HISTORY OF INSURANCE
In some sense we can say that insurance appears
simultaneously with the appearance of human society. We know of twao types of
economies in human societies: natural or non-monetary economies (using barter
and trade with no centralized nor standardized set of financial instruments)
and more modern monetary economies (with markets, currency, financial
instruments and so on). The former is more primitive and the insurance in such
economies entails agreements of mutual aid. If one family's house is destroyed
the neighbours are committed to help rebuild. Granaries housed another
primitive form of insurance to indemnify against famines. Often informal or
formally intrinsic to local religious customs, this type of insurance has
survived to the present day in some countries where a modern money economy with
its financial instruments is not widespread.
Turning to insurance in the modern sense (i.e.,
insurance in a modern money economy, in which insurance is part of the
financial sphere), early methods of transferring or distributing risk were
practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd
millennia BC, respectively. Chinese merchants travelling treacherous river
rapids would redistribute their wares across many vessels to limit the loss due
to any single vessel's capsizing. The Babylonians developed a system which was
recorded in the famous Code of Hammurabi, c. 1750 BC, and practiced by early
Mediterranean sailing merchants. If a merchant received a loan to fund his shipment,
he would pay the lender an additional sum in exchange for the lender's
guarantee to cancel the loan should the shipment be stolen or lost at sea.
Achaemenian monarchs of Ancient Persia were the
first to insure their people and made it official by registering the insuring
process in governmental notary offices. The insurance tradition was performed
each year in Norouz (beginning of the Iranian New Year); the heads of different
ethnic groups as well as others willing to take part, presented gifts to the
monarch. The most important gift was presented during a special ceremony. When
a gift was worth more than 10,000 Derrik (Achaemenian gold coin) the issue was
registered in a special office. This was advantageous to those who presented
such special gifts. For others, the presents were fairly assessed by the
confidants of the court. Then the assessment was registered in special offices.
The subscription room at Lloyd's of London in the
early 19th century.
The purpose of registering was that whenever the
person who presented the gift registered by the court was in trouble, the
monarch and the court would help him. Jahez, a historian and writer, writes in
one of his books on ancient Iran: "[W]henever the owner of the present is
in trouble or wants to construct a building, set up a feast, have his children
married, etc. the one in charge of this in the court would check the
registration. If the registered amount exceeded 10,000 Derrik, he or she would
receive an amount of twice as much."
A thousand years later, the inhabitants of Rhodes
invented the concept of the general average. Merchants whose goods were being
shipped together would pay a proportionally divided premium which would be used
to reimburse any merchant whose goods were deliberately jettisoned in order to
lighten the ship and save it from total loss.
The ancient Athenian "maritime loan"
advanced money for voyages with repayment being cancelled if the ship was lost.
In the 4th century BC, rates for the loans differed according to safe or
dangerous times of year, implying an intuitive pricing of risk with an effect
similar to insurance. The Greeks and Romans introduced the origins of health
and life insurance c. 600 BCE when they created guilds called "benevolent
societies" which cared for the families of deceased members, as well as
paying funeral expenses of members. Guilds in the Middle Ages served a similar
purpose. The Talmud deals with several aspects of insuring goods. Before
insurance was established in the late 17th century, "friendly societies"
existed in England, in which people donated amounts of money to a general sum
that could be used for emergencies.
Separate insurance contracts (i.e., insurance
policies not bundled with loans or other kinds of contracts) were invented in
Genoa in the 14th century, as were insurance pools backed by pledges of landed
estates. These new insurance contracts allowed insurance to be separated from
investment, a separation of roles that first proved useful in marine insurance.
Insurance became far more sophisticated in post-Renaissance Europe, and
specialized varieties developed.
