Did you know that ransom insurance is one of the oldest insurance coverages out there?
People needed insurance because of pirates
Beginning in the early 16th and continuing into the 19th century, state-supported pirates and privateers operating out of North African coastal cities (the “Barbary States”) preyed upon European and colonial commercial shipping.
One lucrative practice was to capture a ship and sell everyone on board into slavery. We don’t know exactly how many people were captured over the centuries, but they probably numbered in the hundreds of thousands. You may have even heard of one particularly famous captive: Miguel de Cervantes, author of Don Quixote.
(Fun fact: some of the first military conflicts for a young United States were the “Barbary Wars” from 1801 – 1805 and again in 1815 – 1816, which were attempts to stop pirate depredations on American shipping. One researcher estimated that the annual costs of Barbary piracy to the U.S., including insurance costs, were equivalent to $10 billion to $20 billion in terms of today’s economy.)
How did ransom insurance work?
Slaves could generally regain their freedom in two ways (if you don’t count mounting a daring escape). One was to convert to Islam – the Barbary States were Muslim and most of their captives were Christian.
A second way was to pay a ransom.
In the early days, churches and families would set up collections to help pay for the release of enslaved captives. That’s how Cervantes was freed in 1580. But starting in the 17th century, cities and states also began to set up ransom insurance pools.
One of the first pools, called the “Sklavenkasse” (literally: “slave insurance”), was established in the German port city Hamburg in the 1620s. That’s over 60 years before Lloyd’s coffeehouse was first mentioned as a proto-insurance shop.
Other places soon followed suit with insurance pools of their own. Individual sailors, churches, and shipping organizations would typically contribute to these pools, which paid out when a participant was captured by Barbary pirates and held for ransom. There were even established rates for how much a ransom should cost: a steersman could fetch 700 Reichstaler (the currency used in Germany at the time), while a common sailor cost a mere 60 Reichstaler.
(For the German speakers out there, you can read more about how the pools worked here.)
Ransom insurance today
Although Barbary piracy faded away in the 19th century, ransom insurance is still available today, usually for important individuals who travel to dangerous regions. Called “kidnap and ransom insurance”, it generally reimburses for ransom payments and other damages, including some medical payments.
And because criminals are creative, we also now have “ransomware” insurance, which covers costs from a ransomware attack. That’s when a hacker freezes a computer system – and will only unfreeze it in exchange for a ransom payment, usually in bitcoin. How the times have changed.