Chapter 11: How Insurance Companies Make Money

History of Insurance

London Fire

A fire raged for four days in 1666, nearly destroying London, England. The Great Fire of London led to the formation of fire insurance. A physician who entered the construction business to rebuild the city also started insuring the homes he built against fire. His successful insurance business led others to get into the industry.

The Great Fire of London followed on the heels of a plague that had claimed the lives of over 68,000 people in the prior two years. The fire, started accidentally by the king's baker, destroyed 373 acres of the city. It lasted four days, destroying a section of the London Bridge and over 13,000 timber homes. It is said to have only killed four people, but the toll was likely much higher.

Once rebuilding got underway, lawmakers sought ways to prevent future catastrophic losses by fire. For example, they required that each quarter of the city be provided with 800 buckets and 50 ladders. Each home had to have buckets and participate in hand-to-hand bucket brigades. Another law paved the way for organizations to provide coverage for losses due to fire.

The first person to make use of this law was Dr. Nicholas Barbon. He was actively involved in rebuilding the city. At some point, he realized he was creating wealth in property that could burn in another fire. This led Barbon to create "The Insurance Office" in 1667. Other insurance companies were soon established, with each employing its own firefighting crew. They would only work to save buildings the company insured. This eventually led to the creation of municipal fire departments that save buildings regardless of what company insured them—if any.