Lloyd's of London, pictured in 1991, is one of
the world's leading and most famous insurance markets
Some forms of insurance had developed in London
by the early decades of the 17th century. For example, the will of the English
colonist Robert Hayman mentions two "policies of insurance" taken out
with the diocesan Chancellor of London, Arthur Duck. Of the value of £100 each,
one relates to the safe arrival of Hayman's ship in Guyana and the other is in
regard to "one hundred pounds assured by the said Doctor Arthur Ducke on
my life". Hayman's will was signed and sealed on 17 November 1628 but not
proved until 1633. Toward the end of the seventeenth century, London's growing
importance as a centre for trade increased demand for marine insurance. In the
late 1680s, Edward Lloyd opened a coffee house that became a popular haunt of
ship owners, merchants, and ships' captains, and thereby a reliable source of
the latest shipping news. It became the meeting place for parties wishing to
insure cargoes and ships, and those willing to underwrite such ventures. Today,
Lloyd's of London remains the leading market (note that it is an insurance
market rather than a company) for marine and other specialist types of
insurance, but it operates rather differently than the more familiar kinds of
insurance. Insurance as we know it today can be traced to the Great Fire of
London, which in 1666 devoured more than 13,000 houses. The devastating effects
of the fire converted the development of insurance "from a matter of
convenience into one of urgency, a change of opinion reflected in Sir
Christopher Wren's inclusion of a site for 'the Insurance Office' in his new
plan for London in 1667." A number of attempted fire insurance schemes
came to nothing, but in 1681 Nicholas Barbon, and eleven associates,
established England's first fire insurance company, the 'Insurance Office for
Houses', at the back of the Royal Exchange. Initially, 5,000 homes were insured
by Barbon's Insurance Office.
The first insurance company in the United States
underwrote fire insurance and was formed in Charles Town (modern-day
Charleston), South Carolina, in 1732. Benjamin Franklin helped to popularize
and make standard the practice of insurance, particularly against fire in the
form of perpetual insurance. In 1752, he founded the Philadelphia
Contributionship for the Insurance of Houses from Loss by Fire. Franklin's
company was the first to make contributions toward fire prevention. Not only
did his company warn against certain fire hazards, it refused to insure certain
buildings where the risk of fire was too great, such as all wooden houses.
In the United States, regulation of the insurance
industry primary resides with individual state insurance departments. The
current state insurance regulatory framework has its roots in the 19th century,
when New Hampshire appointed the first insurance commissioner in 1851. Congress
adopted the McCarran-Ferguson Act in 1945, which declared that states should
regulate the business of insurance and to affirm that the continued regulation
of the insurance industry by the states is in the public's best interest. The
Financial Modernization Act of 1999, commonly referred to as
"Gramm-Leach-Bliley", established a comprehensive framework to
authorize affiliations between banks, securities firms, and insurers, and once
again acknowledged that states should regulate insurance.
Whereas insurance markets have become centralized
nationally and internationally, state insurance commissioners operate
individually, though at times in concert through the National Association of
Insurance Commissioners. In recent years, some have called for a dual state and
federal regulatory system (commonly referred to as the Optional federal charter
(OFC)) for insurance similar to the banking industry.
In 2010, the federal Dodd-Frank Wall Street
Reform and Consumer Protection Act established the Federal Insurance Office
("FIO"). FIO is part of the U.S. Department of the Treasury and it monitors
all aspects of the insurance industry, including identifying issues or gaps in
the regulation of insurers that may contribute to a systemic crisis in the
insurance industry or in the U.S. financial system. FIO coordinates and
develops federal policy on prudential aspects of international insurance
matters, including representing the U.S. in the International Association of
Insurance Supervisors. FIO also assists the U.S. Secretary of Treasury with
negotiating (with the U.S. Trade Representative) certain international
agreements.
Moreover, FIO monitors access to affordable
insurance by traditionally underserved communities and consumers, minorities,
and low- and moderate-income persons. The Office also assists the U.S.
Secretary of the Treasury with administering the Terrorism Risk Insurance
Program.[ However, FIO is not a regulator or supervisor. The regulation of
insurance continues to reside with the states.
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