The process by which an individual or company can obtain financial protection against loss or harm through the payment of a premium to another individual or company.
Insurance, in one form or another, has existed since ancient times. The first mention of any form of insurance appears in the Babylonian Code of Hammurabi. Under the law, if goods were lost in transit, either by caravan or ship, the transporter was absolved of any liability unless it was proven that he was involved in the theft. The merchants then shared in the loss of the goods. The Chinese, as early as 3000 B.C.E., ordered that merchants should split up their shipment of products among several vessels to minimize any losses that they might incur. Greek sailors, who plied the waters of the Mediterranean Sea, relied on a system of average to protect their cargoes and ships against the risk of storms, pirates, or damage. Losses would be compensated on a pro rata basis from funds contributed by the merchants. One or more individuals who provided the coverage guaranteed each cargo individually. This system remained in effect under the Roman empire. There were no insurance companies, just protection on single ships. A captain was often given a loan that would be repaid if he had returned without any damage to ship or cargo. The loan would protect the shippers from debt if the merchandise was lost or destroyed in transit. This rudimentary type of insurance was known as the bottomry loan.
Beginning in the eleventh century, Italian and English merchants formed associations that operated under the Amalfi Sea Code. Under the code, members of the association would contribute funds regularly that could be used to compensate merchants for the loss of cargo. With the rise of Venice as the merchant power in the eastern Mediterranean, the first modern marine insurance policies were used. The amount of trade and the value of the cargo required some protection against the risk of loss. Portugal and France developed marine insurance as well. During the fourteenth century, the Venetians began using agreements that dictated how commerce was conducted. Most of these agreements were verbal while some were written and became official since a notary was involved. However, many of the early insurance agreements were conducted in secret, especially after the government proposed the taxation of such transactions. During the fifteenth century, the Venetians established laws governing the use of insurance policies, primarily to prevent fraud. Throughout the Middle Ages, the Catholic Church discouraged the use of insurance policies since, like loans, insurance was perceived as a wager on the outcome and was therefore equivalent to usury. Eventually, the insurance policy was separated from the risk and the charge of usury no longer applied.
During the late Middle Ages, craft guilds formed mutual aid societies. These groups functioned in much the same manner as life or disability insurance companies. Widows and children were provided for if the head of household died or was disabled. All members of the guild contributed to the fund so that the resources would be available in times of need. During the early seventeenth century, German princes employed the concept of the mutual aid society to all citizens within a particular region. Every head of household would contribute a proportion of the wealth of his assets to the fund in case an emergency occurred and one or more homes were damaged or destroyed.
During the height of the Hanseatic League, merchants in the Baltic region did not have insurance policies as we know them today. The risk of loss was again reduced through the method of spreading cargo among a number of ships. The first insurance company was finally established in Italy in the seventeenth century. Later on, Lombard traders established marine insurance policies in England while other references exist that indicate that the Dutch were also using insurance policies to protect against the loss of their cargoes during this same period. Existence of such policies continued even after the Reformation and into the reign of Elizabeth I, when the Lombard traders had left England. In 1601, a special Court of Policies of Assurance was established to resolve cases involving marine insurance policies, although few suits were actually heard. Marine insurance was accepted in France as a legitimate method of protecting merchants. Under the Ordonnance de la Marine, passed in 1681, King Louis XIV accepted the practice. Napoléon Bonaparte reinforced the use of marine insurance in the Code of Commerce passed in 1807.
Meanwhile, in 1688 Edward Lloyd issued his first insurance policy and over the centuries his company developed into the largest marine insurer in the world. With his first shop located on Tower Street, Lloyd soon moved to Lombard Street (the location of the insurance industry since the establishment of the Lombard insurers in London). Initially, the company provided shipping news to the merchants and captains, but the company soon expanded to offer marine insurance. During the next century, London developed into the center of the insurance industry with insurers copying the policies offered by Lloyd’s company. This same policy served as the blueprint for the Marine Insurance Act of 1906 in Great Britain.
