The institution is currently based in architecturally distinct, high-tech, state-of-the-art premises in the heart of the city of London. (The UK Financial System theory and practice third edition, 145-150
Lloyds Structure
3.1 ‘Names’
Lloyds employ member’s agents to recruit and advise wealthy individuals known as ‘Names’. The advice is to assist Names in selecting the best underwriting syndicates to back with their capital. The member’s agents also deal with the Names administration requirements in relation to Lloyd’s business. Names normally join a number of different syndicates, each of which specialises in different sorts of risks.
Names are required to accept the principle of unlimited liability, so that if an underwriting member sustains a substantial loss, the member is liable to meet these losses from their personal assets. This Unlimited liability means Names could be bankrupted. Lloyd’s realised the need to boost confidence and encourage future names, and so they established a hardship fund to help badly affected members (The UK Financial System theory and practice third edition, 146).
They take shares of the profits or losses from the syndicates they back, proportionate to their capital backing (The UK Financial System theory and practice third edition, 146). In profitable years the money they are making available can be invested elsewhere in order to earn investment income in addition to the profits derived from the excess in the insurance premiums over the liabilities attributable to any claims (Financial Markets and Institutions Pg).
The managing agents act as a financial intermediary managing the asset portfolio’s of the names. There are strict regulations as to the make up of these asset portfolios so they do not have the same scope for risk and reward as funds managed by merchant banks (The UK Financial System theory and practice third edition, 146).
There is a secondary form of profit obtained by the funds under management, in addition to the profits made in access of the liabilities attributable to the underwriting (or losses) (The UK Financial System theory and practice third edition, 146).
3.2 Corporate Capital
Following many syndicate’s heavy losses the question of whether a modern international business could remain competitive whilst relying entirely on private capital was raised. In 1994 Lloyds decided to admit corporate capital for first time. This was an opportunity for Lloyds to increase their underwriting capacity and has enhanced overall capital adequacy. By 1998 60% of Lloyds underwriting obligations were backed by corporate capital (The UK Financial System theory and practice third edition, 147)
3.3 Underwriting
The Underwriters responsibility is to the insurance syndicates; their role is to accept insurance risks on behalf of the names or corporations providing capital backing in return for premiums. Conversely the broker’s responsibility is to the client wishing to purchase an insurance policy. Their role is to get seek out the lowest premium from the various underwriters operating within the Lloyds market (The UK Financial System theory and practice third edition, 146).
The advantage of being a Lloyds accredited broker is the vast choice of insurance companies and other financial institutions operating within Lloyds as well as Lloyds itself. This level of choice facilitates competition, which benefits the broker’s clients as it encourages lower prices and improved levels of service.
The broker will take his clients request to the ‘leading underwriter’ (first one), normally Lloyds, and discuss the required details and terms. The Underwriter will either accept or decline the risk. If he accepts the risk he will make sure that the terms and conditions of the policy are completely clear before deciding on a premium rate. It is usual for the underwriter to accept a proportion of the risk hence the term ‘leading underwriter’. It is therefore necessary for the broker to visit a number of underwriters until the whole risk is covered (The UK Financial System theory and practice third edition, 147).
3.4 Asset portfolio management
The Substantial losses made in the late 80’s and 90’s also caused doubts to be raised over the managing agents. Legal action was taken by Names against managing agents for negligence with Names demanding underwriting obligations be dropped (The UK Financial System theory and practice third edition, 148).
A resolution was reached when the Lloyd’s market made a £3.2 billion out of court settlement with Names in 1996(The UK Financial System theory and practice third edition, 148).
As a result in September 1996 a new company called Equitas was set up to take over more than £11 billion in old liabilities incurred up to and including 1992. Equitas was not authorised to write new business, the rationale being to diminish all outstanding liabilities over time (The UK Financial System theory and practice third edition, 148).
Lloyds transferred the ownership to a discretionary trust, the trustees of which are required to work in the interests of the Names whose obligations are reinsured by Equitas (The UK Financial System theory and practice third edition, 148).
Equitas has set up a new American Trust Fund (EAFT), to ensure adequate funds are available in dollars for US obligations and that Lloyds are able to include the Equitas reinsurance business in solvency tests required by the regulator (The UK Financial System theory and practice third edition, 148).
The Legal disputes are still running, especially in the USA, where an announcement was made as recently as October 2002 detailing a proposal to take legal action against Equitas. (The UK Financial System theory and practice third edition, 148).
Lloyd’s Strategy for the future
Lloyd’s Business
4.1 How insurance operates
The purpose of insurance is to cover undesirable financial consequences to individuals or businesses referred to as ‘risks’. Every individual and business faces numerous and unavoidable risks such as theft or damage to property by, fire, hurricanes, floods etc. This makes the transfer of risk to an insurance provider very attractive as heavy losses can be avoided in exchange for a known premium. A known premium is desirable because it alleviates the need for businesses to hold large funds to cover potential losses, meaning these funds can be invested elsewhere (An introduction to Lloyd’s, page 1/2).
Insurers do not insure against speculative losses such as losses that arise from poor investment performance or profits that are not achieved. The insured is either in a loss or no loss situation (An introduction to Lloyd’s, page 1/2).
Each policyholder makes a fair contribution to the insurers trust funds dependant on the degree of hazard and the values or liabilities associated with that risk. “In this way insurance companies seek to spread the risk amongst all those that insure by compensating those few who suffer a loss out of the funds built up by many” (An introduction to Lloyd’s, page 1/3).
