Insurance from a historical perspective-Part I

In contrast to commodity trades, where the object of exchange is visible and tangible, insurance is a business that is entirely based on trust and expectation. Money is given in exchange for a promise to repay a larger sum in the future, contingent on the occurrence of an uncertain event, or, in one case, death contingent on the occurrence of a certain event at an uncertain point in time. For example, in the case of whole-term life insurance, the insured will not be present to ensure that his or her claim is paid. As a result, trust in the individual or institution selling the insurance product must be strong. The purchaser must have confidence that the product is fairly priced (a much more complicated problem than commodity pricing) and that the insurer will remain solvent for the duration of the policy. The seller must be confident that the risk assumed is insurable and that the moral hazard embodied by the policyholder is acceptable. Why, then, should such a transaction ever take place outside of local communities or close-knit groups characterized by high levels of transparency and reputational knowledge? The short answer is that risk must be spread. For centuries, poor communities in the Philippines have reduced the risks and limited the effects of typhoons and flooding through mutual assistance associations and forms of cooperation denoted by the Tagalog word turnahan, which literally means “doing a turn.” Long-run data for the twentieth century show a close relationship between the per capita density of mutual aid associations and the regions with historically the highest frequency of disasters, implying that the latter was the primary determinant of the former.

Insurance is a mechanism for risk transfer. It is a method of transferring liability for losses to specialists who manage the risk by spreading it across a large number of people or businesses. A system of loss protection in which a number of individuals agree to pay certain sums of money, known as premiums, to create a pool of money that will use these individuals’ contributions to pay the losses of the few caused by events such as fire, accident, illness, or death.

Types of insurance from a historical perspective

Ship and cargo insurance, on the other hand, was the first and most international form of premium insurance. Nonetheless, national markets can be discussed insofar as recognized centres of marine insurance emerged in various states and were taxed by their respective rulers. Such centers were initially established along the northern Mediterranean, Italian, and Adriatic coasts. There were also specialist insurance broker communities in London, Antwerp, Amsterdam, Bruges, and Hamburg by the 1600s. In 1720, the Royal Exchange Assurance and the London Assurance joined 150 private marine underwriters in London, but they were unable to displace the underwriters operating out of Edward Lloyd’s coffee house. By this time, the London market had expanded to include the slave trade and what were known as “cross risks,” or ships or cargoes travelling between two or more foreign destinations other than the United Kingdom. Despite the fact that marine insurance originated in Italy, it gradually spread to other European trade centres. Similarly, a Florence ordinance from 1523 A.D. codifies Italian insurance practise. With the decline of Mediterranean trade after the discovery of America, Antwerp had become a leading insurance market by this time, eventually giving way to London.

Until 1720 A.D., marine insurance was entirely in the hands of individual underwriters, whose primary business was trade and commerce with insurance as a sideline. These people could be found in the Royal Exchange or one of the nearby coffee shops, such as Edward Lloyd’s, which began in the City of London’s Tower Street and later moved to Lombard Street. Lloyd’s Coffee House was a hub for the sale of ships and cargoes. Edward Lloyds died in 1713 A.D., but his family kept the coffee shop going. Individual marine insurers or underwriters used to congregate in this coffee shop to conduct insurance business. In 1772, the underwriters formed Lloyd‘s committee to govern their affairs. The proprietor of the aforementioned coffee shop began publishing Lloyd’s List in 1733, which provided information on ship movements and other matters of trading interest.

Life Insurance

The pooling of funds to offer compensation for the costs of mortality was common practise even before the advent of actuarial life insurance. Burial societies in the later Roman Empire paid a flat amount to the relatives of deceased members. Life insurance emerged as a by-product of marine insurance in the fourteenth century in the Mediterranean, when policies on ships and cargo were extended to cover passengers or slaves on board. On the ground, however, life insurance began as bets on the lives of monarchs and popes, a practice that many states quickly found morally and politically repugnant. The Ordinances of Barcelona, the first codification of insurance law in Spain, outlawed insurance gambling, including all forms of life insurance. Similar prohibitions were enacted in Amsterdam, Middleburg, and Rotterdam between 1598 and 1604, Sweden in 1666, and France in 1681. (with the notable exception of ransom insurance sold to travelers planning to sail in pirate-infested seas). In England, however, life insurance became completely independent of governmental regulation after half-hearted attempts by Elizabethan and early Stuart governments to regulate the industry.

However, at the turn of the century, a slew of new premium-based life insurance businesses popped up, some funded jointly, others by joint-stock, and the market took off. By 1914, 870 million pounds had been covered in 94 offices, a rate of expansion that outpaced the UK population and national GDP. By 1890, life assurance had become a mainstream market in the United Kingdom, with over 1 million Britons having standard life assurance policies and a further 9. Life insurance premiums in Germany, for example, rose from RM 86 million in the 1880s to RM 278 million in the 1900s.

Fire Insurance

The increase of public and private welfare provision in early modern Europe can be considered a major innovation, if not in actuarial science or underwriting techniques, then at least in terms of greater levels of security for private property and earnings. Fire insurance arose straight from the medieval tradition of ‘briefs,’ formal letters permitting post-hoc, sometimes forced collections for the relief of fire victims. After the emergence of private fire insurance towards the end of the seventeenth century in England, the collections quickly died away. They were outlawed in various European countries because they were seen as a barrier to the growth of public fire insurance funds.

From the early seventeenth century, peasant insurance unions known as Bauernassecuranz grew over central Europe, with villages assisting their neighbours with materials, labour, and money to repair their homes and farm structures following fires. The number of insurance unions surged in the nineteenth century as the value of estate property increased. Local governments began to be concerned about a shift in rural customers away from public fire insurance associations, which paid high rates for farmers’ thatched and wooden structures, and toward labour unions, which had virtually no administrative overhead. In Austria, for example, in the late 1880s, there were roughly 300 farmers’ insurance unions with 320,000 members, however this number has since dropped.

During the nineteenth century, as cities flourished and the value of urban property increased, public associations found themselves with a growing dearth of funds to cover their commitments. Even though there were deliberate efforts to merge the many small associations into larger institutions, there were still 72 public fire insurance associations in Germany in 1880, many of them confined to individual towns. Because of these and other factors, the market for private for-profit fire insurance in Europe grew rapidly in the first half of the nineteenth century.

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