The Birth of Insurance Contracts - The Ataturk Institute for Modern ...

commenda) because the high risk and cost initially involved in sea ventures made insurance
too expensive, thereby leading the merchant to buy as little insurance as he could, τ(y) = y ≥
0. Likewise, the model predicts the use of premium insurance, with τ(y) < 0, in response to
a fall in the insurance cost. In real truth, underwriters during the fifteenth century charged
much lower premiums than their counterparts from the twelfth and thirteenth centuries used
to obtained through sea loan and commenda contracts. The insurance rates varied widely
according to the type of vessel, the port of call, the state of war or peace, the season of the
year, and other circumstances, but insurance policies remained consistently cheaper than
the insurance rates paid above the safe interest on sea loans. As already mentioned, rates of
return on sea loans, repayable upon safe arrival of the ship, varied from 25 to 50 percent for
the duration of the voyage, while yearly interest rates on risk-free loans— although high—
only amounted to 20 percent, thereby implying an insurance cost from around 15 to 40
percent on sea loans. The premium paid during the fifteenth century for the safest voyages
amounted to a mere 1-1,5 percent and raised up to 20 percent for exceptionally risky ventures
(see, for example, De Roover, 1945, and Tenenti, 1991).
3. A decrease in the cost and/or risk of trading ventures would causes the transition from the
sea loan/the commenda to premium insurance
Evidence 1: According to Lopez, the sea loan (and the commenda) lost their popularity
when “commerce lost much of its adventurous and almost heroic features” (py lower and
y higher) and “tended to become a routine” (E[x] = px x + p¯x ¯x higher), 15 and wealth
accumulation from commerce reduced the former scarcity of capital (k2 higher, at least with
respect to k). 16
15 The quotations are from the great historian of the Commercial Revolution Lopez (1976, p. 97), who also noted
that “high risks and high profits were predominant in the early stages of the Commercial Revolution; they were
instrumental in forming the first accumulations of capital.”
16 That capital became relatively less scarce is indicated by the sharp drop in interest rates. During the twelfth
century Venice’s “common use of our land” established a 20 percent yearly interest on risk-free loans, subjected to
double penalty if payment was delayed and secured by a general lien on the debtor’s property (González de Lara,
2004a). By the mid fourteenth century average interest rates on commercial loans within Venice had declined to 5
percent (Luzzatto, 1943, pp. 76-79) and the 1482’s new issue of government bonds promised to pay 5 percent yearly
interest on perpetuity (Mueller, 1997, p. 420).
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