How Insurance Began

The Italian city states: the first true policy

The separation of the loan from the risk happened in Italy in the fourteenth century. Merchants in Genoa, Florence, Pisa and Venice began writing contracts in which one party simply undertook the risk of a voyage for a payment, with no loan at all. The earliest surviving documents of this kind date from the 1340s, and the Genoese notarial records are full of them by the end of that century.

The vocabulary of the subject is Italian. "Policy" comes from polizza, a written undertaking. "Premium" comes from the Latin praemium, the reward paid in advance. "Average", in the sense of a partial loss shared out, comes through the Italian avaria.

Insurance travelled with trade. The Lombard merchants carried the practice to Bruges, Antwerp and then London, where Lombard Street still carries their name. The earliest English policies follow the Italian form closely, and disputes about them were originally heard by merchants themselves rather than by the common law courts.

London: Lloyd's, and the birth of a market

Edward Lloyd kept a coffee house in Tower Street, London, from about 1688. It attracted shipowners, merchants and men with money to spare, and it became the place where a person wanting to insure a voyage would take a slip of paper describing the risk and walk it round the room. Each person willing to carry part of the risk wrote his name under the description, which is the origin of the word underwriter.

Lloyd's was, and remains, a market and not an insurer. It is a society of members who accept risks in syndicates. The Society was constituted by the Lloyd's Act 1871 of the United Kingdom Parliament, which is why the Indian statute now refers to it by that name: section 2C of the Insurance Act, 1938, as rewritten by the Act of 2025, permits a foreign body engaged in reinsurance, "including Lloyd's established under the Lloyd's Act, 1871", to establish a branch in India for reinsurance exclusively.

Fire insurance began after a disaster, as it usually does. The Great Fire of London in 1666 destroyed thirteen thousand houses. Nicholas Barbon began writing fire cover the following year and established the Fire Office in 1680, and the first insurance offices maintained their own fire brigades, which attended only buildings carrying the office's own metal badge.

Life insurance came last because it needed mathematics. Early life policies were short term and were sold as much for speculation as for protection. It was only when mortality tables were built, on the basis of recorded deaths in Breslau and later in London, that a life office could price a whole life policy. The Society for Equitable Assurances on Lives and Survivorships, founded in 1762, is usually treated as the first modern life office because it was the first to use such tables systematically.

The statutes that made insurance respectable

The Life Assurance Act 1774 is the most important of them for a student of this subject. By the middle of the eighteenth century it had become common to take out policies on the lives of strangers, of public figures, of prisoners awaiting trial. The Act, still often called the Gambling Act, forbade insurance on a life in which the person taking it had no interest, required the name of the interested person to be inserted in the policy, and limited recovery to the amount of the interest.

That Act is the origin of the doctrine of insurable interest in life insurance, which India applies although it has no corresponding Indian statute. The chapter on insurable interest works out what the doctrine now requires.

The Marine Insurance Act 1906 codified two centuries of case law. Drafted by Sir Mackenzie Chalmers, it stated the existing rules rather than changing them. India adopted it almost word for word as the Marine Insurance Act, 1963, which is why the chapters on marine insurance in this book quote English cases decided long before the Indian Act existed.

A timeline a student can reproduce

A worked example

Take one modern Indian marine cargo claim and trace every part of it back to the history above.

Sagarika Exports ships a container of granite from Chennai to Rotterdam. The vessel strands, part of the cargo is jettisoned to refloat her, and the rest arrives damaged.

The jettison, and the contribution every other interest must make to it, is general average, and it is the oldest rule in the subject, coming from the Rhodian sea law through the Digest of Justinian into sections 66, 72 and 73 of the Marine Insurance Act, 1963, and into the York Antwerp Rules the policy incorporates.

The document Sagarika holds is called a policy, from the Italian polizza, and what it paid is called a premium, from premium, both words fixed in the fourteenth century Genoese and Florentine trade when the insurance was first separated from the loan.

The person who accepted the risk is called an underwriter, because at Lloyd's coffee house from 1688 each merchant wrote his name and his share under the description of the risk on the slip.

The form of the policy in the Schedule to the Act of 1963 is the Lloyd's S.G. policy, whose wording is older than the Act, older than the English Act of 1906 from which the Indian Act is copied, and older than the British presence in India.

And the reason Sagarika had to have an interest in the granite before it could insure it is the reaction against wagering that produced the Marine Insurance Act, 1745, and the Life Assurance Act, 1774, which is now section 6 of the Marine Insurance Act, 1963.

One claim, six survivals. That is the answer to a student who asks why an insurance paper begins with history.

What it does NOT mean

It does not mean that insurance is an English invention. The mechanism is far older, and forms of mutual assistance existed in India, in China and among the Roman burial societies. What London supplied was the market, the written form and, eventually, the statute.

It does not mean the ancient forms are dead. General average is decided today by rules that trace directly to the Rhodian law, and a bottomry bond is still recognised in admiralty although rarely used.

And it does not mean the history is decoration in an answer. An examiner who asks a student to trace the development of the law of insurance is asking for this narrative, with the doctrines attached, and an answer that lists dates without saying what each stage contributed to the modern law will not score well.

Quick revision

Bottomry and respondentia: a loan on ship or cargo, repayable only if the voyage succeeded, at a rate that was in truth a premium.

General average: jettison for the common safety is shared rateably. Rhodian sea law, then the lex Rhodia de jactu, now sections 66, 72 and 73 of the Marine Insurance Act, 1963.

Italy, from the 1340s: the policy separated from the loan. Policy, premium and average are Italian words.

Lloyd's: Edward Lloyd's coffee house from about 1688; the underwriter signs beneath the slip; constituted by the Lloyd's Act 1871 and named in section 2C of the Indian Act.

Fire: after the Great Fire of London, 1666; Barbon's Fire Office, 1680.

Life: needed mortality tables; the Equitable, 1762; the Life Assurance Act 1774 created the requirement of insurable interest in a life.

Codification: the Marine Insurance Act 1906, adopted in India as the Marine Insurance Act, 1963.

Test yourself

1. What is a bottomry bond and why is it the ancestor of insurance? A loan on the security of a ship, not repayable if the ship was lost and repayable with very high interest if she arrived. The extra interest was in substance a premium for carrying the risk of loss.

2. Where does the word underwriter come from? From the practice at Lloyd's coffee house of writing one's name underneath the slip describing a risk, for the share of it one was willing to carry.

3. Which English statute created the requirement of insurable interest in life insurance, and why was it passed? The Life Assurance Act 1774, passed to stop the widespread practice of taking out policies on the lives of strangers as a form of gambling.

4. Name one rule of the ancient world that is still enforced in India today. General average: cargo sacrificed for the common safety is contributed for rateably by all whose property was saved, now in sections 66, 72 and 73 of the Marine Insurance Act, 1963.

5. Why do English cases from the eighteenth century still decide Indian marine insurance questions? Because the Marine Insurance Act, 1963 is a near verbatim adoption of the English Marine Insurance Act 1906, which was itself a codification of the case law those decisions made.