Lloyd's of London

Long before Christmas 1691, when Edward Lloyd (c. 1648–1713) moved his coffeehouse to London's Lombard Street, the hazards faced by ships and their cargoes were insured. Marine insurance emerged amidst the expanding Mediterranean trade of the fourteenth century. By the 1600s it was also familiar in the Atlantic and the Baltic and North Seas. In London some 150 private marine underwriters were joined in 1720 by two monopoly chartered companies, the Royal Exchange Assurance and the London Assurance. By this date the London market had extended to insure the slave trade and so-called "cross risks," insurances of ships or cargoes between two or more foreign destinations outside the United Kingdom.

Lloyd's coffeehouse was only one of many places where commercial information could be exchanged. By 1712, however, the year before Edward Lloyd's death, insurance brokers had adopted the name of Lloyd's as a business address. Shipping intelligence and other news was collected in Lloyd's List, first published in 1692. Lloyd's register of shipping was established in 1760 by a "society of underwriters," the first formal organization at Lloyd's. The flow of information from correspondents at ports around the world gave Lloyd's a competitive edge in marine insurance. The structure of members, or "names," investing with unlimited personal liability and organized into syndicates managed by underwriters who assessed insurance proposals brought to them by brokers, also offered flexibility. Political upheavals raised rates and increased underwriting volume. New war-related clauses were introduced into policies, and marine insurance was sometimes extended to cover goods carried into the interior of Europe. During part of the French and Napoleonic Wars (1793–1815) Lloyd's insured all sides in the conflict.

Soon thereafter, underwriters at Lloyd's and the two chartered companies came under attack, the former for allegedly inadequate capital reserves, the latter for monopoly privileges—though the companies only accounted for 5 percent of the marine market. In response, a constitution for Lloyd's was drawn up, a new "house committee" was established, and the first Lloyd's agents were appointed; their tasks included sending shipping and political intelligence, taking charge of salvage, and overseeing claims and repairs. By 1820 there were more than 100 agents located at U.K, ports, and more than 150 abroad.

The first serious inroads to Lloyd's market share came from the rapid growth of marine insurance in European ports such as Hamburg, and from the new London and Liverpool companies of the 1860s, whose success was ensured when U.S. marine business transferred to Britain at the outset of the U.S. civil war in 1861. By the 1870s several dozen stock companies underwrote marine insurance, together accounting for perhaps 40 percent of the market. In the 1870s and 1880s, a slowdown in international trade, the lower premium rates required for steamships, and competition from the new companies, who often pooled information and standardized practice in trade associations, made life tougher for the private underwriters.

Lloyd's survived by embracing regulatory and organizational change, by attention to new technologies, and by diversification. As iron replaced wood and steam sail, underwriters needed to monitor and influence technological change. From the 1880s new lines of insurance such as burglary, trade credit, earthquake, hurricane, motor, and aviation insurance, were pioneered by underwriters at Lloyd's, notably Cuthbert Heath (1859–1939). Lloyd's became incorporated by act of Parliament in 1871, though this did not eliminate the personal liability of members. Deposits and guarantees became compulsory for members to help safeguard against underwriting failures. Heath also began to insist on an annual audit for the members he wrote for. Lloyd's finally accepted this idea of a compulsory audit in 1908, and nonmarine insurance was given legal recognition in 1911.

During the half-century before World War I, income from the international trade in "invisible" services, including insurance, became increasingly important to the British economy. Such income more than covered the growing deficit in the nation's trade in "visible" commodities, and helped to cement London's position as financial capital of the world. Although the sums earned from insurance were dwarfed by returns from foreign investments and shipping, nevertheless they absorbed between 10 and 25 percent of the British visible trade deficit each year between 1866 and 1913. Lloyd's thus played a central role in keeping British exports, and with them the circulation of global capital, functioning in the era of the classical gold standard.

This was possible because Lloyd's expanded its underwriting capacity in line with the growth of the international economy. The number of members ("names") and the average size of syndicates soared during the twentieth century. There were 378 members in 1870 but more than 30,000 by the 1980s. In the 1880s few syndicates had more than six members. By the 1980s some had more than 1,000. Many of the newcomers, however, lacked adequate capital, and although less scrupulous underwriters profited from volume growth, members in some syndicates were exposed to riskier underwriting. Meanwhile, great brokers created by mergers came to control the syndicates; by 1978 68 percent of premiums at Lloyd's were placed by the dozen leading broking firms. Consolidation was not accompanied by tighter monitoring of business practices, and the convergence of interests between brokers and underwriters left members vulnerable to malfeasance.

