Introduction

The history of insurance can trace the development of the modern business of insurance back to ancient times – against risks of loss or damage, of goods in transit, property, death, vehicle accidents, and medical treatment. The UK is regarded by many to be the birthplace of modern insurance. It was here that privately owned, technically advanced and international insurance companies first emerged, quickly dominating the world’s growing insurance markets and remaining leaders for most of the 19^th century. The first fire, accident and life insurance companies were established in the UK during the 1700s and their development became the blueprint for insurance companies worldwide.

What is insurance?

Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss. An entity that provides insurance is called: an insurer, an insurance company, an insurance carrier or an underwriter.[1]

Arguably, modern insurance started with the Great Fire of London in 1666. After more than 30,000 homes had been destroyed by the fire, the enterprising Nicholas Barbon[2], regarded widely as the founder of fire insurance, started his buildings insurance business. He later introduced London’s first fire insurance company. But the truth is that insurance existed long before that time.

Insurance is the oldest method of transferring risk and was developed to mitigate trade, business and other exposures. It provides an essential source of financial security for both the public and private sectors. Since ancient times, merchants have sought methods to minimise risks, as can be seen below.

KEY DATES

1601 First insurance legislation in the UK. was enacted. Modern insurance has its roots in this law which concerned coverage for merchandise and ships.

1666 The Great Fire of London showed the destructive power of fire in an urban environment. Entrepreneur Nicholas Barbon formed a business to repair houses damaged by fire.

1684 Participants in the Friendly Society in England formed a Mutual Insurance Company to cover fire losses.

1688 Edward Lloyd’s coffee house, the precursor of Lloyd’s of London, became the central meeting place for shipowners seeking insurance for a voyage.

1710 Charles Povey formed the Sun, the oldest insurer in existence which continues to conduct business in its own name.

1762 Equitable Life Assurance Society was formed in England.

1779 Lloyd’s of London introduced the first uniform ocean marine policy.

Ancient times

The first forms of insurance were recorded by the Babylonian and Chinese traders in the ancient world. To limit the loss of goods, merchants would divide their items among various ships crossing treacherous waters. So-called Bottomry contracts[1] were known to merchants of Babylon as early as 4000–3000 BC. Bottomry was also practised by the Hindus in 600 BCE and was well understood in ancient Greece as early as the 4^th century BCE.

Bottomry was recognised in ancient Roman law and became a highly developed industry from the 15^th century as world trade opened up further. To limit the loss of goods, merchants would divide their items among various ships that navigated treacherous waters. 

The Achaemenian monarchs were the first to insure their people[2], and insurance records were submitted to notary offices. The Romans also operated prototype funeral plans, with members paying subscriptions monthly into a fund that would cover the cost of their burial on their death.

Since those early days and over the centuries, insurance has developed into the modern business of protecting people from various risks. The industry has been profitable for many years and has been an essential aspect of private and public long-term finance.

Code of Hammurabi: Persia (approx. 1771 BC)

In late 1901 and early 1902, archaeologists found a 2.25-metre tall basalt or diorite stele in three pieces inscribed with 4,130 lines of cuneiform law dictated by Hammurabi (circa 1792–1750 BC) of the First Babylonian Empire in Persia. The Code of Hammurabi is a collection of 282 rules that established standards for commercial interactions and set fines and punishments to meet justice requirements. The code includes many harsh penalties – sometimes demanding the removal of the guilty party’s tongue, hands, breasts, eye or ear. But it is also one of the earliest examples of an accused person being considered innocent until proven guilty. All 282 rules are written in the ‘if then’ format – such as, if a man steals an ox, then he must pay back 30 times its value.

• Codex Hammurabi Law 100 stipulated repayment by a debtor of a loan to a creditor on a schedule with a maturity date in written contractual terms.
• Laws 101 and 102 stipulated that a shipping agent, factor, or ship charterer was only required to repay the principal of a loan to their creditor in the event of a net income loss or a total loss due to an Act of God.
• Law 103 stipulated that an agent, factor, or charterer was by force majeure relieved of their liability for an entire loan if the agent, factor, or charterer was the victim of theft during the term of their charter party upon provision of an affidavit of the theft to their creditor.
• Law 104 stipulated that a carrier (agents, factors, or charterers) issue a waybill and invoice for a contract of carriage to a consignee outlining contractual terms for sales, commissions, and laytime and receive a bill of parcel and lien authorising consignment from the consignee.
• Law 105 stipulated that claims for losses filed by agents, factors, and charterers without receipts were without standing.
• Law 126 stipulated that filing a false claim of a loss was punishable by law.
• Law 235 stipulated that a shipbuilder was liable within one year of construction to replace an unseaworthy vessel to the shipowner if it were lost during the term of a charter party.
• Laws 236 and 237 stipulated that a sea captain, ship-manager, or charterer was liable for replacing a lost vessel and cargo to the shipowner and consignees respectively, that was negligently operated during the term of a charter party.
• Law 238 stipulated that a captain, manager, or charterer that saved a ship from total loss was only required to pay one-half the value of the ship to the shipowner. See below for the law of general average (see below).
• Law 240 stipulated that the owner of a cargo ship that destroyed a passenger ship in a collision was liable for replacing the passenger ship and any cargo it held upon provision of an affidavit about the collision by the owner of the passenger ship.

