Lloyd's of London, a Commercial Insurance Marketplace
What is Lloyd's of London? Many small business owners have heard of Lloyd's but aren't sure what it does.
Lloyd's Is a Marketplace
Lloyd's of London is not an insurance company. Rather, it is a marketplace where insurance buyers and sellers come together. Lloyd's began as a coffee house in the 1600s. Ship captains, vessel owners, traders and others interested in shipping gathered at the coffee house to buy or sell what is now called ocean cargo insurance. These days, brokers and underwriters convene at the Lloyd's office building on Lime Street in East Central London. Lloyd's is now a major hub for buying and selling a variety of coverages, not just marine insurance.
The word Lloyd's has two meanings. One is the marketplace where brokers and underwriters meet to do business. Lloyd's also means the Corporation of Lloyd's, the company that oversees the insurance marketplace. The corporation ensures that the syndicates are financially sound and that the marketplace operates efficiently.
The Lloyd's marketplace involves five key participants. These include the syndicates, managing agents, brokers, cover holders, and insurance buyers.
- Syndicates: The syndicates are the backbone of the Lloyd's marketplace. A syndicate functions like a little insurance company, assuming risks and paying claims. Each syndicate is made up of one or more members, who may be individuals or corporations. Members provide the financial capital that allows the syndicate to operate. Each syndicate specializes in certain types of insurance. For instance, one syndicate may focus on commercial property insurance, while another underwrites general liability and commercial auto liability insurance.
When Lloyd's syndicates assume risks, they operate by subscription. This means that each syndicate assumes only a percentage of each risk. In some cases, a syndicate may assume only a small amount (such as one or two percent) of the total risk. In others, it may assume a larger chunk, such as 25% or 50%.
For example, Bill plans to ship a load of computers from India to the U.S. The shipment is valued at $15 million. Bill contacts a broker, who obtains cargo insurance on his behalf through Lloyd's. Bill's insurance is underwritten by 15 syndicates. Each syndicate assumes only $1 million or 1/15 or of the total risk. The syndicates have minimized their exposure to loss since each has assumed only a small portion (6 .67%) of the total risk.
- Managing Agents: Managing agents work on behalf of syndicates, overseeing their day-to-day business affairs. They hire and supervise underwriters, claims adjusters, accountants, and other essential staff. A managing agent may oversee more than one syndicate. In some cases, the managing agent may be the same company that provides the capital for the syndicate. Managing agents select and oversee coverholders.
- Brokers: Insurance brokers act as intermediaries between insurance buyers and syndicates. To conduct business in the Lloyd's marketplace, a broker must be accredited by the Corporation of Lloyd's. While many Lloyd's brokerages are situated in London, some are located in other countries. Most large insurance brokerages do business in the Lloyd's marketplace, often through a subsidiary company.
Note that an insurance buyer cannot communicate directly with a Lloyd's broker. Instead, he or she must work through a local broker or agent, who will contact a Lloyd's broker on the buyer's behalf.
- Coverholders: While most of the business underwritten by syndicates is generated by brokers, some comes from coverholders. A coverholder is a company that underwrites risks on behalf of a managing agent. Coverholders operate under binding authority granted to them by managing agents. The scope of this authority varies. Some coverholders are authorized to issue documents such as insurance binders and certificates of insurance. They may also have the authority to collect premiums and settle claims.
By contracting with coverholders, Lloyd's managing agents can operate worldwide without having to establish a local office. For example, suppose a managing agent in the U.K. authorizes a coverholder in the U.S. to bind insurance coverages for U.S. policyholders. Its contract with the coverholder enables the managing agent to do business in the U.S. without a physical presence there. In some countries, coverholders are called managing general agencies or MGAs.
- Insurance Buyers: Most small business owners can obtain the insurance coverages they need from "regular" insurers. Nevertheless, some businesses may present unusual or risky exposures that traditional insurers don't want to insure. Examples are roofing companies, sky-diving operators, and long-haul trucking firms. Lloyd's syndicates may insure such risks.
If your local insurance agent or broker is unable to obtain coverage on your behalf in the standard market, he or she may contact a surplus lines broker who has access to the Lloyd's marketplace. Alternatively, your agent or broker might locate a Lloyd's broker by using the look-up tool on the Lloyd's website. Your local agent will then work with the surplus lines or Lloyd's broker to obtain coverage on your behalf.