Industry Perspective

A Brief History of Marine Insurance

The first formal marine insurance policy was created around 1350.
By: | March 6, 2018 • 14 min read
Topics: Marine | Underwriting

The ubiquitous intermodal box container was developed by Malcolm McLean in 1956. Opposed by longshoremen, railroads, and ship lines, its simplicity and efficiency prevailed, reducing unit costs for retail consumer goods to essentially nothing. But there is a hitch: the efficiency of a pre-packed container means contents are rarely inspected. Flammable or hazardous materials are supposed to be declared, but often are not. As a result, containership fires are not uncommon. The newest massive vessels can carry close to 10,000 40-foot containers, raising new questions about concentration of risk.

Financial history has most often been taken to be the history of money, banking and lending, and stock markets. Fair enough, but insurance deserves equal billing.

It is a widely held belief by insurance professionals and several researchers that marine insurance — hull and cargo specifically — are the oldest forms of insurance. Some date early forms of those to Phoenician traders whose heyday of trading colonies around the Mediterranean began around 1200 BC. The French port of Marseilles was among the farthest west, founded around 600 BC.

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Trade over those distances, with voyages lasting weeks and months, clearly involved risks greater than local trade, terrestrial or maritime. The history of business has been driven by the need to concentrate capital. That also means a concentration of risk. The history of insurance has been driven by the concurrent need to transfer and diffuse those concentrated risks.

The prize document in financial history is the oldest known share certificate, representing stock in the Dutch East India Company dated 1606. But marine insurance has that beat by two and a half centuries.

“The first formal marine insurance policy that we would recognize today as such was from 1350,” said Rod Johnson, director of marine risk management at RSA Global Risk, a major UK underwriter. He is also sits on the loss-prevention committee of the International Union of Marine Insurers.

“Marine insurance is based on agreed levels of uncertainty,” Johnson explained. “The owner of the vessel and the shippers of the cargo know where the vessel is supposed to go, but they don’t know exactly where it is or what it is doing at any moment. Neither do the insurers.”

Rod Johnson, director of marine risk management, RSA Global Risk

Those earliest formal policies built on the earliest attempt at international maritime law. According to Medieval Maritime Law from Oléron to Wisby: Jurisdictions in the Law of the Sea by Edda Frankot (University of Groningen/University of Aberdeen), “the most famous medieval sea laws are probably the Rôles d’Oléron (or Jugemens de la mer [Judgments of the Sea]), which are named after a small island off the coast of the medieval duchy of Aquitaine.” They are also known as The Rolls of Oleron.

“They were drawn up in French in or shortly before 1286 and contain regulations for the wine trade from Brittany and Normandy to England, Scotland and Flanders,” Frankot wrote. “The two oldest extant manuscripts containing the Rôles, both from the early 14th century, are of English origin. A mention of the laws in a report written in the 12th year of Edward III’s reign (1329) confirms that the laws were in use in England in the first half of the 14th century. In France, the Rôles d’Oléron had been adopted as the official sea law by 1364.”

If any ship, or other vessel, by any casualty or misfortune happens to be wrecked and perish, in that case, the pieces of the hulk of the vessel, as well as the lading thereof, ought to be reserved and kept in safety for them to whom it belonged before such disaster happened, notwithstanding any custom to the contrary. — The Rules of Oleron (c. 1266) Article XLVI, according to the Admiralty and Maritime Law Guide

There is evidence of insurance-like risk-transfer agreements from Amsterdam in 1598, Antwerp in 1555, and Barcelona in 1484. And indeed, Marine Insurance: Origins and Institutions, 1300-1850 (Adrian Leonard ed. 2016) cites a 1601 quote from Sir Francis Bacon (1561-1626) that marine insurance had existed from “time out of mind.”

While there it is happenstance that centuries-old ephemera such as stock certificates or contracts have survived to provide original source material today, court records are meticulously kept. According to Robert Merkin et al., Marine Insurance Legislation (5th ed. 2014) “There are reports of marine insurance cases coming before the English courts in the 16th and 17th Centuries, and it is clear from the early cases that the courts were prepared to enforce marine policies according to their terms.”

The early concepts in marine insurance sorted first by practice, then contract, inevitably litigation, and finally legislation, included the difference between human causes and natural causes (“acts of man” or “acts of God”). Even that, which might seem to be a bright line difference, quickly got murky. A storm is obviously an act of nature, but failure to steer away from a storm, or to secure the vessel against wind and waves, are just as obviously human failings.

It should also be noted that merchants and mariners are among the least likely business persons to resolve matters by litigation and legislation. Intervention by civil and criminal authorities leads to regulation and taxation, both of which limit profitability. The distaste was mutual, that is courts and governments felt the limitations of their jurisdiction and of their expertise in nautical matters and early global trade.

