Find out the origins and history of different types of insurance. When and how did they develop and grow? What was the impact on the development of society?
History of Insurance
|Way back in Babylonian times, around 2100 B.C., the Code of Hammurabi was the first basic insurance policy. This policy was paid by the traders in the form of a loan to guarantee the safe arrival of their goods by caravan. Of course, caravans faced the same kind of perils our transportation industry faces today – like robbery, bad weather and breakdowns|
|Moreover, according to history, during the 13th century, the ancient Babylonians also devised a system that protected both the merchants and their customers against theft or loss, and this is one of the earliest recorded examples of insurance. The system involved wealthy people guaranteeing that they would pay for the loss of any ship that might sink, in exchange for receiving an agreed amount of money from ship owners.|
|In Babylon merchants and investors devised a system of contracts in which the supplier of money for a trade venture agreed to cancel the loan if the trader was robbed of his goods. The trader who borrowed the money paid an extra amount for this protection in addition to the usual interest. As for the lender, collecting these premiums from many traders made it possible for him to absorb the losses of the few. This arrangement proved to be more appealing and sensible than the earlier one. Later this series of contracts was extended to include provisions for a family's home and even covered murder, the start of life insurance.|
|The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c. 1750 BC, and practiced 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 first written insurance policy appeared in ancient times on a Babylonian obelisk monument with the code of King Hammurabi carved into it. The "Hammurabi Code" was one of the first forms of written laws. These ancient laws were extreme in most respects, but it offered basic insurance in that a debtor didn't have to pay back his loans if some personal catastrophe made it impossible (disability, death, flooding, etc.).|
|A type of Property Insurance first became popular about 3000 BC in China. Chinese merchants, as well as their investors, wanted to ensure that they would see a profit from their goods that they shipped overseas. In the event that a ship was lost at sea or pirated, an insuring partner would reimburse the owners of the ship and goods. To pay for the loss the merchant would be sold into slavery to the insurer until the debt was repaid. This was a mutually beneficial arrangement since a merchant could not afford to pay for the lost goods or even to buy a ship unless someone invested. The merchant could become very rich and even own a fleet of ships if he was successful.|
|In ancient times, farmers of China sent their crops to market on boats. Inevitably, on occasion a boat sank along the way. The farmers began spreading their crops among numerous boats, so that if one boat sank, any one family would only lose a small portion of their crops, thus avoiding financial devastation. The loss was spread among many families, and was therefore manageable for each one.|
|In China, as early as 5000 BC, when ships were commonly lost at sea, farmers made use of boats as a means of shipping their crops to purchasers or to markets where their produce was to be put on sale. Without a doubt, accidents occurred, boats sank, the harvests were lost, and the farmers faced financial devastation. These farmers, using common sense, conceived the idea of not "putting all their eggs in one basket," or in this case, boat. Instead, farming families relieved their anxieties about their shipments by using multiple boats to ship their merchandise. Therefore, this primitive form of insurance was utilized for situations where one or more shippers could avoid being financially buried by the catastrophic consequences that occurred whenever a boat or boats sank. Because of the distribution of the merchandise, the loss would have been minimized.|
|Insurance in the modern sense (i.e., insurance in a modern money economy, in which insurance is part of the financial sphere), early methods of transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively. Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing.|
| Achaemenian monarchs 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); the heads of different ethnic groups as well as others willing to take part, presented 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. This was advantageous to those who presented such special gifts. For others, the presents were fairly assessed by the confidants of the court. Then the assessment was registered in special offices.
The purpose of registering was that whenever the person who presented the gift 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: "[W]henever 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."
