On the 24th April I went on a tour of the Lloyd’s building with the City Legal Information Group (CLIG). Below are my notes from the tour. It was a fascinating building, and a great tour!
Lloyd’s consists of 57 managing agents who run 88 syndicates that underwrite the insurance. These syndicates have an international reach and come from the US, Australia, Japan, France, Germany among many others.
Lloyd’s Corporation is not linked in any way to the other Lloyds – banks, pharmacies etc.
The syndicates sit in “boxes” that occupy the first four floors of the Lloyd’s building.
Lloyd’s “boxes” – note the underwriters sitting at the desks, and the brokers on stools to the side
In 2012 Lloyd’s had a profit of £2.7bn across all 88 syndicates. Some of the syndicates will have made a loss, and others a profit – these are then combined to give the overall profit/loss figure. The profit was dented somewhat by over £1.4bn in claims for Superstorm Sandy.
In 2011 the 88 syndicates made a loss of just over £500m. This was due to claims for two earthquakes, a tsunami, the floods in Thailand, Hurricane Irene among other natural disasters.
Prior to this, between 2007 and 2010, profits were mostly between £2-4bn. Generally Lloyd’s makes a loss every 5-10 years. For instance, Hurricane Katrina cost Lloyds around £50bn. The corporation fared well through the crash as it does not insure financial guarantees.
Who uses Lloyd’s?
93% of Dow Jones Industrial Average companies
92% of FTSE 100 companies
86% of Fortune Top 50 European Companies
81% Fortune 500 companies
Lloyds will do business with any country except for those on the UN embargo list.
Why Insure At Lloyd’s?
If an underwriter operates in Lloyds, then it automatically has an A+ credit rating. This is because of Lloyd’s 3 tier capital structure that supports its clients and guarantees that they will receive their pay out, even if an insurer goes broke. This capital structure is formed as follows:
1st tier: syndicate level assets. These are provided by the 88 syndicates that operate in Lloyd’s and total £41bn
2nd tier: member funds, provided by capital providers. These members are the ones who make a profit or loss each year. These funds total £15bn.
3rd tier: central fund that was started in 1993. This is controlled by Lloyd’s Insurance and will only be used if a syndicate goes bust and cannot meet its liabilities. This totals £3bn.
These three tiers make Lloyd’s different to any other insurance house. The third central fund provides extra funds and security, therefore securing Lloyd’s A+ rating.
If an insurance syndicate therefore goes bust, the capital structure will be used to pay the client. The structure is not to help bail out the insurance company itself – it is only there to ensure the client gets their insurance money.
History of Lloyd’s
Lloyd’s started life as a 17th century coffee house – it received its first mention in the London Gazette on the 18th February 1688. The corporation’s namesake, Edward Lloyd, ran a coffee house next to the river. Ship captains would come in to the establishment to get news on forecast weather patterns, and the latest routes. Over time, insurers started to operate in Lloyd’s coffee house, and captains would be convinced to insure their ships and cargo, should they not return. The insurance agreement would be signed on a piece of paper known as “the slip” – a term that is still used today.
As the amounts needed to insure cargo and ships grew, insurers would split the cost, and the risk, between them, with each one taking a share. The ship’s captains would move between the various boxes (booths) in the coffee shop to ask various underwriters to take a percentage of the total cost needed to insure the ship. The first individual who signed up became known as the Lead Underwriter, so called as they literally write their name under the risk.
Edward Lloyd himself didn’t insure anything. He simply provided the venue where these transactions took place. He charged rent to the insurers who met there, and this is the same today. Lloyd’s now charges approximately £1200 per year per square foot. Insurance companies sign up as it is known as the insurance house to be in to secure good business.
Little has changed since then – the insurance brokers still move between the syndicates “boxes” asking them to take a share of the risk. Underwriters are still known as such, and today the lead underwriter tends to be an expert in the particular area of insurance concerned.
The Lloyd’s building itself has moved around over the years – the first modern building it moved into was in 1928. It was quickly outgrown and in 1958 it moved to Lime Street, and finally in 1986 into the current Lloyd’s Building, designed by Richard Rogers. The building has been built with the intention of lasting for 100 years. As such, floors 5, 6, and 7 can all be adapted to galleries allowing additional syndicate boxes if required. It is likely that floor 5 will be converted soon, as the fourth floor had its final box occupied last year.
A scale model of Richard Roger’s Lloyd’s Building, completed in 1986. The services are on the outside to allow for easy maintenance, and creating a large uncluttered interior space.
The interior of the Lloyd’s building.