From the late 1970s onwards a series of heavy losses and scandals nearly destroyed Lloyd's. Brokers' fraudulent diversions of syndicate funds into offshore tax havens undermined faith in self-regulation. Claims from asbestosis and pollution liabilities in the United States grew rapidly. More and more syndicates were underwriting excess of loss (London Market Excess of Loss, or LMX) reinsurance on dubious risks at cheap rates. Under these contracts the reinsurer agreed to indemnify the re-insured in the event of the latter sustaining a loss greater than a predetermined sum. Some LMX syndicates began to reinsure other LMX syndicates, so that risks were not properly dispersed.

From 1987 a series of disasters, including the Exxon Valdez tanker wreck, triggered massive losses for syndicates at the top of the LMX spiral. Over U.S.$8 billion were lost between 1988 and 1992 alone, underwriting agencies were decimated, and 10,000 members were ruined. A further series of losses commenced in 1996, capped by the record U.S.$2 billion net exposure from the terrorist attacks on the World Trade Center on September 11, 2001. The number of active members collapsed to below 2,500. The more than 400 syndicates of 1982 had become 86 by 2002. Corporate capital with limited liability, first introduced as part of reforms in 1994, rose to 80 percent of the market capacity at Lloyd's.

OUT OF THE ORDINARY INSURANCE

Starting out in a coffeehouse on London's Tower Street in the 1680s, Lloyd's of London grew to become one of the world's leading specialty insurance companies, underwriting multimillion-dollar policies. Originally simply a gathering for insurers of ships, it later became an organization of specialized insurers. Over the last century Lloyd's has built a reputation on insuring "unusual" items, including:

• A competition organized by Cutty Sark Whiskey that offered a prize of $1 million for the capture of the Loch Ness Monster
• The distinctive physical attributes of performers such as Fred Astaire, Tina Turner, Bruce Springsteen, Dolly Parton, Jimmy Durante, and Brooke Shields
• A grain of rice with a portrait of the Queen and Duke of Edinburgh engraved on it
• The Titanic
• A food critic's taste buds and a wine taster's palate
• Space travel insurance for the Russian cosmonauts who were on the MIR space station • The circus performances of Ringling Brothers and Barnum and Bailey

Ryan Peacock

From 2001 Lloyd's became independently regulated by the U.K. Financial Services Authority. A "modernization" program aimed to end unlimited liability membership and to establish a new board by which Lloyd's would monitor the underwriting agencies as its franchisees. Lloyd's emerged from these two decades of crisis as a very different organization. It retained a competitive advantage, particularly with regard to the efficiency of communication between the agents of supply and demand, and it remained important in the markets in which it had long specialized. In 2002 Lloyd's was the world's fifth-largest reinsurer and it held a large share of the markets for aviation insurance, the insurance of oil and gas rigs, and marine insurance outside Japan.

SEE ALSO Cargoes, Freight; Empire, British; Finance, Insurance; Information and Communications;London;Nationalization;Partnership;Ships and Shipping.

BIBLIOGRAPHY

Brown, Anthony. Cuthbert Heath, Maker of the Modern Lloyd's of London. Newton Abbot, U.K.: David and Charles, 1980.

Brown, Anthony. Hazard Unlimited: From Ships to Satellites—300 years of Lloyd's of London, new edition. London: Lloyd's of London, 1987.

Cockerell, H. A. L., and Green, Edwin. The British Insurance Business: A Guide to its History and Records, 2nd edition. Sheffield, U.K.: Sheffield Academic Press, 1994.

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

Haufler, Virginia. Dangerous Commerce: Insurance and the Management of International Risk. Ithaca, NY, and London: Cornell University Press, 1997.

Lloyd's of London. Report of an Inquiry into Lloyd's Syndicate Participations and the LMX Spira. Lloyd's of London: 1992.

McCusker, John J. "The Early History of 'Lloyd's List'." Historical Research: The Bulletin of the Institute of Historical Research 64 (October 1991): 427–431.

McRae, Hamish, and Cairncross, Francis. Capital City: London as a Financial Centre, revised edition. London: Methuen, 1984.

Raphael, Adam. Ultimate Risk: The Inside Story of the Lloyd's Catastrophe. New York: Four Walls Eight Windows, 1995.

Wright, Charles, and Fayle, C. Ernest. A History of Lloyd's. London: Macmillan, 1928.

Robin Pearson