the division of labor in the division of risk

Chapter 4 of How the West Grew Rich is called "The Evolution of Institutions Favorable to Commerce".

The chapter is broken up into 9 sections, one for each of the institutions the authors credit with the creation of "The European Miracle" of capitalism:

1. legal enforcement of contracts and property claims;
2. bills of exchange and banking;
3. insurance;
4. the substitution of taxation for confiscation and the recognition of property rights;
5. economic association without kinship;
6. double entry bookkeeping;
7. the development of a religious and moral system suitable to the commercial community;
8. the mercantilist partnership; and
9. the divided European political structures and the part it played in allowing the growth of an autonomous merchant class.

I figure I'll blog the passages I might want to write about later.

Here's section 3:

Insurance

The earliest form of marine insurance was a loan, repayable with a high premium if the voyage succeeded but not repayable at all if the vessel was lost. Known as a "bottomry and respondentia bond," this form of insurance loan was used by the ancient Greeks. The separation of insurance from financing took place in Italy, perhaps as early as the latter part of the twelfth century, when insurers began to guarantee against loss of the vessel in return for a stated premium. There is, however, only a scant record of the use of marine insurance before the sixteenth century. A Florentine statute of 1523 contained a form of policy which differed but little from the form adopted by Lloyd's in 1779. Lloyd's itself dates from the late seventeenth century. Merchants who were prepared to accept an insurance risk would meet with shippers and shipowners at Lloyd's coffee house, in London, and negotiate the premium. The insurers were individuals who either did not have enough capital to pay for the loss of an entire vessel or who felt it imprudent to accept the whole risk. So, once a rate had been agreed upon, a number of insurers would sign on, each for a portion of the risk.

The development of marine insurance markets in Italy, Amsterdam, and London separated commercial risks from the risks posed by the perils of the sea and made it possible for merchants to venture increasingly large amounts of capital on the commercial outcome of a voyage without subjecting themselves to the less calculable uncertainties of the sea. The commercial risk was that the cargo might not be as profitable as expected, or might even result in a loss. But only rarely was there a commercial risk that the cargo might prove wholly worthless and produce a loss of the entire capital invested -- a risk decidedly present from storms, pirates, and the other hazards of the sea.

The division of risk between the perils of the sea and the perils of the market, with specialized insurers undertaking the former and merchants and shipowners the latter, converted an intrinsically hazardous business into one capable of drawing capital from relatively cautious and conservative merchants. Some such division of risk was essential to the development of maritime commerce. It is possible to think of other ways the risks might have been divided, such as marketing shares in the voyages themselves at Lloyd's instead of shares in the risk of loss from perils of the sea. But this would have required the underwriters of Lloyd's to familiarize themselves not simply with the risks of the sea, but also with the commercial risks involved in every line of trade conducted by sea. The division between specialists in maritime risks and specialists in market risks greatly facilitated the growth of maritime trade.