The need for insurance arises out of the risks we all run in the course of living our daily lives. Our lives are constantly in danger through accident or illness; our property may be subject to loss or damage, while losses incurred by others may affect us in some way or another. We also run the risk of causing injury or damage to other people or their property at a subsequent heavy cost to ourselves should we be sued for damages.
There is thus a constant striving for security, for some means of eliminating a risk, reducing it or transferring it to someone or something better able to bear it and deal with the financial consequences. This becomes a matter of growing importance to any individual or Nation as economic life develops because of the increasingly onerous burden of risk.
In ancient times, individual possessions were meager, trade was by simple barter, and life, being 'nasty, brutish and short-lived', was not held to be of any great value. The growth of commerce and industry, plus the introduction of money as a means of exchange, led over the centuries to a more complicated society in which losses not only were more severe in their impact but also became measurable and capable of evaluation. The early merchants could attempt to protect their property by arming themselves and guarding it against robbers, while ships could hug the coastline to avoid the greater perils of the sea, but it was impossible to provide complete protection and so some method and remedy of replacing lost goods at least in financial terms was sought.
Many merchant traders and business owners could build up reserve funds for that purpose, but that would tie up capital which could be used more productively in the business itself, while the sums required might be enormous in the case of a major catastrophe. Again, it would be essential to have several years of successful and trouble-free trading to build up sufficient reserves, so that new entrants to business would be at a disadvantage and the entrepreneurial initiative would be stifled.
The answer to these problems was for merchants to pool their resources to provide central funds out of which losses could be met without disastrous effects upon any on contributor. In time some merchants became particularly interested and skilled in this new area of business and dropped their other occupations to become professional acceptors of risks. Gradually they acquired an understanding of classes of trade and the hazards involved so that they were able to assess the risks inherent in a particular venture and decide what contributions it should make on an equitable basis to the central fund.
There was, as there still is, plenty of scope for individual opinion, expertise and portfolio development in risk assessment. It was not long, therefore, before intermediaries appeared to act as a link between merchants and insurers.
From this it will be clearly seen that the introduction of insurance was absolutely vital in the development of trade as a means of transferring risk. Over the years the insurance industry has also played its part in risk reduction and elimination. By increasing premium rates, imposing excesses or asking an insured to carry a part of a risk himself, it has encouraged the improvement of 'poor' risks. The use of trained surveyors to inspect properties proposed for insurance has also resulted in many recommendations for increased security provisions and better fire protection systems.
The inspection services provided by engineering offices reduce the chances of loss or damage. In a more general sense, leaflets and films produced on a range of topics by the insurance associations help to educate the public to be aware of the existence of hazards, especially in the home. A Swiss company even sponsors keep-fit facilities as an encouragement to better health. Insurance-financed research, such as at the Motor Vehicle Research and Repair Centre at Thatcham, sponsored by the Association of British Insurers, affects the design and the repair of cars.
Although the development of insurance was furthered mainly by the desire to cover property lost at sea, in time fire insurance, life assurance and a whole range of other classes were introduced to meet the needs of the day. In recent times, much greater insurance capacity has had to be found owing to the introduction of huge values for such symbols of modern technology as the jet airliner and the super tanker, the phenomenal growth in liability risks through, for instance, nuclear power stations or pharmaceutical manufacture, and the effects of natural disasters such as earthquakes and typhoons on developed communities.
This has greatly accelerated the development of the reinsurance market as a back-up to direct insurers as has the increasing nationalism of countries which see insurance funds as a prime national asset and restrict their exportation by foreign insurers. It has also led to a need for highly qualified brokers to deal between clients and insurers, and insurers and re-insurers. The modern worldwide insurance market is thus an immense and complex industry, without which modern life would hardly be possible.
The reason why we need Insurance today and its value to the community can be summed up as follows.
It spreads the cost of losses over all those exposed to risk, rather than those who actually suffer loss, thus providing security for a minimal cost. Insurance reduces the need for individual reserve funds, thus freeing up capital for productive use elsewhere.
From its own accumulated funds Insurance provides investment capital for governments and industry. Current Government borrowing is substantially underwritten by Insurance Companies who have bought the Gilts.
Insurance encourages loss-prevention activities, thus helping to create a safer society for us all. The UK insurance market, in particular, gains about 70 per cent of its non-life business from abroad so that it is a valuable 'invisible' exporter, which leads to a better standard of living.
Dave Healey is a specialist risks underwiter who has been underwriting Car Insurance polices at Lloyd's for twenty years. Today he is a leading Insurance news journalist and Insurance author.
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