How the Chinese invented insurance?

Over several hundred years, the Chinese civilization invented insurance.

Insurance is now a global industry that is bought all over the world. In fact, insurance has enabled the industrial revolution to spread from England to all four corners of the globe. If there is any kind of economic activity that requires risk-taking, insurance is crucial.

Without insurance, people are not going to invest as widely and as heavily as they would.

Most people would rather take the bird in the hand rather than the two in the bush. That’s just part of the human condition. That’s just how human nature works. Well, with insurance, people can take more risks and this enables industries to flourish. This enables a lot more people to get hired and this makes for a very progressive and technologically advanced society. Make no mistake about it. When it comes to economic progress, insurance must be part of the picture.

Did you know that the Chinese invented insurance in a purely agricultural setting? This was during a time where there were no heavy industries. This was the time where there were no complicated machines. Still, given that China’s a simple agrarian society, they still were able to come up with the concept of insurance.

It’s all about RICE

Several hundred years ago, Chinese merchants would hire or buy boats to transport rice harvested from one part of china and flowed it down to big city centers.

This is how Chinese rice traders made money. They would buy rice at a very low price from rice producing areas of China and then transport them to city centers where they can command a much higher price. They buy low and they sell high and keep the difference as profit. Sounds simple so far, right?

What complicates this neat deliquation is the fact that for every ten Chinese rice boats, sometimes, monsoons, typhoons, bad weather or even robbers and thieves demolish or destroy at least one boat. Accordingly, there’s a ten percent or higher loss rate. Chinese merchants then came up with loss rate. However, this loss rate is not constant. It’s not like every year one of ten boats will run into problems. Instead, that varies from year to year.

Some enterprising Chinese entrepreneur came up with insurance. What they would do is they would collect insurance premiums from all the rice boat owners to distribute the risks among all rice boat owners. They would collect this throughout the year. This means that they would sell insurance even during the dry season where there’s no absolutely no risk of loss. Obviously, they would also sell during the rainy season. What this practice did was that it enabled the rice ship owners to ply their trade with utmost confidence knowing that if disasters strike, they will be covered and best of all, it didn’t cost much for this peace of mind.

The fee was very small per boat but since there are so many boats covered by insurance, this spread the risk across a wide range of boats and this reduced the overall losses to the industry. This is how insurance was born and just as the Italians got the idea of pasta from a Chinese, the Chinese also taught Europeans the basic concept of insurance. It’s not like somebody went from renaissance Italy or Elizabethan England caught a bought down to the tip of Africa and went to China. That doesn’t work that way. Instead, insurance actually spread slowly.

It started in a southern China moved upwards to the northern imperial China and from there, it was carried by the Mongols to the Muslim territories. This is why insurance really flourished because the Silk Road was a very very busy trade route for eastern goods getting into Europe. From there, it spread to Europe. By the late Middle Ages or earlier, insurance was well established in Western Europe. We can all thank the Chinese for this amazing innovation.

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