The story
Founded by Edward Lloyd in 1688, in London.1
History
17th–19th centuries: Formation and first Lloyd's Act
The market began in Lloyd's Coffee House, owned by Edward Lloyd, on Tower Street in the City of London. The first reference to it can be traced to the London Gazette in 1688. The 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 evolved into a meeting place for people of all types of maritime occupations, who would make bets on which ships would make it back to port. Soon, the captains of ships that were suggested to fail to return were betting against the return of other ships. It was the start of Lloyd's insurance. During this time, the coffee house was also frequented by mariners involved in the slave trade. Historian Eric Williams noted that "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 until the abolition of the slave trade in 1807.
Just after Christmas 1691, the small club of marine insurance underwriters relocated to No. 16 Lombard Street; a blue plaque on the site commemorates this. This arrangement carried on until 1773, long after the death of Edward Lloyd in 1713, when the participating members of the insurance arrangement formed a committee and underwriter John Julius Angerstein acquired two rooms at the Royal Exchange in Cornhill for "The Society of Lloyd's". In July 1803, the Lloyd's Patriotic Fund was established by a group of Lloyd's underwriters.
The Royal Exchange was destroyed by fire in 1838, forcing Lloyd's into temporary offices at South Sea House, Threadneedle Street. The Royal Exchange was rebuilt by 1844, but many of Lloyd's early records were lost in the blaze. The Lloyd's Act 1871 (34 & 35 Vict. c. xxi), the first Lloyd's Act, was passed in Parliament which gave the business a sound legal footing. Around that time, it was unusual for a Lloyd's syndicate to have more than five or six backers; this lack of underwriting capacity meant Lloyd's was losing many of the larger risks to rival insurance companies. A marine underwriter named Frederick Marten is credited for first identifying this issue and creating the first "large syndicate", initially of 12 capacity providers. By the 1880s Marten's syndicate had outgrown many of the major insurance companies outside Lloyd's.
Early 20th century: San Francisco earthquake and first Lloyd's building
On 18 April 1906, a major earthquake and resulting fires destroyed over 80 per cent of the 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 the writing of insurance business overseas was viewed with some wariness at the time. While some insurance companies were denying claims for fire damage under their earthquake policies or vice versa, one of Lloyd's leading underwriters, Cuthbert Heath, famously instructed his San Francisco agent to "pay all of our policy-holders in full, irrespective of the terms of their policies". The prompt and full payment of all claims helped to cement Lloyd's reputation for reliable claim payments 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 and as such, since 1906 "fire following earthquake" has generally been a specified insured peril under most policies. Heath is also credited for introducing the now widely used "excess of loss" reinsurance protection for insurers following the San Francisco quake.
Heath had become an underwriting member of Lloyd's in 1880, upon reaching the minimum age of 21, on J. S. Burrows' syndicate. Within a year he was underwriting for himself on a three-man syndicate; in 1883 he also opened a brokerage business. In 1885, he wrote the first fire reinsurance contract, reinsuring the Hand in Hand Insurance Company and marking the start of Heath's push to diversify the market into "non-marine" business. He also wrote Lloyd's first burglary insurance policy, its first "all risks" jewellery policy and invented "jewellers' block" cover. Later, during World War I he offered air-raid insurance, protecting against the risk of German strategic bombing.
The subsequent Lloyd's Act 1911 (1 & 2 Geo. 5. c. lxii) set out the society's objectives, which include the promotion of its members' interests and the collection and dissemination of information.
A year later in April 1912 Lloyd's suffered perhaps its most famous loss: the sinking of the Titanic. It was insured for £1 million (equivalent to £124 million in 2024), which represented 20 per cent of the entire market's capacity, making it the largest marine risk ever insured. The record of its sinking in the 1912 "Loss Book" is on display in the Lloyd's building.
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The society moved into its first owned, dedicated building in 1928. It was located at 12 Leadenhall Street and had been designed by Sir Edwin Cooper.
1960s: Hurricane Betsy and the Cromer report
In 1965 Lloyd's wrote the first satellite insurance policy, covering Intelsat I in pre-launch.
Later that year, when Lloyd's had around 6,000 members on 300 syndicates, Hurricane Betsy struck the Gulf of Mexico coastlines, costing the market over £50 million. The catastrophe halted the capital that hitherto had been pouring into Lloyd's, and twice as many members left between 1965 and 1968 as had left over the prior eight years. It was soon 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 taking on.
