Have you ever wondered where insurance actually came from? Who were the first people to be insured – and why? Insurance is one of those things we tend to take for granted. It just seems to have always been there. The history of insurance is an interesting one, but the basic idea has always been the same. The Merriam-Webster Dictionary describes insurance as, “coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril.” So the basis of insurance is “guarantee against loss”.
Shipping/transportation insurance – the first guarantee against loss
We look back in history at who first felt the need for a guarantee against loss, and who gave them that guarantee. Way back in Babylonian times, around 2100 B.C., the Code of Hammurabi was the first basic insurance policy. This policy was paid by the traders in the form of a loan to guarantee the safe arrival of their goods by caravan. Of course, caravans faced the same kind of perils our transportation industry faces today – like robbery, bad weather and breakdowns.
As history progressed, the needs for insurance increased. The Phoenicians and the Greeks wanted the same type of insurance with their seaborne commerce. The Romans were the first to have burial insurance – people joined burial clubs which paid funeral expenses to surviving family members. In medieval times, the guilds protected their members from loss by fire and shipwreck, paid ransoms to pirates, and provided respectable burials as well as support in times of sickness and poverty.
Then came the very first actual insurance contract, signed in Genoa in 1347. Policies were signed by individuals, either alone or in a group. They each wrote their name and the amount of risk they were willing to assume under the insurance proposal. That’s where the term underwriter came from.
Underwriters play a big part in the insurance industry. They’re the ones who calculate the risk, based on statistics, and decide what the premiums will be. In 1693, the astronomer Edmond Halley created a basis for underwriting life insurance by developing the first mortality table. He combined the statistical laws of mortality and the principle of compound interest. However, this table used the same rate for all ages. In 1756, Joseph Dodson corrected this error and made it possible to scale the premium rate to age.
By this time, the practice of insuring cargo while being shipped was widespread throughout the maritime nations of Europe. Then in London, in 1688, the first insurance company was formed. It got its start at Lloyd’s Coffee House, a place where merchants, ship-owners, and underwriters met to transact their business. Lloyd’s grew into one of the first modern insurance companies, Lloyd’s of London.
As commerce grew – so did the need for insurance
Lloyd's Coffee House was the first marine insurance company.
In the 17th and 18th centuries, British commerce was rapidly growing. As commerce grew, risks increased. In a way, progress was actually working against the insurance industry – there were more and more ways of goods being damaged or lost, as goods were shipped greater distances and by more advanced methods. Therefore, there were higher payouts for claims.
The members of stock companies saw an opportunity for a profitable business here. They were chartered in the insurance business in England in 1720, and in 1735. The first American insurance company was founded in the British colony of Charleston, SC. In 1787 and 1794 respectively, the first fire insurance companies were formed in New York City and Philadelphia. The first American insurance corporation was sponsored by a church – the Presbyterian Synod of Philadelphia – for their ministers and their dependents. Then other needs for insurance were discovered and, in the 1830s, the practice of classifying risks was begun. Although there was religious prejudice against the practice of insurance by a church, after 1840 it declined and life insurance boomed.
Preparing for large losses
So everybody was getting into the swing of insurance. People accepted the fact that they needed to pay premiums to protect themselves and their loved ones in case of loss, including major losses like fires. The insurance companies had a rude awakening to this fact in 1835 when the New York fire struck. The losses were unexpectedly high and they had no reserves prepared for such a situation. As a result of this, Massachusetts lead the states in 1837 by passing a law that required insurance companies to maintain such reserves. The great Chicago fire in 1871 reiterated the need for these reserves, especially in large dense cities.
Insurance companies had to work together to find a solution to the challenge of large losses. So they got together and devised a system called reinsurance whereby losses were distributed among many companies. This system is now commonly used in all types of insurance.
Insurance really gets organized
Amicable Society for a Perpetual Assurance Office, established in 1706, was the first life insurance company in the world.
Now the insurance industry was growing to huge proportions. The companies, although competitors, worked together to create productive systems that could be used throughout the industry. They needed to keep up with the requirements of the increasing amount of laws governing insurance. For example, the Workmen’s Compensation Act of 1897 in Britain required employers to insure their employees against industrial mishaps. This also fostered what we know today as public liability insurance, which came strongly into play when the automobile arrived on the scene.
In the 19th century, many societies were founded to insure the life and health of their members. Fraternal orders were created to provide low-cost insurance strictly for their members. Today, many of these fraternal orders and labor organizations still exist. Most employers offer group insurance policies for their employees, providing them with life insurance, sickness and accident benefits, and pensions.
Now insurance was the accepted thing to do. Everybody needed to protect themselves against the many risks in life. Farmers wanted crop insurance. People wanted deposit insurance at their banks. Travelers wanted travel insurance. Everybody turned to insurance companies to give them peace of mind. And really, isn’t that what insurance is – the paying of a premium to protect against some form of loss.
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