Bottomry, it turns out, was a type of contract whereby a lender would, for a fee, put up money (either in the form of a loan or sometimes a joint stake in the stock) for the purpose of advancing trade. This was on the understanding that “the borrower should, in consideration of a high rate of interest, be freed from liability in the event of certain accidents happening, e.g. failure of goods to arrive at their intended destination” 2. This looks to me rather like a Babylonian version of today’s catastrophe bond. 1  Plantin and Rochet (2007). See also Thoyts (2010). 2  Clayton (1971). See also, Bernstein (1996). 2  BIS central bankers’ speeches  The practice of bottomry flourished due to the proximity of another group of great traders – the Phoenicians, who adapted the basic concept to support trade expansion on the Greek coastline during the 10th and 9th centuries B.C., and to the increasing domination in the Aegean Sea after 800 B.C. of Greek traders who needed indemnity against their cargo. Hop westward across the Mediterranean Sea to ancient Rome, and citizens were paying subscriptions to so-called “burial societies” to cover the cost of expenses associated with their death – a kind of latter-day funeral insurance. This activity evolved such that by the second century A.D. it became common practice instead to pay the relatives of the deceased person a lump sum (the funeraticium), provided their subscription was not in arrears and the deceased had not committed suicide 3.
The role of the PRA is to make sure that the risks for which insurance companies provide protection do not revert to the customer when bad outcomes happen. It would be grossly unfair if you had paid somebody to take your risks away, only to find that you had unwittingly acquired a huge credit risk by giving your money to a financially unsound company. Our main job at the PRA is to ensure that firms are safe and sound, and contribute to policyholder protection. That way, the shareholder can reap the rewards if the risks pay off, but will bear the cost if the firm loses money. This public policy case is well established in many countries, such that the approach of different regulators is often founded in commonly agreed principles. For instance, in the 1970s, the introduction of Solvency I codified these principles into a set of requirements across the EU. The birthplace of insurance However, looked at across the sweep of insurance history, this public policy case is a newfangled set of ideas. I have tried to find out what, if anything, public authorities have thought about insurance through time. In my quest to find the answer to this question, I ended up going back further than anticipated – to around 3000 B.C. – and came across the curiouslynamed practice of “bottomry” in the era of Babylon.