The word “insurance” is so inculcated into our culture that it is easy to forget what it’s all about.
History, Theory & Meaning of Insurance, 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 other’s 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.
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Traditionally, the commercial insurance market would take about seven years to move from ‘hard’ (high premiums) to ‘soft’ (low premiums) through the claims cycle. The abandonment of the tariff in 1984 set off a wave of competition interrupted only by the solvency and capacity crisis following the World Trade Centre attacks of 2001.
Since then, massive premium hikes have stabilised and premiums levels have been uncontroversial, except in industries with specific issues, like solicitors PI or liability for entertainment risks.
Even major natural disasters (Asian and Japanese Tsunamis, New Orleans Flooding) or man-made disasters (Professional Indemnity losses on WorldCom, Enron, Parmalat) have not much interrupted solvency, capacity or premium stability.
More recently, the banking and financial crisis of 2008, which should have increased premiums as interest rates collapsed, forcing a return to underwriting for profit, made little impact as insurers tried to secure cash flow through lowered premiums.
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The Tariff and the Effect of Competition
Until the mid 1980’s, commercial insurance premiums were routinely stable. This stability was inculcated into the system by tariffs which applied throughout the entire market.
It made little difference whether you bought your commercial insurance from Commercial Union or General Accident.
In the 1970’s, increased competition from American insurers and a developing government view that the tariff system was anti-competitive led to it being formally abolished in 1984.
This freed insurers to charge what they thought was the correct rate for the risk and as demonstration that they are frequently wrong, neither of the above mentioned companies now exist.
Since the abolition of the tariff, over fifty composite insurers have collapsed or been rescued by merger and acquisition.
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