Believe it or not, insurance can trace its roots all the way back to the beginning of civilization itself. We’ve come a long way from hunting mammoths, but the basic principle of insurance — the transfer of risk in exchange for money (or mammoth hides) — remains the same.
And while you might be thinking, “Deductibles and date lines? Snooze-fest!” the history of insurance is surprisingly colorful once you start digging. Armed with this knowledge and very little else, we decided to trace it back some 5,000 years. And yes, that’s definitely as ambitious as it sounds. But with the help of Esurance Vice President of Sales Thomas Capp, we conquered!
Now that we’ve got you on the edge of your seat, let’s dig in.
3000 BC – Insurance is born
Like spaghetti and gunpowder, modern insurance can trace its origins all the way back to ancient China. Early Chinese merchants relied on sailors to navigate dangerous and unpredictable waters with their precious cargo, but shipwrecks were still common.
So one day, these ancient entrepreneurs gathered near the town square, cooked spaghetti (probably not), and strategized ways to reduce each individual’s shipping risks.
The solution, like so many other society-transforming ideas, was simple. By evenly distributing each merchant’s goods to all of the ships, they could safely reduce their individual levels of risk. It was agreed and from then on, a shipwreck became a collective downer rather than an individual catastrophe, a tenet of insurance even today.
1790 BC – Getting to the bottom of bottomry
Fast forward to Babylon, the civilization that mastered cuneiform script and brewing. With established trade routes stretching from the Mediterranean to the Persian Gulf, caravans and boats transporting goods faced a myriad of obstacles, from bandits and pirates to rough waters and inclement weather.
The risks of shipping began to outweigh the rewards. But shortly after 1800 BC, Hammurabi, the first Babylonian king, popped a cold one (probably), grabbed his stone tablet, and carved out a rather novel idea: If merchants took out loans for each shipment, they could repay the loan with interest once the shipment arrived safely at its destination. But if the shipment wasn’t delivered, the loan would be forgiven. For the merchants, it was simply a matter of hedging their bets. For the lenders, it was a low-risk gamble that could net them significant profits.
This system, known as bottomry, put the minds of the merchants at ease and guaranteed lenders a profit so long as the shipment arrived safely.
800 BC – Cutting your generally average losses
More than a thousand years later, Rhodes, a small island in the south of Greece, had established itself as a major trading power in the Mediterranean with colonies in modern-day Spain, France, and Italy.
In order to minimize the risk of shipping goods and to help settle trading disputes, the Rhodians developed the earliest form of maritime law and adopted the principle of general average (which to this day, remains a fundamental insurance principle).
Here’s how general average worked: When a ship was in danger of sinking, the captain was sometimes forced to chuck cargo overboard to lighten the load. Such a move could save the ship; but what about the poor guy who owned the sacrificial freight? In essence, his sacrifice benefited everyone else.
Knowing this could happen to anyone, merchants paid to insure their goods so that “what is sacrificed for the common benefit should be made good by
a common contribution.”
Sounds like the work of a few Rhodes scholars.
600 BC – Insurance comes to life…literally
Known for their forward thinking, the Greeks and Romans established guilds known as “benevolent societies” or “burial clubs” that paid for funeral expenses and cared for each member’s family afterwards.
Everyone in the club paid a weekly amount that went toward a common treasury. When a member died, a previously agreed upon sum was taken from the treasury and used to pay for proper funeral rites and the burial. And thus, the first life insurance policies were sold.
If Horace had written “carpe diem” a half a millennium or so sooner, it would have made for a great life insurance ad.
0 – Our last stop
To paraphrase the great Isaac Newton, if we at Esurance have seen further it is only by standing on the shoulders of Chinese, Babylonian, Rhodian, Greek, and Roman giants. (Which is not nearly as catchy as we had hoped.)
Tune in next week for the next installment on the history of insurance, when we play three degrees of separation with the Great Fire of London, Benjamin Franklin, and Esurance.