The History of Risk

By Matt Gartner, XL Specialty Insurance Company

Let’s face it, insurance is one of those things we all take for granted. That is, until something happens.

The Merriam-Webster Dictionary describes insurance as “coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril.” We pay a premium so a given amount of financial protection will be there when we suffer a loss. Meanwhile, we work hard to avoid losses whenever possible. That makes insurance something that many of us pay for while hoping we never have to use it. But even if a loss is never incurred, insurance holds additional value that is often overlooked.

Businesses typically buy insurance for two reasons: to protect their assets and to protect income. We can even date these applications of insurance to around 2100 B.C. The Code of Hammurabi was the first basic insurance policy. This policy was obtained by Babylonian traders in the form of a loan that guaranteed the safe arrival of their goods by caravan against perils along the way like robbery, foul weather and breakdowns.

As time went on, the need for insurance increased. The Phoenicians and the Greeks wanted the same type of insurance for their seaborne commerce. The very first actual insurance contract was signed in Genoa, Italy, in 1347. Policies were issued to individuals or groups. Each person wrote his name and the amount of risk he was willing to assume under the insurance proposal. That’s where the term “underwriter” comes from.

The practice of insuring cargo during shipping was widespread throughout the maritime nations of Europe. The first insurance company was formed in London in 1688. It was founded at Lloyd’s Coffee House, a place where merchants, ship-owners, and underwriters met to conduct their business. Lloyd’s grew into one of the first modern insurance companies, Lloyd’s of London.

As commerce continued to grow and diversify, the number and range of risks increased. Historical events also helped shape insurance coverage and how businesses rely on it. Consider the lessons of Sept. 11, 2001.

Sept. 11 showed many businesses that they are at risk from the unthinkable. The events of that day forced many companies to look at how they would handle even the most unimaginable situations. How would their insurer respond? Was their coverage adequate?

As you might expect, the insurance industry did see an increase in demand for its products and services after the attacks. Insurance, as a product, and insurance carriers as business partners helped businesses re-establish their facilities, covered the costs of interrupted operations, paid the medical expenses of injured workers and provided other crucial financial assistance.

Sept. 11 was the largest financial loss in the history of insurance until Hurricane Katrina in 2005, when insurers paid claims totaling more than $40 billion to help people along the Gulf Coast rebuild their homes and businesses. Ten years later, insurance claim dollars are still playing an essential role in rebuilding Lower Manhattan.

Risk management took on a whole new significance in the aftermath of Sept. 11. The insurance industry certainly changed how it evaluated risk, particularly in high-risk industries and major metropolitan areas. Concerns over future attacks prompted a unique public/private partnership to offer terrorism coverage through the Terrorism Risk Insurance Act, recently extended until 2014.

Meanwhile, businesses began scrutinizing the entities that support their business activities, including providers of transportation, storage, waste disposal or other services. With these business relationships comes vicarious liability, in which one business could be held responsible for injuries or property or environmental damages caused by another it is contracted with.

The purchase of insurance coverage is becoming a prerequisite to doing business. For example, the ongoing construction at Ground Zero would not be possible without the insurance protecting workers and contracting businesses involved.

Many industries, including the waste industry, require that insurance coverage requirements be outlined in contracts. And any firm signing a contract with a municipality is required to carry appropriate insurance. In some instances, contracts will place requirements to carry specific liability limits or types of coverages, like environmental insurance or professional liability insurance. While many businesses are accustomed to meeting the insurance demands placed on them, be equally sure that the other guy is well insured. Otherwise, your company may be left holding the bag when a loss occurs.

We do not conduct business in a vacuum, and we certainly cannot afford to manage our risks as if we did. Insurance was a valuable business tool in ancient times and its value continues to grow, helping businesses recover from a loss, move forward on business opportunities, facilitate business deals and demonstrate commitments to clients and customers.