Insurance 101
Crawling around in the back of my mind is a question I've often wondered about. How did the insurance industry begin, when and why. Are we not
seeing the impact of an insurance mega-industry which has taken control of our freedom to be self-sustaining in every aspect of our lives? Do we not
consciously consider our responsibilities and repercussions thereof in a mature way because we must purchase an insurance "policy" to protect us
from poor choices, accidents, and ignorance?
If in the beginning, insurance policies were in fact, to spread the risk, then how did that practice become commonly accepted Law around the globe?
These days, it is illegal to perform certain activities without purchasing insurance policies. The concept of "insurance" is to spread the risk.
What if I don't want to buy insurance, what if I want to maintain my own responsibility in everything I do? Too bad for me. The only choice I have
is to buy the insurance or pay the penalty for not having it. Risk is a part of life. Is it not an illusion to believe that purchasing insurance
policies keeps risk low for the policy holders? IMO, the law demanding insurance be maintained for certain activities prevents freedom of choice. Or
at the very least, inhibits those freedoms.
The History of Insurance
If risk is like a smoldering coal that may spark a fire at any moment, then insurance is our fire extinguisher.
Countries and their citizens need something to spread risk among large numbers of people and to move risk to entities that can handle it. This is how
insurance emerged. Read on to learn about how insurance evolved and how it can work to protect you from being burned by risk.(
King Hammurabi's Code
The main concept of insurance - that of spreading risk - has been around as long as human existence. Whether it was hunting giant elk in a group to
spread the risk of being the one gored to death or shipping cargo in several different caravans to avoid losing the whole shipment to a marauding
tribe, people have always been wary of risk.
The first written insurance policy appeared in ancient times on a Babylonian obelisk monument with the code of King Hammurabi carved into it. The
"Hammurabi Code" was one of the first forms of written laws. These ancient laws were extreme in most respects, but it offered basic insurance in
that a debtor didn't have to pay back his loans if some personal catastrophe made it impossible (disability, death, flooding, etc.).
Does anyone remember when apprenticeships were commonplace and why the practice has become a relic of the past?
Guild Coverage
In the dark and middle ages, most craftsmen were trained through the guild system. Apprentices spent their childhoods working for masters for little
or no pay. Once they became masters themselves, they paid dues to the guild and trained their own apprentices. The wealthier guilds had large coffers
that acted as a type of insurance fund. If a master's practice burned down, a common occurrence in the wooden hovels of medieval Europe, the guild
would rebuild it using money from its coffers. If a master were robbed, the guild would cover his obligations until money started to flow in again. If
a master were suddenly disabled or killed, the guild would support him or his widow and family. This safety net encouraged more and more people to
leave farming and take up trades. As a result, the amount of goods available for trade increased, as did the range of goods and services available.
The style of insurance used by guilds is still around today in the form of "group coverage".
Insurance replaced apprenticeships. Nowadays, we are expected to go to college to learn our trades. The practice of paying a guild fee has become
the practice of paying college fees.
Insurance and the Stock Exchange
The practice of underwriting emerged in the same London coffeehouses that operated as the unofficial stock exchange for the British Empire. In the
late 1600s, shipping was just beginning between the New World and the old as colonies were being established and exotic goods were ferried back. A
coffeehouse owned by Edward Lloyd, later of Lloyd's of London, was the primary meeting place for merchants, ship owners and others seeking insurance.
Having recognized the extreme profitability and power of issuing maritime insurance, fire and plague became the next lucritive reason for requiring
insurance. This practice began here:
In 1666, the great fire of London destroyed around 14,000 buildings. London was still recovering from the plague had that ravaged it a year earlier,
and many survivors found themselves without homes. As a response to the chaos and outrage that followed the burning of London, groups of underwriters
who had dealt exclusively in marine insurance formed insurance companies that offered fire insurance. Armed with Pascal's triangle, these companies
quickly expanded their range of business. By 1693, the first mortality table was created using Pascal's triangle and life insurance soon followed.
America takes a little longer to play the insurance game and with great reluctance. Insurers were not prepared to "protect" against the "risks"
inherent in establishing a new world. Until a profit could be realized, insuring against the inherent risks were taken by pioneers and colonists.
For over a hundred years, the colonists managed their risk without mandatory (or even optional) insurance coverage.
Insurance companies thrived in Europe, especially after the industrial revolution. In America, the story was very different. Colonists' lives were
fraught with dangers that no insurance company would touch. As a result of lack food, wars with indigenous people and disease, almost three out of
every four colonists died in the first 40 years of settlement. It took more than 100 years for insurance to establish itself in America. When it
finally did, it brought the maturity in both practice and policies that developed during that same period of time in Europe.
Insurance should be optional, not mandatory. Insurance companies are the giants of the monetary world. Its no wonder why.
So, now I know when, why and how the insurance industry began.
