Lloyd's of London: history, operations, and reinsurance market role

Loyd's

Lloyds of London

Lloyd's of London is an internationally based insurance market leader and insurer. The company is the world's second largest insurer and sixth largest re-insurance group in the world. Lloyd's provides specialist insurance services to companies and organizations in 120 markets globally. The name is widely respected and well-known throughout the international business market community. Lloyd's has been in operation for over 300 years. The company has underwritten over 1688 ships and cargoes, 1887 non-marine risk ventures and issued the first motor policy in 1904 (Lloyd's, 2003). The company also underwrote many of the claims that were paid as a result of the San Francisco earthquake of 1906 (Lloyd's, 2003).

Lloyd's began as a coffeehouse, Edward Lloyd's coffeehouse, which bloomed into a marine insurance industry during the 17th century, and eventually expanded from shipping into other risk areas generally deemed untouchable by other insurance markets (Sapient, 2003). Lloyd's has developed a great deal of contacts and networking representatives over the years and established a solid reputation and security because of those relationships. The market Lloyd's provides has become so reliable that the British government in the height of its era has often relied on the market for economic and military intelligence in the past (Sapient, 2003).

Lloyd's of London has been deemed a "bona fide British institution," a marketplace where risk is mitigated via investors who underwrite risk in exchange for premium payments (Sapient, 2003). Lloyd's currently realizes multiple levels of revenue based on the various risk insurance and services it provides to its customers (Sapient, 2003). Though the market is not immune from fluctuations in the economy, such as the events that occurred following the attacks on the World Trade Centers, the market still has consistently managed to realize some profit and long-term security over the years. The companies accounting practices typically span a three-year cycle. This means that the method of accounting requires accounts to remain open for a period of 36 months, and premium income and claims are usually accounted for within the actual year a policy is issued (Lloyd's, 4792). The global assets for the company available to meet policyholder's claims for years 2001 and 2002 are defined in the chart below:

Cash and Investments

Reinsures share of technical provisions

Other assets

Total Assets

Total Liabilities

Net Resources

Source: http://www.lloyds.com/index/asp?ItemID=4792

Currently, Lloyd's holds approximately 5% of the world's re-insurance is placed at Lloyds. This 5% equates to half of London's international insurance market. Reinsurance is basically defined as insurance for insurance companies (ICMIF, 2003). Specifically, Lloyd's reinsures by distributing the risks and potential liabilities of other insurance companies onto itself. An original insured company distributes its risks to reduce the impact of a harsh claim. Reinsurance typically occurs in international business markets. Reinsurance does not guarantee a reduction in loss for the reinsured, but rather makes the impact of loss less damaging.

Lloyd's shares the risk of other insurance companies and enables clients to get coverage that any one company would not necessarily be able to assume. Lloyd's establishes contracts which insure companies against any risk they may incur by insuring someone else. Any international company that insures anything is inherently taking on risks. Lloyd's attempts to enable companies to minimize the impact of such risks.

Lloyd's business class ventures as of December 2002 included the following:

3% of business from Accident and Health

2% Motor third party liability

7% motor other classes

14% Marine, aviation and transport

22% Fire and other property damage

23% third party liability

25% reinsurance

3% other

Source: Lloyd's Market Reporting & Analysis, Lloyd's 2003

Lloyd's is also responsible for insuring some unusual risks. One such risk is lottery winnings. Currently employers can purchase insurance from Lloyd's that will protect them if employees in the UK were to win the lottery and walk out of their job (Lloyd's, 2003). Lloyd's also insures events including the Olympic Games, British and Commonwealth Games and World Soccer Championships (Lloyd's, 2003). Currently Lloyd's is looking into expanding into another unusual market - hacking. According to Lloyd's representatives, "hackers can cause millions of dollars worth of damage to businesses, and insurance companies have historically been unwilling to insure against those losses" (Enos, 2000). Lloyd's however, has recently partnered with a California based insurance company, Counterpane Security Inc., in an effort to provide insurance coverage for business losses that result from hacker "mischief" (Enos, 2000). The new insurance venture will protect companies from loss of revenues and loss of information assets which result from internet and e-commerce breaches (Enos, 2000). Lloyd's in this respect has become a pioneer of sorts, just another example of the constant desire for innovation within the market. Lloyd's agreed to insure the company because Counterpane adequately demonstrated that it could reduce its client's exposure to hacking risk through advanced forms of security monitoring (Enos, 2000). As with all of its unusual ventures, Lloyd's has been very selective to assure that it invests in viable and safe business ventures.

