A LOOK AT LLOYD'S
(November 2024)
Lloyd's of London began with Edward Lloyd's
coffeehouse in 1688. His clientele included merchants owning cargo and ship
owners needing protection when at sea. Lloyd’s establishment evolved into a
meeting place with wealthy and reputable businessmen willing to protect these voyages
against a variety of "perils of the sea" through financial
arrangements.
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The stakes were quite high for businessmen "underwriters," who
agreed to invest in the ships and cargoes. They put up their personal fortunes
as collateral to pay their share of any covered claim. On the other hand, these
underwriters shared in the profits if the voyage was completed without an
incident.
The term "underwriter," according
to some accounts, came from the practice of persons agreeing to insure a ship
and/or its cargo by writing his name (signature) "under" the name of
the applicable vessel.
Lloyd's of London has long been identified
with British history and the growth of worldwide commerce. Lloyd's is an
international insurance market, located in
The major market groups at
Lloyd's consist of:
- Aviation
– includes airports, global aviation, general aviation, aviation products,
satellite, war and terrorism coverage
- Casualty
– includes accident and health insurance, D&O, employers liability,
general liability, medical malpractice and other professional liability
- Energy
– includes traditional sources such as oil rigs (on and off-shore),
refineries and green (renewable) energy (such as solar and wind).
- Life
- Marine
– includes cargo, hull, marine and liability
- Motor –
includes company fleets, collectible and vintage vehicles, high-value
(such as unique and custom) vehicles as well as high-risk driver exposures
- Property
- Reinsurance
The
Corporation of Lloyd's is a society originally incorporated under the Act of
Parliament of 1871. The Corporation is not an insurance market or placement
facility itself. It provides the premises, shipping information services,
administrative staff and other facilities that enable the Lloyd's insurance
market arrangement to transact insurance business efficiently and effectively.
These transactions are actually done by thousands of Lloyd's members.
Approximately
one-third of the membership is actively involved in the market’s insurance
transactions. The remaining members are considered inactive. The latter status
refers to members that provide capital but do not actively place business in
any Lloyd’s market. The underwriters are members of more than 90 underwriting
syndicates and only they can accept and transact business. Each syndicate is
managed by an underwriting agent and his representative who operate in the
underwriting room at Lloyd's, accepting business on behalf of the members of
that syndicate. Some agents underwrite for more than one syndicate. Most
syndicates write either Marine or Non-Marine business, but some write both.
Note: Lloyd’s also has managing agents specializing in handling
syndicate run-off business.
LLOYD'S FINANCIAL LIABILITY
The financial liability structure
supporting a Lloyd's policy is unique and unmatched anywhere else in the
financial world. Lloyd's maintains substantial deposits of money and financial
instruments in several layers, called the Chain of Security. It consists of
individual syndicate and collective assets that help guarantee prompt payment
of covered losses and claims.
Underwriting Deposits
New Lloyd’s members must make an
initial deposit of cash or certain approved securities. The amount of this
deposit is based on the anticipated volume of business to be underwritten, and
it must always keep pace with the volume of business each member accepts. The
Committee of Lloyd's, elected by its members to administer and attend to its
financial affairs, establishes the maximum annual premium income for each
member. If a member exceeds the established and approved premium limits, the
Committee requires an appropriate deposit increase to support the larger
premium volume. These deposits are held in trust and are available only as
security for incurred losses and other underwriting liabilities.
Premiums Trust Fund
The members’ deposits are handled
under a fund in accordance with a trust deed approved by the United Kingdom
Department of Trade and Industry. The trust funds can be withdrawn for only the
following reasons:
·
To pay
claims
·
To return
premiums
·
To pay for
reinsurance
·
To pay
expenses
·
To
distribute ascertained profits
If a member
becomes insolvent, all remaining available trust funds are used to pay any liabilities
owed to that member’s policyholders. The general creditors of a member have no
claim on that member's trust funds until all outstanding policyholder
obligations have been completely met. Underwriting loss reserves are increased from a
member’s underwriting profits.
Lloyd's Central Fund
The Central Fund is intended to
meet the remaining underwriting liability of a member declared insolvent or
having inadequate security and personal assets to meet his underwriting
commitments. It is funded by mandatory, annual contributions from all members
and, when needed, is supplemented by a levy or assessment applied to every
member or syndicate.
Lloyd’s Annual Audit and Accounting Method
Each Lloyd's member is subject to
an annual audit. Its objective is to identify and address any weaknesses or
shortcomings in the financial structure of a given syndicate. The Committee of
Lloyd's examines the underwriting accounts of each member. If the audit reveals
insufficient funds or assets, the member must either provide additional
security in amounts required by the Committee or cease all underwriting operations.
Lloyd's is unique in this area in
that it uses a three-year accounting method. That method is based on
underwriting years of the account, each covering risks where the premium was
accounted for during a specific calendar year. Losses paid during the second
and third years of coverage revert back to the original year of the account,
rather than being debited to the year of loss payment. No collected premiums
are released from an underwriting year of account as a profit until after the
end of the third year. At that time, the account is closed and the required
reserves carried forward to a later year to meet any unsettled losses for that
year.
