Lloyd’s – the Golden Arches of insurance

Never having worked with or visited Lloyd’s, I’ve always had trouble understanding how it operated.

I’m not alone. From its own web site: “Lloyd’s is the world’s best known – but probably least understood – insurance brand.”

It’s not a company, it’s not a consortium of companies. So what is Lloyd’s? This month’s Contingencies magazine answers the question:

McDonald’s!

Well, the article, Lloyd’s: A business survival story, doesn’t put it quite that way. It does call Lloyd’s a franchiser and calls the individual syndicates franchisees. And of course McDonald’s has perfected the art of the franchise.

We all know how McDonald’s operates – it sells the franchises, the right to operate a McDonald’s. To protect its good name, it monitors each restaurant closely. So you know when you walk into McDonald’s:

  • It is clean.
  • The meal will cost a certain, reasonable amount.
  • The french fries will taste like – well, McDonald’s french fries.

That last one is really important. How do they do that? A side of McDonald’s fries in Sandusky tastes just like the fries in Beijing. And no one else’s fries taste like that. Incredible.

Ultimately, though, each McDonald’s stands or falls on its own.

Lloyd’s works the same way, or has since 2003, when, facing ruin, it set up the Franchise Management Board (now called the Performance Management Directorate):

The board introduced the concept that Lloyd’s value was in its brand name. . . . The franchisees would be required to operate in prescribed prudent ways to protect the Lloyd’s brand and reputation. This was somewhat of a departure from the past, when competition among syndicates was rife and coordinating action across syndicates was like herding cats.

Insurance isn’t like flipping burgers, but the key idea is the same. The franchiser controls the quality of each franchisee. If you aren’t sure how the fries will taste in the Sandusky McD’s, you won’t walk into the Beijing restaurant, nor vice versa. The chain is only as strong as the weakest link.

That’s true with Lloyd’s, too. Each insurer needs to make sure its policyholder’s claims are covered. And each pays into a central fund in case one syndicate tanks.

But a failed syndicate creates reputation risk: If Lloyd’s syndicate A doesn’t cover claims, you won’t want to buy from syndicate B. And if you don’t trust the individual syndicates, the brand name collapses.

So to beat the metaphor a bit more: How does Lloyd’s make sure all the fries are crispy?

First, through managing the business:

  • The franchisees must get approval for business plans that “prospectively specify the nature and volume of business to be written, including the amount of capital needed to support the syndicate’s writings.”
  • Lloyd’s monitors rates across nine lines of business. Late last year, they published it in Lloyd’s Premium Rate Index: A guide to Historical Premium Rate Movements (for sale here).
  • If a syndicate underperforms, Lloyd’s can intervene.

Second, Lloyd’s requires a high level of cat management:

  • Lloyd’s must OK the franchisee’s method of monitoring cat exposure.
  • Each franchisee agrees to manage to a minimum return period.
  • Each franchisee must analyze its book using a set of realistic disaster scenarios, then add some of its own. A typical scenario – what would be the loss if the syndicate’s two most expensive aviation exposures collided over a major city.

Going corporate

These and other changes outlined in the Contingencies article have professionalized the syndicates and built the brand. The chart at right shows how the individual names – famous for being liable to their last cuff link – have been replaced by corporate money – not as charming, perhaps, but better protection, for the policyholder as well as the syndicate.

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