Although we typically think of insurance as a complicated but necessary part of doing business and protecting assets in the modern world, its roots have spanned millennia. Risk, in one form or another, is as ancient as human existence, and the foundational concept of insurance (managing the risk by spreading it out) is nearly as old.
The Ancient World at Sea
As ancient civilizations developed around the world, so did international trade, which was largely accomplished by ship. From China to Greece, accounts of spreading shipments across multiple vessels to mitigate the risk of losing goods date back to 3-4,000 BCE. In addition, a practice developed of paying an additional amount—or premium rate—in exchange for a promise to cancel the loan should the goods be lost at sea. The premium rate varied, depending on risk factors like seasons.
Though these examples are undeniably the roots of maritime insurance, the first example of formalized insurance is widely accepted to be the Code of Hammurabi. Written in cuneiform around 1750 BCE, it expanded on the ancients’ method of limiting loss. For example, it outlined an early claims filing process and stipulated that false claims were punishable by law.
In 235 CE, another pivotal insurance document was written in the Roman Empire. This laid out what’s known as Rhodian Law, which, among other things, established the principle of general average. This principle, still used today in maritime insurance, became the foundational principle upon which all insurance is built. Essentially, instead of one merchant paying to guard against risk, multiple stakeholding merchants would agree to share in the risk, each covering a small portion of any losses.
Rise of the Merchant Guilds
In medieval Europe, crowded cities were primarily constructed from wood, which meant fires that could wipe out your livelihood in an eyeblink were a common occurrence. Mainly in response to this, the merchant guild system emerged. Craftsmen were trained through the guild system, and began paying dues into a pool when they reached master status. Should disaster strike, the loss would be covered with the funds from this pool.
Sailing the Ocean Blue
As seafaring expeditions and water-based trade increased during the Middle Ages, insurance slowly grew more formalized. The first insurance contract was written in the mid-1300s. Within the next century, such contracts became standard, spurred on by the increased interest in exploration. The discovery of the Americas solidified this, and by 1500 CE, insurance was a common concept in much of Europe. As transatlantic travel increased, courts formed for the express purpose of arbitrating insurance disputes.
The Great Fire of London
In 1666, a fire swept through London, destroying over 13,000 homes. The aftermath was devastating, and from it rose the beginnings of the property insurance we’re familiar with today. In response to the mass losses—and the quite reasonable fear of another such fire—a property developer began selling fire insurance. By 1681, his insurance company insured 5,000 homes.
This company, and the many others that sprang up in imitation, practiced loss prevention in the form of fire brigades that would actively work to extinguish their customers’ homes if a fire broke out. However, these brigades notoriously ignored uninsured homes or those that were insured by a rival company. Eventually, these brigades consolidated their assets and resources into a single fire brigade responsible for all of London.
Introducing Lloyd’s of London
Despite the setbacks from the fire, London was a major hub for marine trade at the time, especially with the fairly new American colonies. In the late 1860s, Edward Lloyd opened a coffee house near the Thames. Coffee houses were common during this time, but this particular one catered to ship captains, ship owners, and merchants involved in ocean trade. This meant that Lloyd’s was a center of news regarding the success of sea voyages.
Quite organically, a system of underwriting these oceanic enterprises began. After a merchant secured the funding for their shipment, they would take the cargo manifest to Lloyd’s, where investors could sign up to take on the risk, even indicating what share of the cargo they were taking responsibility for. This way, each voyage could have multiple underwriters spreading their risk out.
This coffee house eventually became Lloyd’s of London, a prominent figure in today’s insurance industry.
American Insurance
The insurance industry may have been booming in Europe, but 1600s America was widely considered uninsurable. The risks to lives and property that colonists face were far greater than was typical in their European homeland. Therefore, insurance did not take root in America until the mid-1700s, assisted by Benjamin Franklin. He encouraged the practice of insurance, even starting his own company that focused solely on fire insurance. This company emphasized loss control by warning against fire hazards and contributing to fire prevention efforts. And, similar to policies seen in the wake of California’s many wildfires, the company refused to insure houses that posed too great a risk (in Franklin’s case, this mostly meant all-wooden houses).
