The History of Insurance Pt. I: Navigating Risk
Insurance Evolution before the Rise of the United States
A Natural Propensity to Truck and Barter
Insurance as a concept, a discipline, and ultimately a profession, evolved alongside several other commercially oriented ideas including finance, banking, and trade. In his masterpiece The Wealth of Nations, seminal economist Adam Smith wrote:
“The division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.”
(Note: after this declaration, Smith goes on to describe the prototypical society based on barter, the exchanging of one good directly for another. This idea has basically been dispelled as a myth. Complex societies and communities, ones that would have any sort of division of labor, have had various forms of money as long as anyone can tell. Read the amazing book Debt: The first 5000 Years, by David Graeber for more great insights like this.)
While the specific nature of barter practiced by societies throughout history is in question, I believe Smith was spot on about humanity’s incessant desire to carry things - natural goods, crafts, weapons, ideas - across great distances to trade with others.
Insurance as a financial concept emerged from the complexities and dangers that arise from the physical execution of this desire.
Antiquity
Maritime and overland trade was the lifeblood of ancient civilizations, and along with that practice came inherent risks. Prosperous cultures of antiquity, from the Babylonians, Phoenicians, Indians, and Greeks, to the Romans relied upon seafaring and caravan trade to exchange merchandise and raw materials with sophistication at least as early as 4000 BC. These ventures could be jeopardized by raiders, pirates, weather, even untrustworthy businessmen who might abscond with the property of others once over the horizon.
The foundations of the insurance discipline were laid in this ancient world, beginning with merchant contracts emerging between 4000-3000 BC. The potential for loss of cargo or even entire vessels prompted merchants to devise something called “bottomry” contracts. These agreements allowed investors to share the risks associated particularly with maritime ventures, providing a form of financial protection against unforeseen calamities.
Ancient bottomry contracts were consensual agreements between a shipowner and a lender designed for maritime ventures. The contracts served as risk-sharing mechanisms, with the ship itself serving as collateral for loans advanced to cover voyage costs. If the journey faced perils resulting in loss or damage to the ship or cargo, the lender could claim repayment from the ship's value or insurance proceeds. These contracts, specified high-interest rates and terms for repayment upon the safe completion of the voyage.
Around 1750 BC, Hammurabi's Code, widely understood to be the first comprehensive legal statute, and infamously remembered for its phrase “an eye for an eye,” was disseminated by a king of the Old Babylonian Empire. The code addressed a wide range of legal issues with top down laws that Hammurabi was said to have been given by the gods "to prevent the strong from oppressing the weak.” A portion of the text is intended to address the fundamental issue of fairness in compensating individuals who suffered losses.
Ancient Greeks and Romans began to apply the concept of insurance to the human concerns of life and health through the creation of informal risk capital pools called “Friendly Societies” and burial clubs. These groups regularly collected funds from members to provide financial support for one another during times of illness or death. Membership was limited to discreet communities with members collectively making decisions on how to manage the funds.
Middle Ages
The Middle Ages (roughly from the 5th to the late 15th century) were characterized by profound political, cultural and socio-economic transformations in Europe, including in the realm of risk mitigation. Professional and trade guilds emerged as society moved toward a more urbanized and structured state to respond to the needs of skilled craftsmen and merchants.
Guilds protected the interests of artisans and tradespeople who encountered unforeseen circumstances including financial hardships. As with the friendly societies before them, guilds served discrete communities which could pool resources to offer financial assistance and protection to their members.
Formalization
As trade continued to expand and came to be more or less dominated by coastal European powers, insurance became increasingly formalized with policies drafted in the 14th century that have survived the ages. Maritime insurance policies were drafted in Genoa, Italy in response to the increasing complexities and dangers of seaborne trade. The oldest surviving insurance contract is for a ship named the Santa Clara from 1347. The document is written in an extremely meticulous format, indicating that drafting of similar insurance contracts was probably standard procedure for similar voyages for years or even decades by then. Two hundred years later (1547), the oldest existing English contract, the “Broke Sea Insurance Policy” was drafted, showing an even more standardized format that pedantically clarified the terms of coverage.
The 16th century saw a veritable explosion of insurance as an intellectual discipline and as a technical practice with focused academic explorations being published and businesses created to provide insurance being created. Portuguese thinker Pedro de Santarem's book, "On Insurance and Merchants’ Bets," was published in 1552 in response to the growing intellectual exploration of insurance principles. In 1560 the first British “friendly society,” the Incorporation of Carters, was established to provide dignified burials for members, similar to the practices of medieval guilds and the ancient greek organizations of the same name. The first custom English life insurance policy was issued in 1583, marking a societal transition toward a focus on the individual, and another evolution of the insurance discipline.
The process of insurance democratization and formalization continued in the 17th century with the expansion of global commerce, urban industrialization, more scientific study, and the incorporation of lasting commercial ventures. Ultra long-distance shipping to the colonies of the “New World” required innovative risk management strategies that could be replicated en masse. The Hamburger Feuerkasse, considered the world's oldest existing insurance company, was established in 1676. And in 1680, a governmental entity, the London Fire Office was created to address the risks of urbanization, pioneering the concept of dedicated insurance services.
Standardization
In 1693, scientist Edmund Halley (yes, the same guy who Halley’s Comet is named after) published the Breslau mortality table, a critical document for the standardization of insurance underwriting. The population of Breslau, then part of the Habsburg Empire, was seen as particularly stable, allowing data based on this population to be considered “an estimate of the degrees of mortality of mankind.” Starting with 1000 one year-olds, the table shows how many people of this population survived after each year. The table came to be regularly used in Europe for the calculation of life probability, to compute things like the price of insurance premiums and annuities. Annuities were developed in 1698 by a Rev. William Assheton, recognizing the importance of long-term financial planning, an example of the evolution of insurance alongside other disciplines like finance.
The Equitable Life Assurance Society, founded in 1767, laid the groundwork for the mutual insurance model that would become prevalent in the years to come. Policyholders could collectively share the risks and rewards of insurance, similar to mutual insurance providers of today.
In 1793, the English Parliament passed a landmark piece of legislation, The Rose Act, to provide a stable and effective regulatory framework for the formation of Friendly Societies to serve the English People. With this decision, the government communicated its understanding that insurance had developed into a societally important institution that made life better for the English people, protecting and encouraging the proliferation of the industry.
With the arrival and close of the 19th century, insurance was fully adopted and standardized in Europe. Insurance policy distribution shifted from a handwritten format to printed, dramatically increasing the standardization and scale of insurance operations.
A New Era Beckons
The evolution of insurance before the rise of the United States as a world power is marked by innovative response to risks encountered by the human desire to push forward, to build, and to trade. Businesspeople and specialists continually incorporated new technology into their practice and responded to societal demands. As business shifted so did government, and the insurance industry became more deeply enmeshed in the lives of everyday people.