From Mutual Aid to On-Chain Insurance 【Insurance Evolution and the Potential of web3: Part 1】
This week on insurance
Good morning.
I am mitsui, a web3 researcher.
Every Saturday and Sunday at noon, we update the web3 Basics Report. This week we will discuss Insurance.
1. Introduction
2. mutual aid from ancient times to the Middle Ages
3. insurance by fire extinguisher/community
4. Birth of the Modern Insurance System
5. contemporary insurance models and challenges
1. introduction
The perspective that "insurance = a mechanism for selling peace of mind"
Insurance" has become a common part of our daily lives. Life insurance, medical insurance, automobile insurance, fire insurance, and many other types of insurance are indispensable tools to prepare for any eventuality. These insurance policies transform our vague fears and risks into "peace of mind" and provide us with mental stability.
But how is this "peace of mind" provided? If we delve deeper into the essence of insurance as a "mechanism for selling peace of mind," rather than simply viewing it as a financial product, we realize that it goes beyond mere monetary exchange, and that it is imbued with the spirit of mutual support that has existed in human society since ancient times.
To understand the origins of today's complex insurance system, it is essential to trace its roots.
In the first part, we will examine the history of mutual aid, the origin of insurance, and how it evolved into the modern system of insurance. We will then clarify the challenges facing modern insurance, and in the second part, we will consider the new possibilities offered by web3 technology.
Tracing the History of "Mutual Aid" to Understand Modern Insurance
Mutual assistance is the act of helping one another and sharing common risks within a particular community or group. This is a basic social principle that has been practiced in various forms since humans formed societies. Not only families and relatives, but also tribes, villages, and occupational groups, human beings have always sought "friends to help them when something goes wrong. This spirit of mutual assistance has been refined over time and eventually sublimated into a sophisticated system of modern insurance.
For example, the risks involved in ancient commerce were far greater than we can imagine today. Once an accident occurred, such as plunder by pirates, shipwreck, or damage to cargo due to bad weather, the damage could be devastating to the merchant. To cope with such uncertainties, people voluntarily established mutual aid schemes. These practices, which existed long before the birth of modern insurance, can truly be called "the prototype of insurance.
2. mutual aid from ancient times to the Middle Ages
Merchant caravans (a system of communal protection of goods)
Merchant teams (caravans) traveling to and from ancient Mesopotamia and the Silk Road were constantly exposed to various dangers. Desert banditry, harsh natural conditions, disease, and other risks that could never be overcome when traveling alone. Therefore, it was common for several merchants to gather together and travel in a caravan.
This merchant corps was more than just a shared means of transportation; it also functioned as a risk-sharing mechanism. If one merchant's goods were stolen or damaged by bandits, the other merchants would cooperate to compensate for part of the loss. This can be seen as the germ of the concept of "co-insurance" or "reinsurance" in today's insurance.
This structure was established within a community based on trust, and was a very essential form of mutual aid, in that all participants shared each other's risks and supported each other in a spirit of reciprocity. They were able to avoid individual catastrophic risk and enable more sustainable commercial activity by spreading individual losses across the power of the whole.
Ancient Chinese and Babylonian "loss sharing" system (prototype of marine insurance)
Even in ancient civilizations, the risks of maritime trade were very great. In ancient China and Babylonia, the practice of "loss sharing" in maritime trade already existed. One famous example is the "maritime loan" provision in the Babylonian Code of Hammurabi, circa 2000 BC. This was whereby if a merchant or shipowner suffered a loss during a voyage, he would share the loss with another merchant or lender.
Ancient Chinese merchants also made "loss-sharing" contracts before setting out on a voyage to be prepared for any accidents that might occur. This was a prototype of "maritime insurance," so to speak, which jointly compensated for losses in the event of loss of cargo or sinking of a ship. Although these systems were not yet based on modern actuarial principles or probability theory, the basic idea of diversifying risk through the power of the group is common to modern insurance.
The structure of mutual aid organizations such as "Ko" and "Yorimoko Ko" in the Edo period
In Japan, the culture of mutual support has taken root since ancient times. One of the most representative examples is the "ko. The well-known "Ise-ko" and "Fuji-ko," which were used to accumulate funds for travel expenses to Ise or to climb Mt.