Lloyd's response was to commission a secret internal inquiry in 1968, headed by Lord Cromer, a former Governor of the Bank of England. This report advocated the widening of membership to non-market participants, including non-British subjects and then women, and the reduction of the onerous capitalisation requirements (thus creating a minor investor known as a "mini-Name"). The report also drew attention to the danger of conflicts of interest. The liability of the individual Names was unlimited, and thus all their personal wealth and assets were at risk.
1970s: Changes in the financial markets
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: for a time, capital gains were taxed at up to 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 gain. The investment gain was typically achieved by "bond washing" or "gilt stripping": selling the gilt or other bond cum dividend and buying it back ex-dividend, thus forfeiting the interest income in exchange for a tax-free capital gain. Syndicate funds were also moved offshore (which later created problems through fraud and self-dealing).
Because Lloyd's was a tax shelter as well as an insurance market, the second issue affecting it was an increase in its external membership: by the end of the 1970s, the number of passive investors dwarfed the number of underwriters working in the market. The third issue related to a series of losses as a result of scandal. During the decade a number of scandals had come to light, including the collapse of F. H. "Tim" Sasse's non-marine syndicate 762, which had issued large fire insurance claims that had highlighted both the lack of regulation and the lack of legal powers of the Committee of Lloyd's (as it was then) to manage the Society.
Late 1970s: Sasse scandal and other issues
The collapse of the Sasse syndicate came after it wrote a "binding authority" in 1975 that delegated underwriting authority to Florida-based expatriate Dennis Harrison to write property and fire risks through his Den-Har Underwriters agency, even though Den-Har was not an approved Lloyd's coverholder (a fact noticed neither by Sasse nor Lloyd's Non-Marine Association). Den-Har had suspected Mafia links and many of the risks written were rigged: typically dilapidated buildings in slums such as New York's south Bronx, which soon burned down after being insured for large sums.
Once the three-year Lloyd's accounting period passed, the 110 Names on syndicate 762 were told they faced substantial losses, from mostly fraudulent claims. Sasse's reinsurer, the Instituto de Resseguros do Brasil (IRB), refused to pay its share of the fraudulent losses. The Names (few in number for such large losses) took legal action and ultimately paid only £6.25m of c. £15m of Den-Har claims under the 1976 year, leaving the Corporation of Lloyd's to pay the remainder. The Corporation also paid the near £7m loss for 1977. Lloyd's banned Sasse from the market for life in 1985; he died on 28 February 1987.
Sasse had also been one of 57 underwriters on other syndicates that wrote loss-making "computer leasing" policies in the late 1970s. These claims ultimately ran above $450m, wiping out more than half the entire market's profit in a single year.
Problems also developed out of the Oakley Vaughan agency run by brothers Edward and Charles St George, which had written far more business than its capacity allowed in order to invest premium to take advantage of high interest rates. By writing swathes of business regardless of whether the premiums were adequate, the St Georges left their Names with serious losses. Lloyd's had commissioned investigations into Oakley Vaughan, but investigators were denied access to the books and relied only on reassurances that the agency was profitable.
Arising simultaneously with these developments were wider issues: first, in the US, an ever-widening interpretation by the courts of insurance coverage in relation to workers' compensation for asbestosis-related claims, which created a huge hole in Lloyd's loss-payment reserves, which was initially not recognised and then not acknowledged. Second, by the end of the decade, almost all of the market agreements, such as the Joint Hull Agreement, which were effectively cartels mandating minimum terms, had been abandoned under pressure of competition. Third, new specialised policies had arisen which had the effect of concentrating risk: these included "run-off" policies, under which the liability of previous underwriting years would be transferred to the current year, and "time and distance" policies, whereby reserves would be used to buy a guarantee of future income.
Fisher report
In 1980, Sir Henry Fisher was commissioned by the Council of Lloyd's to produce the foundation for a new Lloyd's Act. The recommendations of his report addressed the "democratic deficit" and the lack of regulatory muscle.
Fisher, working with Richard Southwell QC, drafted the Lloyd's Act 1982 (c. xiv) which further redefined the structure of the business and was designed to give external Names, introduced in response to the Cromer report, a say in the running of the business through a new governing Council. The main purpose of the 1982 Act was to separate the ownership of the managing agents of the underwriting syndicates from the ownership of the brokering houses (which acted as intermediaries, not as underwriters), with the objective of removing conflicts of interest.
