Lloyd's of London
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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. Unlike most of its competitors in the reinsurance market, it is not a single unified company.
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Quick facts
Market Results & Annual Reports 1999-2003 (http://www.lloyds.com/index.asp?itemid=4204), data for 2003 below
Income
- Gross premiums written: £16,144 million
- Pro forma profit on ordinary activities before tax: £1,892 million
Balance sheet
- Balance sheet assets: £48,903 million
History
The 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 first Lloyd's Act was passed in Parliament which gave the business a sound legal footing. The Lloyd's Act of 1911 set out the Society's objectives, which include the promotion of its members' interests and the collection and dissemination of information. By this time the business had became one of the pre-eminent insurers in the world.
In 1965, Hurricane Betsey caused immense damage in the Gulf of Mexico. The membership of the Society, which had been largely made up of market participants, was realised to be too small in relation to the market's capitalisation and the risks that it was underwriting. Lloyd's response was to commission a secret internal inquiry, known as the Cromer Report, which reported in 1968. This Report advocated the widening of membership to non-market participants and also drew attention to the danger of conflicts of interest.
The Lloyd's Act of 1982 further redefined the structure of the business, and was designed to give the 'external Names', introduced in response to the Cromer Report, a say in the running of the business through a new governing Council.
Immediately after the passing of the 1982 Act, evidence came to light, and internal disciplinary proceedings were commenced against, a number of individual underwriters who had siphoned sums from their businesses to their own accounts. These individuals included a Deputy Chairman of Lloyd's, Ian Posgate, and a Chairman, Sir Peter Green.
In 1986 the UK government commissioned Sir Patrick Neill to report on the standard of investor protection available at Lloyd's. His report was produced in 1987 and made a large number of recommendations but was never implemented in full.
In the late 1980s and early 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, many alleging that they were the victims of fraud and incompetence. 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.
Structure
As 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 is a Society without shareholders and lacks its own separate legal status, but includes a service bureaucracy known as the Corporation of Lloyd's which provides centralised 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's
There 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.
Members
For 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.
Syndicates
Members 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. A syndicate is similar to, but not, a partnership, differing in that each participant typically underwrites, and is therefore on risk for, differing amounts.
Managing agents
Managing 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 brokers
Outsiders, 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 ventures
Lloyd's syndicates work on a three year accounting cycle (triennial accounting). They accept premiums from customers to insure risks for one year (the 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.
Each syndicate reserves through the mechanism of reinsurance-to-close policies (RITCs). All outstanding claims, and a provision for incurred but not reported losses (IBNRs), are reinsured at the end of the third year with another venture. Typically, this is the following underwriting year of the same syndicate, but it may be with another syndicate. Long-tail policies are thus rolled over from year to year and there is always capital available, theoretically, to pay claims. It also means that the largest insurance risk typically underwritten by a syndicate is its own reserves.
The origin of the accounting cycle was in the shipping business. Syndicates would insure a ship before the start of its voyage, and the three-year period was considered to be the amount of time that it took a ship to sail around the world.
The structure of triennial accounting and RITCs is considered by some to be ill-suited to modern business. The root of the problem is the desire of publicly-quoted companies to report their earnings on a quarterly basis, and the difficulty of forecasting the results of risks which have a long duration (or 'tail'). 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. An insurer would have paid out its profits decades ago and there would be no capital left to pay the claim.
Capital backing
Four different pools of capital back the ability of Lloyd's to pay claims. These four pools together are called "Lloyd's chain of security."
- Premium trust funds. Premiums collected from customers are deposited in a trust fund which members cannot access until the dissolution of the annual venture. This trust fund is the first source of payment. If there is money left in the fund at the end of the venture's three year life, it is distributed to members as profit. At the end of 2003, total amount of premium trust funds equaled almost £19 billion.
- Funds at Lloyd's. Members have to deposit additional funds at Lloyd's in case that premiums do not cover claims and the venture ends up in a loss. At the end of 2003, total funds at Lloyd's equaled £9.7 billion.
- Personal wealth. Individual members (names) pledge all of their personal wealth to pay claims. As of the end of 2003, this category of personal wealth totaled less than £280 million, due to declining number of names.
- Central fund. Lloyd's levies a premium on all policies written and deposits the proceeds in a central fund that will pay claims if the members backing a policy go bankrupt and cannot meet their obligations. As of the end of 2003, central fund assets exceeded £710 million.
Lloyd's claim paying ability is rated A by A.M. Best and A by S&P.
Types of policies
Lloyd'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:
- Silent film comedian Ben Turpin's eyes from uncrossing.
- Participating automobiles in the carpools involved in the Montgomery Bus Boycott.
- Brooke Shields's and Tina Turner's legs
Miscellaneous
The 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 Lloyd's, stands the Lutine Bell, which used to be struck when a loss of a ship at sea occurred. Now it is rung for major world catastrophes, the recent examples being 9/11 and the Asian Tsunami Disaster.
External links
- Lloyd's official web site (http://www.lloyds.com)
- Special report on Lloyd's in The Economist (September 18th, 2004) (http://www.economist.com/printedition/displayStory.cfm?Story_ID=3195735)
Data
- Yahoo! - Lloyd's Company Profile (http://biz.yahoo.com/ic/41/41174.html)
- Lloyd's bulletin board (http://www.namesline.com)
- Lloyd's litigation database (http://www.uniset.ca/lloyds_cases/lloyds_cases.html)
Criticism
- Web site by former American names who claim to have been defrauded by Lloyd's (http://www.truthaboutlloyds.com/fraud/timeline.html)de:Lloyd's