|The Phoenicians and the Greeks wanted the same type of insurance with their seaborne commerce.|
|Soon the Phoenicians and then the Greeks, Hindus and Romans also had similar concepts in place. Each culture had it's own interesting twist on the laws. For example the Roman's had a "jettison" law which stated that if a ship's crew had to lighten the ship by throwing things overboard then the loss would be split between the merchant and the insurer.|
|The Romans were perhaps the first to have burial insurance – people joined burial clubs which paid funeral expenses to surviving family members|
| In ancient Rome, when a system was devised to assist the families of injured or ill members, or if family members were in need of financial assistance to pay for the burial of their loved one. This basic form of insurance coverage was utilized by poor- free people, slaves, members of the military and average citizens who were not wealthy enough to be sure they could afford to be buried when they died. The people formed and joined burial clubs called Fratres that originated with the intention of paying for the funerals of those people who belonged to the clubs, and financially helping surviving family members. The club members met every month and at festival times. During their meetings, it was expected that the insured would pay fees towards their continued membership. Other rules required that new members, in addition to paying an entrance fee, would have to contribute an agreed amount of wine to the group. And during the meetings, after performing sacrifices, everyone shared a meal that presumably included the donated beverage. There were also other stipulations:
For example, members who hadn't paid their dues for six months were not permitted to make claims for burial. Moreover, members who committed suicide could not be buried in the same cemetery as the other residents of the community, and their survivors could not make claims against the burial clubs for financial assistance.
|The Greeks and Romans introduced the origins of health and life insurance c. 600 AD when they organized guilds called "benevolent societies" which cared for the families and paid funeral expenses of members upon death.|
| In the 7th century, the early Islamic community developed an insurance system called Takaful. It was a co-operative system of reimbursement in case of loss, paid to people and companies concerned about hazards, compensated out of a fund to which they agree to donate small regular contributions managed on behalf by a Takaful operator. It is defined as an Islamic insurance concept which is grounded in Islamic muamalat (Islamic banking), based on Islamic economics. This concept has been practised in various forms since 622 CE. Muslim jurists acknowledge that the basis of shared responsibility (in the system of aquila as practised between Muslims of Mecca and Medina) laid the foundation of mutual insurance.
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|In medieval times, the guilds protected their members from loss by fire and shipwreck, paid ransoms to pirates, and provided respectable burials as well as support in times of sickness and poverty|
|Guilds in the Middle Ages served a similar purpose|
|In the dark and 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 wooden hovels of medieval Europe, the guild would rebuild it using money from its coffers. If a master were robbed, the guild would cover his obligations until money started to flow in again. If a master were suddenly disabled or killed, the guild would support him or his widow and family. This safety net encouraged more and more people to leave farming and take up trades. As a result, the amount of goods available for trade increased, as did the range of goods and services available. The style of insurance used by guilds is still around today in the form of "group coverage".|
| A basic system for funding voyages to the new world was established. In the first stage, merchants and companies would seek funding from venture capitalists. The venture capitalists 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 would be guaranteed some of the returns from the goods the colonists would produce or find in the Americas. It was widely believed that you couldn't take two left turns in America without finding a deposit of gold or other precious metals. When it turned out that this wasn't exactly true, venture capitalists still funded voyages for a share of the new bumper crop: tobacco.
After the voyage was secured by venture capitalists, the merchants and ship owners would go to Lloyd's and hand over a copy of the ship's cargo to be read to the investors and underwriters who gathered there. The people interested in taking on the risk for a set premium would sign at the bottom of the manifest beneath the figure indicating what share of the cargo they were taking responsibility for (hence, underwriting). In this way, a single voyage would have multiple underwriters, who would try to spread their risk as well by taking shares in several different voyages.
