Insurance

Insurance | Reinsurance | Glossary

Insurance is a risk transfer mechanism. It’s a method of shifting the responsibility for losses to specialists (insurance companies) who handle the risk by spreading it over a large number of people or firms.

A system of protection against loss in which a number of individuals agree to pay certain sums of money, called premiums, to create a pool of money which will use the contribution of these individual to pay the losses of the few caused by events such as fire, accident, illness, or death.

History:
(courtesy: Mr. M. A. Chishti- Late)

History is important for the study of any subject. It is all the more essential in insurance because the essentials of the insurance idea are written in the pages of history. Fortunately, insurance has a rich and interesting history. Its history reflects several periods of human civilization. Its beginning was simple and development gradual. As the trade and industry developed, the need of insurance was also felt and the institution of insurance was invented, as the adage goes: “Necessity is the mother of invention”.

Contracts, known as bottomry, were used by money lenders to shift the burden of risk from owners of ships or cargoes to themselves. The loan was cancelled, if the ship or cargo was lost during a voyage. The change for the bottomry loan, if the voyage was successful, was very high because it included the amount of interes and cost of risk. The contract of bottomry loan in fact sowed the seed of the insurance idea.

According to extant records, loans in the form of bottomry were known to the merchants of Babylon during 4000-3000 B.C. It is also recorded that bottomry was practiced by the Hindus in 6000 B.C. Even in ancient Europe, the Greeks and the Romans also adopted this commercial practice. Therefore, the origin of insurance is very old and man, somehow or the other, has continued his earnest efforts to tide over all hurdles that came in his way to make his life easy and comfortable.

Although marine insurance originated in Italy, its practice gradually spread to other trade centres of Europe. In Bruges there is a record of a court judgement in an insurance dispute in 1377 A.D., while in 1435 A.D. an ordinance regulating marine insurance was issued in Barcelona. Similarly, an ordinance of Florence, dated 1523 A.D. codifies the practice of Italian insurance. By this time, with the waning importance of Mediterranean trade after the discovery of America, Antwerp became a leading insurance market, yielding place to London in later days.

Marine insurance is the first category of insurance business that was developed. In England, the earliest records of marine insurance come to us from the court of Admirality. In due course of time, insurance became international in its character. In 1563 A.D., an Antwerp merchant insured three ships on a voyage from Havre to Central America. This policy, in French, was shared by thirty seven British underwriters. This policy, in French, was shared by thirty seven British underwriters. This participation of the English underwriters confirms the rapid insurance growth in London. In 1570 A.D., London’s own bourse which was erected by Sir Thomas Gresham, was named the Royal Exchange by Queen Elizabeth I, of England.

Until 1720 A.D., marine insurance was entirely in the hands of individual underwriters, whose main business was trade and commerce and insurance was a side-line. These individuals were either available in the Royal Exchange or in one of the nearby coffee houses, of which Edward Lloyd’s, who originally started his business in Tower Street in the City of London, moved later on to Lombard Street. Very soon, Lombard Street became the big centre of marine insurance. Lloyd’s Coffee House was the centre for sales of ships and their cargoes. In this Coffee House, businessmen would come for coffee and sit down to talk about their business and would exchange information about the movements of ships. Lloyds thought why not start a short newsletter so that the people would have the latest information about the movements of vessels. So, he issued the newsletter. When the demand for the newsletter increased, he thought why not open a common fund in which all businessmen would participate and deposit monies according to their resources. This was the beginning of insurance. Edward Lloyds died in 1713 A.D. but the coffee house was carried on by his family. In this coffee-house, the individual insurers, or underwriters concerned with marine insurance, used to congregate to do insurance business. Gradually, a corporate spirit was developed among them. In 1772, the underwriters set up the committee of Lloyd’s to govern their affairs. In 1733, the proprietor of the above coffee-house began the publication of Lloyd’s List, which gave the movements of ships and other matters of trading interest. Lloyd’s List is still published as a daily newspaper from London.

In 1871, Lloyd’s Act was passed to incorporate the Society of Lloyd’s or the Corporation of Lloyd’s as it is now called.

The students of insurance should keep this fact in mind that Lloyd’s does not itself grant insurance as insurance companies do. The policyholder who has a Lloyd’s policy is insured “at Lloyd’s” not with Lloyd’s. “i.e. Lloyd’s is like a vast market-place of insurance where individual underwriters sit to accept risks of insurance. The liability to meet claims under the policy rests solely with those underwriters who are committed by any one policy, each for his own share of the risk.

An insurance broker must be accredited to Lloyd’s before he can place business there and inscribe on his note-paper after his address the world “and at Lloyd’s”. Firms of Lloyd’s brokers may be either one-man business, partnerships, or limited companies, and at least one of the partners or directors is required to be either a member i.e. an underwriting member of, or an annual subscriber to, Lloyd’s. The firm must make a substantial deposit with Lloyd’s and it is held as security for fulfiloment of the firm’s obligations to underwriters. At Lloyd’s the broker is treated in law as the agent of the proposer, but not of the underwriter.