THE LAW OF GENERAL AVERAGE

The law of general average is a fundamental principle of maritime (and other) insurance that emanates from Hammurabi Law 238. It works like this:  all stakeholders in a sea venture proportionally share any losses resulting from a voluntary sacrifice of part of the ship or cargo to save the whole in an emergency. For instance, if the crew were to jettison some cargo overboard to lighten their ship in a storm, the loss would be shared pro-rata by both the carrier and all the cargo owners.

Burial Society Collegium[1] and Friendly Societies[2]

In 1816, an archaeological excavation in Minya, Egypt, unearthed a Nerva–Antonine dynasty-era tablet from the ruins of the Temple of Antinous in Antinoöpolis, Aegyptus. The tablet set out the rules and membership dues of a burial society established in Lanuvium, Italia, in approximately 133 AD during the reign of Roman Emperor Hadrian.

The Greeks and Romans, circa 600 BC, set up guilds called “benevolent societies”, which cared for the families of deceased members and paid funeral expenses of members. Guilds in the Middle Ages had similar practices.

Middle Ages

Before modern-style insurance became established in the late 17^th century, Friendly Societies proliferated in England. People donated money to a general sum that could be used for emergencies. 

Sea loans or foenus nauticum were commonplace before traditional marine insurance in medieval times. An investor lent his money to a travelling merchant, and the merchant would be liable to pay it back if the ship returned safely. In this way, credit and sea insurance were provided simultaneously. The rate of interest for sea loans was high to compensate for the high risks involved. Sea loans involved paying for the risks involved, and Pope Gregory IX condemned the practice as usury in his decretal Naviganti of 1236.

In the 14^th century, Italian merchants introduced cambium contracts[1] (meaning change or exchange), where borrowers had to buy bills of exchange from lenders (merchant bankers). Since the bills of exchange were payable no matter what, they did not cover any sea risk at all. To hedge against the sea risks they now bore, merchants invented insurance loans – analogous to today’s marine insurance.

In 1293, D. Dinis, King of Portugal, advanced the interests of the Portuguese merchants when he set up a fund called the Bolsa de Comércio, the first documented form of marine insurance in Europe as traders exported their goods to agents to sell on their behalf.

Sending goods to the agents by road or sea involves different risks, such as sea storms, attack by pirates, damage to goods through poor handling while loading and unloading, etc. Traders used various measures to hedge the risk involved in exporting, such as sending goods on several vessels to avoid a total loss if a ship met with problems.

Separate insurance contracts (i.e., insurance policies not bundled with loans or other kinds of contracts) were invented in Genoa in the 14^th century. Insurance pools were backed by pledges of landed property. The first known insurance contract was dated from Genoa in 1347, and in the next century, maritime insurance developed widely, and premiums were intuitively varied and matched with risks. These new contracts allowed insurance to be separated from investment, which was particularly useful in the case of marine insurance. The first printed book on insurance was the legal treatise On Insurance and Merchants’ Bets by Pedro de Santarém (Santerna), published in 1552[2].

The risk hedging instruments used to mitigate risk in medieval times were sea/marine (Mutuum) loans, commenda contracts[3], and bills of exchange – almost the closest substitute of today’s marine insurance. In the 15^th century, the wording in policies for insurance contracts became standardised.

By the 16^th century, insurance was commonplace in Britain, France, and the Netherlands. Lloyd’s Coffeehouse was the prominent marine insurance marketplace in London during the 18^th century, and European and American traders used this marketplace to insure their shipments. 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.