Lloyd's must be defined as a market and not a company. The Lloyd's market currently overseas interaction between insurance brokers and underwriters within the "Lloyd's market place" (Lloyd's, 2003). Underwriters are responsible for accepting risk, and continually evolving new and innovating ways to meet consumers and client's needs to cover those risks. Brokers are responsible for offering competitive prices to clients and providing specialty knowledge regarding insurance prospects (Lloyd's, 2003).

MEMBERS

Lloyd's members provide supporting capital for the insurance market (Lloyd's, 2605). Corporate eligibility for members includes investment institutions and international insurance companies, who are referred to as "Names" once they join Lloyd's" (Lloyd's, 2605). Lloyd's of London utilizes capital gained from memberships to underwrite insurance risks (Lloyd's, 2605). Certain groups of members are referred to as insurance syndicates. These members are a group of individuals or a corporate entity that provide Lloyd's with the capital necessary to back liabilities that Lloyd's insures, and such members are typically annual ventures (Lloyd's, 2605). A syndicate is typically defined as an association or grouping of companies that come together for a definitive purpose, in Lloyd's case to underwrite or provide insurance (hyper dictionary, 2003). Insurance syndicates of Lloyd's are authorized to undertake underwriting tasks and to negotiate business.

Each insurance syndicate make operate an independent business unit and generally are run by managing agents (Lloyd's, 2605). Syndicates appoint an underwriting team that represents the syndicate membership, whether corporate or individual. Within Lloyd's there are currently 71 insurance underwriting syndicates that cover specialty areas which include: Marine, Aviation, Catastrophe, Professional Indemnity and Motor (Lloyd's, 2605).

Each of the associate or syndicate members are responsible for responding to specific risks in the client base, which for Lloyd's includes "syndicates competing on price and service for business from 96% of the FTSE 100 companies and 93% of Dow Jones companies" (FTSE, 2002). Lloyd's is able to offer its clients flexibility and continued choice and innovation.

MANAGING AGENTS/BROKERS

The managing agents in charge of running syndicates each operate a franchise of Lloyd's market. Brokers are responsible for placing "risk in the Lloyd's market on behalf of clients" (Lloyd's, 2605). As of November of 2002 there were 150 firms of brokers associated with Lloyd's of London (Lloyd's, 2605). Lloyd's requires that all of its brokers seek accreditation in order to access its market, and all must be GISC registered as a means to protect investors and their financial credibility (Lloyd's, 2605).

Management AT LLOYD'S

London enacted an Act of Parliament referred to as the Lloyd's Act of 1982, which currently defines and regulates the management structure that Lloyd's adheres to (Lloyd's, 2638). Currently the management at Lloyd's is regulated by the Financial Services Authority or FSA (Lloyd's, 2638). A council currently manages Lloyd's, comprised of a total 18 members, 1/3 of which are working, 1/3 of which are external members and 1/3 of which are nominated by investors (Lloyd's, 2638). The Governor of the Bank of England currently is responsible for confirming each nominated member, whereas the working and external members are currently nominated and appointed by Lloyd's internal members (Lloyd's, 2638).

The council of Lloyd's currently has the authority to make decisions and issue resolutions, requirements, rules and byelaws for the organization (Lloyd's, 2638). A franchise board has also been established that is responsible for establishing strategy for each independent franchise as well as establishing protocol for risk management procedures for franchisees. The Franchise board, operating under the general direction of the council of Lloyd's also provides direction for syndicates and establishes guidelines for developing business planning and underwriting standards (Lloyd's, 2638). Currently the Franchise Board is comprised of a CEO, Director of Finance, Risk Management Operator and Franchise Performance Director (Lloyd's, 2638).

"Corporation of Lloyd's" also exists to provide executive support to both council members and the Franchise Board (Lloyd's, 2638). Some of the key corporation departments within Lloyd's include the following departments currently exist that govern operations: Change Management and Human Resources/Communications/Finance, Risk Management and Operations/Financial Control/Information Technology/Legal Services.

Change Management and Human Resources are comprised of personnel dedicated to personnel issues, benefits, training and development and community affairs (Lloyd's, 2398). Nick Prettejohn heads up the change management team at Lloyd's and is currently working on the development of a Franchisor business plan that will include defining a long-term vision and objectives for the employment team (Lloyds, 2398). The community affairs council is also part of this group, and currently employees hundreds of volunteers and administers three charities for the market including the Lloyd's Charities Trust foundation (Lloyd's, 2398).

Communications currently aspires to develop strategies that effectively enable franchisees to communicate with internal and external customers. They manage marketing functions for the organization, advertising, market researching, sponsorship and hold events (Lloyd's, 2398). Additionally the department is responsible for working with insurance intermediaries. Finance and Risk Management coordinate activities including taxation, market reporting, accounting, treasury services, market analysis and financial control (Lloyd's, 2396). The current director of finance for the organization is Andrew Moss.

