Sea Control - Sea Control 380 - Underwriters of the United States with Dr. Hannah Farber

Episode Date: September 15, 2022

Links:1. Underwriters of the United States: How Insurance Shaped the American Founding, by Hannah Farber, Omohundro Insitute of Early American History and Culture/UNC Press, November 2021. 2. Sea Control 375 - The East India Company and Modern State Sovereignty with Dr. Swati Srivastava, CIMSEC, Aug 28, 2022.

Hey folks, it's Jared. My guest today is Dr. Hannah Farber, and we'll be discussing her book, Underwriters of the United States. I can tell you already, this is going to be one of my entries on the SimSec holiday reading list. It's only become more applicable since its release, given all the discussions around maritime insurance and the Black Sea shipping. This episode was edited and produced by Joshua Gruber. I'd like to pause here to highlight our local chapters, whether you're in South Korea, Egypt, Singapore, France, New York, India, or the Caribbean. Chances are there's a SimSec local chapter near you. You can find a full listing of our chapters and contact information on the website at simsec.org. So if you're interested, please reach out.

Finally, I want to take the opportunity to recommend our partners in the SimSec Podcast Network, the Bilge Pumps. You can find Alex, Jamie, Drack, and a pot of Iron Brew bottles wherever you download your podcasts. And with that, Kimber's Men. You're listening to Sea Control, hosted by the Center for International Maritime Security. Hello Hashimites and welcome aboard Sea Control. My guest today is Dr. Hannah Farber and we're going to be discussing her book, Underwriters of the United States, How Insurance Shaped the American Founding. So Hannah, welcome. Could you start by telling the audience a little bit more about your background, please? Thanks very much for having me. Yeah, I'm a professor at Columbia

University. My background is in history. It isn't in anything particularly naval. It isn't in anything particularly economic. I'm just a person who started out looking for stories of American adventure on the high seas, and I accidentally fell into insurance. And many years later, here we are, and I'm not bored with it yet. So thanks for giving me the chance to come talk about it. Well, I'm going to ask you how you got onto this topic in just a second here. But as a reminder to the listeners, all opinions today are our own and not reflective of any institution with which we might be otherwise associated. So yeah, first question, sorry, a little unscripted, But yet, how did you come to the topic of maritime insurance in particular?

Initially, I would think not exciting, but to timestamp this for the listeners, we're recording on Sunday, 21 August, and there's a lot of maritime insurance in the news as we discuss grain shipments from Ukraine. So how did you come to this topic? Right. I mean, it's just astonishing to me that anything about this would have been in the news. I was in graduate school at UC Berkeley in a history department that really prided itself on being omnivorous and open-minded in the sense that they wanted graduate students students of

history to look for anything that seemed interesting and compelling and to frame questions that needed to be answered and answer them in any way that seemed to make sense to try to answer them about human change over time and so I had been looking for stories of daring adventures of you know, maybe the American Navy on the high seas or the initiation of American commerce after independence. And as I was looking through all of this merchant paperwork and the sort of the back and forth among informed people, insurance kept coming up again and again in ways that I would never have expected. And at first, I just thought it was funny because I was looking for adventure and instead I found insurance and that didn't make sense to me. And as I came to

understand more, I realized that every commercial adventure is literally a venture. They're venturing, they're taking risk in the hope of profit. That's what every merchant does. And so one fundamentally tool that they have in managing the risk that they take is purchasing insurance. And once I started looking, I saw it everywhere in the memoirs of merchant captains, in descriptions of port cities, important buildings and businesses, a little bit in political conversation, not as much as you might expect. So trying to figure out how insurance could be a business that was both pushing so much money around and supporting so much commerce and also being so little legible to the general public turned out to be a fascinating story for me and kind of a hard one to talk about. And so it took a number of years in my dissertation. And then when I took up my job at Columbia to understand how to say what I was trying to say in the end, which is that insurance is a highly political business, and not just in the sense that it is important to politicians because it makes money, but because it is a political force, a power force in itself that determines what merchants do and when. and why. You started your book with a vignette of a Boston merchant purchasing insurance for one of his vessels. Could you recount that for the listeners to the best of your ability? Because

