Insurance is a protection mechanism against financial loss. To a lot of people, insurance sounds outdated and boring. But realistically speaking, insurance is pretty pervasive in people's lives. There is health insurance to cover unexpected medical expenses. Vehicle owners (i.e. people who own cars, trucks, and/or motorcycles etc.) are required to purchase vehicle insurance in many states within the U.S. Property buyers, especially those who took out mortgage with federally approved mortgage lenders, are required to purchase homeowner's insurance. The list can go on and on. In other words, insurance is relevant and integral to people's lives.
To understand the insurance industry's significance, as an insurance underwriter, I personally find it helpful to learn how insurance became the way it is today. Disclaimer: I am not a historian. My intention is to give a beginner-friendly overview on the history of insurance.
The first type of insurance created was marine cargo insurance. At around 3000 BC, humans started trading by water vessels. In Ancient Babylonia at around 2100 BC, the earliest record of insurance was found in the Code of Hammurabi. The insurance record was scripted based on bottomry. Bottomry is an archaic arrangement which the master of a ship borrowed money from a lender to protect against loss of cargo, while the ship vessel was used as collateral. Through bottomry, traders were protected from debt in the event of cargo loss.
In 1st millennium BC, Phoenician merchants practiced a concept called "general average" (whereby all stakeholders in a sea venture proportionately distribute any losses due to damage in ship or cargo). The collected premiums was used as reimbursement to any merchant whose goods were abandoned during transport, whether it was due to sea storms or ship sinkage.
Marine cargo insurance went through major developments attributed to the rise of European trade guilds from the 11th to 12th century. Traders formed guilds that not only regulated product prices and quality, but also helped to indemnify traders against losses at sea.
Around the same era, the role of marine cargo insurance became more significant due to the flourishing Mediterranean trade in cities like Lombardy, Venice and Florence. In these very same cities official written records of marine cargo insurance emerged. By 1255, Venice applied the principles of mutual insurance by collecting premium to compensate merchants who suffered financial losses due to pillage. But formal documentation for insurance policies didn't appear till much later. The oldest insurance policy document was issued on April 24th, 1384, which covered a vessel called Santa Clara that transported four bales of textiles from Pisa to Savona. Unfortunately, I was unable to find a picture of the world's oldest insurance policy on the internet. If any of my dear readers is able to find a picture of this policy, please email me or let me know in the comments below, thank you.
Merchants not only imported new products to foreign lands, they also passed along innovative ideas across borders. To some degree, merchants were probably the earliest "influencers". Lombard merchants introduced the concept of marine insurance to northern Europe and England during the 13th century. By the 17th century, London, along with the creation of the Lloyd's of London Association in 1688, became the leading center for marine insurance.
Here is a fun fact, the official list of vessels and values published by Lloyd's of London in 1734 (aka "Lloyd's List") is still being used as the golden standard today within the marine insurance field. This detail alone gives emphasis to Lloyd's of London's contribution to the development of marine cargo insurance.
For a long time, because of trade, insurance was considered "a matter of convenience" (by Sir Christopher Wren) that only applied to merchants. But that changed in 1666, when the Great Fire of London burned down more than 13,000 homes and transformed the perception of insurance into "a matter of urgency". In 1681, English economist Nicholas Barbon and his eleven associates established England's first successful property insurance company, the "Insurance Office for Houses" to insure brick homes.
Barbon's fruitful venture inspired many other companies to follow suit in the next few decades. Initially, these insurance companies hired their own in-house fire departments to prevent and mitigate fire damage on properties. They also issued "fire insurance marks" to their customers to be displayed on the main door of each insured property to indicate that the property was insured. But the system was incredibly inefficient, because rival fire brigades would often ignore burning buildings that were not insured with their company.
To solve the problem, insurance companies agreed to provide money and equipment to a local municipal authority in charge of stationing fire prevention equipment and firefighters equally around the city to respond to all fires. As a result, the situation improved but the problem did not completely go away - as the brigades still favored saving insured buildings over uninsured buildings.
Fire insurance marks are metal plaques marked with the insurance company's emblem, see picture on the left. These plaques were attached to the front of insured buildings as a guide to the insurance company's in-house fire brigade. They were used in the 18th and 19th century before municipal fire services were formed.
The development in property insurance was followed by the birth of life insurance shortly after. The first company to offer life insurance coverage was the Amicable Society for a Perpetual Assurance Office, founded in London 1706 by William Talbot and Sir Thomas Allen.
