TOPIC 1 HISTORY OF INSURANCE

Course Learning Outcome:

At the end of this topic, students should be able to:
1. Trace the history of insurance industry
2. Describe the development of insurance industry in Malaysia

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HISTORY OF INSURANCE INDUSTRY INTERNATIONALLY

Have you ever wondered where insurance actually came from?

Who were the first people to be insured and why?
The history of insurance is an interesting one, but the basic idea has always been the
same.

Definition of insurance

Basically insurance can be defined as:

coverage by contract whereby one party undertakes to indemnify or guarantee
another against loss by a specified contingency or peril.

So the basis of insurance is guarantee against loss.

Shipping/transportation insurance the first guarantee against loss

We look back in history at who first felt the need for a guarantee against loss, and who
gave them that guarantee.

Way back in Babylonian times, around 2100 B.C., the Code of Hammurabi was the
first basic insurance policy. This policy was paid by the traders in the form of a loan to
guarantee the safe arrival of their goods by caravan.

Of course, caravans faced the same kind of perils our transportation industry faces
today like robbery, bad weather and breakdowns.

As history progressed, the needs for insurance increased. The Phoenicians and the
Greeks wanted the same type of insurance with their seaborne commerce.

The Romans were the first to have burial insurance people joined burial clubs
which paid funeral expenses to surviving family members.

In medieval times, the guilds protected their members from loss by fire and
shipwreck, paid ransoms to pirates, and provided respectable burials as well as support
in times of sickness and poverty.

Then came the very first actual insurance contract, signed in Genoa in 1347. Policies
were signed by individuals, either alone or in a group. They each wrote their name and
the amount of risk they were willing to assume under the insurance proposal. Thats
where the term underwriter came from.

Underwriters play a big part in the insurance industry. Theyre the ones who calculate
the risk, based on statistics, and decide what the premiums will be.

In 1693, the astronomer Edmond Halley created a basis for underwriting life insurance
by developing the first mortality table. He combined the statistical laws of mortality
and the principle of compound interest.

However, this table used the same rate for all ages. In 1756, Joseph Dodson corrected
this error and made it possible to scale the premium rate to age.

By this time, the practice of insuring cargo while being shipped was widespread
throughout the maritime nations of Europe.

Then in London, in 1688, the first insurance company was formed. It got its start at
Lloyds Coffee House, a place where merchants, ship-owners, and underwriters met to
transact their business. Lloyds grew into one of the first modern insurance companies,
Lloyds of London.

Lloyds of London began in Edward Lloydss Thames side coffee house in Tower
Street in the City of London

The exact date of its establishment is unknown

The first reference to Lloyds coffee house was in the London Gazette, 18-21
February 1688

Lloyds himself was not involve in insurance

He provided premises, reliable shipping news and variety of services to enable his
client (ships captain, merchant, ship owner) carry on their business insuring ships
and their cargoes

The wealthy individuals in the coffee house each took a share of a risk, signing their
names one beneath the other on the policy, along with amount they agreed to cover by
the payment of a premium into a common fund

In the normal course of events, many ships safely arrived in port and only few suffered
loss

The many who were successful thus contributed to overcome the suffering of those
who were unsuccessful

The misfortune of the unfortunate few were borne by the many

Lloyd died in 1713 but the coffee house continued to prosper as a center for marine
insurance

In 1734, Lloyds List was established as a regular weekly publication

In 1774, underwriters had elected a committee and moved to their own premises in the
Royal Exchange

In USA, the first American Insurance Company was formed in Charleston, South
Carolina in 1735

Fire Insurance Companies began spreading to New York City and Philadelphia

Benjamin Franklin
o
o
o
o
o

Founded Americas first successful insurance company

Founded the first mutual insurance company
Encouraged prevention by educating the public about fire hazards
Refused to insure wooden buildings
An ounce of prevention is worth a pound of cure

As commerce grew so did the need for insurance

In the 17th and 18th centuries, British commerce was rapidly growing. As commerce
grew, risks increased. In a way, progress was actually working against the insurance
industry there were more and more ways of goods being damaged or lost, as goods
were shipped greater distances and by more advanced methods. Therefore, there were
higher payouts for claims.

The members of stock companies saw an opportunity for a profitable business here.
They were chartered in the insurance business in England in 1720, and in 1735.

The first American insurance company was founded in the British colony of
Charleston, SC. In 1787 and 1794 respectively, the first fire insurance companies were
formed in New York City and Philadelphia.

The first American insurance corporation was sponsored by a church the

Presbyterian Synod of Philadelphia for their ministers and their dependents. Then
other needs for insurance were discovered and, in the 1830s, the practice of classifying
risks was begun.

Although there was religious prejudice against the practice of insurance by a church,
after 1840 it declined and life insurance boomed.

Preparing for large losses

So everybody was getting into the swing of insurance. People accepted the fact that
they needed to pay premiums to protect themselves and their loved ones in case of
loss, including major losses like fires.

