It was hardly unusual in May for a strong south wind to blow through the mountain passes leading into the town. At 10.00 p.m. on the tenth of the month, a small fire broke out in a nearby stable. Because of the wind, 150 houses extending to the middle of the town were ablaze within thirty minutes. By midnight, the firestorm had killed eight people and destroyed or damaged 793 buildings – two-thirds of the town’s housing stock. Two thousand people, nearly half of the town’s population, were left homeless.
When the smoke finally cleared, some called it a miracle that the death toll had not been much higher. The survivors nevertheless faced a monumental recovery challenge. How would they finance the massive cost of rebuilding the town? Most of the households involved (634) had no insurance. Forty percent of the others were underinsured, and few had any kind of coverage for the contents of their homes. The most exposed private insurance company found itself on the hook for one-quarter of all covered losses, which may well have forced it into bankruptcy had the regional government not agreed to absorb over a third of them. The owners of most of the insured buildings had purchased coverage from a public insurer authorized by that same government. Unfortunately, those policies had been badly mispriced. In the end, premium income and reserves proved wholly inadequate, and fiscal deficits mounted at both the town and regional levels of government.
The disaster would have left widespread misery in its wake no matter what. But a better and more comprehensive insurance system might have eased the pain, accelerated rebuilding, and promoted resilience. The town’s citizens now demanded such a system, and their leaders were pressed to deliver it soon.
The year was 1861 and the town was Glarus, an emerging industrial center in the eastern part of Switzerland, 70 kilometers southeast of Zürich.Footnote 1 The scale of its catastrophe soon made Glarus famous, but the event was hardly unique in pointing to the need for better economic and political instruments to help modern societies, increasingly industrialized, financialized, and concentrated, manage risks. Among others, great fires had destroyed much of London in 1666 and Hamburg in 1842. The famous Chicago fire came ten years after the one in Glarus. The only uncertainty across all of them involved timing. By the late nineteenth century, the danger of fire in tightly packed communities posed a well-understood risk, and the myriad challenges of resilient recovery could and should have been readily anticipated. Why were so many so unprepared?
The Glarus disaster brought into clear view key elements of the protection systems that modern societies needed. In its aftermath, the role of public authorities changed, reliance on techniques for mobilizing private capital rose significantly, and the interaction of markets and states across established borders became deeper and more intricate. The disasters in Glarus and elsewhere in the late nineteenth century spawned new demands for citizens and firms to take more responsibility for their own lives and to lengthen their planning horizons. They stimulated financial innovations that promoted postcrisis resilience, which often opened new social cleavages. They spawned adaptive networks of private insurance and reinsurance provision as well as new expectations that governments would support those networks in novel ways for the common good. In time, and often in the wake of even more damaging catastrophes, national governments around the world would seek to use the practices and technical language of insurance to facilitate structural political changes and also to rationalize limits on claims to fiscal support.
That same language would increasingly be used to frame agreements between and among governments that underlined mutual interests in the transformation of public authority without directly breaching established constructions of political autonomy. At the same time, an expansion of private and cross-border financial networks soon provided vast new sources of capital for insurance and reinsurance. Evolving insurance practices as well as insurance metaphors justifying deeper forms of integration gradually pushed forward consequential transnational experiments in risk assessment, disaster prevention, and emergency management. Today those practices and metaphors transcend political and conceptual frontiers and intimately link private and public sectors around the world. As humanity confronts more encompassing risks and deeper sources of uncertainty, future decisions to travel along the collaborative path they have opened will not come automatically. Both reasonable as well as pragmatic social and political choices will be required, not unlike the choices facing the leaders and residents of Glarus in the spring of 1861.
Of the sectors that make up what is commonly referred to as global finance, the insurance and reinsurance industries that began to grow rapidly during the late nineteenth century have arguably attracted the least attention in the fields of international relations and political economy. And what attention they have received has often justifiably focused on market weaknesses, high premiums charged, inadequate protection offered, and the questionable fairness of ultimate coverage.
I am seeking larger lessons from the history of insurance and its normative foundations. That means first understanding how this vital sector of contemporary capital markets developed after the discovery of risk and the inception of probabilistic reasoning. Intrigued by how the incipient industry and its justifying rhetoric used political ideas and adapted to changing political conditions, my aim is to examine the possibilities and the limits of transposing lessons from that history to the modern global political sphere where our species confronts many risks apparently no longer manageable within established territorial boundaries.
At its most basic level, insurance revolves around efforts to smooth the peaks and valleys of life. But it also forms a key element in the modern quest for risk reduction, crisis prevention, and burden sharing across diverse groups of people unrelated to one another. It is no coincidence that the governments of states have been engaged in that same quest, as their constituents have looked to them for protection from dangers and help in coping with the vagaries of life. In fact, many governments have lately adapted the ideas and practices of insurance to justify policies aimed both at indemnifying citizens and sustaining their confidence in the future. In light of the evident challenges posed for all governments by vast contemporary sources of risk and uncertainty, my overarching objective is to explore the roles that techniques and metaphors drawn from the history of insurance and reinsurance might now be playing in the quiet reconstitution of world order.
