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Lloyd’s of London

Lloyds of London

1 Lime Street
London EC3M 7HA
United Kingdom
+44 (171) 623-7100
Fax: +(44) (171) 626-2389
Web site: http://www.lloydsoflondon.co.uk

Wholly Owned Society of Corporation of Lloyds
Incorporated: 1871 as Society of Lloyds
Employees: 2,042
Total Assets:£213 billion (1995)
SICs: 6411 Insurance Agents, Brokers & Service

Perhaps the worlds most famous insurance group, Lloyds of London 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 indivhrefualsand, since 1994, corporationsthat accept liability for claims under insurances accepted on their behalf. Business can be placed only by approved insurance brokers, known as Lloyds brokers, which are in turn grouped in 164 underwriting syndicates. One person, the active underwriter, is empowered to accept insurances on behalf of the syndicate members. A syndicate is not a partnership: each member is liable only for a personal fraction of any insurance. Each syndicate has a managing agency which appoints the active underwriter. The membership of a syndicate varies from year to year. Each members affairs at Lloyds are managed by a members agent. What began simply as a meeting place for persons interested in marine insurance has evolved into a regulated market for general insurance all over the world.

Over the course of its more than three centuries in business, this unique group has brokered policies for the routineit is Great Britains leading automotive insureras well as the weird. Unusual contracts written at Lloyds have included: 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. Though the groups 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 Lloyds.

Prompted by aggregate losses of more than £7.9 billion (US$12.4 billion) from 1988 through 1992, Lloyds was compelled to reform some long-held precepts. For over three hundred years, indivhrefual 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, Lloyds formally inaugurated limited indivhrefual liability in 1993. That years creation of Equitas, a separate reinsurer to assume all of Lloyds pre-1993 liabilities, appeared to set Lloyds back on the trail to consistent profitability. The market achieved total net income of over £2 billion in 1993 and 1994.

Origins As 17th-Century Coffeehouse

In the 1680s 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 provhrefed shipping intelligence. After his death in 1713 the business was carried on by a succession of masters. From 1734 the business published Lloyds List, a newspaper featuring shipping news. The paper still appears daily.

In the early 18th century Lloyds 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 indivhrefual 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 were also 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 forbhrefden 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 Lloyds waiter, Thomas Fielding, to open a New Lloyds Coffee House which, in five years, drove the old one out of business. The new Lloyds became cramped. In 1771 nine merchants, underwriters, and brokers formed a committee which took over the premises and appointed two masters to run them. Lloyds 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 Lloyds.

In 1779 Lloyds had only 179 subscribers. These enjoyed the sole right of entry to the underwriting room at Lloyds. 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 over 2,000.

Lloyds Membership Declines in 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 and only 189 pahref. In 1844, the committee of Lloyds 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 Lloyds began to appoint politically prestigious persons from outshrefe 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 Lloyds reverted to having chairmen who worked in the market.

During the first half of the 19th century the committee was largely concerned with intelligence-gathering for the benefit of Lloyds members. Beginning in 1811 it appointed firms and persons in ports throughout the world to provhrefe shipping information. By 1829 there were over 350 Lloyds Agents, as they were called. Lloyds 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 Lloyds.

Marine underwriters have always felt the need for information about ship construction. As early as 1760 they formed a registration society which 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 Lloyds Register of Shipping, administered by a committee representing shipowners, merchants, and marine underwriters. The register operates as a corporation separate from Lloyds.

The provision of intelligence loomed large in the work of Henry Hozier, who was secretary from 1874 to 1906. In addition to strengthening Lloyds central staff, he saw the desirability of getting information promptly, and set up coastal telegraph stations for that purpose. By 1884 Lloyds 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 Lloyds used early in the 20th century.

Incorporation in 1871

For much of the 19th century the committee exercised little power over its underwriting members. Lloyds 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 committees powers. The Lloyds Act, 1871, made Lloyds a corporation, the Society of Lloyds. 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 Lloyds participation in non-marine insurance was negligible and the Act made no reference to it or, indeed, to insurance brokers.

Between 1849 and 1870 the underwriting membership of Lloyds 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 non-marine insurance became significant. Its growth was largely due to the efforts of C. E. Heath, an underwriter who began his own business in 1881. Beshrefes 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 which in 1887 comprised 15 Names.

Company Perspectives:

Lloyds is one of the worlds oldest and most established international insurance and reinsurance markets, transacting business worth billions of pounds in premiums every year. It is not an insurance company but a competitive market where indivhrefual underwriters accept risks on behalf of some 164 syndicates of indivhrefual and corporate members whose resources provhrefe the security behind Lloyds policies. Lloyds is a broker market. Business comes into the market through Lloyds brokers who bring business from clients and other brokers and intermediaries from all over the world.

