During the latter half of the 19th century the practice of insurance
extended with unprecedented rapidity, partly in novel forms. While its
several branches, such as life insurance, casualty insurance and others,
have each had an independent and characteristic development, all these
together form an institution peculiar to the modern world, the origin
and growth of which attest a remarkable change in men's ideas and habits
of thought.
The simplest and most general conception of insurance is a provision
made by a group of persons, each singly in danger of some loss, the
incidence of which cannot be foreseen, that when such loss shall occur
to any of them it shall be distributed over the whole group. Its
essential elements, therefore, are foresight and co-operation; the
former the special distinction of civilized man, the latter the means of
social progress. But foresight is possible only in the degree in which
the consequences of conduct are assured, i.e. it depends on an
ascertained regularity in the forces of nature and the order of society.
To the savage, life is a lottery. In hunting, rapine and war, all his
interests are put at hazard. The hopes and fears of the gambler dominate
his impulses. As nature is studied and subdued, and as society is
developed, the element of chance is slowly eliminated from life. In a
progressive society, education, science, invention, the arts of
production, with regular government and civil order, steadily work
together to narrow the realm of chance and extend that of foresight. But
there remain certain events which may disturb all anticipations, and in
spite of any man's best wisdom and effort may deprive him of the fruits
of his labour. These are mainly of two classes: (1) damage to property
by the great forces of nature, such as lightning and hail, by the perils
of the sea and by fire; (2) premature death. A useful life has an
economical value. But no skill can make certain its continuance to its
normal close. In the reasonable expectation that it will last until a
competence is gained or the family ceases to be dependent, young men
marry; but some will die too soon, and in the aggregate multitudes are
left destitute. Both classes of loss are alike, in that they fall on
individuals in the mass who are not known beforehand nor selected by any
traceable law. But the sufferers are ruined, while the same pecuniary
loss, if distributed over the whole number, would be little felt.
Wherever the sense of community has existed this has been discerned, and
some effort made to act upon it. Thus in feudal Europe it was customary
for the houses of vassals to be restored after fire at the cost of the
estate. In England in the 17th century the government practised a method
of relief after accidental fires. When such a loss was proved to the
king in council, the chancellor sent a king's brief to churches,
sheriffs and justices, asking contributions, and trustees for the
sufferers administered the funds collected. But under the last two
Stuarts gross frauds resulted, and the system fell into disrepute and
disuse. At best, the voluntary relief provided by charity after losses
are incurred is but sporadic and irregular. Insurance begins when the
liability to loss is recognized as common, and provision is made
beforehand to meet it from a common fund. The efficient organization of
communities or groups for this purpose is an essentially modern
achievement of social science. But the history of the conception in its
formative stages is extremely obscure.
Its first appearance in business life is often sought in the marine
loans of the ancient Greeks, fully described by Demosthenes. Money was
advanced on a ship or cargo, to be repaid with large interest if the
voyage prosper, but not repaid at all if the ship be lost, the rate of
interest being made high enough to pay not only for the use of the
capital, but for the risk of losing it. Loans of this character have
ever since been common in maritime lands, under the name of bottomry and
respondentia bonds. (See below, _Marine Insurance_.) But the direct
insurance of sea-risks for a premium paid independently of loans began,
as far as is known, in Belgium about A.D. 1300. During the next century
the risks of insurance for the usual voyages between London and European
ports were carefully considered, and customary rates became established.
In his address in opening Elizabeth's first parliament in 1559, Sir
Nicholas Bacon said, "Doth not the wise merchant in every adventure of
danger give part to have the rest assured?" In 1601 parliament created a
commission to decide disputes under contracts for marine insurance, and
the preamble of the act (43 Eliz. ch. 12) expresses the best thought of
the British mind in that day upon the subject. Thus the business of
marine insurance was intelligently and wisely practised three centuries
ago. But the underwriters were private persons, acting independently, so
that the insured lacked the benefit of large aggregations of capital to
make his contract safe; while the insurer, who took one or a few risks,
was without the security of large averages and might be crushed by an
exceptional loss. A partial remedy was gradually reached in London. Men
who had capital to employ in this hazardous business used to meet at
fixed hours when shipowners and merchants could negotiate with them. The
higgling of the open market, in view of all the circumstances of each
risk--as the character and condition of the ship, its crew and cargo,
the length and route of the voyage, the season, the current rate of
interest and profits--determined the rate of premium; and when this
obtained general assent, the written agreement was signed by each
underwriter for that part of the risk which he assumed. Towards the end
of the 17th century these meetings were held in Lloyd's coffee-house,
and their simple practice gradually grew into the complete and
complicated system of marine insurance now general. The underwriters
together evolved rules and improved methods, but continued for
generations to insure severally, without corporate powers or common
responsibility, so that the name Lloyd's became throughout the
commercial world the symbol of marine insurance. More recently the name
has been adopted in the United States by associations of private or
individual underwriters as distinguished from insurance corporations.
Although the underwriters at Lloyd's often considered and assumed other
than marine risks, and made contracts some of which were merely wagers
on public or private events, there is no record of insurances by them
against fire on land. But fire insurance, it is vaguely known, had
previously been practised, in a crude form, in several European cities.
