The History of Insurance - Part 4
In the last instalment, I explored Roman burial societies but we also know that the Romans practised bottomry – the practice of borrowing money using the ship itself (referring to the ship’s bottom or keel) as collateral. If the ship was lost during the course of the voyage then the creditor would lose on the loan; if the ship survived, the lender would receive the loan plus interest.
It may well be that a system of marine insurance arose out of bottomry; its use was widespread, due to the simplicity of the transaction but more importantly to escape the severe penalties which prevailed at that time for usury – the practice of lending money at unreasonably high rates of interest.
Such was the disdain of usury that in 533AD, the Emperor Justinian passed laws governing the maximum interest rates that could be charged. So, for example interest rates were as follows:
4% for an ‘illustrious’ person or one of higher rank
6% or 6.25% for an ordinary loan
4% for loans to farmers
3% for loans to churches and other pious foundations
8% for commercial transactions
However, for ‘Foenus Nauticum’ or bottomry, the rate could be as high as 12.5%. Following the decline of the Roman Empire, we enter what is sometimes called the Dark Ages reflecting demographic, cultural and economic deterioration within Western Europe and the relative scarcity of written records from the period.
Whether called the Dark Ages or Middle Ages, mediaeval trade and commerce rapidly expanded in Italy and the rest of Europe.
Arguably, an important factor in the expansion of trade and commerce in Italy and Europe were the Crusades (1096 onwards). Many new products were introduced to Europe via Italy which came from the so-called ‘Eastern lands’ through which the Crusaders travelled to reach Jerusalem.
Trade and Commerce in products such as spices – from Cairo and Alexandria in Egypt, Damascus in Syria, Baghdad & Mosul in Iraq – led to the development of trading centres along the trade routes which stretched from India, Persia and the Mediterranean (especially Italy) and then on to the major towns and cities of Europe.
The dominance of Italy as an economic power stemmed from their near monopoly in banking as they were the financiers to the church and, as such, huge amounts of taxes and dues passed through their hands before being channelled to the Vatican.
To achieve this, they created partnerships and a network of branch offices. Indeed, one of the oldest financial institutions, the Medici bank, was established along the lines of a holding company today.
They invented the draft bill exchange and developed double entry book keeping. They also carried out marine insurance in a form we would recognise today.
Giovanni Villani who was believed to have lived between 1280 and 1348 was an Italian banker, diplomat and chronicler who wrote extensively on Florence and, according to him, marine insurance originated in Lombardy in 1182.
Another Florentine merchant, Francesco di Marco Datini provides a further insight into the extent of marine insurance in the 14th century as he left some 150,000 letters, over 500 account books and ledgers, 300 deeds of partnership, 400 insurance policies and thousands of other commercial documents (these were discovered in 1870 during alterations which were taking place in the house in which he lived).
The book by Iris Origo, The Merchant of Prato is based upon the daily life of Datini and the goods which he insured included shipments of:
Wool from Barcelona to Pisa,
Silk from Pisa to Barcelona
Fortified wine to Southampton
Premium rates varied from 3.5% to 5% and 8% for the wine. In fact, this could be considered an excellent rate as the normal premium on such shipments was 12-15%.
In what, perhaps, could easily resonate today with some insurance markets, in one particular letter to his wife Datini notes that underwriters were not always trustworthy:
“for when they insure it is sweet to them to take the monies; but when disaster comes it is otherwise and each man draws his rump back and strives not to pay”
Commerce wasn’t restricted to Southern Europe, however. Northern Europe saw the rise of the Hanseatic League – a commercial and defensive confederation of merchant guilds and their market towns.
Growing from a few North German towns in the late 1100s, the league came to dominate Baltic maritime trade for three centuries along the coast of Northern Europe stretching from the Baltic to the North Sea and inland.
Hanse, later spelled as Hansa, was the Middle Low German word for a convoy, and this word was applied to bands of merchants traveling between the Hanseatic cities whether by land or by sea. It is still with us as part of the name Lufthansa, the German airline.
The league was created to protect the guilds’ economic interests and diplomatic privileges in their affiliated cities and countries, as well as along the trade routes the merchants visited.
The league succeeded in establishing additional Kontors (foreign trading posts) in places such as:
Bruges became an important centre of the wool trade and the first northern seaport to have a chamber of insurance. Indeed, so important was the port that a single tide could result in the arrival of over 150 vessels.
The city archives include a document dated 12th April 1377 which speaks of an insurance policy on a consignment of ‘silk and stuffs’.
The London Kontor, which came to be known as the Steelyard (der Stahlhof) was established in 1320, and stood on the site now occupied by Cannon Street station in the area bordered by Upper Thames Street, Allhallows Lane and Cousin Lane.
It grew into a significant walled community with its own warehouses, weigh house, church, offices and houses, reflecting the importance and scale of trading activity on the premises.
Apparently, the steelyard merchants carried out their business with the utmost secrecy and lived a monk-like existence in a state of seclusion.
Indeed, it has been said that the institution was similar to a monastery, the only difference being that instead of praying, the daily occupation was moneymaking.
No individual of the steelyard was allowed to marry or even to speak with or visit any person of the opposite sex – a breach of this law however slight or temporary was followed by immediate expulsion, if not severe penalties!
Whether or not the Steelyard merchants undertook insurance, it is likely that the “Pope’s merchants” or Lombards, after whom the famous street is named, first introduced insurance to England.
It is not until the 16th century that records exist of any specific marine insurance contracted by English merchants but the earliest English policies did follow the wording of the Ordinance of Florence of 1523.
Interestingly, the word ‘policy’ itself is derived from the Italian polizza meaning written evidence of a transaction.
In addition to the major Kontors, individual Hanseatic ports had representative merchants and warehouses – in England, this happened in:
Bishop’s Lynn (now King’s Lynn)
Yarmouth (now Great Yarmouth)
Incidentally, the sole remaining Hanseatic warehouse in England is located in Kings Lynn – St Margaret’s Lane, constructed around 1475.
It should be remembered that at the time, there were no insurance offices. Marine insurance was carried out via private transactions between individuals or as a sideline by merchants, bankers and money lenders.
However, the introduction of coffee in the middle of the 17th century would ultimately change the way in which insurance was transacted.
Make way for a man called Edward Lloyd …