What Is Insurance?
Insurance is not necessarily an investment from which one expects to get one's money back. Nor is it gambling. A gambler takes risks, while insurance offers protection against risks that already exist. Insurance is a way to share risk with others.
The Origins of Insurance
Insurance has existed for thousands of years. A form of credit insurance was included in the Code of Hammurabi, a collection of Babylonian laws said to predate the Law of Moses. To finance their trading expeditions in ancient times, shipowners obtained loans from investors. If a ship was lost, the owners were not responsible for paying back the loans. Since many ships returned safely, the interest paid by numerous shipowners covered the risk to the lenders.
It was likewise in a maritime setting that later one of the world's most famous insurance providers, Lloyd's of London, was born. By 1688, Edward Lloyd was running a coffeehouse where London merchants and bankers met informally to do business. There financiers who offered insurance contracts to seafarers wrote their names under the specific amount of risk that they would accept in exchange for a certain payment, or premium. These insurers came to be known as underwriters. Finally, in 1769, Lloyd's became a formal group of underwriters that in time grew into the foremost market for marine risks.
When people buy insurance today, they are still sharing their risk. Modern insurance companies study statistics that show the frequency of past losses-for example, losses from shop fires-to try to predict what losses their clients will experience in the future. The insurance company uses the funds paid by many clients to compensate the clients who suffer losses.