In 1635, and again in 1638, citizens of London petitioned Charles I. for
a patent of monopoly to insure houses at the rate of one shilling yearly
for each L20 of rent, the association to repair or rebuild those burned,
to maintain a perpetual fire-watch in the streets, and to pay L200
yearly towards rebuilding St Paul's cathedral until finished. The
attorney-general approved the project, but in the disorders of the
kingdom it was forgotten. The Great Fire of 1666 revived interest in the
subject, and led to practical measures. In May 1680 a private fire
office was opened "at the back side of the Royal Exchange" to insure
houses in London, by assuming the risk of loss to a fixed amount for a
fixed premium, namely, 2(1/2)% of the yearly rent for brick houses and 5%
for frame houses, the rent being always assumed to be one-tenth of the
value of the fee. The estimates of the promoters are interesting. In the
fourteen years since the Great Fire 750 houses had been burned in
London, with an average loss of L200. A fund of L40,000 subscribed as
guaranty was to be increased by L20,000 for every 10,000 houses insured,
and the interest of the fund alone therefore might be expected to meet
all losses and leave a surplus. Thus the security was perfect and the
promise of profit great. Meagre as was the basis of facts for the
calculations, and crude as was the statistical method employed, the
insurance offered met a general want and the business grew rapidly.
Within a year a strong demand was heard that the city of London should
itself insure the houses of its citizens, and the common council voted
to do so at lower rates than the fire office. But the courts put a
speedy end to this movement, holding that the charter conferred on the
city no power to transact such business. Thus the socialistic theory
that insurance is properly a branch of government is almost as old as
the business itself, though it has never found favour or been
practically tested on a large scale in Great Britain or America.
The next notable step in the evolution of modern methods was the
organization of mutual insurance associations. In 1684 the Friendly
Society was organized. Each member paid a small entrance fee for
expenses, made a cash deposit as a reserve for emergencies, to be
returned at the end of his term, and agreed to meet equitable
assessments for current losses. Payments were computed on the assumption
that one house in 200 is burned every fifteen years. The rivalry between
the proprietary and the mutual systems began at once, and has continued
till now. In 1686 "the Fire Office at the back side of the Royal
Exchange" petitioned for a patent of the fire insurance policy and a
monopoly of its issue for thirty-one years. The Friendly Society opposed
the grant. The most eminent lawyers for both were heard by the king in
council, and on the 30th of January 1687 King James II. decided the
case. No charter was granted, but the Fire Office might continue its
business, having a monopoly for one year. Thereafter the Friendly
Society might for three months sell policies, but must then suspend for
three months, and so on for alternate quarters. But the Fire Office must
pay the ordinance service for its work in extinguishing fires, the
amount to be fixed for each fire by the king. This was the first
appearance of the plan, so widely prevalent in after years, of imposing
on insurance companies the support of fire departments; that is, of
taxing the prudent who insure to protect the reckless who do not.
After 1688 the atmosphere of England was freer, and underwriting was
soon practised without special licence. In 1704 the societies began to
insure household goods and stocks in trade, and the insurance of
personal property rapidly became as important as that of buildings. In
1706 the Sun Fire Office was founded, and began to issue policies on
both real and personal property in all parts of England. Other
associations arose in quick succession of which the Union Fire Office,
dating from 1714, and the Westminster from 1717, still survive. Before
1720 both fire and marine insurance had become general in all great
centres of trade. But life insurance was as yet hardly conceived.
Sporadic evidences that it was needed, and that men were feeling after
it, occur in very early records. It was a medieval custom to advance to
a mariner goods or money, to be restored with large additions, but only
in case of safe return; or to contract, for a sum in hand, to ransom him
if captured by pirates, or to pay a fixed amount to his family if he
were lost. To evade the usury laws life annuities were often sold at a
low rate, redeemable for a stipulated sum. Life estates were sold upon
some guess at their probable duration; and leases, especially of church
lands, were made for one, two or three lives on rude and conventional
estimates of the time they would run. Thus there was a commercial and
social pressure for some intelligent method of valuing life
contingencies. But the direct insurance of life, as a means of reducing
the element of chance in human affairs, was hardly thought of. Indeed,
such contracts were commonly regarded as mere forms of gambling, and
were prohibited in France as against good morals.
The earliest known policy of life insurance was made in the Royal
Exchange, London, on the 18th of June 1583, for L383 6s 8d. for twelve
months, on the life of William Gibbons. Sixteen underwriters signed it,
each severally for his own share, and the premium was 8%. The age of the
insured is not referred to, nor was it then considered, except when far
advanced, in fixing the premium. Gibbons died on the 29th of May 1584.
