Insurance is nothing but a system of spreading the risk of one onto the shoulders of many. While it becomes somewhat impossible for a man to bear 100% loss to his own property or interest arising out of an unforeseen contingency, insurance is a method or process that distributes the burden of the loss among a number of persons within the group formed for this particular purpose.
History of The Insurance Industry
Origin of Insurance
Although not in the present-day form of insurance, the concept of such a philosophy of grouping together or risk sharing developed in very ancient times.
We can probably go back to the 4th century, which witnessed the practice of Bottomry Bonds and Respondentia Bonds in maritime trade.
If, at a time of distress in mid-ocean, the master of the vessel needed funds/money to complete the journey but could not manage it at an intermediary port either on his own account or on the account of the owner of the vessel, he (the master) was empowered to raise such funds by pledging the vessel.
This system was known as Bottomry Bond, as the loan was given by signing a bond.
The term of the agreement was that the loan was required to be repaid only if the ship reached its destination safe and sound. In case of total loss of the ship, nothing was required to be repaid.
It was quite obvious, therefore, that the creditors used to charge a premium, in addition to interest, to protect themselves against the possibility of total losses when they lose the principal amount.
Similar loans could also be raised on the pledge of cargo, and this was done through Respondentia Bonds.
The terms of repayment were exactly the same. The practice has been abandoned since the 19th century because of tremendous advancement in the communication system.
Another practice that still exists is known as General Average, which involves sharing the loss of one by all. It is a very old custom and can be traced back to 916 B.C. during the time of Rhodians.
In a maritime adventure, it is probable that the ship, along with cargo and other interests, is in great distress in mid-ocean, and it may be required of the master of the vessel to make a bold decision on the spot aiming at the safety of the venture.
Such an action may involve incurring expenditure or making a sacrifice (for example, throwing overboard the cargo to lighten the vessel).
As this expenditure or sacrifice relates to some interest by which the rest of the interests are saved, it is natural that all interests involved (saved and lost) should contribute to this loss.
This is known as General Average, and it should be understood that an element of sharing the loss by many is involved in the system.
Until the 18th century, we also see, among the merchant community, a system of sharing risks with each other.
They used to form a group in which one of the merchants, in a particular voyage, would accept the risk against a premium from others, while the others would trade.
On a different occasion, another member from the group would accept the risk while the rest would trade, and so on.
So at one time or another, each member had to take the responsibility of risk-bearing, and the collection (premium) was such that it could reasonably take care of a probable loss.
As the group was small and the professional expertise on risk management was limited, the rate of premium necessarily used to be high.
It is necessary for the students to appreciate that even though this is not the present-day system of insurance as an isolated specialized entity, the concept of insurance, that is to say, a system of sharing or spreading risks, gradually developed out of need and was ultimately replaced by the modern insurance approach.
Considering that knowledge of the historical development of any branch of study provides the reader with useful background information on how
that particular branch gradually developed as a separate entity, it has been felt that insofar as insurance is concerned, such knowledge is also indispensable for students studying this branch.
With this aim in view, a brief chronological historical development of the various branches of insurance is given below:
History and Development of Marine Insurance
Marine insurance is the oldest form of insurance and came first on the list. This type of insurance probably began in Northern Italy sometime during the 12th and 13th centuries, and gradually the concept was transferred to or taken over by the United Kingdom.
During the 13th and 14th centuries, Italian merchants went to the UK and brought with them the trading customs, including the concept of marine insurance.
Marine insurance, as such, was not practiced as a separate specialized entity during that time since it was the merchants who transacted marine insurance business alongside their general trading activities.
Gradually, Lombard Street in England (named after the merchants of Lombardy, Italy) became the nerve center of marine insurance activities as it was where the merchants assembled for the purpose of trade and insurance protection.
However, problems arose as there were no set rules or regulations for settling disputes arising out of marine policies, and it was the Lombard Street customs that influenced the settlement of such disputes.
There were practices to refer disputes to the Admiralty Court, but it had the drawback of not having specialized knowledge of the Law Merchants or Lombard Street customs.
Subsequently, in 1575, the Chamber of Assurances was established for the registration of insurance policies, and the advantage it had was that disputes were minimized because such registration served as evidence of the contract and the various terms and conditions under it.
In 1601, the Court of Arbitration was established through enactment for settling disputes on marine policies.
