by elmads

Introduction

When I was young I encountered the word insurance due to my grandfather, as he worked part time in the insurance industry. Then as I grew up, I get to hear it frequently, my parents took insurance plans, and some of my relatives including my cousin also offered insurance plans to other people.

And overtime, I get to understand its benefits and importance to our lives. I even said to myself that insurance is a wonderful modern financial invention, and whoever invented it is surely a genius.

looking back to what I’ve said, I actually find it funny now because insurance is not a modern creation. As I continue my journey through finance and investing I get to learn things that I’ve never knew happened before.

The word “Insurance” may have been only used in the mid 17^th Century yet, the idea of financial coverage, protection and risk mitigation have been practiced by our ancestors even before the dawn of the 1^st Millenia.

Insurance in Ancient Civilization

The Code of Hammurabi

One of the first forms of law in existence was created in 1754 BCE (Before Common Era) Babylon. It consists 282 laws made by the Babylonian King Hammurabi as a systematic way to properly govern his empire.

Included in here is the early idea of an insurance policy in the form of a clause that safeguarded a debtor, allowing the law to forgive their loan if some personal catastrophe impeded payment, such as death, debilitating medical illness and others more.

Debt is indeed as old as humanity.

Bottomry

The great Roman Empire dominated its time not just because of their colonial expansion, but also through the augmentation of their trade network. From their vast European territories, across the Mediterranean seas up to the Egyptian Empire. The birth of trading routes that we still use even up to this day.

During that time, for the merchants to import and export products to different states and countries, they would have used ox-drawn carts or horses across the trade network. Using this method has its downside, land travel takes a substantial amount of time and also resources. Resources, because horses and oxen needed food and nutrients for them to be able to pull a fully loaded cart multiples of miles away, to and form their destination.

This dilemma gave rise to the increase in demand and usage of galleys (see the ship photo on the left). It made transport of goods from one point to another less time consuming and less costly by utilizing the Mediterranean seas.

It’s true that traveling through land had its risks like robberies, but sea travel of that time had its fair share of risks as well, such as storms, Pirate pillages and mutinies to name a few.

With this dilemma came the idea of Bottomry, an idea where the Romans took from the Greeks. It wasn’t the maritime insurance policy that we have now today, it was actually more of a lending structure than an insurance policy. Nevertheless, bottomry had an influence to the creation of maritime insurance.

In Bottomry, the owner of the Galley/Ship borrows money to finance his voyage of transporting goods, instead of paying a fee to insure the goods and his ship. It was a lending structure that would lead into the eventual formation of the proper maritime insurance policy after a few centuries to the future.

To make it understandable, I’ve made an visuals down below to show how the Bottomry contract works.

So in here, the structure is the other way around of the traditional insurance, where we pay a specified amount of money each month called premium. If the risk does materialize, like for example medical emergencies, that’s when we will receive the money from our insurer.

In bottomry, think of it like this, we receive first the money from the lender as a loan. If the risk does happen, we wouldn’t need to repay the money anymore, but if it doesn’t then we would need to repay it back with interest.

The Guild System

Guilds are great contributors of economic growth during the medieval ages. It spurred learning, productivity, creativity, community building and in turn growth of a community or a country. Insurance played a pivotal role in this age as it incentivized people to take more risk into participating and learning new things outside the agricultural space, endeavours like making shields and weapons. This became possible all thanks to the guild system.

During the medieval ages, some kids will be trained by a master craftsman as an apprentice. The apprentice will help and assist his master for a long period of time with barely no pay at all. Eventually, the apprentice can also be a master when the time comes that they’ve been trained well and be the master craftsman himself. The new master craftsman can then make a choice to start his own workshop if he wanted to. Joining a guild was crucial for a new craftsmen, as it meant protection, support and also a way to have their own apprentice and assistant. But for them to be part of a guild, they would need to pay dues.

This in turn will give them benefits. For instance, if there would be any disaster that befalls to the master craftsman and or his workshop, like accidental fire resulting for his work place to be burnt down. The craftsman’s guild will then cover the expenses needed to help rebuild the workshop. The money used by the guild as an aid where from the collective dues they got from all of their members overtime.

This protection is the incentive to take on more risk, because who wouldn’t want a scenario where, If you fail you wouldn’t lose much but if it works out, the returns are limitless.

This insurance like guild coverage system resulted to the increase of productivity, which made more products and services for trade, hence economic growth during the medieval times.

Insurance in Modern Times

The Great Fire of London – The Rise of Property Insurance

This historical great fire of London in 1666, burnt down 13,200 houses in just 4 days. A catastrophic event in one of the larges cities of the world during that time.

This crisis led to the formation of the first fire protection insurance company in Britain named “The Sun insurance company.” The said insurance company is now under the Royal and Sun Alliance (RSA) Group Limited. This insurance policy covers properties or belongings that will be damaged due to fire.

This great fire prompted the development of fire brigades and the Federal Emergency Management Agency (FEMA).

