Marine insurance is one of the oldest forms of insurance. In Europe, it traces its history to the Late Middle Ages and even predates life insurance, at least in continuous widespread use. In the 17th and 18th centuries, the insurance industry became increasingly sophisticated and even recognizable to modern eyes. Insurance marketplaces were formed, like that at Lloyd’s of London, as were some of the first insurance companies. These entities served shipowners looking to insure their vessels against the dangers inherent in sea travel but insurance buyers also turned to hull clubs and other mutual marine insurance schemes as well. These mutual insurers had their own advantages.
Marine insurance is one of the oldest forms of insurance, purchased for centuries by shipowners wanting protection from the many hazards of the sea, from storms to piracy. Marine insurance had existed in Southern Europe since the late 13th century. One of the more common forms was the ‘sea loan’ which combined debt financing with insurance. A sea loan would be made to finance a vessel but the debtor did not have to repay the loan should their ship fail to arrive safely at its destination.
Evidence of marine insurance is found in Northern Europe starting around 1350. By the 17th century, even Venetians were buying insurance up north and Amsterdam had become the most important insurance market in Europe. Shipowners based nowhere near Amsterdam or even belonging to nations at war with the Dutch would still choose to insure in that market.
Of course, not everyone used the services of insurance underwriters. Merchants often self-insured their cargo by spreading it across multiple ships and shipowners diversified by owning fractional interests in several ships rather than investing their wealth in a single vessel. Self-insurance did reduce the need for conventional insurance but the market for underwritten coverage was nonetheless growing; some of the first Dutch insurance companies were founded in Rotterdam in 1720 and Amsterdam in 1772.
In 18th century Britain, the Lloyd’s insurance market had a dominant position in marine insurance, which was still at this time the most commonly purchased form of insurance. Lloyd’s had started as a coffee house frequented by merchants, ship owners, and insurance underwriters. By the 1730s, underwriters active at Lloyd’s had turned the humble coffee house into an insurance marketplace, not a singular corporation but rather an assembly of private underwriters acting independently to assume insurance risk for profit.
In Britain, the incorporation of new insurance firms was banned by the Bubble Act of 1719. The existing firms, London Assurance Corporation and the Royal Exchange Assurance Corporation, were the only two chartered insurance corporations permitted thereafter. The legislation also benefited Lloyd’s by limiting the formation of new competitors using a corporate form. As a non-corporation, Lloyd’s underwriters could operate outside the duopoly. In any case, Lloyd’s continued to dominate the market; the two incorporated firms had just one-ninth of the market share of the Lloyd’s underwriters.
Besides through corporations and individual underwriters, there were other places from which protection could be acquired, namely through mutual marine insurance schemes. Some of these existed in the Netherlands. An ordinance passed in the Dutch city of Groningen in 1605 required members of the Groot schipper gilde or ‘Guild of Great Skippers’, who were typically shipowners and captains, to contribute to a mutual insurance fund called a gemeene bus upon setting sail. The required contribution would depend on the distance to their destination. Half of the fund’s collections would go towards poor relief and the remaining half towards captains ruined by poor health or the loss of a ship.
The first iteration of the insurance fund would not have made a captain whole upon the loss of a ship but would merely offer some financial support to him. Nor was this a novel creation, various Dutch guilds had already established such funds to aid members and their families should they become sick, infirm, or dead. Mutual insurance funds established for fishermen, called zeevarende beurzen, paid ransom money in the event members were captured by Spanish privateers.
In any case, while this kind of early mutual marine insurance fund was arguably just a charitable endeavor without the contractual specificity of a modern insurance scheme, this too came with time. A 1665 agreement to form a new gemeene bus seemed more well defined. There was now a schedule established to determine the specific payout in the event of a claim. Any member suffering the total loss of a ship or damages of at least 800 guilders, would receive 300 guilders; claims of less than 800 guilders would receive less and the first 100 guilders of damages had to be borne entirely by the insured party.
Over time, the program advanced still further. Minimum standards for good and capable vessels were introduced as an underwriting measure and a new coverage schedule featured varied premiums and coverage amounts for ships of different values and ages. Reflecting the greater dangers, a fifty percent premium surcharge was added for ships setting sail in wintertime. This is clear evidence of a more advanced underwriting and pricing of risk.
Vessels from Groningen were employed to carry locally harvested peat to Holland and northern Germany. Though their trade would take them to Amsterdam, they would nonetheless forgo insuring there, hence the reliance on the gemeene bus. Of course, there was a market for marine insurance in Amsterdam but Groningen’s skippers sailed to ports which Amsterdam-based underwriters were less familiar with, often leading to expensive and non-standardized coverage. Just as with past self-insurance practices, mutual insurance organizations were established to achieve lower costs, at least partly by possessing better knowledge of members’ situations.