The information technology group at Lloyd's may become essential to the innovation efforts the market has currently undertaken by essentially assisting in establishing e-commerce and e-trading opportunities for Lloyd's.

REVENUE and CAPITAL

Capital, required to support associates and affiliates of Lloyd's of London is acquired through the "Names" or individual members of Lloyd's (Lloyd's, 3423). Currently corporate capital is responsible for 87% of the market share of Lloyd's. The capital backing for Lloyd's has changed from the period of 1996 to 2003. Capital was introduced only as recently as 1994 to the company.

As of October of 2003, 768 corporate members and 2198 individual members all infuse capital into Lloyd's market (Lloyd's, 3423: 2003). The organization can currently accept insurance premiums for as much as 23.2 billion per year, and for the last 300 years the company has paid every valid claim presented to it (Lloyd, 3423). Sources of Capital are demonstrated in the pie chart below. The chart shows that much of the capital is received via the Bermudian Insurance industry, with an equally large portion of capital introduced by members or "Names" as Lloyd's describes its affiliates.

Source: Lloyd's Members' Services Unit /

MARKET CAPACITY/STRUCTURE

To describe Lloyd's as an insurance company would be a misnomer. Lloyd's is "an insurance market of members, both corporate and individual, that conduct their insurance business in syndicates run by managing agents" (Lloyds, 2664). Lloyd's in essence is an association or conglomerate of capital providers that conduct insurance business for profit (Lloyd's, 2664). The organization is made up of several different companies, individuals and partnerships that support each "syndicate" or association of insurers. Lloyd's syndicates underwrite insurance policies and when applicable, pay for outstanding claims (Lloyd's, 2664). Lloyd's is capable of providing this service through the capital gained from members, whether corporate or individual entities. Members must provide capital to support the underwriting business. Lloyd's operates off of a concept referred to as "risk-based capital" or RBC, where the amount of capital or funds provided by each member is dependent on the level of risk inherent in the business they are underwriting for (Lloyd's, 2664). Capacity or the volume of business that any member can partake in is measure by the total amount of insurance premiums a member can accept (Lloyd's, 2664).

INTERNATIONAL COMPLIANCE and INTELLIGENCE

Lloyd's currently employees a worldwide market intelligence group which is responsible for ensuring Lloyd's legal compliance and trading status throughout it's global market (Lloyds, 2407). The group manages all of the company's overseas offices and assists in accreditation for brokers (Lloyds, 2407). The worldwide intelligence group is also responsible for promoting Lloyd's overseas and currently updates Lloyd's international licenses to maintain compliance with international regulatory requirements. The worldwide markets group was formed in 2001 and is comprised of vie key areas, including: International Compliance, Development and Strategies, International Relations, Overseas Offices and Business Intelligence (Lloyd's, 2407).

Lloyd's international trading status is maintained via accurate return of annual returns, assessment of new law proposals and the provision for providing up-to-date information on Lloyd's ability to trade to brokers and underwriters in worldwide markets (Lloyd's, 2407). Lloyd's has maintained its international relations and presence by providing promotional events to its customers and brokers. At these events, developmental work is promoted. Lloyd's is consistently striving to acquire new licenses and market prioritization in several Global areas (Lloyd's, 2407).

Additionally, Lloyd's also has an international intelligence center which is responsible for providing information and access to insurance markets and companies regarding legal information, business statistics and business processes.

STRENGTHS/WEAKNESSES OF LLOYD'S

Lloyd's has many strengths which make it a global dominant insurance market representative. Lloyd's has an outstanding and resilient reputation, which reflects the organizations continuing desire to replenish their market and match the perceptions and expectations laid upon the group by their associates (Plimley, 2003:53).

Lloyd's also has proven it's integrity, or value of service to all of its customers (Plimley, 2003: 58). From a security standpoint, Lloyd's has been around for years and can guarantee that issues such as time lags will not be of a concern to interested investors. Lloyd's greatest strength however, lies in its "underwriting expertise, product quality and innovation" (Plimley, 2003:53). These attributes are perceived from all countries and businesses that have been associated with Lloyd's for the past several years.

Some difficulties or weaknesses that Lloyd's may have to encounter include its access to foreign markets. Lloyd's is based in London, and in the case of Asia a time difference exists which may cause hesitation on the part of parties that may be interested in doing business with Lloyd's (Plimley, 2003: 53). Many companies prefer to conduct business during "real time" and the time difference between countries may be an issue. Lloyd's also lacks an adequate physical presence in many of the Asian countries it is interested in investing in, which can make communication difficult (Plimley, 2003: 53). This shortcoming can be overcome however by creating and building more on site locations and insuring that dialogue is frequent and accessible between Lloyd's and future interested parties.

