FAQs about Lloyd’s of London16/11/2020 I sometimes get emails from individuals who have stumbled across my website and have questions about Lloyd's of London which they can't find the answers to online. Below I've collated some of these questions and my responses, plus some extra questions chucked in which I thought might be helpful. A brief caveat - while I've had a fair amount of interaction with Lloyd's syndicates over the years, I have never actually worked within Lloyd's for a syndicate, and these answers below just represent my understanding and my personal view, other views do exist! If you disagree with anything, or if you think anything below is incorrect please let me know! Are Lloyd’s of London and Lloyds bank related at all? They are not, they just happen to have a similar name. Lloyd’s of London is an insurance market, whereas Lloyd’s bank is a bank. They were both set up by people with the surname Lloyd - Lloyds bank was formed by John Taylor and Sampson Lloyd, Lloyd’s of London by Edward Lloyd. Perhaps in the mists of time those two were distantly related but that’s about it for a link. Is Lloyd’s the same as the ‘London Market’ The London Insurance Market is a lot broader than just Lloyd’s. The term ‘London Market’ is used to describe the hub of interconnected companies who sell insurance and reinsurance in the City of London. It can broadly be split into three sections:
Like Lloyd's, in the London Market there is a focus on non-life insurance business over life insurance, it mainly comprises insurance for companies rather than individuals, and often focuses on complex or particularly large risks. The geographical spread of risks will be international and not just domestic to the UK. Most of the business will be brokered through an insurance broker. To give some context of the size of each, in 2019 Lloyd’s wrote around £35bn of premium, whereas the total size of the London Market was around £100bn. London Market premium here is defined in line with the London Market Group who combine all premium written in London with business controlled or managed by London insurance companies. You can read more about the London Market here, along with the source of the premium estimate: https://lmg.london/wp-content/uploads/2020/05/London-Matters-2020-Digital-1.pdf You can read Lloyd’s latest premium figures here: https://www.lloyds.com/investor-relations/financial-performance/financial-results Is it true that you can’t sue Lloyd’s? There is some truth to this idea. The Lloyd's Act of 1982, the main piece of legislation that governs Lloyd’s, includes the following wording: “the Society shall not be liable for damages whether for negligence or other tort, breach of duty or otherwise, in respect of any exercise of or omission to exercise any power, duty or function conferred or imposed by Lloyd's Acts 1871 to 1982 or any byelaw or regulation made thereunder…” See page 18 of the following https://www.legislation.gov.uk/ukla/1982/14/pdfs/ukla_19820014_en.pdf Which basically means the Society cannot be sued by anyone in the market for actions which are taken or not taken in the course of carrying out the functions which are assigned to them (Regulating and running the market). I honestly can’t figure out if this is still in-force or not, sources online give conflicting responses on this point. The idea behind the above immunity was that the Society of Lloyd’s was self-regulating, and in order to effectively regulate, the officers would need immunity from lawsuits relating to that regulation. If you think this sounds like a bad idea, then you may be surprised to learn that the FCA has a similar immunity. The issue with the Lloyd's immunity was that following various events in the 80/90s (such as recruit-to-dilute, asbestos, LMX spiral, etc.) many individual names felt that the corporation had failed in their role of self-regulator. These individuals, having lost huge amounts of money had no recourse to the UK courts – which is a pretty unique situation given the fundamental position that the rule of law holds in the open democratic societies. How do underwriters at Lloyd’s decide how much to charge for a risk? Whole books have been written on this subject, all I’ll say in addition to the literature is that in my experience there is often a gulf between how underwriters claim to price risks, and how risks are priced in practice. Most technical approaches are based on a ‘cost-plus’ model. The idea is you estimate/guess/model the expected claims from the contract, you add any expenses you expect to incur operating the contract, and then charge slightly more than this to allow yourself a profit. For a rigorous actuarial approach on how to price insurance along these lines, Pietro Parodi’s Pricing in General Insurance is a good read. We mentioned above that underwriters will claim to be doing this but then do something else. What else do they do it?
