even covered murder, the start of life insurance.

Of course news of a good idea spread fast. Soon the Phoenicians and to the Greeks, Hindus and Romans also had similar concepts in place. Each culture had it's own interesting twist on the laws. For example the Roman's had a "jettison" law which stated that if a ship's crew had to lighten the ship by throwing things overboard then the loss would be split between the merchant and the insurer. In fact, this law still exists today as part of our own laws for protection against losses at sea and the very word "insurance" is derived from the Latin word for "security."

Other forms of insurance terminology are also derived from ancient practices of Mediterranean commerce. The origin of the word "underwriter," for example, is Italian, from an old system of signing contracts on marine insurance. Those businessmen who had agreed to share in the profit or loss on a certain venture signed their names underneath the contract, writing at the same time the amount of risk assumed by each. It is possible that "policy" is also of Italian origin - derived from "promise" - although other sources have been claimed for this word.

Things changed dramatically in the 17th century. In 1666 the Great Fire of London finally and forcibly demonstrated the need for fire insurance. The primitive fire-fighting methods of the day were virtually helpless against the hungry flames that roared unchecked through narrow streets reducing timbered dwellings to ashes. The Great Fire of London burned for four days and nights. It razed 436 acres, devouring 13,200 houses, 89 churches (including Saint Paul's Cathedral), the Custom House, the Royal Exchange and dozens of other public buildings. Only six people perished in the flames, but hundreds died from shock and exposure.

Insurance protection as we know it today can be traced to the aftermath of that tragedy and a man call Nicholas Barbon. Profoundly shaken by the Great Fire, Barbon promptly opened an office "to insure buildings." This venture was apparently successful, because in 1680 he founded a partnership and established England's first fire insurance company, The Fire Office, to insure brick and frame houses.

The first mutual fire insurance company was established in 1696 with the cumbersome name of "Contributorship for Insuring Houses, Chambers, or Rooms from Loss by Fire by Amicable Contributions". This company was highly successful, eventually being absorbed by the Commercial Union Assurance Company, Ltd., of London in 1905. In 1704 the Lombard House inaugurated fire insurancefor household and business goods, and in 1762 the first mutual life insurance company was formed, The Equitable of London.

From this brief accounting of history we can see how insurance came to be. Fortunately for us we no longer have to sell ourselves into slavery if our car is stolen. However we can be confident that we will be compensated for our loss. Without people wanting to secure their investments and great tragedies throughout history we may not have insurance as we know it today and what a loss of peace of mind that would be.