The
concept of insurance as a means of protection
against financial loss developed in the wake
of maritime trade and was originally limited
to commercial enterprises. Bottomry, one of
the first known examples of insurance, was
used by seafaring Phoenician merchants from
about 1200 B.C.; it was a outgrowth of
Babylonian business practice dating back at
least to 2000 B.C. In its simplest form, the
ship-owner borrowed money, using his ship (or
“bottom”) as collateral. If the ship reached
port safely the loan was repaid with profit
(corresponding to today’s insurance premium),
but if the ship was lost at sea the loan was
forgiven, thus compensating the ship-owner for
the loss. Respondentia loans insured the cargo
on a similar basis These early forms of
insurance spread with the sea trade, reaching
eastward to India by 600 B.C. and westward to
Greece by 400 B.C.
The ancient Greeks and Romans appear to have
been the first people to establish life
insurance on the principle of individual
contribution. Members of benevolent societies
paid dues which provided for burial expenses
of members and, in some cases, living expenses
of surviving family members. During the Middle
Ages craft guilds, especially those in Italy
and in England, continued and expanded the
benefits of the earlier benevolent societies.
In England, the insurance function of the
guilds was gradually assumed by “friendly
societies,” groups of workers who contributed
equally to a common fund intended to provide
protection for all. Unfortunately, many of the
societies met financial disaster due to poor
management and inadequate funds. These
problems were alleviated somewhat by the
establishment of government regulation through
passage of the Friendly Society Act in 1793.
In 1711, the Earl of Oxford organized the
South Sea Company, a trading monopoly that had
a profound effect upon the growth of the
insurance industry. Speculation in South Sea
stock created such a demand that many stock
companies of dubious or even fraudulent
operation were hastily organized to take
advantage of the market. Among them were about
one hundred insurance companies. For nearly
ten years the bubble of speculation swelled,
and when it burst the result was catastrophic.
Many people had been swindled, government
officials were shown to be involved in the
frauds, and England’s financial credit was
called into question. In 1720 Parliament
passed and King Gorge-I approved the so-called
Bubble Act, regulating the establishment and
operation of business under royal charters.
Within a month of the Bubble Act passage,
charters were granted to two insurance
companies, the London Assurance Corporation
and the Royal Exchange Assurance Corporation.
Both companies became respected leaders in the
developing insurance industry.
In colonial America, as in England, the
earliest type of insurance was maritime. Until
the American Revolution, much of it was issued
by British underwriters, who employed agents
in the major cities – Philadephia, New York,
and Boston. When American marine insurers
began to attract business, British insurers
undercut their rates. The Americans urged
their fellow colonials to “buy American” for
patriotic reasons, for the convenience of
settling claims with a local company rather
than one overseas, and for Yankee thrift, as
American firms would accept payment in paper
currency while the British required payment in
specie. Because American firms were still
small, they could not write large policies, so
the British retained controlled of the market
for several years. In 1792 the Insurance
Company of North America was organized in
Pennsylvania to write marine insurance. With
$600,000 in capital this company could insure
large risks and compete effectively with
insurers from abroad.
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