Sea loans or foenus nauticum

 Sea loans or foenus nauticum were common before the traditional marine insurance in the medieval times, in which an investor lent his money to a traveling merchant, and the merchant would be liable to pay it back if the ship returned safely. In this way, credit and sea insurance were provided at the same time. The rate of interest for sea loans was high to compensate for the high risks involved. Merchants taking sea loans had to pay the high interest charges to the lenders for having borne the sea risk as opposed to sharing the profits, which is how things were done when merchants carried goods by land. Since sea loans involved paying for risk, the Pope Gregory IX condemned the practice as usury in his decretal Naviganti of 1236 (Decretales, V, XIX, 19).[12][13][14] The commenda contracts were introduced when Pope Gregory IX condemned the sea loans. Under commenda contracts, capitalists provided funds to an entrepreneur to carry out a trade as partners in the enterprise, sharing the profit but both sea and commercial risk belong to capitalist.[14] In the fourteenth century, Italian merchants introduced cambium contracts where borrowers had to buy the bills of exchange from the lenders (merchant bankers). Since the bills of exchange were payable no matter what, they did not cover any sea risk at all. To hedge against the sea risks they now bore, merchants invented insurance loans that were very close to today's marine insurance, i.e. “ the insured or borrower remained on the land, 2) the insured goods are sent unaccompanied, and the loan is due not upon the safe arrival of ship but upon the safe arrival of goods”.[citation needed]

In 1293, D. Dinis, King of Portugal advanced the interests of the Portuguese merchants, and set up by mutual agreement a fund called the Bolsa de Comércio, the first documented form of marine insurance in Europe, approved on 10 May 1293.[15][16]

In the thirteenth and early fourteenth centuries, the European traders traveled to sell their goods across the globe and to hedge the risk of theft or fraud by the Captain or crew also known as Risicum Gentium. However, they realized that selling this way, involves not only the risk of loss (i.e. damaged, theft or life of trader as well) but also they cannot cover the wider market. Therefore, the trend of hiring commissioned base agents across different markets emerged.[17] In 1310 the Chamber of Assurance was established in the Flamish commercial city of Bruges.[18]

The traders sent (export) their goods to the agents who on the behalf of traders sold them. Sending goods to the agents by road or sea involves different risks i.e. sea storms, pirate attack; goods may be damaged due to poor handling while loading and unloading, etc. Traders exploited different measures to hedge the risk involved in the exporting. Instead of sending all the goods on one ship/truck, they used to send their goods over number of vessels to avoid the total loss of shipment if the vessel was caught in a sea storm, fire, pirate, or came under enemy attacks but this was not good practice due to prolonged time and efforts involved. Insurance is the oldest method of transferring risk, which was developed to mitigate trade/business risk.[19] Marine insurance is very important for international trade and makes large commercial trade possible. The risk hedging instruments our ancestors used to mitigate risk in medieval times were sea/marine (Mutuum) loans, commenda contract, and bill of exchanges.[14] Nelli (1972) highlighted that commenda contract and sea loans were almost the closest substitute of marine insurance. Furthermore, he pointed out that for a half century, it was considered that the first marine insurance contract was floated in Italy on October 23, 1347; however, professor Federigo found that the first written insurance contracts date back to February 13, 1343, in Pisa. Furthermore, Italian traders spread the knowledge and use of insurance into Europe and The Mediterranean. In the fifteenth century, word policy for insurance contract became standardized. By the sixteenth century, insurance was common among Britain, France, and the Netherlands. The concept of insuring outside native countries emerged in the seventeenth century due to reduced trade or higher cost of local insurance. According to Kingston (2011), Lloyd's Coffeehouse was the prominent marine insurance marketplace in London during the eighteenth century and European/American traders used this marketplace to insure their shipments. The rules and regulations of insurance were adopted from Italian merchants known as “Law Merchant” and initially these rules governed the marine insurance across the globe. In case of dispute, policy writer and holder choose one arbitrator each and these two arbitrators choose a third impartial arbitrator and parties were bound to accept the decision made by the majority. Because of the inability of this informal court (arbitrator) to enforce their decisions, in the sixteenth century, traders turned to formal courts to resolve their disputes. Special courts were set up to solve the disputes of marine insurance like in Genoa, insurance regulation passed to impose fine, on who did not obey the Church's prohibitions of usury (Sea loans, Commenda) in 1369. In 1435, Barcelona ordinance issued, making it mandatory for traders to turn to formal courts in case of insurance disputes. In Venice, “Consoli dei Mercanti”, specialized court to deal with marine insurance were set up in 1436. In 1520, the mercantile court of Genoa was replaced by more specialized court “Rota” which not only followed the merchant's customs but also incorporated the legal laws in it.[citation needed]

Separate insurance contracts (i.e., insurance policies not bundled with loans or other kinds of contracts) were invented in Genoa in the 14th century, as were insurance pools backed by pledges of landed estates. The first known insurance contract dates from Genoa in 1347, and in the next century maritime insurance developed widely and premiums were intuitively varied with risks.[20]

These new insurance contracts allowed insurance to be separated from investment, a separation of roles that first proved useful in marine insurance. The first printed book on insurance was the legal treatise On Insurance and Merchants' Bets by Pedro de Santarém (Santerna), written in 1488 and published in 1552.[21][22]