Insurance in general

Insurance is a risk management tool designed to reduce financial risks of private individuals and enterprises. The principle of insurance is based upon the spread of risk. The idea behind it is that the random occurrence of events within one hazard unit becomes statistically calculable if this unit is big enough. In order to level out risks optimally, insurers create relatively homogeneous "risk classes" wherein, in accordance with the law of large numbers, the likelihood of variations from the statistical average will be inversely proportional to the number of risks.

Insurance is the equitable transfer of the risk of a large potential loss, in exchange for a calculable and regular payment (premium), creating thereby financial stability for individuals and/or corporations. Throughout the centuries, insurance has developed from mutual friendly societies of risk classes to modern commercial insurance companies. This progression is presented in the next chapter.

The history of insurance

Early methods of transferring or spreading risk were practised in the ancient times when the evolution of the commodity and money economy brought along the first forms of insurance - which were mainly applied for marine shipments. Such an early form of insurance was for example the so-called "foenus nauticum" in the 4th century BC, which was actually an insurance product hidden in a loan agreement. If a merchant received a loan to fund his shipment, he would not have to repay it should the shipment be lost in part or in whole as a consequence of force majeure. 
Before that, in the 9th century BC the principle of "Lex Rhodia de iactu" was invented. Merchants whose goods were being shipped together would pay a proportionally divided premium which would be used to reimburse any merchant whose goods were jettisoned during a storm or sank or was voluntarily handed over to pirates in order to save the ship. This concept is still applied in marine shipping and is called "general average" in marine insurance policies. The first insurance policy was issued in 1347 in Genoa, and it was also a marine insurance policy. The initial form of modern insurance is the so called "pooling and spreading" system where the loss sustained by one member of a risk class is divided among the other members; that is, "premium" payment takes place practically after the event. This principle was applied by sea merchants who gathered in Edward Lloyd's coffee house in London which was opened in 1688. They made agreements that if anyone's ship or cargo was lost or damaged (e.g., due to pirates' attack or storm), the loss would be divided among those signing the agreement. This method was later replaced by insurance policies underwritten by companies specialised in assuming risks (insurance companies). In spite of this fact, one can still find similar examples of the old pooling and spreading system (like the Hungarian Social Security), and risk spreading is still applied between insurers in the form of co-insurance and reinsurance. One of the markets for these products remained Lloyd's of London. The first Hungarian insurer was formed in 1843 and it was called "Mutual Insurance Society Against Hail", and in 1857 "First Hungarian General Insurance Company" was established. By the turn of the century about 50 Hungarian and foreign insurers worked in the country. Following the 2nd World War, in 1948, insurance companies were nationalised; one State Insurance Company was formed and operated in a monopoly until the 1st July 1986, when Hungária Insurance Company was established. Foreign owners have since gained a footing in the Hungarian insurance sector and today they dominate the Hungarian insurance market.