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Cover Story

Offers a competitive insurance market in which over 130 businesses compete and cooperate

By Syed M. Aslam
Sep 27 - Oct 03, 1999

No part of our lives remains untouched today by insurance though many of us don’t realize it. The imported finished goods that we buy from the market, the raw materials and semi-finished imports used in the local manufacturing, the imported fertilizer used by our farmers to help put food on our tables are all insured at all stages of shipments. This is also true for all exports as one’s exports are someone else’s imports.

The ships which carry all global imports and exports are being insured while they are being built. Ship insurance is called the ‘hull insurance’ while all cargoes— either marine, air or land— are also insured to cover all possible risks.

From the early days of civilization men have formed societies whose members promised to help each other in the event of a misfortune. As early as 900 BC, the merchants of the Rhodes Island in the Mediterranean agreed to share certain risks among themselves.

Basically there are two kinds of insurance, Life and non-life or General— Marine, Fire, Motor and Miscellaneous such as cash in safe or transit. We have also read about such unusual insurance covers where famous singers have insured their voices for millions of dollars or a model insuring her pretty face for huge amount of money.

Insurance in the modern sense— where insurers collect small premiums from their policy holders, pay claims them who had incurred losses and made a profit for taking the risks after deducting business expenses— dates back to as early as thirteenth century.

The history of life insurance dates back to as early as 1500s, fire insurance to as early as second half of 1600s while the concept of accident insurance was developed in Britain in the 1800s when in 1840, the Guarantee Society was formed to insure employers against embezzlement by their employees. The British became the principal marine insurers when Sir Thomas Gresham established the Royal Exchange in London in 1570 to transact the marine insurance. With the invention of automobile early this century a new clause ‘Motor’ was developed by the insurance industry to provide insurance cover for automobiles which included such other clauses as accidental insurance.

From its modest beginning in a 17th century coffee-house in London Lloyd’s today is the world’s leading insurance market. Although an insurance market, Lloyd’s is not an insurance company which produces global results and an annual report. Lloyd’s also operates under certain conditions in the USA.

Lloyd’s market is a unique service provider— though not a company it offers a competitive insurance market in which over 130 businesses compete and cooperate. This combination of choice, information, experience and expertise under one roof enables Lloyd’s to provide expert opinion of leading underwriters for many specialty classes of business including such diverse coverage as marine, aviation, catastrophe cover and professional indemnity.

Lloyd’s has become a benchmark name in insurance the world over and rated the second top global business insurers by Standard and Poor, an international rating company specializing in insurance. Llyod’s net premium stood at $ 9.94 billion, second only to Tokio Marine and Fire Insurance Company whose net premiums were $ 10.714 billion last year.

The history of Lloyd’s, however, also offers economic scientists unique opportunity to study financial ups and downs which though doing business is in a serious financial problems not only at present but also in the decades to come. To understand the irony one has to track the entire history of Lloyd’s without which the intrigue could hardly be understood clearly.


For nearly three hundred years, Lloyd’s insurance policies were backed by British investors who came to be known as ‘Names’ because their signatures were written on the face of each policy. The ‘Names’ participated in one-year venture syndicates to insure risks chiefly in the maritime industry.

Each ‘Name’ pledged his entire personal wealth to back up his share in the syndicate’s policies which accepted business for one year, then allowed two more years for claims to come in and be settled. Each syndicate closed its ‘year of account’ and finish its affairs after the end of the third year. The ‘Names received their shares of the profits or paid their share of the losses and their liability ended. However, if all claims were not settled by the end of the third year, the syndicate had to remain ‘open’ and the profits or losses could not be shared among the ‘Names’ until all claims were settled.

As Lloyd’s expanded into non-marine business the syndicates found they could no longer close their accounts after just three years. Staying longer than three years on the other hand meant delaying the distribution of profits to weaken the financial base of the ‘Names’ who might had looked elsewhere for more reliable investments with quicker returns. Llyod’s decided to have each closing syndicate reinsure its remaining risks with a syndicate from the next year of account. For a premium paid, a still-open syndicate, during its third year, would assume any remaining Incurred But Not yet Reported (‘INBR’) liabilities of the closing syndicate from the prior year by issuing it specialized policy of Re-Insurance To Close (‘RITC’). Thus the syndicates continue distributing profits after three years, instead of having radically altered their long-established and familiar procedure.