This was how the company's first life insurance plan worked: each member paid a fixed annual amount per share from one to three shares contingent to the age of the members (ranging from twelve to fifty-five). At the end of each calendar year, a portion of this pooled contribution was divided among the widows and children of deceased members proportionate to the number of shares passed down. Though various life insurance companies came and went through the years, the original intentions behind life insurance plans were pretty much the same.
A major flaw with the Amicable Society's life insurance plan was that people over the age of fifty-five were excluded from membership. And such "flaws" indirectly inspired the creation of a subject called actuarial science - the use of mathematical and statistical tools to assess financial risks in fields such as insurance.
In 1693, Edmund Halley created the first life table - a table that shows the probability of death in different ages. But it wasn't till much later in the 1750s, mathematical and statistical tools were discovered that added momentum for modern life insurance development.
After being refused admission to the Amicable Society because of his age, James Dodson, a mathematician and actuary himself, attempted to start a new company that issued premiums that correctly offset the risks of long-term life insurance policies. Unfortunately, he passed away in 1757 before he could even procure a charter from the British government.
Edward Rowe Mores, Dodson's student, took the baton and established the Society for Equitable Assurances on Lives and Survivorship in 1762. The world's first mutual insurer, the Society for Equitable Assurances on Lives and Survivorship pioneered the concept of age-based premiums based on mortality rates, thereby laying the foundation for modern life insurance. The Society sought to treat its members more equitably - its Directors ensured that policyholders received a reasonable return on their investments. The best thing was that premiums were calculated based on age, and any person could purchase life insurance regardless of his or her state of health.
Picture on left: Edward Rowe Mores, the founder of the Society for Equitable Assurances on Lives and Survivorship. Not pictured here, James Dodson - a mastermind innovator of the life insurance industry.
The advent of railway trains created a demand for accident insurance in the late 19th century during the Industrial Revolution. The first company to offer accident insurance was an English company (founded in 1848) called the Railway Passengers Assurance Company. The company primarily insured against a growing number of fatalities on the newborn railway system.
The Railway Passengers Assurance Company reached agreements with leading railway giants, so that basic accident insurance was sold as a package deal along with train travel tickets to customers. This method of selling is similar to insurance companies bundling sales of travel insurance along with airline tickets.
The Industrial Revolution brought huge advancements in multiple areas such as manufacturing processes and food production, such improvements also led to growth in the average human life span. Since the late 19th century, governments built national insurance programs as safety nets against sickness and elder age.
In the 1880s, German Chancellor Otto von Bismark introduced senior pensions, accident insurance and medical care as part of Germany's welfare program. His paternalistic approach towards welfare was popular among German blue collar workers and reduced outflow of German immigrants to the U.S.A, where wages were higher but similar welfare programs did not exist.
In Great Britain, the Liberal government at the time passed the 1911 National Insurance Act, which gave the British working classes a contributory insurance system against illness and unemployment for the very first time in British history. The act was rather generous because it offered free treatment for tuberculosis and maternity benefits. But it was also limited since it only insured workers from cyclical industries such as ship construction and didn't offer any dependent coverage. After World War II, this national insurance system was expanded under the influence of Social Insurance and Allied Services report by William Beveridge. This systematic postwar expansion made Great Britain the first modern welfare state in the 20th century.
Welfare State - is a form of government in which the state protects and promotes the economic and social well-being of the citizens, based upon the principles of equal opportunity, equitable distribution of wealth, and public responsibility for citizens unable to avail themselves of the minimal provisions for a good life (Wikipedia)
By the 1930s, the U.S.A was the only modern industrial country without a national insurance program. The United States didn't introduce a national insurance program until the passage of the 1935 Social Security Act. The act was developed by President Roosevelt in response to unemployment and poverty during the Great Depression. The Social Security act expanded the concept of insurance as an alternative means to achieve base level individual financial security that might not be available to some people.
Under the Social Security program, payroll taxes funded the old-age program that contributed to poverty rate declines among the elderly. The program also established an unemployment insurance program which is administered on a state level. The act also established the Aid to Dependent Children program that provided financial aid to single mother households.
In 1965, the Social Security Act was amended that led to the founding of two major healthcare programs that are still active today: Medicare and Medicaid.
Since this post talks about the history of insurance, I wouldn't go too in depth on the components of the Social Security Act. I will consider doing a more in-depth analysis on the Social Security Act in a separate post depending on the interest of my readers.
I hope my dear readers would find this post informative. I did my best to use the internet to research and cross examine the facts listed in this post. To play it safe, I only used information with multiple references and could be strung together in the form of a timeline. If you like this post, don't forget to hit "like", leave a comment below and click subscribe!
Comments