The History of Insurance

Many consumers may wonder (especially as they are paying their insurance premium) how insurance has spread throughout nearly all aspects of our lives. There is virtually no industry that can exist without insurance. There are virtually no aspects of our personal lives that exist without insurance coverage. How did this occur?

The concept of insurance - the notion of spreading risk - actually existed even back in caveman days when hunters would pursue dangerous animals in groups in order to spread the risk of one man being injured or killed.

But the first insurance policy was probably written on a Babylonian monument, carved by King Hammurabi.  The "Hammurabi Code" actually included a basic insurance policy, waiving one's loan debt in the event of a personal catastrophe such as death, flooding, etc.

The concept of insurance expanded during and middle ages. Craftsmen paid dues to their guild, which was in essence an insurance pool. If a shop burned down, the guild would pay to rebuild it. If a craftsman was robbed, the guild would provide revenue to help him recover. If someone was killed or injured, the guild would provide benefits for the family.

In the 1600s, a man named Edward Lloyd became perhaps the most important man in the history of the insurance industry. Lloyd owned a coffee shop that was the meeting place for British merchants, ship owners and other people looking to insure ships and goods being transported back and forth to the New World. This insurance exchange became known as Lloyd's of London. Merchants and ship owners would meet at Lloyd's with investors and underwriters interested in potentially underwriting the venture. The investors would establish a premium for guaranteeing a specific portion of the ship's cargo. Each voyage would have multiple underwriters, so that the risk was spread among them.

In 1654, two Frenchman, Blaise Pascal and Pierre de Fermat, discovered a way to determine probabilities. This discovery allowed underwriters to determine the level of risk for a particular event. Pascal's formula evolved into the first actuarial tables that are still used today when calculating insurance rates.

Insurance products spread throughout Europe, thanks to the availability of actuarial tables. Fire insurance and life insurance were available by the late 1600s. But due to the dangers that existed in the New World, very few underwriters wanted to provide coverage in the Colonies. It was over a century before insurance became an established industry in America. Today, as we noted, insurance products are prevelant throughout all segments of our society.