By the mid-1600s, London had become a hub of global trade, with merchants, bankers and underwriters gathering in coffee shops to arrange ship and cargo insurance – as well as to gamble and gossip. The term ‘underwriter’ comes from their contracts, with the insurer signing his name underneath the document wording. Edward Lloyd became a successful marine insurer, and Lloyd’s of London remains an industry world leader even to this day.

Modern Insurance

Insurance became more sophisticated in Enlightenment-era Europe, and specialised varieties developed. Some forms of insurance developed in London in the early decades of the 17^th century. For example, the The will of English colonist Robert Hayman mentioned two insurance policies taken out with the diocesan Chancellor of London, Dr Arthur Duck. Of the value of £100 each, one related to the safe arrival of Hayman’s ship in Guyana and the other was stated by Hayman to be “one hundred pounds assured by the said Doctor Arthur Ducke on my life”.

Life insurance became widespread and affordable after the invention of mortality tables, which helped predict longevity. Two Fellows of the Royal Society (John Graunt and Edmond Halley) are reputed to have ‘invented’ the life table or table of mortality in the late 1600s.[1] The first life insurance companies were established in the UK during the 1700s, although the earliest life insurance policy is dated much earlier (1583) and covers the life of someone called William Gibbons. Life policies were typically taken out to cover loans and were subscribed to by individual underwriters.

As technology developed during the industrial revolution and into the 20^th century, the insurance industry moved with the times and specialist companies were formed to meet the needs arising from the development of the railways, motor vehicles and planes. 

The UK is the largest insurance market in Europe. Insurance in the UK works much the same as in other parts of the world, with customers paying monthly or annual premiums in addition to a contribution (called an ‘excess’) towards any claim they make.

Regulation of the Insurance Industry

Two bodies perform regulatory oversight of the UK insurance industry:

• The Prudential Regulatory Authority (PRA), an arm of the Bank of England, ensures that insurers are financially sound.
• The Financial Conduct Authority (FCA) regulates the behaviour and practice of insurance firms.

The Association of British Insurers (ABI) is the leading representative body of the UK insurance sector, with over 250 members.

Is Insurance Compulsory?

UK

In the UK, the position is:

Vehicle insurance: If you’re driving a vehicle, insurance is compulsory. The minimum cover is known as Third Party Insurance.

Home insurance: Homeowners are not required by law to have building insurance. However, it’s often a condition of a lender in the UK that, as a borrower, you must have building insurance. 

Employers’ liability insurance: Under the Employers’ Liability Act 1969, employers’ liability insurance is a legal requirement for all employers. It protects employees if they get injured or become ill due to working for your business.

Regulators of some professional bodies, such as lawyers and accountants, require their self-employed members to have certain types of insurance to operate and provide services to their clients. This means that those insurances will be mandatory for those professions. Apart from solicitors and accountants, some healthcare professionals must have professional indemnity insurance.

Other Countries

In other countries, the position may be different. For example, in the US:

• Auto insurance covering liability for injuries and property damage is compulsory in most states, but different states enforce the insurance requirement differently. In Virginia, where insurance is not mandatory, residents must pay the state a $500 annual fee per vehicle if they choose not to buy liability insurance. Penalties for not purchasing insurance vary by state but often include a substantial fine, license and/or registration suspension or revocation, and possible jail time. Usually, the minimum required by law is third party insurance to protect third parties against the financial consequences of loss, damage or injury caused by a vehicle.
• Generally, liability coverage purchased through a private insurer extends to rental cars. Full coverage (comprehensive policies) usually also apply to the rental vehicle, although this should be verified beforehand. 
• Health insurance coverage is no longer mandatory at the federal level, effective from 1^st January 2019. Some states still require health insurance coverage to avoid a tax penalty.
• Compulsory insurance is mandatory for individuals and businesses that want to engage in certain financially risky activities, such as operating a vehicle or running a business with employees.

The oddest things people insure

“There’s none so queer as folk”, goes a Northern saying. Well, if you want to be really picky, the expression is: “There’s nowt so queer as folk.”

Nowt means nought, or naught or nothing, but it is pronounced nowt in this sentence. I don’t know who first said it, but we probably all know that some people do some strange things, some of the time – such as taking out insurance against the loss or damage of something that may be valuable to them. Did you know that you can insure yourself against being abducted by aliens? Or, if you are planning to get married and your intended gets cold feet, there’s an insurance policy that will cover your disappointment?

