Value and Capital Management: A Handbook for the Finance and Risk Functions of Financial Institutions

Chapter 8Property and Casualty Insurance

This chapter outlines the “rules of the game” (or generic strategies) and core competencies for creating value in PC insurance, beginning with a brief history and economic rationale of the industry.

History And Economic Rationale¹

The concept behind property and casualty insurance – sharing risks across a larger collective so that the burden is made manageable for an individual – is as old as human society; for example, early agrarian societies often committed to rebuild the home of a member in the event of fire or other catastrophe. Through such commitments, risks which were infrequent but catastrophic to an individual become manageable to the collective.

Modern insurance involving an upfront payment to protect against potential future losses is recorded in early history, especially with risks arising from commercial, maritime activities. One contract is recorded as early as 1750 BC in the Babylonian Code of Hammurabi: a merchant financing a shipment could pay the lender an additional premium to cancel the loan should the shipment be stolen or lost at sea. Similarly, in Athens c. 400 BC, a “maritime loan” provided merchant financing but repayment was cancelled if the ship was lost; the rates on these loans differed according to the time of year, evidence of risk-based underwriting and pricing.

Coverage of personal losses is also recorded very early: during the period of Achaemenian monarchs in Persia (550–330 BC), upon receipt and registration ...