Although marine insurance dates back to ancient times, the first instance of fire insurance policies being offered occurred after the Great Fire of London that began on September 2, 1666. The fire started in a baker’s shop on Pudding Lane. High winds blew the burning embers across the city. The wooden structures quickly ignited and the situation was made worse by the fact that one of the first places to be burned was the water-wheel that supplied the city with water. The fire reached a crisis point, and King Charles II called on his brother, the duke of York, the head of the navy, to assist in fighting the fire. The duke ordered everything surrounding the fire to be pulled down and removed so that the fire no longer had fuel to continue spreading. After five days, the fire finally died out. During that short period, more than 13,200 homes and 87 churches in London spread out over more than 400 acres were destroyed. When rebuilding commenced, new structures were required to be built of brick and stone to prevent another disaster. The Great Fire of 1666 had destroyed four-fifths of the city.
Merchants lost all their property and goods, ruining their futures as well as those of their families. The following year, Nicholas Barbon founded the first fire insurance company. The company offered a policy against future fires, but to ensure that it did not sustain substantial losses in the future, the firm was forced to establish and maintain fire brigades throughout the city—the first brigade being formed in 1680. Other insurance companies formed to offer fire protection as well. Since the cost of maintaining the fire brigades was not cheap, companies would issue emblems representing their insurance company to policyholders who placed them outside of the insured buildings. When a fire broke out, men from several different companies would show up, but if the emblem was not the one for their company, many times they refused to fight the fire. Eventually, the various fire brigades were merged and the companies were relieved of their responsibility for fighting fires in 1865 when Parliament passed the Metropolitan Fire Brigade Act.
The example established in England was followed in the American colonies. Fire insurance policies were first available in Charleston, South Carolina, in 1732. Benjamin Franklin established a fire insurance company in Philadelphia in 1752. Relatively few fires occurred, and the companies managed to earn profits. The largest fire to strike the United States occurred in Chicago on October 8, 1871. The fire lasted for 29 hours and destroyed more than 17,000 structures valued at more than $2 million. Relief efforts assisted the victims of the fire, and the city slowly rebuilt, but fire struck again in 1874, destroying another 800 buildings. Although most of the damage from the initial fire occurred in the business district, fire insurance helped the merchants recoup most of their losses. After the second fire, the insurance companies threatened to refuse to sell any fire insurance in Chicago until the city improved its fire department and updated its city code to enforce the use of more fire-resistant material in the construction of the buildings.
Fire protection in the twentieth century still remains important even though most structures are constructed with fire-resistant materials and city ordinances require the availability of fire extinguishers and sprinkler systems in larger buildings. Since the number of fires remain relatively small in comparison to the value of the property insured, insurance companies continue to earn a profit. Meanwhile, business owners and individuals are covered, and if a fire does occur they will not be forced out of business or into poverty from the loss.
Life insurance has its roots in medieval times when guilds would provide for the widow and children of a deceased member. Contributions would be collected from all members on an equal basis. In 1693, Edmond Halley, the astronomer, devised a mortality table based on the statistical probability of mortality. Additional revisions to the table in 1756 by Joseph Dodson resulted in the payment of fees for life insurance based on the age of the insured. The first life insurance company in the United States was formed in Philadelphia in 1759. Established by the Presbyterian Synod of Philadelphia, the policies covered the lives of that denomination’s ministers and their families. Although companies did not generally provide life insurance for their employees until the mid- to late twentieth century, business owners and the wealthy would often purchase such policies to cover the expenses that might occur as a result of their death. The future needs of both their businesses and their families usually determined the amount of insurance purchased. In the late twentieth century, many companies offered the employee life insurance benefits or the option to pay for such insurance at group rates.
Health insurance is another field that has developed primarily in the mid- to late twentieth century as medical advances have resulted in increased cost of services. Individuals had paid the physicians themselves or offered some form of barter arrangement to pay for their medical expenses until hospitals began investing in advanced technology. Corporations started offering health insurance benefits to their employees as the cost of medical treatment continued to escalate. By purchasing insurance at group rates, the employees, who sometimes had their own insurance paid for while having to cover the cost for dependents, could have the maximum coverage at the lowest price. Self-employed businesspeople often found that the insurance available to them was (and still is) either more expensive or did not offer the same coverage.
