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WEB FILE - LLOYD'S OF LONDON
SPECIAL REPORT
A Brief History
From coffeehouse to powerhouse
In the late 17th century, seafarers flocked to Edward Lloyd's coffeehouse in Tower Street, near the Thames waterfront in London, to gossip, play cards, and conduct business, and Edward Lloyd serviced their needs. Coffee, valued for its therapeutic powers, was a penny a cup. Pens, ink, and paper were free, as was news, provided by Lloyd's runners who scurried back and forth between the coffeehouse and the docks, gathering the latest information on the comings and goings of ships and their cargoes.
In the days of sail and rudimentary navigation, the news was often bad: ships were wrecked and merchants ruined. Although ship and cargo insurance can be traced back to the Phoenicians, it was at Lloyd's coffeehouse that modern marine insurance was born. A shipowner would write on a slip of paper the particulars of a proposed voyage--the name, route and ports of call of a vessel, the value of its hull and cargo, and the amount he was willing to pay for "insurance." Other coffee drinkers arrayed in booths and benches around the room, many of them shipowners themselves, would then decide how much, if any, of the risk they were willing to accept in exchange for the premium. An "insurer" would write his name on the shipowners' slip under the shipping information (hence the term underwriter).
Although risky, the business was lucrative, and it attracted investors, who formed groups, or "syndicates," to back underwriters. On the side, opportunists took bets not only on whether a ship would arrive safely but on contingencies as varied as whether a candidate for Parliament would be elected and when a sick person would die. Corruption flourished.
By 1771 larceny and wagering threatened to overwhelm legitimate business. That year, 79 of the soberer underwriters broke away and established a formal association in a building nearby. Though Edward Lloyd was long dead, his name stuck, as did the tradition of doing business from wooden benches clustered in rectangular "boxes" around a large room.
Lloyd's came of age insuring ships during a succession of wars culminating in the defeat of Napoleon at Waterloo in 1815. War drove premiums up. Many ships were sunk and much money was lost, but the skilled underwriters got rich, and Lloyd's grew in size and importance. By the 19th century, its runners had become a worldwide network of intelligence agents, utilized not only by Lloyd's for ship monitoring but by the British government for a range of economic and military intelligence--a phenomenon that fed Lloyd's reputation for mystery and secrecy.
In 1906 a signal event came to Lloyd's--the San Francisco earthquake. Cuthbert Evan Heath, a leading broker and underwriter, telegraphed instructions to his California representatives to immediately pay all claims to Lloyd's customers in full, whatever the terms of their policies. Heath's dramatic gesture, at a time when U.S. insurers were nickel-and-diming the quake victims, emblazoned Lloyd's in the pantheon of world finance as an emblem of trust.
While still insuring much of world shipping, Lloyd's by then also offered coverage for property and casualty, fire and theft, and product liability. It was known for accepting large and complex risks that no one else would touch. By granting or withholding insurance, Lloyd's could make or break a risky new business venture.
Lloyd's earned for the British balance of payments nearly as much as the entire British banking system. It was the largest private investor in the U.S. government, holding billions of dollars in Treasury bonds. It also was a cultural and social force. Lloyd's chairmen were celebrities. People stood when they entered a room. The art collection of one Lloyd's official became the nucleus of the National Gallery in London. Lloyd's name was so potent in America--a household word--that in 1936 it was celebrated in a full-length Hollywood movie starring Tyrone Power.
By the middle of the 20th century, having passed its 250th birthday, Lloyd's of London was sui generis--a singular force, with an aura unmatched by any other business enterprise.
It also had a unique structure. Unlike normal publicly held companies whose shareholders can vary the size of their investment (and thus their financial exposure), Lloyd's has been backed by a unique breed of investors known as Names.
A would-be Name had to be sponsored by an existing Name and demonstrate a net worth (in near liquid form) equivalent to at least $1 million in today's money. Each Name then joined one or more syndicates--groups of Names headed by an underwriter. After assembling the funds his Names had agreed to invest, the underwriter sold insurance policies to clients, collected their premiums and, when necessary, paid their claims.
Although Names' investments are equal to the amount of insurance coverage they agree to finance, they are required to post in advance, or pledge, only 30% of that amount--usually in the form of securities, a letter of credit or a bank guarantee. Thus Names have several opportunities for financial gain. First, they can earn a profit when premiums exceed claims. Second, they can earn money when premiums pooled and invested by Lloyd's draw investment income. Third, they enjoy income from funds pledged but not actually made available to Lloyd's.
There is, of course, a catch--the risk that claims might exceed premiums. And that risk is multiplied many times over by a key factor: a Lloyd's Name incurs unlimited liability for the risk he or she underwrites. Thus a huge claim can drain a Name of all his or her assets--"right down to your last cufflink," as Lloyd's Names were told, tongue in cheek, when they signed on. But down the years thousands of Names discovered that unlimited liability means just what it says and not what they were told and wanted to hear.
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