What do the owner of a coffee house in London, the developer of the first calculator, an early developer of the fundamental concept of calculus, and the namesake of Halley’s Comet have in common? Each of the above played pivotal roles in the beginnings of what we now call insurance.
The Code of Hammurabi (circa 1750 BC) describes the financing of a ship’s cargo. The cargo would be pledged to secure the loan. Should the ship be lost at sea, the loan would be forgiven. This was an early form of risk avoidance.
During the Middle Ages, craft guilds were formed and collected dues from participating craftsmen. If a craftsman lost his business as a result of a fine, the funds from the dues would help with the reestablishment of the business. The fund also provided funds for theft protection and premature death of the craftsmen. This form of risk protection encouraged the rise of trade economies and a movement away from farming.
When the American colonies became established, trade between Europe and the New World brought on a new type of risk. Shipping was risky, and that risk needed protection. Financiers and shop owners would meet in the coffee house of Edward Lloyd to work out financing for a shipment. Risks were minimized by multiple financial underwriting arrangements.
The problem with these early forms of risk avoidance was there was no way to assess the risk and to determine if it was a wise investment. Blaise Pascal, the developer of the early calculator, and Pierre de Fermat, a mathematician were able to determine the probabilities of risks.
Fire insurance and life insurance were established in the 16th and 17th centuries. The problem was that there was no way to assess the risks of these. Edward Halley developed mortality tables through a study of birth and death records. Fire insurance remained an uncertain risk.
Over time, insurance has evolved and has become available for all kinds of risks. There has been a growing sophistication in determining risk levels. Insurance companies have protected themselves against risks by insuring their risks with reinsurance companies.
The insurance industry how now begun to experience risk levels unseen since the beginnings of the American colonies. In the early days of America, insurance was problematic because of uncertainties of starvation, conflicts, and other aspects of the new world. As the world is now beginning to experience challenges due to climate change, the risk calculations are becoming more problematic. In the years ahead, there may need to be another new beginning for risk protection.
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“There are worse things in life than death. Have you ever spent an evening with an insurance salesman.”– Woody Allen (comedian)