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A Lloyd's of London case study

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Page 3: Lloyd´s of London

Lloyd's of London is the world's oldest and best known insurance market. In the 17th Century, London's growing importance as a trade centre led to an increasing demand for ship and cargo insurance.

Business in those days was conducted very informally. A merchant with a ship to insure would ask a 'broker' to take the risk from one wealthy merchant to another seeking insurance cover. Each merchant would take a portion of the risk and the broker would visit several merchants until the risk was completely covered. The broker's skill lay chiefly in ensuring that policies were underwritten only by people who could meet their share of a claim, if need be, to the full extent of their personal fortunes. This process came to be known as underwriting.

Lloyd's first existed as a coffee house owned by a man called Edward Lloyd who encouraged ships' captains, merchants, ship owners and others with an interest in overseas trade to visit his establishment. So, at a time when communications were unreliable, Lloyd's gained an enviable reputation for trustworthy shipping news. This was crucial to successful underwriting and ensured that Lloyd's became recognised as the place for obtaining both information and marine insurance.

In 1769, a number of Lloyd's customers broke away and set up a rival establishment. However, the 'New Lloyd's Coffee House' eventually proved too small. A committee was elected and 79 merchants, underwriters and brokers each paid £100 into the Bank of England for new premises. In 1774 rooms were leased in the Royal Exchange. No longer a coffee house, the modern Lloyd's had been born.

Over the next century the society of underwriters at Lloyd's gradually evolved. Membership was regulated and the elected Committee was given increased authority. This period culminated in 1871 with the incorporation of Lloyd's by Act of Parliament. The Lloyd's Act 1871 gave Lloyd's a formal legal basis allowing it to acquire property and make by-laws backed with the full authority of Parliament. This established Lloyd's as a business institution that can still be seen working successfully today.

Lloyd's is very different today, but operates using the same principles of broking and underwriting, providing a market made up of:

  • Brokers, acting on behalf of their clients, who bring risks to the market; and
  • Underwriters, accepting risks from the brokers on behalf of syndicates, who provide insurance cover.

Lloyd's of London | A truly global market