1 Lime Street
London EC3M 7HA
United Kingdom
Telephone: +44 7327-1000
Fax: +44 7327-5599
Web site: http://www.lloyds.com

Private Company
1871 as Society of Lloyd's
Employees: 582
Total Assets: $237.5 billion (2003)
NAIC: 524210 Insurance Agencies and Brokerages

Perhaps the world's most famous insurance group, Lloyd's is a uniquely organized insurance market. It does not sell insurance per se, but regulates a market through which insurance contracts are transacted. The organization is a society of individuals—and, since 1994, corporations—that accept liability for claims under insurances accepted on their behalf. In a nutshell, Lloyd's brokers act on behalf of their clients. Underwriters accept risk from the brokers for the syndicates, which, in turn, are the actual business units that sell insurance—they provide insurance after a premium is paid—in the Lloyd's market. In 2005, there were 62 underwriting syndicates that covered all classes of business from more than 200 countries across the globe. Lloyd's had the capacity to accept insurance premiums of more than £13.7 billion ($26 billion) in 2005. The United States is the largest geographical market for Lloyd's, accounting for 34 percent of business in 2004. Lloyd's is the world's sixth largest reinsurer.

Over the course of its more than three centuries in business, this unique group has brokered policies for the routine (it is Great Britain's leading automotive insurer) as well as the weird. Unusual contracts written at Lloyd's have included the following: a food critic who insured his taste buds for £250,000; a comedy troupe that took out a policy to cover the risk that an audience might die laughing; and rock star Bruce Springsteen, who insured his voice for £3.5 million. Although the group's most famous claim is probably the sinking of the Titanic in 1912, numerous and massive claims in the late 1980s and early 1990s threatened to "sink" the venerable Lloyd's.

Prompted by aggregate losses of more than £7.9 billion ($12.4 billion) from 1988 through 1992, Lloyd's was compelled to reform some long-held precepts. For more than 300 years, individual underwriting members, called Names, accepted unlimited personal liability for the policies they signed. Facing a lawsuit that eventually cost the group more than £3 billion, Lloyd's formally inaugurated limited individual liability in 1993. The creation of Equitas, a separate reinsurer to assume all of Lloyd's pre-1993 liabilities, was intended to set Lloyd's back on the trail to profitability.

Origins As 17th-Century Coffeehouse

In 1688, Edward Lloyd opened a coffeehouse in Tower Street, London, near the docks. He sought to attract a clientele of persons connected with shipping and, in particular, marine underwriters, those willing to transact marine insurance. By 1689 he was well established. In 1691 his coffeehouse moved to Lombard Street. Lloyd provided shipping intelligence. After his death in 1713 the business was carried on by a succession of masters. From 1734 the business published Lloyd's List, a newspaper featuring shipping news. The paper still appears daily.

In the early 18th century Lloyd's became the main, though not the only, place where marine underwriters congregated. The Bubble Act of 1720 gave two newly formed corporations, The London Assurance and The Royal Exchange Assurance, the exclusive right to transact marine insurance as corporations, but expressly allowed individual private underwriters to continue operating. The two corporations exercised the utmost caution and took only a fraction of the growing market, leaving scope for private underwriters. Some of these also were willing to effect gambling insurances, where the policyholder did not stand to lose financially if the event insured against occurred, that is, he had no insurable interest. Such insurances on ships and cargoes were forbidden by an Act of 1745 but persisted on lives and specific events.

In 1769 some underwriters who disapproved of gambling insurances broke away. They persuaded a Lloyd's waiter, Thomas Fielding, to open a New Lloyd's Coffee House, which, in five years, drove the old one out of business. The new Lloyd's became cramped. In 1771 nine merchants, underwriters, and brokers formed a committee that took over the premises and appointed two masters to run them. Lloyd's moved into the Royal Exchange in 1773. By the Life Assurance Act, 1774, Parliament prohibited gambling insurance on lives, thus vindicating the stand of those who had reorganized Lloyd's.

In 1779 Lloyd's had only 179 subscribers. These enjoyed the sole right of entry to the underwriting room at Lloyd's. The wars with France from 1792 to 1815 brought great prosperity for marine insurers, among them John Julius Angerstein, an underwriter and broker who served as chairman in 1786, from 1790 to 1796, and again in 1806. At the height of the wars the number of subscribers rose to more than 2,000.

