How Insurance Industry Evolved to Todays Modern Form

Insurance is nothing but a system of spreading the risk of one onto the shoulders of many.

Whilst it becomes somewhat impossible for a man to bear by himself 100% loss to his own property or interest arising out of an unforeseen contingency, insurance is a method or process which distributes the burden of the loss on a number of persons within the group formed for this particular purpose.

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 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 used to be in need of fund/money for completion of the journey, but could not manage the same at an intermediary port either on his own account or on the account of the owner of the vessel, he (master) was empowered to raise such fund by pledging the vessel.

Such a system was known as BOTTOMRY BOND, as the loan was used to be given by signing a bond.

The term of the agreement was that the loan was required to be repaid only if the ship reached 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 used to be done on RESPONDENTIA BONDS.

The terms of repayment were exactly the same. The practice has been abandoned since 19th century because of tremendous advancement in communication system.

Another practice which is still in existence is known as GENERAL AVERAGE which has in itself the element of 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 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 take a bold decision on the spot aiming at the safety of the venture.

Such an action may involve incurring of expenditure or sacrifice (for example throwing overboard of 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 quite natural that all interests involved (saved & 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.

Up to 18th century we also experience, amongst the merchant community, a system of sharing risks with each other.

They used to form a group wherein one of the merchants, in a particular voyage, used to accept the risk against a premium from others whilst the others used to trade.

On a different occasion another from the group used to accept the risk whilst the rest used to trade, and so on.

So at one time or the other each had to take the responsibility of risk bearing and the collection (premium) was such which could reasonably take care of a probable loss.

As the group was indeed small and the professional expertise on risk management was rather very limited, the rate of premium used to be necessarily high.

Here also 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,

But Nevertheless,

the concept of insurance, that is to say, a system of sharing or spreading risks gradually developed because of need, which was ultimately replaced by modern insurance approach.

Considering that a knowledge of historical development on any branch of study provides for the reader a useful background information as to how that particular branch gradually developed as a separate entity, it has been felt that in so far as insurance is concerned such a knowledge is also indispensable for the 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 Marine Insurance

Marine is the oldest form of insurance and came first in the list. This type of insurance probably began in Northern Italy sometime during the 12th & 13th Century and gradually the concept was rather transferred to or taken over by the United Kingdom.

During the 13th/14th century the Italian merchants went to U. K. and along -with’ the merchandise carried with them the trading customs including, the concept of marine insurance.

Marine insurance as such was not being practiced as a separate specialized entity during that time since it were the merchants who used to transact marine insurance business side by side with their general trading activities.

Gradually the Lombard street of England ( named after the merchants of Lombardy of Italy ) started becoming the nerve- center of marine insurance activities as it was here where the merchants used to assemble for the purpose of trade and insurance protection.

However, problems used to arise as there were no set rules or regulations for settling disputes arising out of marine policies and it was the Lombard street customs that used to influence settlement of such disputes.

Practices were there to refer disputes to Admiralty Court but it had the drawback of not having special knowledge of the Law Merchants or of Lombard Street customs.

Subsequently in 1575 Chamber of Assurances was established for the registration of insurance policies and the advantage it has had in it was this that the disputes were minimum because such registration was the evidence of the contract and various terms and conditions under it.

In 1601, Court of Arbitration was established-through enactment for settling disputes on marine policies.

The Bubble Act, 1720 saw the granting of Charter to two insurance companies, viz., Royal Exchange and London Assurance, for transacting marine insurance business side by side with the individuals.

The coffee houses of London have indeed played a very vital role in the development of trade and commerce of the U.K. It is in such houses that the merchants and traders used to congregate for their business transactions.

One such coffee house was opened by Edward LLOYD in 1680 where the merchants used to frequent their visits. Auctions of ships, insurance coverage etc. used to take place here and gradually it became a place of shipping intelligence.

Since later part of the 17th century and early 18th century this coffee house virtually turned into the most famous LLOYD’S which can boast of being the strongest and soundest insurance organization all over the world.

The monopolies granted to two insurance companies previously by the Bubble Act 1720 were subsequently repealed and now numbers of insurance companies and individual insurers are operating as marine insurers in the U. K. The present Act regulating the marine insurance business is The Marine Insurance Act, 1906 and this Act is followed in our country also.

HISTORY AND DEVELOPMENT FIRE INSURANCE

Fire insurance came second in the list of development. The insurers who had hitherto been doing marine were contemplating about starting fire insurance business also.

The Great Fire of London in 1666 practically demonstrated the necessity and urgency of fire insurance.

About 7 insurance companies came forward to provide fire insurance protection. But due to introduction of newer types of hazards arising out of Industrial Revolution of the 19th century and because of the increased demand for such type of insurance, some more companies had to come into the picture.

The Toole Street Fire, 1861 had an influence in improving the business of fire insurance as it demonstrated that classification of risk was necessary for sound rating system.

In 1868 the Fire Offices Committee (FOC) was formed which has multifarious responsibilities like, uniform rating, statistics and various technical advices to member companies.

Subsequently also developed various other bodies, such as. Joint Fire Research Organization, Salvage Corporations and more who are directly and indirectly helping the fire insurance business on a sound scientific line.

History and Development Life Insurance

The third in the list of development is the life insurance business. The earliest policy of which there is a record dates back to 1583.

During this period only short-term policies were used to be issued meaning that only at the death of the life assured during the term period the money was to be paid. On survival nothing was payable.

More so, there was no fixed sum-assured and the amount payable used to vary depending on the fund available. Life insurance virtually did not have any scientific basis at that time.

There was no mortality table through which the risk could be scientifically assessed. Legal backing was also not there for sound and systematic conduct of business.

In 693 Hailey introduced the mortality table giving a definite value to risk of death. Subsequently, Dodson demonstrated that it was possible to charge level premium throughout the duration of policy period.

In 1774, the Life Assurance Act was passed in the British parliament requiring the presence of insurable interest before one could effect a life policy on the life of another.

All these gradually gave life assurance a sound, systematic and scientific basis as we see in the present day.

History and Development Accident Insurance

The last in the list of development is the accident insurance business, it is still an open branch in the sense that any new type of insurance that is not cared for under marine, fire and life would fall under accident branch.

Therefore,

we see a number of various types of policies coming under accident department.

Examples are, 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 from personal accident insurance. The effect of industrial revolution in the 19th century, particularly the invention of steam power and railway, was responsible for numbers of accidental deaths and bodily injuries.

Some specialized insurance companies started operating in this field side by side with the existing companies doing fire, marine and life business.

With the increased demand from the public for protecting themselves against various other types of risks associated with rapid industrialization, gradually developed other types of business already indicated.

Common Features of Development

If we analyze the gradual development in the sphere of insurance, we shall come across certain common features associated with such development.

These are:

  1. Insurance developed basically in response to a demand created by the insuring community.
  2. Industrial revolution of the 19th century was largely responsible for rapid growth of insurance business.
  3. In the early days there were absence of reliable statistical data and theoretical soundness. Gradually this vacuum was filled in by various theoretical approaches and concerted actions of various associations. This ultimately gave legal, technical, scientific and theoretical soundness to the business of insurance.
  4. In the earliest days insurers started as specialist offices (i.e., doing one type of business only), but gradually with multifarious demands they turned into composite offices (i.e., doing more than one class of business).
  5. The idea as to maintenance of reserve for withstanding catastrophe losses gradually developed and now-days hardly there is a company which does not provide for such a reserve.

The necessity of reinsurance gradually developed with the increase in the insurer’s commitment on a particular risk.