Collection of the Massachusetts Historical Society shipping, created a tremendous increase in the demand for marine insurance, and it was clear that in the likely event of a war, the private underwriters in America’ s brokerages would likely be hard-pressed to cope satisfactorily with this surge in demand. In response, they began to innovate with new organizational forms to expand their underwriting capacity.
In 1783, for example, a group of Boston underwriters formed an arrangement in which each agreed to take a one-20th share in any policy signed by any three of them. In 1793, a Boston broker organized a syndicate of 13 underwriters according to a curious arrangement in which each agreed to take £ 100 lines, in alphabetical rotation, on the risks underwritten on their behalf by the broker until each risk was completed, each new policy being begun by the next underwriter in turn. These arrangements reduced costs by obviating the need to find a new group of underwriters for each policy, but they also meant that underwriters were delegating their underwriting decisions to others rather than individually evaluating each risk. This naturally raised the possibility that others, despite lacking the mercantile experience necessary to judge risks themselves, might also get in on the act.
The emergence of insurance corporations was therefore a natural development. Britain’ s Bubble Act of 1720 had prevented the formation of marine insurance corporations during the colonial period, but independence freed American underwriters from these restrictions. Corporations faced the problem of balancing their underwriters’ incentives to induce profitmaximizing underwriting decisions, and of aligning the interests of owners( shareholders) and managers. In contrast, the
Receipt for the payment of an insurance premium from the Ezekiel Price papers, dated November 22, 1764.
private underwriters faced no such agency problems because they underwrote on their own account: the people taking the risks were also the ones making the underwriting decisions.
But corporations had two major advantages. First, they were perceived as more secure insurance than private underwriters because they held a large, securely invested capital fund dedicated solely to the payment of insurance losses. Equally important, the corporate form also enabled wealthy individuals without detailed knowledge of mercantile affairs to fulfill an underwriting function by buying shares and entrusting the underwriting decisions to experts, thereby expanding the scope of risk sharing beyond the merchant community.
The first American marine insurance corporation was established in Philadelphia in 1792( chartered in 1794), and many others followed during the subsequent decade, including the Boston Marine Insurance Company, established in 1797( chartered in 1799). Boosted by high demand and wartime premiums, the corporations quickly proved highly profitable. Yet these corporations came into being at a turbulent time. Tensions with France ultimately culminated in the undeclared“ Quasi-War” of 1797-1800, fought during a period of political chaos in the West Indies in which French privateers captured hundreds of American vessels( later giving rise to the“ French spoliation” claims). The premium on one-way voyages to the West Indies rose from a range of 3 – 6 % in the fall of 1796 to as much as 15 – 20 % in the summer of 1797 and reached 25 % by 1798.
The crisis of the Quasi-War catalyzed the creation of the US Navy, which was
deployed to capture French privateers, notably culminating in the capture of the French frigate Insurgente by the US frigate Constellation in February 1799. It also brought into clear focus the advantages of the corporate form for conducting marine insurance, and it accelerated the transition from private to corporate underwriting. While private underwriting persisted alongside corporations for a time, by the early 19th century, the inexorable dominance of the corporate form was assured.
Chris Kingston is the Richard S. Volpert’ 56 Professor of Economics at Amherst College. He holds a BA in Mathematics from Trinity College Dublin and a PhD in Economics from Stanford University. His research uses a combination of archival evidence and game theory to explore how the institutional organization and governance of the marine insurance industry evolved in Britain and America during the 18th and early 19th centuries.
Sources Boston Athenaeum: Benjamin Pollard papers( Ms. L49); Ezekiel Price papers( Ms. L50)
Farber, H. Underwriters of the United States: How insurance shaped the American founding. University of North Carolina Press. 2021.
Fowler, W. M.“ Marine insurance in Boston: The early years of the Boston Marine Insurance company, 1799 – 1807” in Entrepreneurs: The Boston Business Community, 1700 – 1850, C. E. Wright and K. P. Viens, Eds. Massachusetts Historical Society. 1997.
Hardy, E. R. Reports of 1888 – 1900, With an account of the Early Insurance Offices in Massachusetts, from 1724 to 1801. Insurance Library Association of Boston. 1901.
Kingston, Christopher.“ Marine insurance in Britain and America, 1720 – 1844: A comparative institutional analysis.” Journal of Economic History 67, 2. June 2007.
Kingston, Christopher.“ Marine insurance in Philadelphia during the Quasi-War with France, 1795 – 1801.” Journal of Economic History 71, 1. March 2011.
Massachusetts Historical Society: Benjamin Dolbeare letter book( Ms. N-201); Boston Marine Insurance Company records( Ms. N-2043)
Tyler, J. W. Smugglers and Patriots: Boston Merchants and the Advent of the American Revolution. Northeastern University Press. 1986.
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