How the great fire of London created the insurance industry…(and moving towards a creative economy)

As usual good speech by Andy Haldane of Bank of England.

The key to his speech is that humans have managed to be very creative in response to the several challenges posed to them. The same approach is needed to the challenges posed by the 4th industrial revolution.

He points how humans reacted creatively to the Great Fire in London. There were 3 responses:

The response to the destruction caused by the
Great Fire of London is every bit as much its legacy as the Monument that stands by the banks of the
Thames. It is a remarkable a story of individual imagination and collective action – the self-same ingredients
that first enabled humans to break free from their biological chains.

One response to the Great Fire was the introduction of new fire laws and regulations. The first-ever building
regulations were after soon put in place, specifying the materials to be used when building houses and the
minimum spacing between them. This may not sound transformational now, but at the time marked a
significant rewriting of the social contract between government, businesses and households.

A second response, this time from the private sector, was to create a market previously missing entirely. In
response to the devastation, a market for insuring people’s homes was for the first time created. The first fire
insurance company, the “Insurance Office for Houses”, was set up in 1681 at the back of Royal Exchange,
close to my office. It was the inspiration of (of all things) an economist, Nicholas Barbon.

The idea was simple enough. By pooling risks across a number of households, both the insurer and insured
were provided with an extra degree of financial protection against fire risk. A problem shared was a problem
halved. The newly-installed rules and regulations around house-building reduced this risk further, by
protecting individually-insured households, and collectively-at-risk insurance companies, from correlated
conflagrations.

This risk-pooling idea caught on. The home insurance industry grew rapidly, first in London, then Edinburgh,
then across the UK. In 17th century Britain, home insurance was very much a creative industry. It was the
Fintech of its day. On the back of this, markets for other types of insurance began to flourish, based on the
same risk-pooling principle. Lloyds of London emerged in 1688. In the space of a decade, London became
the pre-eminent insurance market in the world.

And so it has remained. That first-mover advantage has locked in London’s dominance for 340 years.
Within a mile’s radius of Monument today are hundreds of insurance companies writing billions of pounds of
insurance contracts each working day. The Bank of England keeps an eye on this industry in its role as
regulator. The impulse for that creative agglomeration came from the destruction of the Great Fire.

A third creative response came during the 18th century. Until then, there was no public fire service in the UK.
Companies hired private companies to fire-fight or had their own fire service. The Bank of England was in a
particularly vulnerable position at the time, as one of the world’s largest paper factories. The Bank bought its
own fire engines and hired its own firemen to help protect it from going up in smoke.12

With time, it became clear it made no sense for everyone to self-insure against fire risk. This risk was best
collectivised through a municipal fire service – a “public good”, like lampposts and lighthouses. A public fire
service was introduced in Scotland in 1824 and in England in 1833.13 The Bank’s fire engines and firemen
were stood down. This particular public good also arose, with a lag, from the destruction of 1666.

From the ashes of the Great Fire emerged a new public infrastructure of laws, regulations and institutions.
That supported a new private infrastructure of contracts, companies and services. And this mass flourishing
created one of the world’s leading financial centres, a position London retains. The regeneration spawned
by the Great Fire set the economy and society – as well as the Bank – on an entirely different course.

Lots of similar stuff in the speech. Must read..

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