Declining Membership in the Early 19th Century

British entrepreneurs chafed at the law against new marine insurance companies. In 1824 the Bubble Act was at last repealed, but peace had signaled a decline in marine insurance. The number of subscribers fell from 2,150 in 1814 to 953 in 1843. In 1846, to raise money, a higher subscription was imposed on those subscribers who underwrote insurances; only 189 paid. In 1844, the committee of Lloyd's abolished the office of the masters and assumed full responsibility, through its secretary, for administering the market.

In 1848 Captain G.A. Halsted of the Royal Navy was appointed secretary, a post he held for 20 years. From 1850 Lloyd's began to appoint politically prestigious persons from outside its own community to the chairmanship. The most notable was G.J. Goschen, a young liberal member of Parliament who later became chancellor of the exchequer. He was chairman from 1869 to 1886 and again from 1893 to 1901. After 1901 Lloyd's reverted to having chairmen who worked in the market.

During the first half of the 19th century the committee was concerned, in large part, with intelligence-gathering for the benefit of Lloyd's members. Beginning in 1811 it appointed firms and persons in ports throughout the world to provide shipping information. By 1829 there were more than 350 Lloyd's Agents, as they were called. Lloyd's Agents receive no remuneration except for services rendered to underwriters such as surveying damaged property. They could, however, hope for some commercial advantage from their association with Lloyd's.

Marine underwriters have always felt the need for information about ship construction. As early as 1760 they formed a registration society that published a book of details of ships for the use of subscribers only. In 1798 shipowners began publishing a similar book. In 1834 the two publications were merged to form Lloyd's Register of Shipping, administered by a committee representing shipowners, merchants, and marine underwriters. The register operated as a corporation separate from Lloyd's.

The provision of intelligence loomed large in the work of Henry Hozier, who was secretary from 1874 to 1906. In addition to strengthening the central staff of Lloyd's, he saw the desirability of getting information promptly, and set up coastal telegraph stations for that purpose. By 1884 Lloyd's had 17 stations at home and six abroad. They worked in cooperation with the Admiralty. Hozier was knighted. He was a pioneer of wireless telegraphy, which Lloyd's used early in the 20th century.

Incorporation in 1871

For much of the 19th century the committee exercised little power over its underwriting members. Lloyd's remained a loosely run club. Not until 1851 did a general meeting resolve that any member becoming bankrupt should forfeit his membership. Legislation was sought to strengthen the committee's powers. The Lloyd's Act, 1871, made Lloyd's a corporation, the Society of Lloyd's. The objectives of the society were stated as the carrying on of marine insurance by members and the collection and publication of intelligence. At that time the participation of Lloyd's in nonmarine insurance was negligible and the Act made no reference to it or, indeed, to insurance brokers.

Between 1849 and 1870 the underwriting membership of Lloyd's had doubled. The committee became increasingly concerned to see that applicants for membership had the necessary means to support their underwriting. From 1856, in a few cases, guarantees or deposits were required, but it was not until 1882 that they became mandatory. Even then they related only to marine insurance.

After 1871 the volume of nonmarine insurance became significant. Its growth was due, in large part, to the efforts of C.E. Heath, an underwriter who began his own business in 1881. Aside from transacting fire insurance he pioneered new forms such as all risks insurance on property on land, and on household burglary. C.E. Heath underwrote on behalf of a syndicate that in 1887 consisted of 15 Names.

The years 1875 to 1900 saw the accelerating development of Lloyd's in two respects. Thanks to the activities of Lloyd's brokers, much business began to reach Lloyd's from the United States and other overseas sources. Reinsurance, that is, the acceptance of liabilities assumed by direct insurers under their own policies, came to be transacted at Lloyd's, which pioneered novel forms of reinsurance contracts.

Company Perspectives:

The aim of the Lloyd's franchise is to be the world's leading specialist insurance marketplace. Lloyd's businesses are independent and operate within the Franchise. They are committed to delivering consistent underwriting profit, benefiting from a common rating and mutual security, and attracting the highest quality management and underwriting talent.

