History of Insurance

History of Insurance

Thanks to the LMI Group, you can now learn more about the epic history behind the global insurance industry which YIPs are a part of.

The need for insurance to protect our assets and the business income stream is as old as commerce itself.*

The need for insurance became apparent with the early development of human society. In fact, some describe the insurance profession as the fourth profession after the farmer, soldier, and trader. It is no co-incidence that insurance followed the trader.

When you consider it, there are two types of economies in human societies: natural or non-money economies; and money economies (with markets, currency, financial instruments, etc).

The first form of economy is a more ancient form. Even in the early economies and communities, we see insurance in the form of people helping each other. For example, if a house were to burn down, the members of the community would help build a new one. It works, in that if the neighbours do not help and their house was to burn down, no one would help them. This type of insurance has survived to the present day in many developing countries.

When it comes to insurance in the modern sense (i.e. insurance in a modern money economy, where insurance is part of the financial sphere}, early methods of transferring or distributing risk were practised by Chinese and Babylonian traders as long ago as the third and second millennia BC. For example, Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to the capsizing of any single vessel.

The Babylonians developed a system that was recorded in the famous Code of Hammurabi, c. 1780 BCE, and practised by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen. The Code also addressed the loss of a home or shop. Insurance fraud was discouraged (yes, it was around even then), with the punishment of death. When you consider the first written word on insurance at the Musee du Louvre in Paris, it is hard to believe that insurance was codified nearly 4,000 years ago.

Achaemenian monarchs of Iran were the first to insure their people and made it official by registering the insuring process in governmental notary offices. The insurance tradition was performed each year in Norouz (beginning of the Iranian New Year), with the heads of different ethnic groups, as well as others willing to take part, presenting gifts to the monarch. The most important gift was presented during a special ceremony. When a gift was worth more than 10,000 Derrik (Achaemenian gold coin), the issue was registered in a special office.

The purpose of registering was that whenever the person who had presented the gift that was registered by the Court, was in trouble, the monarch and the Court would help him. Jahez, a historian and writer, writes in one of his books on ancient Iran:

"Whenever the owner of the present is in trouble or wants to construct a building, set up a feast, have his children married etc, the one in charge of this in the court would check the registration. If the registered amount exceeded 10,000 Derrik, he or she would receive an amount of twice as much".

A thousand years later, the inhabitants of Rhodes invented the concept of the 'general average', which is a concept still used in marine insurance to this day. Merchants whose goods were being shipped together would pay a proportionally divided premium, which would be used to reimburse any merchant whose goods were jettisoned during a storm or pirate attack.

The Greeks and Romans introduced the origins of health and life insurance at around 600 AD when they organised guilds, called 'benevolent societies', which cared for the families and paid funeral expenses of members upon death.

Guilds in the Middle Ages served a similar purpose.

The Talmud deals with several aspects of insuring goods. Before insurance was established in the late 17th Century, 'friendly societies' existed in England, in which people donated amounts of money to a general fund that could be used for emergencies.

Separate insurance contracts (i.e. insurance policies not bundled with loans or other kinds of contracts) were invented in Genoa in the 14th Century, as were insurance pools backed by pledges of landed estates. These new insurance contracts allowed insurance to be separated from investment; a separation of roles that first proved useful in marine insurance.

Insurance became far more sophisticated in post-Renaissance Europe, and specialised varieties were developed.

Lloyd's of London

Towards the end of the 17th Century, London's growing importance as a centre for trade increased demand for marine insurance.

In 1688, Edward Lloyd opened a coffee house in Tower Street, London. It eventually became the world-renowned insurance market it is today.  So important, we gave it its own page.  Click here to read more about Lloyd's.

The Great Fire of London

Insurance, as we know it today in developed economies, can be traced to the Great Fire of London that, in 1666, devoured 13,200 houses, 87 parish churches, 6 chapels, 44 Company Halls, the Royal Exchange, the Custom House, St Paul's Cathedral, the Guildhall, the Bridewell Palace and other City prisons, the Session House, four bridges across the rivers Thames and Fleet, and three city gates, making around 100,000 people homeless, which was one-sixth of the city's inhabitants at that time. The death toll from the fire is unknown, and is traditionally thought to have been quite small, but it is more likely that thousands may have died in the flames or from smoke inhalation. Only six verifiable deaths were recorded.

Ironically, Ye Olde Wine Bar, which is located only a few hundred metres from the seat of the fire and is constructed entirely of timber, survived and still trades to this day. Eight stone churches also survived.

The losses in London caused by the Great Fire was the equivalent to a staggering 830 times the income of every man, woman and child in the city! When you compare the damage caused by this fire to the damage caused by the Blitz in World War II, you get a small appreciation of the size of this conflagration.

We tend to think that a massive loss of homes would never happen to a modern city in a first world country. However, we only have to think back to the Canberra bushfires on 18 January 2003 when, in the course of 18 hours, 10 people died and 431 homes in Canberra were destroyed or severely damaged by fire, started by a series of lightning strikes in the surrounding bush lands. Or 'Black Saturday' on 7 February 2009 when fires raged across Victoria and 173 people perished, with over 2,000 homes were destroyed along with another 1,500 buildings.

Like many tragedies, much came out of the Great Fire of London. Nicholas Barbon opened an office to insure buildings and, in 1680, he established England's first fire insurance company, The Fire Office, to insure brick and timber frame homes. The insurance companies developed the forerunners of today's modern fire brigades, while building construction and town planning were both improved. Within only a few short days, Sir Christopher Wren had sketched out the plans of a new and better London. This is a great example of the fact that out of every crisis arise opportunities and threats.


*Reproduced from '‘IT MAY HAPPEN TO ME! The Essential Guide to General Insurance’ (Second Edition) by Dr Allan Manning, with permission from the LMI Group.

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