History of insurance. Ancient world.
Initially people used to sell goods in their own villages and gathering society. However, with the passage of time, they turned to nearby villages to sell. Furthermore, in the thirteenth and early fourteenth centuries, the European traders used to travel to sell their goods across the globe and to hedge the risk of theft or fraud by the Capitan or crew also known as Risicum Gentium. However, they realized that selling this way, involves not only the risk of loss (i.e. damaged, theft or life of trader as well) but also they cannot cover the wider market. Therefore, the trend of hiring commissioned base agents across different markets emerged. The traders sent (export) their goods to the agents who on the behalf of traders sold them.
Sending goods to the agents by road or sea involves different risks i.e. sea storms, pirate attack; goods may be damaged due to poor handling while loading and unloading, etc. Traders exploited different measures to hedge the risk involved in the exporting. Instead of sending all the goods on one ship/truck, they used to send their goods over number of vessels to avoid the total loss of shipment if the vessel was caught in a sea storm, fire, pirate, or came under enemy attacks but this was not good practice due to prolonged time and efforts involved. Insurance is the oldest method of transferring risk, which was developed to mitigate trade/business risk. Marine insurance is very important for international trade and makes large commercial trade possible. The risk hedging instruments our ancestors used to mitigate risk in medieval times were sea/marine (Mutuum) loans, commenda contract, and bill of exchanges.
Nelli (1972) highlighted that commenda contract and sea loans were almost the closest substitute of marine insurance. Furthermore, he pointed out that for half century, it was considered that the first marine insurance contract was floated in Italy on October 23, 1347; however, professor Federigo found that the first written insurance contracts dates back to February 13, 1343 in Pisa. Furthermore, Italian traders spread the knowledge and use of insurance into Europe and The Mediterranean. In the fifteenth century, word policy for insurance contract became standardized. By the sixteenth century, insurance was common among Britain, France, and Netherlands. The concept of insuring outside native countries emerged in the seventeenth century due to reduced trade or higher cost of local insurance.
According to Kingston (2011), Lloyd’s Coffeehouse was the prominent marine insurance marketplace in London during the eighteenth century and European/American traders used this marketplace to insure their shipments. The rules and regulations of insurance were adopted from Italian merchants known as “Law Merchant” and initially these rules governed the marine insurance across the globe. In case of dispute, policy writer and holder choose one arbitrator each and these two arbitrators choose a third impartial arbitrator and parties were bound to accept the decision made by the majority.
Because of the inability of this informal court (arbitrator) to enforce their decisions, in the sixteenth century, traders turned to formal courts to resolve their disputes. Special courts were setup to solve the disputes of marine insurance like in Genoa, insurance regulation passed to impose fine, on who did not obey the Church’s prohibitions of usury (Sea loans, Commenda) in 1369. In 1435, Barcelona ordinance issued, making it mandatory for traders to turn to formal courts in case of insurance disputes. In Venice, “Consoli dei Mercanti”, specialized court to dealt with marine insurance were setup in 1436. In 1520, the mercantile court of Genoa was replaced by more specialized court “Rota” which not only followed the merchant’s customs but also incorporated the legal laws in it.
In some sense, we can say that insurance dates back to early human society. We know of two types of economies in human societies: natural or non-monetary economies (using barter and trade with no centralized nor standardized set of financial instruments) and monetary economies (with markets, currency, financial instruments and so on). Insurance in the former case entails agreements of mutual aid. If one family's house gets destroyed, the neighbours are committed to help rebuild it. Granaries embodied another early form of insurance to indemnify against famines. These types of insurance have survived to the present day in countries or areas where a modern money economy with its financial instruments is not widespread.
The first methods of transferring or distributing risk in a monetary economy, were practised by Chinese and Babylonian traders in the 3rd and 2nd millennia BC, respectively. 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 that 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.
Merchants have sought methods to minimize risks since early times. Pictured, Governors of the Wine Merchant's Guild by Ferdinand Bol, c. 1680.
Achaemenian monarchs in Ancient Persia were presented with annual gifts from the various ethnic groups under their control. This would function as an early form of political insurance, and officially bound the Persian monarch to protect the group from harm.
At some point in the 1st millennium BC, the inhabitants of Rhodes created the 'general average'. This allowed groups of merchants to pay to insure their goods being shipped together. The collected premiums would be used to reimburse any merchant whose goods were jettisoned during transport, whether due to storm or sinkage.
The ancient Athenian "maritime loan" advanced money for voyages with repayment being cancelled if the ship was lost. In the 4th century BC, rates for the loans differed according to safe or dangerous times of year, implying an intuitive pricing of risk with an effect similar to insurance.
The Greeks and Romans introduced the origins of health and life insurance c. 600 BC when they created guilds called "benevolent societies", which cared for the families of deceased members, as well as paying funeral expenses of members. Guilds in the Middle Ages served a similar purpose. The Jewish Talmud also deals with several aspects of insuring goods. Before insurance was established in the late 17th century, "friendly societies" existed in England, in which people donated amounts of money to a general sum that could be used for emergencies.
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