By FintechOS · July 19, 2022
6 minute read

Disaster! How historic events shaped property insurance

Disaster! How historic events shaped property insurance

The property insurance industry is constantly evolving, but it has often been catastrophes that propel insurance innovation forward. Let’s take a look back at the history of insurance, and how we ended up with the digital insurance market we have today.

Forms of the insurance industry have existed for thousands of years. A Babylonian monument has carved into its stone a basic cover policy stating that debtors didn’t have to pay back loans if a personal catastrophe made it impossible.

The development and expansion of commerce over the centuries made insurance a necessity. In the 18th century, a voyage across the Atlantic, for example, was still a gamble for any ship’s backers and led to the emergence of Lloyd’s of London out of Edward Lloyd’s coffee house in the 17th century.

The value of not only the vessel, but also the cargo was at stake. Without insurance, entrepreneurs eager to invest in the new world would have put their money in less-risky, less-profitable ventures. Businesses’ trust in a system of multiple underwriters removed much of the risk constraints to their enterprise.

Yet, it is precisely the times things have gone wrong for the insured that have shaped the industry, and with each new age and new technology, mode of living, or transport, doing business presents emerging risks that require the insurance industry to re-invent itself.

The birth of property insurance: the Great Fire of London in 1666

Much of the insurance industry has its roots in London, which has much to do with Britain being a maritime nation and the need to protect the value of expensive assets in transit. However, the Great Fire of London in 1666 was also a seminal moment in the development of the insurance industry, particularly property insurance.

The fire blazed for days, and the densely packed homes made of flammable building materials were a recipe for disaster. According to the London Fire Brigade, the cost of the fire was estimated to be GBP 10 million when London’s annual income was only GBP 12,000. Many people were financially ruined by the disaster, and debtors’ prisons became overcrowded.

The unprecedented loss led to the introduction of fire insurance, where people paid a fee to an insurance company to cover the damage. To protect the homes of their policyholders and reduce their own losses, the insurance companies employed up to 30 Thames watermen to put out fires, effectively establishing the first fire brigades (although the term was not used until the 19th century).

Property insurance altruism: the San Francisco earthquake of 1906

When a massive earthquake measuring 8.25 on the Richter scale struck San Francisco in the early morning of 18 April 1906, it shook the city to its core, and much of it burned to the ground. It is one of the most significant natural disasters in the history of the United States. According to the Insurance Information Institute, it produced insured losses of USD 25 million a the time, equivalent to USD 6.3 billion in today’s money. At least 12 American insurers went bankrupt, as well as an Austrian and German company. The earthquake wiped out the industry profits of the preceding 47 years.

Due to the underwriting innovator, Cuthbert Heath at Lloyd’s of London, it was a pivotal moment for the property insurance industry. As one of the leading earthquake underwriters, Heath confronted an enormous bill and famously instructed his local agent in San Francisco to “pay all of our policyholders in full, irrespective of the terms of their policies.” Heath’s actions were significant; while other insurers failed, trust in Lloyd’s of London soared as a market that honored its policies and delivered in disaster, backing the rebuilding of an entire city.

As a result of that event and its impact, the industry sought to understand the risks and impacts better, and developed more sophisticated building and risk-modeling practices to protect against the devastation of natural disasters. Heath’s principle is today reflected in the emerging parametric insurance industry, which you can learn more about in our previous article:

Parametric insurance: macro- and micro-insurance, part 1

Finely tuning the system: the Piper Alpha explosion of 1988

Piper Alpha was the world’s single largest oil offshore producer and accounted for around 10% of North Sea oil and gas production. The platform exploded in a ball of flames caused by a gas leak in July 1988. Of the 226 people on board, only 59 survived, while two crewmen of a rescue vessel also died.

The event resulted in a USD 1.4 billion insurance loss and presented the insurance industry with a considerable challenge, not just from the cost, but due to the complex nature of the risk. The claims process revealed severe weaknesses in the way insurers kept track of their potential exposures and led to procedures being reformed.

Piper Alpha presented Lloyd’s of London with a turning point, at the time the industry’s costliest man-made catastrophe. Lloyd’s of London struggled to quantify its exposures and led to more finely-tuned systems. The event urged the industry to develop a Realistic Disaster Scenario framework, which was introduced at Lloyd’s in 1995. Since then, Lloyd’s of London syndicates have had to demonstrate they have an accurate handle on risk accumulations to cover their exposures.

Modern property insurance: September 11, 2001

The consequences of the 11 September terrorist attacks in 2001 were felt the world over. When four passenger airlines were hijacked, two flew into the World Trade Center and one into the Pentagon, while the fourth crashed in a field in Pennsylvania, tragically killing nearly 3,000 people.

The insurance industry, as it is today has largely been shaped by what happened in 2001. Insurers had not envisaged events where classes of insurance, such as aviation, fine art, and property and casualty lines, could suffer major claims at the same time. Such unthinkable correlations are now calculated and measured and more adequately reinsured against.

Another issue was contract certainty; disputes over claims stemmed from old-fashioned practices when final policies were not in place ahead of the attacks. The culture of ‘deal now, detail later’ was overhauled.

9/11 claims did take years to be settled. Overall, USD 40 billion was paid out. The event prompted closer examination, not only of terrorist threats, but how the industry should adapt to incorporate better cover. There is now a more-defined market for terrorism cover where wordings are much clearer.

Property insurance industry innovation in the future

The lessons learned from the once-unthinkable happening are what make the industry stronger. With each event, the industry looks to build or restore trust with the promise to pay when the worst happens. That ability is dependent on the flow of timely and accurate information on risk, policy, exposure, and mitigation. Facilitating that flow of data, analyzing it, and reacting to it is critical to each insurer, and critical to the industry at large.

When the next disaster happens, a whole new wave of insurance industry innovation will inevitably follow. To ride that wave, you need to be agile enough to adapt to whatever the next phase of the insurance industry will be. That will require the right technology.

To find out what the FintechOS Northstar platform can do to upgrade your insurance offering, see our Northstar page.

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