In the days of the Roman Empire, which stretched from NorthAfrica and the Middle East to Scotland—the Romans hadn't quitesubdued those Norsemen yet—trade and commerce could travel theRoman roads in relative safety, although piracy was still common onthe Aegean and Mediterranean Seas, and insurance contracts oftenwere taken out on shipments, depending on the quality of thevessel.

The Justinian Code (Corpus Juris Civilis Iustinianus)included the earlier Rhodian law of jettison, that when some goodshad to be thrown overboard to save the vessel, those whose goodssurvived shared in the loss on the basis of the general averagevalue of what was sacrificed.

Remember that little phrase in the family auto policy of the1960s about paying “general average”? To many of us it was amysterious phrase, but it meant that if the insured auto was on aferryboat and other vehicles had be jettisoned to save the vessel,the FAP would pay the “general average” loss assessed to thosewhose vehicles were saved.

The closest today's personal auto policy comes to such coverageis the physical damage provision for “expenses for which you becomelegally responsible in the event of loss to a 'non-owned auto,'”but only if the insured has “other than 'collision' coverage” on anowned automobile. Considering that there is “no benefit to [a]bailee” or common carrier, this is far removed from the jettisontheory of general average.

The Rise of the Insurance Guilds

“The dissolution of the Roman Empire, about the 5th CenturyA.D., brought repeated invasions by Barbarians from the north andby Moors and pirates from North Africa, and resulted in thedisruption of trade and commerce in the Mediterranean World,” wroteHumbert O. Nelli, a historian and professor in the Department ofInsurance at Georgia State University in Atlanta in the June, 1976,issue of the CPCU Annals. “The growth of Christianity withits abhorrence of usury further handicapped trade and banking. Inthe period between the fall of Rome and the rise of the Italiancity-states, about the 12^th century A.D., the void waspartially filled by Jewish itinerant peddlers and money lenders andby Jewish merchants who filtered in fromByzantium andNorth Africawhere they were actively engaged in commerce.”

It may have been Scandinavian and Germanic gildas(guilds) that began to take the place of the Romancollegia of merchant shippers, providing primarilyfraternal benefits and burial duties of the older Roman and Greeksocieties, Nelli suggests. But it was the Italian city-states thatgave rise to the capitalistic commerce in the 12th and 13thcenturies. Marco Polo ofVenice had traveled east, and the Silk Roadwas opening trade with the Orient. Medieval crusades made Europeankingdoms aware of the wealth of the East, and there is someindication that it was the financing of pilgrims' travel to theHoly Land that gave the Knights Templar their wealth.

Risk Management in Medieval Europe

The feudal system common throughoutEuropein the Middle Ages wasa class system, but it lacked a middle class. There was thearistocracy—royalty, knights and high positions in the church—andthere were the serfs, the yeomen, sailors and peasants who servedthem from birth to death. When a king wanted a war, he called onhis noblemen to provide the soldiers, and the serfs took up theirpitchforks and spikes or bows and arrows and battled to the death.Unlike the well-trained and disciplined Roman Armies of earliercenturies, peasant armies just did as they were told. If wounded,they died. Livestock fared better. Mutual insurance on cattle wassold in Flanders as early as 1250.

Which is not to say that there were no hospitals; learning andwriting was maintained by monasteries and universities.Universities practiced which might be called medicine, adaptingknowledge from the Greeks who had learned under Hippocrates. Manymonks learned the healing arts as well, and every great city, fromParis and Bologna to Oxford and Cambridge had universities teachinga variety of sciences, including medicine. However, the science ofrisk was not generally among the subjects taught.

The idea of risk management was the same as in times before theRoman Empire: Build your city on a hilltop, and fortify it with awall. As long as Joshua didn't show up with that trumpet of histhat blew down the walls ofJericho, the city might escape invasionsby an enemy army or a dread disease. With noblemen fighting eachother for territory and the Italian city-states constantly at warwith each other, it was clear then, as now, that war was anuninsurable peril. Many war widows and orphans spent their days inconvents or monasteries, their only place of any refuge andsurvival.

