The rise of the modern insurance industry

These mutual protection communities had a fatal flaw, the concentration of risks. Ship owners sailing the same routes would experience the same weather events resulting in accumulated losses. A fund for mine workers in a single mine is easily wiped out in the event of a cave-in. Furthermore, because the cause was benevolent, there was no profit incentive to professionalize operations and to adopt new technologies such as actuarial sciences.

In 1681, Nicholas Barbon of London created the first known joint stock insurance company. His main motive was not solidarity and mutual protection, but business, pure and simple. He was already wealthy from rebuilding London after the Great Fire of 1666 and used his experience as a mortgage banker to build the first modern insurance operation. He separated the operating capital from the risk capital and used the shareholding structure to raise funds for many different lines of insurance inside and outside of London.

This structure came with its own problems as investors, who did not share in the risk that was being insured, became speculators who “bet on the most unlikely risks, such as the outcome of wars, the danger of dying from excessive consumption of gin, or the date of birth of heirs to empires.” Nonetheless, such activity did not discount the need and positive benefits of insurance and mutual protection and hence the industry flourished and grew.