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Man has always striven to alleviate the risk of disaster and devastation, whether by taking active steps to prevent losses, or by transferring risk to someone else. Insurance has played an important role as a risk transfer mechanism by allowing people to buy protection against the consequences of the risks they run to a third party for a premium.
The insurance is a cooperative device to spread the loss. Further, it is also a social device to accumulate funds to meet uncertain losses. The main function of insurance is to provide protection against the possible chances of gathering losses. It eliminates worries and miseries of losses at destruction of property and death. Further it provides capital to the society as the accumulated funds are invested in the productive channel. The earliest traces of insurance are in the form of marine trade losses or carriers’ contracts. However there is no evidence of a particular form or shape, especially prior to the 12th century.
The idea of insurance is as old as civilized society. The oldest form of insurance is the marine Insurance and is documented in marine cargo insurance contracts as early as 4000BC in Babylon, and in ancient Greek, Roman and early European Societies. The travelers by sea or by land were very much exposed to the risk of losing their vessels and merchandise. The piracy on the open seas and highway robbery or fear of sinking the vessels in the deep waters necessitates a device, which spreads financial losses. Thus, the marine insurance was found suitable for that very purpose. After marine insurance, Fire insurance was developed. It started from Germany in the beginning of the 16th century and its further consideration after the great fire in England in 1666, which turned eighty percent of houses to ashes but at the same time also injected life, strength and continuity to the insurance program.
All human history, as H.G. Wells has observed, is in essence the history of ideas. Since the beginning of civilization, ideas have ruled the world. Every nation has brought forth tyrants and benefactors. Their names are written with a bold flourish on the pages of history. Yet in the long perspective of life they are seen to have been but instruments for translating ideas into actions. The nations that have prospered most are those that have produced the greatest number of the new ideas/innovations. To the western world, the greatest of ideas have always been those that contribute most to man’s freedom and security. One of the most notable and practical of these is the idea of insurance. An idea, that has been described as, “victory of human thought over the rude violence of life”.
In its technical development and world wide expansion, insurance has made more progress in the last hundred years than in the previous thousand. Its rise as a social force has paralleled the rise of capitalism and the extension of the democratic system.
Insurance is indispensable to a free economy and a free society because it not only protects the value produced by men and women who work for themselves but fosters in them confidence to produce more. What oxygen is to air, insurance is to the economic and social life of our time.
There can be little doubt of the significance of the insurance for the student of economic development. The service it has provided has facilitated the management of risk in trade, industry and family life. Few would dispute that insurance has encouraged investment and initiative. Insurance institutions have stimulated saving and accumulated funds to an extent that has affected the level and direction of national investment. As outlined in Professor supple’s Introduction, insurance has played an important role in British Economic Development.
Insurance was involved to such an extent in so many businesses and in so many aspects of economy that its history reflects the evolution of atleast the modern business and social life in a most intimate and revealing way. To describe the main divisions of the insurance business – marine, fire life and accident insurance is to emphasize how they interpenetrate the central themes of the economic history. The growth in terms of foreign trade, capital formation, social security, transport systems, consumer durable industries, all these and more can be directly/indirectly, traced and examined through the systematic and comprehensive documentation that has been generated through insurance. The expansion of insurance and the value of its contribution have been based on its capacity to develop efficient forms of market organization and to innovate creatively.
Considered as an economic and social activity, insurance is an ambiguous phenomenon. It originated as a means of guarding against the most basic and individual risks (the loss of a ship or it’s cargo, the outbreak of fire in domestic properties, premature death) and has matured into set of complex arrangements facilitating economic transactions and harmonious social existence throughout the sophisticated societies. It combines elements of gambling and certainty – speculative hazard and reduction of or even elimination of chance by using the predictability to random occurrences in large numbers of instances. Appealing above all to the desire for stability and predictability, the business of insurance has evolved through competition and vigorous exploration of novelty, as well as by some of the most effective collusive devices in modern business history. The act of insurance is based on the mutual pooling of resources and hazards, but has flowered through proprietary profit making as well as (occasionally) mutual organizations and even over the last few decades public provision.
Insurance is essentially a simple proposition. As Calvin Coolidge once remarked “Insurance is part charity and part business, but all common sense”. Basically, insurance is a plan by which the many make good the losses of few. It scatters the effects of the hazards, which beset human affairs so widely among the whole community that no member is heavily burdened. It is in essence a modern refinement of old age custom of passing the hat to relieve distress. Now days, of course the hat is passed before the unlucky event occurs and as a result it is no longer necessary for a member of the community who suffers the economic misfortune to rely on impulsive, erratic charity. Insurance makes recompense certain and equitable. The practice of insurance involves the gathering of small, regular sums from many to form a pool. The contributors agree that a loss to one will be treated as a loss to all. When losses occur, sums are drawn from the pool in line with agreement. The machinery used to administer the pool is known as an insurance company.