|The Talmud deals with several aspects of insuring goods.|
|In some sense we can say that insurance appears simultaneously with the appearance of human society. We know of two types of economies in human societies: money economies (with markets, money, financial instruments and so on) and non-money or natural economies (without money, markets, financial instruments and so on). The second type is a more ancient form than the first. In such an economy and community, we can see insurance in the form of people helping each other. For example, if a house burns down, the members of the community help build a new one. Should the same thing happen to one's neighbour, the other neighbours must help. Otherwise, neighbours will not receive help in the future.|
|Before insurance was established in the late 17th century, "friendly societies" existed in England, in which people donated amounts of money to a general sum that could be used for emergencies.|
History of Insurance Companies
|Toward the end of the seventeenth century, London's growing importance as a centre for trade increased demand for marine insurance. In the late 1680s, Mr. Edward Lloyd opened a coffee house that became a popular haunt of ship owners, merchants, and ships’ captains, and thereby a reliable source of the latest shipping news. It became the meeting place for parties wishing to insure cargoes and ships, and those willing to underwrite such ventures. Today, Lloyd's of London remains the leading market (note that it is not an insurance company) for marine and other specialist types of insurance, but it works rather differently than the more familiar kinds of insurance|
|Insurance as we know it today can be traced to the Great Fire of London, which in 1666 devoured 13,200 houses. In the aftermath of this disaster, Nicholas Barbon opened an office to insure buildings. In 1680, he established England's first fire insurance company, "The Fire Office," to insure brick and frame homes.|
|The world´s oldest insurance market, Lloyd's of London was formed 300 years ago. Queen Elizabeth I introduced the Insurance Act, stating the intention to ensure "that the loss lighteth easily on many rather than heavilie on few."|
|Lloyd's of London saw the growing need for marine insurance and became one of the first established insurance companies.|
|Then in London, in 1688, the first insurance company was formed. It got its start at Lloyd’s Coffee House, a place where merchants, ship-owners, and underwriters met to transact their business. Lloyd’s grew into one of the first modern insurance companies, Lloyd’s of London.|
|The first mutual fire insurance company was established in 1696 with the cumbersome name of "Contributorship for Insuring Houses, Chambers, or Rooms from Loss by Fire by Amicable Contributions". This company was highly successful, eventually being absorbed by the Commercial Union Assurance Company, Ltd., of London in 1905.|
|Insurance companies thrived in Europe, especially after the industrial revolution. In America, the story was very different. Colonists’ lives were fraught with dangers that no insurance company would touch. As a result of lack food, wars with indigenous people and disease, almost three out of every four colonists died in the first 40 years of settlement. It took more than 100 years for insurance to establish itself in America. When it finally did, it brought the maturity in both practice and policies that developed during that same period of time in Europe.|
|The first insurance company in the United States underwrote fire insurance and was formed in Charles Town (modern-day Charleston), South Carolina, in 1732. Benjamin Franklin helped to popularize and make standard the practice of insurance, particularly against fire in the form of perpetual insurance. In 1752, he founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. Franklin's company was the first to make contributions toward fire prevention. Not only did his company warn against certain fire hazards, it refused to insure certain buildings where the risk of fire was too great, such as all wooden houses.|
|The first American insurance company was founded in the British colony of Charleston, SC.|
|In 1762 the first mutual life insurance company was formed, The Equitable of London|
|In 1787 and 1794 respectively, the first fire insurance companies were formed in New York City and Philadelphia.|
|The first American insurance corporation was sponsored by a church – the Presbyterian Synod of Philadelphia – for their ministers and their dependents|
|The first American insurance company, which only provided fire insurance, was established in Charleston, South Carolina in 1732.|
|The first life insurance company in the United States began in 1735, for the benefit of the families of Presbyterian ministers.|
|Life Insurance in its modern form came to India from England in the year 1818. Oriental Life Insurance Company started by Europeans in Calcutta was the first life insurance company on Indian Soil.|
|The business of life insurance in India in its existing form started in India in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta|
|Between 1787 and 1837, more than two-dozen life insurance companies were started, but less than six of them prospered and survived. During these times, anyone could purchase an insurance policy on anyone else, even a complete stranger. As a result, the strangers being insured sometimes wound up murdered. Therefore, a governing rule of insurance stated that the purchaser of the policy must have a legitimate interest in the preservation of the insured.|
| Bombay Mutual Life Assurance Society heralded the birth of first Indian life insurance company in the year 1870, and covered Indian lives at normal rates. Starting as Indian enterprise with highly patriotic motives, insurance companies came into existence to carry the message of insurance and social security through insurance to various sectors of society.
Bharat Insurance Company (1896) was also one of such companies inspired by nationalism. The Swadeshi movement of 1905-1907 gave rise to more insurance companies.
The United India in Madras, National Indian and National Insurance in Calcutta and the Co-operative Assurance at Lahore were established in 1906.
In 1907, Hindustan Co-operative Insurance Company took its birth in one of the rooms of the Jorasanko, house of the great poet Rabindranath Tagore, in Calcutta.