By the way, Getting Kidnapped by Aliens Insurance will only pay out if you can prove being within an alien vicinity such as a spaceship or another planet – no successful claims so far. Here are some other unusual examples of insurance[1]:

• Betty Grable (from the Hollywood golden era) had her legs insured, and Jennifer Lopez has insured her derriere.
• Julia Roberts[2] has insured her smile for about  $30 million.
• David Beckham insured his entire body, the feared Australian cricketer, Merv Hughes, insured his facial hair (moustache) for $3.7 million, and Tom Jones is said to have insured his chest hairs for $7 million.
• Getting kidnapped worries some people so much they take out insurance against it – presumably to provide money to pay a ransom demand.
• 1920s Silent film comedian Ben Turpin famously bought an insurance policy with Lloyd’s, payable if his trademark crossed-eyes were ever to uncross. 
• Food critic Egon Ronay had his taste buds insured.
• Comedians Abbott and Costello took out an insurance policy to cover them if an argument split their team. 
• In the UK Kingdom, employers can purchase insurance against having two or more employees quit because they won the National Lottery. This policy would only pay up if the company lost at least two employees during the same lottery draw, which sets the odds of collecting on the policy astronomically high.
• Lloyd’s has been asked to insure some strange things (the latest being to insure spaceflights for Virgin Galactic). Earlier examples are:
• According to novelist Arthur C Clarke, film director Stanley Kubrick wanted to take out insurance with Lloyd’s to protect himself against losses if extra-terrestrial intelligence was discovered before his movie, ‘2001: A Space Odyssey’ was released. Lloyd’s refused.
• A Householder’s Comprehensive policy from 1914 covered damage caused by aeroplanes, airships, riots, strikes – and suffragists.
• Forty members of a Derbyshire Whiskers Club insured their beards against (of all things) fire and theft.

[1] See more at: https://www.usinsuranceagents.com/unusual-insurance-policies/

[2] Picture Credit: “Julia Roberts 2” by John Mathew Smith & www.celebrity-photos.com is licensed under CC BY-SA 2.0

[1] Source: https://royalsocietypublishing.org/doi/10.1098/rsnr.1938.0017

[1] See paper on The Cambium Maritimum Contract, by Raymond de Roover of Brooklyn College, HERE.

[2] Source: http://wsrinsurance.com/how-insurance-began-3000-years-of-history/

[3] The commenda was a medieval contract which developed in Italy around the 10^th century, and was an early form of limited partnership. The commenda was an agreement between an investing partner and a traveling partner to conduct a commercial enterprise, usually overseas. The terms of the partnership varied, and are usually categorized by modern historians as unilateral commenda and bilateral commenda, based on the share of contributions and profits between the partners. The bilateral commenda was known in Venice as colleganza or collegantia.https://en.wikipedia.org/wiki/Commenda – cite_note-5 The commenda has been described as a foundational innovation in the history of finance and trade – see Pryor, John H. (January 1977). The Origins of the Commenda Contract.

[1] Any association in ancient Rome which acted as a legal entity (a society) was called a Collegium.

[2] Friendly Societies are mutual-aid organisations formed voluntarily by individuals to protect members against debts incurred through illness, death, or old age. Friendly Societies arose in the 17^th and 18^th centuries and were most numerous in the 19^th century. They had their origins in the burial societies of ancient Greek and Roman artisans. In the Middle Ages the guilds of Europe and England extended the idea of mutual assistance to other circumstances of distress, such as illness. Friendly Societies went a step further by attempting to define the magnitude of the risk against which it was intended to provide and how much the members should contribute to meet that risk. Modern offshoots of Friendly Societies include trade unions, fraternal orders (such as the International Order of Odd Fellows), and Life Insurance companies. Source: Britannica.com, HERE.

[1] Bottomry is a maritime contract (now almost obsolete) by which the owner of a ship borrows money for equipping or repairing the vessel and, for a definite term, pledges the ship as security—it being stipulated that if the ship be lost in the specified voyage or period, by any of the perils enumerated, the lender shall lose his money. A similar contract creating a security interest in the cargo is called a Respondentia. Source: Britannica.com – https://www.britannica.com/topic/bottomry

[2] The dynasty ruling in Persia from Cyrus I to Darius III (553–330 BC).

[1] Source: Wikipedia, HERE

[2] Nicholas Barbon (1640 – 1698) was an English economist, physician, and financial speculator. Historians of mercantilism consider him to be one of the first proponents of the free market. In the aftermath of the Great Fire of London, he became an active London property developer and helped to pioneer fire insurance and mortgages as a means of financing such developments. Source: Wikipedia – https://en.wikipedia.org/wiki/Nicholas_Barbon