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Swiss Re A History of Insurance 5
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66 Swiss Re A History of Insurance
Risk tradition and risk trading Risk mitigation based on solidarity MANCHESTER UNITY was widespread among guilds trade associations, and village communities 000000 Today the link between risk, new ventures organisations provided ex-post, and thus and growth seems self-evident. And yet morally acceptable, forms of solidarity. his understanding is surprisingly recent reading risk in such a way had its limits bove: In antiquity. risk was often seen through however, and as a business model it faced riendly or benevolent societies, also called the lens of fate and met with acceptance many difficulties. Ship owners sailing fraternal organisations have a long tradition rather than defiance. Protecting again the same route would often experience ceived as t insurance, often for people with a similar to interfering with divine providence communities such as mine-workers working background. With the advent of For millennia, prayers, pilgrimages an a single disaster could far exceed the modern insurance and the welfare state donations outperformed insurance capacities of a burial club. many of these mutual organisations went Indeed. as late as the 19th out of business entury, insuring against death was likely Also, early forms of mutual insurance, Preceding pages lacked the sophistication of modern A flood at Erichem, the Netherlands, in 1809. But there were acceptable ways of enterprises Operating costs had to be alleviating losses, such as sharing risks financed out of members' contributions vithin social and business communities. and hardly any such societies had ways Members of fire societies were obliged to help Risk mitigation based on solidarity was to invest the capital professionally For each other to secure goods from burni houses of fellow members the societies had widespread among guilds, trade modern insurance, spreading risk and their own fire-fighting equipment. Some associations, and village communities. managing finances was to become vital. of them gradually started collecting mone Most seafaring nations distributed for those affected by a fire and eventually cargo onto different ships to hedge One more element however, was to be turned into mutual fire insurance companies. against storms and pirates while fraternal at least as influential During the Middle Ages, many countries allowed begging for those who had lost their house and goods after a fire. The fire of berne Switzerland in 1405 killed over 100 people and destroyed more than 600 houses 少 Pve Swiss Re A History of Insurance
Swiss Re A History of Insurance 7 Risk tradition and risk trading Today the link between risk, new ventures and growth seems self-evident. And yet this understanding is surprisingly recent. In antiquity, risk was often seen through the lens of fate and met with acceptance rather than defiance. Protecting against misfortunes was perceived as tantamount to interfering with divine providence. For millennia, prayers, pilgrimages and donations outperformed insurance premiums. Indeed, as late as the 19th century, insuring against death was likely to arouse controversy among clerics. But there were acceptable ways of alleviating losses, such as sharing risks within social and business communities. Risk mitigation based on solidarity was widespread among guilds, trade associations, and village communities. Most seafaring nations distributed cargo onto different ships to hedge against storms and pirates while fraternal organisations provided ex-post, and thus morally acceptable, forms of solidarity. Spreading risk in such a way had its limits, however, and as a business model it faced many difficulties. Ship owners sailing the same route would often experience accumulated losses, as would certain communities, such as mine-workers. A single disaster could far exceed the capacities of a burial club. Also, early forms of mutual insurance, whereby premiums were paid ex ante, lacked the sophistication of modern enterprises. Operating costs had to be financed out of members’ contributions and hardly any such societies had ways to invest the capital professionally. For modern insurance, spreading risk and managing finances was to become vital. One more element, however, was to be at least as influential. Above: Friendly or benevolent societies, also called fraternal organisations, have a long tradition in many European countries. Before modern insurance such organisations would provide insurance, often for people with a similar working background. With the advent of modern insurance and the welfare state many of these mutual organisations went out of business. Preceding pages: A flood at Erichem, the Netherlands, in 1809. Right: Members of fire societies were obliged to help each other to secure goods from burning houses of fellow members. The societies had their own fire-fighting equipment. Some of them gradually started collecting money for those affected by a fire and eventually turned into mutual fire insurance companies. Opposite: During the Middle Ages, many countries allowed begging for those who had lost their house and goods after a fire. The fire of Berne, Switzerland, in 1405 killed over 100 people and destroyed more than 600 houses. Risk mitigation based on solidarity was widespread among guilds, trade associations, and village communities
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8 Swiss Re A History of Insurance
