History and Insurance

Where did insurance come from? Who were the people who were first to use insurance?

The history of insurance is a very interesting one. Insurance emerged thousands of years ago from the need of people to spread the risk of calamity or catastrophe among a larger group. The basis of insurance is essentially a “guarantee against loss”.

In ancient Babylon, in about 2100 BC, the first written insurance policy was issued on an obelisk carved with the code of King Hammurabi. The Hammurabi code provided basic insurance taken by traders to guarantee the safe arrival of their caravans or cargo, in that a trader didn’t have to pay back his loans if some catastrophe, whether a natural catastrophe or robbery, effected his cargo.

In India, insurance has a deep-rooted history and is mentioned in the writings of Manu (Manusmrithi), Yagnavalkya (Dharmashastra) and Kautilya (Arthashastra). The basis is the same i.e. pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine. Ancient Indian history provides the early traces of insurance in the form of marine trade loans and carriers’ contracts, much the same as King Hammurabi’s code.

Insurance evolved from these early roots. The Greeks and Phoenicians wanted risk cover for their marine trade. The Romans brought in the concept of burial insurance where people became members of a burial club which paid funeral expenses on the member’s death.

In the middle ages, the British guilds provided protection to their members from loss by fire and shipwreck, robbery, piracy, and support in times of sickness and poverty. The guilds also provided risk cover in the event of death or disablement of the member to support him or his widow. This encouraged more people to move to the cities and take up jobs as craftsmen, resulting in increased availability of goods for trade.

In the late 1600’s Insurance, as practiced today, emerged in London’s coffeehouses. Shipping and trade was beginning to increase between the New World and the Old as new colonies were being established and goods brought back. A coffeehouse owned by Edward Lloyd, was the preferred meeting place for merchants, ship owners and others seeking insurance. This coffeehouse later became Lloyd’s of London.

Traders and Companies would seek investment for setting out on their voyage from wealthy individuals who would fund voyages as venture capital. These investors would also buy the provisions required for the voyage and help find people who wanted to travel to the New World as colonists. In turn the Venture Capitalists were paid a share of the booty or goods brought back from the Americas.

Once a voyage was finalised, the trader and shipping company would go to the Lloyd coffeehouse to have the voyage insured against risk of not returning.

The first insurance company was formed in London in 1688 after the Great Fire of London in which nearly 14,000 of houses were destroyed. A group of Underwriters who had till then been issuing marine and cargo insurance, set about insuring for Fire.

Edmond Halley, the astronomer, developed the first mortality table in 1676 which was used to Underwrite Life Insurance for the first time. Halley combined mortality statistics with the principle of compound interest to give the first basis to underwrite a human life. However, this table used the same rate for all ages. In 1756, Joseph Dodson introduced a new mortality table to adjust the premium rate with age.

In the 19th century, as trade between the Americas the Europe grew, so did cargo losses. The insurance business grew more organised and developed new companies in the colonies. Many societies were founded to insure the life and health of their members, many of these provided low cost group insurance to members. Today, many employers arrange for group insurance policies for their employees, providing life insurance, health and accident insurance and pensions.

The Fire of New York in 1835 and subsequently the Chicago Fire of 1871, led to high losses with companies not having adequate reserves to meet the scale of the claims. This led to regulations requiring Insurance Companies to maintain adequate reserves – a regulatory requirement today, which has been significantly tightened.

During this period Insurance companies started working together to find a solution that would allow them to further distribute any large losses – and this led to the birth of Reinsurance. Today reinsurance is a part of all types of insurance businesses.