The place where Edward Lloyd’s Coffee house was situated, was taken over by the government as a national asset and today one reads these words on the brass plaque “Lloyd’s Coffee House 1691-1785”.

Lloyd’s is not now an insurance company but an insurance corporation and it is said that it is the biggest insurance organization in the world and participates in the business of every insurance company of every country. In other words, where there is insurance, there is Lloyd’s.

This organization after its establishment in 1688 made such rapid strides that, after about a century, when in 1799 a ship laden with gold and silver bullion sank, the Lloyd’s paid up its insured value of a million pound sterling. The biggest marine loss suffered by this organization was in 1975 when, due to the sinking of 802,502 tonnes of cargo and ship, it paid 122 million pounds sterling within a year.

The Earthquake fire in San Francisco in 1906 resulted in the payment by Lloyd’s of 25 million pounds.

In 1970, one aeroplane was hijacked and destroyed by fire. Lloyd’s paid twelve and a half million pounds.

In 1974, a Turkish Airlines DC-10 crashed near Paris, and Lloyd’s paid its full insured value of one hundred million pounds.

After Lloyd’s, hundreds of insurance companies have come into existence many of whom have worldwide reputation and standing.

After the discovery of marine insurance other classes of insurance such as fire, life, motor, accident etc. appeared in the market. When the Great Fire of London occurred in 1666 A.D., no fire insurance existed. In the same way, life insurance made its debut in 1553, when the life of one William Gibbons was insured by sixteen individual underwriters in London.

How other classes of insurance came into existence would be elaborated in other chapters of this book, when each class of insurance would be dealt with.

Importance of Insurance?
(courtesy: Mr. M. A. Chishti-Late)

Economic security is the most sought after assurance of well being in the modern age of technology. An effective instrument of ensuring security is Insurance-may it be the security of the dependants of the bread-winner or it may be the security of goods lost by the natural, accidental or circumstantial mishaps.

As man developed his arsenal or weaponry for the protection of his body, he also developed means of economic and financial protection. It emerged in the shape of life and non-life insurance.

The subject of life insurance is the human being and the object is to provide financial security, to the dependants of the deceased, while the subject of non-life or general insurance encompasses everything from a pin to a jumbo jet, all goods and property – with the object of putting a person back in the same financial position of the loss as he was at the occurrence of the loss. It would, thus; be seen that insurance is the most effective equipment to protect oneself against the horrendous effects of personal or property loss due to disastrous events.

The desire of all people has always been, and will always remain, to live a cleaner, healthier, comfortable and easy life. To fulfil this basic need of human beings, enterprises produce and provide goods and services and, in the process, make innovations and inventions. When you make innovations and inventions, you take big risks. An onerous responsibility devolves on the shoulders of innovators and inventors and, while doing this, they play with the lives of people. A small error or lapse can cause numerous side effects which may result in the death or disability of a large number. The notorious case of Union Carbide, commonly known as Bhopal tragedy, in India occurred in 1984, when poisonous gas escaped from the plant, killing 3,300 people and injuring 200,000. The Supreme Court of India settled this claim for an amount of US$470 million.

These types of instances speak of the importance of insurance. Had insurance not been at the back of all these innovators, the world would never have progressed in all walks of our lives. Once this insecurity factor was taken care of, the entrepreneur started looking for new and more sophisticated machines, robots and gadgets. Atomic energy was harnessed for the progress of man. Booster rockets put the man on the moon. Computers enabled man to acquire answers to the most complicated problems in minutes for which an army of experts took days to solve. Deep seas were exploited and bowels of the earth were torn apart fearlessly to extract wealth for the progress of man. Concords and Jumbo jets were developed and the world shrank to a small size. Medical sciences made tremendous advances and most of the hydraheaded diseases, dreaded by man from times immemorial, have been eradicated, expanding man’s life expectancy. All this happened because of insurance support.

In all spheres of a man’s life, insurance is there to help and assist him, be it motor insurance, or fire or life or any other class of insurance. The helping hand of insurance is always there to protect and provide him financial security.

Insurance is also an effective tool for mobilization of savings which helps both in the control of inflation and in capital formation for the development of the country. Thus, it plays a pivotal role in the economic progress of a country.

In peace time, the coffers of insurance are open to trade and industry which eventually contributes towards the progress of man. Insurance is a great source of revenue to the national exchequer. In short, “Insurance is among the most leading forces contributing towards economic, social and technological progress of man”. In other words, progress of insurance is linked with the progress of man.

During war, insurance plays its leading role as no other economic activity can. Life insurance finances war efforts, marine insurance provides funds for new ships whenever these vessels are sunk, while fire insurance makes goods the losses sustained due to fire as a result of bombing.

Without insurance cover all industrial, economic and social activity of the world will come to a grinding halt. Major trade and commercial contracts will be abandoned, aeroplanes grounded, and vehicular traffic withdrawn from roads. There will be an utter chaos. This shows that insurance is a synonym of human progress, prosperity and civilization.