while I think most of the audience is going to be familiar with life health and auto insurance and kind of the things that we all require on a day-to-day basis, maritime insurance probably requires a little bit more of an explanation. Probably a bit more of an explanation, which is funny because it's the oldest kind of insurance that there is, strictly speaking. If you're sort of a stickler about definitions. It probably dates back to Renaissance Italy, when you have a bunch of wealthy merchants in these small city-states who can make a lot of money getting stuff from one place to another, but they're living in politically splintered and hazardous terrain. It's not just the risks that they seize that they're managing, it's just the risks of

doing business with someone in a faraway country. So a surprising amount of what's fundamental about marine insurance stays the same over hundreds of years. But I decided to drop readers down in the world that they would experience if they were the kind of person who could walk into an insurance office in Boston in the year 1800 and attempt to buy a policy. So the character in the prologue of my book is somebody who has purchased insurance before, but never from a corporation, because this is one big transformation that happens in the U.S. after independence is that more and more maritime insurance is sold through incorporated entities so you walk into the office and you tell the secretary there the specifics of your voyage and the secretary they ask you

some follow-up questions about the kind of the ship that you have the captain that you have not a lot of documentation is produced up front there is not a lot that hangs on really technical distinctions between vessels or even too much on the cargo because the policy itself is sort of going to manage all that merchant tradition is going to manage all that and the secretary will take your request back and some directors of the company who are hanging out in the office that day will discuss your request. They will discuss you because part of the question is what sort of a character you have and what they might know about you. And so it's good if you know someone who's connected to the company. And then in the afternoon, you can come back or

you can do this all by mail and they'll say, we'll give you a policy on this cargo at such and such a rate, right? So, you know, it'll be 7% if you're going from Boston to this island. And if you stop at another island, it's going to be another percent. There are equivalents of rebates if you don't go to do certain risky things or deductibles if you have a little bit of loss on your perishable cargo. So a lot of this might seem familiar to shippers today. And then I put into the prologue that sort of you are the guy for whom things work out. You're towing the line. You're doing sort of a standard form of trade to the Caribbean. And then you have a friend who's getting into some sort of naughtier, nastier business of arms trading to the warring Latin American republics

in place with a little bit more political unrest going on. And so he winds up falling into more political difficulties. And his policy may end up in arbitration or litigation for a long period of time. You, however, sustain a little bit of damage on your policy, but they accepted the documentation that you produce and they indemnify you through the company for your losses. So some of this stuff will probably sound really familiar to anyone who has an insurance policy today. But what I would emphasize that distinguishes this most from how we understand insurance today is that it is a business by merchants for merchants. It involves a great deal of technical expertise to understand what makes a policy work and indeed whether somebody has followed the terms

of their policy appropriately. And that includes the question of whether you have done something illegal or not. And this is where a lot of people have gotten tricked in their studies of insurance because the insurers tend to say very self-righteously, we would never insure an illegal voyage. And then what is it exactly that legal means? Who gets to determine that? The question of who gets to decide whether a trading voyage is legal under certain political circumstances is always up for discussion. And who are the people whose opinions matter on whether a voyage is legal or not, most of the time it's the insurers. So this gives them a sort of a political power over the shipping choices made by American merchants. And so I gave you in the

prologue sort of a straightforward case of that, but the complexity itself of most of the circumstances of trade in the age of revolution are what give tremendous power to insurers as merchants try to navigate this. What is lex mercatoria and what's its relevance to the maritime insurance industry? If you ask a merchant in the 18th or the early 19th century, what are the laws that govern what you do? They sort of have two ways of thinking about it. And one is that they're a citizen or a subject of the country that they inhabit, but also a surprising number of and believe that there is this body of sort of quasi-law called merchant law, lex mercatoria, the laws of merchants.

