History of Insurance

The roots of insurance might be traced to Babylonia, where traders were encouraged to assume the risks of the caravan trade through loans that were repaid (with interest) only after the goods had arrived safely—a practice resembling bottomry and given legal force in the Code of Hammurabi (c.2100 B.C.). The Phoenicians and the Greeks applied a similar system to their seaborne commerce. The Romans used burial clubs as a form of life insurance, providing funeral expenses for members and later payments to the survivors.

With the growth of towns and trade in Europe , the medieval guilds undertook to protect their members from loss by fire and shipwreck, to ransom them from captivity by pirates, and to provide decent burial and support in sickness and poverty. By the middle of the 14th century, as evidenced by the earliest known insurance contract ( Genoa , 1347), marine insurance was practically universal among the maritime nations of Europe . In London , Lloyd's Coffee House (1688) was a place where merchants, ship owners, and underwriters met to transact business.

By the end of the 18th century. Lloyd's had progressed into one of the first modern insurance companies. In 1693 the astronomer Edmond Halley constructed the first mortality table, based on the statistical laws of mortality and compound interest. The table, corrected (1756) by Joseph Dodson, made it possible to scale the premium rate to age; previously the rate had been the same for all ages.

Insurance developed rapidly with the growth of British commerce in the 17th and 18th century Prior to the formation of corporations devoted solely to the business of writing insurance, policies were signed by a number of individuals, each of whom wrote his name and the amount of risk he was assuming underneath the insurance proposal, hence the term underwriter.

The first stock companies to engage in insurance were chartered in England in 1720, and in 1735, the first insurance company in the American colonies was founded at Charleston , S.C. Fire insurance corporations were formed in New York City (1787) and in Philadelphia (1794). The Presbyterian Synod of Philadelphia sponsored (1759) the first life insurance corporation in America , for the benefit of Presbyterian ministers and their dependents. After 1840, with the decline of religious prejudice against the practice, life insurance entered a boom period. In the 1830s the practice of classifying risks was begun.

The New York fire of 1835 called attention to the need for adequate reserves to meet unexpectedly large losses; Massachusetts was the first state to require companies by law (1837) to maintain such reserves. The great Chicago fire (1871) emphasized the costly nature of fires in structurally dense modern cities.

Reinsurance, whereby losses are distributed among many companies, was devised to meet such situations and is now common in other lines of insurance. The Workmen's Compensation Act of 1897 in Britain required employers to insure their employees against industrial accidents. Public liability insurance, fostered by legislation, made its appearance in the 1880s; it attained major importance with the advent of the automobile.

In the 19th century many friendly or benefit societies were founded to insure the life and health of their members, and many fraternal orders were created to provide low-cost, members-only insurance. Fraternal orders continue to provide insurance coverage, as do most labor organizations. Many employers sponsor group insurance policies for their employees; such policies generally include not only life insurance, but sickness and accident benefits and old-age pensions, and the employees usually contribute a certain percentage of the premium.

Since the late 19th century there has been a growing tendency for the state to enter the field of insurance, especially with respect to safeguarding workers against sickness and disability, either temporary or permanent, destitute old age, and unemployment (see social security). The U.S. government has also experimented with various types of crop insurance, a landmark in this field being the Federal Crop Insurance Act of 1938. In World War II the government provided life insurance for members of the armed forces; since then it has provided other forms of insurance such as pensions for veterans and for government employees.

After 1944 the supervision and regulation of insurance companies, previously an exclusive responsibility of the states, became subject to regulation by Congress under the interstate commerce clause of the U.S. Constitution. Until the 1950s, most insurance companies in the United States were restricted to providing only one type of insurance, but then legislation was passed to permit fire and casualty companies to underwrite several classes of insurance.

Many firms have since expanded, many mergers have occurred, and multiple-line companies now dominate the field. In 1999, Congress repealed banking laws that had prohibited commercial banks from being in the insurance business; this measure was expected to result in expansion by major banks into the insurance arena.

In recent years insurance premiums (particularly for liability policies) have increased rapidly, leaving unprecedented numbers of Americans uninsured. Many blame the insurance conglomerates, contending that U.S. citizens are paying for bad risks made by the companies.

Insurance companies place the burden of guilt on law firms and their clients, who they say have brought unreasonably large civil suits to court, a trend that has become so common in the United States that legislation has been proposed to limit lawsuit awards. Catastrophic earthquakes, hurricanes, and wildfires in late 1980s and the 90s have also strained many insurance company's reserves.


The History of Protection & Indemnity Insurance

P&I insurance is the traditional name of the insurance of third party liabilities which arise in connection with the operation of ships.

The forerunners of P&I clubs were mutual hull clubs which were first formed at the beginning of the 18th century by shipowners in England to insure hull risks on a non-profit making basis, so as to avoid paying the high premiums charged by the market insurers at that time.

Until the formation of mutual hull clubs the underwriters of Lloyd's and certain other institutions had a virtual monopoly of hull insurance by virtue of an English Act of Parliament of 1719. As this monopoly was exploited, shipowners joined forces and started to insure themselves on a mutual basis. By 1819 there were already more than 20 mutual hull clubs and, although two of them were in London , they were mostly on the North-East coast of England . In 1824 the Act of 1719 was repealed, thereby breaking the underwriters' monopoly. From then on mutual hull clubs began to decline.

The first P&I clubs were formed in England in the middle of the 19th century. The causes of their coming into being are somewhat unclear. Some believe that the managers of the declining mutual hull clubs were looking for other activities and realised that hull underwriters insured only 3/4ths of an owner's liability for collision damage, leaving the owner to bear 1/4th of the collision liability himself, and that the managers expanded their business by insuring this 1/4th collision liability which the hull underwriters refused to carry. Others assume that the cause was the enactment in the United Kingdom of the Fatal Accidents Act of 1846, which imposed stricter rules of liability for death and personal injury.

Whatever the true cause may have been, the first P&I club was founded in 1855 as an offshoot of a mutual hull club. It was soon joined by others which developed also mainly from mutual hull clubs.

The new P&I clubs were mutual clubs, that is to say that their members agreed to share each other's liabilities on a non-profit making basis. In this field the mutual form proved to be particularly suitable. The clubs started their activities by insuring the 1/4th collision liability, damage to fixed objects (such as jetties and quays) excluded from hull cover, and liability for death and personal injury. This cover was called protection insurance. Shipowners at the time felt no need for more extensive cover because the remaining 3/4ths of the collision liability was carried by the hull underwriters and liability for cargo could be avoided by appropriate exemption clauses in bills of lading. However, in 1870, the owner of a ship which was lost off the Cape of Good Hope , the 'Westonhope', was held liable for the loss of cargo because it had been carried beyond its destination and the exemption clauses in the bill of lading did not cover such an eventuality. As a result, in 1874, one of the clubs started to insure liability for loss of or damage to cargo. Such insurance was called indemnity insurance and was soon adopted by the other clubs. Thereafter the clubs became known as mutual protection and indemnity clubs.