As you might be able to tell, in my opinion most of these are normally justifications for making bad decisions. What does ‘writing on Lloyd’s paper’ writing on ‘non-Lloyd’s paper’ mean? Writing on Lloyd's paper just means that the insurance contract is issued through Lloyd's (i.e. by a Lloyd's syndicate, backed by the Lloyd's central fund), writing on non-Lloyd's paper means that the policy is issued by anyone other than a Lloyd's syndicate, e.g. a standard insurance company, an insurance mutual or some other entity. The whole thing can be confusing to people new to insurance, as some Lloyd's syndicates are fully owned and backed by insurance companies and they will then sometimes use the same name for the syndicate as the insurance company. Did Kanye West sue Lloyd’s? He did, and you can read the BBC article here: https://www.bbc.co.uk/news/entertainment-arts-43071141 Kanye bought event cancellation cover from a Lloyd’s syndicate for an upcoming tour. He ended up having to cancel 21 dates due to medical issues, the dispute was then over whether this was covered by the insurance. What was the LMX spiral? It seems rather obvious in hindsight (but then most things do), at the time it was an issue that took the market by surprise. The problem was – if company A reinsurers company B, and company B reinsurers company C, and company C then reinsurers company A, company A has actually ended up insuring itself. If a loss occurs and A claims from B, then B will claim from C, C will claim from A, and A will end up having to pay the loss itself. This means that it won’t actually have the reinsurance is thought it had. You can read more about this on Wikipedia: https://en.wikipedia.org/wiki/Lloyd%27s_of_London#Late_1980s:_Piper_Alpha_and_the_LMX_spiral Was the titanic insured at Lloyd’s? It was indeed, the Lloyd’s website has a page describing it: https://www.lloyds.com/about-lloyds/history/catastrophes-and-claims/titanic A few interesting points to note:
What was the 'Recruit to Dilute' scandal? Before understanding this, we need to quickly review the (quite complex) capital structure of Lloyd's. An investor joins for one year at a time, but with the option (which almost everyone takes) of rolling your investment over year by year. An investor has to wait two years after the end of the year in which they invested before the year is ‘closed’ and profits and losses are paid out. See this post for an explanation: https://www.lewiswalsh.net/blog/lloyds-of-london The reasons for using this capital structure are complicated and partly historical, but the broad idea is that after two years have elapsed, the final profit or loss from that year should generally be known and it’s safe to take money out of the syndicate. An issue that arose in the 80s, is that some types of claims (such as those arising from asbestos) can take decades to emerge, after which the people who invested in the years which should have covered those losses have had their profits paid out, and there’s no money left to pay them. The recruit to dilute scandal is an alleged policy (which was never proven in court) taken in the late 80s by some participants in the Lloyd’s market whereby they allegedly tried to get as much new capital and investors into Lloyd’s in order to spread out the losses across a larger capital base from losses that they knew they had incurred on older closed years, but hadn't been formally notified of yet and which they did not have the money to pay for. The injustice from the point of view of the new investors is that they joined, and then immediately started to be asked to pay the claims from losses from decades ago, often these losses were greater than the initial investment, and due to how Lloyd’s worked at the time the name's liability was unlimited. The allegation of fraud centres around the extent to which the participants who carried out the recruitment drive were aware of these latent claims. Ultimately the courts (in my reading) tended to favour an interpretation of incompetence from the recruiters rather than outright fraud. The market has been heavily reformed since, and unlimited liability has largely been phased out. For a news article at the time you can read this BBC article: http://news.bbc.co.uk/1/hi/business/658834.stm For a more in-depth explanation of how Reinsurance to Close, and the Lloyd’s capital structure works, you can read the following blog post: https://www.lewiswalsh.net/blog/lloyds-of-london As an example of a slight less objective view from a disgruntled Name (and to be honest partly-justifiably so since they lost a lot of money), you can read the following: http://www.truthaboutlloyds.com/fraud/10minutes.html Are women allowed in Lloyd’s? They are now, and have been since 1973. Personally I think it reflects rather badly on Lloyd's that in 1972, women still were not allowed on the Underwriting floor. Then again, there remain a handful of private members clubs in London where women are still not allowed to be members, so from that perspective 1973 appears positively groundbreaking. Apparently a lady with the intriguing name 'Countess Inchcape', starting worked as a Lloyd's underwriter in 1970, but could only communicate with clients through a male agent, as she was not allowed on the underwriting floor. Source: https://www.lloyds.com/news-and-risk-insight/news/lloyds-news/2018/02/celebrating-inclusive-progress Is there really a barber shop at Lloyd’s? There is, it is called Claire’s barber. There are a range of other services at Lloyd's you can see a full list here: https://www.lloyds.com/about-lloyds/uk-building-services/our-services Did Samuel Pepys visit Lloyd’s? We know that Pepys visited a number of coffeehouses