Origins of insurance: Mutual protection and risk-sharing

The concept of mutual protection from shared risks is inherent in human nature. Mutual protection is one of the main reasons why communities exist. In ancient times, groups of people formed tribes and settlements that pooled resources to survive against forces of nature or against enemies.

Insurance arose as a form of mutual protection that is financial in nature. Instead of proactive protection, insurance represents reactive protection. Rather than trying to prevent something bad from happening, insurance strives to mitigate the negative effects of an event with money. We can’t prevent an earthquake, but we can make sure there’s enough money to rebuild after the earthquake damages our homes.

Some of the earliest hints of insurance date back to the 4th century with bottomry bonds. Shipowners would pledge their ships to a lender in exchange for a loan to cover maritime risks. If the ship was lost during the voyage, the loan would not have to be repaid. In the 7th century, the tribes of Arabia had a system called Aqilah which made tribe members collectively responsible for paying the blood money due as a result of an accidental homicide. In the 10th century, there was a common maritime practice known as the “General Average”. If a ship got into trouble, the ship captain would throw some cargo overboard to save the ship. Since doing so would save the remaining cargo, merchants collectively agreed that they would compensate the merchant whose cargo was lost.

In Europe, insurance as a formal activity arose alongside benevolent societies and fraternal organizations for people with a similar background and shared risks. Things really kicked into high gear with the advent of cities, the rise of the maritime industry and the industrial revolution. Suddenly, there were many different types of risks that people needed to protect themselves from and the stakes were getting higher. Fires in densely populated cities would wipe out entire communities. Many mutual protection communities arose, risk mitigation based on solidarity was widespread among guilds, trade associations and village communities.