The Origins of Insurance

Insurance has existed for thousands of years. A form of credit insurance was included in the Code of Hammurabi, a collection of Babylonian laws said to predate the Law of Moses. To finance their trading expeditions in ancient times, shipowners obtained loans from investors. If a ship was lost, the owners were not responsible for paying back the loans. Since many ships returned safely, the interest paid by numerous shipowners covered the risk to the lenders.

It was likewise in a maritime setting that later one of the world's most famous insurance providers, Lloyd's of London, was born. By 1688, Edward Lloyd was running a coffeehouse where London merchants and bankers met informally to do business. There financiers who offered insurance contracts to seafarers wrote their names under the specific amount of risk that they would accept in exchange for a certain payment, or premium. These insurers came to be known as underwriters. Finally, in 1769, Lloyd's became a formal group of underwriters that in time grew into the foremost market for marine risks.

Insurance Today

When people buy insurance today, they are still sharing their risk. Modern insurance companies study statistics that show the frequency of past losses-for example, losses from shop fires-to try to predict what losses their clients will experience in the future. The insurance company uses the funds paid by many clients to compensate the clients who suffer losses.

Do you need insurance? If so, what kind of insurance is right for your circumstances? And whether you have insurance or not, what precautions can help you to cope with life's risks?

In some lands certain kinds of insurance are compulsory. In others, most kinds are practically unknown. In addition, the cost of insurance and the type of coverage provided vary widely from country to country. But the fundamental principle of insurance-sharing risk-remains the same.

Naturally, the more property a person owns, the more he has to lose. Similarly, the more family responsibility a person has, the greater the impact if he or she dies or becomes physically disabled. Having insurance can alleviate one's concern about the possibility of suffering a loss of property or a disabling accident.

Yet, is it wise to spend money on insurance even though a claim may never be made? Well, is keeping a spare tire in the car a wasted investment, even if the tire is never needed? The sense of security to the car driver may make the expense of the extra tire worthwhile. While financial compensation cannot make up for certain losses, it may compensate for other losses.

Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed and known small loss to prevent a large, possibly devastating loss. An insurer is a company selling the insurance; an insured or policyholder is the person or entity buying the insurance. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.

In some sense we can say that insurance appears simultaneously with the appearance of human society. We know of two types of economies in human societies: money economies (with markets, money, financial instruments and so on) and non-money or natural economies (without money, markets, financial instruments and so on). The second type is a more ancient form than the first. In such an economy and community, we can see insurance in the form of people helping each other. For example, if a house burns down, the members of the community help build a new one. Should the same thing happen to one's neighbour, the other neighbours must help. Otherwise, neighbours will not receive help in the future. This type of insurance has survived to the present day in some countries where 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 practised by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively.[8] 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 practised 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.