between 1660-1670. You can read about the coffeehouses he visited here: https://www.pepysdiary.com/encyclopedia/7944/ Lloyd’s coffee house was not established until 1686, after Pepys had finished writing his diaries, so it obviously did not get a mention. Pepys was however keen on coffee houses, and having worked at the admiralty had an interest in shipping and maritime trade. Lloyd’s, specialising in just this area, would have been exactly the kind of place Pepys would have enjoyed. So did he visit? My guess is he probably would have. Where/what is the Lamb? It’s in Leadenhall market, it’s famous, it’s well worth a visit. What is a scratch boy? A slight pejorative term for a junior broker who is sent around to visit underwriters and obtain their stamp on slips which a more senior broker has already negotiated the deal. Is everyone who works at Lloyd’s posh? Certainly not everyone, however the number of people who work in the market who went to a public school does seem a lot higher than the general population. I would be interested if there were any stats on this. Analytics teams seem to be a bit more diverse though, as a majority of people have a STEM degree which tends to cut across various demographics a bit more. Does Lloyd’s insure celebrities? This is one of the things that Lloyd’s is better known for among the general public, but it only makes up a small part of the overall premium written by the market. You can read about some of the outlandish insured items here: https://www.lloyds.com/about-lloyds/history/innovation-and-unusual-risks/going-out-on-a-limb What is Equitas? Lloyd’s almost went bankrupt in the 90s, this had many causes but the main issue that tipped it over the edge was the emergence of asbestos related claims. Equitas was the special vehicle set up to take on all the pre-1993 business written by Lloyd’s. All the liabilities along with a sufficient amount of assets were transferred into Equitas, allowing the market to continue writing new business without the uncertainty of the past years hanging over it. Equitas was eventually purchased by Berkshire Hathaway in 2006 who still own and operate it as a run-off vehicle. Can I see a full list of syndicates? You can see a full list here by clicking on ‘Lloyd’s syndicates’ in the link below. https://www.lloyds.com/market-directory Note that the following is not a list of syndicates: https://www.lmalloyds.com/LMA/About_us/Full_members_list.aspx It is a list of LMA members, some of which are managing agents. Hiscox for example operates multiple syndicates but the list above only shows the managing agent – Hiscox Syndicates Limited. I remember being confused by this when I first started working in the London Market. How much money did Lloyd’s make last year? We need to be careful exactly what we mean by this. Lloyd’s itself doesn’t make money per se, it’s the syndicates who write insurance through Lloyd’s who make money (or even more exact, the people who provide capital to the syndicates). You can think of Lloyd's as acting in a similar way to a Stock Exchange. Different parties come together to buy and sell shares at a stock exchange, but the stock exchange just charges enough fees to cover its costs. In the same way, Lloyd's acts as a marketplace for buying and selling insurance. (I've simplified this a bit, Lloyd's does partly mutualised some of the default risk thought the central fund, unlike a stock exchange. Lloyd's also acts as a regulator in some respects, also much more so than a stock exchange.) If a news story says something like 'Lloyd's of London made £1 billion last year' they mean that the syndicates that sell insurance through Lloyd's collectively made a profit of £1 billion, not the corporation of Lloyd's itself. To answer the question, 'how much money did Lloyd's syndicates collectively make last year', then you can refer to the Lloyd's annual report: www.lloyds.com/investor-relations/financial-performance/financial-results What mix of business does Lloyd’s insure now? The best way to get a sense of this is to read through the latest annual report, see the link below: www.lloyds.com/investor-relations/financial-performance/financial-results Is Lloyd’s of London an insurance company? Lloyd’s is not an insurance company, it is an insurance marketplace with various extra bits of regulation and oversight and some mutualisation of risk. So just as the London Stock Exchange is a marketplace where firms come together to buy and sell stocks and shares, Lloyd’s is a place where firms come together to buy and sell insurance. Part of the reason for this misconception is that any insurance sold through Lloyd’s is processed centrally, and any syndicate that might go bankrupt is guaranteed by Lloyd’s (through the central fund) - so there is some element of mutualisation unlike a stock exchange. What does a Lloyd’s broker do day to day? The work of a broker typically follows an annual cycle – a vast majority of insurance contracts are written for a period of 12 months, and certain classes of business tend to cluster around certain renewal dates, with 1st January being the most common one. Throughout the year, at any given point a broker will normally have a number of contracts which they manage coming up for renewal and there will be new opportunities being put out to market sporadically. The practical job that a broker does when a renewal is coming up is to:
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Thank you for writing this, I feel much better informed. I appreciate you taking the time. Best Wishes to you
Oops! You forgot to mention Members' Agents. They will say that they provide a critical function in the operation of the Lloyd's Market.