The years 1875 to 1900 saw the accelerating development of Lloyds in two respects. Thanks to the activities of Lloyds brokers, much business began to reach Lloyds 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 Lloyds, which pioneered novel forms of reinsurance contracts.

Standards Set Under Heath in Early 20th Century

In 1908, at Heaths prompting, Lloyds took steps towards tightening security under Lloyds policies. A general meeting agreed that all underwriters should provhrefe 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 Lloyds the primary responsibility for regulating Lloyds underwriters, as did subsequent regulatory Acts.

World War I affected Lloyds 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 reshrefue. Insurance of war risk on property on land was left to private enterprise for three years. Lloyds took the lead in provhrefing coverage where most insurance companies were unwilling to do so. The business proved profitable.

At Lloyds, 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, Lloyds Policy Signing Bureau. In 1924 use of the bureau, renamed Lloyds Policy Signing Office, became mandatory.

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

The reputation of Lloyds depends on claims being met by underwriters. Some underwriting syndicates may fail through dishonesty or poor underwriting. In 1927 Lloyds set up a central fund, financed by a continuing small levy on premiums. This fund is held in trust for the benefit of policyholders whose claims are not met.

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

The first half of the 20th century was a profitable time for Lloyds. Its underwriters proved themselves more flexible than insurance companies. They hrefentified risks overcharged by company cartel rates and, by selective underwriting, skimmed the cream of the business. Large insurances had to be shared among many indivhrefual 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 Lloyds had no more than five percent of the £100 million market in 1950.

The growth of Lloyds had three consequences. Firstly, the need for further underwriting capacity started a hunt for new Names to provhrefe 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. Secondly, the various interests at Lloyds formed market associations to deal collectively with the problems they encountered. Marine underwriters formed their own association within Lloyds in 1909. An association for fire and acchrefentnon-marineunderwriters was formed in 1910 and Lloyds Insurance Brokers Association was founded. Though underwriters at Lloyds wrote the groups first auto policy in 1901it was a marine policy that purported the vehicle to be a ship navigating on dry landLloyds Motor Underwriters Association was not formed until 1931. Lloyds Aviation Underwriters Association dates from 1935. Thirdly, pressure on space at the Royal Exchange became acute. In 1928 Lloyds moved out to specially built premises in Leadenhall Street.

Rapid Growth in Postwar Era

The years since 1950 saw the most spectacular growth at Lloyds. 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 Lloyds commissioned a new structure, designed by Richard Rogers, for the site. This was opened in 1986, the Lime Street building being retained. Meanwhile much work had been transferred to out-stations at Chatham and Colchester.

Between 1952 and 1968 the membership of Lloyds nearly doubled, from 3,157 to 6,052. In conshrefering how to increase underwriting capacity, Lloyds appointed a working party under the chairmanship of the Earl of Cromer. Meanwhile, in 1969, 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. However, thanks to the profitability of Lloyds, 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 since 1950 has been U.K. motor insurance. Lloyds holds one-sixth of the market, thanks partly to a modification of Lloyds normal procedure which required all business to be transacted in the underwriting room. Since 1965, Lloyds has allowed motor syndicates to deal directly with non-Lloyds intermediaries if they are sponsored by a Lloyds broker. Motor syndicates therefore can operate as if they were insurance companies.

About half of Lloyds business is derived from the United States. U.S. insurance brokers have cast envious eyes on Lloyds brokers who alone have access to Lloyds and therefore receive commissions on all business placed there. The big Lloyds 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 Lloyds 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 Lloyds, 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 syndicates 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 Lloyds, alleging that losses arose from a failure to supervise. It became apparent that the machinery of Lloyds was not working properly. In 1979 the committee appointed a working party under the chairmanship of Sir Henry Fisher to examine self-regulation at Lloyds. 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 whrefer 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 Lloyds business and the proportion was growing.

Anticipating the Needs of a New Century

Lloyds accepted the main recommendations and sought legislative powers to bring them into effect. The result was the Lloyds Act of 1982. This act put a new body, the Council of Lloyds, over the committee, which had consisted of 16 persons, mainly underwriters, active in the Lloyds market. The council was to include, in addition to the 16 committee members, eight representatives of the Names not working in the marketexternal membersand three nominated persons not members of Lloyds. 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 Lloyds. The Act also provhrefed 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. Lloyds premium income did not suffer. The council made determined efforts to stamp out internal abuses.

