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History and evolution of
short-term insurance

The word insurance invokes images of lengthy policy documents and lifelong commitments – a complex modern-day necessity that protects us from potential misfortune. However, the idea of insurance has been around as long as mankind itself, and finds its origins in two fundamentals of humanity: mutuality and freedom.

Mutality

Mutuality in its purest form describes our human nature to share risk. It is both instinctive, like holding out your arm to prevent a stranger from walking into oncoming traffic, and pragmatic - knowing that the same would be done for us.

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An early example of mutuality dates back to the 18th century in early Cape Town: On the slopes of Devil’s Peak lay a small village known as Kanaladorp (later known as District Six). Its residents, while not wealthy, shared a strong habit of banding together by building and repairing one another’s homes. Their equal dependency on one another and their unique ability to share their risk effectively not only improved their own lives, but to benefit the greater good of the community.

And why would the people of Kanaladorp unite to help build one solid community? The answer lies in the fact that, as human beings we have always found ways to share our risk. It has travelled a long road with us and in modern South Africa it encompasses the values of humanity and ubuntu.

As society evolved – along with the advent of technology – we can now leverage mutuality to share risk not only with our friends, family and neighbours, but with people all over the world. We not only share risk to our homes, but to almost all our other assets, including our health and commercial value of our lives.

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Modern-day insurance is therefore a highly evolved and efficient manifestation of mutuality or risk-sharing, in the interest of an organised society and a good life for all.

Freedom

The second fundamental of insurance is freedom – the primal aspiration of all human beings. As human beings we act within a framework of risk and reward. For example, driving from A to B can be done quickly, but at more risk; or conservatively at reduced risk. As individuals we weigh up the benefits and risks and settle on our own area of comfort.

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Think about how often you text while driving. Most people understand that it is a relatively dangerous thing to do and still, having weighed up the benefits and risks, we find in spite of overwhelming evidence of its dangers, a number of people continue to do so.

A proper understanding of the risk we face daily, and knowing that portion of risk can be reduced to reward, can set us free from a relatively cautious life. That is why proper insurance gives us the confidence and freedom to tap into our ability to live our lives more abundantly – to enjoy that ride as a truly rewarding and fulfilling experience.

 


Development of insurance

Three major contributors impacted the evolution of insurance from a simple extension of basic human fundamentals to its current, more structured and efficient guise:

The development of currency

Urbanisation

Development of actuarial theory

Currency

The second fundamental of insurance is freedom – the primal aspiration of all human beings. As human beings we act within a framework of risk and reward. For example, driving from A to B can be done quickly, but at more risk; or conservatively at reduced risk. As individuals we weigh up the benefits and risks and settle on our own area of comfort.

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Urbanisation

The second contributor to modern day insurance was the growing concentration of assets as a result of urbanisation. Improved living conditions in Europe around the 16th and 17th century led to a population spike and a rapid development of towns and cities. But the growing concentration of assets in these centres also increased the risk of substantial financial loss through a single risk, such as fire.

The Great Fire of London of 1666 is a good example of such a catalyst for the development of insurance, and people started looking for more innovative and formal ways to share risk. The concentration of assets therefore became the ‘necessitator’ for the development of modern insurance. Perhaps the earliest form of modern-day insurance emerged from the booming maritime industry around that time. Trade ships were heading out to the new world in search of treasures, and the ship owners were understandably keen to ensure that their cargo is protected. They therefore offered up-front payments or premiums to potential punters willing to accept the risk of a portion of the cargo.

These early insurers would identify which assets they were prepared to take the risk on and then sign in the designated area at the bottom of the page – hence the term underwriting. Whilst these transactions represented a formal risk-sharing agreement, an important element of modern insurance was still missing. Premium calculations were based on experience and gut feel, and were generally very expensive.

Actuarial approach

A third and significant step towards modern insurance was the shift from a simple gut-feel hedging of risk to a scientific, actuarial approach to pricing risk. As the concept of insurance grew as a symbol of respectability, so did the demand for more affordable cover among an increasingly sophisticated society.

This theory proved that, once the probability and extent of risk could be measured more accurately, the price of insurance would drop dramatically, making it more affordable and accessible to a bigger portion of society.

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Modern-day insurance continued to evolve as more and more people embraced this shared mutuality in pursuit of freedom – in the interest of a good life, an efficient society and the freedom to live life to the full, knowing that they are properly protected against probable risk.