The Beginning of Insurance and Its Importance to Many of Us
The word "insurance" refers to a contract that gives an individual or an entity financial protection in case of illness or death, or that allows reimbursement against certain losses. It gives the following benefits: financial support to survivors upon the policyholder’s death, replacement income when the insured incurs disability, and payment of health-related expenditures. Suffice it to say, an insurance policy is a guarantee against loss.
Insurance in the Ancient Times
The history of insurance dates back to 2100 B.C., at a time when the Hammurabi Code was used. This Code was the first insurance policy which traders willingly paid because they wanted guaranteed safety of their goods against threats like robbery, transportation breakdown and bad weather.
Later, the Phoenicians and Greeks had their own forms of insurance for sea-borne trade while the Romans had burial insurance in the form of club memberships, which paid funeral expenses. Guilds during the medieval times, on the other hand, protected their members from loss brought by fire and shipwreck, paid ransom to pirates as the need arose, extended financial support during sickness and poverty, and even provided respectable burials.
The First Insurance Contract
The first actual insurance contract was signed in Genoa in 1347. Individuals signed policies, and indicated the amount of risk they were willing to assume. The risks were calculated by an underwriter who used statistics to decide on the amount of premiums. By 1693, underwriting for insurance was based on a mortality table developed by astronomer Edmond Halley. This table combined statistics and the principle of compounded interest but used a standard or uniform rate across age groups. This erroneous rate standardization was corrected almost a century later by Joseph Dodson, who scaled the premium based on age.
The First Insurance Business
The first insurance company was formed in 1688, at Lloyd’s Coffee House in London. This place served as a meeting place for merchants, ship-owners and underwriters who transact business. It later grew and became one of the first modern insurance companies – Lloyd’s of London.
When commerce grew, the need for insurance increased due to greater risks. Since goods were usually lost during shipment to distant places, this meant higher payouts for claims. Members of stock companies saw this as an opportunity for profit, and penetrated the insurance business to learn the ropes.
By 1735, the first American insurance company was founded in the British colony of Charleston, SC. Three decades later, the first fire insurance company was formed in New York. With the passing of time, people felt a greater need for insurance. Other needs were identified. By the 1830s, risk classification has begun.
On the part of insurers, a system called “reinsurance” emerged to protect their companies from bankruptcy. Under this set-up, unexpectedly high claims were distributed among cooperating insurance companies. This way, the impact of these claims on their capital was softened.
Why We Need To Get Insurance
Nowadays, people consider insurance as an important need. Since risks abound, everyone wants protection. If you are a traveller, you want travel insurance; if you are a farmer, you will have a need for crop insurance; if you are an investor, you will prefer institutions with deposit insurance. Every time we are confronted with risks, we look for protection. And to a lot of us, insurance is the best instrument that gives peace of mind.