Some sources on the history of insurance believe it originated in the 3rd millennium BC in China. Chinese merchants would put their wares in several ships instead of just one so if one ship sank all of their wares would not be lost. This practice was used on the rough rivers traveled by the merchants and limited their exposure in the event of an accident or force of nature caused a boat to sink.
Other sources believe insurance was started by Babylonian merchants. They developed a system recorded in the Code of Hammurabi. This allowed merchants to pay an additional fee which would cancel the loan for their goods if they didn’t make it to their final destination because the merchandise was stolen or lost at sea.
The Greeks followed with similar contracts in place where loans were repaid in full only if the goods arrived to their final destination. Cargo insurance flourished as maritime exposures grew. While Europe developed as a society, this type of insurance followed. Covered losses began to include piracy, fire, ransom, shipwreck, death and sickness. Maritime insurance became universal in Europe around the mid-1400’s.
Lloyd’s Coffee House in London became the place of choice where insurance contracts were negotiated and acquired. As commerce grew in the 17th and 18th century Lloyd’s of London developed into one of the original modern insurance companies. Insurance moved across the Atlantic to America before it was the United States. The first insurance company in America was established in Charleston, South Carolina. Like today, the premium and acceptability of coverage depended on its characteristics.
There were several large fires in the 1600’s and 1700’s that accelerated the growth of insurance. These included the Great Fire of London in 1666, the Great Fire of 1740 that destroyed over 300 buildings and the Great Chicago Fire of 1871. During this time an insurance carrier might provide a paid or voluntary fire department depending on how it was structured. Benjamin Franklin founded a mutual insurance company that required insureds in the area to help to join forces with other insureds in the event of a structure fire.
Insurance companies still continue to look at the numerous components of a risk and to determine the premium they are comfortable with. By having many insureds paying premiums a carrier is able to pay for losses; commonly referred to as the law of large numbers. Insurance continues to evolve as exposures evolve. The large fires that occurred in the early days caused many insurance companies to not be able to cover losses and the insureds were not able to collect from the insurance company.
Looking at the roots of insurance, it’s amazing to see how similar underwriting is today. We’ve gone from a world that moves goods on the backs of animals and individuals to one that has terrible disasters. The principle and theory of underwriting remains the same albeit much more sophisticated. I continue to watch the insurance industry evolve as our exposures change. Cyber liability which was very uncommon not long ago is now regularly placed with businesses and individuals. The insurance industry today is a trillion dollar business employing over two and a half million people in the US alone. As exposures increase the insurance industry will continue to grow.
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