Insurance

Abstract

Insurance is an ancient institution. It is impossible to reflect on evolutionary processes without recognizing the intrinsic role of insurance. Any species that relied on nature’s harmony and regularity and ignored its stochastic whims was soon extinct. The position adopted here is that uncertainty is one of the decisive determinants of individual behaviour. ‘Individual’ includes not only early and modern man, but also plants and animals. Furthermore, the response to uncertainty is both adaptive and dynamic. Martingale models are ideally suited to portray these responses. The goal of the individual is to maximize expected utility and for early man this was roughly equivalent to maximizing the probability of survival. In order to achieve this goal, he devised a variety of insurance mechanisms he established institutions that included a large element of flexibility so they could readily adjust to nature’s stochastic quirks. Insurance and the ensuing flexibility were key components of his decisionmaking. Aggregating these individual responses over the entire group reveals one critical aspect of the society’s culture. The individual quickly perceived that some of the most effective devices for mitigating uncertainty entailed cooperative arrangements.