I remember years ago certain underwriters (like “Goldfinger” Ian Posgate) were willing to accept a risk on a net basis. After evaluating a risk the underwriter could offer a quote on a net net basis and would sign a slip with his net amount. Other underwriters set a limit on the maximum commissions they would allow. A normal insurance commission for the direct broker might be 15%, 2.5% for the ceding insurer, 10% for the Facultative reinsurance broker and 5% for the Lloyd’s broker for a total discount of 32.5%. In other words if the insured paid a premium of one million dollars and the entire risk was placed at Lloyd’s, the underwriters at Lloyd’s would receive $675.000. However, certain underwriters may have decided to quote a “net equivalent” for their share. For example, if an underwriter was willing to accept a 10% “net equivalent” share for $60.000 less 10%, he/she would receive $ 54.000…instead of $ 67.500 like the other participating underwriters, leaving an unclaimed amount of $13.500 in this example. I believe this practice of “net equivalents” was declared ilegal years go. That is my question. Do net equivalents still exist.
Hi Victor,
Thanks for the message.
I'd not heard of net equivalents before, thanks for the explanation. As to whether they are still used, the following Lloyd's document [1] makes it pretty clear that these clause are not allowed.
Thanks,
Lewis
[1] "Performance Management - Supplemental Requirements & Guidance July 2020"
https://assets.lloyds.com/assets/performance-management-supplemental-requirements-and-guidance-july-2020highlighted/1/Performance%20Management%20Supplemental%20Requirements%20and%20Guidance%20July%202020Highlighted.pdf
(This is a repost of Victor's comment, as the $ symbol has messed up the formatting)
I remember years ago certain underwriters (like “Goldfinger” Ian Posgate) were willing to accept a risk on a net basis. After evaluating a risk the underwriter could offer a quote on a net net basis and would sign a slip with his net amount. Other underwriters set a limit on the maximum commissions they would allow. A normal insurance commission for the direct broker might be 15%, 2.5% for the ceding insurer, 10% for the Facultative reinsurance broker and 5% for the Lloyd’s broker for a total discount of 32.5%. In other words if the insured paid a premium of one million dollars and the entire risk was placed at Lloyd’s, the underwriters at Lloyd’s would receive USD 675.000. However, certain underwriters may have decided to quote a “net equivalent” for their share. For example, if an underwriter was willing to accept a 10% “net equivalent” share for USD 60.000 less 10%, he/she would receive USD 54.000…instead of USD 67.500 like the other participating underwriters, leaving an unclaimed amount of USD 13.500 in this example. I believe this practice of “net equivalents” was declared ilegal years go. That is my question. Do net equivalents still exist.
Hi Victor,
Thanks for the message.
I'd not heard of net equivalents before, thanks for the explanation. As to whether they are still used, the following Lloyd's document [1] makes it pretty clear that these clause are not allowed.
Thanks,
Lewis
[1] "Performance Management - Supplemental Requirements & Guidance July 2020"
https://assets.lloyds.com/assets/performance-management-supplemental-requirements-and-guidance-july-2020highlighted/1/Performance%20Management%20Supplemental%20Requirements%20and%20Guidance%20July%202020Highlighted.pdf
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