The Roots of Risk: A Brief History of Insurance

With today’s insurance industry plagued by legal jargon, frivolous litigation, excessive fees and misleading small print, we’ve decided to step back and use our inaugural post to acknowledge the industry’s ancient and humanitarian roots. Although they may not have been using actuary tables, the earliest hunter and gatherer societies were in fact thinking about their “risk exposures.” The original insurance policy was free — people formed communities and helped each other. Hunting in groups improved the odds for survival and, if and when beast won over man, even primitive people made provisions for the victim’s family.  At the beginning, insurance was simple.

Over thousands of years, as commerce expanded, insurance became increasingly complicated. The seas dominated the early evolution of insurance and the expansion of shipping introduced new ways for vessels and goods to get damaged, lost or stolen. This in turn increased claims frequency and payout amounts. As far back as 3000 B.C, Chinese and Babylonian traders used caravans to distribute their valuables and decrease the chance of loss.  This continued through1688, when a popular coffee shop in London, Lloyds of London, started as an informal hub for maritime business transactions. It was there that modern underwriting was born changing the insurance industry forever.

The U.S. was a relatively late entry into the insurance industry due to the broad range of risks to early American life. Benjamin Franklin wholeheartedly believed in insurance, “an ounce of prevention is worth a pound of cure.” In 1752, he became one of the early proponents of mutual insurance and helped formed The Philadelphia Contributionship for The Insurance of Houses from Loss by Fire, the first successful fire insurance company in the U.S. colonies. Houses that didn’t conform to legal specifications were denied insurance. By hiring a chimney sweep to maintain the chimneys of insured houses, they were officially one of the first insurance carriers to enact loss control standards. Brokers became increasingly prevalent to help people comply with new and changing laws and decipher contracts.

Although it’s far from perfect, insurance exists for a reason — a fundamental need for people to help people.  Insurance is essential to daily, modern life, enabling individuals and businesses to manage their existence with a measure of security. Just as ships full of treasure could be lost at sea, and rampant fires could consume entire cities, a lawsuit can consume an entire corporation. The bottom-line is that insurance has gotten way too complicated, costly and confusing.

BizInsure Guest Blogger: Tanya Weliky

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