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History of Insurance

History of Insurance

Early methods of transferring or distributing risk were practiced by Babylonian traders as long ago as the 2nd millennium BC. The Babylonians developed a system which was recorded in the famous Code of Hammurabi, circa 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.

A thousand years later, the inhabitants of Rhodes (Greece) invented the concept of ‘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.

The Greeks and Romans introduced the origins of health and life insurance circa 600 AD when they organized guilds called ‘benevolent societies’ which acted to care for the families and funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose.

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 specialised varieties developed.

Towards the end of the 17th century, the growing importance of London as a centre for trade led to rising demand for marine insurance. In the late 1680’s, Mr. Edward Lloyd opened a coffee house which became a popular haunt for ship owners, merchants and ship’s 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.

Insurance companies as we know them today can be traced to the Great Fire of London, which in 1666 consumed 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 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 popularise and make standard the practice of insurance, particularly against fire. 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.


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