Crises always tend to create risk assessments and mitigation insurance policies, to further reduce the risk of financial constraints when such event occurs again.

The Covid19 pandemic actually passed into my mind while typing this portion. For sure ,there will be newer pandemic and more communicable diseases related insurance policies that will pop up in the future.

Marine Insurance

Sea expeditions, shipping goods and the relationship of capitalism gained its traction in the medieval ages, but most notably in 17^th Century. In a time of discovering the new world where it bridges it from the old world. It was very enticing for the bold and adventurous individuals. People who pursue the possibilities not just for new information and land, but also to attain precious metals and spices as a reward for their voyages.

This created the boom of the shipping industry. It was a very lucrative way to make money for marine and shipping merchants, but a very dangerous way of life as well, because it is not without risks.

On the other hand, there were also merchants on lands of the old world who wanted to have a piece of the possible upside of what voyages could deliver, this is despite of the probable downside it also posses.

I somehow consider these merchants as the modern day venture capitalists of that time period. Why? well because venture capitalists fund start up businesses that can yield great returns on investments, but without certainty of success. The maritime voyages are the same, very high risk with very high rewards.

Contrary to popular belief, marine insurance have been practiced in Italy way before the British merchants were able to create and cement underwriting in the 17^th century. Nonetheless, the creation of proper insurance due to underwriting, which is spreading the risks of an unfortunate event to happen hence capital loss among investors, was all thanks to the British merchants and Edward Lloyds.

 The Lloyd’s Coffee House – The Birth of Underwriting

Merchants gathered frequently to do business in coffee shops in the past, and one of the go to shops was Lloyd’s, owned by a coffee shop owner and businessman named Edward Lloyd. It was in the said shop where underwriting was born, including the job that is directly tied to insurance even up to this day, the insurance brokers.

Remember that voyages and shipping goods were a risky trade because of pirate plunders, storms and mutinies. Due to this, shipping merchants of that time were not confident to risk majority of their capital to do this endeavour. So, they went to coffee shops, as this was the place to meet and talk to other merchants, to find someone who would be willing to share the risks and also the rewards with them.

While these events took place in his shop, Edward Lloyd observed what transpired whilst serving coffee and food to his mostly businessman customers. He noted that most people who entered were merchants of the marine trade.

During that time, he noticed something, merchants were substantially lacking a systematized data & information of the ships, trade routes, world events, time of shipping and others more. Because of this, Edward Lloyd took the opportunity and he first started his own way to systematize information and made his own “Lloyd’s registry”. His aim was to give merchants and underwriters recorded information on the quality of vessels. Edward took this further by making a shipping news business that tackled everything that was marine trade related, which was previously an initially lacking.

Back to the shipping merchant looking for someone to share the risk of shipping. The spreading of risk of shipping goods was divided from different merchants who were willing to take it on. There would be one merchant who would be deemed as a leader in a group, and the one who would take the risk first. This leader would asses the risks based on the available information of the shipment, its cargo, routes and others more (this is where Lloyd’s registry and shop became a go to place for the British marine traders, as this gave clarity and data needed to make a sound and calculated decision). The leader would then write on a piece of paper the amount of risk he would be willing to take, including the premium that it would cost for the mariner.

Once the leader writes the first line, the succeeding merchants who also want to take some of the risk and reward, will then write on the line below the initial line where the leader wrote his conditions. This continues until the risk has been divided, totalling to 100%.In short, Leader writes on the 1st line, the next merchant will write under the 1st line which would then be the second line, so on and so forth. Hence the word “Underwriting”, straightforward isn’t it?

Overtime, Lloyd’s coffee brought upon the unofficial stock exchange of the British empire. Today, Lloyd’s is known as Lloyd’s of London where it is still a market place for insurance and reinsurance. It still operates as what its founder originally started it for.

To Sum It Up

Since the creation of underwriting, the insurance industry boomed and created jobs needed for it to be the industry that we now know of. Insurance policies afterwards spread like wild fire, it was used for everything we see and use and in any endeavour humans undertake, such as during the Industrial revolution. Most companies needed insurance for their machines and properties to protect it from the possible losses that can befall the company.

Additionally, life and medical insurance became a crucial policy needed by humanity due to the new illnesses and diseases that has been forming in our world, despite the eradication and treatment of some diseases. When there is life there will always be death, it is the natural cycle of life. This just cements the importance and integrity of life & medical insurance as a means of financial protection, not to the policy holder but for their loved ones and dependents.

The history of insurance tells us the story of the ambition, determination and resilience of the human race to move forward, learn and grow despite the dreadful calamities and crises that humanity have encountered and will forever continue to encounter overtime.

I’ve ran into this one article about insurance that I really liked, where it stated that “If you take care of yourself and your possessions, you can have more of the life that you want. So, next time you think of insurance, just think of it as ANCIENT WISDOM”.

Knowledge is my sword, and patience is my shield

elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.