Dangerous Commerce: Insurance and the Management of International Risk 9781501734939

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DANGEROUS COMMERCE

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All rights reserved. Except for brief quotations in a review, this book, or parts thereof, must not be reproduced in any form without permission in writing from the publisher. For information, address Cornell University Press, Sage House, 512 East State Street, Ithaca, New York 14850. First published 1997 by Cornell University Press. Printed in the United States of America Library of Congress Cataloging-in-Publication Data Haufler, Virginia, 1957Dangerous commerce : insurance and the management of international risk / Virginia Haufler. p. cm. Includes bibliographical references and index. ISBN 0-8014-3231-6 (alk. paper) I. Risk (Insurance)—History. 2. International trade—History. I. Title. HG8054.5.H38 1997 368—dc2i

96-53653

Cornell University Press strives to utilize environmentally responsible suppliers and materials to the fullest extent possible in the publishing of its books. Such materials include vegetable-based, low-VOC inks and acid-free papers that are also either recycled, totally chlorine free, or partly composed of nonwood fibers. Cloth printing

109876.5 43 21

for my parents Herbert E. and Joan F. Haufle

Contents

Preface 1

2

The Search for a Sure Thing: Risk and International Political Economy

ix

i

Creating an International Risks Insurance Regime, 1870-1914

28

3

Testing the Limits of Private Protection, 1917-1939

60

4

Redefining Risk and Responsibility, 1979-1989

89

5

The Infrastructure of Global Capitalism

125

Notes

143

Selected Bibliography

185

Index

199

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Preface

In December 1957 the nationalistic Indonesian government seized forty Dutch ships to protest continued Dutch control of the territory of Western New Guinea. To the government leaders, the ships represented the hated colonial power, even though they were privately owned and served as the main source of transportation among the Indonesian islands. This ship seizure did not simply threaten large losses for a Dutch shipping concern, however; it could also have ruinous con¬ sequences for a major British institution—Lloyd’s of London. Most of the Dutch ships were insured at Lloyd’s under policies that forced them to be declared a total and complete loss if they were held longer than four months. This could wipe out a number of Lloyd’s underwriters and potentially undermine the financial capacity of the insurance market as a whole. Given the central position of Lloyd’s in the international insur¬ ance market, a weakened Lloyd’s of London would leave many interna¬ tional risks, especially for shipping, uninsured. Without that insurance many commercial transactions simply would not be concluded—in In¬ donesia and potentially everywhere else. Thus, the direct and indirect consequences of this one political gesture could ripple throughout the world. What happened next.^ The Dutch government could do little, and the British government was unwilling to intervene. Instead, a group of Lloyd’s representatives took diplomacy into their own hands and trav¬ eled to Indonesia to try to convince the government that this poke in the eye of the Dutch would slice into the heart of the British. With the clock IX

X

Preface

ticking on the four-month deadline, the men from Lloyd’s waited and hoped to avert disaster. Almost at the last moment the Indonesian gov¬ ernment finally released the ships, largely because of the good relations between key Indonesian officials and the Lloyd’s delegation. This story illustrates some key relationships between the risks of foreign commerce and the ways in which commercial and political sys¬ tems respond to risk. In this case, the shipowners decided to continue their business in Indonesia despite the deteriorating political environ¬ ment. Some of their risk would be covered by insurance. But there also existed the possibility that the extent of the risk, which was difficult to calculate in any case, would overwhelm the resources of the insurers. Underlying the concerns of both the shippers and the insurers was a profound uncertainty about what the three relevant governments would—or should—do. Governments can both generate and mitigate economic losses, but their ability and willingness to do so interacts with the ability and willingness of the private sector to act on its own behalf, either through developing techniques and institutions to mediate risk or by acting more directly through private diplomacy. Should governments intervene, or do they bear no responsibility when their citizens encoun¬ ter political risks in commercial ventures abroad? When governments do not intervene, what alternatives exist? How have perceptions about risk shaped both the public and private sector institutions we see around us today? And what happens to economic growth and development when the institutions that reduce or redistribute the risks of commerce break down? Our current era has been characterized by Anthony Giddens as a “risk culture,” symbolized by the eager participation of “ordinary” people in the sometimes wild gyrations of increasingly globalized finan¬ cial markets. People today can bet the family nest egg on economic opportunities in unknown countries halfway around the world. The entrepreneur conquering new markets, at home and abroad, is held up as the hero of our times, as someone willing and able to overlook the possibility of disaster in the search for new sources of profit, stimulating growth and progress for all. Such “heroes” have always existed, but what is striking today is the degree to which they, and the free markets they exemplify, are glorified in almost every corner of the globe. This research began with the realization that this model of the heroic risk taker does not actually appeal to most people, especially those in the business community. The best deal, in the eyes of many, is one with a great deal of certainty about future positive returns. We can see this in

