Origins of Insurance
presented by Kathy Bayes Insurance Agency
From the beginning human societies sought ways to soften the shocks of existence. Our ancestors were very much aware that no individual could go it alone, that only by pooling the resources of the many could the unfortunate few be helped.
This simple notion of mutuality persists like a welcome footpath through the incredible tangle of human history. While empires have risen and collapsed, through wars, famines and pestilence, during the ebb and flow of struggling generations, the idea of insurance as "the victory of human thought over the rude violence of life" has endured and even flourished.
Examples abound. Even as human society emerged from the darkness of unrecorded time, we see it at once. In ancient Babylonia, where from the confluence of two rivers, enterprising merchants sent caravans and ships to trade with all parts of the known world: with Egypt, Phoenicia, India and China.
To reduce the risk of robbery, plunder and capture for ransom, the Babylonians devised a system of contracts in which the supplier of capital for a venture agreed to cancel the loan if the trader was robbed of his goods. The trader who borrowed the capital paid an extra amount for this protection (a premium) 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 of pledging not only the trader's ships and other tangible property, but also his life (as a slave) and those of his family as well. Accordingly, the practice was sensibly legalized in the Code of Hammurabi. (This code also made provisions for the indemnification of a family's home and even for murder or robbery.)
These arrangements became well known to the Phoenicians and to the Greeks, Hindus and Romans. In ancient Rhodes we discover a comprehensive code of sea laws, including a principle of "jettison" or "general average." It states that if it becomes necessary to throw goods overboard in order to lighten the ships, such sacrifice for the common benefit should be made good by a common contribution. Such laws of the sea, including Solon's Greek laws, found their way into early Roman civil codes and into the laws of the Byzantine Empire. In fact, they still exist today as part of our own laws for protection against losses at sea. 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.
The principle of sharing losses becomes more clearly defined as we trace the origins of life and health insurance in the ancient practices of Greece and Rome.
We see, for example, people joining together in burial societies that paid funeral costs out of monthly dues. Although these associations or guilds began as purely religious groups, they gradually became broader in scope as the benefits of the sharing principle became steadily more apparent. Health and burial insurance evolved extensively under a mutual plan without profit considerations in the Anglo-Saxon and German guilds of the middle ages. As successors to their Greek and Roman counterparts, the guilds combined the characteristics of trade associations, unions and fraternal societies.
To the Italian city republics of Venice, Pisa, Florence and Genoa, we can track the practice of insurance on a "premium" basis to about 1250 A.D. And in the Barcelona of 1435 A.D. we find the first comprehensive code of insurance laws. Our earliest record of true life insurance with "insurable interest" dates back to 1430 in Genoa and, among other things, had to do with the lives of pregnant wives.
With the decline of medieval guilds, so called "friendly societies" assumed the functions of mutual protection. Typically, these "societies" were made up of local groups of working people who made regular weekly or semiweekly contributions into a common fund administered by elected officers.
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 which 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.
Not surprisingly, the effects of the Great Fire were galvanizing to a stunned population. Insurance protection as we know it today can be traced to the aftermath of that tragedy and to 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 second company to be formed, The Friendly Society, was organized in 1683 incorporating some mutual characteristics. Policyholders had to agree to contribute toward settlement of each loss incurred, although the founders retained a predominant interest in the profits.
The first mutual fire insurance company was established in 1696 under the cumbersome title 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 insurance for household and business goods, and in 1762 the first mutual life insurance company was formed, The Equitable of London.
Thus, we can trace the steady search of embattled humans for various forms of security (insurance) from the vicissitudes of life: indemnification for ships and caravans, safety for property, recompense for fire and plunder, dignity in death and, above all, hope for a healthier, more meaningful existence.