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Lloyd’s of London, generally known simply as Lloyd’s, is an insurance market located in London’s primary financial district, the City of London. Unlike most of its competitors in the industry, it is not a company but rather is a corporate body governed by the Lloyd’s Act of 1871 and subsequent Acts of Parliament. Lloyd’s serves as a partially mutualised marketplace within which multiple financial backers come together to pool and spread risk. These underwriters, or “members”, are a collection of both corporations and private individuals, the latter being traditionally known as “Names”.
The insurance business underwritten at Lloyd’s is predominantly general insurance and reinsurance, although a small number of syndicates write term life assurance. The market has its roots in marine insurance and was founded by Edward Lloyd at his coffee house on Tower Street in 1688. Today, it is based in a dedicated building on Lime Street, opened in 1986. Its motto is Fidentia, Latin for “confidence”.
In 2014, there were 94 syndicates that wrote £25.28 billion of gross premiums on business produced by 219 Lloyd’s brokers. The year saw few catastrophic loss events, and collectively the market reported a pre-tax profit of £3.16 billion.
Formation and first Lloyd’s Act
The Subscription Room in the early 19th century.
The market began in Lloyd’s Coffee House, opened by Edward Lloyd in around 1688 on Tower Street in the historic City of London. This establishment was a popular place for sailors, merchants, and ship-owners, and Lloyd catered to them with reliable shipping news. The coffee house soon became recognised as an ideal place for obtaining marine insurance. The shop was also frequented by mariners involved in the slave trade. Historian Eric Williams notes: “Lloyd’s, like other insurance companies, insured slaves and slave ships, and was vitally interested in legal decisions as to what constituted ‘natural death’ and ‘perils of the sea’.” Lloyd’s obtained a monopoly on maritime insurance related to the slave trade and maintained it up through the early 19th century.
Just after Christmas 1691, the small club of marine insurance underwriters relocated to Lombard Street; a blue plaque on the site commemorates this. This arrangement carried on until 1774, long after Lloyd’s death in 1713, when the participating members of the insurance arrangement formed a committee and moved to the Royal Exchange on Cornhill as The Society of Lloyd’s.
The Royal Exchange was destroyed by fire in 1838 and, although the building was rebuilt by 1844, many of Lloyd’s early records were lost. In 1871, the Lloyd’s Act was passed in Parliament which gave the business a sound legal footing. The Lloyd’s Act of 1911 set out the Society’s objectives, which include the promotion of its members’ interests and the collection and dissemination of information.
San Francisco earthquake
On 18 April 1906, a major earthquake and resulting fires destroyed more than 80 per cent of the Californian city of San Francisco. This event was to have a profound influence on building practices, risk modelling, and the insurance industry.
Lloyd’s losses from the earthquake and fires were substantial, even though at the time the placement of insurance business overseas was viewed with some wariness. One of Lloyd’s leading underwriters, Cuthbert Heath, famously instructed his agent in San Francisco to “pay all of our policyholders in full, irrespective of the terms of their policies”. The prompt and full payment of all claims arising out of the disaster helped to cement Lloyd’s reputation for reliable claims payment and as an important trading partner for US brokers and policyholders. It was estimated that around 90 per cent of the damage to the city was caused by the resultant fires. Since 1906, fire following earthquake has generally been an insured peril under most policies.
Changes in the UK financial markets
It was realised that the membership of the Society, which had been largely made up of market participants, was too small in relation to the market’s capitalisation and the risks that it was underwriting. Lloyd’s response was to commission a secret internal inquiry, which produced the Cromer report in 1968. This report advocated the widening of membership to non-market participants, including non-British subjects and women, and to reduce the onerous capitalisation requirements (which created a more minor investor known as a “mini-Name”). The report also drew attention to the danger of conflicts of interest.
During the 1970s, a number of issues arose which were to have significant influence on the course of the Society. The first was the tax structure in the UK: capital gains were taxed at 40 per cent (nil on gilts), earned income was taxed in the top bracket at 83 per cent, and investment income in the top bracket at 98 per cent. Lloyd’s income counted as earned income, even for Names who did not work at Lloyd’s, and this heavily influenced the direction of underwriting: in short, it was desirable for syndicates to make a (small) underwriting loss but a (larger) investment profit. The investment profit was typically achieved by “bond washing” or “gilt stripping'”: buying the gilt or other bond ex dividend, and selling it cum dividend, creating an income loss and a tax-free capital gain. Syndicate funds were also moved offshore (which later created problems through fraud and self-dealing).
Courtesy : Wikipedia