PCW scam and Lioncover
Immediately after the passing of the 1982 act, evidence came to light and internal disciplinary proceedings were commenced against a number of underwriters who had allegedly siphoned money from their syndicates to their own accounts. These individuals included a deputy chairman of Lloyd's and some of its leading underwriters. Successful marine underwriter Ian Posgate, who at one point had written 20 per cent of the Lloyd's marine market, was expelled under suspicions but later acquitted of criminal charges. His name remained tarnished and he did not return to the market, retiring to run his Oxfordshire farm until his death in 2017, aged 87. A greater debacle arose when Peter Cameron-Webb and Peter Dixon, of PCW Underwriting Agencies, allegedly defrauded their business of some $60m through rigged reinsurance transactions and fled to the United States, never to return.
The emergence of fraud at PCW was the first in a series of events that led to the resignation of Lloyd's chairman Sir Peter Green in 1983. Lloyd's was later forced to make a settlement with the roughly 3,000 Names on the various PCW syndicates involved and to reinsure their liabilities into a new syndicate, number 9001, in turn reinsured by a unique vehicle named Lioncover, which was set up as a Lloyd's subsidiary insurance company. Lioncover assumed the liabilities of PCW as well as the associated WMD and Richard Beckett underwriting agencies in 1987. In 1988 it also assumed the 1967–1969 liabilities of syndicates 2 and 49. Dixon and Cameron-Webb remained at large in the US; Cameron-Webb reportedly died in 2004 in a nursing home in California and Dixon became a real estate agent in Florida; he died in 2017.
Lioncover's PCW liabilities were reinsured as part of the Equitas arrangement in the late 1990s and transferred to National Indemnity Company in two stages in 2007 and 2009. Residual funds in Lioncover were later distributed to surviving PCW Names or donated to the Lloyd's Charities Trust. Lioncover was voluntarily dissolved in 2014.
Warrilow syndicate and Centrewrite
Lloyd's also faced action from Names on C. J. Warrilow's syndicate 553, which had chronically exceeded its underwriting capacity in the early 1980s and failed to adequately reinsure the huge quantity of risks it was taking on. The solution was to create a new company in 1990 into which these liabilities could be reinsured in order to relieve the Warrilow Names. This entity was named Centrewrite Ltd and in 1993 it assumed Warrilow's 1985 and prior years' liabilities, separately also offering "estate protection plans" (EPPs) for resigned Names. Tens of thousands of Lloyd's Names bought these reinsurance policies.
Centrewrite still exists today but has not written any EPPs since 2011 and conducts little other business; its most recent transaction was in 2013 when it assumed the 2001 liabilities of the life syndicate 1171. It also reinsured the 1997–1999 years of Crowe syndicate 1204 and the 1999–2001 years of Cotesworth syndicate 535. In 2012 the Crowe and Cotesworth liabilities (then valued at just over £17m) were novated to Riverstone (a Fairfax company) meaning minimal liabilities remain in Centrewrite today.
In 1986, the year Lloyd's moved into a new building at 1 Lime Street (where it remains today), the British government commissioned Sir Patrick Neill to report on the standard of investor protection available at Lloyd's. His report was produced in 1987 and made a large number of recommendations, but was never implemented in full.
Late 1980s: Piper Alpha and the LMX spiral
It has long been normal for one Lloyd's syndicate to reinsure another, but when Piper Alpha, a North Sea oil rig, exploded on 6 July 1988 causing an initial $1.4bn loss, the practice had become so widespread that the underwriters in Lime Street initially had no idea how extensive their exposure was: the loss was passed around in what became known as the London market excess of loss (LMX) "spiral" and claim values escalated out of control.
The rig's operator, Occidental Petroleum, bought a direct insurance policy from Lloyd's underwriters, who then passed part of their shares of the risk on to other syndicates via reinsurance. Those reinsurers then in turn reinsured part of the risk out to other reinsurance underwriters within Lloyd's (known as "retrocessionaires"), and so on. Consequently, many syndicates, especially those writing a large amount of excess of loss reinsurance, became exposed to the same claim multiple times through multiple layers in the spiral. Other catastrophes, including Hurricane Hugo and the Exxon Valdez oil spill in 1989, also went into the spiral.
Some of the leading LMX reinsurers at the time that suffered serious spiral losses included the numerous syndicates managed by the Gooda Walker agency, Devonshire syndicate 216, Rose Thomson Young 255, R. J. Bromley 475, and Patrick Fagan's already challenged Feltrim syndicates 540 and 542. Gooda Walker syndicate 298 became the first fatal casualty, with 13,500 policies being exposed to the Piper Alpha disaster alone and its 1989 account producing a 650 per cent loss on capacity; Feltrim followed with a 550 per cent loss on capacity. Roy Bromley, underwriter of syndicate 475, later committed suicide after being dismissed by his Board and reportedly becoming distressed at his operation's mounting losses.
