April 14, 2022
LLoyd’s
Lloyds of London is technically not an insurance company, rather it is an Insurance Marketplace. It is a place of business and a set of methods that allow 80 or so syndicates to bid and provide insurance contracts typically on risks that many domestic, foreign,and admitted insurers refuse to offer. Lloyds is NOT your standard insurance option.
The Official Name of Lloyds is the Society of Lloyd’s. The Society of Lloyds goes by numerous other names.
In this article we will Review the following:
- A very brief history of Lloyds of London and the Confusions surrounding its Name
- Types of Insurance Policies
- The Lloyd’s Syndicate System
- Unlimited, Limited Liability and Financial Strength Ratings
- Historical Examples of Lloyds Cover and Historical Challenges
- Other Consumer Considerations when Purchasing a Nonadmitted Product
Fidentia:
Lloyd’s of London was founded by Edward Lloyd around 1686 on Tower Street in London to provide marine insurance for ships and their cargo.
Today LLoyds is the leading insurance marketplace in the world and is headquartered in London. Today Lloyds is governed by the “Lloyd’s Act 1871 and subsequent acts of parliament.” Source.
The Lloyds motto is Fidentia or Confidence.
The headquarters of Lloyds of London is One Lime Street. Their headquarter’s building is often referred to as the “Inside Out” building due to its unusual architecture. It was designed by Richard Rogers. The building is about 298 feet tall. Lime St has been their headquarters since 1986. Lloyds of London has always been based in London.
London is considered one of the world financial headquarters of finance and insurance for centuries. Other global financial firms based in London include: Nat West Group, Barclays, and Lloyds Banking Group, among numerous others.
Lloyds Name Confusion:
The word Lloyds in the financial world can be a bit confusing. To begin with LLoyds of London is not per se an insurer as much as series of syndicates that provide insurance. Therefore when you mention the term Lloyds, what more than likely folks are referring to is the Lloyds marketplace of insurance.
Secondarily: there is more than one Lloyds in the financial world. (Apparently its a popular name in the money world.)
- LLoyds Bank: which this article is not about.
- Lloyds of London: a Insurance marketplace.
Thirdly: Within the Lloyds of London marketplace there are the Lloyds various syndicates and the Lloyds corporation which is responsible for “set[ting] strict financial rules and other regulations but does not itself assume liability.”
Lastly Lloyd’s is often written as just Lloyds and can go by other monikers: Lloyds of London, Certain Underwriters at Lloyds, the Society of Lloyds, etc.
[Editors Note: please be aware that this article is based on Lloyds being a non admitted insurer and there are some Lloyds insurers that are admitted in some jurisdictions in current or historical periods, although rare. In the state of California and approximatly 47 other US States, Lloyds is non-admitted. Only in Kentucky, Illinois, and the US Virgin islands can they be considered Admitted. And not in all cases in these states/territory]
What types of Insurances does Lloyd’s provide?
In general lloyds policies are reserved for harder to place risks. Risks that most insurers will not touch. There are numerous bizarre examples of the crazy types of insurance policies they have written. Lloyds of London write both personal lins, such as Homeowners and Commercial lines, such as General Liablity policies. However for most consumers the more common examples can be more useful.
A lloyds policy could be for a life insurance policy for a famous person, a business insurance policy for a risky endevour, or in many parts of California: a home insurance policy in a wildfire zone. Many difficult to insure properties in the San Francisco Bay area are insured by none other than a syndicate of Lloyd’s of London and hence through the Lloyds marketplace.
In summation its not easy to list out all of the various things that Lloyds will cover. From a personal lines perspective is concerned in California, Lloyds of London is used increasingly for Home Insurance due to wildfire risk and building rebuild valuation.
Of Foreign and Alien Consideration – Nonadmitted Documents to Sign:
Some jurisdictions, including California, require agents presenting nonadmitted options from Lloyds to first check and receive declinations from numerous admitted insurers first. In other words you can not purchase a Lloyds policy without first being declined in the standard market. There is a legal/insurance form that insurance brokers and agents are asked to sign by the California DOI called an SL2. Additionally consumers are asked to sign a Form called a D1/ D2.
