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The Actuary The magazine of the Institute & Faculty of Actuaries
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Shylock: the underwriter?

For those of us who toil in the financial
world, William Shakespeare’s The
Merchant of Venice is a particularly
compelling play. The overriding
theme through all of its plots and subplots
is risk. Merchants send precious cargo worth
fortunes to sea; noblemen borrow money they
cannot repay; suitors play games of chance to
win a wife. Defying categorisation as comedy,
history or tragedy, The Merchant of Venice might
better be considered as a financial drama.
In the play’s first scene, the merchant Salerio
expresses anxiety at having so much wealth
invested in cargo at sea, fearing his ship will run
aground and be destroyed. His friend Antonio
claims he has no such worries, because of the
number of ships he owns:
My ventures are not in one bottom trusted,
Nor to one place; nor is my whole estate
Upon the fortune of this present year.
(I.i.4244)
Antonio is inherently optimistic about his
business, never considering downside risk.
When another merchant, Bassanio, borrows
3,000 ducats from the moneylender Shylock,
Antonio guarantees this interest-free loan by
agreeing to forfeit a pound of flesh if the loan
cannot be repaid. Discouraged by Bassanio
from accepting Shylock’s terms, Antonio reassures
him:
Within these two months that’s a month
before
This bond expires I do expect return
Of thrice three times the value of this bond.
(I.iii.156158)
Shylock, of course, knows better. As he considers
the loan he reflects on the likelihood of
loss:
But ships are but boards, sailors but men;
there be land rats and water rats, water
thieves and land thieves I mean pirates
and then there is the peril of waters, winds,
and rocks.
(I.iii.2124)
Antonio bears significant risk from his business
before the loan is made, yet seems unaware
of the fact. Shylock only assumes risk through
making the loan, and he engages in prudent
underwriting by weighing the risk with while loathed, is tolerated as a necessity in a
mercantile economy. Antonio and the other
Venetian merchants avail themselves of Shylock’s
services while simultaneously insulting
his religion, calling him a dog, and spitting on
him in the streets of Venice. In addition, Antonio
makes a habit of subverting Shylock’s business
by offering free loans to Shylock’s
customers when he finds himself with sufficient
funds. ‘He hath hindered me half a million’,
says Shylock of Antonio, explaining his hatred
for the merchant.
It is clear when he agrees to the terms of the
loan that Antonio understands neither the
amount of risk being assumed by Shylock, nor
the value that Shylock places on the 3,000 ducats
(and, indeed, on the pound of flesh). Uncertain
why interest would be required at all, Antonio
and Bassanio are thrilled at Shylock’s apparent
generosity in offering what they perceive to be
a free loan. Shylock says the pound of flesh is
just ‘a merry sport’ and downplays its significance
to Bassanio in order to close the loan:
If he should break his day, what should I
gain
By the exaction of the forfeiture?
A pound of man’s flesh taken from a man
Is not so estimable, profitable neither,
As flesh of muttons, beef, or goats.
(I.iii.162166)
Accepting this statement at face value, Antonio
and Bassanio fail to see that the forfeit is, in
fact, enormously valuable to Shylock because it
will rid him of a competitor in his business as
well as a personal enemy. More astute borrowers,
even if they did not suspect Shylock’s violent
intention, would have realised that such an
experienced and successful moneylender would
never take on so much risk without the prospect
of a great reward. Antonio understands his position
only when Bassanio defaults on the loan,
Antonio’s ships are lost at sea, and Shylock
sharpens his knife to claim the pound of flesh.
Protect and insure
Given the play’s historical realism in other
areas, it is somewhat surprising that Antonio
fails to take advantage of other means to protect
himself from Shylock. A little marine insurance
(which was readily available in Venice at
that time) would have saved him a good deal of anxiety and made this tale significantly shorter
and simpler. If some clever broker had persuaded
Antonio to insure his cargo, Shylock the
Sadistic Moneylender might have become
Shylock the Friendly Underwriter, sharpening
a pencil instead of a knife.
Recent scholarship seems clear in its conclusion
that Shakespeare was neither an actuary
nor an underwriter. While this unfortunate circumstance
explains his failure to address the
specifics of marine insurance, it also makes The
Merchant of Venice even more remarkable for its
detailed exploration of risk. Part comedy and
part tragedy, much like the modern financial
world, the play provides valuable insights into
risk management more than four centuries after
its creation.

The original version of this article appeared in
the May/June 2007 issue of Contingencies, the
magazine of the American Academy of Actuaries.

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