The insurance companies had a rude awakening to this fact in 1835 when the New
York fire struck. The losses were unexpectedly high and they had no reserves prepared
for such a situation.

As a result of this, Massachusetts lead the states in 1837 by passing a law that required
insurance companies to maintain such reserves. The great Chicago fire in 1871
reiterated the need for these reserves, especially in large dense cities.

Insurance companies had to work together to find a solution to the challenge of large
losses. So they got together and devised a system called reinsurance whereby losses
were distributed among many companies. This system is now commonly used in all
types of insurance.

Insurance really gets organized

Now the insurance industry was growing to huge proportions. The companies,
although competitors, worked together to create productive systems that could be used
throughout the industry.

They needed to keep up with the requirements of the increasing amount of laws
governing insurance. For example, the Workmens Compensation Act of 1897 in
Britain required employers to insure their employees against industrial mishaps.

This also fostered what we know today as public liability insurance, which came
strongly into play when the automobile arrived on the scene.

In the 19th century, many societies were founded to insure the life and health of their
members. Fraternal orders were created to provide low-cost insurance strictly for their
members.

Today, many of these fraternal orders and labor organizations still exist. Most
employers offer group insurance policies for their employees, providing them with life
insurance, sickness and accident benefits, and pensions.

Now insurance was the accepted thing to do. Everybody needed to protect themselves
against the many risks in life. Farmers wanted crop insurance. People wanted deposit
insurance at their banks. Travelers wanted travel insurance.

Everybody turned to insurance companies to give them peace of mind. And really,
isnt that what insurance is the paying of a premium to protect against some form of
loss.

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HISTORY OF INSURANCE INDUSTRY LOCALLY

How it start?
The beginning of insurance in Malaysia can be traced in the colonial period between
the 18th and 19th centuries
Start along 3 major ports along Straits of Malacca (Penang, Malacca & Singapore)
Insuring mainly trade of spices, rubber & tin from Far East and Western Europe
British trading firms or agency houses established in this country acted as agencies for
the British based insurance companies

As trade continue to grow,agency houses were authorize to accept risk and settle
claims.

Among which were Harrison & Crossfield, Boustead and Sime Darby

As the insurance business continue to expand,overseas insurers start to establish their

own local branches.

Branches are largely managed by expatriate managers and executives.

Insurance industry in Malaysia are model on British system

Early Development
The 1950s witnesses a spiraling growth in the insurance industry

A substantial portion of the market was cornered by British and American firms
although locally incorporated companies were making their presence felt

Even as late as 1955, it was reported that foreign insurers domination of the local
insurance market was as much as 95% of the total business transacted

After independence in 1957 however, nationalistic sentiments resulted in moves to

control the establishment of wholly-owned subsidiaries or branches of foreign
companies which had previously been allowed a free rein.

Local participation was negligible because of ignorance and lack of expertise

As a result, conscious efforts were made to introduce domestic insurance companies

The early 1960s witnessed the growth of quite a few life insurance companies, which
wound up soon after, because of their unsound operations and inadequate technical
background.

This unhealthy feature culminated in the Government's intervention through the

enactment of the Insurance Act, 1963 to regulate the insurance industry

Regulations the early days

Two early developments that have significant influence the growth of insurance in
Malaya:
1.Workmen's Compensation Ordinance 1952authorities require employers to insure
their workmen for liability arising from death or injury.
2.Road Traffic Ordinance 1958compulsory to have third party insurance for users of
motor vehicles.

After independence (1960s) theres a need for comprehensive legislation to cover the
whole insurance industry in Malaya.

S.W.Caffin,Commonwealth Actuary and Insurance Commissioner of Australia publish

Report Upon Legislation For Federation of Malaya to the government

Caffin Report becoming the base of drafting Insurance Act 1963.

4 major components of Insurance Act 1963:

control & supervision of insurance companies frameworks established office of

Insurance Commissioner

Provision for safe & sound insurance company e.g. minimum capital
requirement & approved actuarial pricing for life policy

Safeguarding the interest of policy holders

Accommodate national needs & aspiration e.g. assets be invested locally

The 1963 Act had since by super ceded by the 1996 Insurance Act. As at 1 January
1997, the Insurance Act 1996 is now the principal document governing the conduct of
insurance business in Malaysia.

Basically maintain the 4 main fundamentals of the 1963 Act.

To make the law more effective in ensuring solvency,more safe & sound insurers.

Abolishes the DGI office and replace by BNM.

Widen BNM scopef or action in managing the regulatory framework.

Supervision

Insurance industry in Malaysia is now governs by Bank Negara Malaysia under

Ministry of Finance since of 1988.

BNMs primary objective in its supervision over the insurance industry is the
protection of policy owner's interest

Towards this end, BNM has put in place various measures since 1988, to strengthen
the industry structurally and operationally