When the ‘RITC’ was developed there were only a few thousand members of Lloyd’s, of whom perhaps a thousand, known as ‘working Names’, actually conducted the business of Lloyd’s insurance market. The rest— ‘external Names— relied on their syndicate managing agents to protect their interests through careful evaluating each risk accepted and by calculating RITC in such a way that neither an excessive profit nor a drastic loss was realized by the ‘Names’ on the old syndicate or the new syndicate.

In the 1930s, 1940s and 1950s, in order to carve out an insurance market Lloyd’s syndicates issued many broadly-worded policies without monetary limits, insuring risks in the US. They it gave Lloyd’s a competitive advantage temporarily by 1960s and 1970s it set the stage for numerous lawsuits over claims in the US from asbestos (a grey material which does not burn and used in making fireproof material), pollution and other health hazards or the so-called ‘APH’ losses. The ‘Names were soon to be held liable from these claims far in excess of not only their original investments but also in excess of their combined wealth. Fearing that the getting out of the undisclosed liabilities would threaten the flow of incoming investment the Lloyd’s syndicates hushed up the issue.

In the early 1970s the ruling Committee of Lloyd’s lowered the minimum net worth requirement for ‘Names’ to $ 150,000 in assets and opened membership at Lloyd’s to the British upper-middle class and also foreigners particularly American, Canadian, Australian and South African citizens— who enjoyed excellent reputation. Llyod’s began recruiting large number of ‘Names’ and opened its membership to women for the first time in 1973 and also came up with new bureaucratic layer— "members’ agents"— between external ‘Names’ and managing agents of the syndicate. The external ‘Names’ were strictly passive investors who delegated all authority to conduct insurance business to their member’s and managing agents, who placed the ‘Names’ on syndicates and otherwise handled all their business at Lloyd’s.

This resulted in the disappearance of the formerly close and trusted relationship between ‘Names’ and their managing agents. Many of the aristocrats ‘Names’ on the threatened syndicates before 1970 quietly ‘disappeared’ as soon as RITC had been contracted for them. They either resigned from Lloyd’s or moved elsewhere. None of the ‘new Names’ were informed of the billions in losses.

Had Lloyd’s been honest about its financial situation in 1970 no reasonable person would have invested in Lloyd’s thereafter and its then-Names would have gone bankrupt. However, that not being so the ‘new Names’ realized to their horror in that they had not invested in the safest institution but rather a loss-ridden organization when Lloyd’s announced a loss of Pound Sterling 500 million ($ 800 million) in 1991. It was the largest single-year loss Lloyd’s suffered during its entire history and by 1995 the cumulative loss ballooned to $ 15 billion.

Lloyd’s paid out premium reserves initially and later making cash calls on the ‘Names’ on the affected syndicates not only to recover the outstanding claims but also to amass reserves to pay the INBR (Incurred But Not yet Reported) claims that would come against syndicates in the future. The premium reserves of hundreds of syndicates were exhausted were exhausted by the end of the traditional three-year accounting cycle. The syndicates could not close and the ‘Names’ bore unlimited personal liability for all the unquantifiable claims in future. The APH claims are expected to continue to flow in to Lloyd’s for another 31 years and maybe even beyond.

The fiasco left thousands of ‘Names’ bankrupt and 30 suicides since 1991. Llyod’s has continued to make cash calls and UK courts have continued to issue rulings in Lloyd’s favour to make it possible to collect more and more money from the remaining ‘Names’ and/or their estates. The dishonestly bordering on fraud by Llyod’s has brought more financial devastation and human misery in its wake than the biggest tornadoes in the entire history of the catastrophe.

The glossary of commonly used, but less understood, insurance terms:

Actuary: A mathematician who makes calculations of probability, particularly in life insurance

Adjustor: An expert employed to settle claims

Indemnity: Compensation for a loss

Re-insurance: In case of big insurance the insurance companies decide not to risk too much money on a single policy. By Re-insuring the loss it passes on the risk to a re-insurer by placing some of its insurances to a re-insurer. There are companies which sell only re-insurance cover to the insurance comapnies

Third Party: Someone other than the insured or the insurer, such as an injured person, making a claim

Underwriter: The person who considers proposals for insurance to whether or not to grant the insurance, the terms on which it may be granted.