Standards Set Under Heath in the Early 20th Century

In 1908, at Heath's prompting, Lloyd's took steps toward tightening security under Lloyd's policies. A general meeting agreed that all underwriters should provide certificates of solvency from approved auditors and that premiums be held in trust accounts for the payment of claims. This had beneficial effects in the following year. The Assurance Companies Act, passed in 1909, which for the first time imposed a measure of regulation on companies transacting the main classes of general insurance, left to the Corporation of Lloyd's the primary responsibility for regulating Lloyd's underwriters, as did subsequent regulatory Acts.

World War I affected Lloyd's favorably, creating a large demand for war-risk coverage at high premiums. The state took 80 percent of the war risk on ships, leaving 20 percent to private underwriters. The state also insured cargoes at sea at fixed rates, leaving underwriters free to offer lower rates for any business they wanted. They made large profits on the desirable cargo business while the state was losing money on the residue. Insurance of war risk on property on land was left to private enterprise for three years. Lloyd's took the lead in providing coverage where most insurance companies were unwilling to do so. The business proved profitable.

At Lloyd's, all policies were prepared by brokers who then had to take them to the underwriting room for signature on behalf of all the syndicates concerned, a tedious process. In 1916, to save clerical labor, the committee sanctioned an optional system whereby policies could be signed on behalf of all the underwriters concerned in a new bureau, Lloyd's Policy Signing Bureau. In 1924 use of the bureau, renamed Lloyd's Policy Signing Office, became mandatory.

The first quarter of the 20th century saw the development of three new classes of insurance—motor, aviation, and credit. Credit insurance involved a guarantee that monies due would be paid. In 1923, one syndicate transacting this business failed through reckless underwriting. The committee of Lloyd's banned future direct insurance by way of financial guarantees but allowed reinsurance of such business to continue.

The reputation of Lloyd's depended on claims being met by underwriters. Some underwriting syndicates had the potential to fail through dishonesty or poor underwriting. In 1927 Lloyd's set up a central fund, financed by a continuing small levy on premiums. This fund was held in trust for the benefit of policy-holders whose claims were not met.

In World War II Lloyd's again prospered, although war risks were undertaken by the government. Special arrangements had to be made to protect the company's U.S. business. Lloyd's established a U.S. trust fund into which all premiums in U.S. dollars had to be paid and held for the benefit of policyholders.

The first half of the 20th century was a profitable time for Lloyd's. Its underwriters proved themselves more flexible than insurance companies. They identified risks overcharged by company cartel rates and, by selective underwriting, skimmed the cream of the business. Large insurances had to be shared among many individual underwriters. The increasing size of insurances led to a growth in the size of syndicates. In 1890 a syndicate with ten Names was exceptional. By 1952 there were 16 syndicates with 100 Names or more. The largest had more than 300 Names. Large syndicates developed for motor insurance, of which Lloyd's had no more than 5 percent of the £100 million market in 1950.

The growth of Lloyd's had three consequences. First, the need for further underwriting capacity started a hunt for new Names to provide the capital required. Brokers were well placed to find people. They also organized underwriting syndicates. A number, called underwriting agents, acted as both members' agents and managing agents. Second, the various interests at Lloyd's formed market associations to deal collectively with the problems they encountered. Marine underwriters formed their own association within Lloyd's in 1909. An association for fire and accident—nonmarine—underwriters was formed in 1910 and Lloyd's Insurance Brokers' Association was founded. Although underwriters at Lloyd's wrote the group's first auto policy in 1901—it was a marine policy that purported the vehicle to be "a ship navigating on dry land"—Lloyd's Motor Underwriters' Association was not formed until 1931. Lloyd's Aviation Underwriters' Association dates from 1935. Third, pressure on space at the Royal Exchange became acute. In 1928 Lloyd's moved out to specially built premises in Leadenhall Street.

Rapid Growth in the Postwar Era

The years following 1950 saw the most spectacular growth at Lloyd's. In 1957 a further building had to be opened on an adjoining site across Lime Street. In 1983 the old Leadenhall Street building was demolished and Lloyd's commissioned a new structure, designed by Richard Rogers, for the site. This was opened in 1986, with the Lime Street building being retained. Meanwhile much work had been transferred to out-stations at Chatham and Colchester.

