Lloyd’s of London is not an insurance company. Rather, it is a marketplace where insurance buyers and sellers come together. Lloyd’s began as a coffee house in the 1686. Ship captains, vessel owners, traders and others interested in shipping gathered at the coffee house to buy or sell what is now called ocean cargo insurance. These days, brokers and underwriters convene at the Lloyd’s office building on Lime Street in East Central London. Lloyd’s is now a major hub for buying and selling a variety of coverages, not just marine insurance.
The word Lloyd’s has two meanings. One is the marketplace where brokers and underwriters meet to do business. Lloyd’s also means the Corporation of Lloyd’s, the company that oversees the insurance marketplace. The corporation ensures that the syndicates are financially sound and that the marketplace operates efficiently.
Its motto is Fidentia, Latin for “confidence”, and it is closely associated with the Latin phrase uberrima fides, or “utmost good faith”.
The market began in Lloyd’s Coffee House, opened by Edward Lloyd in 1686 on Tower Street in the City of London. This establishment was a popular place for sailors, merchants, and ship-owners, and Lloyd catered to them with reliable shipping news. The coffee house soon became recognised as an ideal place for obtaining marine insurance. The shop was also frequented by mariners involved in the slave trade.
Claims and bankruptcies in the 80’s & 90’s
In the late 1980s and early to mid-1990s, Lloyd’s went through perhaps the most traumatic period in its history. Unexpectedly large legal awards in US courts for punitive damages led to large claims, especially on APH (asbestos, pollution and health hazard) policies, some dating as far back as the 1940s. Many of these policies were designed to cover all liabilities that were typically excluded from broad-form (wide cover) liability policies.
An employee at an industrial plant may have been exposed to asbestos in the 1960s, fallen ill twenty years later, and claimed 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. However, because the insurer did not fully understand the nature of the future risk back in the 1960s, it and its reinsurers would not have properly reserved for it. In the case of Lloyd’s, this resulted in the bankruptcy of thousands of individual investors who indemnified general liability insurance written from the 1940s to the mid-1970s for companies with exposure to asbestosis claims.
In the 1980s, Lloyd’s was also accused of fraud by several American states and external Names.
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 (for example, individuals and companies seeking insurance, or insurance companies seeking reinsurance).
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, as borne out in the fact that in 2016 the 99 syndicates were operated by just 57 managing agents.
Outsiders, whether individuals or other insurance companies, cannot transact business directly with Lloyd’s syndicates. They must hire Lloyd’s brokers, who are the only customer-facing companies at Lloyd’s. They are therefore often referred to as intermediaries. Lloyd’s brokers shop customers’ risks around the syndicates, trying to obtain the most competitive terms.
Integrated Lloyd’s Vehicles
When corporations became admitted as Lloyd’s members, they often disliked 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 (ILV) is a group of companies that combines a corporate member, a managing agent, and a syndicate under common ownership. Some ILVs allow minority contributions from other members, but most now try to operate on an exclusive basis.
Lloyd’s capital structure, often referred to as the “Chain of Security”, provides financial security to policyholders and capital efficiency to members. The Corporation is responsible for setting both member and central capital levels to achieve a level of capitalization that is robust and allows members the potential to earn superior returns.
There are three “links” in the chain: the funds in the first and second links are held in trust, primarily for the benefit of policyholders whose contracts are underwritten by the relevant member. Members underwrite for their own account and are not liable for other members’ losses.
The third link is the Lloyd’s Central Fund, which contains mutual assets held by the Corporation which are available, subject to Council approval, as required, to meet any member’s insurance liabilities.