history of insurance-

8/8/2019 History of Insurance-WWW.SELUR.TK

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HISTORYOF

INSURANCE

If risk is like a smoldering coal that may spark a fire at any moment, then

insurance is our fire extinguisher.

Countries and their citizens need something to spread risk among large numbers

of people and to move risk to entities that can handle it. This is how insurance

emerged.Lets see how insurance can help us protect ourselves from being burned

awy by the risk.

1775 BCE, Mesopotamia

King Hammurabi's Code

The main concept of insurance - that of spreading risk - has been around as long

as human existence. Whether it was hunting giant elk in a group to spread the

risk of being the one gored to death or shipping cargo in several different

caravans to avoid losing the whole shipment to a marauding tribe, people have

always been wary of risk.

The first written insurance policy appeared in ancient times on a Babylonian

obelisk monument with the code of King Hammurabi carved into it. The"Hammurabi Code" was one of the first forms of written laws. These ancient laws

were extreme in most respects, but it offered basic insurance in that a debtor

didn't have to pay back his loans if some personal catastrophe made it impossible

(disability, death, flooding, etc.).

ACHAEMENIAN MONARCHS

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


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special gifts. For others, the presents were fairly assessed by the

confidants of the court. Then the assessment was registered in special

offices.

The purpose of registering was that whenever the person who

presented the gift registered by the court was in trouble, the monarchand 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."

Guild CoverageIn the dark and middle ages, most craftsmen were trained through the guild

system. Apprentices spent their childhoods working for masters for little or no

pay. Once they became masters themselves, they paid dues to the guild and

trained their own apprentices. The wealthier guilds had large coffers that acted as

a type of insurance fund. If a master's practice burned down, a common

occurrence in the wooden hovels of medieval Europe, the guild would rebuild it

using money from its coffers. If a master were robbed, the guild would cover his

obligations until money started to flow in again. If a master were suddenly

disabled or killed, the guild would support him or his widow and family. This

safety net encouraged more and more people to leave farming and take up trades.

As a result, the amount of goods available for trade increased, as did the range of

goods and services available. The style of insurance used by guilds is still around

today in the form of "group coverage".

12th-Century Mediterranean

y Economist Meir Kohn cites explosive sea trade for the need for new

security. "Bottomry loans" allowed ship owners to borrow money to

supply outgoing vessels and pay the crew. Borrowers provided shares in

ships for security. With "pignus loans," merchants supplied goods to

lenders traveling overseas. The lender sold the goods to recoup the money

loaned. The Church deemed sea loans "usurious" in 1236 which

contributed to a decline. Also, sea loans depended heavily on the honesty

of either the borrowers or the lenders.


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14th-Century Italy

y The earliest recorded marine insurance policy (written in 1350)

guaranteed 54 florins to the lender---unless a ship owner lost the cargo. In

that event, the lender received 300 florins for the loss of the loan money.Twenty years later, insurers themselves sought security. An insurer

underwriting a voyage from Genoa to Sluis purchased the first known

reinsurance (stop-loss insurance) policy, buying coverage for the most

dangerous leg of the trip from Cadiz.

15th-Century Europe

y The Italians became the most insured society of the period (eveninsuring marriage dowries), though policies for shipping and land

transport spread throughout the continent. Insurers standardized the

language to cover shipwrecks and seizures, among other casualties. With

standardized language came printed policies including fill-in-the blank

sections for borrowers. And Europeans initiated a new profession into

society, that of risk assessor, while also adding new insurers. Guilds and

communes received subscription income to maintain widows, orphans and

the health (or burials) of their members. Guilds insured against shipping

casualties, fire, death of the member, or loss of livestock.

Dangerous Waters

The practice of underwriting emerged in the same London coffeehouses that

operated as the unofficial stock exchange for the British Empire. In the late

1600s, shipping was just beginning between the New World and the old as

colonies were being established and exotic goods were ferried back. A coffeehouse

owned by Edward Lloyd, later of Lloyd's of London, was the primary meeting

place for merchants, ship owners and others seeking insurance.

A basic system for funding voyages to the new world was established. In the first

stage, merchants and companies would seek funding from venture capitalists.

The venture capitalists would help find people who wanted to be colonists,

usually those from the more desperate areas of London, and would purchase

provisions for the voyage. In exchange, the venture capitalists would be

guaranteed some of the returns from the goods the colonists would produce or

find in the Americas. It was widely believed that you couldn't take two left turns


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in America without finding a deposit of gold or other precious metals. When it

turned out that this wasn't exactly true, venture capitalists still funded voyages

for a share of the new bumper crop: tobacco.

After the voyage was secured by venture capitalists, the merchants and ship

owners would go to Lloyd's and hand over a copy of the ship's cargo to be read to

the investors and underwriters who gathered there. The people interested in

taking on the risk for a set premium would sign at the bottom of the manifest

beneath the figure indicating what share of the cargo they were taking

responsibility for (hence, underwriting). In this way, a single voyage would have

multiple underwriters, who would try to spread their risk as well by taking shares

in several different voyages.

