Insurance

Insurance is a method of risk management used to protect against uncertain financial losses. It works by transferring the risk of a potential loss from one party to another. The entity providing this protection is known as an insurer, an insurance company, or an underwriter. The person or group purchasing the protection is called the policyholder. The person or entity actually covered by the agreement is referred to as the insured. This system allows individuals and businesses to plan for unexpected events that could otherwise cause devastating financial harm.

The mechanism of insurance relies on a specific transaction. The policyholder agrees to a guaranteed, relatively small loss called a premium. This is a regular payment made to the insurer. In exchange, the insurer provides a contract known as an insurance policy. This document details the specific conditions under which the insurer will compensate the insured. If a covered loss occurs, the insured submits a claim. A claims adjuster then processes this request to determine the payout. Sometimes, a policy requires a deductible, which is a mandatory out-of-pocket expense paid before the insurer covers the rest.

Insurance operates through a process called risk pooling. This involves collecting funds from many different insured entities into a single group. This group of funds is known as a risk pool. Because only a few people will experience a loss at any given time, the pool can cover those costs. The cost of the premium depends on the frequency and severity of the risks involved. To manage very large risks, an insurer might use reinsurance. This is when one insurance company buys protection from another company to spread the risk even further.

Humanity has sought to manage risk for thousands of years. As early as the 3rd and 2nd millennia BC, Chinese and Indian traders used methods to distribute risk. Chinese merchants would spread their goods across many different boats. This way, if one vessel capsized, they would not lose everything. Ancient laws also addressed these concerns. The Codex Hammurabi, dating to around 1755 BC, included rules for sea captains and ship owners. In the Mediterranean, the principle of general average was established on the island of Rhodes between 1000 and 800 BC. This principle remains a fundamental part of marine insurance today.

As trade grew, insurance became more specialized. In the 14th century, separate insurance contracts were invented in Genoa. The first known insurance contract dates to 1347. Later, in the 1680s, Edward Lloyd opened a coffee house in London. This became a famous meeting place for the shipping industry. This informal market eventually led to the establishment of Lloyd's of London. In 1666, the Great Fire of London destroyed over 13,000 houses. This disaster turned property insurance from a convenience into an urgent necessity. By 1681, Nicholas Barbon established the first fire insurance company to protect homes.

Life insurance and accident insurance also emerged as distinct fields. The first known life insurance policy was recorded in London in 1583. In 1706, the Amicable Society for a Perpetual Assurance Office was founded in London. This was the first company to offer life insurance by collecting premiums into a common fund. In 1848, the Railway Passengers Assurance Company was formed in England. This was the first company to offer accident insurance, responding to deaths on the new railway systems. These developments moved insurance toward more scientific and organized practices.

In the late 19th century, governments began creating national insurance programs. In the 1880s, German Chancellor Otto von Bismarck introduced medical care, accident insurance, and old age pensions. This helped form the basis of the German welfare state. In Britain, the National Insurance Act of 1911 provided the working classes with insurance against illness and unemployment. This system grew even larger after the Second World War. Today, the insurance industry is a massive part of global finance. The Global Federation of Insurance Associations represents 40 member associations across 67 countries. These members account for approximately 89% of all insurance premiums worldwide.