And lex mercatoria is this sort of living falsehood that is constantly making itself real over time. And what I mean by this is lex mercatoria has this idea at its heart that merchants do the same stuff everywhere in all places and times. They buy and they sell, right? They try to buy low and they sell high. They try to make binding agreements. They try to follow these agreements and they do whatever they need to do to get that done. And they follow the laws of their countries, of course. Ha ha ha. um so a lot of this is not true of course the way that people do business from place to place really does vary um some lawyers get very twitchy at this concept of flex mercatoria because there is no official governing body there's no merchant sovereignty the way there is state sovereignty

right the u.s has its courts um the u.s courts determine whether you broke u.s law or not there are not well in different places people call different kind of things merchant courts but there's no overall merchanty authority. However, merchants operate with such confidence sometimes that this merchant law exists, that it becomes this political force in and of itself. For example, when the United States is setting up its own court system, this court system has to learn how to adjudicate these complex disputes among merchants. I'll get to the insurance part this in a second. And how is the US court system going to establish all these precedents? It can't just come down and dictate how merchants should do things because there is no, there's no existent

expertise outside of the merchants themselves. It's like a horror movie. The call's coming from inside the house. The merchants are making merchant law. They're telling American judges what merchant law is. And there's, you know, to be fair, I think there's some real reason to that Because if the United States had set up a judicial system that was hostile or nonsensical to the ways that most Americans were already doing business, it would not be an effective court system. It wouldn't provide justice. It wouldn't support merchant citizen confidence. It wouldn't help bring money into the country. So it's really important that the court system operate in ways that merchants understand. That said, what this does is it allows merchants to sort of take this vision of how they should be allowed to do business with one another and pour it straight into the U.S. court system. And so in this way, these coordinated groups of merchants really are making a very strong foothold in the U.S. judicial system. and saying, the shorthand for this is saying that the United States should operate in ways that

make sense according to merchant law. Now, the most powerful people in pouring this merchant law into US law or into British law are insurers. Because as I've said, insurers are nodes of information, of expertise, and of authority in this really complicated and chaotic world of international commerce. Insurers are, through the policies that they give and how they enforce them, they are enforcing their own views of proper merchant practice on the entire transnational commercial system as it exists. And again, no government wants this system to shut down. Insurance is always a major topic of compilations of merchant law because it is this fundamentally supple transnational business. And insurers are the ones who are, they're news junkies.

They are at central points in communication networks. They're handling a lot of merchant money. A lot of merchants are insurers themselves, right? So a lot of merchants end up having shares in insurance companies. They underwrite for their fellow merchants. So through insurance, merchants are creating this politically cohesive system that is blobbing itself into the new United States in ways that are for better and for worse. Thanks. I'm going to pause here and interject one thing. So for the listeners, we'll be publishing, it hasn't come out yet as you and I are recording this, but Sea Control 375, Dr. Swati Srivastav from Purdue University has a whole discussion about corporate sovereignty

versus state sovereignty through the lens of the East India Company. So if the listeners want to go back and pair that podcast with this podcast, I would strongly recommend based on that last conversation, the two would go together pretty well. But Hannah, in the century prior to American independence, what was going on with the British Empire that changed the insurance industry? The British Empire is going through this incredible surge of growth in the 18th century through basically several interconnected phenomena. And one is that the states, the British state, the British government gets a hold on its finances

in a whole new way. Its relationship with other outside institutions like the Bank of England becomes so strong that it's able to essentially borrow more money from its own subjects and from foreigners in these really effective ways. With this finance in hand, what the government does is wage war. And so these naval wars sort of transform what the empire does and what it's about with these infusions of money in the system. that in turn wins new territory for the british empire as in the seven years war when the british

are able to um gain a big swath of eastern north america that hadn't previously been quote unquote you know under its sovereignty um and that was that's destabilizing in its own way right it produces new kinds of governance problems so you have a bigger territory under control you have more victories, you have more to handle, you have more to spend money on, more money has got to be borrowed to defend and administer what you have. And at the same time, you've unleashed the merchants to whole new places, new opportunities to trade, to set up and finance sugar plantations, to speculate on the development of the interior, to explore new ports. So there's just this juices running through the empire on both the government and the commercial side and that in turn produces

this like civic revolution in the British empire because public culture is so proud of what's been accomplished there so insurers are a little bit in the you know people apprehend that Lloyd's of London a sort of central London insurance hub is this tremendously powerful node of information and expertise and money that the that the empire needs that that's sort of a symbol of the empire's maritime expanse and the profitability that's just that's just increasing and increasing over this century um lloyds also becomes a sort of a political hub again because there are these sources of of information um that they're that they're soaking up from all over their commercial networks that sometimes the government has to work to get a handle on that as well. So there's