Key Dates:

Edward Lloyd opens a coffeehouse in Tower Street, London.
A group of underwriters who disapprove of gambling insurances persuade a Lloyd's waiter, Thomas Fielding, to open a New Lloyd's Coffee House.
Nine merchants, underwriters, and brokers form a committee to take over the premises.
By now, there are more than 350 Lloyd's Agents.
The Society of Lloyd's is incorporated.
Lloyd's Motor Underwriters' Association is formed.
Membership is opened to nationals of all countries.
The Lloyd's Act of 1982 creates the Council of Lloyd's.
The first corporate members join Lloyd's; Equitas is created.
The group drops "of London" from its name; it completes its Reconstruction and Renewal plan.
The market experiences its worst year as claims related to the September 11, 2001, terrorist attacks against the United States skyrocket to £2.66 billion.

Between 1952 and 1968 the membership of Lloyd's nearly doubled, from 3,157 to 6,052. In considering how to increase underwriting capacity, Lloyd's appointed a working party under the chairmanship of the Earl of Cromer. Meanwhile, in 1968, membership, hitherto confined to the commonwealth, was opened to nationals of all countries. Eligibility was extended to British women in 1970. It was not until 1972 that women were admitted to the underwriting room.

The Cromer working party issued its report in 1970. It favored the admission of corporations as members, but this recommendation was not adopted. Thanks to the profitability of Lloyd's, however, membership again rose steeply, reaching 20,145 in 1982 and 33,532 in 1988, although by 1990 it had fallen to 28,770.

One growth area after 1950 was U.K. motor insurance. Lloyd's held one-sixth of the market, thanks in part to a modification of the company's normal procedure, which required all business to be transacted in the underwriting room. Since 1965, Lloyd's allowed motor syndicates to deal directly with nonLloyd's intermediaries if they were sponsored by a Lloyd's broker. Motor syndicates, therefore, could operate as if they were insurance companies.

During this time period, about half of the company's business was derived from the United States. U.S. insurance brokers cast envious eyes on Lloyd's brokers, who alone had access to Lloyd's and, therefore, received commissions on all business placed there. The big Lloyd's brokers found themselves exposed to takeover overtures from their U.S. counterparts. In 1979 Marsh & McLennan, the largest U.S. broker, acquired C.T. Bowring. In 1982 Alexander & Alexander acquired Alexander Howden. Since 1982 two Lloyd's brokers have acquired two large U.S. brokers: Sedgwick took over Fred S. James and Willis Faber merged with Corroon & Black.

In a market such as that of Lloyd's, where hundreds of enterprises competed from time to time, unsatisfactory situations arise. One such event was the affair of the Sasse syndicate in 1976. Its active underwriter authorized an underwriting firm in New York to write business on his syndicate's behalf. The firm transacted a large volume of bad business, which led to heavy losses. The Sasse syndicate exceeded the premium income it was authorized to write. Some members of the syndicate, faced with heavy calls, sued Lloyd's, alleging that losses arose from a failure to supervise. It became apparent that the machinery of Lloyd's was not working properly. In 1979 the committee appointed a working party under the chairmanship of Sir Henry Fisher to examine self-regulation at Lloyd's. The working party reported in 1980. It made 79 recommendations for improvements. Apart from a general tightening up, the working party recommended a new governing body with wider powers. It drew attention to the growing influence of the big brokers. In 1978 the six largest brokerage groups had placed more than half of Lloyd's business and the proportion was growing.

Record Profits in the 1980s Giving Way to Unprecedented Losses in the 1990s

Lloyd's accepted the main recommendations and sought legislative powers to bring them into effect. The result was the Lloyd's Act of 1982. This act put a new body, the Council of Lloyd's, over the committee, which had consisted of 16 persons, mainly underwriters, active in the Lloyd's market. The council was to include, in addition to the 16 committee members, eight representatives of the Names not working in the market—external members—and three nominated persons not members of Lloyd's. At the prompting of the governor of the Bank of England, prominent accountant Ian Hay Davison was appointed chief executive and became a nominated person and one of three deputy chairmen of Lloyd's. The Act also provided for the separation of brokers and managing agents. They were to divest themselves of financial interests in each other. The separation was achieved by 1987.