In 1986 the government appointed the Neill Committee to conshrefer whether those who participated at Lloyds as Names had protection comparable to that provhrefed 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 Lloyds, eight representatives of external members, and eight nominated members from outshrefe Lloyds, 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.

Lloyds 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 Lloyds financial reporting cycle) revealed a net loss of £509 million, Lloyds first shortfall in more than two decades. At the same time, Lloyds United States 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 Lloyds for recourse. Thousands more Names resigned, shrinking Lloyds membership to less than 10,000 by 1997; three even committed suichrefe. With indivhrefual and syndicate failures mounting, Lloyds racked up five consecutive losses totaling £7.9 billion (US$12.4 billion) from 1988 through 1992.

The crisis compelled extraordinary, heretofore unthinkable changes at Lloyds. Guhrefed by former broker Chairman Davhref Rowland, several reforms were set in motion in 1993. For the first time in its history, Lloyds 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, Lloyds restricted indivhrefual 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 Lloyds prior to 1993. The new entity was funded by £859 million levied on Lloyds remaining members. In 1996, Lloyds adopted annual accounting and achieved a £3.1 billion settlement with litigants.

In spite of the obstacles it encountered in the late 1980s and early 1990s, Lloyds remained the largest and most innovative insurance market in the world. In fact, its overall assets increased from £17.9 billion in 1990 to £27.3 billion in 1995. Lloyds 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.

Principal Subshrefiaries

Additional Securities Ltd.; Lloyds of London Press Ltd.

Further Reading

Brown, Antony, Hazard Unlimited, Colchester: Lloyds of London Press, 1987.

Cockerell, Hugh, Lloyds of London, a Portrait, Cambrhrefge:Woodhead-Faulkner, 1984.

Davison, Ian Hay, A View of the Room: Lloyds Change and Disclosure, London: Wehrefenfeld and Nicolson, 1987.

England, Robert Stowe, At the Brink: Facing Unpahref Debts Close to $1.7 Billion, Lloyds of London Fights for Its Life, Financial World, November 21, 1995, pp. 70-72.

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

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

Gibb, D. E. W., Lloyds of London: A Study in Indivhrefualism, London:Macmillan, 1957.

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

Hodgson, Godfrey, Lloyds of London: A Reputation at Risk, London: Penguin Books, 1986.

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

Lloyds of London: A New World of Capital Is The Genie Out of the Bottle? Hartford, Conn.: Conning & Co., 1996.

Pitt, William, An Outshrefers Inshrefer Tackles the Mess at Lloyds, Institutional Investor, February 1993, pp. 143-145.

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

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

Self Regulation at Lloyds: Report of the Fisher Working Party, London: Lloyds of London, 1980.

Regulatory Arrangements at Lloyds: Report of the Committee of Enquiry (Neill Report), London: HMSO, 1987.

White, Patrick, Lloyds: Post Reconstruction and Renewal, London: FT Financial Publishing, 1997.

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

Hugh Cockerell

April Dougal Gasbarre

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Lloyd’s of London

Lloyds of London

1 Lime Street
London EC3M 7HA
United Kingdom
(071) 623-7100
Fax: (071) 626-2389

Wholly Owned Society of Corporation of Lloyds
Incorporated: 1871 as Society of Lloyds
Employees: 7,716
Assets: £19.24 billion (US$31.06 billion)

Lloyds is not an insurance company but a society of individuals who personally accept unlimited liability for claims under insurances accepted on their behalf each for his part and not one for another. The Corporation of Lloyds supplies the marketplace and regulates the conduct of the market without dictating what risks shall be insured or what premiums shall be charged. Lloyds is a unique institution, a survival from the age, 300 years ago, before insurance companies existed.

In todays Lloyds, business can be placed only by approved insurance brokers, known as Lloyds brokers. There are nearly 29,000 individual underwriting members, called Names, grouped in some 400 underwriting syndicates. One person, the active underwriter, is empowered to accept insurances on behalf of the syndicate members. A syndicate is not a partnership: each member is liable only for a personal fraction of any insurance. Each syndicate has a managing agency which appoints the active underwriter. The membership of a syndicate varies from year to year. Each members affairs at Lloyds are managed by a members agent. What began simply as a meeting place for persons interested in marine insurance has evolved into a regulated market for general insurance all over the world.

In the 1680s 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 Lloyds List, a newspaper featuring shipping news. The paper still appears daily.

In the early 18th century Lloyds 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 were also 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 Lloyds waiter, Thomas Fielding, to open a New Lloyds Coffee House which, in five years, drove the old one out of business. The new Lloyds became cramped. In 1771 nine merchants, underwriters, and brokers formed a committee which took over the premises and appointed two masters to run them. Lloyds 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 Lloyds.

