Coffee really is a wonderful thing. It tastes and smells heavenly, especially first thing in the morning. It enlivens us when we're sluggish, and bolsters our courage when we're timid. It sharpens our minds and makes our tongues more articulate. As comedian David Letterman once said, "Without coffee, I'd have no identifiable personality whatsoever." And-would you believe this? -without coffee, insurance as we know it may not even exist!
It's true. Lloyd's of London, the 324-year-old British insurance and reinsurance market, was founded in a London coffee house called Lloyd's back in 1688. A bunch of sailors, merchants, and ship owners were sitting around imbibing their daily dose of caffeine when all of a sudden somebody got a brilliant idea, which is no surprise-after all, that's what coffee is for.
The idea was this: in order to protect businessmen and seafarers from potential losses during their risky ventures and ocean adventures, numerous financial backers, called underwriters, would come together to pool and spread risk. In exchange for payment, known as a premium, these underwriters would literally write their names on a Lloyd's slip under a written description of the risks associated with a certain venture, such as a sea voyage during which shipwreck was a possibility. By underwriting the voyage, they would agree to accept some of the risk in exchange for a premium. And so underwriting-and insurance-was born, the product of a brainstorming session made possible, no doubt, by the stimulating power of dark-roasted beans.
Needless to say, times have changed since those 17th-century days, and underwriting has changed with them. Underwriters no longer simply scrawl their names on a Lloyd's slip, promising some responsibility for risk in the event of a sunken ship. Today, there are many types of underwriting, each with a unique purpose and process. These include securities underwriting, bank underwriting, real estate underwriting, forensic underwriting, and sponsorship underwriting. Of course, insurance underwriting still exists, and insurance companies have underwriters whose job it is to make important decisions that protect both the company and its clients.
Insurance underwriters must assess both the risks and exposures of potential clients. They are the ones who decide whether to accept a potential client's risk and insure him or her. If they feel it's worthwhile to insure a client, the underwriters then determine just how much coverage a client should receive, as well as how much the client should pay for that coverage.
Just like it did back in 1688, the act of underwriting involves measuring the potential risks associated with a client and determining the amount of money-or premium-to charge that client in order to insure that risk. This is no easy task, as underwriters want to protect their own insurance companies while serving clients at the same time. They need to establish premiums that correspond to the risks. Needless to say, this is serious business-the sort that is rarely accomplished without a few strong cups of coffee.
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