CONCLUSIONS

Lloyd's market structure benefits its clients by offering unparalleled business solutions and opportunities. The market is diverse and well structured. The market offers flexible and tailored underwriting policies to all of its investors, clients and members. Lloyd's of London has been in business for over 300 years. The company started out as an insurer of maritime affairs. Since the early beginnings Lloyd's has constantly sought out new and innovative ways to present solutions to its clients and personnel. The company is one of the most reputable, and is world renown for accepting risks that other insurers would deem unreasonable. Remarkably, the company has never failed to make payment on a legitimate claim in the three hundred years its doors have been open to the public.

The Lloyd's market currently holds licenses in more than 60 global territories and countries. Despite this the market is currently aspiring to acquire licenses in additional countries, specifically seeking out more business in the Asia Pacific region. To facilitate this process Lloyd's recently embarked on a research venture in the area to assess the potential for consumer interest and profitability.

Lloyd's continually aspires to meet market needs and expand its horizons, as evidenced by its ventures into this Asia market. The Asia market has been receptive to the markets ventures, most notably because Lloyd's offers new opportunities and insurance services with the backing of a solid reputation and security. The market at Lloyd's is also continually seeking out innovative ways to respond to new risks in the insurance market. This is evidenced by it's willingness to provide insurance to unusual causes, such as its provision for hackers insurance recently offered to an American company.

Lloyd's for all intents and purposes is considered secure and highly professional, and is backed by its members which provide capital for the market. Lloyd's goals include provider access to the market for any and all brokers that are capable of meeting international standards and levels of professionalism and customer service. The company continually strives to implement stringent accreditation services to ensure members meet the highest underwriting and international standards. Lloyd's of London is very competent at meeting international regulatory and tax requirements, and has yet to fail to meet annual reporting deadlines or requirements under any circumstances.

Lloyd's commitments include writing insurance worldwide, and conducting business in more than 120 countries. The market has not stopped however, and entrepreneurs are looking to expand its industry, in lesser known countries and lesser known markets. Currently Lloyd's should be looking at expanding its share in the reinsurance market.

As noted previous, currently the market is the world's second largest insurer and sixth largest reinsurance group. Should Lloyd's continue its expansive global efforts, it is likely that it can become of the nations leading two reinsures. Lloyd's of the future looks to expand capacity growth, improve efficiency and profitability and expand into international market ventures (Lloyd's, 2003). Lloyd's plan to improve efficiency currently involves many steps. These include the following principles:

Improved Service to clients

Clarity at point of contact

Streamlining of claims process

Transparent service standards

Faster Premium and Claim Payments

Earlier Policy Introduction

One Stop Processing for London Market

Adoption of e-commerce and electronic trading

Source: "Lloyds Shaping the Future" http://www.lloyd's.com / http://217.158.183.180/PreDownload4.asp?location=997381623%5C0%5C0

The adoption of e-commerce strategy and electronic trading will perhaps be the most innovative and profitable venture for the 300-year-old company. Currently e-commerce has been deemed the "wave of the future" by many international executives. Conducting business via the internet will lower administrative costs among other benefits. E-commerce ventures and electronic trading may also enable the company to better manage concerns in potential markets regarding time differences, such as concerns expressed in the Asia territory. Business conducted via the internet can be conducted instantly, rather than requiring time lapses and uncertainties. One of Asia's hesitations in signing on with Lloyd's were concerns over the time lapse between London and many of Asia's constituents. Lloyd's may be able to work around this and provide expedient, instantaneous service via ecommerce ventures.

One step in the right direction for Lloyd's has been providing Hacker insurance to clients. This step acknowledges that Lloyd's is aware of the profitability of e-commerce, but also clearly aware of the many risks associated with such a venture. Should Lloyd decide to expand opportunities via e-commerce, it has the foresight and knowledge to do so securely and safely.

Innovation and constant adaptation have allowed Lloyd's to remain a global leader in the insurance market. Lloyd's has also continually committed to taking on new risks and business ventures that other markets have historically shunned. According to Sax Riley, Former Chairman of Lloyd's, the markets forward thinking strategies will "help reshape Lloyd's of London into a business that will remain a force in the international insurance markets throughout the 21st century." Lloyd's indeed has presented itself as a global powerhouse in the insurance and risk management business, and it's innovative thinking and vision will lead the market into a continued bright and successful future.