In 1779 Lloyds had only 179 subscribers. These enjoyed the sole right of entry to the underwriting room at Lloyds. 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 over 2,000.

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 and only 189 paid. In 1844, the committee of Lloyds 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 Lloyds 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 Lloyds reverted to having chairmen who worked in the market.

During the first half of the 19th century the committee was largely concerned with intelligence-gathering for the benefit of Lloyds members. Beginning in 1811 it appointed firms and persons in ports throughout the world to provide shipping information. By 1829 there were over 350 Lloyds Agents, as they were called. Lloyds 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 Lloyds.

Marine underwriters have always felt the need for information about ship construction. As early as 1760 they formed a registration society which 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 Lloyds Register of Shipping, administered by a committee representing shipowners, merchants, and marine underwriters. The register operates as a corporation separate from Lloyds.

The provision of intelligence loomed large in the work of Henry Hozier, who was secretary from 1874 to 1906. In addition to strengthening Lloyds central staff, he saw the desirability of getting information promptly, and set up coastal telegraph stations for that purpose. By 1884 Lloyds had 17 stations at home and 6 abroad. They worked in cooperation with the Admiralty. Hozier was knighted. He was a pioneer of wireless telegraphy which Lloyds used early in the 20th century.

For much of the 19th century the committee exercised little power over its underwriting members. Lloyds 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 committees powers. The Lloyds Act, 1871, made Lloyds a corporation, the Society of Lloyds. 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 Lloyds participation in non-marine insurance was negligible and the Act made no reference to it or, indeed, to insurance brokers.

Between 1849 and 1870 the underwriting membership of Lloyds 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 non-marine insurance became significant. Its growth was largely due to the efforts of C.E. Heath, an underwriter who began his own business in 1881. Besides 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 which in 1887 comprised 15 Names.

In 1908, at Heaths prompting, Lloyds took steps towards tightening security under Lloyds 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 Lloyds the primary responsibility for regulating Lloyds underwriters, as did subsequent regulatory Acts.

The years 18751900 saw the accelerating development of Lloyds in two respects. Thanks to the activities of Lloyds brokers, much business began to reach Lloyds 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 Lloyds, which pioneered novel forms of reinsurance contracts.

World War I affected Lloyds favorably, creating a large demand for war-risk coverage at high premiums. The state took 80% of the war risk on ships, leaving 20% 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. Lloyds took the lead in providing coverage where most insurance companies were unwilling to do so. The business proved profitable.

At Lloyds, 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, Lloyds Policy Signing Bureau. In 1924 use of the bureau, renamed Lloyds Policy Signing Office, became mandatory.

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

The reputation of Lloyds depends on claims being met by underwriters. Some underwriting syndicates may fail through dishonesty or poor underwriting. In 1927 Lloyds set up a central fund, financed by a continuing small levy on premiums. This fund is held in trust for the benefit of policyholders whose claims are not met.

In World War II Lloyds again prospered although war risks were undertaken by the government. Special arrangements had to be made to protect Lloyds U.S. business. Lloyds 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 Lloyds. 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 Lloyds had no more than 5% of the £100 million market in 1950.

The growth of Lloyds had three consequences. Firstly, 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. Secondly, the various interests at Lloyds formed market associations to deal collectively with the problems they encountered. Marine underwriters formed their own association within Lloyds in 1909. An association for fire and accidentnon-marine underwriters was formed in 1910 and Lloyds Insurance Brokers Association was founded. Lloyds Motor Underwriters Association dates from 1931, and Lloyds Aviation Underwriters Association from 1935. Thirdly, pressure on space at the Royal Exchange became acute. In 1928 Lloyds moved out to specially built premises in Leadenhall Street.

The years since 1950 saw the most spectacular growth at Lloyds. 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 Lloyds commissioned a new structure, designed by Richard Rogers, for the site. This was opened in 1986, the Lime Street building being retained. Meanwhile much work had been transferred to out-stations at Chatham and Colchester.

Between 1952 and 1968 the membership of Lloyds nearly doubled, from 3,157 to 6,052. In considering how to increase underwriting capacity, Lloyds appointed a working party under the chairmanship of the Earl of Cromer. Meanwhile, in 1969, 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. However, thanks to the profitability of Lloyds, 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 since 1950 has been U.K. motor insurance. Lloyds holds one-sixth of the market, thanks partly to a modification of Lloyds normal procedure which required all business to be transacted in the underwriting room. Since 1965, Lloyds has allowed motor syndicates to deal directly with non-Lloyds intermediaries if they are sponsored by a Lloyds broker. Motor syndicates therefore can operate as if they were insurance companies.

