Over three centuries ago, Britain had just overtaken Italy to be the center of the world’s insurance trade and it nearly came crashing down. At the time, marine insurance was the largest insurance sector; it was virtually synonymous with insurance itself. The dominance of London’s insurers almost led to ruin as many new underwriters complacently entered the business during a period of elevated premium revenue caused by a concurrent war with France. When a single merchant convoy was intercepted during that war, resulting in the loss of dozens of ships, underwriters in London were in panic and many were driven to bankruptcy.
Lombardy to Lombard Street
Though London has been at the center of the insurance business for at least the past two centuries, marine insurance has its origins farther south, in Italy. It was in Palermo that the first known marine insurance contract was written over six centuries ago. The maritime city-states of medieval Lombardy, northern Italy, housed the first large market for insurance in the days before Londoners dominated the business. These centuries-old insurance policies were quite unconventional though, in that they were structured as loans. That said, they were loans whose payout depended on the occurrence, or rather the non-occurrence, of a covered event. These were called sea loans and they were much more akin to today’s insurance-linked bonds, like catastrophe bonds, than straightforward insurance contracts.
Under a sea loan, a lender lent money to a merchant shipping cargo by sea. If the ship sank, the loan was forgiven; only if it arrived at its destination would the borrower have to repay the loan. The sea loans combined credit risk and insurance risk; they were part loan agreement and part insurance contract. In places where lending at interest was illegal, the sea loans allowed lenders to obscure interest income as an insurance premium. Eventually, the religious authorities in Italy caught on and, following some abuse of the concept, restricted the practice. Afterwards, the center of the marine insurance industry migrated to Protestant London and the products combined under the sea loan were split in two.
Despite the differing practices in London, the insurance trade continued to be very Italian as many existing underwriters resettled in the industry’s new capital. The names of underwriters operating in London in the 15th and 16th centuries reveal that many were expatriate Italians, particularly on Lombard Street, which had previously been home to an Italian community of goldsmiths, hence the name. Such were the demographics of the industry that some policies were written in Italian even where the underwriters and insured parties were not Italians themselves. According to the research of Adrian Leonard, a Cambridge University academic whose work covers much of the history of marine insurance, Florentine law was even chosen as the governing law of some contracts signed in Britain.
In London, much like in Lombardy, merchants were often part-time insurance underwriters. Despite the differences between directing trading vessels and underwriting policies, this combination of professions made sense. Merchants best knew the shipping industry and the dangers posed by certain routes, cargos, crews, and captains. Underwriting policies also allowed merchants to diversify their risks and recoup the cost of insuring their own vessels. They acted as both buyers and sellers of insurance and this aligned incentives. A merchant who also wrote insurance was perhaps less inclined to file a fraudulent claim if it would encourage others to do the same against him.
Nonetheless, insurance underwriting gradually morphed into a distinct profession, separate from the trade it was protecting. The establishment of Lloyd’s of London, likely the most important institution in the global insurance business today, was crucial to the development of that profession in London. It was on the eve of the industry’s biggest disaster that Lloyd’s was founded at a Tower Street coffee-house in 1689; it soon relocated a block north to Lombard Street.
From its start, it was a market for marine insurers who frequented the coffee-house. At Lloyd’s, policies were not just underwritten though, they were traded. Lloyd’s created a secondary market for insurance, one where underwriters sold policies they had written to others. Historians today can track the premium demanded on a particular voyage for example; the premium generally fell as time elapsed without news of a wreckage. However, too much time passing without any news at all surely would make traders and underwriters nervous.
War in particular was especially sure to make underwriters anxious and premiums would always surge upon the start of any hostilities. Higher premiums provided insurers with more compensation for taking on risk but underwriters who had already written policies at lower rates were stuck with the off-market contracts while the sometimes months-long voyages they had insured were still underway. One of the costliest and most testing conflicts for London’s early insurance industry was the Nine Years’ War, also called the War of the Grand Alliance, which started in 1688, just two years after Lloyd’s was founded.
Coinciding with the Glorious Revolution in Britain, the Nine Years’ War began with French incursions in the Netherlands and the Rhineland. At sea, France’s navy had been growing rapidly prior to the start of the war and was certainly an intimidating rival for the navies of Europe’s other maritime nations. However, during the conflict, France saw itself surrounded by enemies that included seafaring countries with combined navies far larger than its own. As a result, the country increasingly resorted to employing privateers, private vessels given a commission to attack enemy ships. This was a cheaper alternative to building a larger fleet, an initiative that would divert resources away from the French army. Even the deposed English King, James II, exiled in France was said to have hired some privateers to attack the merchant fleets of his own former realm.