So, who were the medieval adjusters? Most likely it was thetraveling friars. When a Franciscan friar came to town everyoneflocked to confession, for the penances they imposed werereasonable and helpful. It is no accident that in Walter Scott'sIvanhoe it was a traveling friar who took a starring role.While there may or may not have been a real “Robin Hood,” therewere certainly a few jolly Friar Tucks about the land serving thepoor and doing their best to teach the illiterates how to read.Some of the top scholars in medieval universities such as theFranciscan Duns Scotus in Paris reintroduced Aristotelian thinkingback into the early 14th century, perhaps leading to theRenaissance.

Still, it was not until the 14th century that an insurancecontract per se arose. “To protect themselves against fortuitousloss of their goods and ships and still evade the provisions of theusury laws and the prohibitions of a powerful church, the merchantshad to engage in subterfuge and use fictitious language in theircontracts of insurance,” Professor Nelli explains. Some recordsshow that burglary insurance was also available.

“Many modern insurance writers have accepted [one historian's]statement that the first true insurance contract is dated October23, 1347,” notes Nelli, “and [that it was] recorded intheGenoaArchives. Recently, however, an earlier contract, datingfrom February 13, 1343, has been found.” Such records of marineinsurance were primarily from the notaries of the city republics,mostly those on the east or west coasts ofItaly. ChristopherColumbus came fromGenoa; perhaps the Spanish royalty that financedhis westbound search forIndiapurchased insurance on the tiny fleetto hedge their bets.

By Land or Sea

The Renaissance was not limited to Florence and the Italiancity-states; in Paris Abbot Suger (Soo-jay) ofSte. Denis (San-Da-nee) improved on Romanesquearchitecture by opening the walls to light by using buttresses tosupport the walls and roofs of his abbey, causing Bernard ofClairvaux to declare it “an invasion of the Goths!” SoGothic it became, and the concept was adapted all overEurope. Yet commerce inEurope had one major problem: The Alps.There were a few mountain passes, so traveling merchants werelimited primarily to either old Roman roads or rivers, the Seine,the Rhone, the Danube and theRhine.

As the Italian concept of insurance guilds moved north, thenotion of contracts for loss of goods to natural or man-made perilstraveled with them. Consider, for example, the expanse of theHanseatic League fromGermanyintoScandinavia. While Christianmissionaries had perhaps tamed the Norse Vikings, they stillremained the primary sailors of the North, just as the Venetianshad been of the Mediterranean andAegean. But there were new threatsby the close of the Dark Ages.

One was the Black Death that depleted Europe's population.Another was the Islamic invasions and the fall of Byzantium to thecaliphs. Travel was a major endeavor. Many who set out onpilgrimages to holy places never made it. Thus one of the mainitems of trade became religious relics: if pilgrims couldn't get toa holy place, holy objects came to them.

The Impact of Religion on Trade

It was not only food and trade goods that became the merchandiseof the late Middle Ages, but also religious beliefs. Yet, even fora world without modern transport and communication new religiousideas and orders spread quickly. Giovanni Bernadone (of Assisi) hadbarely received permission from Pope Innocent III (the same popewho almost claimed England from Prince John while his brother, KingRichard, was imprisoned and awaiting ransom, leading to thecreation of the Magna Carta and parliamentary law) to formhis Order of Friars Minor than the Franciscans had spread all overEurope.

When an Augustinian theology professor in Wittenberg, MartinLuther, posted his 95 arguments against the Church in 1517 on thechurch door for debate, he set off a war between Catholics andProtestants that tore Europe apart, and still blazes in certaincorners of it. What the Reformation did to commerce is anotherstory, but it certainly had an effect on the sale of relics andindulgences used by Rome to finance Vatican construction andartistic projects.

The concepts of insurance had spread by this time to England,and with the discovery of the New World across the Atlantic and newroutes to Asia around the Cape of Good Hope in Africa, maritimecommerce was “off and running.” It had a new triangular pattern forBritish, French, Dutch and Spanish traders: Northern portstoSenegaland other African ports for slaves, then hauling theslaves to South American, the Caribbean or North America using theEasterly Trade Winds, and returning to Europe via the Westerliesand the Gulf Streamwith sugar, rum, coffee, cotton, tobacco andgold. But with the Atlantic crossings came risks, and risk-takingwas what underwriting and claims handling was all about.

In the next month, we will explore this further, with the riseof the ocean marine insurance business inLondon.