How Lloyd's responds to changes in the business environment
A Lloyd's of London case study

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Page 1: A brief history of Lloyd's -covering risks

Economic prosperity in England during the second half of the 17th century created a significant group of wealthy people with a growing taste for luxury products from other continents. Sailing ships and their cargoes faced many risks, for example treacherous seas, bad weather, piracy, even mutiny. These hazards meant that a merchant's fortune could literally disappear overnight.

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. This process came to be known as underwriting.

Lloyd's first existed as a coffee house owned by a man called Edward Lloyd. He encouraged ships' captains, owners and merchants to visit his establishment. So, at a time when communications were unreliable, Lloyd's gained an enviable reputation for providing 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 (a large sum then) into the Bank of England for new premises. In 1774 they leased rooms in the Royal Exchange. No longer a coffee house, the modern Lloyd's was born.

Lloyd's is very different today, but still operates using the same principles. The market consists of:

  • Brokers - They act on behalf of clients (businesses and private individuals), who bring to the market what they wish to insure against.
  • Underwriters - They accept risks from the brokers on behalf of syndicates who (in return for the payment of a premium) provide insurance cover.
  • Syndicates - The individual business units that sell insurance in the Lloyd's market.

Lloyd's of London | How Lloyd's responds to changes in the business environment