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Lloyds of London, or simply Lloyds, is an insurance market located in the Central London.

It serves as a marketplace where underwriters come to manage marine risk. It is unique that it is not a company but a corporate body governed by Lloyds Act of !" . Lloyds has retained some of the unconventional practices that differ from insurance providers of today. #riginally it was a non$incorporated association of subscribed members. %ow it is incorporated by Lloyds act of !" . %ow Lloyds does not underwrite business, rather it leaves it to subscribing members. %ow Lloyds acts as a market regulator, codifying rules under which members can operate and offering centrali&ed administrative services to its members. 'he Lloyds act of (!) described the management structure and rules for modern Lloyds. 'he Council of Lloyds is accountable for its management and supervision. 'he Council is delimited by the *rudential +egulations Authority and ,inancial Code of Conduct. 'he Council has si- working, si- e-ternal and si- nominated members. 'he appointment of nominated members, including the C.#, is approved by the /overnor of 0ank of .ngland. 'he working and e-ternal members are elected by Lloyds members. 'he Council can let go of members by issuance of resolutions, requirements and by laws. 'here are two types of groups of people and firms functioning at Lloyds1 2embers or sources of capital, and agents3brokers of these 2embers. ,or most of Lloyds history, wealthy investors backed policies with unlimited liability. 4owever since ((5, Lloyds has approved corporate members into their market with limited liability. Losses in early ((6s shocked the investments of many investors, many of whom declared bankruptcy. #bviously this scared away a lot of other potential investors. 'oday, individual investors provide only 57 of the capacity at Lloyds, with 89 listed companies providing : 7 and the remainder through the international insurance industry. Apart from individual investors, agents sponsor and manage syndicates. 'hey survey members and their capacity to commitment to underwriting, create syndicates, hire underwriters and oversee all of the syndicates activities. #utsiders cannot do direct business with the syndicates. 'hey must go through Lloyds brokers often stated as intermediaries. 'hese brokers try to obtain the best prices and terms for their customers.

The History of Lloyds

;uring the "th century, as 89 began to grow as an important trading centre, there was an increased for ship and cargo insurance. <hipowners would send their employees to solicit investors to participate in diversification of risk. 'hese employees became proficient at risk valuation and seeking out insurance investors. ;uring the late =66s .dward Lloyds coffee house became the meeting place for seamen, shipowners, brokers, charterers and insurance investors. 4ere at this place, the roots of marine insurance began and the Lloyds we know today was formed. ,rom =!! .dward Lloyd began circulating a shipping newspaper from a newsstand at the coffee house. <ince shipowners and insurers wanted reliable shipping news and they began to flock to his newsstand. In ":6, Lloyds established itself in Central London, which during those days, was rapidly becoming the centre of the business world. At the time of emerging marine underwriting market, Lloyds established itself as a reliable source of shipping news. /radually Lloyds became a pioneer in marine insurance and grew over :)> years to become the worlds

biggest marine insurer. 'he American +evolution, %apoleonic ?ars, and the two ?orld ?ars showed how important marine insurance was to trade and economy. In ":5, Lloyds published the Lloyds List, their first @ournal to spread shipping news. 'o this day, it is one of the worlds oldest continuously running @ournals. .ven after :)> years, Lloyds List still provides weekly shipping news to the shipping community. In ">6, Athe first concrete details of underwriting were recorded. ?hile there are no records of how the market was organi&ed at this time, a Buaker businessmans @ournal states that in ">" he went to Lloyds coffee house and subscribed the book at two guinea a yearC>.

