Ariel Munin

Insurance in Simple Terms - The History


Nowadays, insurance is considered a sophisticated science based on statistical calculations and risk tables. Actuarial science (specializing in probability calculations for states of uncertainty, in accordance with which insurance is priced) gives the field an aura of something new. Infact, however, risk management has been practiced since ancient times.


Long ago, the farmer chose to grow many kinds of vegetables, not only to maintain an independent farm, but also to spread the financial risk. If, for example, cucumbers did not ripen in a particular year, then growing tomatoes as well served to spread the risk. This same farmer brought many children into the world, due in part to a lack of means of contraception, but also because mortality among young children was high and only some of the children survived. Those who reached adulthood continued to farm the land, while the farmer could "retire" and be supported by them.

Over the years, people have realized that they must prepare for more severe economic damage than failure of cucumbers to grow. On September 2nd, 1666, in a small bakery in London, the royal baker to King Charles the Second, forgot to put out the fire in the oven before going to bed. A few sparks from the oven ignited the great fire of London, destroying the entire city of London in four days. Over 10,000 buildings burned down. The super-tanker hadn't been invented yet, and the mayor was forced to decide to destroy buildings to stop the fire.

After the big fire of London, the English understood that fire is one of the biggest causes of damage and began to hedge their risks through mutual insurance. Insurance companies promoted the development of fire departments, pushed for the establishment of municipal fire-fighting systems and even nailed metal plaques on buildings (fire signs) indicating which company insured the building.

During those same years, seaborne trade to far-flung destinations reached a peak and the need to protect the merchandise during the journey brought about the establishment of mutual guaranties for insurance risks. In 1688, in Edward Lloyd's coffee house in London, merchants, ship owners and captains gathered and paid premiums to representatives of capitalists (syndicates). If disaster struck, the syndicates paid the insured in proportion to their share in the mutual guaranties. Similarly today, the auto insurance premium is determined by the age of the driver, his accident history and the type of vehicle. So too then: the captain of the ship who wished to insure his journey was asked about his experience, the ship’s past, the goods being carried and the ship’s route. The premium was set accordingly.

Since then, the insurance mechanism has been refined; the syndicates of Lloyd's coffee house have become the largest insurance corporation: Lloyd's. In this way, insurance enterprises were born to join the needs of people who want to insure their property and pay a premium to those who have suffered damage and need financial resources to restore their property to its state before the disaster occurred.

Over time, hundreds of different types of policies have been created to insure every possible risk, in accordance with social and technological developments. However, do you need to insure everything?Read about that in the next chapter.

*Translated by Elsa Hadar

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