Hired privateers operated out of several French ports at the time, including Dunkirk, Brest, and Saint-Malo. Released British prisoners held in the latter revealed to their government the existence of thirty commerce-raiding privateers operating out of the port of Saint-Malo alone. It wasn’t just the privateers that heightened the danger to British merchants and their insurers, the French navy itself focused on disrupting the trade of its foes. The masses of hostile vessels meant that English merchant fleets resorted to operating in convoys with armed escorts.
One of the largest of these convoys set sail in 1693. This particular fleet, far larger than usual, included perhaps up to four hundred English and Dutch merchant ships en route to Smyrna in modern-day Turkey. They were to be protected by a combined Anglo-Dutch fleet. However, the protecting ships turned back once the convoy was judged to be sufficiently away from danger. Given the size of the convoy and the perils involved, the risk being transferred by underwriters back in London was massive and insurance did not come cheap. Due to the war, ships travelling to and from the Levant paid premiums of around 20% of any potential claim. Rates on the Smyrna convoy were higher still, at 25%, when the ships got underway.
Nonetheless, the convoy proceeded with the protection of a reduced force. Then, on the 27th of June 1693, the convoy encountered a French fleet of over fifty navy vessels off the coast of Portugal. This was far larger than the small twenty ship squadron that remained to protect the English and Dutch convoy. In the resulting Battle of Lagos, the Royal Navy squadron led by Sir George Rooke fled the scene of the fighting after engaging the enemy long enough to give the ships he was protecting time to disperse. Nonetheless, perhaps around ninety merchant vessels were sunk or captured by the French. By the time the remnants of the convoy arrived in Ireland, the insured losses amounted to around £1 million, or 2% of estimated English GDP at the time.
The defeat at Lagos was a military defeat that caused a profound political and economic panic. It prompted the resignation of a quite powerful English Secretary of State, the Earl of Nottingham. At Lloyd’s, the defeat caused the simultaneous payout on dozens of marine insurance policies. Though the rates they charged were high and most ships were not lost, the disaster exhausted the capital of many underwriters. It did not help matters that many new underwriters were drawn to the market due to the high wartime premiums. The reason for those rich premiums were now obvious to everyone as at least thirty-three underwriters went bankrupt and others were threatened by uncompromising creditors.
Some underwriters were able to compromise with the insured parties to reduce their liability. Insurers appealed for relief on the grounds that losses through acts of war were no reflection of their own neglect. However, holdouts were threatening many with bankruptcy. The result was an appeal for legislative action. The following year, the Marine Insurers Bill was put to the English Parliament. The legislation would have required that all creditors acquiesce to terms that were acceptable to at least two-thirds of their peers, thus preventing holdouts from driving underwriters into irrecoverable ruin. One of the underwriters named in the legislation was none other than Daniel DeFoe, then known simply as Daniel Foe, the future novelist who, at the time, was dabbling in marine insurance underwriting, with disastrous effect.
Regardless, the bill passed the House of Commons in the winter of 1694 but was voted down in the House of Lords on March 9 that year. The legislation was politically contentious, with opinion divided amongst the Whig and Tory parties. While the Whigs saw the disaster as a failure of military planning, many Tories in the Lords were resentful of London financiers unwilling to take a loss for the national interest. In the end, the underwriters were left unrescued and many were forced to abandon the insurance trade. At least one of them, Daniel DeFoe, found success elsewhere; his skills turned out far more fit for writing novels than insurance contracts.
The War of the Grand Alliance had major implications for English finance. Not only did the war lead to the insolvency of many of London’s insurance underwriters, it also contributed to the creation of Britain’s sovereign bond market and the Bank of England as the state looked for new ways to finance the war. Despite the challenges, the nascent Lloyd’s market survived and London remained at the forefront of the world’s marine insurance business and perhaps the entire insurance industry more broadly.
More from the Tontine Coffee-House
1. Leonard, Adrian. “Contingent Commitment: The Development of English Marine Insurance in the Context of New Institutional Economics, 1577–1720.” pp. 48–75.
2. Leonard, Adrian. “Gresham and Defoe (Underwriters): The Origins of London Marine Insurance.” Gresham College. Gresham College, 13 Mar. 2014, London.
3. Leonard, Adrian. Marine Insurance: Origins and Institutions, 1300-1850. Palgrave Macmillan, 2016.
4. Manuscripts of the House of Lords 1693-1695. Her Majesty’s Stationary Office, 1900.
5. “The Story of Sir George Rooke.” Fifty-Two Stores of the British Navy: from Damme to Trafalgar, by Alfred Henry Miles, Hazell, Watson and Viney, 1848.