One such example is the "Fire Prevention Association" or "Water Prevention Association" to prepare for fires and disasters. Residents of a village or town would regularly pool their money and rice, and when someone's house was damaged by fire or flood, they would receive aid from the accumulated funds.
The "tanomoshiko" also functioned as a financial mutual aid organization. In this system, a number of people gathered together and periodically contributed a certain amount of money, which was then loaned to one person at a time by lottery or bidding each time. For those who needed funds for sudden expenses or business, this had the advantage of raising funds without paying interest. These schemes were built on a foundation of trust within a strong community based on blood and land ties, and can be said to be the origin of modern mutual aid associations and mutual aid organizations.
3. insurance by fire extinguisher/community
Edo Firemen's Union → Sharing the Fire Risk
The town of Edo was densely built with wooden structures, and fire was the most feared disaster. At that time, once a fire broke out, there was a risk that it could spread to the entire town in an instant. To cope with such risks, the townspeople of Edo formed a "fire extinguisher association," which functioned as a vigilante group. The firefighters, carpenters, steeplejacks, etc., were led by townspeople, who were assigned to their own posts and cooperated with each other to extinguish fires.
This firemen's association did more than simply extinguish fires; it also played a role in assisting those who had lost their homes to fire. The members of the cooperative would share the costs in advance, and in the event of a fire, they would jointly help the victims rebuild their homes, thus fulfilling the function of "fire insurance. The fact that the residents themselves took the initiative in sharing the risk and helping each other, rather than a specific specialist, strongly reflects the spirit of mutual assistance.
Fire insurance was born in the wake of the great fires of Europe
Even in Europe, large fires were a serious problem that threatened the survival of cities. In particular, the Great Fire of London in 1666 marked a turning point in the history of fire insurance. The Great Fire almost destroyed the center of London, leaving many citizens homeless. Witnessing this devastation made people keenly aware of the need to prepare for large-scale risks that cannot be handled by individuals.
This lesson led Nicholas Bourbon, an architect, to establish the world's first fire insurance company in 1681. He established a business model that is almost identical to that of modern insurance companies: statistically calculate fire risks, collect premiums, and pay out insurance claims to those who suffer losses from fires. This fire insurance company was revolutionary in that it collected premiums from an unspecified number of policyholders and allowed for broader risk diversification, whereas previous mutual aid had relied on trust relationships within communities.
Evolution from "union" to "company"
Mutual aid schemes were originally based on trust and geographical ties within specific communities and associations. However, as the industrial revolution and urbanization progressed, people's social ties became weaker, and a new mechanism was needed to cover a wider range of people. This is where the form of the "company" emerged.
Insurance companies have specialized knowledgeable professionals (e.g., actuaries) who statistically analyze risks and calculate fair insurance premiums. They have established a business model in which they collect premiums from an unspecified number of people, manage them as one huge pool (premium pool), and pay out insurance claims in the event of an accident.
This evolution has allowed for more efficient, large-scale risk diversification while maintaining the spirit of mutual aid. This has transformed insurance from being limited to a few communities to an infrastructure that supports society as a whole.
4. the birth of the modern insurance system
Lloyd's of London (started as insurance for sailors)
London played a central role in the development of the modern insurance system. One of the most famous is "Lloyd's of London": in the late 17th century, Edward Lloyd's Coffee House was a meeting place for shipowners, merchants, and investors. It was here that they exchanged navigational information about each other's vessels and entered into agreements to share the risks of their individual voyages. This practice eventually became organized and became the prototype for today's Lloyd's.
Lloyd's is not a specific insurance company, but a collection of individual underwriters (syndicates) that specialize in underwriting insurance.
When shipowners seek insurance for a voyage, they visit this coffeehouse to recruit underwriters (underwriters) to underwrite the risk. Underwriters underwrite a portion of the risk and are rewarded from a successful voyage, but are liable for the loss of the underwriter in the event of an accident. This structure reduces the risk of individual bankruptcy by spreading the risk among several underwriters, thus making large-scale maritime trade possible.
Industrialization and the Spread of Life Insurance in the 19th Century
As the Industrial Revolution gained momentum in the 19th century, the concentration of population in cities further weakened family and community ties. In addition, factory work was hazardous, and when a worker died of accident or illness, the family left behind was at increased risk of being left destitute. These social changes created a rapidly growing demand for life insurance.
