Insurance

Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of potential financial loss. Ideally, insurance is defined as the equitable transfer of the risk of a potential loss, from one entity to another, in exchange for a reasonable fee. In practice, however, the business of providing insurance protection often ends up in litigation between the parties involved, while the responsibilities of regulating insurance markets routinely winds up as a political football for government agencies. In general, it is contract in which one party agrees to pay for another party's financial loss resulting from a specified event.

History of insurance

Early methods of transferring or distributing risk were practiced by Babylonian traders as long ago as the 2nd millennium BCE. 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.

Related Topics:
Babylonian - 2nd millennium BCE - Code of Hammurabi - Mediterranean - Merchant

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A thousand years later, the inhabitants of Rhodes invented the concept of the 'general average'. Merchants whose goods were being shipped together would pay proportionally divided premium which would be used to reimburse any merchant whose goods were jettisoned during storm or sinkage.

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The Greeks and Romans introduced the origins of health and life insurance c. 600 AD when they organized guilds called "benevolent societies" which acted to care for the families and funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose. The Talmud deals with several aspects of insuring goods.

Related Topics:
Greeks - Romans - Families - Funeral - Death - Guild - Middle Ages - Talmud - Goods

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Insurance became far more sophisticated in post-Renaissance Europe, and specialized varieties developed.

Related Topics:
Renaissance - Europe

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Towards the end of the seventeeth century, the growing importance of London as a centre for trade led to rising demand for marine insurance. In the late 1680s, Mr Edward Lloyd opened a coffee house which 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, Lloyds of London remains the leading market for marine and other specialist types of insurance, but it works rather differently to the more familiar kinds of insurance. (See Lloyd's of London).

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Insurance as we know it today can be traced to the Great Fire of London, which in 1666 devoured 13,200 houses. In the aftermath of this disaster Nicholas Barbon opened an office to insure buildings. In 1680 he established England's first fire insurance company, "The Fire Office", to insure brick and frame homes.

Related Topics:
Great Fire of London - 1666 - Nicholas Barbon

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The first insurance company in the United States provided fire insurance and was formed in Charles Town (modern-day Charleston), South Carolina, in 1732.

Related Topics:
United States - Charleston - South Carolina - 1732

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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. 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.

Related Topics:
Benjamin Franklin - Fire - Perpetual insurance - 1752

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In the United States, regulation of the insurance industry is highly Balkanized, with primary responsibility assumed by individual State insurance departments. Whereas insurance markets have become centralized nationally and internationally, State insurance commissioners operate individually, though at times in concert through a national insurance commissioner's organization.

Related Topics:
Regulation - Balkanized - State - Commissioner

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In the State of New York, which has unique laws in keeping with its stature as a global business center, attorney general Eliot Spitzer has been in a unique position to grapple with major national insurance brokerages. Spitzer found that Marsh & McLennan steered business to insurance carriers based on the amount of contingent commissions that could be extracted from carriers, rather than basing decisions on whether carriers had the best deals for clients.

Related Topics:
New York - Eliot Spitzer - Marsh & McLennan

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