Historically Speaking: Insuring Against Disasters

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

The Wall Street Journal, February 21, 2019

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.

WSJ Historically Speaking: ‘A Brief History of Brinkmanship’

ILLUSTRATION: THOMAS FUCHS

In 1956, Secretary of State John Foster Dulles, explaining how America could use the threat of nuclear war in diplomacy, told Life Magazine, “The ability to get to the verge without getting into the war is the necessary art…. If you try to run away from it, if you are scared to go to the brink, you are lost.” President Donald Trump recently seemed to embrace this idea with his warning that if North Korea made any more threats to the U.S., it “will be met with fire and fury like the world has never seen.” Continue reading…

WSJ Historically Speaking: Juries, From the Ancient Athenians to ‘12 Angry Men’

A scene from the 1957 version of ‘12 Angry Men’: From left, John Fiedler, Lee J. Cobb, Henry Fonda, E.G. Marshall, Jack Klugman, Edward Binns and George Voskovec. PHOTO: EVERETT COLLECTION

On jury duty this month, I’ve had plenty of time to reflect on the meaning of the 1957 film “12 Angry Men.” Law schools still use the 60-year-old courtroom drama about a biased and easily swayed jury as a teaching tool. The question remains: Does the movie prove or disprove Mark Twain’s characterization of trial by jury as “the most ingenious and infallible agency for defeating justice that human wisdom could contrive”?

Jurors are all too human, something the ancient Greeks tried to mitigate by allowing some jury panels to have 1,000 or more citizens at a time. To prevent malicious plots and ensure a broad mix of people, every juror received half a drachma a day—enough to feed a poor man and his family. But such precautions failed to save Socrates from his enemies in 399 B.C. An Athenian jury, egged on by an anti-Socrates faction, convicted him of “impiety” and “moral corruption of the young” by a majority of 280-221. Continue reading…

WSJ Historically Speaking: When the Enemy Is at the Gates

When the Enemy Is at the Gates

ILLUSTRATION: THOMAS FUCHS

After a rebellion erupted in 2011 against Syrian President Bashar al-Assad, the city of Aleppo found itself split in two. Today, with help from Russia and Iran, Mr. Assad’s regime is laying waste to rebel-held parts of Aleppo. Mosques, museums, hospitals and schools there now lie in ruins. The image of a stunned, wounded little boy covered in soot and blood held the world’s attention briefly in August, as the siege went on. Many classrooms have moved underground, but the fact that schools continue to operate at all in Aleppo testifies to the determination of parents and educators to keep alive both civic values and culture.

Sieges have often drawn out such higher ideals and achievements, even as they show humanity at its brutal worst. Continue reading…