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At the Catex London market bash at the end of January, Tom Bolt began his comments by encapsulating in a few sentences the traditional history of the London market. There is a non-traditional version of the entire history of insurance. This is it.
Insurance began when an unnamed caveman stuffed a lump of dead behemoth into his loincloth for later consumption. Reinsurance was introduced quite soon after this, when the leader of a cave clan told everyone to produce the 'insurance policies' they had been carrying around in their loincloths, for the office Christmas party. The leader of the clan had the largest club, and today reinsurance remains just that, a club.
Early hunter-gatherers needed life and travel insurance, but lacked airports in which to buy the policies. Life was brutish and short. If you made it to 20, you got a telegram from God. The largest risk was being eaten by dinosaurs, but cover was limited and the terms ridiculous.
The industry then lay dormant for millennia as insurers missed endless opportunities for diversification. There were no consequential loss policies for Adam and Eve to consider before biting into the apple. The exclusion for acts of God was introduced right after the Red Sea business, when the Egyptians found they had neither flood coverage nor auto insurance on the chariots. Moses bought a rudimentary fire policy and noted in a codex that the burning bush fell under special risks.
The Philistines lacked building insurance. The premium Noah had to pay for marine and hull cover was an outrage and, worse, the company was washed away and so effectively denied his claim for the lost unicorns. Jonah's dinosaur policy carried a standard sea-monster exclusion clause.
About 3000 BC, once the Y-3K scare had been seen off, the Chinese began sending cargoes by several vessels simultaneously, the better to guarantee the arrival of at least some of them, due to tidal waves and whirlpools. Not so much a risk pool, then, as a risk of pools.
While the Chinese were taking acceptable losses on their sea trade, the Babylonians evolved marine loans, which allowed borrowers not to repay capital or interest if certain accidents befell vessels or their cargo. The loans became what we call bottomry bonds; you may make your own joke at this point.
In the ninth century BC, the Law of Rhodes proposed that traffic drive on the left and horns not be sounded after 6:30pm on Saturdays. No, wait, that's wrong. The Law of Rhodes established the idea of general average. The Romans are believed to have had written insurance contracts: Nero, plainly, had fire coverage in place.
The industry kept missing opportunities. There were no forms available when Icarus applied for flight insurance. Ingestion cover more or less died out completely when Rome Re announced the lion exclusion. The computers were down when King Alfred burned the cakes.
The concept of insurance in its modern form is credited to the merchants of the city states of northern Italy. The idea spread to England via the Low Countries, which for most of the Dark Ages hosted the RIMS conferences. In 1310 AD, the Duke of Flanders granted papers to a Chamber of Assurance at Bruges, which underwrote marine risks. It's all true; you can't make this stuff up.
Major lines in the Middle Ages included P&L (pillage and looting) and dragon cover, with niche markets in rust coverage for chain mail owners. Beheading coverage was offered only on a partial loss basis. Early insurance traders packaged these four lines as "Some Risks". OK, you can make this stuff up.
Where business is done, government is never far behind, with its hand out. In 1601, the Parliament in London passed legislation relating to the burgeoning marine market. Premiums, of course, rose.
The underwriters of the day were caffeine addicts who lingered all day in coffee houses. Excited fellows would charge in, offering details of vessels and cargos in need of insurance. The proto-brokers would cry "Double lattes all round!" and set to signing their names at the bottom of the page containing descriptions of the risks. The traditional view is that underwriters got their name from this practice, but it is more widely believed that in England's clearly delineated social status, these gentlemen were considered of lesser value than writers. That view that no longer holds.
The first fire insurance contracts were written in London in 1680. The impetus for this development was the Great Fire of London, which in turn led to the first recorded insurance company, the Hand-in-Hand fire office, established in 1696. (True: the Hand-in-Hand became part of Commercial Union in 1905.)
The Hand-in-Pocket insurance office fared less well, however. It tried two advertising slogans: "Our hand in your pocket", which inhibited the flow of new business; and "Our hand in our pocket", which finished off the claims side.
The heat these early fire policies generated was followed in London by the first accident policy - a new product developed in record time for an industry with a reputation for caution - just 160 years later, in 1840. To even things out, in the interests of fair play and all that, reinsurance was banned in Great Britain from 1746 until 1864. Banned!
Much has happened since then, of which three highlights are all the true insurance student needs to know.
(1) In 1922, Cornelius Vander Starr founded American International, to insure chopsticks against blight;
(2) In 1963, Fred Reiss invented the captive insurance company when he was detained by Bermuda customs for a week while they investigated his hat; and
(3) In keeping with long tradition, Lloyd's of London still offers excess of loss on the ingestion of human beings by dinosaurs.
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Roger Crombie is an American Society of Business Publication Editors national award winner. An English chartered accountant who lives in London, he writes and broadcasts news and opinion in the US, UK, Bermuda and the Caribbean, in print and online. His main beat is insurance and financial services, with 30-year sidelines in music and humour. All views expressed in Roger's columns are exclusively his own. Contact Roger at [email protected].
Copyright CATEX Reports
February 21, 2013
