The Concept of Insurance

The main concept of insurance is that of spreading risk among many, which we, as humans, have been doing for a very, very long time. Countries and their citizens need to spread risk throughout the population and can do this through companies that can handle it. This is how insurance emerged.

King Hammurabi's Code and Early Insurance

The concept of insurance dates back to around 1750 B.C. with the Code of Hammurabi, which was carved into a stone monument and several clay tablets by the Babylonians. The code describes a form of insurance, whereby a ship’s cargo could be used as leverage in exchange for a loan. The loan would be repaid with the ship reaching port and the cargo sold. If the ship did not reach port and sank, the loan did not have to be repaid.

Medieval Guilds Provided Group Coverage

In the Middle Ages, most craftsmen were trained through the guild system. The wealthier guilds had large coffers that acted as a type of insurance fund.

If a master's practice burned down, the guild would rebuild it using money from its own funds. If a master craftsman was robbed, the guild would cover their obligations until money started to flow again. If they were suddenly disabled or killed, the guild would support them or their surviving family.

With this safety net, it prompted others to move into the trades and forgo a life of farming. This is the basic premise of group insurance, which is still being used and sold today.

Spreading Risk in Dangerous Waters

When shipping between continents was occurring in the early 1600s and good were flowing between each, owners of those goods wanted a way to protect their investment. A coffeehouse owned by Edward Lloyd, later of Lloyd's of London, was the primary meeting place for merchants, ship owners, and others seeking insurance and “the birthplace” of underwriting”.

What Is Insurance?

Insurance is a contract, represented by a policy, in which a policyholder receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured. Most people have some insurance for their car, their house, their healthcare, or their life.

Insurance policies hedge against financial losses resulting from accidents, injury, or property damage. Insurance also helps cover costs associated with liability (legal responsibility) for damage or injury caused to a third party

How Insurance Works

Many insurance policy types are available, and virtually any individual or business can find an insurance company willing to insure them, for a price. Common personal insurance policy types are auto, health, homeowners, and life insurance. Most individuals in Canada have at least one of these types of insurance, and car insurance is required by law.

Businesses obtain insurance policies for field-specific risks, For example, a fast-food restaurant's policy may cover an employee's injuries from cooking with a deep fryer. Medical malpractice insurance covers injury- or death-related liability claims resulting from the health care provider's negligence or malpractice. A company may use an insurance broker of record to help them manage the policies for itself and its employees. Businesses may be required by provincial law to buy specific insurance coverages.

Courtesy of Investopedia