At first, all that was at stake was the capital invested, or sunk, if that became literally true. Shipowners could also take out liens or mortgages on their vessels, called bottomry bonds. Like an equity loan on terrestrial property, the asset could be seized for non-payment. But if the asset were lost, both the owner and the lender were out.

Insurance represented a different approach: contingent capital. It was pledged by underwriters, but not at risk, and could theoretically be extended indefinitely. Underwriters were literally those who signed their names at the bottom of the policy. The synonym at the time was subscribers. They in turn could lay off part of their risk to others to the point where any one loss, or even a group of losses, could be borne by the wider pools of contingent capital.

Interestingly, marine insurance in Europe developed as a way to protect capital, but around the coast of what are today India and Pakistan at roughly the same time it developed as a way to replace capital. Lands bordering the Indian Ocean long had a maritime trading system every bit as extensive as that around the Mediterranean or northern Europe. There was, however, significantly less capital. The loss of a vessel could be ruinous to a fisherman or trader.

Marine insurance is based on agreed levels of uncertainty. The owner of the vessel and the shippers of the cargo know where the vessel is supposed to go, but they don’t know exactly where it is or what it is doing at any moment. Neither do the insurers. — Rod Johnson, director of marine risk management, RSA Global Risk

Early on, British merchants and mariners struck a balance between private and public interests: the club. Groups of traders, shipowners, brokers and investors would pool their resources.

The key factor is that all members of the club were known to each other and usually pledged to do business only within the club. In insurance, the similar form is the mutual in which pooled contingent capital is pledged.

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“A succession of wars against France from the end of the 16th Century had grave effects for both merchant and war vessels,” wrote Merkin.

That “also led to the wave of financial speculation ultimately stamped out by the Bubble Act of 1720, [which] resulted in a prohibition on the carrying of marine insurance by companies other than the two chartered [ones], The Royal Exchange, and London Assurance.”

In February 1688, Edward Lloyd’s Coffee House in Tower Street was referred to for the very first time in the London Gazette, according to the official company history, corroborated by historical references. The article declared a reward for five stolen watches and encouraged anyone with information to contact Lloyd at his shop “in the City.”

To this day “The City of London” is the one-square-mile business center, equivalent to the Financial District in Manhattan.

Lloyd’s coffee house specialized in information about shipping. At this time, there were more than 80 coffee houses within the City of London’s walls, each claimed its own specialization. By the 1730’s, Lloyd’s was emerging as the spot for marine underwriting by individuals.

The American Revolution, followed by the Napoleonic Wars, did not see the dire effects on shipping business as had been seen in earlier naval conflict. That helped to substantiate the viability of contingent risk. Just as important, marine insurance proved to be profitable, attracting more legitimate involvement, business expertise and capital.

Costa Concordia, owned by the world’s largest cruise line Carnival, hit rocks close to the island of Giglio off Tuscany in January 2012, killing 32 people. The captain, who fled as the ship sank, was convicted of manslaughter. The salvage — righting, removing, and scrapping of the ship; as well as payment of damages and environmental restoration — cost $2 billion and took more than two years.

At least one reference dates the first publication of Lloyd’s Ships arrived in 1692 as a news sheet that became Lloyd’s List. The company itself cites 1734 as the initial publication of Lloyd’s List.

“The first edition of Lloyd’s List, one of the world’s oldest continuously running journals, was first published by Thomas Jemson,” according to the official company history.

“He used Lloyd’s name and not his own because by this time, the establishment had instant recognition in the shipping community and a dedicated audience who would pay for subscriptions. More than 300 years on, the paper still provides weekly shipping news to London and beyond.”

Returning to the question of natural versus human causes for loss, an important trial took place in 1764. It was over a ship built in France and insured by Lloyd’s. At the trial after its loss, the vessel was described as being in a “weak, leaky and distressed condition.”

The long case determined that a ship must be seaworthy before leaving shore, and that a loss would not have to be paid on an insured vessel “which suffered from a latent defect unknown to both parties to the contract.”

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Favorable rulings and profitability led to a lowering of standards. “Underwriters at Lloyd’s coffee house had enjoyed higher profits in the early 1760s, in part due to the Seven Years’ War, but as it came to an end, marine premiums returned to a lower level,” according to the company history.

This drove certain underwriters to more speculative lines — putting their names to other kinds of risks, including highway robbery and death by gin drinking — and Lloyd’s coffee house soon became notorious as a gambling den.

An extract from the London Chronicle of the time stated: ‘The amazing progress of illicit gambling at Lloyd’s coffee house is a powerful and very melancholy proof of the degeneracy of the times.’” A “new Lloyd’s” was formed by reform-minded members, supported by legislation and regulation.

In 1799 the economy in the German city of Hamburg was in dire straights, and City of London merchants raised a large amount of capital, mostly in specie, to keep its sister port city solvent. The consignment was loaded onto the Royal Navy frigate HMS Lutine, and insured by Lloyd‘s underwriters.

