Insuring Against Disasters

Insurance policies go back to the ancient Babylonians and were crucial in the early development of capitalism

ILLUSTRATION: THOMAS FUCHS

Living in a world without insurance, free from all those claim forms and high deductibles, might sound like a little bit of paradise. But the only thing worse than dealing with the insurance industry is trying to conduct business without it. In fact, the basic principle of insurance—pooling risk in order to minimize liability from unforeseen dangers—is one of the things that made modern capitalism possible.

The first merchants to tackle the problem of risk management in a systematic way were the Babylonians. The 18th-century B.C. Code of Hammurabi shows that they used a primitive form of insurance known as “bottomry.” According to the Code, merchants who took high-interest loans tied to shipments of goods could have the loans forgiven if the ship was lost. The practice benefited both traders and their creditors, who charged a premium of up to 30% on such loans.

The Athenians, realizing that bottomry was a far better hedge against disaster than relying on the Oracle of Delphi, subsequently developed the idea into a maritime insurance system. They had professional loan syndicates, official inspections of ships and cargoes, and legal sanctions against code violators.

With the first insurance schemes, however, came the first insurance fraud. One of the oldest known cases comes from Athens in the 3rd century B.C. Two men named Hegestratos and Xenothemis obtained bottomry insurance for a shipment of corn from Syracuse to Athens. Halfway through the journey they attempted to sink the ship, only to have their plan foiled by an alert passenger. Hegestratos jumped (or was thrown) from the ship and drowned. Xenothemis was taken to Athens to meet his punishment.

In Christian Europe, insurance was widely frowned upon as a form of gambling—betting against God. Even after Pope Gregory IX decreed in the 13th century that the premiums charged on bottomry loans were not usury, because of the risk involved, the industry rarely expanded. Innovations came mainly in response to catastrophes: The Great Fire of London in 1666 led to the growth of fire insurance, while the Lisbon earthquake of 1755 did the same for life insurance.

It took the Enlightenment to bring widespread changes in the way Europeans thought about insurance. Probability became subject to numbers and statistics rather than hope and prayer. In addition to his contributions to mathematics, astronomy and physics, Edmond Halley (1656-1742), of Halley’s comet fame, developed the foundations of actuarial science—the mathematical measurement of risk. This helped to create a level playing field for sellers and buyers of insurance. By the end of the 18th century, those who abjured insurance were regarded as stupid rather than pious. Adam Smith declared that to do business without it “was a presumptuous contempt of the risk.”

But insurance only works if it can be trusted in a crisis. For the modern American insurance industry, the deadly San Francisco earthquake of 1906 was a day of reckoning. The devastation resulted in insured losses of $235 million—equivalent to $6.3 billion today. Many American insurers balked, but in Britain, Lloyd’s of London announced that every one of its customers would have their claims paid in full within 30 days. This prompt action saved lives and ensured that business would be able to go on.

And that’s why we pay our premiums: You can’t predict tomorrow, but you can plan for it.

Unenforceable Laws Against Pleasure

The 100th anniversary of Prohibition is a reminder of how hard it is to regulate consumption and display

ILLUSTRATION: THOMAS FUCHS

This month we mark the centennial of the ratification of the Constitution’s 18th Amendment, better known as Prohibition. But the temperance movement was active for over a half-century before winning its great prize. As the novelist Anthony Trollope discovered to his regret while touring North America in 1861-2, Maine had been dry for a decade. The convivial Englishman condemned the ban: “This law, like all sumptuary laws, must fail,” he wrote.

Sumptuary laws had largely fallen into disuse by the 19th century, but they were once a near-universal tool, used in the East and West alike to control economies and preserve social hierarchies. A sumptuary law is a rule that regulates consumption in its broadest sense, from what a person may eat and drink to what they may own, wear or display. The oldest known example, the Locrian Law Code devised by the seventh century B.C. Greek law giver Zaleucus, banned all citizens of Locri (except prostitutes) from ostentatious displays of gold jewelry.

Sumptuary laws were often political weapons disguised as moral pieties, aimed at less powerful groups, particularly women. In 215 B.C., at the height of the Second Punic War, the Roman Senate passed the Lex Oppia, which (among other restrictions) banned women from owning more than a half ounce of gold. Ostensibly a wartime austerity measure, 20 years later the law appeared so ridiculous as to be unenforceable. But during debate on its repeal in 195 B.C., Cato the Elder, its strongest defender, inadvertently revealed the Lex Oppia’s true purpose: “What [these women] want is complete freedom…. Once they have achieved equality, they will be your masters.”

Cato’s message about preserving social hierarchy echoed down the centuries. As trade and economic stability returned to Europe during the High Middle Ages (1000-1300), so did the use of sumptuary laws to keep the new merchant elites in their place. By the 16th century, sumptuary laws in Europe had extended from clothing to almost every aspect of daily life. The more they were circumvented, the more specific such laws became. An edict issued by King Henry VIII of England in 1517, for example, dictated the maximum number of dishes allowed at a meal: nine for a cardinal, seven for the aristocracy and three for the gentry.

The rise of modern capitalism ultimately made sumptuary laws obsolete. Trade turned once-scarce luxuries into mass commodities that simply couldn’t be controlled. Adam Smith’s “The Wealth of Nations” (1776) confirmed what had been obvious for over a century: Consumption and liberty go hand in hand. “It is the highest impertinence,” he wrote, “to pretend to watch over the economy of private people…either by sumptuary laws, or by prohibiting the importation of foreign luxuries.”

Smith’s pragmatic view was echoed by President William Howard Taft. He opposed Prohibition on the grounds that it was coercive rather than consensual, arguing that “experience has shown that a law of this kind, sumptuary in its character, can only be properly enforced in districts in which a majority of the people favor the law.” Mass immigration in early 20th-century America had changed many cities into ethnic melting-pots. Taft recognized Prohibition as an attempt by nativists to impose cultural uniformity on immigrant communities whose attitudes toward alcohol were more permissive. But his warning was ignored, and the disastrous course of Prohibition was set.