Extending the Theory to Meet the Practice of Insurance

Ament for thoughtful comments, and to Dan Gilbert for helpful conversations. We thank the participants at the Brookings/Wharton Conference on Public Policy Issues Confronting the Insurance Industry for thoughtful comments, and Richard Derrig for our cartoon. Doth not the wise merchant in every adventure of danger give part to have the rest assured? Nicholas Bacon, to the Opening of Parliament, 1559 Formal insurance arrangements date back at least to ancient Greece. Marine loans in that era advanced money on a ship or cargo. It would be repaid with substantial interest if the voyage succeeded, but forfeited if the ship were lost, much like the structure of contemporary catastrophe bonds. The interest rate covered both the cost of capital and risk of loss. 1 Direct insurance of sea risks, using premiums, probably started around 1300 in Belgium. The first known life insurance policy was written in 1583. By the end of the 17 th century, sea risk insurance had evolved to a competitive process between underwriters evaluating risks and meeting at Lloyd’s coffee house, the precursor to Lloyds of London.