The Beauty of Uncertainty: The Rise of Insurance Contracts and Markets in Medieval Europe

Abstract Maritime insurance developed in medieval Europe is the ancestor of all forms of insurance that appeared subsequently. We address the question of why modern insurance was first invented in medieval Europe, and neither earlier nor elsewhere. Drawing from insights from the literature on uncertainty aversion, we show that medieval merchants had to bear more frequently natural risks (they traveled longer distances) and new human risks with unknown probabilities (they faced unpredictable attacks by corsairs due to increased political fragmentation and commercial competition in Europe). The increased demand for protection in medieval seaborne trade met the supply of protection by a small group of wealthy merchants with a broad information network who could pool risks and profit from selling protection through a novel business device: the insurance contract. A new market—the market for insurance—was then born. Next, analyzing more than seven thousand insurance contracts redacted by notaries and about one hundred court proceedings housed in the archives of Barcelona, Florence, Genoa, Palermo, Prato, and Venice, we study the main features of medieval trade, the type of risks faced by merchants, and the characteristics of insurance contracts and markets from 1340 to 1500. The empirical analysis delivers two main findings. First, risks related to human activities (e.g., attacks by corsairs) seem to have had a relatively greater impact on insurance premia compared to natural risks (proxied by seasonal risks). Second, distance mattered but the route seems to have had a greater impact on insurance premia. Specific routes (e.g., in the Tyrrenian and the western Mediterranean) were more plagued by human risks, which were harder to avoid for the majority of merchants who did not have a broad information network compared to the few wealthy merchants, who became the key players in selling insurance in the early stages of the development of insurance markets.