Earlier Development of Forms and Principles of Insurance Law: Various Types of Risk-shifting Devices - TANZANIA

Insurance as we understand it today as a distinct discipline has passed through many years of changes and refinery to acquire the position and role [it] has today. The learned author, Florence Edler de Rover, contends that a genuine insurance was a product of commercial revolution. It is now undisputable truth that insurance emanated from maritime practices; though in its early days [it] was likened to game of chances such as wager and betting, as well as usury. This essay dwells in extenso on earlier forms and principles of insurance as subsumed under various types of risk-shifting devices, and major instances thereto.

Both Euro-centric and Afro-centric scholars place and trace the said earlier forms and principles of insurance as well as risk-shifting devices from primitive communalism to mercantile epoch.

The earliest form of insurance was mutual aid assistance. This form was based on solidarity and equality principle. Essentially, under this form, the losses (or misfortune) suffered by one member of a community were sponged by all members of his/her social group as a whole in terms of labour, and kind (materially) as well as moral support. Therefore, the risk (losses) of one individual was to be assumed by all members he or she belongs i.e the loss was shifted from an individual and thus distributed to other members of the community through equitable contribution principle. In essence, this form of early insurance existed in primitive-communal societies and therefore, acquires a position in insurance history as one of the early devices for risk shifting.

Later, due to the advancement of technology and commercial activities increased more risks both man-made and natural, thus another form of insurance emerged, namely, credit-based insurance. This was common in maritime era under static-feudalism. In this form, two kind of risk-shifting devices were common, namely, sea loans, and maritime exchange contract. The major instance of the two devices may be evidenced by proto-bottomry bills.

First, sea loans (i.e foenus nauticum), here an investor lent a given sum of money to a travelling merchant with the understanding that the loan would have to be repaid only if the ship returned safely to the port (i.e. sana eunte nave). Thus, the sea risks were transferred to the lender. However, the principle was that the lender assumed no responsibility for poor business management. In some instances, sea loans were likened to usury practices. Principally, the lender avoided heavy losses by entrusting his money to different merchants travelling in different ships. In instances where goods or ship was damaged or lost the travelling merchant (managing partner) had no residual liability toward the partner (lender) who had supplied the fund. Therefore, this type of risk-shifting device was credit-based in a sense that the supplied credit accrued super-interest upon safe arrival of the ship. 

The second type of risk-shifting device was the maritime exchange contract (i.e cambium nauticum). This device replaced the sea loan. In principle, it shifted the sea risk from the borrower to the lender, and it was contingent upon the safe arrival of the goods pledged as security.

Finally, money-based credit emerged as another form of early insurance. Though, it had some features of credit-based insurance, to a large extent showed a highly transformation. It emerged in mercantile capitalism (in transition to competitive capitalism). Here, the notable type of risk-shifting device was [an] insurance loan. Principally, insurance loan contained several elements present in real marine insurance. It differed with other types of risk-shifting devices in that the lender, here, was always a ship owner, and the borrower, a shipper. The major instance of this device was the respondentia bill. There are some notable features (principles) of marine insurance are found in insurance loan, namely; first, that the insured or borrower remained on land; second, the goods insured were sent unaccompanied. Finally, the loan was repayable not upon safe arrival of the ship (i.e sana eunte nave) but upon the safe arrival of the borrower’s goods (i.e mutuum ad risicum maris et gentium).

Generally speaking, around the year 1329, some inherent features and principles started to emerge of insurance. Therefore, specialisation in protection and assumption of losses acquired a central role. In some city states in continental Europe such as Barcelona (Spain), Venice and Genoa (Italy), creditors started to assume [marine] risks by demanding special charges or quasi-premium for assumption of a risk, this is exemplified by the Palermo insurance policies around 1350 in Italy. Later, merchant-bankers emerged followed by international merchant-bankers as early risk underwriter who essentially transformed tremendously the insurance business. In that context premium-based insurance started to emerge with some inbuilt insurance principles such as insurable interest and, indemnity. All in all, early forms and principles of insurance as well as early risk-shifting devices were the foundational mark to the current insurance practices and its inherent principles.    

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Reference:

Florence Edler de Rover (1945) Early Examples of Marine Insurance, in The Journal of Economic and Business History, PP.172-200