The underwriters refused to pay, alleging that twelve months, in law,
are twelve times twenty-eight days, and that Gibbons had survived the
term. The court, of course, enforced payment. A few instances of similar
contracts are found, mostly in judicial records, during the 17th
century; but every such transaction was justly regarded as a mere wager,
at least on the part of the insurer. It could not be otherwise until the
principles of probability and the uniformity of large averages were
understood and trusted. A few great thinkers were groping for principles
which were profoundly to modify the practical reasoning of
after-generations. But their work first obtained wide recognition upon
the publication of the _Ars Conjectandi_, the posthumous treatise of
Jacques Bernoulli, in 1713. Meanwhile the social need for insurance
continued to express itself in empirical efforts, which at least helped
to make clearer the problems to be solved. Thus in 1699 "The Society of
Assurance for Widows and Orphans" was founded in London, a crude form of
what is now called an assessment company. Each of 2000 healthy men under
fifty-five years of age was to pay 5s. as entrance fee, 1s. quarterly
for expenses, and 5s. at the death of another member; and at his own
death his estate should receive L500, less 3%. On default in any payment
his interest was forfeited. The society lasted about eleven years, and
the accounts of its eighth year are preserved, showing the payment of
L5200 upon twenty-four claims. The economic significance of this society
lies in its distinct recognition of the principle of association for the
distribution of losses. Together with the Friendly Society, it shows
that this principle had now been so widely grasped by business men that,
when embodied in a practical venture, it found substantial support.
The conception of a corporation as an artificial person to hold property
and support obligations uninterrupted by the death of individuals was
found in Roman law and custom. Its first use in modern business
enterprise was perhaps the Bank of St George in Genoa, about A.D. 1200,
a joint-stock company with transferable shares, whose owners were liable
only to the amount of their shares. In England the crown, itself the
chief and type of corporations sole, was the source of chartered rights,
and from about 1600 the principle steadily gained recognition, the
advantages of incorporation being attested by the successes of the great
trading companies. Experience showed that the corporate form was the
obvious remedy for the chief difficulties in the practice of insurance.
Single risks were but speculative wagers; a great number must be taken
together to obtain a trustworthy average. A larger capital than an
average private fortune was demanded as a guaranty, and this capital
must not be exposed to the dangers of trade, but set aside for the
special purpose. Individual underwriters may die or fail; only a
permanent institution can be trusted in long contracts. Several projects
were devised on this basis. Early in the 18th century, indeed, the
English government refused a charter for marine insurance, declaring
that corporate insurance was an untried and needless experiment, while
private underwriting was satisfactory and sufficient. But in 1720, when
two sets of promoters offered L300,000 each for a charter, exclusive of
other associations though not of individuals, to insure marine risks,
parliament chartered the Royal Exchange and the London Assurance Company
with a monopoly to this extent. The business disappointed its projectors
at first, and the government accepted half the price rather than revoke
the grant. In 1721 the companies extended their operations to fire
insurance throughout England.
Thus the principle of insurance had now become a distinct part of the
common stock of thought in enlightened nations, and gradually, by
association with successive new ideas, plans and methods, was developed
into a business or trade, which before the middle of the 18th century
already formed an essential element of the social scheme. Most of the
modern forms of insurance against the elements were known, and at least
crudely practised. But there was no scientific basis for the business.
Premiums were fixed, not by computation from known facts or reasonable
assumptions, but by guess and the higgling of the market. Only the
competition of capital checked the extortionate demands of underwriters.
The first important steps towards a scientific valuation of hazards were
taken in dealing with the class of risks hitherto so much neglected,
those which depend upon human mortality. Marine and fire insurance had
their origin in the pressure of need. The practice began before a theory
existed. But life insurance had its origin in the scientific study of
the facts of human mortality. Both marine and fire insurance became
general before there was any intelligent study of the risks by
statistical or mathematical methods, nor can it be said that much
progress has since been made towards establishing a scientific basis for
the valuation of risks in these classes. But life insurance may be said
to have been impossible until the theory of probabilities had become a
recognized part of the common stock of ideas.
The value of insurance as an institution cannot be measured by figures.
No direct balance-sheet of profit and loss can exhibit its utility. The
insurance contract produces no wealth. It represents only expenditure.
If a thousand men insure themselves against any contingency, then,
whether or not the dreaded event occurs to any, they will in the
aggregate be poorer, as the direct result, by the exact cost of the
machinery for effecting it. The distribution of property is changed, its
sum is not increased. But the results in the social economy, the
substitution of reasonable foresight and confidence for apprehension and
the sense of hazard, the large elimination of chance from business and
conduct, have a supreme value. The direct contribution of insurance to
civilization is made, not in visible wealth, but in the intangible and
immeasurable forces of character on which civilization itself is
founded. It is pre-eminently a modern institution. Some two centuries
ago it had begun to influence centres of trade, but the mass of
civilized men had no conception of its meaning. Its general application
and popular acceptance began within the first half of the 19th century,
and its commercial and social importance have multiplied a hundred-fold
within living memory. It has done more than all gifts of impulsive
charity to foster a sense of human brotherhood and of common interests.
It has done more than all repressive legislation to destroy the gambling
spirit. It is impossible to conceive of our civilization in its full
vigour and progressive power without this principle which unites the
fundamental law of practical economy, that he best serves humanity who
best serves himself, with the golden rule of religion, "Bear ye one
another's burdens."