The Indian Mercantile, General Assurance and Swadeshi Life (later Bombay Life) were some of the companies established during the same period.
Development of Society and Insurance
|A thousand years later, the inhabitants of Rhodes invented the concept of the 'general average'. 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 storm or sinkage.|
|Actual insurance contracts originated in the 13th century with ship owners who wanted to protect themselves against the possibility of catastrophic losses. As before, ships were inevitably lost at sea from time to time. The owners were aware of this, but they could not foresee which ships would be lost at what time. Wealthy individuals agreed to receive a certain amount of money from each ship owner in exchange for a promise to pay for the loss of a ship when it occurred.|
|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 specialized varieties developed.|
|Then came the very first actual insurance contract, signed in Genoa in 1347. Policies were signed by individuals, either alone or in a group. They each wrote their name and the amount of risk they were willing to assume under the insurance proposal. That’s where the term underwriter came from|
|The earliest authenticated insurance contract (i.e. That which displays the characteristics of insurance in the sense of a transfer of risk of loss due to a fortuitous uncertain event in lieu of payment of consideration / premium), is a marine insurance contract on a ship “The Santa Clara” dated 1347 in Genoa. The policy is in the Italian language and appears in the form a maritime loan to avoid the canon (church) prohibition against usury.|
|The earliest insurance contracts did not appear in the form of a modern insurance contract, but rather was drafted in the form of either a fictional sale or loan, until the insurance contract proper was recognized and accepted.|
|The earliest insurers were merchants underwriting risks for fellow merchants, on a part time basis.|
|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, thereby, understand levels of risk. Pascal's triangle led to the first actuary tables that were, and still are, used when calculating insurance rates. These formalized the practice of underwriting and made insurance more affordable.|
|In 1666, the great fire of London destroyed around 14,000 buildings. London was still recovering from the plague had that ravaged it a year earlier, and many survivors found themselves without homes. As a response to the chaos and outrage that followed the burning of London, groups of underwriters who had dealt exclusively in marine insurance formed insurance companies that offered fire insurance. Armed with Pascal's triangle, these companies quickly expanded their range of business. By 1693, the first mortality table was created using Pascal's triangle and life insurance soon followed|
|In 1693, the astronomer Edmond Halley created a basis for underwriting life insurance by developing the first mortality table. He combined the statistical laws of mortality and the principle of compound interest. However, this table used the same rate for all ages|
|In 1756, Joseph Dodson corrected this error and made it possible to scale the premium rate to age.|
|Until the 1800-1900’s premiums were not determined by statistics kept etc. as in the modern sense, but was often arrived at as a result of haggling.|
|1830s, the practice of classifying risks was begun.|
|In 1835 when the New York fire struck. The losses were unexpectedly high and they had no reserves prepared for such a situation. As a result of this, Massachusetts lead the states in 1837 by passing a law that required insurance companies to maintain such reserves. The great Chicago fire in 1871 reiterated the need for these reserves, especially in large dense cities.|
|Insurance companies had to work together to find a solution to the challenge of large losses. So they got together and devised a system called reinsurance whereby losses were distributed among many companies|
|Although there was religious prejudice against the practice of insurance by a church, after 1840 it declined and life insurance boomed.|
|The Workmen’s Compensation Act of 1897 in Britain required employers to insure their employees against industrial mishaps. This also fostered what we know today as public liability insurance, which came strongly into play when the automobile arrived on the scene.|
|In the 19th century, many societies were founded to insure the life and health of their members. Fraternal orders were created to provide low-cost insurance strictly for their members. Today, many of these fraternal orders and labor organizations still exist. Most employers offer group insurance policies for their employees, providing them with life insurance, sickness and accident benefits, and pensions.|
| With the efforts of eminent people like Babu Muttylal Seal, the foreign life insurance companies started insuring Indian lives. But Indian lives were being treated as sub-standard lives and heavy extra premiums were being charged on them.