The D1/D2 forms states in no uncertain terms that you are purchasing a policy by an insurer “that is not licensed by the State of California.” And “the insurer is not subject to the financial solvency regulation and enforcement that apply to California licensed insurers.” It also details that “the insurer does not participate in any of the insurance guarantee funds created by California law.” – Among numerous other considerations.
The D1 and D2 can be a bit confusing if you are not aware that in the United States, insurers based out of State may be referrred to as “Foreign Insurers” while insurers based out of the US may be referred to as “Alient Insurers.“
Of course these forms are on top of the typical forms you may be required to sign, which include Acord Applications, Supplemental Applications, Private Statements, etc.
Why do People Buy Home Insurance from Lloyd’s?
Consumers purchase home insurance through the LLoyds market typically because their house is considered a hard to write risk. This could be for a variety of reasons. The most common of which is that the home is in a wildfire zone. Or other underwriting reasons might be the following:
- Build Characteristics of the home
- The location of the property and home
- Age of the home or home systems
- Frequency, Severity, or Disposition of past claims
- Other various underwriting criteria
- Past Insurance Situation
What is a Syndicate as it Relates to Lloyds?
-More than you wanted to know about Syndicates and the Syndicate System
As we previously stated Lloyd’s is a marketplace. The oldest continuously operated insurance marketplace in the world. The marketplace consist of various syndicates, managing agents, the association, brokers, and other entities. The syndicate may be one of the more unique aspects of Lloyds.
According to IRMI, a syndicate is “a group of individuals at Lloyd’s of London who have entrusted their assets to a team of underwriters who underwrite on behalf of the group.” That is a rather overly simplistic definiton of a syndicate as it it is so central to Lloyds.
Britannica explains the Lloyd’s “Syndicates” the best in our opinion: A syndicate “each [comprises] from a few to several hundred members. These syndicates are represented at Lloyd’s by underwriting agents, who accept insurance business on behalf of syndicate members.”
“The syndicate system… created a means of spreading an insurance risk over a number of individuals. When a claim is made, each underwriter is responsible only for his portion. Syndicate members who did not underwrite personally became known as “names.”
More Information about the Society of Lloyd’s and Lloyd’s Syndicates:
Currently there are around 75+ Syndicates. Atlas Magazine listed the top twenty syndicates based on Turnover. in 2021. The largest syndicate was Beazley Furlonge [Number 2623] followed by Brit Syndicates {Number 2987].
Lloyds Syndicates are run by Management Agent Groups. Management Agents “have responsibility for employing underwriters, overseeing their underwriting and managing the infrastructure and day-to-day operations.” Source. There are approximatly 50 Management Agents.
Syndicates are in essence – the meat and potatoes of the Lloyds marketplace, without them, you would not be able to procure insurance through Lloyd’s.
Lloyds Syndicate Liablity:
Unlimited or Limited Liability:
The Lloyds syndicate liablity situation has changed signficantly over the years. Orginally created with the intent of unlimited or full liability it has been ammended in recent decades to a more modern limited liability solution.
“Traditionally, names had unlimited personal liability for the business transacted for them by their underwriting agents. This policy was modified after thousands of names were bankrupted by record losses in the late 1980s and early ’90s. From 1993, personal losses were limited to 80 percent of a name’s total permitted annual premium income over a period of four years. Losses exceeding the limit would be paid from a pool funded by an annual levy on all names.”
Lloyds Syndicate Changes to include Corporations.
Orginally when this whole system was put together participants who joined syndicates were individuals. However in modern times, this needed to change. “In the same year, Lloyd’s voted to allow corporate and institutional investors to participate in its underwriting business for the first time. Eventually, the number of names dropped from more than 30,000 to fewer than 10,000.”
Today there are fewer than “1,900” individual names who “still plough their personal wealth into the market.” Source Standard. The vast majority of entites are LLCs, Corporations, and other Entities. “There are not a huge number of syndicates now that are capitalised with private capital,” says David Gittings, chief executive of underwriters’ trade body Lloyd’s Market Association. “Most of them are capitalised with corporate capital, although there are lot of syndicates which do have Names on them.”
If and when you purchase a Lloyds policy you might note the existance of several syndiate names listed on the actual policy. This is done for a variety of reasons including the spreading of the risk.
