From Roman Risk Pools to Modern Algorithms: The History of Life Insurance
Since September is Life Insurance Awareness Month, this is a good opportunity to review how life insurance started, and how it has evolved over the years. Did you know that the concept of shared risk management is centuries old? The evolution of life insurance is a story of human ingenuity, scientific advancement, and the drive to manage uncertainty. More interesting than you initially thought, right? And there’s no quiz at the end!
The Early History of Insurance
The concept of insurance as mutual risk management dates back to ancient Egypt, but the Romans formalized the practice by establishing Collegia Funeraticia, or burial societies, which pooled resources to cover members’ funeral expenses. This early form of mutual support underscored the importance of community in managing financial risks – a core principle in the insurance programs offered today by churches, banks, and professional associations.
Next, we’ll visit the seafaring people of Rhodes, who established maritime laws (Rhodian Laws of Jettison) to support their extensive trade networks across the Mediterranean. Around 800 BC, they introduced the principle of “general average.” This required all parties involved in a maritime venture to share losses incurred for the common good, regardless of whose cargo was jettisoned. General average was one of the earliest business risk management concepts.
The Romans incorporated many legal concepts, including Rhodian Law, into a compilation of legal thought called the Pandects. This document emphasized the principle of shared risk, which is the foundation of modern insurance practices. Now that you know the historical connection, let’s discuss the evolution.
The Development of Actuarial Science
Let’s return to our time machine and jump to the 1600’s. In 1662, John Graunt published the first Life Table, an analysis of London’s birth and death records. This became the statistical basis for understanding human mortality and predicting life expectancy, key components of the actuarial science behind life insurance.
A few years later, Edward Lloyd opened a London coffee shop that became a hub for shipowners, merchants, and other business owners. Together, they developed more systematic ways to assess risk and determine premiums, a major shift from the more arbitrary previous practices. They also professionalized the concept of underwriting. You guessed correctly – Edward Lloyd was the founder of Lloyds of London!
A discussion about the history of life insurance should recognize a couple of other pioneers. Edmund Halley was the first scientist (an astronomer) to apply statistical methods to analyze birth and death records. Actuarial analysis and professional underwriting are the financial fundamentals behind today’s life insurance programs.
William Gibbons was the earliest recorded life insurance policy recipient. His death less than a year later also caused the first life insurance dispute.
How Modern Life Insurance Policies Took Shape
Let’s jump to more modern times, including 20th-century positive product developments and regulatory oversight.
Have you heard of Universal Life Insurance? First introduced in the 1980s, it was a major industry innovation. With flexible premiums, adjustable death benefits, and an interest-bearing cash value component, universal life insurance gave policyholders greater control over their coverage and investments, but with more financial responsibility. Mutual insurance companies embraced this model and even offered dividends to policyholders as an incentive to participate.
Unfortunately, the popularity of the new products also exposed some issues, mainly due to the lack of regulatory oversight. For example, universal life insurance policies offered policyholder flexibility, but sometimes had complex structures and less-than-favorable terms. Since then, regulatory and industry reforms have been implemented to safeguard the interests of both insurers and their clients in an increasingly complex market.
Life Insurance Today – Are You Covered?
Welcome back to the 21st century! The insurance industry is still a dynamic and evolving landscape, helping provide an added level of financial security to individuals, businesses, and governments worldwide. Technological advancements, like artificial intelligence (AI) and data analytics, are revolutionizing the industry by enhancing risk assessment, pricing accuracy, and claims processing. The net result is a better customer experience for you and me.
After all the technological and regulatory changes, the core mission of life insurance remains the same – providing financial protection and peace of mind. If something catastrophic happens to you, life insurance can help pay off debts and provide financial security for your family’s future.
Are you and your family adequately covered? Please contact us to review your financial goals and look at the best available insurance options.
