Risk Management in Early Civilizations

Sumer (Mesopotamia)

Counting: 30,000 years ago, Tally Sticks were invented by early Homo Sapiens to keep track of events and interactions.

Credit: In 3,000 BCE, ancient Sumerians issued loans for grain and metal.

Babylon

Shipping Insurance: In the First Babylonian Empire, The Code of Hammurabi law (1750 BCE) stipulated the rules for loan repayment. In particular for charter parties, a.k.a "ship for hires".

The concept of bottomry was invented to transfer risk. Bottomry works in a similar way as modern catastrophe bonds. This was a last resort security for the master of the ship, in case anything went wrong on the journey. If urgent repairs were needed, they could dock at the nearest port and be reimbursed the costs.

Ancient China

Mutual Aid: In Ancient China, Guild Coverage provided social support and compensation in the event of an accident or natural disaster.

Ancient Greece (800 - 300 BCE )

Shipping and Maritime Insurance: In 800 BC, Julius Paulus published the Lex Rhodia, the Rhodes Maritime Code.

Ancient Greeks used contracts like the General Average to spread risks, particularly in shipping. All parties involved in a sea voyage share the costs of losses incurred for the common good. The insurance covered, for example, jettisoning cargo to save a ship.

Insurance Fraud: Taking bottomry against a ship and valuable cargo, setting sail with cheap cargo, and "scuttling" (deliberately sinking) the ship was a scam to keep the loan and the cargo.

An alternative scam was pretending that the ship had sunk, while actually hiding it in a distant port and giving it a new name and crew. See Demosthenes (384–322 BCE) speech "Against Zenothemis" where the shipper Zenothemis was accused of such insurance fraud.

Achaemenid (First Persian Empire) (550 - 330 BCE) Cyrus the Great of the Achaemenid dynasty founded the First Persian Empire in 550 BC.

Standard Money: In ~300 BCE, Alexander the Great conquered countries from Macedonia to the Indus Valley. He standardized coinage by distributing Gold minted with his image alongside Hercules and Zeus. Alex standardized money across the empire, creating a network of trade.

However, shortly after his death the Hellenistic empire fell to civil war.

Ancient Rome (100 BC - 300 CE):

Collegia Tenuiorum: In Rome, there were many kinds of collegia of people associated with trades like shoe makers and gladiators. Collegia Tenuiorum were known as "burial clubs", that covered the costs of dying, like funeral expenses.

Maritime Insurance: Roman law included contracts to share risks in joint ventures, particularly in maritime trade and shipping.

Early Chinese Imperial Age (221 BCE - 280 CE)

Middle Ages England (500 - 1500 CE):

Corrody: The Schism of 1054 split the Christian church into Western Roman Catholic and Eastern Orthodox.

In Western Europe, buildings called Monasteries were built and functioned as religious sanctuaries and community centers. A corrody was a lump sum paid to a monastery in return for board and lodging there for the rest of your life.

Islamic Golden Age (800 - 1350 CE)

Takaful: Since as early as 620 CE, the concept of takaful emerged. This was a mutual aid system where participants contributed to a fund to share risks collectively. Takaful funds were designed in line with Islamic principles forbidding abusive interest (riba) and excessive uncertainty (gharar).

Islamic Finance: Beginning in 800 CE, Islam saw a 500 year period of flourishing in mathematics, science, and culture that was centered in Baghdad.

Scholars were confronted with the Qur’an's requirement that Muslims keep records of their indebtedness as a part of their obligation to account to God on all matters of their life. Over time, Islamic Finance grew as a field of study that investigated how money should be ethically used and accounted.

In 820 CE, inheritance mathematics were solved by Persian polymath Al-Khwarizmi in his "The Compendious Book on Calculation by Completion and Balancing".

Fire and Farm Insurance: In Ancient Iran the order of Kayqobad (1200 CE) paid citizens whose house caught fire or whose crops were affected by drought.

European Age of Enlightenment (1600 - 1700 CE)

Probability Theory: In 1654, Blaise Pascal corresponds with Fermat about gambling problems. Dutch mathematician Christian Huygens, having learned of the topic from Pascal and Fermat, publishes the foundational work on Probability Theory in 1657.

Mortality Tables: In 1662, John Graunt does a Statistical Analysis of the London Bills of Mortality and demonstrates patterns in life and death of groups of people. In 1693, Edmond Halley analyzes deaths in 1687-1691 Breslau Germany by age. This analysis was used to calculate the price of a Life-Annuity at different ages.

First Insurance Company: In 1676, Hamburger Feuerkasse is founded as the first insurance company. They provide fire insurance.

Compound Interest is Understood: In 1685, Jacob Bernoulli discovers the mathematical constant $e = 2.72$ , the growth rate when interest is continuously earned and reinvested.

