Lloyd’s of London : Other Roles

At 5.13am on 18 April 1906,San Francisco, the seventh largest city in theUS, shook, crumbled and then burned to the ground. A massive earthquake, measuring 8.25 on the Richter Scale, brought the city to its knees, sparking uncontrollable fires that raged out of control for three days, taking several thousand lives and making half of the population homeless. TheSan Francisco disaster cost Lloyd’s more than $50 million – a staggering sum in those days, the equivalent to more than $1 billion in today’s dollars.

But the quake also cemented Lloyd’s reputation for paying valid claims. As one of the leading earthquake underwriters, Lloyd’s underwriter, Cuthbert Heath issued his famous edict and built the foundations of the modern Lloyd’s. Cuthbert Heath is credited as being the father of non-marine insurance at Lloyd’s. He cemented Lloyd’s reputation in theUSby paying all claims in relation to the 1906San Franciscoearthquake and fire, irrespective of policy wordings Lloyd’s reputation for paying claims has been tested many times since 1906.  Lloyd’s played an integral part in rebuilding theUSafter Hurricane Andrew in 1992, and more recently helped the US back to its feet after the terrorist attack of 9/11 and the hurricanes of 2005.

The disaster had a profound effect on the insurance industry of today. Prominent Lloyd’s underwriter, Cuthbert Heath famously instructed his San Franciscan agent to ‘pay all claims’. The quake also laid the foundations for many of today’s modern risk modelling and building practices.

Lloyd’s of London : The Need for Insurance

 

During the reign of Queen Elizabeth I there was an economic boom in England and the demand for luxuries from around the world grew rapidly. To outfit for this increased demand, English merchants would charter cargo ships to sail to far fling countries in order to bring back exotic goods for the courtiers to enjoy. However, sea travel was extremely treacherous. The weather was highly unpredictable and many ships never returned, having been sunk in the heavy gales at sea. Most journeys were very long and many took years to complete. Sometimes these merchant ships, filled with rich cargo, might find themselves the victim of a pirate attack. Spanish pirate ships would lie in wait in the Bay of Biscay, off the coast ofSpain, to plunder any merchant ships on their way back toEngland.

 

All this made life very difficult for the merchants whose livelihood depended on their ships returning safely with their cargo intact. In return for this insurance, they demanded a premium. The value of the premium varied with the value of the cargo and, more importantly, with the risk being undertaken. For example, the premium for a short journey that did not go pastSpainwould be less than for a long journey across the Bay of Biscay and round the southern tip ofAfrica.

 

Lloyd’s of London was now firmly on the map as the most important insurance market in the empire, and therefore the world. The original location was onTower Street, but Lloyd moved in 1691 toLombard Street. The little coffee house inLombard Streetquickly became too small to house all the underwriters, and the premises were moved to a room above the stock exchange with box-like tables and benches. These tables became known as ‘boxes’ and the room became known as the underwriting room or just ‘the room’.

 

The Room is where the business of writing insurance occurs. To place insurance at Lloyd’s, you first need to approach a broker¹. Unlike your car insurance company who you can phone directly to buy your car insurance, at Lloyd’s only the brokers can place insurance. Once you have contacted a broker, he will write up a slip detailing your risk to be insured. This will then be passed round the underwriters for the syndicates who will sign a line underneath the risk (hence the name underwriters) and determine a premium level. The broker will pass this information on to you, and if you accept then you are now insured at Lloyd’s.

Lloyd’s of London : From Coffee House to Insurance Market

It all started at Edward Lloyd’s coffee house on Tower Street. The first reference to Lloyd’s coffee house was in the London Gazette, 18-21 February, 1688. Lloyd himself was not involved in insurance, but he provided a free information service on shipping, which prompted the wealthy to invest in insurance from Lloyd’s coffee house. After Lloyd’s death in 1713 the coffee house remained the centre for insurance inLondon. His information sheet became the ‘Lloyd’s list’, and Lloyd’s prospered as a place for marine insurance. By 1774, the underwriters had organised a committee and had taken space at the Royal Exchange building. In 1871, in return for supporting and funding the government, the Lloyd’s Act gained Royal Assent, incorporating Lloyd’s.

At the period when journalism was in its early years and the postal system was unorganized and uneven, the coffee-house provided a centre of communication for news and information. Runners were sent around to the coffee-house to report major events of the day, such as victory in battle or political upheaval, and the newsletters and gazettes of the day were distributed mainly in the coffee-house.  Most of the establishments functioned as reading rooms, for the cost of newspapers and pamphlets was included in the admission charge.  In addition, bulletins announcing sales, sailings, and auctions covered the walls of the establishments, providing precious information to the businessman who conducted much of his business from a table at his favorite coffee-house.

Lloyd’s of London : Introduction

         According to BBC, Lloyd’s of London is the world’s leading insurance market, providing specialist insurance services to businesses in over 120 countries. It is the world’s second largest commercial insurer and sixth largest reinsurance group. What this means is that Lloyd’s is not an insurance company. Lloyd’s does not sell insurance, just as the Stock Exchange does not sell shares. It is a marketplace where one goes to buy insurance. The business at Lloyd’s is conducted in ‘The Room’, the inner sanctum of the Lloyd’s building in London, and is only open to a very select few.

         Lloyd’s is a broker market. Business comes into the market through Lloyd’s brokers who bring business from clients and other brokers and intermediaries from all over the world. It is a competitive market where individual underwriters accept risks on behalf of some 164 syndicates of individual and corporate members whose resources provide the security behind Lloyd’s policies. 

inside Lloyd’s building