The Wonderful World Of Insurance

Imagine what it was like back in the old days. Before the new world was discovered. People had a hard time scraping together enough money to pay the rent, let alone sail across the ocean in search of places that may or may not be there. Most people thought they'd simply fall off the edge of the world, or be eaten by sea monsters, never to be seen again.

Think about all that was required to sail off on a mission that might very well fail. First you'd need a ship. Then you'd need a suitable captain with lots of experience. Then you'd need a crew, and plenty of equipment. And of course you'd need plenty of money. How else could you hire guys to spend a year of their lives on the ocean, knowing they may very well end up in the belly of a whale?

So where'd they get the money from? From the first insurance companies. After all, setting sail like that was a big risk. They needed some financial backers. Sure, there are stories of Christopher Columbus going to the Queen of Spain for the cash, but where do you think she got it? They had investors, bankers, and insurance companies.

The biggest, most famous company that bankrolled most of England's growth into an empire was Lloyd's of London. When ships set sail, they would calculate what the risks were, and what the potential rewards were. Then they would underwrite them in exchange for a part of the reward.

Say a company was sending a ship and a crew of to a land where they were reasonably sure they could develop some lucrative trade agreements. If the ship sunk, they'd be out a million bucks. But if they were successful, the income stream could be well into the hundreds of millions of dollars. This was a sensible investment for the insurance company. They'd put up the capital, and if they were successful, they would get a piece of the action.

Today, of course, it's a lot different. They aren't hoping to get some benefits, they are just hoping that the money they get in premiums is more that they'll pay out in claims. The more they know about the situation, the more statistics they've collected over the years, the better they can calculate the odds.

If they know that, on average, one person out of a hundred is going to make one claim a year costing an average of a thousand bucks, then they know how much to charge in order to protect their profits. That way, everybody is happy.

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