this productive tension between the British government and centers like Lloyd's, where they need each other, they support each other, they bring each other profit and power, but there's a little bit of conflict as well. And you see a little bit of this play out in the early United States as well. What role did underwriters play in the American Revolution? How did the American marine insurance industry of all post-revolution. So the two different stories really, and one is about the American Revolution itself, which from the British side, from the perspective of the very jaded underwriter gamblers at Lloyd's of London, they're a little bit like, well, isn't this an interesting new twist? You know, it produces a new legal conflict because the British and the

American rebels are, you know, the British are saying this is just an internal conflict because they don't want foreigners to get involved. And the Americans are saying, you know, this is a genuine revolution because they want foreign aid. Now, those are two very different insurance situations. One is if your merchant ship is captured by some internal rebel and, you know, internal disturbance, let's say. And the other situation as well, you know, has a genuine rebellion taken place and has this vessel taken place by a foreign power so at lewis they can sort of handle anything like they a lot of these guys are just they're high rollers they're better they're political junkies they're just curious to see what's going to happen and they're going

to fight it out and in litigation if necessary um from the american side look i i mean as you know there i mean there there is no american navy right away there's there's nothing right they have to sort of lease these merchant ships so one of the fundamental ways you can see that a new united states is coming into existence is that there is a new entity that takes the risks of damage to those merchant ships that they fight with right so if a merchant leases their ship to the government to the new revolutionary government the new revolutionary government's got to say you know we are going to compensate you for loss so through insurance you can kind of see this new political entity coming into being. What is U.S. government? It's that which is going to confiscate me if it

sinks my ship. So that's one piece. Also a facet of the American naval weakness, not as weak as you would expect, during the American Revolution, is that Americans cannot expect a ton of really high profile naval victories. So what they end up liking doing is poaching British merchant ships. And one of the ways that they know they're successful at this is that insurance rates on British vessels go up. So in this early part of the American Revolution, when there's a big question of whether the US is going to attract international allies and supporters, one big public sign of evidence that Americans can point to of their success is that they've raised insurance rates on British merchant vessels.

Like, we've made it dangerous out here for you guys. We've made it more expensive for you to trade. And this does become something of a headache for the British government for both logistical and PR purposes, we would say in modern terms. And finally, I would say that insurance becomes a risk-sharing mechanism in a lot of revolutionary American ports. So a lot of these little knots of, for example, New England Patriots Forum, who are fitting out privateers together, and they are insuring these privateers. And when you insure a privateer vessel, your insurance rates like 60 or 70 percent sometimes. I mean, these wild insurance rates. But it's a formal mechanism for cost sharing, just literally sharing the financial risk of independence.

Maybe you will capture a British merchant ship and you'll all share the booty. Maybe you'll lose and you'll all take the hit together. But insurance becomes this financial mechanism by which American port city merchants can share their own risks. And because they have this expertise already embedded in them, you know, insurance, their merchant business is part of what's sustaining them to this really risky transition toward being merchants of a tiny new independent country. Should I go on and talk about early republic stuff as well? Yeah, please. I was going to follow it up because I'm just curious. But there had to have been then the establishment of some sort of counterbalance to Lloyd's of London, because I can't imagine American merchants would have been super welcome to purchase their insurance via Lloyd's. so so the funny thing is that lloyds is actually pretty eager to keep its american clientele business is business um and pretty swiftly after the revolution um you know it's actually not technically illegal to insure a foreign um vessel at war against you until like 1793 with the french revolutionary wars and even then lloyds drags their feet in enforcing this in all sorts of ways

