Expert Commentary

In the Beginning: Managing Risks

Being reminded of our business origins offers a useful perspective on the continuing evolution of our profession. This is especially the case when unpredictable global instability, terrorism, and natural disasters are looming prospects. Whatever challenges our industry must face, we can be instructed by how our business has evolved over the centuries.

Risk and Insurance History
June 2007

For millennia, various parties—including benevolent nobles and nervous merchants—have attempted to protect against fortuitous loss.

Mesopotamian and Babylonian Interest Rates

The precursor of insurance—as a specific and definable way of treating risk—dates back at least 5,000 years to Mesopotamian interest rates. By 3000 B.C., interest rates were evident in Babylon, the nexus of well-traveled trade routes, which linked population and cultural centers throughout the Middle East and beyond. Caravan operators and traders were at the mercy of acts by God or man, by enemy or friend. They needed loans to purchase goods and finance cargo shipments. In addition to interest on the capital, the merchants also charged a "risk premium" reflecting a venture's riskiness.

The risk premium could amount to double the interest charge, or more. Borrowers often posted all their property and sometimes family as collateral. If cargo was lost, they and their families might be sold into slavery.

The Code of Hammurabi

Thirteen centuries later, insurance emerged in a form similar to what we know today. The Code of Hammurabi, circa 1755 B.C., offered a basis for institutionalizing insurance. It formalized concepts of "bottomry," referring to vessel bottoms, and "respondentia," referring to cargo. These provided the underpinning for marine insurance contracts. Such contracts contained three elements:

  • A loan on the vessel, cargo, or freight
  • An interest rate
  • A surcharge to cover possibility of loss.

In effect, shipowners were the insured and lenders were the underwriters. By 750 B.C., this practice was common, and risk sharing was refined into a concept known as "general average," which became a fundamental doctrine of maritime insurance. General average is a partial loss falling on all interests in a maritime venture; all parties share, on a pro-rata basis, a partial loss that affects them all (e.g., jettisoning of cargo to save the vessel). In Athens, this risk sharing principle led to the birth and growth of the first insurance exchange.

After Greece declined, Rome continued such practices and also advanced early forms of life insurance. Members of collegia regularly contributed to a fund, out of which their own burial expenses eventually were paid.

Precursors of Insurance Falter

Rome's fall, circa 450 A.D., nearly took the precursors of insurance with it, but vestiges continued throughout the Middle Ages in merchant and artisan guilds. These provided forms of member insurance covering risks such as fire, flood, theft, disability, death, and even imprisonment.

During the feudal period, early forms of insurance waned as travel and long-distance trade declined, but transportation, commerce, and insurance would reemerge in the fourteenth through sixteenth centuries.

Marine Insurance

Marine insurance appeared in Italian port cities as early as the twelfth century. And, the Hanseatic Leagues actually produced detailed regulations for marine policies used in Lombardy by 1300. Venice became an insurance center.

Policies (derived from the Italian word polizza, meaning a promise or undertaking) were given to those insuring marine risks. Shipowners and merchants offered policies to individuals who signed their names and recorded risk percentages at the bottom of the contract, hence becoming known as "underwriters."

Other early European underwriting examples abound. Evidence suggests that a bank in Bruges, Belgium, also offered insurance in the twelfth century, but the first organization formed specifically to write commercial insurance there dates from 1210. After merchants paid a percentage of the risk, the Bruges Chamber of Assurance covered their goods.

Marine insurance developed haphazardly in Britain. Italian merchants insured fourteenth and fifteenth century London exports, which suggests they were the ones who brought marine insurance to Britain.

Insurance Develops in England

The following century, policies providing the basis for the British Admiralty Court's first civil actions were written in Italian and adapted from the 1523 Ordinance of Florence. In 1574, Queen Elizabeth I granted Richard Candler the right to establish an insurance office in the Royal Exchange Building—the office could prepare policies and register them for a fee.

English law began dealing with insurance in the 1601 Francis Bacon Bill. The bill's preamble read in part:

… by means of which policie of assurance it comethe to passe upon the losse or perishing of any shippe there followed not the undoing of any man but the losse lighteth rather easillie upon many, than heavilie upon few.

Again, sharing risk is at the heart of the idea. Throughout the seventeenth century, marine insurance was written primarily by shippers and traders as a sideline.

Fire Insurance

Fire insurance probably originated as a commercial product in Hamburg and other German cities during the thirteenth century. When London's Great Fire took place in 1666, however, there was no fire insurance in Britain. Shortly thereafter, Nicholas Barbon, a former doctor, opened an office to underwrite such protection.

Others joined Barbon in 1680 to start The Fire Office, the first joint-stock company for fire insurance in London and perhaps the world. Renamed The Phoenix Office in 1705, initially it insured buildings but not furniture, fittings, or goods.

Life Insurance

Although Spain had life insurance by 1100, this type of policy evolved slowly and was introduced elsewhere in Europe during the 1700s and 1800s. England's first recorded life policy dates from 1583.

Under the sponsorship of "friendly societies" (similar to U.S. fraternal orders), such insurance grew quickly. However, sparse vital statistics and lack of actuarial science caused many early life insurers to fail. The present form of life policies originated with England's Society for Equitable Insurance on Lives and Survivorship founded in 1762.

Birth of London Coffeehouses

As capitalism developed, English institutions changed fundamentally. The middle class gained power through its mobile cash and credit resources, and challenged the nobility whose wealth was rooted in land. In this context, coffeehouses became popular. London's first opened in 1652. In less than 50 years, the city had 3,000 coffeehouses, which had become hubs of social, intellectual, and business life.

In a subsequent article, we discuss the remarkable early development of Lloyd's as an insurance marketplace.

Robert Moore has worked with Jack Bogardus for a quarter of a century. Mr. Moore worked for Alexander & Alexander from 1977 to 1995 and served as a senior vice president of Alexander & Alexander Services Inc., as well as chairman and president of A&A Government and Industry Affairs Inc. In 1985 he was elected president of the National Association of Insurance Brokers, and from 1989 to 1993 he served as chairman of that organization's Past Presidents' Advisory Council. He has written and spoken extensively on corporate issues. As The Conference Board's emerging issues coordinator, he identified and responded to the business community's public policy concerns. He is coauthor of School for Soldiers: West Point and the Profession of Arms, which was selected as a New York Times "Noteworthy Book." Mr. Moore earned a bachelor's degree from Davidson College, a master's degree from the University of North Carolina, and a doctorate from the University of Wisconsin. Commissioned a U.S. Army officer, he taught at the Military Academy at West Point and was an associate professor on the graduate faculty at the University of Maryland. Jack Bogardus and Robert Moore are coauthors of the award-winning Spreading the Risks: Insuring the American Experience (2003) and the revised edition (2005). He is president and senior editor of PMR Communications Group in Vienna, VA and can be reached at 703-759-0233 and through the website

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