Life insurance is a mechanism to financially cover an individual's mortality risk. Life insurance companies used statistics and probability theory (actuarial science) to accurately calculate mortality rates based on age and health status to determine appropriate premiums.
This has allowed many people to prepare for their family's future at an affordable cost. The expansion of life insurance not only stabilized the lives of individuals, but also had a profound impact on the economy as a whole. The huge pools of premiums collected by insurance companies became an important source of funding for infrastructure investments, such as railroads and factories, and helped fuel industrialization.
Life insurance in Japan during the Meiji Era (Dai-ichi Life Insurance, Meiji Yasuda Life Insurance, etc.)
The modern insurance system was introduced in Japan during and after the Meiji period (1868-1912), with Meiji Life Insurance Company, founded in 1881 under the leadership of Saigo Takamori's younger brother, Saigo Yukimichi, and Dai-ichi Life Insurance Company, founded in 1888, being the pioneers of modern life insurance in Japan. At that time, Japan was rapidly westernizing and actively adopted advanced social systems and financial technologies from the West.
These companies did not merely imitate Western systems, but popularized insurance in a way that was adapted to Japanese culture and social conditions. During the chaotic period following the Meiji Restoration, people's lives were unstable, and the importance of being prepared for contingencies was accepted by many. Initially, insurance spread mainly among the wealthy and intellectuals, but it gradually spread to the general public as well. As a result, life insurance became one of the important pillars supporting the family system and social stability in Japan.
5. contemporary insurance models and challenges
Insurance company model (premium pooling, risk diversification)
The modern insurance model essentially functions around an "insurance company". In this model, the insurance company manages the premiums collected from policyholders as a "premium pool" and pays claims from that pool.
Insurance companies also diversify individual risks by underwriting multiple policies. For example, in the case of automobile insurance, the premiums of a large number of policyholders who do not cause accidents are used to pay the claims of a small number of policyholders who do.
Insurance companies use statistical data and past accident cases to calculate premiums. This allows them to offer fair premiums to specific groups of policyholders and establish a sustainable business model. Furthermore, by raising investment income on premiums, the company secures profits and expands its business. This model is an extremely effective mechanism for efficiently distributing risk throughout society and supporting individual economic stability.
Challenges: opaque premium calculation, payment delays, information asymmetry between policyholder and company
Although the modern insurance model is highly developed, it also faces some deep-seated challenges.
First is the opaque premium calculation.
Insurance premiums are determined based on a vast amount of data held by insurance companies, but the calculation process is a black box to the average policyholder. Policyholders have no choice but to trust the insurance company, as it is difficult for them to determine whether the premiums they are quoted are truly fair. This opacity is often a breeding ground for distrust.
Second, late payments.
Insurance claims are paid to compensate policyholders for losses suffered, but the payment process can be complex and time-consuming. Particularly in the case of major disasters or complex accidents, insurance payments can be delayed, preventing victims from rebuilding their lives.
Third, there is an information asymmetry between the contractor and the company.
Insurance companies have experts and statistical data, while policyholders have only their own information. This asymmetry of information leads to insurance companies always having the upper hand. For example, in many cases, payment of insurance claims is denied because of complicated conditions or exclusions that the policyholder is unaware of.
'Insurance is necessary but distrustful' issue
These challenges have caused many people to feel that insurance is essential, but somewhat mistrustful. Insurance is supposed to provide "peace of mind," but opaque processes, complicated procedures, and asymmetric information can create anxiety and frustration.
Resolving this distrust and creating a more transparent, efficient, and fair insurance system is a major challenge for the future. web3 offers a completely new approach to this challenge. In the second part, we will take a closer look at how blockchain technology is reviving the ancient spirit of mutual aid in the modern world and fundamentally changing the way insurance is provided.
Disclaimer：I carefully examine and write the information that I research, but since it is personally operated and there are many parts with English sources, there may be some paraphrasing or incorrect information. Please understand. Also, there may be introductions of Dapps, NFTs, and tokens in the articles, but there is absolutely no solicitation purpose. Please purchase and use them at your own risk.
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mitsui
A web3 researcher. Operating the newsletter "web3 Research" delivered in five languages around the world.
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The author is a web3 researcher based in Japan. If you have a project that is interested in expanding to Japan, please contact the following:
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