Lloyd’s The Regulator
Lloyd’s is the administrator of the building, charging rent, but it is also important to remember that it is the regulator as well. Anyone who operates in the building must be approved by the Corporation of Lloyd’s. The approval process is carried out by the counsel which consists of brokers, government representatives and representatives from the Bank of England. In total, the corporation employs roughly 900 people, 700 of whom are based in London, and the other 200 in Chatham in Kent.
Lloyd’s needs capital to trade, and the source of this capital has changed greatly since 1993. Today, the biggest providers of capital are now large corporations. In total 88% of Lloyd’s capital today comes from these big corporations, most of which are based in the UK and US, but international companies also contribute. The other 12% comes from high net worth individuals.
Previously, these were known as “the names” and used to have unlimited liability for loss. Between 1688 and 1993 these made up 100% of Lloyd’s capital, but the 1980s brought a series of very large insurance claims (Piper Alpha, Exxon Valdez, Hurricane Andrew, Asbestos claims etc). These took their toll and many of “the names” were unable to fund all the claims going forward having seen their wealth greatly depleted. Large corporations therefore stepped in with limited liability to take the place of names that had departed.
Today, it is no longer possible to join as a “name” with unlimited liability and those that still exist are getting old. At present, there are about 500 left who managed to trade their way through the late 1980s and early 1990s – the oldest “name” is 101. Instead, to join as a name today, you must have limited liability. Eventually, “names” with unlimited liability will die out.
The Insurance Process
Not just anyone can enter Lloyd’s and negotiate insurance. In total, 186 companies are allowed to send their broking staff into Lloyd’s. These 186 companies and their brokers act as the intermediary between the client and the underwriters. Traditionally, they would approach each syndicate box in turn, sit on the stool beside the box and negotiate the premium and amount of risk the underwriter was willing to take on. They would continue this process until 100% of the risk was accounted for.
The challenge for the broker is as follows – they work on commission and have to find the best balance between getting the lowest premium for the client, and a substantial enough sum to make their commission worthwhile (usually calculated as a %).
Today, as most insurance deals are too complicated to be negotiated in person due to the terms and conditions involved, the insurance contract lead conversations will take place between the director of the broking company and the lead underwriter in private. This is acceptable, but the final signature must still be done inside the Lloyd’s building.
This means that a lot of the day to day conversation that takes place on the open floor in Lloyd’s is now renewals. To talk to the underwriters though, it is still not possible to book – brokers must queue beside the boxes.
Is there a Standard Degree for Brokers?
A wide range of graduates are employed – geographers are often popular due to their knowledge of natural disasters, but maths skills are very important.
What Type of Insurance is done at Lloyd’s?
38% of Lloyd’s business is reinsurance – insurance companies insuring other insurance companies for amounts over a certain level of loss. Many of these insurance companies are often competitors to Lloyd’s, such as Swiss Re or Munich Re. They still have boxes in Lloyd’s though due to the licenses that Lloyd’s grants – for instance having a box at Lloyd’s provides a license for China.
The rest of Lloyd’s business is roughly broken down into the following (based on premiums) – Property 21%, Liability 18%, Marine 8%, Energy 7%, Motor 5%, Aviation 3%.
30% of the world’s ships and cargo are still insured at Lloyd’s – this hasn’t deteriorated since Lloyd’s began, it is just that the other insurance categories have grown to such an extent that it reduces the % greatly. The Lutine Bell now sits in Lloyd’s in commemoration to a ship that sank on route to Holland with a great deal of gold on board. The ship was insured for £1m – a great deal in 1799. The amount was paid in full. Following salvage of the bell in 1859, the bell was installed at Lloyd’s and rung whenever a ship sank to alert the syndicates. Today, it is ceremonial.
The Lutine Bell
Dead ships are still recorded on a daily basis at Lloyd’s in the loss book though – they are written in by the head waiter.
The loss book – no ships sunk over Easter weekend!
Much of Lloyds business still comes from the US – roughly 41%. This is due to Lloyd’s strong reputation of paying out in full following the San Francisco earthquake in the early 1900s. Lloyd’s paid out in full where many other US insurers went bust, leaving a lasting reputation in the US.
Almost anything can be insured at Lloyd’s – the Olympics was insured for roughly £5bn. Jennifer Lopez is insured for £30m for loss of income. There are only three areas that Lloyd’s won’t insure – financial guarantees, war and life (although they will do short term life and key man insurance).
The future challenges for Lloyds are insuring things that have never happened. They have a dedicated research team that look into these issues.
The Adam Room contains a portrait of Churchill – his father in law was the secretary of Lloyd’s. The portraits are all backlit to glow in dim light. The room itself was taken apart from its original location in Wiltshire where it was designed in 1763, and rebuilt first in the Lime St building, and again in the present Lloyd’s building. It is today used by the Counsel of Lloyd’s.