The History of Insurance

If risk is like a lump of smoldering coal that may spark a fire at any moment, insurance is civilization's fire extinguisher. The main concept of insurance—that of spreading risk among many—is as old as human existence.

Whether it was hunting giant elk in a group to spread the risk of being the one gored to death or shipping cargo in several different caravans to avoid losing the whole shipment to a marauding tribe, people have always been wary of risk. Countries and their citizens need to spread risk among large numbers of people and move it to entities that can handle it. This is how insurance emerged.

King Hammurabi's Code and Early Insurance

The concept of insurance dates back to around 1750 B.C. with the Code of Hammurabi, which Babylonians carved into a stone monument and several clay tablets. The code describes a form of bottomry, whereby a ship’s cargo could be pledged in exchange for a loan. Repayment of the loan was contingent on a successful voyage, and the debtor did not have to repay the loan if the ship was lost at sea.

Medieval Guilds Provided Group Coverage

In the Middle Ages, most craftsmen were trained through the guild system. Apprentices spent their childhoods working for masters for little or no pay. Once they became masters themselves, they paid dues to the guild and trained their own apprentices.

The wealthier guilds had large coffers that acted as a type of insurance fund. If a master's practice burned down—a common occurrence in the largely wooden cities of medieval Europe—the guild would rebuild it using money from its own funds. If a master was robbed, the guild would cover their obligations until money started to flow in again. If a master was suddenly disabled or killed, the guild would support them or their surviving family.

This safety net encouraged more people to leave farming to take up trades. As a result, the amount of goods available for trade increased, as did the range of goods and services. The basic style of insurance used by guilds is still around today in the form of group coverage.

Spreading Risk in Dangerous Waters

In the late 1600s, shipping was just beginning between the New World and the Old, as colonies were being established and exotic goods were ferried back. The practice of underwriting emerged in the same London coffeehouses that operated as the unofficial stock exchange for the British Empire. A coffeehouse owned by Edward Lloyd, later of Lloyd's of London, was the primary meeting place for merchants, ship owners, and others seeking insurance.

A basic system for funding voyages to the New World was established. In the first stage, merchants and companies would seek funding from the venture capitalists of the day. They, in turn, would help find people who wanted to be colonists, usually those from the more desperate areas of London, and would purchase provisions for the voyage.

In exchange, the venture capitalists were guaranteed some of the returns from the goods the colonists would produce or find in the Americas. It was widely believed you couldn't take two left turns in America without finding a deposit of gold or other precious metals. When it turned out this wasn't exactly true, venture capitalists still funded voyages for a share of the new bumper crop: tobacco.

After a voyage was secured by venture capitalists, the merchants and ship owners went to Lloyd's to hand over a copy of the ship's cargo manifest so the investors and underwriters who gathered there could read it.

Those who were interested in taking on the risk signed at the bottom of the manifest beneath the figure indicating the share of the cargo for which they were taking responsibility (hence, underwriting). In this way, a single voyage would have multiple underwriters, who tried to spread their own risk by taking shares in several different voyages.

By 1654, Blaise Pascal, the Frenchman who gave us the first calculator, and his countryman Pierre de Fermat, discovered a way to express probabilities and better understand levels of risk. That breakthrough began to formalize the practice of underwriting and made insurance more affordable.

Fire Insurance Rises out of the Ashes

In 1666, the Great Fire of London destroyed around 13,200 homes. London was still recovering from the plague that had begun to ravage it a year earlier and an estimated 100,000 survivors were left homeless. The following year, property developer Nicholas Barbon began selling fire insurance as a personal business, which was then established as a joint-stock company, the Fire Office, in 1680.

History of Life Insurance

Life insurance began to emerge in the 16th and 17th centuries in England, France, and Holland. The first known life insurance policy in England was issued in 1583. But, lacking the tools to properly assess the risk involved, many of the groups that offered insurance ultimately failed.

That started to change in 1693, when astronomer and mathematician Edmund Halley, best known today as the namesake of Halley's Comet, studied birth and death records in the city of Breslau for the purposes of calculating the price of life annuities. This gave rise to the use of mortality tables in the insurance industry.

Insurance Immigrates to America...Slowly

Insurance companies thrived in Europe, especially after the Industrial Revolution. Across the Atlantic, in America, the story was very different. Colonists' lives were fraught with dangers that no insurance company would touch. For example, starvation and related diseases killed almost three out of every four colonists in the Jamestown settlement between 1609 and 1610, a bleak period that came to be known as "The Starving Time."

Ultimately, it took more than 100 years for insurance to establish itself in America. When it finally did, starting around the 1750s, it brought the maturity in both practice and policies that developed during the same period of time in Europe.

The Bottom Line

The history of insurance is long and detailed, and it has involved significantly over time. Though it can be expensive, insurance has prevented people and businesses from suffering financial loss and it has financially protected people throughout time.