Financial Strength Ratings of Lloyds [Lloyds CSR/Syndicates]
Lloyds states that their Financial Strength Rating is an “A” from AM Best. This is an”independent opinions of Lloyd’s financial strength and ability to meet its ongoing insurance policy and contract obligations. Lloyd’s currently enjoys an A+ rating from Standard & Poor’s, AA- from Fitch, A from A.M. Best and AA- from Kroll Bond Rating Agency.” Source. [Ratings are subject to change and may not be updated on this site.] Although this may appear simple, it is not
As discussed Lloyds of London is a series or syndicates, essentially. The above rating is an FSR of the “market” and not the actual syndicate. Which is exceptionally unique. According to Lloyds: “All Lloyd’s syndicates benefit from Lloyd’s central resources, including….the Central Fund.” And that “Central Fund is available at the discretion of the Council of Lloyd’s to meet any valid claim that cannot be met by the resources of any member.” Lloyds market believes that that ” a single market rating can be applied to all syndicates post-1992.”
Why “post-1992”? Because “All policies written from 1993 are backed by security that is partially mutualised via the Central Fund. Lloyd’s believes that attempting to differentiate between syndicates by assigning individual financial strength ratings [to each syndicate] is not a meaningful analytical approach.”
Their documentation does note the existance of several other rating agency: S&P, Standard & Poors, Fitch,. and Kroll. Within the insurance industry though – AM Best is the most well known, it is there specialty. The AM Best Lloyds Market FSR rating history is an “A” from 1997 to 2001, an “A-” from 2001 till the present. Other rating agencies downgraded Lloyds in Sept of 2001 as well.
Lastly it should be noted that there are various syndicates of Lloyds that could themselves have an FSR rating. That FSR rating could be higher or lower than the Lloyds CS rating.
The Great San Francisco Earthquake of 1906 and Lloyds of London:
1906 was turning point in the history of insurance and the history of Lloyds of London as well. Foreign [or Alien in insurance parlance] insurance was viewed with scepticism up until the great San Francisco Earthquake.
Following the great quake the underwriter Cuthbert Heath famously ordered his agent to “pay all of our policyholders in full, irrespective of the terms of their policies” Total losses from the earthquake exceeded $50MM US Dollars, a staggering sum at the time.
“His actions had highlighted Lloyd’s excellent reputation for paying valid claims – a reputation that still stands today – and business boomed.” In an odd way the Great Quake significantly helped and enhanced Lloyds place in the insurance landscape, certainly in the United States.
Other Historical Coverage & Claims Paid out by Lloyds of London:
Lloyds of London, having been in exsistance for so long and having providing coverage for so many interesting and unique risks, has certainly seen its place in US and World History Financial History.
The famous sinking of the Titanic “will long be remembered as one of the market’s biggest losses.”
The explosion of the Hindenburg was insured and paid out by Lloyds.
The Andrea Doria cost Lloyds “nearly $6m.”
The Exxon Valdez and its ensuing costs and environmental debacle.
Betty Grable was never paid out, but her legs were covered [no pun intended] for approximatly $1MM a piece. Bruce Spingsteen and Bob Dylan both reportedly took out policies on their voices.
There is so much fascinating history of Lloyds underwriting because they have been around and take on so many interestering risks. Much of it positive. It is not at all perfect though.
Lloyd’s Historical Controversy:
The one major example of an issue is the significant trauma of tail risk with regards to commercial Asbestos Litigation in the 1970s and 1980s in the United States. Sometimes this is referred to as the Asbestosis Affair. This story is sad and exceptionally complicated. Asbestos although a natural product, we all now know is very dangerous. That was not always the case. In the early part of the 20 century it was not known that asbestos was dangerous.
According to WebMD, the first “cases of asbestos-related illnesses were recorded in 1924 in the British Medical Journal.” And “Knowledge about asbestosis and lung cancer began spreading by the 1940s, and by the mid-1950s…” and “mesothelioma the most commonly known asbestos-related cancer, was discovered in the 1960s.” But “the 1970s brought about “widespread knowledge about the dangers of asbestos exposure.”
This created a major risk management problem for Corporations and Insurance related issues for commercial insurers. It is not the finest hour of cover from Lloyds. Latent or Tail risk when paired with Syndicates is difficult to explain and beyond the scope of this article*. Suffice to say it did not all end well. In 1991 “Lloyd’s announced losses of 500 million pounds” And by By “1995, the cumulative losses on the 1988 through 1992 years of account had grown to $14 billion.” Many ‘Names’ were bankrupted and others committed suicide when faced with total financial ruin.