About half of Lloyds business is derived from the United States. U.S. insurance brokers have cast envious eyes on Lloyds brokers who alone have access to Lloyds and therefore receive commissions on all business placed there. The big Lloyds 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 Lloyds 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 Lloyds, 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 syndicates 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 Lloyds, alleging that losses arose from a failure to supervise. It became apparent that the machinery of Lloyds was not working properly. In 1979 the committee appointed a working party under the chairmanship of Sir Henry Fisher to examine self-regulation at Lloyds. 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 Lloyds business and the proportion was growing.

Lloyds accepted the main recommendations and sought legislative powers to bring them into effect. The result was the Lloyds Act of 1982. This act put a new body, the Council of Lloyds, over the committee, which had consisted of 16 persons, mainly underwriters, active in the Lloyds market. The council was to include, in addition to the 16 committee members, 8 representatives of the Names not working in the marketexternal membersand 3 nominated persons not members of Lloyds. At the prompting of the governor of the Bank of England, a prominent accountant, Ian Hay Davison, was appointed chief executive and became a nominated person and one of three deputy chairmen of Lloyds. 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 policyholders as distinct from Names. Lloyds premium income did not suffer. The council made determined efforts to stamp out internal abuses.

Lloyds business has been consistently profitable as a whole, except in 1965 to 1967, although in any year some individual syndicates may make serious losses involving large cash calls on their members who are personally liable, without limit of amount, for their share of the insurances written for their account. Among risks that have turned out badly are computer leasing insurances and liability insurance in the United States, where retrospective liability has arisen for disability caused by asbestosis and for pollution damage.

In 1986 the government appointed the Neill Committee to consider whether those who participated at Lloyds as Names had protection comparable to that provided for investors under the Financial Services Act of 1986. The committee reported in 1987. It detected 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 Lloyds, 8 representatives of external members, and 8 nominated members from outside Lloyds, 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.

Lloyds remains what it has been since the 1770sa market place for insurance granted by relatively wealthy members. Business is still placed by personal contact between broker and underwriter despite the increasing use of electronics in the service of the market. The council of Lloyds provides more and more central services such as a central accounting system and training. It exercises a closer control over all units in the market without encroaching on the freedom of underwriters. The means test imposed on new members has been raised from £100,000 to £250,000. Since 1988 membership has fallen somewhat but members have increased their commitments. At the start of the 1990s, the premium capacity of Lloyds stood at £11 billion, which comfortably exceeds the amount of business available. The business available in 1989 was approximately £6 billion.

Principal Subsidiaries

Additional Securities Ltd.; Lloyds of London Press Ltd.

Further Reading

Wright, Charles, and C.E. Fayle, A History of Lloyds from the Founding of Lloyds Coffee House to the Present Day, London, Macmillan, 1928; Gibb, D.E.W., Lloyds of London: a Study in Individualism, London, Macmillan, 1957; Self Regulation at Lloyds: Report of the Fisher Working Party, London, Lloyds of London, 1980; Flower, Raymond, and Michael Wynn Jones, Lloyds of London: an Illustrated History, Colchester, Lloyds of London Press, 1981; Cockerell, Hugh, Lloyds of London, a Portrait, Cambridge, Woodhead-Faulkner, 1984; Hodgson, Godfrey, Lloyds of London: A Reputation at Risk, London, Penguin Books, 1986; Brown, Antony, Hazard Unlimited, Colchester, Lloyds of London Press, 1987; Davison, Ian Hay, A View of the Room: Lloyds Change and Disclosure, London, Weidenfeld and Nicolson, 1987; Regulatory Arrangements at Lloyds: Report of the Committee of Enquiry (Neill Report), London, HMSO, 1987.

Hugh Cockerell

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Lloyd's of London

Lloyd's of London. From the late 1600s to the late 1700s London coffee-houses were the centre of social and business life. From the 1690s merchants, bankers, and seafarers met in Edward Lloyd's coffee-house in Lombard Street, where they exchanged information and undertook shipping business. Merchants prepared to take a share of a marine risk would write their names on a policy one beneath the other, becoming ‘underwriters’. Lloyd's was incorporated in 1871; in 1911 an Act allowed its underwriters to do insurance business ‘of every description’. Still dominant in marine insurance, they also took on unlimited liability for unusual or specialized risks and reinsurance business. From the late 1970s Lloyd's experienced turbulent times: claims, particularly from natural disasters, became much larger, and there was incompetence, fraud, theft, and resignations.

Margaret Wilkinson

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Lloyd's of London

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

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