So the insurers really just want to keep their hands in the game in any way that they can. In my book, one of the big things that I talk about that I put together from my assessment of the sources is that the big process of domesticating the U.S. insurance business is not actually after the revolution. it's after the ratification of the constitution and the um the creation of hamilton sort of funding apparatus for the united states um and the reason for that is you know if you're a merchant who's trading things internationally and you're an american odds are you're going to intersect with london or with some other financial sector financial center in europe and you can get your insurance there along with your other financial services. With the creation of the U.S. securities market, the circulation of U.S. debts, suddenly, and the sort of decrease of stigma against

corporations in the United States, suddenly everyone starts to see the advantages in a bunch of American seacoast towns of starting their own corporations. And they start banks, They start insurance corporations. Those are the first big money corporations in the United States. They're founded by some of the same people, as I also talk about in my book, banks and insurance companies, then as now are closely connected with one another. They support each other in all these intricate ways I'm happy to talk about. but fundamentally you can have an insurance company then in the united states because you have something to buy with all that money that you've got to hold while you wait and see if you have to pay out your merchant customers on losses um because the funny thing about this sort of post-revolutionary country is there isn't much to buy that would work that way banks are lending out their capital to individual merchants you don't want to buy land because land's not liquid

And the land in theory is this enormous U.S. asset, but it's very volatile. So the insurance companies can now get set up. And what they tend to do, they buy huge quantities of American federal securities and they buy huge quantities of their local banks. And this makes them sort of the third leg of this, these financial stools, I guess I would call it in American port cities where the federal government, the banks and the insurance companies are all sort of supporting one another's value. And that is what really catalyzes the movement of American merchant confidence toward domestic insurance. It's not that there's anything magical about the corporate form. It's that all of a sudden, there are a lot of these entities being formed because merchants see that there is potential stability and profit in them. They can use the money they get from U.S. securities, the interest the government pays them to buffer the risk that they take being insurance companies in an age of war. And that's really helpful for them. And so all over the East Coast of the new United States, these little corporations are springing up to the extent that by 1810, there's actually hearings at Lloyd's. And one of the things that they're concerned about is that they say they've lost 95% of their American clientele. Americans are now insuring at home. They're a little bit like, what happened here? You know, it wasn't that they it wasn't because we were enemies like Lloyd's doesn't care about that.

It wasn't these increasing tensions with the Jefferson or administration or anything like that. Nobody cares. It's that there's now this federal lending, borrowing apparatus. There's like legal security that's starting to settle in. And there's these financial institutions now that are all playing ball with one another. What impact did the Napoleonic Wars have on the American shipping industry? So I think that the timing of the Napoleonic Wars, the French Revolutionary and Napoleonic Wars were quite lucky for the US and its insurance industry, in that the US is not directly facing British guns until, you know, the end of this very long period. And in fact, this is a reason the British are delaying an out and out conflict with the United States. Like, let's deal, we got to figure out this Napoleon problem first, like, not the United States too, whatever. This is very, you know, you can tell I'm a very deep naval historian. But the reason that I talk about it this way is because I've thought about it for so long from the merchant and insurer's time period, where the main goal is just to stay ahead of the game for six months at a time. And sometimes Napoleon's your problem and sometimes he's not. So at the same time as domestically all of these insurance corporations are formed, another reason that that's happening is because the French Revolutionary and Napoleonic era is a very high risk, high reward environment for American traders.

It's high risk because there's a lot of hungry British and French and Danish and Neapolitan privateers out there on the oceans. It's high reward because trading networks are being upended by the Napoleonic conflict. The British are trying to blockade the continent. The French sugar islands are starving for traders to export their goods. So Americans have as this enormous asset as an independent country, their merchant marine, right? This is one of the huge things that this country has to work with. And so the United States is like geopolitically well positioned. It needs to jump into this trading world, but it's very risky. So insurance becomes this mechanism through which, again, American merchants manage their risks. And insurers do really well in periods of sort of uncertainty, of political unrest, in regional conflicts, times when everybody thinks there's going to be a war. They can charge really high insurance prices. It's not great when war breaks out, but what really is hard on the insurance business is when wars end, you can no longer charge high premiums, but you have to pay out on your wartime losses. So a couple of them tend to go under when wars end. So the insurance industry is supporting and profiting and redistributing its profits to merchants during this whole period of erratic conflict, such that by the time that 1812 comes and Britain and America are formally at war, the sector is secure enough.