*The writer of this article believes that since the purpose of this article is Personal lines in nature that explaining the risk management problem of Latent Risk or the “Tail of old liabilities…50 years or more” is not in the best interest of this article and hence decided to avoid it in its entirety. Thefore we have purposefully not explained Latent risks as it relates to this ongoing Lloyds challenge.
Are Insurance Policies from Lloyds of London Expensive?
Expensive is a loose term. However in general relative to an admitted carrier typically a Lloyds policy would cost more. The reason for the higher cost has numerous reasons. Lloyds nonadmitted policies typically come stacked with insurer fees and state taxes. Yes you read that correctly, state insurance taxes.
Lloyds policies may also contain include a minimum earned premium. This would mean that a percentage of the unearned premium is non-refundable.
What Fees Might be Added to a Nonadmtted Policy?
In a general sense, their may be Inspection fees, private Wildfire Fighting fees, Stamping fees, Brokerage charges. However it is all clearly laid out in the estimate: the fees, the surplus lines taxes, and premium for a total amount due. Often the fees are nonrefunanable and the premium may only partially be refundable. See your own specific policy for more information.
Who Sells Lloyds of London Insurance Policies?
In the state of California, and other jurisdictions one needs a “Surplus Lines License” to create nonadmitted insurance estimates. These are highly specialized licenses. Independent Retail Brokers [Marindependent among others] access Lloyds Quotes through various Surplus Lines Agencies. You will see the surplus lines agency’s name on the paperwork.
Therefore these policies often have both a Retail Agent and a Suplus Lines Agent attached the policy. Typically all of the communication for the policy would go through through the Retail Agent.
Why are Insurance Policies from Lloyds of London Considered Nonadmitted Insurance?
Nonadmitted [written in a variety of other ways including non-admitted] and also called surplus lines policies are insurance policies not regulated by your insurance regulator. In California [among numerous jurisdictions] this means a multiple things. Insurer not backed by the State Guarantee Fund, Insurer not regulated by the State DOI, Insurer may not exactly be able to conform to all State Requirements, among other differences. Some of the key takeaways from this situation is that the premiums from Lloyds do not have to necesarily be approved by the California DOI. Other notices and exclusions may be different
Is there a Reason that a Consumer Should Not get a Lloyds of London Homeowners Policy?
If a consumer were able to secure an admitted insurer, it would almost always be beneficial to purchase that insurance policy. Additionally it might legally be required for the consumer to purchase that policy instead.
However many indivduals that purchase Lloyds homeowners policies have no other choices. Therefore in the absence of a better offer, the Llloyd’s market is the place to turn.
As for other reasons that a consumer might opt to not purchase a Lloyds policy or any policy at all are too numerous to begin to state.
Is Lloyds of London the only Nonadmitted Option in California and other US States?
No, Lloyds of London is one of several nonadmitted or surplus lines insurers in the United States. In the personal lines space [including home insurance] other nonadmitted options include: Lexington Insurance, Scottsdale Insurance, HDI, and Canopius. There are several others.
Since LLoyds is a marketplace though, the market is free to add new members as it sees fit and therefore many new insurers think it best to form a syndicate rather than a direct insurer.
Do Lloyds of London Policies Provide a Different Type of Coverage than Standard Homeowner’s Policies?
Lloyds Home policies can be similar or different to other homeowners policies. It depends frankly on what you are compairing it to. Most home insurers offer HO3 form insurance products. Lloyds offers HO3 form insurance products. Some insurers use ISO policy forms, other insurers use their own policy forms. Sometimes Lloyds of London uses ISO policy forms.
One consideration is the type of exclusions added onto these policies. Exclusions, which exclude or limit coverage can greatly limit coverage in many circumstance. It is advised that consumers speak with not only a licensed agent when making these decisions but also an agent that has experience in providing these types of insurance contracts.
Speak with a Licensed Agent about Lloyds:
Always, and I do mean always speak wtih a licensed agent whenever you are considering purchasing, ammending, or doing anything with your insurance policy. This is a website and you can frankly only get so much information from it and its NOT enough to make an informed decision.
