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Lloyd's of London is a British insurance market. It serves as a meeting place where multiple financial backers or "members", whether individuals (traditionally known as "names") or corporations, come together to pool and spread risk.
HistoryThe market began in Edward Lloyd's coffeehouse around 1688 in London. While Lloyd was only the proprietor of the coffeehouse, his establishment was a popular place for sailors, merchants, and shipowners and Lloyd catered to them with reliable shipping news and a variety of services. The shipping industry community frequented the place to discuss insurance deals among themselves. This arrangement carried on long after Lloyd's death in 1713 until 1774 when the participating members of the insurance arrangement formed a committee and moved to the Royal Exchange as The Society of Lloyd's. In 1871, The Lloyd's Act was passed in Parliament which gave the business a sound legal footing. By the early 1900s, the business became one of the pre-eminent insurance companies in the world. The Lloyd's Act of 1982 further redefined the corporate structure of the business. In the 1990s, Lloyd's went through the most traumatic period in its history. Unexpectedly large legal awards in US courts for punitive damages led to large claims by insureds, especially on APH (asbestos, pollution and health hazard) policies. For the first time in Lloyd's history, members refused or were unable to pay the claims. The market was forced to restructure by allowing corporate members, ring-fencing old liabilities in a vehicle called Equitas at a cost of $21 billion, and changing the financial requirements for underwriting. It has rebounded and started to thrive again after the World Trade Center attacks, but it has not regained its past importance as newly created companies in Bermuda captured a large share of the reinsurance market. StructureAs the oldest continuously active insurance marketplace in the world, Lloyd's has retained some unusual structures and practices that differ from all other insurance providers today. Lloyd's itself does not have any shareholders and lacks its own separate legal status, but the corporation does provide services to Lloyd's members (for example, membership at Lloyd's gives access to licenses to write insurance in dozens of countries) and levies fees from members. Businesses at Lloyd'sThere are two classes of people and firms active at Lloyd's. The first are members or providers of capital, the second are agents, brokers, and other professionals who support the members, underwrite the risks, and represent outside customers. MembersFor most of Lloyd's history, rich individuals ("names") backed policies written at Lloyd's with all of their personal wealth (unlimited liability). Since 1994, Lloyd's has allowed corporate members into the market, with limited liability. The losses in the early 1990s devastated the finances of many names (1,500 out of 34,000 names declared bankruptcy) and scared away others. Today, names provide only 20% of capacity at Lloyd's, with corporations accounting for the rest. No new names with unlimited liability are admitted, and the importance of individual names will continue to decline as they slowly withdraw or die off. SyndicatesMembers do not write insurance policies directly, but through syndicates. There are currently 66 syndicates competing against each other for business. Some syndicates specialize in niche insurance areas (such as aviation, marine hull, etc.) while others are generalists. Syndicates employ underwriters who decide which policies and at what prices the syndicate should write. Managing agentsManaging agents sponsor and manage syndicates. They canvas members for commitments of capacity, create the syndicate, hire underwriters, and oversee all of the syndicate's activities. Managing agents may run more than one syndicate. Lloyd's brokersOutsiders, whether individuals or other insurance companies, cannot do business directly with Lloyd's syndicates. They must hire Lloyd's brokers, who are the only customer-facing companies at Lloyd's. Lloyd's brokers shop customers' policies among the syndicates, trying to obtain the best prices and terms. Integrated Lloyd's vehicles (ILVs)When corporations became admitted as Lloyd's members, they did not like the traditional structure. Insurance companies did not want to rely on the underwriting skills of syndicates they did not control, so they started their own. An integrated Lloyd's vehicle is a company that combines a corporate member, a managing agent, and a syndicate under one ownership. Some ILVs allow minority contributions from other members, but most now try to operate on an exclusive basis. Underwriting venturesLloyd's syndicates work on a three year accounting cycle. They accept premiums from customers to insure risks for one year (annual venture). At the end of the year, the venture stops writing business, but continues to pay claims. After three years (one year of writing and two years of paying claims) the venture is dissolved and its profits are paid out to members. The origin of the venture structure was in the shipping business. Syndicates would insure a ship before the start of its voyage. If the ship did not come back within three years, it would be declared lost and claim would be paid. The annual venture is ill-suited for modern insurance business, where some claims take decades to report after the original loss was incurred. A classic example is asbestos claims. A worker at an industrial plant may have been exposed to asbestos in the 1960s, fallen ill 20 years later, and collected compensation from his former employer in the 1990s. The employer would report a claim to the insurance company that wrote the policy in the 1960s. A traditional venture would have paid out its profits decades ago and there would be no capital left to pay the claim. Lloyd's solution was to adopt reinsurance-to-close policies (RITCs). All incurred but not reported losses (IBNRs) are reinsured at the end of the year with another venture. Long-tail policies are thus rolled over from year to year and there is always capital available to pay claims. Capital backingFour different pools of capital back the ability of Lloyd's to pay claims. These four pools together are called "Lloyd's chain of security."
Lloyd's claim paying ability is rated A by A.M. Best and A by S&P. Types of policiesLloyd's syndicates write a diverse range of policies, both direct insurance and reinsurance, covering property, liability, catastrophe and many other risks. Lloyd's has a unique niche in unusual, specialist business such as kidnap and ransom insurance, fine art insurance, aviation insurance, marine, etc. The general public knows Lloyd's for some unusual policies it has written in the past. Lloyd's has insured:
MiscellaneousThe present Lloyd's building was designed by architect Richard Rogers and was completed in 1984. It stands on the site of the old Roman Forum. In the great Underwriting Room of Lloyds, stands the Lutine Bell, which used to be struck when a loss of a ship at sea occured. Now it is rung for major world catastrophes, the recent examples being 9/11 and the Asian Tsunami Disaster. External links
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