Swiss Re A History of Insurance 150 YEARS
A History of Insurance
Table of contents Risk tradition and risk trading From conjecture to calculation The birth of modern insurance Global expansion Reinsurance World War II A poor start for the 21 st Natural catastrophes Financial catastrophes, regulation, and a po
Table of Contents Foreword 2 Introduction 4 Risk tradition and risk trading 6 From conjecture to calculation 8 The birth of modern insurance 10 Global expansion 16 Reinsurance 24 San Francisco 26 Swiss Re History 30 Money matters 38 World War II 44 Booming economy and growing problems 46 More money matters 50 A poor start for the 21st century 54 Natural catastrophes 56 Financial catastrophes, regulation, and a positive outlook 60
Foreword Dear readers This year Swiss Re celebrates its 150th anniversar Since the time of our foundation in 1863 the world has changed a lot. And insurance has been an instrumental part of this change We all know that without risk protection, no skyscraper could be built, no products marketed, no goods shipped Insurers and reinsurers have become key risk takers and ultimately the shock absorbers in today' s evermore interconnected and volatile world But the insurance industry does still more. Premiums are invested on a long term basis in different financial assets. Through their investments insurers and reinsurers provide capital to the real economy and support the production and provision of goods and services Swiss Re is proud to be part of this process. Initial types of insurance and reinsurance were used long before Swiss Re came into existence. some already in ancient times. But with the expansion of global trade, the industrial revolution, and the advent of social security our industry rapidly gathered momentum, and Swiss Re evolved with it. Our own past and present would not have been possible without our clients and their hard work to develop the global insurance markets 2 Swiss Re A History of Insurance
2 Swiss Re A History of Insurance Foreword Dear readers This year Swiss Re celebrates its 150th anniversary. Since the time of our foundation in 1863 the world has changed a lot. And insurance has been an instrumental part of this change. We all know that without risk protection, no skyscraper could be built, no products marketed, no goods shipped. Insurers and reinsurers have become key risk takers and ultimately the shock absorbers in today’s evermore interconnected and volatile world. But the insurance industry does still more. Premiums are invested on a long term basis in different financial assets. Through their investments, insurers and reinsurers provide capital to the real economy and support the production and provision of goods and services. Swiss Re is proud to be part of this process. Initial types of insurance and reinsurance were used long before Swiss Re came into existence, some already in ancient times. But with the expansion of global trade, the industrial revolution, and the advent of social security our industry rapidly gathered momentum, and Swiss Re evolved with it. Our own past and present would not have been possible without our clients and their hard work to develop the global insurance markets
Contributing to the prosperity of these markets has always been paramount for Swiss Re be it by helping diversify risk, supporting our clients in growing their balance sheet, or by providing knowledge and expertise and supporting our clients and partners with dedication and reliability We would like to express our gratitude to our clients and share some of the highlights of the insurance and reinsurance industry with you. To do this we are publishing a series of insurance history brochures to shed more light on this rather neglected aspect of world history We trust you will enjoy this publication We look forward to continuing to work with you for the benefit of our clients, our markets and ultimately also our economies and societies -protecting this generation, but also the generations to come Most sincerely Michel lies Group CEO Swiss Re A History of Insurance 3
Swiss Re A History of Insurance 3 Michel Liès Group CEO Contributing to the prosperity of these markets has always been paramount for Swiss Re – be it by helping diversify risk, supporting our clients in growing their balance sheet, or by providing knowledge and expertise and supporting our clients and partners with dedication and reliability. We would like to express our gratitude to our clients and share some of the highlights of the insurance and reinsurance industry with you. To do this we are publishing a series of insurance history brochures to shed more light on this rather neglected aspect of world history. We trust you will enjoy this publication. We look forward to continuing to work with you for the benefit of our clients, our markets and ultimately also our economies and societies – protecting this generation, but also the generations to come. Most sincerely
Introduction A total of USD 4 613 billion was spent globally on insurance in 2012 Modern life can hardly be imagined without this form of risk protection And yet, comparatively little is known about the history of the industry, although it has played a major part in shaping today s society and culture. Industrialisation, welfare, innov economic development, or modernisation per se would not been the same without private insurance Since the 18th century, building insurance on solidarity, business acumen, and the logic of calculation has proved an almost unbeatable business idea. It was to conquer the world over the next centuries Trade and emigration became the two most important enablers for creating a global insurance safety network As every history. that of insurance has been exposed to challenges Many were inherent to the industry. Some large catastrophes proved too big to deal with for some companies From the San Francisco Earthquake in 1906 to Hurricane Betsy in 1965 or the attack on the World Trade Center in 2001 the industry had to cope with unexpected enormous losses. But challenges also came from the economy and its recurring crises which at times caused bigger losses than the worst insured catastrophes. Also monetary issues caused difficulties with floating exchange rates and fluctuating interest rates But overall the insurance industry has proved remarkably resilient to all these challenges. E\ the recent crisis insurance was less affected than other industries. a long history of prudent reserving and risk awareness had taught insurers to act cautiously HET INSTORTEN VAN HUIZEN N IET OMKOMEN DEN AI
4 Swiss Re A History of Insurance Introduction A total of USD 4613 billion was spent globally on insurance in 2012. Modern life can hardly be imagined without this form of risk protection. And yet, comparatively little is known about the history of the industry, although it has played a major part in shaping today’s society and culture. Industrialisation, welfare, innovation, economic development, or modernisation per se would not have been the same without private insurance. Since the 18th century, building insurance on solidarity, business acumen, and the logic of calculation has proved an almost unbeatable business idea. It was to conquer the world over the next centuries. Trade and emigration became the two most important enablers for creating a global insurance safety network. As every history, that of insurance has been exposed to challenges. Many were inherent to the industry. Some large catastrophes proved too big to deal with for some companies. From the San Francisco Earthquake in 1906 to Hurricane Betsy in 1965 or the attack on the World Trade Center in 2001 the industry had to cope with unexpected enormous losses. But challenges also came from the economy and its recurring crises which at times caused bigger losses than the worst insured catastrophes. Also monetary issues caused difficulties with floating exchange rates and fluctuating interest rates. But overall the insurance industry has proved remarkably resilient to all these challenges. Even in the recent crisis insurance was less affected than other industries. A long history of prudent reserving and risk awareness had taught insurers to act cautiously
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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
