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 Insurance companies are frequently maligned in the modern media for their unnecessary profit margins.  After all, being nothing but an accumulation of capital, the actual service they provide should require relatively little infrastructure to administrate, meaning that more collective, democratic organizations or NPO’s should be capable of executing the same functions, but with much greater efficiency.  Shouldn’t the most affordable car insurance, for example, yield but the tiniest, if any, profit to the insuring company?  We are not the first group of people to think like this.  Insurers have historically been held in some degree of disdain, and keeping them in check through regulations is a practice that goes back to the ancient world. 

The first recorded reference to insurance practices in the Western world come from Babylon.  The Code of Hammurabi outlines a regulation on bottomry, an early form of insurance for marine cargo ships.  The ship’s master would take out a bond for the amount of the ship and its cargo, so as to have immediate funds available in the event of misfortune, and repay the bond with substantial interest upon return.  If the ship sunk, the loan was canceled.  (This was considered a form of insurance, although it bears some resemblance to an equity loan by modern standards).  The practice was widely reviled, but as there were few insurance options for the large ships, it was a necessary evil.  Hammurabi legally capped the interest rate at a whopping 20%, an amount which would translate into nightmarishly unattainable premiums today.  (While we do not have accounting records of these ancient businessmen, reconstructions of the early business models leave historians with estimates of profit margins in the double digits)  The Roman Emperor Justinian later fixed the bottomry interest rate at 12% in an edict in the sixth century, and included regulations protecting some of the interests of the ship masters.  (This was quite a few steps behind the modern day variants of affordable car insurance for commercial purposes).

In more modern times, the Progressives in 1921 put a 5% cap on the insurance industry’s profit margins.  This has helped protect the interests of the public, although there have been some seemingly scandalous attempts to increase this through diverted income investment.  Nevertheless, it is these progressive practices that help ensure that we continue to have affordable car insurance, health insurance and homeowners insurance always available to us.

This Financial Services article was written by Mark Karavan on 10/14/2009

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