Lloyds of London

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).

GLOBAL OVERVIEW

As a global insurance market representative, Lloyd's capacity has risen over the last three years, as much as 18% in 2002 alone (Lloyd's, 2663). Lloyd's has been increasing its geographic influence and increasing diversity among suppliers worldwide, especially within the last several years.

Lloyd's operates based on a well defined protocol. All premiums received by Lloyd's are first held in a trust fund to protect policyholders (Lloyds, 2003). Monies invested with Lloyd's are invested conservatively to avoid mass fluctuations in value, and payment of claims is a priority for the market (Lloyds, 2003). Profits for the market are distributed only after the accounts for the year are closed and "reserves established for outstanding liabilities" (Lloyds, 2003). Lloyd's members are all required to hold capital.

Lloyd's is eligible to conduct insurance business in many international territories. The table below contains the international countries that Lloyd's currently holds licenses in and conducts a wide range of business in:

Anguilla

Greece

New Zealand

Antigua

Grenada

Norway

Australia

Guernsey

Papua New Guinea

Austria

Hong Kong

Portugal

Bahamas

Iceland

Singapore

Barbados

Ireland

South Africa

Belgium

Isle of Man

Spain

Belize

Israel

St. Kitts & Nevis

Bermuda

Italy

St. Lucia

British Virgin Islands

Jamaica

St. Vincent

Canada

Japan3

Sweden

Cayman Islands

Jersey

Switzerland

Cyprus

Liechtenstein

Trinidad & Tobago

Denmark

Luxembourg

UK

Dominica

Malawi

US Virgin Islands4

Finland

Malta

USA - Illinois

France ( & territories) 1

Mauritius

USA - Kentucky

Gambia2

Monaco

USA - other states5

Germany

Namibia

Vanuatu

Gibraltar

Netherlands

Zimbabwe

Source: "Lloyd's Licenses" May 15, 2003. Retrieved November 13, 2003, http://www.lloyds.com/index.asp?ItemId=2593

Lloyd's is also registered and licensed to conduct reinsurance business in 7 territories: Argentina, Chile, Colombia, Ecuador, Labuan, Mexico and Venezuela (Lloyd's, 2593).

Lloyd's global policies were enacted to ensure that Lloyd's complies with international reporting and taxation requirements, and to ensure that background information and guidance on the "identification of individual national exposures" are ensured (WWM 2002). Recently Lloyd's instituted a new policy system of checks and balances to ensure that their underwriters and business franchisees are in compliance with global and multinational policies, because the organization has such influence in so many international territories (WWM, 2002). Regulatory and tax rules associated with international business ventures are complex in nature.

Lloyd's assesses risk in all countries that it conducts business with. European risk is defined as risk associated with EU member states, which includes business interactions with the following: Austria, Belgium, Denmark, Italy, Finland, France, Germany, Greece, Republic of Ireland, Luxembourg, Netherlands, Portugal, Spain, Sweden and the UK (WWM, 2002:4). The risks assessed within these companies include property risks. Property, vehicles and travel may all be insured by the underwriting staff at Lloyd's.

The risk assessment protocol for the U.S. is similar to the protocol for assessing European risk. Specific rules do apply to insuring vehicles. According to Lloyd's policy, vehicles in the U.S. "are usually allocated to the jurisdiction where they are principally garaged, not where they are registered" (WWM, 2002: 5). This means that when insuring Lloyd's takes into consideration the physical locality of all objects and businesses being considered, not the jurisdiction where something is licensed or registered. The physical locality of all business is where risk is introduced.

OPPORTUNITIES ABROAD/FUTURE GROWTH

Lloyd's of London's current global span is split worldwide. Currently Lloyd's conducts business globally based on the following percentages:

35% of business conducted within U.S.A

32% of business UK

14% market share held in Europe

9% market share in countries deemed "Other Americas"

7% business conducted in Asia/Africa combined

3% business conducted "other countries"

Source: Lloyd's Market Reporting and Analysis, 31 December 2002. http://www.lloyds.com

Lloyd's is also ranked 8 out of 10 global top motor vehicle insurer/manufacturers and ranked among the top 10 global pharmaceutical companies (Lloyds, 2003). 78% of global electronics manufacturers and 71% of general manufacturing businesses currently look to Lloyd's for insurance representation (Lloyds, 2003).

Currently Lloyd's is exploring opportunities in the Asia Pacific region. This region is growing very rapidly, and therefore Lloyd's has much to gain from investing in this market. Recently Lloyd's embarked on a strategic research pursuit conducted over a nine-month period where interviews were conducted by the Market and Opinion Research International to assess the overall business climate and opportunity within the Asia-Pacific region (Plimley, 2003: 5). Part of the reason for conducting the research included the desire to explore the impact of "the economic climate in Asia-Pacific on the demand for Lloyd's specialist insurance products, and investigate the image of Lloyd's in this region" (Plimley, 2003: 5).

This region represents broad growth opportunities for Lloyd's, and includes the following countries: Australia, China, Hong Kong, Indonesia, South Korea, Malaysia, New Zealand, Singapore, and Thailand (Plimley, 2003: 5). From the study, researchers concluded that Asia may be a prime target for increased capital and growth. Asia was viewed primarily as a market for the following goods and services: Reinsurance; Surplus lines; Direct specialist lines in certain key markets" (Plimley, 2003: 5). At this time Lloyd's has decided that incorporating Asia in its global portfolio of business will prove an economically profitable venture. A plan of action has been laid out to include Asia in future business that will include improvement among distribution channels in the region, education of brokers regarding Lloyd's services and review of existing license networks to evaluate new opportunities (Plimley, 2003: 6).

Currently, China stands out as one of the fastest growing economies with a large gross domestic product (Plimley, 2003: 7). Such growth rates are attractive to Lloyd's, and represent opportunities for regional insurance market growth. Currently Asia accounts for a very large portion of the international market in other industries, and Lloyd's is forward thinking in its plans to invest in business opportunities with the region.

Currently there is an agreement among brokers and investors that the insurance professionals currently operating within this region lack the availability of insurance products that Lloyd's could provide, and most agree that the quality of service is substandard compared to that of Lloyd's (P). Introduction of Lloyd's services in this market should not be difficult. Currently Lloyd's has only a 6% market share in this region, including its relationship with Japan (Plimley, 2003:9).

Asia offers many opportunities which include the following:

of the top 25 world's largest economies (GDP) (China; South Korea; Australia; Taiwan; Hong Kong) of the top 25 fastest growing economies (China; Vietnam, Singapore, Malaysia, Laos, Myanmar; Taiwan, South Korea) of the top 25 biggest traders (China, South Korea, Taiwan, Singapore, Hong Kong, Malaysia, Australia, Thailand) of the top 25 largest industrial outputs (China, South Korea, Australia, Taiwan, Indonesia, Thailand) of the top 25 largest outputs (China, Australia, South Korea, Taiwan, Hong Kong)

Source: Plimley, Jonathan. "Opportunities in Asia-Pacific. http://www.lloyds.com/index.asp?ItemID=4170

The percentage of growth rate in Asia has been deemed the highest in the world, which is why this would be an incredibly lucrative market for Lloyds to invest in. Lloyd's currently shares a miniscule portion of the Asia market, less than 6% if one does not factor in Africa, with whom the Asia market share is currently combined. The market potential within the countries of Asia is tremendous. If "Lloyd's premium income was proportionate with the size of the markets and their contribution to global premiums, capital would rise substantially.

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.