The annual audit requires a check
of loss experience for both open and closed years at their respective stages of
development or maturity. Open years are checked at the 12th, 24th and 36th
months of their existence. It is believed that the three-year method has a
number of advantages when compared to a one-year system. The three-year method
makes closing an account after 36 months more accurately reflect mature losses
and earned premium and any return premiums accounted for more accurately. With
this approach, a greater proportion of losses on the account will have been
settled and remaining outstanding losses will be more accurately measured.
Finally, this approach provides a more accurate means to establish loss
reserves at the end of each year. Audits address a wide array of concerns,
including:
- Accounting
and General Finance
- Accounting
Transactions
- Aggregate,
Risk and Premium Bordereaux Analysis
- Claims
- Compliance
and Governance
- Documentation
- IT and
Data Security
- New
recommendations
- Review
of any previous recommendations
- Underwriting
The audit report also includes extensive appendices with
additional details and supplemental information.
INSURANCE PLACEMENTS AT LLOYD'S
Lloyd's transactions involve
millions of premium dollars every day and come from every continent. Authorized
Lloyd's brokers, coverholders (an authorized intermediary) or open market
correspondents are the only parties with direct access to the Lloyd's market.
When a Lloyd's broker begins to
arrange coverage on behalf of a client, it is done using a “slip” (a relatively
simple document that gives the basic details of the risk to be placed). The
broker then goes into the Underwriting Room of Lloyd's and approaches one or
more lead syndicate underwriters who specialize in the type of risk he is
trying to place. The underwriter asks pertinent questions about the risk and,
if interested in providing coverage, suggests a rate for the exposure. Negotiations
then begin in earnest to arrange for the optimum price and coverage terms.
Often, more than one syndicate participates in coverage or other syndicates are
sought if agreeable terms are unavailable.
When all parties agree on a
premium or rate, the underwriter "takes a line" by writing on the
"slip" the share of the risk he accepts for his syndicate, along with
the premium or rate and his initials. If the cover required is large, as is
often the case, the "lead" underwriter usually accepts part of the
risk instead of all of it. The broker then moves around the Underwriting Room
with the "slip" and attempts to persuade other underwriters to take
portions of the risk at the same rate or premium until the commitments cover
100% of the risk or exposure. At times, the broker will "over
complete" the risk. This is being done to provide room for needed future
limit increases as well as to give as many underwriters as possible the
opportunity to participate on the risk. The proportion of participation by each
syndicate is then adjusted so that the coverage totals 100% (along with allowance
for future coverage increases without involving other underwriters).
The degree of trust and
confidence between brokers and underwriters is illustrated by the
"slip." Initially, the "slip" is the only written evidence
of an agreement to insure between the parties. The broker knows that a
legitimate claim will be honored, if necessary and before an insurance policy
is issued, when the "slip" contains the initials of the underwriters.
In years past, all insurance policies at Lloyd's had to be personally signed by
the individual underwriters accepting a share of the risk. Today, the Lloyd's
Policy Signing Office checks policies and compares them against the
"slips," signs them on behalf of the involved syndicates and marks
them with its official seal.
THE LLOYD'S UNDERWRITING ROOM
The hub for underwriting
activities at Lloyd's of London is its modern headquarters building. The
20-story glass and steel building is located in the heart of the
Electronic technology has
replaced much of the personal contact that used to be essential to making
coverage commitments characteristic of the Lloyd's system for more than three
centuries. In spite of this development, personal contact, communication and
commitments continue because these characteristics are part of the trust and
integrity of the Lloyd's arrangement and system.
The Underwriting Room at Lloyd's
has retained the traditional layout and arrangement of functions that existed
when it first began. One wall is devoted to the Casualty Board, referred to as
the "chamber of horrors." This is where special reports, faxes and
telegrams from around the world are posted with news of maritime and aviation
casualties and more general disasters and occurrences such as strikes, floods,
earthquakes, hurricanes or tornadoes and catastrophic fires. The underwriters
take special note of these events and the events of a given day profoundly
affect the atmosphere and working of the Lloyd's insurance market. This
information is the result of the work of the Lloyd's Intelligence Department,
widely recognized as the world's fastest and most accurate news gathering
system. Reports are compiled and submitted by Lloyd's brokers, not insurance
producers, around the world and are dispatched by the latest or most effective
method of communication.
The center of the Room contains a
lectern that holds the Casualty Book. This is a large volume in which a clerk
enters the major marine casualties of the day, as they occur, using a
traditional quill pen. In the middle of this unique and unusual business
setting are men wearing livery, a distinctive uniform worn by male servers, and
called "waiters" as was the case with the staff in the original
coffeehouse.
Lloyd's is a blend of the old,
traditional methods and the new, including the latest technological
developments, that produces a product based on modern techniques superimposed
on time-tested methods. For example, "calling," which is the way brokers
contact their colleagues, dates back to the original coffeehouse days when a
boy read notices from a pulpit. At a later date, a waiter called the names of
brokers through a megaphone. Today, a microphone is used at the Caller's
Rostrum. When a broker hears his name over a speaker system, he signals his
location using screens in the Rostrum and in the Gallery using an electronic
system.
