Ancient Insurance Methodology

Some historians claim that similar methods of transferring or distributing risk were practiced by ancient Babylonian and Chinese traders as far back as the 3rd and 2nd millennia BC, respectively. Ancient Chinese merchants would distribute their wares across multiple vessels to reduce the risk of loss due to a single ship capsizing when traveling dangerous river rapids. On the other hand, the Babylonians created a system that was later practiced by early Mediterranean sailing merchants and recorded in the Code of Hammurabi (circa 1750 BC). In this system, a merchant who took out a loan to fund his shipment would pay a premium to the lender for a guarantee that the loan would be cancelled if the shipment was stolen or lost at sea.

Around the 8th century BC, the citizens of the Greek island of Rhodes created the concept of “General average,” which allowed groups of traders and merchants to insure their wares collectively if shipped together. The collected insurance payments would be used to reimburse any merchant whose goods were lost during shipment, due to natural causes or sinkage.

Separate insurance agreements were also invented in Genoa in the 14th century, using insurance pools with landed estates as collateral. These insurance policies were not linked to loans or other contracts. The earliest recorded insurance contract dates from Genoa in 1347. Maritime insurance experienced significant developments over the next century, with premiums becoming more complex based on the risks. This new type of insurance contract allowed for the separation of insurance from investment, which proved useful in maritime trade and the formation of insurance companies.