INSURANCE

INSURANCE. Insurance is a contract of indemnification in which an underwriter agrees to compensate a policyholder for specified losses during a certain length of time, or term, in return for a payment, or premium. Insurers hedge their financial exposure by adjusting premiums to the perceived likelihood that a policy will result in a claim and by underwriting a number of policies, thereby dispersing individual risks among many. During the early modern period insurance evolved from a specialized device utilized mainly by merchants and financiers to a firmly established industry offering marine, life, and fire insurance to a rapidly growing market.

ORIGINS

While insurance-like mechanisms for distributing risk have been identified in the ancient world, the first recognizable policies of insurance originated in Florence and other northern Italian towns in the early fourteenth century. These early policies, the first surviving example of which was issued at Genoa in 1347, covered losses at sea. In the following decades Italian merchants transmitted the practice of marine insurance across the Mediterranean basin and into northern Europe. By the early sixteenth century the marine insurance business, still largely under Italian control, had spread to Flanders and the Netherlands, and thence by mid-century to England and the Baltic countries. Marine insurance was by far the largest and most widely practiced branch of underwriting in early modern Europe.

Life insurance appeared, around the year 1400, as an incidental circumstance when marine insurance policies covered embarked travelers or slaves. It was quickly adapted to the money-lending business to collateralize loans by insuring the debtor's life, as was done on the life of Pope Nicholas V in 1454. The growth of life insurance was hindered, however, by its increasing use as a device for wagering on human longevity and by the concomitant suspicion that it incited fraud and murder. The alleged immorality of life insurance led to its prohibition, from the fifteenth through the seventeenth centuries, everywhere in Europe except Florence, Naples, and the British Isles. Its use as a long-term device guaranteeing family welfare had to await the formation, at the end of the seventeenth century, of the first life insurance societies in England, the most enduring of which was the Amicable Society (1706–1866).

A system of fire insurance that went beyond the traditional mutual aid arrangements of guildsmen was first established on a municipal basis in Hamburg's General Feuerkasse as early as 1591. Similar town-sponsored offices were founded in London (1682), Altona (1713), Berlin (1718), and in French cities in the same period. These public initiatives proved less successful than the private provision of fire insurance, which began in London in the years following the Great Fire of 1666. The earliest of these companies were transient, but Nicholas Barbon's pioneering Fire Office (1680) demonstrated the long-term viability of the fire insurance business. Other notable ventures included the Hand-in-Hand (1696), the Sun Fire Office (1710), and the Royal Exchange Assurance and London Assurance Corporations (both 1720). In France, the use of fire insurance was slower to develop. The first large company insuring against fire losses was the Compagnie d'assurances générales (1753), later joined by the Compagnie royale d'assurance (1786).

ORGANIZATION

Unlike marine insurers, whose risks were short-term and dispersed on various sea routes, fire and life insurers faced the daunting challenge of providing long-term coverage against contingencies that sometimes occurred catastrophically, such as urban conflagrations or outbreaks of epidemic disease. As a consequence, marine insurance remained over-whelmingly the preserve of underwriters working individually or in partnerships, even if they also entered into larger associations like Lloyd's (originally Lloyd's Coffee House, established in 1688), whereas fire and whole life underwriting required a corporate or mutual structure in order to ensure the payment of claims. Many of the early fire and life companies were mutual associations in which members contributed as need arose, with the result that either the cost of membership or the amount of compensation for loss was variable. This arrangement was necessitated by a lack of reliable statistical data from which the liabilities attached to life or fire risks might be calculated. Although Edmond Halley in 1693 published a mortality table (giving the average expectation of life at different ages), life insurers were very slow to place much trust in mortality statistics. Instead, they excluded the very young, the very old, and the obviously infirm or drunken. Similarly, fire insurers discriminated among "common," "hazardous," and "doubly hazardous" risks based more on intuition than hard data, and until the foundation of the Phoenix Assurance Company in 1782 simply refused to insure fire-prone sugar bakers. By the second half of the eighteenth century insurance was acquiring a more secure statistical basis. The Equitable Life Assurance Society (1762) was the first insurer to graduate policy premiums according to age at purchase, although it continued, conservatively, to price its policies above their actuarial value.

SOCIAL AND ECONOMIC IMPACT

Insurance played a major role in European economic expansion and in the social management of risk. Marine underwriting reduced the risks of maritime commerce, especially during wartime. Fire insurers during the eighteenth century provided increasing coverage for commercial stocks and industrial plants, thereby fostering the expansion of industrial capitalism. The provision of life insurance protected the fortunes of middle-class families against the premature death of a breadwinner. Insurers also lowered economic losses more subtly by disciplining risk-taking, since ship captains who failed to sail in convoys during wartime or manufacturers who practiced hazardous trades in timber-framed buildings were subject to higher premiums or the withdrawal of coverage altogether. Fire insurance companies contributed to a generally safer urban environment by organizing fire brigades to protect the properties that they insured. With time, these brigades were amalgamated into municipal squads. Insurance furthermore had an important mental influence on early modern society by serving as a major conduit (along with gambling) for the transmission of probabilistic and statistical thinking to the eighteenth-century public. Despite its power, this new statistical worldview supplemented rather than supplanted older magical or religious beliefs, even among practitioners of insurance. Seventeenth-century English merchants queried the famous astrologer, William Lilly, whether ships overdue in port could be insured for profit, while a century later underwriters in Barcelona still had masses sung for the deliverance of ships they insured.

See also Commerce and Markets ; Shipping .

BIBLIOGRAPHY

Primary Sources

Magens, Nicolas. An Essay on Insurances. 2 vols. London, 1755. A valuable summary of European insurance practices and laws, with incisive commentary.

Park, James Allan. A System of the Law of Marine Insurances, with Three Chapters on Bottomry, on Insurances on Lives, and on Insurances against Fire. London, 1789. A classic legal compendium of British insurance law with occasional reference to Continental codes.

Secondary Sources

Clark, Geoffrey. Betting on Lives: The Culture of Life Insurance in England, 1695–1775. Manchester, U.K., and New York, 1999. A study of the birth and early growth of the first substantial life insurance market, with European background.

Halpérin, Jean. Les assurances en Suisse et dans le monde, leur rôle dans l'evolution économique et sociale. Neuchâtel, 1946. A thought-provoking examination of the role of insurance in the development of financial and commercial capitalism.

Raynes, Harold E. A History of British Insurance. London, 1964. Originally published, 1950. A comprehensive account of insurance in the country where it flourished most.

Stefani, Giuseppe. Insurance in Venice from the Origins to the End of the Serenissima. 2 vols. Trieste, 1958. Collection of archival documents.

Geoffrey Clark