Underwriters in the Room sit at
wooden pew-like desks, known as "boxes." These are another survivor
of the original coffeehouse days. Most underwriters occupy surprisingly small
spaces, but millions of premium dollars can be transacted in even the smallest
box each year. Marine, Motor and Aviation business is transacted on the ground
floor. Non-Marine boxes and business transactions occur in the immense gallery
that circles the upper story of the Room.
Lloyd's maintains its
long-standing traditions and habits because they are practical and still work.
A waiter is easily recognized when needed. The Casualty Book as devised is a
practical and handy work reference. In a city where floor space is precious and
carries premium prices, the boxes are as inexpensive, practical and convenient
a use of space as anything and a more convenient and accessible arrangement in
which to transact business could not be devised.
The accumulated knowledge,
expertise and skill of the individuals both in the boxes and between the
different syndicates are a particular and special strength of the organization.
It creates a special environment for the free and spontaneous exchange of
ideas. In addition, Lloyd's takes a special and deserved pride in its history,
its trappings and its traditions.
CORPORATE CAPITAL
For decades, Lloyd’s has allowed
corporate investors to be admitted as members. This change was fueled by the belief
that corporate investors were needed in order to bolster Lloyd’s capital base.
At the time, the market capacity of Lloyd's had dropped from over $21 billion
to only $13.5 billion.
The parties that expressed
interest in such a corporate investment were combinations of insurance brokers
and other financial entities, such as investment banks. These combined ventures
were formed into companies that invested in Lloyd's. Other corporate membership
came from existing names that incorporated themselves or pooled their resources
with other names to form a corporation. Corporate investors have limited
liability, unlike the unlimited liability of individual names, and are
protected from losses over their authorized capital at Lloyd's. Investors
incorporated within the
LLOYD'S STRUCTURE
Lloyd’s consists of its various
members (both non-corporate and corporate) and the market, the structure that
facilitates its myriad insurance and reinsurance transactions. The overall
structure of Lloyd’s is made up of its Council (including reporting committees)
and its Directorates (see below).
The Council of Lloyd’s is,
essentially, its executive leadership to which reports the Franchise Board
(which oversees the Market Supervision and Review Committee, the Investment
Committee and the Capacity Transfer Panel) as well as the following committees:
- Lloyd’s
Appeal Tribunal
- Nominations
- Remuneration
- Audit
- Enforcement
Board
Lloyd’s functions are facilitated
by six large departments called Directorates:
Corporate
Services - This umbrella consists of departments that handle auditing, business and
strategic planning, marketing, personnel (human resources) and governance.
Finance,
Risk Management and Operations - Monitors Lloyd’s financial stability, resources and assets use.
International
Markets - Oversees
Lloyd’s international operations (other than North America), pursues business
opportunities and monitors new exposures via emerging markets.
Market
Operations - Essentially
handles initiatives designed to keep Lloyd’s operations (particularly work
processes) efficient and competitive.
North
America and General Counsel - Handles Lloyd’s legal services, relations with U.S. managing
agents, oversees Lloyd’s North American operations and deals with Lloyd’s
government and regulatory affairs.
Performance
Management - Oversees
review of syndicate performance, monitoring asset levels with regard to risk
levels and ensures compliance with underwriting and service guidelines
OPERATING STANDARDS
Lloyd’s, like many other
commercial entities, has to be highly concerned with its reputation. Its
success as a premier insurance marketplace depends upon its consistent ability
to meet or exceed various standards in critical areas such as the following:
- Underwriting
Management
- Governance
- Scope,
Change and Use
- Validation
- Reserving
- Conduct
Risk
- Claims
Management
- Risk
Management
- Modelling,
Design and Implementation
- Investment
Management
- Regulatory
- Operating
at Lloyd's
Ongoing Challenges
As a critical part of the global
insurance sector, Lloyd’s deals with a range of complex issues that affect its
ability to serve its customers and members.
Britain’s decision to leave the
European Union resulted in Lloyd’s making
structural adjustments. One was the creation of Lloyd’s Insurance Company S.A.
which is also called Lloyd’s Europe.
Lloyd’s Europe is a subsidiary insurer/reinsurer that is legally incorporated
in Belgium. Prior to Britain’s EU withdrawal, all of Lloyd’s non-British
insurance and reinsurance business (except life insurance) was transferred to
the subsidiary. Lloyd’s Europe operates within the tax and insurance regulatory
laws of the EU. New and renewal insurance contracts on business located within
the EEA (European Economic Area) is written and serviced by Lloyd’s Europe.
Lloyd’s, especially in its role
as a major supplier of reinsurance, faces additional challenges. While climate
change continues to be debated, the impact of extreme weather remains. Storms
are becoming more frequent and intense, flooding, wildfires, droughts and other
catastrophes are adding substantial strains. Political struggles impact the
world’s economies including creating constraints on supply chains, and damage
from rioting. Technology also brings blessings and curses. While advancement improves
the ability to customize and deliver more insurance products to a wider market,
it also increases risks of cyber-attacks, network interdependency and fraud.