By 1654, Blaise Pascal, the Frenchman who gave us the first calculator, and his

countryman Pierre de Fermat discovered a way to express probabilities and,

thereby, understand levels of risk. Pascal's triangle led to the first actuary tables

that were, and still are, used when calculating insurance rates. These formalized

the practice of underwriting and made insurance more affordable.

Fire and Plague

In 1666, the great fire of London destroyed around 14,000 buildings. London was

still recovering from the plague had that ravaged it a year earlier, and

many survivors found themselves without homes. As a response to the chaos and

outrage that followed the burning of London, groups of underwriters who had

dealt exclusively in marine insurance formed insurance companies that offered

fire insurance. Armed with Pascal's triangle, these companies quickly expanded

their range of business. By 1693, the first mortality table was created using

Pascal's triangle and life insurance soon followed.

19th-Century Europe

y

Battle of Britain Firefighting - National Archives and RecordsAdministration

Large city fires in Germany and Switzerland bred a need for more

reinsurance underwriting, according to David Holland, former president

and CEO of Munich American Re. The Hamburg City Fire Fund suffered


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heavy losses in 1842 when the conflagration razed homes for 20,000

citizens. The burn sparked the birth of Cologne Re, the first official

reinsurance company founded in 1846. Similarly, Swiss Re opened its

doors in 1863 after a city-wide fire in Glarus two years earlier.

20th-Century America

yBenny Turpin - Wikimedia Commons

The 1900s brought new assets for consumers to insure. In the U.S., an

Ohio resident purchased the first auto policy in 1897 for $11.25.

Massachusetts required coverage for all drivers in 1925. Also that year,

American comic Benny Turpin insured his crossed eyes for $20,000

through Lloyds of London---a firm that became known for insuring

celebrity bodies. Murdered oil magnate Eugene Mullendore carried life

policies totaling $15,000,000 in 1970. The primary insurer offset risks to

reinsurers, who ceded risks to hundreds of other companies.

Global Millennium

y Today it's possible to insure almost any asset, from ancient artwork to

shiny, new Zambonis, and to insure against disasters from avian flu to zoo

outbreaks. Though most consumers know their own primary insurance

companies, it's more than likely that these regional and national shops

seek their own "reassurance" from institutions overseas. Because many of

these are global corporations with numerous divisions and subsidiaries, the

wealth and risk spread around the world until it becomes difficult to tell

where profits and losses lie.


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AHISTORY OF INSURANCE STARTING WITH LLOYD S OFLONDON

Insurance was the idea of a man called LLoyd, who freqented the coffee houses of

London.These coffee houses were meting places of businessmen, and the mainbusiness in London then was shipping. He would listen to the tales of

businessmen who had lost their ships at sea, or had their cargoes hijacked by

Pirates. LLoyd thought about this and came up with the idea of insuring these

cargoes by insuring them for a premium. The first premium paid was for 100 for

a ships cargo. Within six months, this business proved so successful that he

opened offices in London. He based it ina building near the docks, and named it

Lloyds House. That was the start of LLoyds of London which today, has a

reputation second to none.

Lloyds ofLondon is neither a company nor a corporation. It is

basically a British insurance market. It serves as a meeting placewhere multiple financial backers or members, whether individuals,

who are known as Names or corporations, come together to pool

and spread risk. Their main business is in the reinsurance market.

The market began in Edward Lloyds coffeehouse around 1688 in

Tower Street, London. His establishment was a popular place for

sailors, merchants, and ship owners. Lloyds main business with his

customers was to provide reliable shipping news, which he gleaned

from all his different customers and then fed back to them. The

shipping industry community frequented the place to discuss

insurance deals among themselves. Soon after Christmas in 1691, the

coffee shop moved to Lombard Street, where today a blue plaque

commemorates its location. Long after Lloyds death in 1713 the

arrangement continued until 1774 when the participating members of

the insurance arrangement formed a committee and moved to the

Royal Exchange, and called itself The Society ofLloyds.

Between 1688 and 1807, slave trading became one of the primary

constituents of all British trade, and the dangers in the slave trade

meant that insurance of the ships was of major concern. The

insurance of ships engaged in slave trading became one of the primary

sources ofLloyds business as Britain established itself as the chief

slave trading power in the Atlantic. With slave-trading forming such a

prominent part ofLloyds business, the organization was one of the

chief opponents to the abolition of the slave trade.

In 1838 the Exchange burned down and, although rebuilt, many of

Lloyds early records were lost. In 1871, the first Lloyds Act was

passed in Parliament which elevated the business to a legal footing.


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The Lloyds Act of 1911 set out the Societys objectives, which include

the promotion of its members interests and the collection and

dissemination of information.

It soon became apparent that the membership of the Society, which

was largely made up of market participants, was too small in relationto the risks that it was underwriting and the small market

capitalization. Lloyds commissioned a secret internal inquiry, known

as the Cromer Report, which reported in 1968. This report advocated

the widening of membership to non-market participants, including

non-British subjects and women, and to reduce the onerous

capitalization requirements, which created a minor investor known as

a mini-Name.