Connection with the economy

An interesting development in the history of Lloyds shows that during the early "=6s, due to the <even Dears ?ar, underwriters were raking in high profits but when the war ended, profit levels returned to pre$war levels and underwriters resorted to e-treme forms of speculative gambling such as underwriting the risk of highway robbery and other idiosyncratic activities. As a result of this Lloyds gained a reputation as a gambling den. In "=( a group of sober professional underwriters established a new Lloyds coffee house to separate themselves from the stigma that was flourishing for Lloyds. 'he old Lloyds eventually shutdown and the new Eprofessional Lloyds came in the limelight. Lloyds insurer policies were formali&ed in "":, wherein a lead underwriter concept was conceptuali&ed as someone who would set the rate and others would follow. 0y ""5, Lloyds was so influential that underwriters were able to station warships at #stend, 0elgium should the 0elgian port be invaded by the ,rench. ;uring the American +evolution and the %apoleonic wars, Lloyds played a pivotal role in the global shipping industry. Lloyds influence over the +oyal %avy grew and they founded the *atriotic ,und which is still functional today. Lloyds news and intel surpassed that of the +oyal %avy and became invaluable during wartime. In fact, the "(5, confiscation of a 0ritish vessel by the ,rench was first reported by Lloyds before the %avy even knew about it. 'he Admiralty recogni&ed the importance of Lloyds service and gave them the contract to provide maritime intelligence for the +oyal %avy. ;uring "((, when the economy of 4amburg was on the verge of collapse, a ship was chartered by London merchants to deliver gold and silver to the port. Lloyds underwriters were the ones chosen to insure the valuable cargo. 'he importance of Lloyds and the key role it played was underline not only in 89 but also in the .uropean economy. 0esides Lloyds, insurance underwriting was limited to two other companies. 0ecause of this lack of competition, Lloyds was able to capture significant market share and thrive as a monopoly in the sector. 'he Competition Commission was against such monopolies in businesses and wanted to create competitions in every sector to ensure fair pricing and business policies. 0y ! , information gathering had grown vast and comple- and required a network of agents to ensure fast information gathering by Lloyds. 'his was the first time in the marine industry that individuals would act as the eyes and ears of the market. Individuals would share data, detect problems and underlying issues and suggest solutions. 'his practice would later be carried on to the London <tock .-change by brokers and investors. 'he massive

e-change of information also helped in consolidating Lloyds reputation as an information powerhouse in the marine industry. In !)5, a 0ill was passed in the *arliament that ended the monopoly of Lloyds. 'aking advantage of the situation, %athan +othschild of the famous For infamousG +othschild family of bankers, set up his own insurance firm, the Alliance Assurance Company now known as +<A Insurance /roup. <ubscribers began to flock to the rival firm and Lloyds market share fell. #ver the ne-t decade, Lloyds took steps to regain the lost market dominance. Lloyds List was turned into a daily newspaper and the Lloyds Agency system was e-panded. Lloyds also tightened member policies, no longer favoring bankrupt members and put in place a new system requiring new members to place a margin account or deposit to support their underwriting practices. 'he 8nderwriting +oom at Lloyds was thought to be the information nerve centre of the shipping world. .ven Charles ;ickens hinted at Lloyds through a character, who worked there, in his last novel #ur 2utual ,riend. 4owever things were gradually changing. 'he average age of Lloyds members was increasing. And the spirit of underwriters was not as &esty as before. Around !"6, the concept of large syndicates was conceived. ?hereas rival firms would consist of two or three syndicates, Lloyds began underwriting for up to ) members syndicates. 'his brought back market share to Lloyds.