From conjecture to calculation ortality tables were often the work of clerics who wanted to discover the role and plans of a divine creator MITI CONJICTNDI In 1654, the French nobleman Chevalier grouped by age range, interest was shared de mere was vexed by uncertainties in his out and paid to subscribers annually en a nominee #需乱点:操 what the chances were of rolling a six in5 scriber s share in the annuity became certain sequence. The mathematicians oid, and the remaining subscribers Blaise Pascal and Pierre de Fermat used within the age range received an increased an old pyramid of numbers and eventually share of the interest. Many tontines were were able to prove that a mathematical fraudulent or badly undersubscribed probability could be determined and eventually were turned into simple This triggered a revolution in the development of probability theories It was only later in the 18th century that and mathematicians all over Europe life insurance was put on a healthier operated and applied their findings to calculate life expectancy. English mathematician, was refused e because of his advanced ag This attempt at predicting the future was This annoyed him so much that he in direct opposition to Church doctrine searched for a mathematical solution but, ironically, it was the Church whose in order to form a more equitable base mortality tables provided some of the upon which to calculate premiums Pascals triangle was used by the swiss input used in those early probability as a percentage of life expectancy mathematician Jacob Bernoulli who contributed calculations. mortality tables were often the law of large numbers to actuarial science he work of clerics who wanted to discover This principle was to be adopted by This was to become the axiom from which life he role and plans of a divine creator and the English Equitable Life Assurance usurers could calculate expected losses ove the clear regularities and divine Society in 1766. On this basis, the order behind the apparent randomness Welshman Richard Price later developed Blaise Pascal as a twelve year old boy Together of mortality a cost and accounting model. In 1774 with Pierre de fermat he late he calculated profitability in life insurance basis for probability calcul thich were surance was slow to adopt ti itable Life based on current to have a lasting impact on new science. Various forms of annuit and expected mortality, so that prevailed, resembling gambling more current state of the operations co than assurance. For some time so-called assessed more precisely. tontine schemes named after their creator Lorenzo Tonti, had enjoyed great From then on, life insurance no longer success, especially in Italy and France relied on speculation Subscribers could buy a share in a kind of life annuity based on the mortality of an appointed nominee With nominees Swiss Re A History of Insurance
Swiss Re A History of Insurance 9 From conjecture to calculation In 1654, the French nobleman Chevalier de Méré was vexed by uncertainties in his gambling pastime. He wanted to know what the chances were of rolling a six in a certain sequence. The mathematicians Blaise Pascal and Pierre de Fermat used an old pyramid of numbers and eventually were able to prove that a mathematical probability could be determined. This triggered a revolution in the development of probability theories and mathematicians all over Europe cooperated and applied their findings to calculate life expectancy. This attempt at predicting the future was in direct opposition to Church doctrine but, ironically, it was the Church whose mortality tables provided some of the input used in those early probability calculations. Mortality tables were often the work of clerics who wanted to discover the role and plans of a divine creator and prove the clear regularities and divine order behind the apparent randomness of mortality. Life insurance was slow to adopt the new science. Various forms of annuities prevailed, resembling gambling more than assurance. For some time so-called “tontine” schemes, named after their creator Lorenzo Tonti, had enjoyed great success, especially in Italy and France. Subscribers could buy a share in a kind of life annuity based on the mortality of an appointed nominee. With nominees grouped by age range, interest was shared out and paid to subscribers annually. When a nominee died, the associated subscriber’s share in the annuity became void, and the remaining subscribers within the age range received an increased share of the interest. Many tontines were fraudulent or badly undersubscribed and eventually were turned into simple life annuities. It was only later in the 18th century that life insurance was put on a healthier footing. James Dodson, a 45-year-old English mathematician, was refused insurance because of his advanced age. This annoyed him so much that he searched for a mathematical solution in order to form a more equitable base upon which to calculate premiums as a percentage of life expectancy. This principle was to be adopted by the English Equitable Life Assurance Society in 1766. On this basis, the Welshman Richard Price later developed a cost and accounting model. In 1774 he calculated profitability in life insurance for the Equitable Life based on current and expected mortality, so that the current state of the operations could be assessed more precisely. From then on, life insurance no longer relied on speculation. Mortality tables were often the work of clerics who wanted to discover the role and plans of a divine creator. Above: Pascal’s triangle was used by the Swiss mathematician Jacob Bernoulli who contributed the law of large numbers to actuarial science. This was to become the axiom from which life insurers could calculate expected losses. Opposite: Blaise Pascal as a twelve year old boy. Together with Pierre de Fermat he later developed the basis for probability calculations which were to have a lasting impact on life insurance