The Bubble Act of 1720 saw the granting of charters to two insurance companies, namely, Royal Exchange and London Assurance, to transact marine insurance business alongside individual insurers.
The coffee houses of London played a vital role in the development of trade and commerce in the UK. One such coffee house was opened by Edward Lloyd in 1680, where merchants used to frequent their visits. Auctions of ships, insurance coverage, etc., took place there, and gradually it became a place of shipping intelligence.
Since the latter part of the 17th century and early 18th century, this coffee house virtually turned into the famous Lloyd’s, which can boast of being the strongest and soundest insurance organization worldwide.
The monopolies granted to the two insurance companies by the Bubble Act of 1720 were subsequently repealed, and now a number of insurance companies and individual insurers are operating as marine insurers in the UK. The present Act regulating the marine insurance business is The Marine Insurance Act, 1906, which is also followed in other countries.
History and Development of Fire Insurance
Fire insurance came second on the list of development. Insurers who had previously been involved in marine insurance were contemplating starting the fire insurance business as well.
The Great Fire of London in 1666 practically demonstrated the necessity and urgency of fire insurance.
About seven insurance companies came forward to provide fire insurance protection. However, due to the introduction of newer types of hazards arising out of the Industrial Revolution of the 19th century and the increased demand for such type of insurance, more companies had to enter the market.
The Toole Street Fire in 1861 had an influence in improving the business of fire insurance as it demonstrated that the classification of risk was necessary for a sound rating system.
In 1868, the Fire Offices Committee (FOC) was formed, which had various responsibilities such as uniform rating, statistics, and providing technical advice to member companies.
Subsequently, various other bodies were developed, such as the Joint Fire Research
Organization, Salvage Corporations, and others that directly and indirectly support the fire insurance business on a sound scientific basis.
History and Development of Life Insurance
Life insurance is the third branch on the list of development. The earliest policy on record dates back to 1583.
During this period, only short-term policies were issued, meaning that the money was to be paid only upon the death of the life assured during the term period. On survival, nothing was payable.
Furthermore, there was no fixed sum assured, and the amount payable varied depending on the available funds. Life insurance did not have a scientific basis at that time.
There was no mortality table through which the risk could be scientifically assessed, and there was also no legal backing for the sound and systematic conduct of business.
In 1693, Halley introduced the mortality table, giving a definite value to the risk of death. Subsequently, Dodson demonstrated that it was possible to charge a level premium throughout the duration of the policy period.
In 1774, the Life Assurance Act was passed in the British Parliament, requiring the presence of insurable interest before one could affect a life policy on the life of another.
All these developments gradually gave life assurance a sound, systematic, and scientific basis as we see in the present day.
History and Development of Accident Insurance
Accident insurance is the last branch on the list of development. It is still an open branch in the sense that any new type of insurance not covered under marine, fire, and life insurance would fall under the accident branch.
Therefore, we see a number of various types of policies coming under the accident department, such as personal accident, burglary, fidelity, workmen’s compensation, liability policies, engineering, erection all risk, cash in safe and transit, crop, cattle, bond, credit guarantee schemes, motor, aviation, etc.
Accident insurance basically started with personal accident insurance. The effect of the industrial revolution in the 19th century, particularly the invention of steam power and railways, was responsible for a significant number of accidental deaths and bodily injuries.
Some specialized insurance companies started operating in this field alongside the existing companies involved in fire, marine, and life insurance.
With the increased demand from the public for protection against various other types of risks associated with rapid industrialization, various other types of business developed as indicated.
Common Features of Development
If we analyze the gradual development in the sphere of insurance, we can identify certain common features associated with such development:
- Insurance developed in response to a demand created by the insuring community.
- The industrial revolution of the 19th century played a significant role in the rapid growth of the insurance business.
- In the early days, there was an absence of reliable statistical data and theoretical soundness. However, this vacuum was gradually filled in by various theoretical approaches and concerted actions of various associations, leading to legal, technical, scientific, and theoretical soundness in the insurance business.
- Initially, insurers started as specialist offices, focusing on one type of business only. But with multifarious demands, they gradually turned into composite offices, offering more than one class of business.
- The concept of maintaining reserves to withstand catastrophe losses gradually developed, and nowadays, almost every company provides for such reserves.
- The necessity of reinsurance also gradually developed as insurers committed to specific risks.
This summarizes the historical development of insurance, highlighting its various branches and their evolution over time.