It is not possible to insure against an event that is certain to occur (except for life insurance), insurance must facilitate the transfer of risk and the definition of risk requires uncertainty. (An introduction to Lloyd’s pg 1/3).
4.2 September 11th
The September 11th events sent the stock market into frenzy.
This sent shockwaves through the global insurance industry that are still reverberating. It is feared the waves will continue for many years yet. Losses are undeniable, currently at between 40-50 billion US Dollars. This is the biggest loss in the insurance industry ever.
Http://ft.com/worldinsurance
4.3 Stock market
The insurance industry struggles to remain solvent in the wake of the unstable stock market. Continued uncertainty from avenues like: the uncertain US economy, a potential war with Iraq, poor earnings forecasted in the corporate sector, increased oil prices, accounting scandals etc. Have all contributed and created the biggest bear market in decades.
UK insures have traditionally held 70% of their assets in the stock market. Recently, more than 20% of their assets have been wiped of the FTSE 100.
This has happened in the past twelve months, erasing the insurer’s capital base, which they need to pay out on policies, and to compete for new business. The insurer’s response to this is to cut payouts, and imposed redemption penalties to stop the investors depleting their reserves. Although this provides short-term aid, and they have not altogether removed their assets off the stock market, Insures are still in difficulties. Europe wide they are seeking to raise about £6.4 billion through stocks and bonds issues, and further diverting any scarce cash that could boost the ailing stock market.
http://news.ft.com/frontpage/stories
4.4 Aviation
With respect to the falling stock market performance, mostly stemming from the September 11th attack, the Aviation industry has been hit particularly hard.
It has become increasingly costly to insure aircraft due to the direct link with the atrocities.
This in turn has caused financial crisis in the airline industry, with a lot of the major aerospace groups finding themselves in need to cut back their costs.
An example is Boeing, the worlds leading aerospace and defence group. Boeing has announced a cutback of 8% of its commercial aircraft workforce in response to the continuing financial crisis as well as the forecast on order and delivery of new aircraft being revised downwards.
It is forecast that recovery in this industry will not begin until way after 2004.
http://ft.com/stockmarket/aviation/industry
4.5 Lloyds Strategy for the future
4.6 A breakdown of Lloyd’s insurance business 1996 (an introduction to Lloyds
Marine (20.5 per cent)
Marine is the oldest class at Lloyd’s and is still regarded as the leading world marine market. This can range from insuring yachts to super-tankers and their cargo to offshore drilling rigs, dating back over 300 years to the coffee house days (The UK Financial System theory and practice third edition, 146). Over 13 per cent of world’s marine business is placed at Lloyd’s. (An introduction to Lloyd’s, page 6/5)
Non-marine (51.4 per cent)
Non-marine business owes its great expansion to Cuthbert Heath who in the 1890s introduced earthquake, burglary, loss of profits and jewellers’ block policies, etc. Today, this market accounts for nearly half the premium income of Lloyd’s underwriters and also includes fire, windstorm, theft, product liability and disease. (An introduction to Lloyd’s, page 6/5) (The UK financial system, theory and practice Third edition, Mike Buckle and John Thompson, Pg 149)
Aviation (10.9 per cent)
The Lloyd’s aviation market leads in the provision of cover for all aspects of the global aviation industry, from damage to aircraft to the attendant liability risks faced by airline operators, airport authorities and manufacturers. Cover is provided for all types of aircraft and for communications satellites.
Lloyd’s writes over 25 per cent of the world’s aviation business. (An introduction to Lloyd’s, page 6/5) (The UK financial system, theory and practice Third edition, Mike Buckle and John Thompson, Pg 149)
Motor (17.2 per cent)
Lloyd’s syndicates have been insuring motor vehicles since motor insurance first began. Motor business covers all facets of the insurance of road vehicles in the UK and certain territories overseas. Lloyd’s will stand ready to insure unusual and high-value vehicles and non-standard risks. It is estimated that more than one in six British private motorists are insured at Lloyd’s. (An introduction to Lloyd’s, page 6/5) (The UK financial system, theory and practice Third edition, Mike Buckle and John Thompson, Pg 149)
Conclusion
With the September 11th stock markets lost significant numbers of shares. Therefore I conclude that:
Lloyd’s business should encourage more people to get insurance with them in order to transfer future risks that are uncertain.
With the September the 11th its more likely that less insurance which will lead to less profit will occur, which 40 – 50 billion dollars proves as losses.
It will therefore take up a while for things to go back to normal and there is not much insurance companies can do because the cannot avoid the scandals or incidents that are currently going on.
Extra security should be introduced particularly in access such as the airport, aircraft etc, as this will encourage from taking up the risk.
Because of the incidents that are going on the economy is affected and therefore stock market is also affect as Insurance Companies therefore I think Government should try to resolve this matter in order to calm things down.
Insurance Companies such as Lloyd’s for example have to boost confidence and encourage future names in order to re-establish the hardship fund to help badly affected members. The profit that they are currently making should also be invested, so that more income is raised.
Bibliography
WWW.ft.com
The UK financial system, theory and practice, third edition, Mike Buckle and John Thompson.
Financial Markets and Institutions third edition, Peter Howells and Keith Bain.
An Introduction to Lloyd’s Lloyds.
