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Insurance: Cost or Catalyst?

Since Lloyd’s was established in a London coffee house in 1688 by Edward Lloyd, the insurance industry has always had a property akin to gaming. In fact an insurance policy and a lottery ticket have a similar payoff property – little down for a potentially large, probabilistic payoff. While the concept of insurance predates Lloyd’s by many centuries, with Chinese merchants separating their cargo to avoid catastrophic losses, Lloyd’s succeeded in both industrializing and globalizing this vital industry. The original wagers were made on whether or not insured vessels would make their treacherous ocean journeys to their far flung destinations with their hull, cargo and crew intact. The original insurers at Lloyd’s, the ‘underwriters,’ would write their names on a sheet of paper indicating the percentage of their financial support for the downside risks of a particular shipment. When the shipment made the journey successfully, the underwriter received their premium – or prize – for absorbing the economic costs of any losses. If by contrast a ship faltered or came across some calamity or storm and was a total loss, the underwriter was on the hook for their given share of the loss. This property of betting and the human underwriting process remains largely unchanged at Lloyd’s. The broader change in the insurance market is whether this class of financial service remains a catalyst as it once was to seafaring traders or whether it has been reduced to a commodity, or merely a cost for an undifferentiated product category.

When you think of insurance as a catalyst, not unlike the original insured’s at Lloyd’s, the advent of a risk-transfer process enabled journeys and shipping routes that would have otherwise never occurred. The real or perceived risks associated with shipborne trade in the late 1800s heralded the industrialization of insurance, which in turn rode alongside the maritime traders from Europe to all corners of the world – in effect making bets of increasing size and sophistication that ships would make it.

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