Origins of Insurance: from Sea Loans to Lloyd's and Life Tables

In brief. The idea of insurance is older than the insurance contract. For millennia losses were shared within a community, a caravan or a guild, and the "premium" was often hidden in the higher interest of a loan. A stand-alone insurance contract emerged in the trading cities of late-medieval Italy when the Church's ban on usury forced merchants to separate the risk element from the sea loan. Marine insurance then became the engine of insurance development, culminating in the London market at Lloyd's. Fire insurance grew out of mutual aid after devastating urban fires, and life insurance became a science once Edmond Halley showed in 1693 how to price annuities from a mortality table. Many concepts that Estonian courts apply today under the Law of Obligations Act (võlaõigusseadus, VÕS) can be traced to these origins.

Two roots: mutual aid and risk transfer

Two strands run through the early history of insurance. The first is mutual aid: a group exposed to the same danger agrees that the loss of one member will be borne by all. The second is risk transfer for a price: one person (originally a lender, later an insurer) takes over another's risk in exchange for remuneration. Mutual societies, parish fire funds and social insurance descend from the first strand; joint-stock insurers and the Lloyd's market from the second. Both survive today. Under the Estonian Insurance Activities Act (kindlustustegevuse seadus, KindlTS) an insurer may operate as a commercial cooperative, although the form is rare in practice.¹

Antiquity

The Code of Hammurabi (18th century BC) required members of trading caravans to bear jointly the losses caused by robbery. Babylonian merchants who financed caravans on credit agreed that the loan would not be repaid if the caravan was lost, in return for a higher rate of interest; the risk element of that interest is the forerunner of the premium.²

In Greek and Roman maritime trade the same idea took the form of the sea loan (foenus nauticum): the loan, with its high interest, was repayable only if ship and cargo arrived safely. Lenders spread their capital across several ships, applying the basic insurance principle of diversification. The Rhodian law of jettison (lex Rhodia de iactu), received into Roman law, required all parties whose property was saved by jettisoning cargo to share the loss. This is the origin of general average, which still governs maritime trade through the York-Antwerp Rules.³

Roman burial societies (collegia tenuiorum) collected regular contributions and paid members' funeral costs, and are regarded as precursors of life insurance. Their weakness was the small number of members and the correlation of their risks: if a whole legion fell, the fund could not bury everyone. Accumulation risk remains a central concern of insurance supervision today.⁴

The Middle Ages: guilds and the first insurance contracts

Medieval guilds organised mutual assistance in case of fire, shipwreck, theft of livestock and death. In the Baltic towns, including Tallinn and Tartu, guild funds supported members with building materials, food and money after a fire.⁵

The decisive step came when the Church condemned the sea loan as usury in the 13th century. Merchants needed a contract that was not a loan, and the solution was to separate capital from risk: a third party undertook, for a premium, to indemnify the loss of ship or cargo. The oldest known stand-alone insurance contract dates from Genoa in 1347.⁶ The first treatise on insurance law, Tractatus de assecurationibus et sponsionibus mercatorum by the Portuguese jurist Pedro de Santarém, appeared in 1552. Its title treats insurance (assecuratio) together with merchants' wagers (sponsio), illustrating how long it took to distinguish the two.⁷

Marine insurance and Lloyd's

In England insurance was written not by companies but by individuals who signed their names and the sum they accepted under the description of the risk, hence the term underwriter. They met at the Royal Exchange, which was destroyed in the Great Fire of 1666, and later in coffee houses. Edward Lloyd's coffee house in Tower Street is first mentioned in the London Gazette in 1688. Lloyd himself was not an underwriter, but his coffee house became a centre of shipping intelligence. Lloyd's List was first published in 1734 and in 1774 the "Subscribers to Lloyd's" moved to the Royal Exchange.⁸ The Estonian textbook links the founding of Lloyd's directly to the 1666 fire; Lloyd's own records show that the market developed gradually in the 1680s.

The Bubble Act 1720 gave two corporations, the London Assurance and the Royal Exchange Assurance, a monopoly of corporate marine insurance, but did not restrict individual underwriters. The monopoly corporations were cautious and expensive, and by the time the monopoly ended in 1824 Lloyd's had become the world's leading marine insurance market.⁹

English marine insurance law, developed by the courts and notably by Lord Mansfield, was codified in the Marine Insurance Act 1906. Its strict rules on utmost good faith, non-disclosure and warranties were reformed for non-marine and marine business alike by the Insurance Act 2015, which introduced the duty of fair presentation and proportionate remedies. Foreign insurers should note that English avoidance has no automatic Estonian equivalent. Under the VÕS the insurer may withdraw from the contract (taganemine) or be released from its obligation to perform (täitmiskohustusest vabanemine) only under the statutory conditions in sections 440–442. Withdrawal under § 441 requires a culpable breach and is subject to time limits (§ 442(1)); where the insurer withdraws after an insured event, it must nevertheless perform if the undisclosed circumstance did not affect the occurrence of the insured event and does not exclude or limit its obligation to perform (§ 442(2)).¹⁰

Fire insurance

In the Nordic countries fire relief was organised by parish. The Icelandic law collection Grágás contained rules under which farmers' associations compensated half of losses from fire and livestock disease, with assessment by five neighbours, a threshold, exclusions and a cap on repeated claims. The Swedish Land Law of Magnus Eriksson (1347) obliged parishioners to help the victims of fire.¹¹

In German towns fire insurance developed from guilds into fire guilds and fire funds. On 30 November 1676 Hamburg merged private fire contracts into the General-Feuer-Cassa, renamed Hamburger Feuerkasse in 1867 and regarded as the oldest insurer still in existence.¹² Membership was voluntary, but members could be called on for supplementary contributions when the fund was insufficient. The Great Fire of London of September 1666, which destroyed more than 13,000 buildings, led to the establishment of fire offices in London, including the Sun Fire Office in 1710, which maintained its own fire brigade.¹³ The link between insurance and loss prevention is thus centuries old and underlies today's contractual safety requirements and the consequences of their breach (VÕS § 452).

Life insurance and actuarial science

Early modern life insurance was often a wager. The Life Assurance Act 1774 made void life policies where the policyholder had no insurable interest in the life insured. Under Estonian law insurable interest is defined for non-life insurance in VÕS § 478, while a life policy on the death of a third party is valid only with that person's written consent (VÕS § 533(1)).¹⁴

Life insurance became scientific when mortality could be measured. In 1693 Edmond Halley published "An Estimate of the Degrees of the Mortality of Mankind" in the Philosophical Transactions of the Royal Society, constructing a life table from the records of Breslau and showing how to price life annuities.¹⁵ Later developments, such as the level premium and the founding of the Equitable Society in London in 1762, built on this work. The separation of life and non-life business, required by EU law since the first insurance directives and reflected in KindlTS § 16, reflects the different risk profiles that emerged in this period.

Related pages

• History of insurance: overview
• Codification of insurance contract law in Europe
• Estonian insurance contract law
• Subrogation and recovery in Estonia

References