New social conventions and financial instruments arising from the discovery of risk began to spread around the world five centuries ago. They rationalized speculative impulses and fostered resilience by spreading the burdens of economic loss and providing resources for recoveries after disaster. They also often concentrated the gains resulting from novel processes of financial intermediation. It’s no coincidence that the modern state would emerge simultaneously with insurance and reinsurance markets. The social tensions of industrialization and what came to be called globalization demanded new political and economic buffers. Their interaction and incompleteness are part of a long and continuing story.
Today, states collectively face the challenge of adapting and designing anew politically tolerable instruments for governing some risks collaboratively, if they are to be governed at all. Market-led innovations in this direction typically give priority to efficient risk management. But when markets break down, other sources of support for resilience and recovery must be found.Footnote 2 In their absence, social and political structures can quickly become brittle, and then collapse in moments of crisis.
Since the end of World War II, the potential social costs of a widening array of risks, some measurable and some only plausibly imaginable, have loomed ever larger. In the midst of disasters, public authorities – often in complex alliances with private centers of effective power – have sometimes responded constructively and collectively. They have signaled explicit or implicit understandings about the practical necessity of mutual support and solidaristic adjustment. Those understandings have underpinned experiments aimed at recovery in the aftermath of emergencies and at the prevention of future emergencies. As we shall see, insurance practices and metaphors have proven to be most useful up to the point where plausible risk meets uncertainty. But even after that point, the notion of solidarity underpinning them has sometimes helped concentrate minds. Perhaps we have lately been more lucky than smart when systemic conditions have forced political and business leaders to gaze into the abyss, as happened when the global financial crisis of 2008 reached its most perilous moment. The reasonable urge not to push our luck lies behind the next generation of political experiments to transcend the impulse of self-reliance.
Risks that cannot be contained within national silos are clearly expanding. Some are connected, for example, with international financial intermediation, nuclear energy production, and the rapid development of artificial intelligence and digital technologies. Others are linked to the deterioration of natural environments, genetic engineering, and the spread of lethal pathogens. Emerging plans to govern such risks set the stage for new experiments in global political collaboration. Some of the most ambitious combine attention to complex public and private interests with the seemingly anodyne practices of insurance and related metaphors. They promise to aggregate capital, craft new social balances, and justify deeper cross-border and cross-generational transfers of opportunities, burdens, and responsibilities. Critical debates on the benefits and costs of such plans remain vital.
After the global wars of the twentieth century, pooling risks and sharing burdens – the basic logic of insurance – motivated the design of collaborative international institutions targeted at specific problems of collective action. Without abridging the legal doctrine of state sovereignty, they were intended to breach radical notions of political autonomy, share prosperity, and promote mutual security and social stability. These days, many of them appear to have reached the limits of their capacities. To be sure, some productive adjustments have occurred in the missions of organizations such as the International Monetary Fund, the World Bank, the World Trade Organization, and the World Health Organization, but their shortcomings in the twenty-first century cannot be ignored. Even so, they were not primarily responsible for various recent disasters – from the global financial crisis of 2008 to the Great Recession and trade conflicts that followed to the COVID-19 pandemic. They also did not cause the increasingly visible damage from climate change, biodiversity loss, and fragile technological networks. While some commentators see them as useful scapegoats, the organizations themselves are trying to adapt their mandates and increase their resources in light of changing risk parameters. But the world soon needs much more ambitious political instruments to successfully manage more complex and long-term risks as well as better ways to cope with new generators of uncertainty.
Against the backdrop of history, I assess the political terrain that today’s leaders have to traverse as they try to reform and design transformative governing arrangements on a global scale. The objective must be to share sustainably the burdens and benefits of change. My observation point is admittedly at a high altitude, or what the international relations scholar Barry Buzan calls the angle necessary to take in the big picture. I look back to highlight the conditions under which risk and the insurance techniques to manage it developed in the early stages of globalizing capitalism. After drawing analytical distinctions among the border-spanning risks encountered as that system advanced, I show how discrete insurance and reinsurance practices and related metaphors helped concentrate productive capital investment, propel innovations in the roles of government, facilitate societal resilience, and justify novel intergovernmental organizations. This leads to a brief exploration of the federalizing logic of insurance in the face of challenges that cannot be contained within national boundaries. I then provide detailed examples of how formal and informal public–private risk sharing experiments, some intergovernmental in form, confront the limits of complexity and time. Finally, without discounting the contemporary realities of great power rivalry and rising populist autocracy, I defend the idea that innovative collaborative policies – instinctive, pragmatic, and informed by the history of insurance and reinsurance – can help push those limits outward.
