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 you to 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. Working hard, year ’round, they 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. If the ship when down or was damaged, he would do anything to ensure that he, his family, his company and his employee’s future wouldn’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 heard of a financial center in London located in, of all places, a coffee shop named Lloyds Coffee Shop, owned by the afore mention Mr. Edward Lloyd. Mr. Hunter traveled down to meet Mr. Lloyd and hopefully find financial security and peace of mind. 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, the concern he has for his woolens and the voyage itself, in such a way that the business men would see a way to help him and make a profit at the same time.
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 and the crew, etc. and offered to ‘underwrite’ a portion of the $10,000. He then spread the risk of the loss by going 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, all 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 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 were undamaged, he received the $10,000 and went on to be an investor in the development of the first ‘safety’ pin.