HISTORY OF INSURANCE IN INDIA

In India, insurance has a deep-rooted history. It finds mention in the writings of Manu (Manusmrithi ), Yagnavalkya (Dharmasastra ) and Kautilya ( Arthasastra ). The writings talk interms of pooling of resources that could be re-distributed in times of calamities such as fire,floods, epidemics and famine. This was probably a pre-cursor to modern day insurance. AncientIndian history has preserved the earliest traces of insurance in the form of marine trade loans andcarriers contracts. Insurance in India has evolved over time heavily drawing from othercountries, England in particular.

1818 saw the advent of life insurance business in India with the establishment of the OrientalLife Insurance Company in Calcutta. This Company however failed in 1834. In 1829, theMadras Equitable had begun transacting life insurance business in the Madras Presidency. 1870saw the enactment of the British Insurance Act and in the last three decades of the nineteenthcentury, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started inthe Bombay Residency. This era, however, was dominated by foreign insurance offices whichdid good business in India, namely Albert Life Assurance, Royal Insurance, Liverpool andLondon Globe Insurance and the Indian offices were up for hard competition from the foreigncompanies.

In 1914, the Government of India started publishing returns of Insurance Companies in India.

The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate lifebusiness. In 1928, the Indian Insurance Companies Act was enacted to enable the Government tocollect statistical information about both life and non-life business transacted in India by Indianand foreign insurers including provident insurance societies. In 1938, with a view to protectingthe interest of the Insurance public, the earlier legislation was consolidated and amended by theInsurance Act, 1938 with comprehensive provisions for effective control over the activities ofinsurers.


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The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were alarge number of insurance companies and the level of competition was high. There were alsoallegations of unfair trade practices. The Government of India, therefore, decided to nationalizeinsurance business.

An Ordinance was issued on 19

th

January, 1956 nationalising the Life Insurance sector andLife Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian,16 non-Indian insurers as also 75 provident societies245 Indian and foreign insurers in all. TheLIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector.

The history of general insurance dates back to the Industrial Revolution in the west and theconsequent growth of sea-faring trade and commerce in the 17th century. It came to India as alegacy of British occupation. General Insurance in India has its roots in the establishment ofTriton Insurance Company Ltd., in the year 1850 in Calcutta by the British. In 1907, the IndianMercantile Insurance Ltd, was set up. This was the first company to transact all classes ofgeneral insurance business.

1957 saw the formation of the General Insurance Council, a wing of the Insurance Associaton ofIndia. The General Insurance Council framed a code of conduct for ensuring fair conduct andsound business practices.

In 1968, the Insurance Act was amended to regulate investments and set minimum solvencymargins. The Tariff Advisory Committee was also set up then.

In 1972 with the passing of the General Insurance Business (Nationalisation) Act, generalinsurance business was nationalized with effect from 1st January, 1973. 107 insurers wereamalgamated and grouped into four companies, namely National Insurance Company Ltd., theNew India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United IndiaInsurance Company Ltd. The General Insurance Corporation of India was incorporated as acompany in 1971 and it commence business on January 1sst 1973.

This millennium has seen insurance come a full circle in a journey extending to nearly 200years. The process ofre-opening of the sector had begun in the early 1990s and the last decadeand more has seen it been opened up substantially. In 1993, the Government set up a committeeunder the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendationsfor reforms in the insurance sector.The objective was to complement the reforms initiated in thefinancial sector. The committee submitted its report in 1994 wherein , among other things, itrecommended that the private sector be permitted to enter the insurance industry. They statedthat foreign companies be allowed to enter by floating Indian companies, preferably a jointventure with Indian partners.

Following the recommendations of the Malhotra Committee report, in 1999, the InsuranceRegulatory and Development Authority (IRDA) was constituted as an autonomous body toregulate and develop the insurance industry. The IRDA was incorporated as a statutory body inApril, 2000. The key objectives of the IRDA include promotion of competition so as to enhancecustomer satisfaction through increased consumer choice and lower premiums, while ensuringthe financial security of the insurance market.


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The IRDA opened up the market in August 2000 with the invitation for application forregistrations. Foreign companies were allowed ownership of up to 26%. The Authority has thepower to frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000onwards framed various regulations ranging from registration of companies for carrying on

insurance business to protection of policyholders interests.

In December, 2000, the subsidiaries of the General Insurance Corporation of India wererestructured as independent companies and at the same time GIC was converted into a nationalre-insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in July, 2002.

Today there are 14 general insurance companies including the ECGC and AgricultureInsurance Corporation of India and 14 life insurance companies operating in the country.

The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Togetherwith banking services, insurance services add about 7% to the countrys GDP. A well-developed

and evolved insurance sector is a boon for economic development as it provides long- term fundsfor infrastructure development at the same time strengthening the risk taking ability of thecountry.

At the end I would like to round it off by saying following about insurance:

Helping your plan for tomorrow... today.

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