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Risk and insurance

Risk and insurance image

The origin of insurance is so far in the history of civilization that it is not precisely established. Although it is relatively easy to find remains of buildings, works of art and other material traces of past civilizations, it is difficult to establish exactly how the then inhabitants of cities have organized activities related to the service system in their economy. Among the most impressive material remains of prehistoric, ancient, medieval and early modern civilizations are the barns in which people stored food for emergencies. The biblical parable of Joseph, which explains the dream of the Egyptian king, is an illustration of the principle on which this service was organized. Experience has shown that sometimes the harvest is poor or that an invader prevents city dwellers from picking it up from the surrounding area. It would be possible to leave it to each household to insure itself against such a situation, but even then the inhabitants of the cities realized that the creation of collective or common stocks was more efficient. A moderate tax in the years of abundance, when food prices are low, can be collected by anyone who can afford it. This money can be used to buy crops, especially wheat, to be stored. Farmers are happy because they sell more (and at a better price) than they would if the authorities did not buy food at the market.

At the end of the fifteenth century, when Europeans embarked on the epic journeys to Asia and America that led to the so-called "trade revolution" (which preceded the more famous "industrial revolution"), the ideas of identifying risk and creating a common fund came together. If a small flotilla of small ships manages to get from Europe to, say, Indonesia, trade there and return with cargo of exotic goods, there is a risk that some of the ships will not return from this voyage. Storms can sink some vessels; some may be left without provisions (or all crew members may die of disease); some ships may be lost due to poor navigation; some vessels may sink due to overload, poor construction or, as a result, the harmful effects of wood-eating insects. It seemed reasonable for people who invest in such ventures to share the risk with each other so that they do not lose their entire investment as a result of the accident that their vessels disappear.

Two ways have been found to meet this need. One was to set up a joint stock company, under which a group of investors co-invested in a group of co-ships, thus sharing the risk of losses as well as the profits that could be made by the company as a whole. The other way was insurance - a system in which the owner of the ship and / or cargo (which may be an individual or a company) offered cash to other people if they agreed to indemnify him in case the ship in question succeeds in completing the specified travel. Thus, the joint stock company and the insurance began to complement each other. A group of individuals or companies received cash bonuses in return for promising to pay compensation to the shipowner in the event of his loss. These insurers created a common pool of resources from which they promised to pay the compensation due to the insured in the event of an insured event.

In the early stages of this process, if an insured event occurred, insurers had to sell some property (or withdraw funds from their bank account) to pay the insured. This principle still applies in Lloyd's to the so-called Natural Names, or Natural Names, in which the same promise of payment continues to be the basis of the contract. Those who become "natural names" at Lloyd's promise to pay for their personal fortune if the risk they have taken arises. The term "sign" means exactly what is communicated with it: a document is identified that identifies the "risk" (the insured object, the circumstances and the period of time for which it is insured), and the insurer writes it down at the end of its readiness to take part of the whole "risk".

It wasn't long before some businessmen discovered that many members of society were reluctant to take such great risks, on such an individual basis as that of Lloyd's insurance. For this reason, the concept of pooling capital was sought in the insurance context. People were invited to buy shares from insurance companies. The companies hired specialists who signed the risks. When the risk occurred, the company paid the insured compensation from the fund, which it held as an investment. The fund was created from the money the company received from the sale of shares to shareholders, plus the income from investing it in the fund, plus the premiums paid by the insured, minus the claims paid, the expenses incurred and the dividends distributed. With successful calculations by professional insurers of what "risk" to take and what premiums to claim for each "risk", the fund would always be able to pay dividends to shareholders to keep them satisfied with their investment.

In the beginning, the main field of insurance for companies was fire insurance. In the rural society that preceded urbanization, all the neighbors came together to help rebuild a burned-out house - the principle of direct mutual assistance applied. In contrast, on a city street, the neighbors of a family with a burned-out house have specific occupations (weavers, shoemakers, clerks or fishmongers) and had neither the skill nor the time to help their neighbors rebuild their homes after a fire. . Instead, it was more convenient for all of them to pay premiums to an insurance company that promised two things: to provide a fire service (to put out fires to prevent them from spreading to other houses and to minimize the size of the fire) and to compensate each owner on a policy with cash, allowing him to hire the necessary specialists (builders, tilers, carpenters, etc.) to repair the damage (or, in extreme cases - to rebuild the house).

Along with fire insurance, life insurance funds also appeared. The purpose is to provide a certain amount in the event of the case described in the policy. There is no uncertainty about the death of a person: everyone will die, but there is uncertainty about the length of every human life. Only a fraction of people die in a given year, and deaths are distributed among all ages - from 1 day to about 110 years (although in most cases life expectancy is less than 80 years). In the context of material existence, human life has immeasurable value and it is not possible for any organization to provide a person with a value that compensates for the loss of his life. For this reason, life insurance contracts are for a certain amount. The person whose life is insured (or a person with a legitimate interest as a spouse) pays part of their income to an insurer so that they receive a certain amount of money either when the insured dies or when the policy matures after a few years (without the insured to die).

Life insurance is a form of saving for the benefit of the insured, the dependents or their business partners.

From the primary "types" of insurance (marine, fire, life) have developed a wide range of types of insurance.


Source: David E. Bland "Insurance: Principles and Practice"