At about the time of the Act, scandals erupted involving two leading broker groups. Large amounts of premiums had been siphoned off from some profitable syndicates by means of reinsurance with companies in which the chairmen and other directors of the groups had a financial interest. The reverberations of these events continued for some years with expulsions and suspensions, but none involved any loss to policy-holders as distinct from Names. Lloyd's premium income did not suffer. The council made determined efforts to stamp out internal abuses.

In 1986 the government appointed the Neill Committee to consider whether those who participated at Lloyd's as Names had protection comparable with that provided for investors under the Financial Services Act of 1986. The following year the committee reported a number of shortcomings and made 70 recommendations for remedy. They included an amendment to the constitution of the council by which it would consist of 12 working members of Lloyd's, eight representatives of external members, and eight nominated members from outside Lloyd's, including the chief executive, so that the working members would be in the minority. The council accepted the recommendations beginning with the change to its membership. In three years most of the other changes were implemented.

Lloyd's appeared to be on a roll in the 1980s, chalking up record net income in 1986 and attracting thousands of nouveau riche to swell the ranks of Names to a high of 32,433 in 1988. But that veneer of success was shattered in the late 1980s, when a string of large claims brought massive losses to bear on the 300-year-old institution. Claims stemming from marine disasters such as the 1988 explosion of the Piper Alpha oil rig and the 1989 Exxon Valdez oil spill combined with natural disasters including the San Francisco earthquake and Hurricane Hugo, both in 1989. Final accounting for 1988 (which was not reported until 1991 due to a three-year lag in the Lloyd's financial reporting cycle) revealed a net loss of £509 million, Lloyd's first shortfall in more than two decades. At the same time, the Lloyd's U.S. operations were hit with retrospective liability for disability caused by asbestosis and for pollution damage. Faced with personal financial ruin, thousands of Names refused to honor their debts, instead launching preemptive lawsuits against Lloyd's for recourse. Thousands more Names resigned, shrinking Lloyd's membership to less than 10,000 by 1997; three even committed suicide. With individual and syndicate failures mounting, Lloyd's racked up five consecutive losses totaling £7.9 billion ($12.4 billion) from 1988 through 1992.

The crisis compelled extraordinary, heretofore unthinkable, changes at Lloyd's. Guided by former broker Chairman David Rowland, several reforms were set in motion in 1993. For the first time in its history, Lloyd's permitted corporate and institutional investors to underwrite policies. The first corporate members joined the organization in 1994. In a revolutionary departure from the long-held principle of unlimited liability, Lloyd's restricted individual Names' financial obligations to 80 percent of premium income, with excess losses reverting to a reserve funded by annual membership dues. It created a reinsurer, dubbed Equitas in 1994, to assume all liabilities incurred by Lloyd's prior to 1993. The new entity was funded by £859 million levied on Lloyd's' remaining members. In 1996, Lloyd's adopted annual accounting and achieved a £3.1 billion settlement with litigants after a long and bitter standoff.

In spite of the obstacles it encountered in the late 1980s and early 1990s, Lloyd's remained the largest and most innovative insurance market in the world during the mid-1990s. In fact, its overall assets increased from £17.9 billion in 1990 to £27.3 billion in 1995. Lloyd's returned to profitability in 1993, recording net income of £1.1 billion that year and a preliminary profit of £1 billion in 1994 as well.

The Late 1990s and Beyond

Changes continued for Lloyd's into the late 1990s and beyond. It completed its Reconstruction and Renewal plan in early 1997, which structured Lloyd's into five main operating segments, including Members' Services, Insurance Services, Facilities Management, Business Development, and a North American unit. It also dropped the "of London" portion of its moniker, opting to be known simply as Lloyd's. Problems related to its pre-1993 liabilities left it pursuing payment from many of its former members for underwriting losses well into the late 1990s. Lloyd's was seeking $231.1 million from former Names that failed to comply with the earlier settlement.

The new millennium brought with it a new era of catastrophic events. The terrorist attacks of September 11, 2001, in New York and Washington wreaked havoc on the insurance industry. The market experienced its worst year in 2001, when claims skyrocketed to £2.66 billion. Three years later, the market was once again hit hard by natural disasters including hurricanes, earthquakes, and tidal waves. Total claims reached £1.33 billion.

