Fundamentals of Risk Management

History of insurance
Insurance has a very long history that can be traced back to Chinese and Babylonian 
traders. There is evidence that marine insurance had become universal among the 
maritime nations of Europe by the mid-1300s. In more recent times, the Great Fire 
of London in 1666 gave rise to the modern insurance industry. In the 1680s, a coffee 
shop (Lloyd’s) opened in London, which became the meeting place for parties wish-
ing to insure cargoes and ships and those willing to underwrite such ventures.
Insurance developed rapidly during the 18th and 19th centuries. Prior to the
formation of incorporated organizations, insurance policies were signed by individuals 
whose names and the amount of risk they were prepared to assume were written 
underneath the insurance proposal. This gave rise to the term ‘underwriter’.
Modern insurance companies in the United States developed between the mid-
1730s and mid-1750s. The development was frequently in response to major disasters, 
typically large fires. There was a significant fire in New York in 1835, and the Chicago 
Fire of 1871 illustrated the costly nature of fires in urban areas and the need for
insurance. The Chicago Fire of 1871 is considered in more detail in the box on the 
next page.

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Risk response
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Some insurance arrangements were also associated with protection for dependants 
following the death of the money-earning member of the household. These arrange-
ments became more formalized with the establishment of friendly or benefit societies 
during the 19th century.
The development of liability insurance has a more recent history, spreading back 
perhaps only 100 years. Compulsory liability insurance is a requirement in many 
countries and it has an even more recent history of perhaps only 50 years. Compulsory 
liability insurance is normally restricted in most countries to employers’ liability
(or workers’ compensation) and motor third party.
At about 9 o’clock on the night of 8 October 1871, a fire started in a cowshed behind a 
Chicago home. It had been an unusually dry summer and the flames jumped quickly from 
house to house, then from street to street. The blaze raced along from the south-west to the 
north-east, enveloping the business district. Then the lumber capital of the world, Chicago 
was a city built primarily of wood.
Chicago’s business district was indeed impressive. With the development of the railroad 
and the economic boom that followed the American Civil War (1861–65), the city thrived.
But the fire raged through four square miles of the metropolis; it demolished factories, stores, 
railroad depots, hotels, theatres and banks. Flames burned ships in the Chicago River and 
consumed nearly all the city’s publishing and printing. In the end, property damage totalled
$192 million. Nearly 300 people died in the blaze and 100,000 were made homeless.
The rebuilding of Chicago was a tremendous endeavour. Insurance companies in the 
United States and Europe rose to the occasion, producing the sums they were obliged to
pay for the damages. Cities in the United States and abroad sent $5 million in relief funds,
and thousands of donated books replenished Chicago’s libraries. Before long Chicago began 
to attract entrepreneurs, businessmen and well-known architects, who found ways to profit 
from the reconstruction efforts.
Chicago Fire of 1871