Contribution to UKs economy and society

In !" , the first Lloyds Act was passed in the 0ritish *arliament which established it as a corporate body. It also secured Lloyds legitimacy by not allowing non$members to sign their names to Lloyds policies. 2a@or reforms were made in overseas policies including claims to be paid in foreign ports. <ubsequent Acts formali&ed Lloyds ob@ectives and its commitment to dissemination of information. 0y the !!6s Lloyds was already formali&ing policies on underwriting in the American markets. 'his was the time when Lloyds ventured into non$marine policies as well. %on$marine underwriting included covering health and safety risks such as riots in 2e-ico, <an ,rancisco earthquake, Chicago fires and other risks. Lloyds partnered with 8< brokerage firm +ollins 0urdick 4unter to establish their presence in the American market. 0ack home in 89, Lloyds ventured into insuring workers compensations and certainly found great profits therein. 'o combat elitism within itself, Lloyds commissioned a secret internal enquiry which resulted in the Cromer report in (=!. 'he Cromer report proposed increasing membership to non$market participants and increased corporate governance to reduce conflicts of interest. 'he nature of underwriting at Lloyds was influenced by the ta- structure of 89. <ince capital gains were ta-ed at 567, income was ta-ed up to !:7 and investments income were ta-ed up to (!7, syndicates would try to make underwriting losses but larger investment profits. <yndicates would buy bonds e- dividend and sell it cum dividend thereby creating income losses but they would also get ta-$shielded capital gains. Lloyds underwriters also began to move funds accounts to offshore sites.

'he attraction of Lloyds as a ta- shelter invited many passive investors and non$members. 0y the (!6s, passive investors far outnumbered underwriters in the Lloyds underwriting market. A multitude of scandals came to the news such as the downfall of the <ass syndicate. 'his indicated the deficit of regulations and bad governance by the Committee of Lloyds to supervise the <ociety. Lloyds also suffered huge losses in the 8< market when <upreme Court ruled that insurance coverage for workers compensation will e-tend to certain asbestos related issues. %early all market agreements, for e-ample the Hoint 4ull Agreement founded in ( 6 which represents the Ainterests of those who write marine hull business in the London marketC =, were in essence cartels advocating minimum terms which had previously been revoked when the monopoly of Lloyds was broken back in !)5. <peciali&ed risk began to be managed by certain policies called Arun off policiesC. 'his meant that liability of previous underwriting liabilities could be carried forward to future years. #ther changes in policies included Atime and distanceC policies which meant that margins or deposits given by members could be used to purchase forwards and futures in the stock market. 'hese policies narrowed and concentrated risk taking and speculators became increasingly risk averse. In (!6, a new Lloyds Act was contemplated. 'he ,isher report pointed out to the Edemocratic deficit and dearth of good corporate governance practices. In (!), another Lloyds Act was drawn which supplemented the e-isting business model and was intended to provide further access to non$members, a move which was first initiated by the Cromer +eport, by making a new governing council. 'his Act gave autonomy to Lloyds underwriting syndicates and separated them from the insurance brokers which acted as intermediaries and were not actually underwriters. 'his removed conflicts of interests that were arising at Lloyds. After the Act was passed, action was taken against underwriters who had siphoned funds from their businesses to their accounts. <trict actions were taken and stiff penalties were imposed on offenders. In (!=, the 0ritish government appointed an overseer to inform on the model of investors interests protection at Lloyds. 'he resulting report made a number of recommendations but it was not implemented in full. ;uring this period Lloyds underwent another ma@or financial challenge. 8nforeseen colossal litigations in 8< courts for damages forced by claimants, on asbestos, pollution and health ha&ard policies nearly crashed Lloyds. <ome of these claims were as old as (56s and now LloydIs was e-pected to pay the claims. Lloyds was also implicated of fraud by several investors in underwriting syndicates on the basis that LloydIs withheld knowledge on asbestos and pollution situations and attracted more investors to take on these liabilities without properly informing them of it. ?orkers, who had been e-posed to asbestos as early as (=6s, could claim compensation after :6 years. 'he insurance company would handle the claim but because the insurer did not reali&e the true nature of the risk at that time, no amounts were reserved for such circumstances, should they occur. 'his produced the effect of bankrupting thousands of individual investors who then repaid liability claims that had been underwritten from (56s to ("6s. It can be speculated how the e-isting 2embers of Lloyds can be amenable to pay such archival losses. 'his happened due to Lloyds policies known as reinsurance to close F+I'CG. <ince membership at Lloyds was not like traditional share ownership at a company, individuals @oined for one year noted as ALloyds annual ventureC. At the end of the year, syndicates would

