Insurance as we know it today started in Mr. Edward Lloyd’s Coffee House in London, England in the late 1600’s. To understand the beginnings I am going to introduce to you a fictional Mr. George Hunter who owns a woolen mill in north central England. Mr. Hunter has a wife, two children and his woolen mill with 20 employees. They all work very hard at the mill around the year and are justifiably proud of the beautiful cloth they produce. All of the bolts of cloth they made this year are going on a ship to America. This one order is very lucrative and has guaranteed their income and livelihood for the years to come. As such, Mr. Hunter is nervous about the dangerous sea crossing and would do anything to ensure that, if the ship goes down or is damaged and the cloth is lost, that he, his family, his company and his employees’ future don’t go down with it. That single large loss would effectively wipe out his financial future and sink his own little woolen mill “ship”.
He had heard of a financial center in London in, of all places, a coffee shop named Lloyds Coffee Shop owned by Mr. Edward Lloyd. He traveled down to meet Mr. Lloyd and hopefully finds financial security. When he got to the coffee shop he saw the men of finance sitting in booths, enjoying their coffee and talking. His challenge was to present his fear for his woolens and the trip in such a way that the business men would see a profit to be made in helping.
Mr. Hunter was to receive $10,000 for receipt of his woolen order when it reached America safely and damage free. He knew he needed this much to have a financially safe future. What he decided to do was to go to each of the booths and ask the business men if they, for a profit, would consider “underwriting” a portion of the $10,000 to be made, against the ship going down and the cargo lost or damaged. The men in the booth asked their questions about the boat, the experience of the captain, etc and offer to “underwrite” a portion of the $10,000. He then spread the risk of the loss and went to the next booth, asking and answering the same questions, receiving a yes or no from those “underwriters”, then going on to the next booth until the full $10,000 was fully “underwritten”. When done, he knew he, his family, his mill and his employees were financially safe. If the ship went down or the wool cloth damaged he would be indemnified, or “made whole” of his loss and have a great next year. Thanks to the “underwriters” at Lloyds of London.
Although Mr. Hunter and the specific situation is fictional, insurance has not changed. These are still the principals upon which insurance is needed, underwritten, risk accepted and a claim paid. A single, unexpected large loss that would sink any of our little ships if we didn’t have help.
Oh, Mr. Hunters’ ship landed safely in America, the woolens undamaged, he received the $10,000 and went on to be an investor in the development of the first “safety” pin.