It has ways of distributing its own risk that allow it to weather this period of extreme naval conflict, which in the grand scheme of things doesn't really last that long. How did the growth of the American administrative state at the federal and state level affect the marine insurance industry in the decades after the Napoleonic Wars? Right. So after the Napoleonic Wars end, we just don't see as much need for for insurers to play this central role in managing American merchant trade. political unrest sort of shrinks to certain hotspots that some insurers want to play in and some don't the federal government gets bigger and more capable and it takes over some of the information gathering capacity that had previously been in the hands of the insurers And this isn't contentious, but it is a transition that happens in the sector overall. There's a quote that I love that's in the book from a diary of somebody who has nothing to do with insurance. He's a mister and he's just going from one town in New England to the next. but the war of 1812 is going on and when he arrives in town he says all the lights are on

like the bell he's like the bells are ringing for the taking of something something by commodore perry on the great lakes i forget exactly what it was um and the lights are on at the insurance office and i just love that because it shows that during the war the insurance office is like where all these merchants go these guys who are running their towns um they're again the information junkies the political news junkies um they know all of the details and they've sort of quantified how safe the united states is in the world they all go to the insurance office to like talk about it and see how this reshuffles um their deck even while everybody else is celebrating after the wars governments the government uh it takes up more of this project of the statistics about u.s trade

which are much better after the wars than they are before um and so insurance is not so central in this like geopolitical process anymore and the the high rollers the people who are in the insurance business for the high risk high reward environment um are moving on to do other things and marine insurance becomes a more predictable eventually an actuarial phenomenon of that has more to do with what's the risk of running a leak or getting caught up in a hurricane if you're going to the Caribbean in October. So one final question you can feel free to pass if you don't have an answer to this, but you talk about news junkies, information junkies, and obviously this has been the topic of maritime insurance has been in the news a lot recently. How closely are you

following discussion about insurance rates related to shipping in around the Black Sea, specifically like Ukrainian grain. And then are you noticing any of the same trends that you've saw in your research as far as the discussions around rates and who's underwriting what? Yeah, I think it points to a couple of things what's happening now. And the first is what a giant and politically important business insurance is and how much it benefits from mostly staying out of the public eye is a business that has so much influence. All of a sudden, the government's really interested in insurance rates. Insurance is particularly significant during times of political unrest and conflict. That's when rates go up. Again, another thing that's making it

politically central because there's so much of the commercial world that we live in. And as citizens, we just don't think about until something shakes the way that it operates. So when I see these articles i'm thinking you know who is it that's making the money on this right now um in uh we've shifted when when political conflict emerges i would say then insurance becomes the second type of business that it is the first type of business that it is is an actuarial business a business where you know you run similar kinds of things lots of times like a trip across the ocean in peacetime and once in a while something goes wrong and you can calculate and predict, you can make this sort of actuarial assessment of how often that's going to happen and do your business that

way. But insurance becomes this whole other kinds of business in times of political conflict, which is fundamentally unpredictable. You just cannot reduce human conflict, the conflict of nations to this actuarial mode of thinking. And that's this weird, fascinating and very scary world in some ways. And so I am just desperate for more contemporary journalists to do what I did,

which was very scary to me, which is to do the diving and explain what is happening with all of these sort of subterranean, interconnected financial apparatuses so that we can have a more public civic discussion on what's happening and whether we agree with it. Because we cannot let the sort of complexity of this

be a barrier to our political engagement. So my thought always is that we have a lot more to learn. Well, I'm sorry that that's all that we have time for today. I'd like to thank my guest, Dr. Hannah Farber. Hannah, where can we find you online and what are you working on next? I am, you can find me on Columbia. My email's up there. You can, I'm happy to hear from folks always. It's been wonderful talking to folks who are informed with naval and commercial

phenomena. I'm writing one more article about insurance, the insurance of the slave trade, and I'm talking about why we don't know more about it than we do. And then I'm really still interested in how people with money fight with each other. So I'm interested in writing more about American civil court and the sort of complex conflicts there. So I've moved from merchants to lawyers. Well, once you publish that article on the insurance-related slave trade, please let me know. I'd love to bring you back on to discuss that. But thank you again for joining us. To listeners, thanks for tuning in. We'll see you next time. © BF-WATCH TV 2021

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