LLOYD’S of London is an insurance market governed by various Acts of Parliament of the United Kingdom. Foremost of these acts are the Lloyd’s Act of 1871 and the Lloyd’s Act of 1982. It is not an insurance company, as in fact, it is not a company at all. As a market, underwriting is done by syndicates which are actually a pool of financiers composed of corporations and individuals. The individual members are known as “Names.” While the insurance business offered by Lloyd’s is very diverse, it is well-known for its reinsurance business. It is also well-known for taking up unusual risks, such as providing insurance cover for Celine Dion’s and Bruce Springsteen’s vocal cords and Tina Turner’s legs.
In 2011 its gross premiums totaled £23.44 billion. And in 2012 it rose to £25.50. As of December 31, 2013, £1 is equivalent to $1.66. By Philippine legal standards, its existence is peculiar for no such notion of an “insurance market” exists in Philippine legal contemplation. By general recognition, its existence is “unusual,” different and unique.
The underwriting is done, not by Lloyd’s itself, but by its syndicates. Supervising these syndicates is the Council of Lloyd’s (“Council”). The Council, on the other hand, is regulated by the Prudential Regulation Authority, a subsidiary of the Bank of England created under the 2012 Financial Services Act. It is also supervised by Financial Conduct Authority, a non-governmental financial regulatory body. A body called the Corporation of Lloyd’s supports the market and the operation of the syndicates.
The financial capacity of the syndicates is provided by individuals called Names, who are obviously very wealthy, comprising 12 percent of the financial capacity of Lloyd’s (9 percent with limited liability and 3 percent with unlimited liability); by corporations (both the UK and others) with limited liability, comprising 32 percent of the financial capacity; and the others by the international insurance industry, of which 21 percent are from the United States, 15 percent are Bermuda-registered, and 20 percent from the rest of the world. Supporting the syndicates are the agents and the brokers. Transactions are never carried out directly with the syndicates. These must be coursed through the brokers as the only intermediaries. Thus, Lloyd’s is known as a broker market.
As of 2013, there are 181 Lloyd’s brokers and 56 managing agents. There are 91 syndicates (there used to be 410 syndicates) composed of 773 individual Names with unlimited liability and 1,238 corporate members. Each syndicate may choose the kind of risk it wants to underwrite. Most syndicates specialize in one or two types of risks. Syndicates are managed by a managing agent who may manage one or more syndicates. A managing agent hires the underwriter and his team.
A notable manner by which it does business is the face to face transaction between the brokers (on behalf of the insured) and the underwriters in their mammoth Underwriting Room in particular areas called “underwriting boxes.” A syndicate’s underwriter decides which insurance policies the syndicate will underwrite. A broker approaches an underwriter with policies already written and priced and the underwriter will decide whether to accept the risk at a given premium or to reject it. “Trading” is carried out in floors of the Lloyd’s building along Lime Street with the first floor reserved for marine insurance. It is said that 15,000 people pass through these floors during peak days.
One function of the underwriter is the setting of reserves. The reinsurance for estimated future liability function is the creation of a reserve or a fund wherein every year, a reserve required for the estimate of future liabilities is recalculated. Actuarial services are needed for this function.
Lloyd’s does business in over 200 countries. Forty-three percent of its transactions come from the US and Canada, 18 percent from the UK, 15 percent from the rest of Europe, 12 percent from Central Asia and Asia Pacific, 8 percent from the other Americas, and 4 percent from the rest of the world. The financial strength of Lloyd’s has been rated as A+ (Strong) by Standard & Poor’s, A+ (Strong) by Fitch Ratings, and A (Excellent) by AM Best.
The reinsurance business of Lloyd’s covers both short- and long-tail, both facultative and treaty, generally on an excess of loss basis. The bulk of its reinsurance covers property insurance including catastrophe risks.
The Lloyd’s of London was founded in 1688 quiet notably in a coffeeshop owned by Edward Lloyd. Rich merchants gathered in coffeeshops for coffee was an expensive commodity at that time. Back then, marine insurance was its exclusive concern. Specifically, it insured slaves, slave ships, and other maritime-related risks. Its leadership in marine insurance (ships and cargo) continues to this day. It was only in 1885 when Lloyd’s created its first non-marine syndicate. In 1774 Lloyd’s transferred to the Royal Exchange in Cornhill to be known as the Society of Lloyd’s, under the influence of John Julius Augestein. While it continued long after Edward Lloyd’s death in 1713, it was only in 1871 when Parliament gave legal recognition to Lloyd’s. The Lloyd’s Act of 1911 defined its objectives.
Lloyd’s established its reputation for reliability during the San Francisco earthquake of 1906. Lloyd’s Chairman Cuthbert Heath ordered all claims to be expeditiously paid, and they were. While Lloyd’s has been embroiled in controversies in the past including accusations of fraud, it has manifested that all these are now in the past. There have been reforms since then to satisfy regulator’s concerns in various jurisdictions.
As A. M. Best stated in 2010: “Lloyd’s occupies an excellent position in the global general insurance and reinsurance markets as a specialist writer of property and casualty risks. Its competitive strength derives from its reputation for innovation and flexibility, which is supported by the pool of underwriting expertise in London.”
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Atty. Dennis B. Funa is the Insurance Commission’s deputy commissioner for legal services. Send comments to dennisfuna@yahoo.com.