The insurance industry as a whole was on the cusp of major change during this time period as businesses faced a new realm of risk. Many companies were forced to protect against international fraud, corrupt practices, technology risks, terrorism, and compensation claims. In response to the changing business environment, Lloyd's syndicates began to offer a host of new products, including terrorism and political violence insurance, Home Value Protection insurance, Nannycare, which offered nannies protection against liability claims, and Club Esurance, a product offering businesses protection against system crashes and hacking activity.

In 2003, Lloyd's adopted a new franchise model, a cornerstone in its business strategy that signaled yet another signifi-cant shift in focus away from Names to corporate customers. According to Lloyd's, the model altered its status from regulating the market to commercially managing the market. This new structure had a threefold purpose: to develop and sustain a commercial business environment; to position Lloyd's as the top market in the insurance industry; and to develop a group of well-managed and efficient businesses.

Despite the unprecedented natural disasters in 2004—the worst year for natural catastrophes in history—Lloyd's secured a profit of £1.35 billion. Nevertheless, the events over the past several years had forced the industry to rethink risk management and contract certainty, a term for agreeing on final contract terms before inception. Whereas Lloyd's appeared poised for success in the future, its management team was on its toes keeping pace with ever-changing industry demands.

Principal Competitors

Allianz AG; AXA; Marsh & McLennan Companies Inc.

Further Reading

Ashworth, Jon, "Shake-up at Lloyd's Threatens to Put Hundreds of Jobs at Risk," Times, November 15, 1995, p. 26.

Brown, Antony, Hazard Unlimited, Colchester: Lloyd's of London Press, 1987.

Cockerell, Hugh, Lloyd's of London: A Portrait, Cambridge: Woodhead-Faulkner, 1984.

Davison, Ian Hay, A View of the Room: Lloyd's Change and Disclosure, London: Weidenfeld and Nicolson, 1987.

England, Robert Stowe, "At the Brink: Facing Unpaid Debts Close to $1.7 Billion, Lloyd's of London Fights for Its Life," Financial World, November 21, 1995, pp. 70–72.

Fleming, Charles, "Moving the Market: Lloyd's Pretax Profit Drops 28%," Wall Street Journal, April 7, 2005, p. C3.

Flower, Raymond, and Michael Wynn Jones, Lloyd's of London: An Illustrated History, Colchester: Lloyd's of London Press, 1981.

The Future of Lloyd's and the London Insurance Market, New York: Practicing Law Institute, 1992.

Gibb, D.E.W., Lloyd's of London: A Study in Individualism, London: Macmillan, 1957.

Goddard, Sarah, "Lloyd's Puts on a New Face," Business Insurance, April 28, 1997.

——, "Lloyd's Resolving Nagging Problems," Business Insurance, August 31, 1998.

Gunn, Cathy, Nightmare on Lime Street: Whatever Happened to Lloyd's of London?, London: Smith Gryphon Publishers, 1993.

Hodgson, Godfrey, Lloyd's of London: A Reputation at Risk, London: Penguin Books, 1986.

"Leaking at the Seams," Economist, January 26, 1991, pp. 69–70.

Lloyd's of London: A New World of Capital—Is the Genie Out of the Bottle?, Hartford, Conn.: Conning & Co., 1996.

Pitt, William, "An Outsider's Insider Tackles the Mess at Lloyd's," Institutional Investor, February 1993, pp. 143–45.

Proctor, Patrick, For Whom the Bell Tolls, Harlow: Matching Press, 1996.

Raphael, Adam, Ultimate Risk, London: Corgi Books, 1995.

"Regulatory Arrangements at Lloyd's: Report of the Committee of Enquiry," Neill Report , London: HMSO, 1987.

"Sir David Rowland: Master Communicator Spearheads Reconstruction of Lloyd's," Business Insurance, October 30, 1997.

White, Patrick, Lloyd's: Post Reconstruction and Renewal, London: FT Financial Publishing, 1997.

Wright, Charles, and C.E. Fayle, A History of Lloyd's from the Founding of Lloyd's Coffee House to the Present Day, London: Macmillan, 1928.

—Hugh Cockerell
—updates: April Dougal Gasbarre;
Christina M. Stansell

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