During the 1990s, changes in insurance resulted in the formation of health maintenance organizations, where a doctor receives a specified amount per month for each patient assigned to him or her through the insurance company. Fee schedules have been established as well. Medical professionals, bound by contracts with the insurance companies, often find that the procedures that they recommend are not covered or that some patients, those who they see frequently during the month, actually end up costing them money. These issues have opened the debate over national health care in the United States.
Governments began experimenting with public forms of insurance in the mid-twentieth century. The rising cost of medicine meant that a portion of the population could no longer afford adequate medical services. In Great Britain, Parliament passed the National Health Service Act that provided free medical treatment for everyone. A national health tax and the treasury covered the cost of the program. As prices increased, small fees were charged to cover items such as dentures, glasses, and prescriptions. Doctors are paid directly by the national system. Canada eventually adopted a similar health-care program, as did Sweden and other European countries.
Of the industrialized Western countries, the United States remains the only nation that has not adopted a national health-care program. Resistance from doctors, who would receive a lower wage under the system, and from the insurance carriers, who have built large companies with thousands of employees in the industry, has blocked several attempts to pursue this type of public health insurance. Consumers argue that the Canadian and British systems have resulted in dissatisfied patients who often have to wait months or years to receive a particular treatment. Those who can afford to travel to the United States for treatment do so, while the poor must wait.
Since the problem of income disparity has not been addressed, the U.S. Congress has not seen fit to approve such a program. Congress has authorized two programs that specifically address the health-care needs of the poor. Under Medicare, senior citizens have access to medical coverage and even some prescription drug benefits, while Medicaid covers the medical expenses of the poorest in society. American hospitals cannot refuse to treat patients who do not have the means to pay in an emergency, although the patient might later be transferred to a county hospital.
Just as the ancient and medieval mariners relied on some form of insurance to cover their losses, automobile insurance is a vital aspect of life in modern times. Motor vehicles are used to transport goods and people over short and long distances. Merchants protect their goods from loss or damage through insurance policies. Most states require that owners maintain a minimum policy of $25,000 for personal automobiles to cover damages incurred during an accident. That coverage might eventually have to be raised since the average cost of a new vehicle exceeds that amount. The failure to maintain financial responsibility comes with a stiff fine. Insurance companies support legislation requiring such coverage not only because it allows them to write more policies, but also because damage caused by uninsured motorists would have to be covered by paying customers if the law did not exist.
Insurance companies have traditionally offered other forms of coverage such as flood insurance. Since the terrorist attacks of September 11, 2001, the cost of insurance that would compensate the policyholder for damage caused by acts of terror has skyrocketed. The government has attempted to intervene since the extreme spike in premiums placed many large construction projects on hold. Continued terrorist attacks would force insurance companies out of business unless some mechanism can be implemented to prevent the destruction of high-value properties.
The insurance industry, from its rudimentary beginnings to the sophisticated policies of the twenty-first century, has allowed trade to flourish. Merchants could not have continued to ship or sell their goods if some protection against loss was not available. Economically, insurance made trade possible and profitable.
Cynthia Clark Northrup
See also: British Empire; Hanseatic League; United States; Venice.
Ackroyd, Peter. The Great Fire of London. Chicago: University of Chicago Press, 1988.
Bagehot, Walter. Lombard Street. New York: Arno, 1979.
Barlow, Douglas, ed. The Marine Insurance Code of France, 1681: A Translation of the Articles on Bottomry, Respondentia, and Marine Insurance, of the Ordonnance de la Marine, 1681, of France. Toronto: n.p., 1989.
Gutner, Howard. The Chicago Fire. New York: Scholastic, 2002.
Harper, Robert Francis. The Code of Hammurabi King of Babylon about 2250 B.C.E. Holmes Beach, FL: Gaunt, 1994.
Lister, John. By the London Post: Essays on Medicine in Britain and America. Waltham, MA: New England Journal of Medicine, 1985.