While initially created by a local statute, mutual insurance schemes were also established voluntarily. In the 18th century, a group of shipowners in Groningen formed a new organization for providing mutual insurance, what came to be known as a ‘hull club’, at least in Britain. Rather than raise a fund that would sit in reserve, these shipowners agreed that upon any loss experienced by one among them, each of the members would pay ten guilders. Essentially, premiums would be paid ex-post rather than in advance of losses.
Why the members chose to establish this hull club when the city’s gemeene bus were open to them is not very clear. Perhaps those mutual insurance funds did not provide adequate coverage. In any case, the gemeene bus remained competitive options for those seeking insurance for 150 years until private insurance underwriters and brokers appeared in Groningen in the late 18th century. They would more or less disappear by the 19th century.
Hull clubs and other mutual insurance organizations provided members with worthwhile benefits, as illustrated by the longevity of the Dutch example. They offered insurance where gaps existed in the rest of the market. Whether organized by a particular guild or not, members shared a common trade; they thus knew each other and their vessels and were each very familiar with marine risks. Operations were also set up to be very simple, reducing the need to employ managers or underwriters with specialized knowledge. As non-profit ventures, the mutual marine insurance schemes could charge lower premiums. Further, members belonged to a close community, and typically a common guild, reducing the risk of insurance fraud.
Hull clubs were also established in Britain at the start of the 18th century. As in the Netherlands, they were not to be found in the capital but in smaller port cities. The British hull clubs were organized as a less costly alternative to the Lloyd’s market and like Lloyd’s, operated outside the duopoly of the London Assurance Corporation and the Royal Exchange Assurance Corporation. As at Lloyd’s, the hull clubs were not organized as corporations but rather its members were individually liable for any losses borne by the group; essentially, each member was operating as an insurer and an insured party at the same time; hull clubs comprised shipowners who agreed to act as each other’s insurer. The average club insured between 80 and 100 members, each an owner or part owner of at least one ship.
The hull clubs were often established with fixed lives, such as twenty-one years, provided that their membership did not fall below a certain level, sometimes twenty, at which point they would dissolve. To manage the club, a committee would be elected by members. Upon joining a hull club, new members would pay an initial premium, called an ‘advanced call’, and whenever an insurance claim was made, would pay any required further premiums, each a new ‘call’, to compensate the insured member. Coverage was usually offered under twelve-month policies. This sort of arrangement proved attractive. By 1819, there were twenty hull clubs in existence in Britain, mostly serving collier and fishing fleets in the northeast and southwest of England.
Like their Dutch equivalents, British hull clubs took risk reduction measures. The clubs set minimum criteria pertaining to the quality and value of ships being insured. Annual inspections were required and measures were in place to protect against intentional over-insurance of a ship, a sign of fraudulent activity or at very least a concerning moral hazard. As in the case of the Dutch clubs, the mutual insurance scheme would not cover all losses suffered by the insured. Instead, members had to self-insure a large percentage of any loss. For example, this self-insurance requirement was one-third of any loss in the case of one club in South Shields, near Newcastle.
Legislation enacted in 1824 opened up the British insurance market to greater competition. The law repealed the earlier Bubble Act of 1719 that had given the two insurance corporations a duopoly. The opening of the marine insurance market did bring about a decline in the old hull clubs but the concept of a mutual marine insurance club was hardly finished.
Protection and indemnity (P&I) clubs were formed in the mid-19th century to provide supplemental coverage on a mutual basis. Though the insurance market was by now more competitive than it had been, other insurers typically covered only three-fourths of any collision damage.
Further, other damages, such as those to fixed objects like jetties and quays, were also excluded from conventional policies. In addition to covering these gaps, the P&I clubs also covered liability for worker deaths or injuries which was made higher following passage of the Fatal Accidents Act of 1846. Still other legislation made passenger ship owners liable for additional service shortfalls ranging from inadequate lighting and ventilation of passenger decks to avoidable delays or cancelations of voyages.
This coverage was known in the trade as ‘protection’. Later in the century, the P&I clubs began offering ‘indemnity’ coverage as well, insurance covering any liability arising from a ship losing or damaging its cargo. The P&I clubs served a valuable role to their members, covering risks for which there was little or no other insurance offered in the market. In the late-19th century when the needs of larger and more specialized ships, like the first oil tankers, challenged mutual insurance schemes, P&I clubs began to enter into reinsurance and pooling arrangements with other clubs, further reducing risk and allowing them to cover more expensive vessels. This practice, along with their resilient market niche, surely helps explain why such clubs survive to this day.
Mutual insurance provided a third option for insurance buyers, just as distinct from insurance companies and private underwriters as those two options were from each other. Each of these three forms of insurance organization began to appear around the same time as each grew with the burgeoning insurance trade generally. However, that a mutual structure would work well for marine insurance is not obvious. Marine insurance involves covering very expensive vessels which were prone to being lost. Nonetheless, shortcomings in other parts of the market and the distinct advantages of mutual insurers made them appealing options even in marine insurance, both in the past and today.
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