Freface

XI

the lengthy history of cartelization, the antithesis of a risk-taking strat¬ egy. In transactions that take place in foreign territory involving people from unfamiliar cultures, certainty about outcomes tends to be dis¬ tinctly less than in home markets. Thus, individuals search for 'ways to reduce or eliminate the downside risks of their activities, especially when they go abroad. When they cannot do so, they may not pursue a particular opportunity. Unmitigated risk can lead to the danger that productive investments will not be made, new technologies will not be discovered, and trade and commerce will not expand. The history of economic development shows us that institutions and techniques cre¬ ated to deal with uncertainty and risk, such as insurance, proved crucial to the expansion of markets. Surprisingly, very little has been written on the important role of insurance in the development of a modern economy. What interested me particularly was the relationship between interna¬ tional risk and the development of alternatives to government interven¬ tion or protection of commerce. What role has insurance played in the expansion of the global economy? How did insurers deal with the politi¬ cal risks peculiar to foreign economic affairs? What was the relationship between the public and private sectors in the development of insurance? The answers to these questions should appeal to two audiences—first, to those intrigued by the insurance industry itself, perhaps from per¬ sonal involvement, perhaps from interest in business history or finance in general, or perhaps from the tidbits of scandal about insurers we sometimes see in the news today; and second, to those who want to understand the role of institutions, including both the state and the firm, in the globalization of markets and the distribution of power and re¬ sources. When I started this project, the reaction among my colleagues could not be called universally enthusiastic. Their concerns centered on whether the insurance industry made a suitable subject for a political scientist to explore; some declared insurance dreadfully dull. Certainly, few had bothered to explore this area previously. When I began my interviews, I discovered many insurers who honestly did not see any political signifi¬ cance in what they did. The challenge to me was to demonstrate to readers in both the scholarly and business communities that the histor¬ ical development of insurance reveals something broader about politi¬ cal-economic development and the changing relationship between the public and private sectors. I hope I have succeeded.

Xll

Preface

A book such as this one is not produced without the help, support, and participation of many people. I spent hours interviewing insurance industry representatives and government officials and poring over ar¬ chival documents and clippings files in London, Geneva, New York, and Washington, D.C. This research would not have been possible with¬ out the generous financial support and encouragement provided by the FERIS Foundation/Gallatin Fellowship, the Cornell University Center for International Studies/MacArthur Fellowship, and the University of Maryland General Research Board and Office of International Studies. I bear a debt of gratitude to those in the insurance industry who were willing to spend their time with me and let me use their library re¬ sources, including Orio Giarini, director of the Geneva Association; Antony Baker, of the Association of British Insurance Underwriters; representatives of the United Nations Conference on Trade and Devel¬ opment; officials of the U.S. Department of Commerce, Overseas Pri¬ vate Investment Corporation, and Export-Import Bank; as well as in¬ surers, reinsurers, brokers, and lawyers in London and New York. The last category includes my father, Flerbert E. Haufler, former vicepresident of an insurance company, who introduced me to some of my interview subjects. This research also relied on documents from the Chartered Insurance Institute of London, the Geneva Association li¬ brary, the library of the League of Nations/United Nations in Geneva, the Guildhall Library in London, the Public Record Office of Great Britain, the British Library, the Library of Congress, and the National Archives of the United States. Many people contributed their time, advice, and support to help me in this endeavor. They challenged me intellectually in ways that forced me to grow and change in how I viewed both this project and my profession more generally. I am deeply indebted to them. First and foremost, Richard Rosecrance, then at Cornell University, gave me the initial idea for this project and provided an enthusiastic source of intel¬ lectual stimulation and support as it developed. He asked the big ques¬ tions that helped me link the minutiae of insurance with the issues and ideas of a political scientist. Susan Strange egged me on with her eager¬ ness to see someone fill that gap where analysis of the role of the insurance industry in contemporary affairs should have been but wasn’t. Many people read and commented on portions of the book, and their questions often forced me to rethink my argument. Thanks go especially to Philip Cerny, Claire Cutler, Francine D’Amico, H. Richard Friman, Lori Gronich, John Kroll, David Lake, Jeannette Money, M. J. Peterson,

Preface

xiii

Tony Porter, Simon Reich, Volker Rittberger, and Geoffrey Underhill. I also would like to recognize the contributions made by the anonymous reviewers of the manuscript, whose suggestions helped me significantly improve the coherence of my argument and the presentation of the material. Of course, this book would not have been possible without a support¬ ive editor. I am deeply thankful for the encouragement and criticism of Roger Haydon at Cornell University Press; his patience surpasses under¬ standing. I also would like to thank Kay Scheuer and Kristina Kelsey at the Press, and Kim Vivier for copyediting. My friends and family have kept me going throughout the entire process of research, writing, and publishing. Deserving special mention are my good friends Linda Jarschauer Johnson and Jack Moran, who fed and entertained me, and Julie Hoffman, who literally yelled at me to “finish that book!” My sisters. Marge and Carol, looked impressed at what I was undertaking but certainly kept me from taking myself too seriously. My brother, Michael, and his lovely family took my mind off work and made me play. And I especially thank my mother and father, who always—always—assumed I knew what I was doing, despite regu¬ lar evidence to the contrary. Virginia Haufler

College Parky Maryland

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