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 While car insurance companies have only come into existence as recently as the late nineteenth century (predictably after the invention of the first gasoline-powered car), the origins of this trade are rooted in commercial marine insurance, which has been practiced throughout nearly all of recorded history.  In fact, tracing how far back it goes depends on how broadly one defines “insurance.”  For example, the earliest written records of Chinese cargo sailors approximately 5,000 years ago indicates that they practiced a method of hedging losses by deliberately designing vessels to be smaller than was architecturally possible so that the capital they carried could be distributed among multiple vessels, thus decreasing the risk of overwhelming ruin. 

As the Chinese became wealthy enough to accommodate the existence of investors, the strategy of the ship owners became more sophisticated.  Ship owners could now meet with investors beforehand and negotiate a premium to guarantee the reimbursement of the ship and cargo.  This was a boon to trade; ships could now be built larger, allowing greater amounts of cargo to safely be transmitted in larger, more efficient quantities. 

The earliest records of these practices in the Western world that we know of date back to the Babylonian empire, where the ancient Code of Hammurabi outlines the rules and regulations for the practice of “bottomry,” or proto-premiums taken out before voyages.  It spread to the Indian subcontinent, and to the Mediterranean where the Phoenicians and Greeks adopted their own forms of it.  The Greek form is particularly interesting, because the vessels they used were very large and carried the cargo of multiple merchants.  Accordingly, to ensure fairness in the event of having to jettison the cargo in dangerous conditions, investors were required by Rhodian law to agree to contribute to the “general average” of loss; that is, if one party’s cargo was jettisoned, or if damage came to the ship, it was agreed that the cargo and stake in the ship of all the investors would contribute toward the loss.  Because of the obvious effects that one investor’s misfortune would have on another investor, insurance became a social responsibility.  This is one of the earliest forms of insurance mandates that was seen in the world, and is similar to the state mandates of liability coverage that modern car insurance companies are expected to follow.

In the thirteenth century, the European guilds produced the first incidences of premiums, where the risks of individual investors were weighted and a commensurate amount of insurance payment was issued.  These practices were developed extensively the Mediterranean and were later brought north to England, which at the height of its empire became a leader in marine insurance practices. 

What was unique to the modern car insurance companies was a wide demand for insurance on relatively small pieces of capital that were operated frequently, but less perilously.  The model they adopted was unique, as they had to accommodate large numbers of frequent, low-risk capital investments, and abide by social mandates, as well as cover the new higher costs of modern medicine as per demand.  

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

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