EVOLUTION OF INSURANCE
Marine is the oldest known type of insurance. One of the earliest records of a marine policy relates to a Mediterranean voyage in 1347. This was followed by life insurance some three hundred years later. The business soon gained popularity and some persons were able to earn a living exclusively from insurance transactions. A book was written by a merchant of Florence which provides a clue of premium rates charged for goods transported by land from Florence to Milan and for shipments by sea from London to Pisa. From Italy, marine insurance spread along the trade routes to other countries of Europe. In Bruges there is a record of court judgment in an insurance matter in 1377, when wool being sent from there to northern Italy frequently insured, while in 1435 a law passed in Barcelonia (Spain) to regulate the insurance business. Even at that time, the law recognized the moral hazards created by over insurance and gave an advantage to domestic industry over foreign competition. An ordinance of Florence dated 1523, codifies the practice of insurance in Italy. Later on in the year 1556, Philip II made marine insurance regulations for Spain and in 1563 for Antwerp (America). After the discovery of America, the importance of Mediterranean trade declined and the scene shifted to Antwerp and London.
Marine insurance was brought to England from Italy by the Lombard merchants who settled in England and controlled a large portion of British trade in 15th and 16th centuries. Lombards were great traders and in addition to their goods, they brought their business methods and practices, including insurance. Their place in British commercial history is recorded in the name of Lombard street in the city of London. The records of British admiralty court indicated that marine was in existence in the early 1500. In a law suit in 1562, the underwriters refused to pay a claim on ground that the plaintiff had no insurable interest in the ship covered by the policy. Luckily the court held otherwise and the underwriter had to pay the compensation. The policy was written in Italian. In 1575, in the reign of Elizabeth I, the chamber of assurance was opened in the Royal exchange for registration of marine policies and subsequently, an act of parliament was passed in the year 1601, for dealing with the disputes pertaining to marine insurance.
During 16th and 17th centuries insurance was considered only a part – time profession and was exclusively practiced by professional merchants, who used to undertake the risk in association with their fellow traders. However, in early eighteenth century it was established that insurance can no longer be considered as a part – time profession. During the period 1720 – 1824, the two chartered companies viz; London Assurance and Royal exchange Assurance, dominated and enjoyed the sole right to transact marine insurance as corporations, though they were subject to successful competition from individual underwriters who, in London came together at Llyods. Later on, with the coming of the steamship and growth of international trade specialist marine offices were introduced. Subsequently, the Llyods association, founded in 1692 and originated from a coffee house run by Edward Llyod, became the center of marine insurance world. Even today the Llyods organization forms an important part of British Insurance Market.
Fire Insurance was born in England. Its birth was one of the few happy results of the Great Fire of London in 1666. On Sunday night, September 2, the kings’ baker, who is known in the history as “One Faryner”, left a pile of fagots carelessly by the open oven in his house on pudding lane. By Monday morning the Great Fire of London was underway. It blazed for five days eventually spreading over an area of 436 acres. It laid waste 13,200 houses, 89 churches including St. 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 the exposure. The heart of London, three quarter of the city’s building had stood, was reduced to ashes. According to Stow’s survey, the total property loss was well over pound 10,689,000 pounds.
Fire insurance was started by Nicholas Barbon, a doctor by profession but better known as a builder. Within a year after the great fire, when Barbon was twenty – seven, he set up an “Office for insuring houses and buildings”. At that time he was building system probably consisted inducing each of those to whom he sold a property to pay something extra in return for Barbon’s promise to rebuild the house in case of fire. Fortune evidently favoured this enterprise, for he branched out to offer a similar proposition to the owners of the houses other than those he had built. Barbon operated his insurance scheme as one man show for thirteen years. During this time he was an individual underwriter. Since his office was in his hat and he was operating on a strictly caveat emptor basis, there are no existing records showing the manner in which he conducted his business.
Barbon Nicholas abandoned his one man venture in 1680 and with several other men formed a new insurance project, which they called the “Fire Office”. The Fire Office was the first stock company organized to write fire insurance. It was capitalized at about $200,000. After three years the company had some 4000 houses insured. It had taken $90,000 in premiums and paid claims amounting to $35,000.
The first competitor of fire office was Friendly Society. It issued circulars telling of a new way or method for securing houses from any considerable loss by fire by way of subscription and mutual contribution. People who insured according to this new way were required, first to pay an annual premium, the size of which depended on the amount of insurance taken and whether the house insured was brick or frame, second, to deposit in advance with the society a sum equaling five premiums, third, to contribute to the settlement of each fire loss of the society up to an amount not exceeding $7.50 on each of $500 of insurance carried. The Friendly Society, like the Fire Office, took all the business it could get, accepting bad risks as well as good in the hope that the average would work in favour. A little more than a year after it’s founding, the Society had 1265 houses insured. Later on Fire Offices changed its name to Phoenix.
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