Privateers and Premiums

British merchant ships during the Revolutionary War ran the risk of being captured by American privateers, and shipping insurance costs went up accordingly.

What did the Revolutionary War have to do with the price of insurance? Plenty.

Shipping insurance, specifically. American privateers — privately-owned ships that were authorized by the new American governments to attack British ships — cruised the Atlantic, looking for British merchant ships carrying valuable cargo. When they succeeded in capturing one, they would put a few of their own men on board and sail the “prize” back home, where they would sell ship and cargo, and the crewmen of the privateer would each get a share of the money. (Of course, the captain and other officers would get bigger shares than the men before the mast.) It was a profitable business — as long as you didn’t get caught by the Royal Navy ships that were out cruising to intercept rebel ships.

But for the merchants in Britain, this kind of war was a nightmare. It didn’t matter whether they were for or against American independence: the privateers were simply out for profit and to hurt Britain, and every British vessel they captured was another step toward both of those objectives. Merchants who invested money in shipping cargo to or from places like the West Indies or the Mediterranean might lose both their ships and their cargo.

And that’s where the insurance comes in. Shipping was always somewhat risky — then more than now, and it was common to insure a ship for a voyage. But the privateers dramatically increased the risk, which drove up the insurance premiums. For example, a London newspaper stated in July 1776:

The certain advice received on Friday of nine sail of ships being taken by the American privateers, have raised the insurance on all Jamaica ships, and ships from the West-India islands 20 per cent. more than it was before; and many of the [insurance] underwriters even refuse to enter their names on a policy; for they look upon it a very hazardous venture, as there are a vast number of privateers out to intercept our homeward bound West-India ships.

A couple months later, when an American privateer captured several “straits-men” — so called because they were coming from or going to the Straits of Gibraltar, for trading in the Mediterranean — the news caused a lot of “Consternation at New Lloyd’s Coffee-House” in London, which was a gathering place for businessmen: “many a long Face was seen, and very few inclinable to do Business, unless upon very good [insurance] Policies.” Giambattista Pizzoni, an Italian living in London, reported to his government in Venice:

the daring of the Americans has gone so far as to affront Great Britain even in its own channels and capture its ships trading with Portugal, Africa, and Italy. … insurance [rates] which were one and a half percent jumped to ten and ten and a half percent, and are staying there…

The Royal Navy offered some protection by escorting convoys of merchant ships, but even that didn’t eliminate the danger; the convoys only left every so often, and they didn’t go to every port that the merchants might want to go to. As a result, the shipping business continued to be riskier, and therefore more expensive, than it had been before “the American war.”

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