be dissolved. As practice, the same syndicate would renew again with the same membership. <ome syndicates were as old as >6 years continuous but each year was deemed to be a separate occasion. <o there would have been >6 separate manifestations of the syndicate at each year, underwriting insurance as a separate entity every time. <ince claims take a while to be e-pressed and called for, profits and losses took some duration to become palpable. 8sual convention was to wait three years before closing the year for accounting purposes and to confirm the results. ,or e-ample, a )665 syndicate would announce its results at the end of ;ecember )66=. 'he syndicate members would be paid any underwriting profits during )66", proportionately to their underwriting in the syndicate. 'o arrive at the bottom line profits and losses, reserved amounts would be set aside for contingent liabilities and future claims, that is, claims notified but not paid and claims incurred but not reported. 'he estimation process was comple- and time consuming. Liabilities could come at a time long after policies were written. 'hese reserves were resolved in an unconventional way. 'he syndicate would purchase a reinsurance policy to offset future claims. 'he premium would be equivalent to the sum of the reserves. +ather than placing the reserves into a bank to bear interest, the syndicate transmitted its liability to a reinsurer. A'his was +I'C$ a transaction that allowed the syndicate to be closed and a profit or loss declared.C" 'he reinsurer was always consistently another Lloyds syndicate. In this method, liabilities for losses were conveyed every year until it reached the present syndicate. A new member enlisting in the syndicate usually gathered liability for losses on policies written decades ago. As long as the reserves had been precisely assessed and the applicable +I'C premium paid every year, everything was fine, but in some cases this had not been possible. Case in point the losses due to claims by asbestos, pollution and health ha&ards had not been predicted, therefore the amounts of money coming in from earlier +I'C premiums to compensate for these losses were inadequate and members had to pay the deficit. 0y contrast, in a traditional company, an initial reserve for future claims liabilities is set aside immediately in the first year. Any depreciation in the reserves would lead to lower profits in subsequent years and therefore lower the dividend payouts for investors. Arguably Lloyds practice of using reserves in year : to establish +I'C premiums should have resulted in a more equitable handling of long tailed losses such as the asbestos claims. 4owever the difficulty of estimating these losses amounts was too great for Lloyds actuaries. As a result, many great individual members of syndicates faced losses by the mid$ ((6s. It is alleged that during the (!6s, some Lloyds officials began a recruitment program to enroll new investors to help capitali&e Lloyds prior to the anticipated onslaught of asbestos claims. 'his allegation known as Erecruit to dilute i.e. court new investors to bear the losses. ?hen Lloyds huge losses came to light, many members refused to bear the claimants responsibility while some were unable to pay. Allegations were made of withholding vital information while they were being recruited. 'herefore Lloyds had to restructure during ((=. Liability for all pre ((: business was forcibly transferred by +I'C into a special vehicle called .quitas. %ew corporations were allowed to @oin with limited liability. 4owever individuals with unlimited liability were barred from @oining. ,inancial requirements for underwriting were changed to prevent

e-cessive underwriting that was not backed by liquid assets. 2arket inspection has dramatically increased.

Timeline of Significant Events at Lloyds

=!! #pening of Lloyds Coffee 4ouse on 'ower <treet. =( Lloyds Coffee 4ouse relocates to Lombard <treet. ""5 ,oundation of the <ociety of Lloyds at the +oyal .-change. !" Lloyds Act of !" . (6= Lloyds covers the <an ,rancisco earthquake. ( Lloyds Act of ( .

()> market relocates to its first owned business at ) Leadenhall <treet. (>! 2arket relocates to new Lloyds building at > Lime <treet. (=! Cromer +eport comes out with recommendations regarding management structure at Lloyds. ("" scandals at Lloyds come to light. (!) third Lloyds Act passed. (!= 2arket relocates to new Lloyds building at Lime <treet.