The Life Insurance Companies Act, 1912 made it necessary that the premium rate tables and periodical valuations of companies should be certified by an actuary. But the Act discriminated between foreign and Indian companies on many accounts, putting the Indian companies at a disadvantage.
|Insurance eventually evolved to where its basic premise came to be thought of as spreading the risk among others, so that individuals could trust that they or their survivors would be financially compensated in the event of loss.|
|The practice of underwriting emerged in the same London coffeehouses that operated as the unofficial stock exchange for the British Empire.|
|The origin of the word, “underwriter” is Italian, and is derived from the ancient practice of signing contracts for marine insurance in order to share in the profit or loss of a venture. The participants in the contracts signed their names underneath the contract, writing at the same time the amount of the risk that would be assumed by each businessman.|
|the very word "insurance" is derived from the Latin word for "security."|
|Other forms of insurance terminology are also derived from ancient practices of Mediterranean commerce.|
|The origin of the word "underwriter," for example, is Italian, from an old system of signing contracts on marine insurance. Those businessmen who had agreed to share in the profit or loss on a certain venture signed their names underneath the contract, writing at the same time the amount of risk assumed by each.|
|It is possible that "policy" is also of Italian origin - derived from "promise" - although other sources have been claimed for this word.|
|In 1666 the Great Fire of London finally and forcibly demonstrated the need for fire insurance. The primitive fire-fighting methods of the day were virtually helpless against the hungry flames that roared unchecked through narrow streets reducing timbered dwellings to ashes. The Great Fire of London burned for four days and nights. It razed 436 acres, devouring 13,200 houses, 89 churches (including Saint Paul’s Cathedral), the Custom House, the Royal Exchange and dozens of other public buildings. Only six people perished in the flames, but hundreds died from shock and exposure.|
|Insurance protection as we know it today can be traced to the aftermath of that tragedy and a man call Nicholas Barbon. Profoundly shaken by the Great Fire, Barbon promptly opened an office “to insure buildings.” This venture was apparently successful, because in 1680 he founded a partnership and established England’s first fire insurance company, The Fire Office, to insure brick and frame houses.|
|In 1704 the Lombard House inaugurated fire insurance for household and business goods,|
|In 1752, Benjamin Franklin was instrumental in helping insurance, especially fire insurance, become commonly established|
| Car insurance is a spin-off of marine insurance. It was developed after policymakers decided that operating a motor vehicle on public property was a privilege. It was ordered that motorists must purchase car insurance to protect innocent third parties against injury or property damage.
The first car insurance policy that offered liability coverage was written by an English company in 1895. The first liability car insurance policy written in the United States took place in 1898 and was written for Dr. Truman J. Martin.
|Congress first authorized Federal crop insurance in the 1930s along with other initiatives to help agriculture recover from the combined effects of the Great Depression and the Dust Bowl. The Federal Crop Insurance Corporation (FCIC) was created in 1938 to carry out the program. Initially, the program was started as an experiment, and crop insurance activities were mostly limited to major crops in the main producing areas. Crop insurance remained an experiment until passage of the Federal Crop Insurance Act of 1980.|
| 1924: First pet health insurance policy is written for a dog in Sweden.
1947: First policy is sold in Britain, and pet health insurance takes off rapidly. Today, the UK has the most mature pet health insurance market in the world with over 18% of pets insured. 1982: First pet health insurance policy is sold in the US to cover TV’s heroic dog Lassie.
Insurance in India
| 1912 - The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business.
1928 - The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance businesses.
1938 - Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public.
1956 - 245 Indian and foreign insurers and provident societies taken over by the central government and nationalized. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India.
| The General insurance business in India, on the other hand, can trace its roots to the Triton Insurance Company Ltd., the first general insurance company established in the year 1850 in Calcutta by the British.
Some of the important milestones in the general insurance business in India are:
1907 - The Indian Mercantile Insurance Ltd. set up, the first company to transact all classes of general insurance business.
1957 - General Insurance Council, a wing of the Insurance Association of India, frames a code of conduct for ensuring fair conduct and sound business practices.
1968 - The Insurance Act amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee set up.
1972 - The General Insurance Business (Nationalization) Act, 1972 nationalized the general insurance business in India with effect from 1st January 1973.
107 insurers amalgamated and grouped into four companies viz. the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. and the United India Insurance Company Ltd. GIC incorporated as a company.