Insurance – A Brief History

The idea that people who suffer a loss could be indemnified in some way has ancient origins.  Nearly 4,000 years ago the Code of Hammurabi, outlined more than 250 specific offenses or conditions and specified how each should be dealt with.  Much of the code was pretty stern stuff.  For example:  “If a man has committed highway robbery and has been caught, that man shall be put to death.”  However, many of the items in the code also dealt with compensation for offenses and some offered a notion of shared risk that predates private insurance. 

If the highwayman has not been caught, the man that has been robbed shall state on oath what he has lost and the (community) city or district governor where the robbery took place shall restore to him what he lost.

The notion of compensating individuals for losses beyond their control was born.

The Romans carried the insurance concept along a little further.  As funeral expenses increased, Roman citizens formed burial clubs that collected funds from the membership and paid funeral expenses to surviving family members. Later, in medieval times, Guild associations collected money from their members to support a common fund.  Depending on the guild and its interests, these funds could protect members from loss by fire and shipwreck, pay ransoms to pirates, provide burials or even offer support in times of sickness or poverty. This early safety net helped to encourage people to take up trades and helped generate increases in the amount and range of goods and services available.

The first known insurance contract was evidently signed in Genoa in 1347. Policies were signed by individuals who wrote their name and the amount of risk they were willing to assume in exchange for a premium payment at the bottom of the insurance contract – giving rise to the term underwriter.  The practice of exchanging a premium for a share of the risk was developed further in the coffeehouses of London in the 17th century.  One coffeehouse owned by Edward Lloyd, was a frequent meeting place for merchants, ship owners and others seeking insurance.  This lead to the rise of Lloyd’s of London.  At this time, underwriting was basically a bet.  The underwriter (insurer) made their own assessment of the risk and offered a premium in exchange for taking on that risk. For shipping insurance, for example, merchants or ship owners would go to Lloyd’s with a copy of the ship’s cargo to be read to the investors and underwriters who gathered there. Anyone interested in taking on the risk for a set amount signed at the bottom of the manifest beneath the figure indicating what share of the cargo they were responsible for. 

Formal assessment of risk awaited developments in mathematics.  Blaise Pascal and Pierre de Fermat contributed to ways to understand and express probabilities and understand levels of risk. These formalized the practice of underwriting and made insurance more predictable and affordable. In fact, it was the 1666 fire in London that spurred underwriters to begin to look at fire insurance and to estimate risk using tools like Pascal’s Triangle.  The insurance business further expanded at the end of the 17th century as underwriters developed mortality tables that allowed them to offer life insurance. 

Today, underwriters can use data, statistics and their understanding of circumstances to insure virtually any item or endeavor.  If you need insurance of any kind, your Washington Insurance agent can help you find it!

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