HISTORY OF INSURANCE
HISTORY
OF INSURANCE
Legend
says that Chinese merchants travelling through the dangerous waters of
the
Chang Ts6 Jiang river or the Huang He river the Yellow river)
of
the risk of losing their merchandise if a boat was upset during the trip to the
coast
of China. They agreed to share this risk by distributing their merchandise
among
several boats rather than concentrating them on a single boat. If a boat
was
upset, then each merchant was exposed only to the loss of a small portion of
his
cargo.
Another
version of the same story relates to caravans travelling across the
desert
from Babylonia and distributing the merchandise among camels and
several
caravans to reduce the risk of loss caused by wind storms or bandits.
The
Insurance Idea
Long
time before Christendom, around the Mediterranean Sea, Phoenicians
merchants
traded goods and wheat and were certainly engaged in the same risk
management
practices. Because ships loaded with wheat could result in a large
loss
for the merchants, even though they had already distributed their cargo on
several
ships, they came with another idea. If each merchant would agree to
leave
on the alongside the quay part of the wheat cargo from each ship that
would
constitute a stock of wheat that could be used to compensate some
merchants
for the loss of the entire cargo.
They
engaged a man to guard the wheat who soon discovered that by
sowing
the wheat he could replace the cargo and make some profit. Merchants
very
soon realized that the more they were, the less was needed from each ship's
cargo.
It was also agreed that the merchant whose cargo went further was
running
more risk and that other criteria like the age of the vessel, the
experience
of the captain could also reduce or increase the risk. They engaged
another
man to survey the causes of losses. The idea of insurance was born in
what
could have been a barter economy.
The
Relationship to Trade
Pirates,
weather, fire, illness and death were risk elements affecting merchants
along
the various trade routes. The chances of loss were very high and the
Babylonians
merchants who extended credit on such vulnerable collateral as
cargo
in transit charged a risk premium above the interest charges on capital.
The
Code of Hammurabi (2100 B.C.), which formalized the concepts of civic
responsibility,
bottomry and respondentia, improved trade conditions and
established
doctrines that were to play significant roles in the evolution of
insurance.
1
The
history of insurance from its origins to today is related to the concept of
international
trade. Pfeffer and Klock (1974) provide a relevant summary of the
early
history of insurance business. During the time of the Greek area of
modem
history the contract of bottomry was established by Demosthenes ( The
Orations)
with premium rates depending upon factors such as time of the year,
the
type of vessel, the route followed, the experience of the company.
The
Greek tradition in insurance was adopted by the Romans, but the decay
of
the Roman Empire led to the development of agrarian societies, based on
small
communities living in autarcy. Trade almost disappeared and security was
provided
by the family, the community and/or the church. The revival of
international
trade, after the Middle Ages, may be due to the Scandinavian's
trading
activities which included most of Europe and the Middle East. The
merchants
of the Hanse cities organized a league to protect trade routes and to
enforce
strict codes of conduct.
Until
the seventeenth century, the Hanse merchants had sovereign status in
the
city of London. Today, the development of insurance is generally credited
to
the bankers and merchants of Northern Italy. The Lombards began
developing
marine insurance coverages in the city of London towards the end of
the
twelfth century. The Lombard merchants engaged in international trade
established
also a league for common protection. Bottomry agreements were
common
in Venice, Genoa, Florence, Naples and Bari before the year 1000.
The
first written account of a marine insurance contract involved a policy for a
voyage
commencing in Genoa in 1347.
17
By
1400, Europe's trade pattern was well developed. It is probable that the
insurance
activity developed at the same time and for the same reasons in the
northern
part of Europe and in Italy. In the year 1310 it is recorded that the
Duke
of Flanders granted a charter for the establishment of a Chamber of
Assurance
to underwrite marine risks.
During
the fifteenth century the patterns of trade became international and
Portugal
became the leading trade country in Europe soon followed by England,
France,
Holland and Spain. Spain conquered Portugal in 1581 and added
Antwerpen
(Anvers) and the Netherlands to its domain by 1585. The defeat of
the
Spanish Armada in 1588 left the field to the Dutch, English and French.
Over
the next two hundred years, England established authority over all of
Europe
as a dominant nation in international trade (Pfeffer and Klock, 1974,
p.13).
In
1720, the first two insurance corporations chartered in England, The
London
Assurance Corporation and the Royal Exchange Corporation enjoyed a
monopoly
in the marine insurance field until 1824 but insurance underwriters in
London
continued to operate the major bulk of the marine insurance business.2
This
situation apparently protected the individual underwriters from competition
and
helped the City of London to become the world center in the marine
insurance
field.
Industrialization
and Urbanization
As
industrialization gave rise to the development of urban centers where wood
construction
predominated, it also generated high losses when fires occurred.
While
a farmer could rebuilt a damaged home with the help of neighbours, the
complexity
and impersonality of cities resulted in catastrophic consequences for
the
owners.
The
Great Fire of London in 1666 is always given as the catalyst event for
the
development of fire insurance (Pfeffer and Klock, 1974, p.18). The first
recorded
suggestion for a fire insurance company seems to have been made in
1609
in Germany but the company was not formed.
Several
fire insurance companies were formed shortly after the fire. Fire
marks
were issued by these companies and affixed to the insured buildings, so
that
in the event of a fire these buildings could be identified and protected by
the
fire-brigades: no fire marks, no protection.
In
1667 Nicholas Barbon established the "Insurance Office at the Back-Side
of
the Royal Exchange" which became "The Fire Office" in 1680. The
"Amicable
Contributors for Insurance from Loss by Fire" appeared in 1696. It
became
known as the "Hand-in-Hand Office" from the logo of clasped hands on
its
fire mark. Progress in the early years was slow, and gave little indication of
the
vast development which was to take place in the later years.
