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Insurance: History, theory, meaning...
Background
The word “insurance” is so inculcated into our culture that it is easy to forget what it’s all about.
The history books point to the beginnings of an organised industry in the seventeenth century. Shipping merchants, gathering in Edward Lloyd’s coffee shop in Lime St, London would speculate on whether each others ships would successfully reach their destination – with the kitty going to those unfortunates whose ship didn’t make it.
Lloyd’s of London remains the world’s biggest insurance market and still sits on the site of Edward Lloyd’s coffee shop. The modern insurance industry evolved out of something else, however.
When Karl Marx predicted that Britain would become the first communist country, he wasn’t paying a compliment. Marx was referring to the ongoing carnage caused by the industrial revolution.
This would lead workers to rise up, he thought, and take over the Forces of Production.
The Idea
The underlying ‘idea’ – that the misfortunes of the few fall light on the many, runs deep in societies of all kinds, across all cultures and creeds. Indeed, the word ‘insurance’ is so inculcated in our culture, it is easy to forget how pivotal it is to our civilization and society in the round.
Early History: The Coffee Shop
‘Insurance’ existed in a recognisable form in pre-historic Minoan and other ancient civilisations but also spontaneously developed around the London shipping market about 350 years ago, in Edward Lloyd’s coffee Shop, in Lime Street, London which remains the site of the world’s largest insurance market, Lloyd’s of London – it still bears his name.
The shipping merchants would gather in Lloyds, drink coffee and speculate on the outcome of their maritime adventures, with the kitty going to the owner whose vessel didn’t survive the voyage.
The first Marine and Life Assurance Acts would describe the function of insurance as a mechanism to ‘mitigate the consequences of misfortune’. These days, inelegant management-speak calls it ‘a risk transfer mechanism’.
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Victorian Development
The backbone of what is now the modern insurance industry developed during the industrial revolution. The Victorians were visionaries with amazing confidence and ambition. Invention and innovation were second nature, they believed anything was possible.
They transformed innate human compassion into an organized industry, which promoted social good, cohesion and underwrote the spirit of their age – progress. However, progress came at a high cost. When Karl Marx predicted that Britain would become the first communist country he wasn’t referring to our collective intellectual genius, he was referring to the ongoing carnage of the industrial revolution, which would result in the workers rising up to take control of the Forces of Production.
The Marxist revolution was stymied in the UK by the first Workers Compensation Acts, industrial welfare and mutual societies and the rise of social insurance. In time these all turned into companies and in turn the companies all merged into global capital reinsurance giants. It is ironic that this most ‘socialist’ of concepts is now run by global capitalists and is one of the pivots on which Western society operates and functions. Our ability to transfer risk and financially ameliorate ‘acts of god’ has allowed progress across society
as a whole, making risk taking, innovation and product development commonplace.
21st Century Insurance
The range of covers available has constantly widened;- everything from the destruction of your property to the breakdown of your washing machine, or even against the prospect of paying prize money for a “hole in one” in a golf match, or against your racehorse being kidnapped.
If all this sounds like an exaggerated form of gambling, then there are some important distinctions about insurance policies that separate them from the local bookmaker.
Theory
You can only insure property and circumstances in which you have a personal financial interest – known as insurable interest.
‘Ownership’ is the principal criteria, but there are other circumstances where you may suffer financially albeit you do not own the property in question.
Moreover, insurance is about putting you back “where you were”, not making you better off. This is called indemnity even if some settlements are “new for old”.
An insurance policy is a contract listing clearly defined risks covered (called perils i.e. – fire). It is not a maintenance contract for your business and should not be perceived as such.
Meaning
Insurance believe it or not is partly responsible for the great technological progress mankind has made over the last century. It covers everything from shoelaces to skyscrapers to satellites floating about in space. It’s contribution to society is immeasurable.
If we couldn’t get insurance cover, would we attempt to put billions of pounds worth of hardware in space, or in the North Sea?
Would banks lend money to business to invest in buildings and equipment if their security was at risk from fire?
Would we experiment and try new medicines, technologies, building methods if we couldn’t transfer the risk of it going wrong?
It really does happen...
And indeed in spite of, (or perhaps because of) all the advances mankind has made, inhabiting the planet remains a hazardous affair.
Natural phenomena (fires, storms, etc) are bad enough but our own mistakes continue unabated with disastrous results.
Ferry boats tip over, airplanes fall out of the sky, crushes happen in football stadiums, motor cars crash, oil platforms explode, factories collapse and helicopters crash into pubs. Accidents abound.
It is negligent human error mostly, that causes the insurance industry intense time and effort into making sure the policy conditions explain clearly exactly what should, and should not, be done.
And that’s before you take account of deliberate malicious activity, mugging, murder, burglary, arson, terrorism and then, of course, there’s a new medical condition emergent every
year.
It’s endless. Just where would we be without it?