Not all excess of loss writers succumbed to the LMX spiral; in fact the spiral was relatively confined to a minority of such syndicates. Among the prominent reinsurers that remained profitable throughout the spiral were C. F. Palmer syndicate 314, M. H. Cockell 269/570 and D. P. Mann 435, while G. S. Christensen 958 reported only a slight loss in 1989 but healthy profits in 1990 and 1991.
Emergence of claims
The early to mid-1990s saw the continuation of Lloyd's most traumatic period in its history that had begun with the explosion on Piper Alpha. Unexpectedly large legal awards in US courts for punitive damages led to substantial claims on asbestos, pollution and health hazard (APH) policies, some dating as far back as the 1940s. Many of these policies were open-peril policies, meaning that they covered any claim not specifically excluded. Other policies (called standard, or broad) only cover stated perils, such as fire.
The classic example of "long-tail" insurance risks is asbestosis/mesothelioma claims under employers' liability or workers' compensation policies. An employee at an industrial plant may have been exposed to asbestos in the 1960s, fallen ill 20 years later and claimed compensation from his former employer in the 1990s. The employer would report a claim to the insurance company that wrote the policy in the 1960s. However, because the insurer did not fully understand the nature of the future risk back in the 1960s, it and its reinsurers would not have properly priced or reserved for it. In the case of Lloyd's, this resulted in the bankruptcy of thousands of individual investors who indemnified general liability policies written from the 1940s to the mid-1970s for companies with exposure to asbestosis claims. A group of Names mounted a legal case as the Names Against Lloyd's of London, where they attempted to prove fraud among those brokers who had involved them in the underwriting syndicates.
Reinsurance to close
It may not be immediately clear how current members of current Lloyd's syndicates, which accept business one year at a time, could be liable to pay historical claims. This came about as a result of the Lloyd's accounting practice known as reinsurance to close (RITC).
Timeline of significant events at Lloyd's
1686 Earliest reference to Edward Lloyd's coffee house on Tower Street
1691 Coffee house relocated to Lombard Street
1774 Society of Lloyd's founded at the Royal Exchange
1783 Zong massacre trial
1799 Sinking of HMS Lutine
1871 Lloyd's Act
1906 San Francisco earthquake
1909 Sinking of RMS Republic
1911 Lloyd's Act
1912 Sinking of RMS Titanic
1914 Sinking of RMS Empress of Ireland
1925 Market relocated to its first owned building, at 12 Leadenhall Street
1955 Supported the Montgomery bus boycott by insuring the civil rights volunteers' carpool fleet after local insurers refused to
1956 Sinking of SS Andrea Doria
1958 Market relocated to new owned building, at 51 Lime Street
1965 Hurricane Betsy
1968 Cromer report published
1977 F. H. "Tim" Sasse syndicate scandal
1978 Amoco Cadiz disaster
1977 Computer leasing losses emerged
1979 Betelgeuse incident; Three Mile Island accident
1980 Asbestos Working Party created to monitor the increasing losses from asbestos injury
1982 Accountants Neville Russell warned that assessing the losses from asbestos injury was "an impossibility"
1982 Lloyd's Act
1986 Market relocated to the current Lloyd's building, at 1 Lime Street
1988 Piper Alpha disaster
1989 Exxon Valdez oil spill; Hurricane Hugo; Loma Prieta earthquake
1989 Lloyd's Community Programme founded, with first chairman Michael Wade
1990s Escalation of the asbestosis affair and London market excess of loss (LMX) spiral
1991 Typhoon Mireille
1992 Hurricane Andrew
1993 Bishopsgate bombing and subsequent establishment of Pool Re
1994 Northridge earthquake
1994 Hardship Scheme set up to help Names whose losses exceeded their assets
1996 Equitas set up to harbour all pre-1993 exposures
2000 A group of Names led by Sir William Jaffray issue court proceedings alleging fraud
2001 World Trade Center attack
2004 Hurricanes Charley, Frances, Ivan and Jeanne
2005 Hurricanes Katrina, Rita and Wilma
2006 Berkshire Hathaway assumed Equitas liabilities
2010 Deepwater Horizon disaster
2011 Tōhoku earthquake and tsunami
2013 Inga Beale appointed first female chief executive officer of Lloyd's
2017 Hurricanes Harvey, Irma and Maria and California wildfires
2020 COVID-19 pandemic resulted in the first ever temporary closure of Lloyd's building
2022 Hurricane Ian and losses arising out of the Russian invasion of Ukraine
2024 Baltimore Key Bridge collapse
From Wikipedia’s article on Lloyd's of London, shared under CC BY-SA 4.0.4