History Of Insurance
( Originally Published 1911 )
Insurance defined.—Insurance is a provision for the distribution of risks; that is to say, it is a financial provision against loss from unavoidable disasters. The protection which it affords takes the form of a guaranty to indemnify the insured if certain specified losses occur. The principle of insurance, so far as the under-taking of the obligation is concerned, is that for the payment of a certain sum the guaranty will be given to reimburse the insured. The insurer, in accepting risks, so distributes them that the sum total of all the amounts paid for this insurance protection will be sufficient to meet the losses that occur.
Insurance, then, indicates divided responsibility. This principle is introduced in most stores where a division is made between the sales clerk and the cashier's department, the arrangement dividing the risk of loss. The insurance principle is similarly applied in many other cases of divided responsibility. As a business, however, insurance is usually recognized as some form of securing a promise of indemnity by the payment of a premium and the fulfillment of certain other stipulations.
Early instances of insurance.—Forms of insurance were known to the Romans and to some extent were practiced among the Collegia. In certain respects these bodies resembled our benefit societies. For example, they provided for burial and also made some form of provision for promotion among the soldiers in their organizations. In reality, then, they were based on the insurance principle since they accepted from their members a certain stipulated sum and in return agreed to perform certain services. Demosthenes describes marine loans made to the ancient Greeks ; we also have record that insurance existed among the Chinese 2500 years ago. In none of these early instances, however, did insurance reach anything like large proportions. In fact, so far as we know, it entirely disappeared, many centuries passing before there was a revival. It is true that certain laws among the Romans governing annuities necessitated a mortality table, but it was, however, for this sole purpose and apparently not in any sense an insurance matter.
Present forms of insurance.—The business of insurance is divided into four main branches: marine insurance, fire insurance, life insurance and casualty insurance. The first three state the form of disaster against which insurance is provided. The fourth—originally accident insurance—includes all forms not embraced in the other three. An idea of the variety of events against which insurance is offered.
Marine insurance antedates every other form, its history dating back over seven centuries. It appears to have been practiced in the Mediterranean, and at least one old policy has come down from the thirteenth century, proving that marine insurance was an established practice among the commercial countries of that time. A broad gap exists between that period and the continuous history running back now some four hundred years, but since that time insurance has been an established business among those engaged in maritime adventures.
Fire insurance, the second oldest form to become permanently established, dates from the great London fire of 1666.
Life insurance followed a little later, although not until 1760 was a company founded on a modern basis.
Casualty insurance owes its origin to the application of steam to railway travel; its more common name of accident insurance was due to the fact that the first events to be insured against were those of accidents to the person on a railway journey. It originated in England in the first half of the nineteenth century.
The theory of probabilities.—All forms of insurance have a fundamental basis in the theory of probabilities. This theory deals with those events which seemingly do not lend themselves to a fixed law but which in reality occur with such approximate regularity that a definite law may be deduced from a sufficient number of these uncertain events, the law being that these events will occur with sufficient regularity over a period of time so that conclusions may safely be drawn from them.
The possibilities contained in the theory of probabilities were first brought to light by the famous solution of a gaming problem. Two noblemen, engaged in a game of cards called the Game of Points, were obliged to cease play before the game could be finished. Being unwilling to separate with each retaining his own stakes, they asked Pascal, the eminent Frenchman, to suggest how the stakes should be divided. The stakes amounted to $64, each having contributed $32, and it was necessary for one of the players to make three points before he would be entitled to the stakes. At the time they appealed to Pascal, one player had two points to his credit and the other player had one. Pascal submitted the following solution: "Suppose," he said, "that you had played another hand. One of two things would necessarily happen : either the player who has two points would gain one, and, having three points to his credit, would claim the stakes; or the player with one point to his credit would win another so that he would have two points to his credit, the same as his opponent. If this latter should happen, each would have retained his individual stake. The chances of winning I consider equal, and as it is evident that the player with two points cannot, if he plays another hand, lose his original stake of $32, the other 832 should be divided into two parts and the player who has one point to his credit retain $16 and the player with two points receive $16, or the whole stake be divided into proportions of 48 and 16.
Pascal submitted two other suggestive solutions to clinch his theory, but they need not be discussed here. Gambling at that time was prevalent in the courts, and nothing pleased the gamblers more than to be shown ways whereby their games could be decided although not played to a conclusion. Great intellectual interest was aroused in the theory of probabilities, and out of this condition the business of insurance in its modern aspect originated. At this point it should be said that insurance, although often compared with gambling—possibly because of these early' associations—is entirely different from it in principle. Gambling is an attempt to increase, one's means by a venture not based on any known factors; that is, it is purely and simply a chance. Insurance, on the other hand, takes into consideration all the factors that enter into the problem and that may affect the hazard insured against, or the factors that may, if guarded against, prevent the contingency from happening.