Why did your ancestors need insurance?

Insurance has evolved from a variety of risk management needs. This has involved cargo, property, death, and medical treatment risks. It traces back 4,000 years to the Chinese and Babylonians who wanted to protect their goods during transit from bandits and bad weather. But how did insurance as we now know it today start?

Marine insurance - Edward Lloyd’s Coffee House

Lloyd’s of London are noted as being the first insurers, starting in Edward Lloyd’s Coffee House (hence the name) in 1688. At a time when London's stock as a centre for trade was growing, so did demand for ship and cargo insurance. A popular location for ship owners, merchants, and captains, Lloyd’s was a reliable source of the latest shipping news. It became the best place for those who were entrusting their goods to a sea captain.

But there was a need for some financial guarantee if their cargo ended up at the bottom of the ocean. Investors took note and agreed to pay the owners if their goods did not make it to their destination - for a premium. If the ship stayed safe, the guarantor kept the premium. When ships and cargos were lost, they had to make good on their promise and pay the “assured”.

No single investor was willing to insure the total value of a ship and its cargo. A full list of the ship, its captain, the cargo, its route and destination was prepared for all investors. Each one stated how much of the total value of the risk they were willing to “insure” by writing their name and the percentage under each item. This created the term “underwriters” which is still used today.

Property and business insurance - The Great Fire of London

We all know the story of how a baker on Pudding Lane was at fault for the fire that burnt much of the City of London in 1666. To protect against future loss by fire, a merchant called Nicholas Barbon came up with a plan to minimise losses.

He proposed each property owner pay a small fee into a joint fund that would cover losses by fire. This is not unlike the way reinsurance is placed now where risk is spread across more than one underwriter. The joint funds were in effect property insurance companies. By around 1720, these companies had developed common categories for rating property risks. These lasted well into the 19th Century, and were an early insight of insurance being priced on the basis of risk. A practice that still holds true today.

The Great Fire's legacy meant insurers and advisers continued to adapt their services to reduce risks. Risk management services, and access to health and safety data for example. Insurers also began to advise on business continuity plans and interruption insurance plans. Forward planning allowed businesses to continue working under adverse conditions. Should a ‘business-stopping’ event such as a fire happen.

Life and accident insurance

The first company to offer life insurance was the Amicable Society for a Perpetual Assurance Office in 1706. Each member paid a fixed annual payment per share on from one to three shares. At the end of the year part of the "amicable contribution" was shared among the wives and children of the deceased members. This was in proportion to the amount of shares the heirs owned.

In the late 19th century, "accident insurance" became available. The first company to offer this was the Railway Passengers Assurance Company. Formed in 1848, they insured against the rising number of injuries. Basic accident insurance was sold as a package deal with travel tickets. Second and third class travel was charged at a higher price due to the increased risk of injury in the roofless carriages.

What history teaches us

History shows insurance exists because people need security. Anything that holds value, whether to an individual or a group, will always need protecting. But imagine a world without insurance. There would be far less risk-taking and innovation. There would also be far more financial loss. Insurance provides the financial freedom that enables the world to get on with the present, so we can build for the future.