How Did Insurance Get Started?

Most people think of insurance as a modern concept. But the basic premise of shared risk as a means of protection goes very far back in human history.

Records show that Sumerian, Babylonian and Chinese merchants pooled their risk of loss from pirates and thieves as early as 3000 B.C. By the time the Code of Hammurabi, the Babylonian code of law, was written in 1754 B.C., strict laws had already been established by the Mesopotamians governing the transfer of risks from merchants to money lenders. By 400 B.C., nearly all of the states and settlements around the Mediterranean and throughout Asia had established similar laws restricting the interest rates or percentage of profits that could be charged.

First Insurance ‘Policies’
The oldest form of what we now think of insurance policies would have been in the area of maritime insurance. By the 13th century, the Lombard merchants of Northern Italy had established shops that were dedicated to backing maritime trade ventures.

From there, the business of backing maritime trade ventures for a percentage of the profits spread to the rest of the European continent and then by the 1800s to England.

This accounts for the naming of one of the historical centers of the insurance industry: Lombard Street in London.

Underwriters
The way much of the business was done in those times involved a merchant ship’s captain publishing a description of his vessel, its proposed voyage and hopeful trading. The captain would make the description available to possible backers. Those wishing to assume part of the risk (in exchange for a part of the voyage’s profits) would sign their names at the bottom of the page. These backers were said to be "writing under" the risk description. That is the origin of the word "underwriter" that is still in use today.

Homeowners & Business Insurance
Moving into the 20th century, in the 1950s the idea of packaged insurance policies ‒ covering a range of perils that could strike a house or business ‒ came into being. These packages created by insurers offered the home or business owner a considerable savings over individual policies. These products also reduced the amount of paperwork and sales effort on the part of insurance agents and companies.

Flood Insurance
The economic prosperity of the 1950s, coupled with the baby boom that followed World War 2, pushed the expanded population into once-sparsely-populated rural areas. Natural disasters, such as floods, hit Americans in these areas. But these natural disasters presented risks that most insurance companies simply could not cover. This led to the passing of the Disaster Relief Act of 1950 (DRA), which gave authority to the President to provide federal help when requested by a state.

As dam construction expanded and flooding from other natural disasters became more localized, the DRA was augmented by the National Flood Insurance Act of 1968. This act expanded the resources available to flood victims. For the first time, it also made possible the purchase of flood insurance directly from an insurance carrier.

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Article and photo courtesy of Selective Insurance.