Insurance and Pensions

First Life Insurance Company: In 1705, William Petty lays foundational ideas for life insurance. The following year, the Amicable Society for a Perpetual Assurance Office is founded in London by William Talbot and Sir Thomas Allen, becoming the first life insurance company.

Life Insurance Premium Formula: In 1756, James Dodson publishes "First Lectures on Insurances" and develops a formula for life insurance premiums.

Racialization: In 1758, Carl Linnaeus created a hierarchical and color-coded system to classify humans and assign traits. Linnaeus laid out several proposed "species" of humans, including Americanus, Europaeus, Asiaticus and Africanus.

First Age based Premiums: In 1762, The Society for Equitable Assurances on Lives and Survivorships is established in London, pioneering age-based premiums and laying the foundation for modern life insurance practices.

First "Modern Actuary": In 1775 William Morgan is appointed as the first modern actuary at the Society for Equitable Assurances, serving until 1830 and contributing significantly to the profession's development.

Insurance Protects Slave Trade: As of 1790, the Slave Trade makes up 41% of British Marine Insurance

Gompertz Law: In 1812, Benjamin Gompertz publishes his "Gompertz Law of Mortality," describing the exponential increase in death rates with age.

Professionalization of Actuaries

First Actuarial Societies: In 1848 The Institute of Actuaries is founded in London. Two years later, The Actuarial Society of Edinburgh and the Faculty of Actuaries in Scotland are founded. These institutions focused on regional advancements in the field.

Regulation: In 1870, The Life Assurance Companies Act in the UK introduces regulations to ensure the financial stability of insurance firms, based on actuarial principles.

U.S. Actuaries: 1889: The Actuarial Society of America is established in New York City, marking the beginning of organized actuarial practice in the United States. 25 years later (1914), the American Institute of Actuaries is established, later merging into the Society of Actuaries (SOA) in the United States.

Insurance in Islamic World: As early as the 1890s, Islamic scholars begin forbidding commercial insurance because it contains Al-Gharar (uncertainty), Al-Maisir (Gambling), and Riba (Usury).

Life Insurance in China: In 1884, the New York Life Insurance Company starts doing business in China. In 1899 The China Mutual Life Insurance Company is founded later absorbed by Sun Life in 1924.

Statistics: In the 1850's, Florence Nightingale invents the Coxcomb Chart to analyze health and mortality data.

Ronald A. Fisher invents ANOVA, Maximum Likelihood Estimation (MLE), Tukey's Exploratory Data Analysis (EDA)

In 1927, Anders Hald expands actuarial science by incorporating statistical methods into insurance and risk management.

Andrey Kolmogorov “Foundations of the Theory of Probability,” published in 1933 provide a rigorous mathematical framework for Probability Theory.

Casualty Actuaries: 1921: The Casualty Actuarial Society is founded, focusing on property and casualty insurance.

Canadian Actuaries: In 1965, The Canadian Institute of Actuaries (CIA) is incorporated, becoming the national organization of the actuarial profession in Canada.

Modernization

Credit Scores: In 1956 the Fair Isaac Coporation is founded on the FICO score, a measure of consumer credit risk. 40 years later (1993), they create modern credit-based Insurance Scores for homeowners policies.

Computers: In 1968, the development of modern computing enabled complex actuarial calculations, transforming the profession.

Financial Mathematics: In the 1980s, risk theory and finance become integral to actuarial science, broadening its applications beyond insurance to pensions, investments, and enterprise risk management.

Actuarial Software: SAS is implemented as the data infrastructure for many insurance companies. Tools like GGY Axis (founded in 1989 in Toronto, Canada) for modelling life insurance risks are built. The Willis Towers Watsons suite of software products specializes in P&C risk modelling.

Big Data Analytics (BDA): 2000s: The rise of data analytics and machine learning begins to influence actuarial modeling. The integration of stochastic modeling and predictive analytics in programming languages like R and Python sets root. Modelling pipelines are version controlled with Git.

Global Standardization: In the 2010s The International Actuarial Association (IAA) began to expand its influence, promoting global standards in actuarial education and practice. In North America, attempts were made to merge the SOA and the CAS, but these efforts failed.

Transformation

Racial Justice: In the context of the Black Lives Matter Movement in 2020, the insurance industry reckons with its central role in slavery and racial inequality.

The NAIC publishes the report Milestones in Racial Discrimination with the Insurance Sector. Several CEOs of insurance companies issue apologies. In particular, Lloyds of London apologizes for their "shameful" role in the Atlantic Slave Trade.

In 2023, Black Beyond Data works with Lloyds to develop Underwriting Souls, an interactive archive and set of online exhibitions that examine the role of insurance in the trans-Atlantic slave trade.

Cyber and Climate Risks: In the 2020s, Actuarial science incorporates emerging risks such as climate change and cyber threats