The Lutine was driven ashore in the Netherlands by a storm with the loss of all crew and cargo. In 1858 The Lutine bell was salvaged and hung from the rostrum of Lloyd’s Underwriting Room. Eventually, the bell would be struck when news of an overdue ship arrived — once for its loss, and twice for its safe return.

Just two years earlier the North of England Steam Ship Insurance Association (NESSIA) was founded in Newcastle upon Tyne in January 1856, according to the sesquicentennial history of the successor organization, the North of England Protecting & Indemnity Club.

NESSIA appears to have been among the earliest clubs founded to insure steamships. Although they had been in use for almost half a century, steamships were still a minority of the British merchant fleet, which then accounted for half of all the world’s tonnage.

Some shipowners, especially those in the north of England, bridled at the limited market for insurance, one of the two recognized commercial underwriters, The Royal Exchange and London Assurance, as well as the individuals and clubs in Lloyd’s. By 1824 the legal sanction for that triumvirate was ended, and mutual clubs began to grow.

The North of England Iron Steam Ship Protecting Association, its name reflecting the growing development of the steamship, emerged out of NESSIA in 1860.

“Today the P&I clubs, including 13 international groups, represent about 90 percent of the world’s P&I business,” said Nick Tonge, deputy director (correspondents) at North of England P&I. “There are a few commercial underwriters that get into P&I, and the business is still growing. Vessels are growing in size.”

The insurance ticket signing off on the loss of the Titanic. Courtesy: Willis Towers Watson

The most recent set of broad maritime laws pertaining to responsibilities of owners, masters, and shippers is the International Convention for the Unification of Certain Rules of Law relating to Bills of Lading, universally known as the Hague-Visby Rules.

The original Hague Rules were adopted in 1924, then updated in 1968 and 1979.

Interestingly, several major maritime nations “denounced” the original 1924 treaty; notably the U.K., the Netherlands, Finland, Sweden, Denmark, Japan, Australia and Hong Kong. All subsequently accepted the conventions.

Today only four nations refuse to acknowledge Hague-Visby: Paraguay and St. Vincent & the Grenadines stand by their ’24 refusal; Lebanon declined in ’24 and again in ’68. Egypt accepted in ’24 then denounced in ’68.

To be clear, Hague-Visby does not set insurance policy or practice. They are international conventions upon which individual insurance companies or clubs base their policy terms and conditions.

Marine insurance has now developed into about half a dozen distinct lines, some reflecting the original and timeless need to transfer risk for vessel and cargo, and some reflecting very modern perils. Tonge explained that P&I insurance covers primarily liability: crew claims, passenger claims, pollution, cargo damage and some collision.

Nick Tonge, deputy director (correspondents), North of England P&I

The other elemental form of marine insurance is hull and machinery (H&M), the vessel itself. That is handled largely by brokers in the commercial market.

The third line is freight, demurrage and defense (FD&D) that primarily protects charterers. Today, vessel owners tend to be investors that lease to operators on various types of time charters. “FD&D indicates what the owner is responsible for, and what the charterer is responsible for, but a lot of disputes still arise,” said Tonge.

The other three major forms of modern marine insurance are specialized. There is war-risk cover because acts of war are specifically excluded by both P&I and by H&M. There is also strike cover, to offset expenses arising out of labor disputes by stevedores, pilots and other trades essential to getting vessels loaded and unloaded. And, sadly, there is kidnap and ransom insurance.

For a business practice that dates back millennia, marine insurance continues to develop. The latest element is the newest in all of business: distributed-ledger systems, also known as blockchain technology. While these systems arose out of dodgy cryptocurrencies, it is just this year being put to legitimate commercial use by several consortia of steamship lines, underwriters and brokers.

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For example, a vessel is supposed to have war-risk cover if it will be passing through a designated war zone. Often insureds choose not to take on that cost, which can be considerable.

With satellite navigation and “smart” contracts using a blockchain, a vessel can effectively go on-risk if it enters a danger zone and off-risk when it leaves, with the premium pro-rated for only the actual on-risk time rather than the whole voyage.

But even with such digital developments, marine insurance retains its history. P&I contracts are still renewed on February 20 because that was the earliest date on which Tyneside traders could leave port and cross the North Sea to the Baltic and find it free of ice.

The Lutine bell is still rung at Lloyd’s to herald news of an overdue vessel.

And even on the inland seas of North America, “The legend lives on from the Chippewa on down, of the big lake they called ‘Gitche Gumee.’ … And the iron boats go, as the mariners all know, with the gales of November remembered.”

The author thanks Taryn L. Rucinski, supervisory librarian at the U.S. Court of International Trade, for her insight, diligence and cheerful support of in finding and providing research materials.

Reprinted with permission from the Winter 2018 Edition of Financial History Magazine (https://joom.ag/tYCY), quarterly  publication of the Museum of American Finance  (www.moaf.org). All rights reserved.

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Insurtech

Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”

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“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.

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“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?

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“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.