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History of insurance
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: natural or non-monetary
economies (using barter and trade with no centralized nor standardized set of
financial instruments) and more modern monetary economies (with markets,
currency, financial instruments and so on). The former is more primitive and
the insurance in such economies entails agreements of mutual aid. If one
family's house is destroyed the neighbours are committed to help rebuild.
Granaries housed another primitive form of insurance to indemnify against
famines. Often informal or formally intrinsic to local religious customs, this
type of insurance has survived to the present day in some countries where a
modern money economy with its financial instruments is not widespread.[citation needed]
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 practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively.[13] 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 practiced 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.
The subscription room at
Lloyd's of London in the early 19th century.
The purpose of registering
was that whenever the person who presented the gift registered by the court was
in trouble, the monarch and the court would help him. Jahez, a historian and
writer, writes in one of his books on ancient Iran:
"[W]henever the owner of the present is in trouble or wants to construct a
building, set up a feast, have his children married, etc. the one in charge of
this in the court would check the registration. If the registered amount
exceeded 10,000 Derrik, he or she would receive an amount of twice as
much."[14]
A thousand years later, the
inhabitants of Rhodes invented the concept of the general average. Merchants whose goods
were being shipped together would pay a proportionally divided premium which
would be used to reimburse any merchant whose goods were deliberately
jettisoned in order to lighten the ship and save it from total loss.
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.[15] The Greeks andRomans introduced the origins of
health and life insurance c. 600 BCE when they created guilds called
"benevolent societies" which cared for thefamilies of deceased members, as
well as paying funeral expenses of members. Guilds in the Middle Ages served a similar purpose.
The Talmud 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.
Separate insurance
contracts (i.e., insurance policies not bundled with loans or other kinds of
contracts) were invented in Genoa in the 14th century, as
were insurance pools backed by pledges of landed estates. These new insurance
contracts allowed insurance to be separated from investment, a separation of
roles that first proved useful in marine insurance.
Insurance became far more sophisticated in post-Renaissance Europe, and specialized varieties developed.
Lloyd's
of London, pictured in 1991, is one of the world's leading and most
famous insurance markets
Some forms of insurance had
developed in London by the early decades of the
17th century. For example, the will of the English colonist Robert Hayman mentions two "policies
of insurance" taken out with the diocesan Chancellor of London, Arthur
Duck. Of the value of £100 each, one relates to the safe arrival of Hayman's
ship in Guyana and the other is in regard to "one hundred pounds assured
by the said Doctor Arthur Ducke on my life". Hayman's will was signed and
sealed on 17 November 1628 but not proved until 1633.[16] Toward the end of the
seventeenth century, London's growing importance as a centre for trade
increased demand for marine insurance. In the late 1680s, Edward Lloyd opened a coffee house that
became a popular haunt of ship owners, merchants, and ships' captains, and
thereby a reliable source of the latest shipping news. It became the meeting
place for parties wishing to insure cargoes and ships, and those willing to
underwrite such ventures. Today, Lloyd's
of London remains the leading market (note that it is
an insurance market rather than a company) for marine and other specialist
types of insurance, but it operates rather differently than the more familiar
kinds of insurance. Insurance as we know it today can be traced to the Great
Fire of London, which in 1666 devoured more than 13,000 houses. The
devastating effects of the fire converted the development of insurance
"from a matter of convenience into one of urgency, a change of opinion
reflected in Sir Christopher Wren's inclusion of a site for 'the Insurance
Office' in his new plan for London in 1667."[17] A number of attempted fire
insurance schemes came to nothing, but in 1681 Nicholas Barbon, and
eleven associates, established England's first fire insurance company, the
'Insurance Office for Houses', at the back of the Royal Exchange. Initially,
5,000 homes were insured by Barbon's Insurance Office.[18]
The first insurance company
in the United States underwrote fire insurance
and was formed in Charles Town (modern-day Charleston), South Carolina, in
1732. Benjamin Franklin helped to popularize and
make standard the practice of insurance, particularly against fire in the form of perpetual
insurance. In 1752, he founded the Philadelphia Contributionship
for the Insurance of Houses from Loss by Fire.[19] Franklin's company was the
first to make contributions toward fire prevention. Not only did his company
warn against certain fire hazards, it
refused to insure certain buildings where the risk of fire was too great, such
as all wooden houses.
In the United States, regulation of the insurance industry
primary resides with individual state insurance departments. The
current state insurance regulatory framework has its roots in the 19th century,
when New Hampshire appointed the first
insurance commissioner in 1851.[19] Congress adopted the
McCarran-Ferguson Act in 1945, which declared that states should regulate the
business of insurance and to affirm that the continued regulation of the
insurance industry by the states is in the public's best interest.[19] The Financial Modernization
Act of 1999, commonly referred to as "Gramm-Leach-Bliley",
established a comprehensive framework to authorize affiliations between banks,
securities firms, and insurers, and once again acknowledged that states should
regulate insurance.[19]
Whereas insurance markets
have become centralized nationally and internationally, state insurance
commissioners operate individually, though at times in concert through the National Association of Insurance Commissioners.
In recent years, some have called for a dual state and federal regulatory
system (commonly referred to as the Optional federal charter (OFC)) for insurance
similar to the banking industry.
In 2010, the federal Dodd-Frank Wall Street Reform
and Consumer Protection Act established the Federal
Insurance Office ("FIO").[20] FIO is part of the U.S. Department of the Treasury and it monitors all aspects
of the insurance industry, including identifying issues or gaps in the
regulation of insurers that may contribute to a systemic crisis in the
insurance industry or in the U.S. financial system.[20] FIO coordinates and develops
federal policy on prudential aspects of international insurance matters,
including representing the U.S. in the International Association of
Insurance Supervisors.[20] FIO also assists the U.S. Secretary of Treasury with negotiating (with the
U.S. Trade Representative) certain international agreements.[20]
Moreover, FIO monitors
access to affordable insurance by traditionally underserved communities and
consumers, minorities, and low- and moderate-income persons.[20] The Office also assists the
U.S. Secretary of the Treasury with administering the Terrorism Risk Insurance
Program.[20] However, FIO is not a
regulator or supervisor.[20] The regulation of insurance
continues to reside with the states.[20]
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