Category Archives: Lloyd’s

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:


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.


The future of actuaries – the view at Lloyd’s

InsuranceERM interviews Henry Johnson, actuary at Lloyd’s of London. The interview focuses on how the operation is adopting Solvency II, but I’d like to focus on other parts:

First, what capital regulation means to the actuarial profession. In short, actuaries are becoming more important contributors: Continue reading

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Lloyd’s results: not so bad

A lot of buzzing the past day or so about Lloyd’s of London’s first-half profits. Business Insurance was typical:

LONDON—Lloyd’s of London said its pretax profit fell by more than half during the first six months of this year due to significant claims and reduced investment returns.

Lloyd’s said Tuesday that its pretax profit was £628 million ($994 million) for the first six months of this year compared with £1.32 billion ($2.09 billion) for the first half of last year.

Lloyd’s, remember, is not an insurance company. It’s a consortium of independent underwriters – these days usually backed by a major insurer or reinsurer. The results are a pro forma aggregation of those underwriters, meaning all the results are added together to show how Lloyd’s would be performing were it a single company. (Lloyd’s releases on results are here.)

But are those results really so bad? Reactions, in one of its always welcome free articles, does the sanity check:

OK, profits were halved but otherwise the important numbers were as good if not better than their peers. Compare the Lloyd’s market’s results to the Aon Benfield Aggregate for example. Aon Benfield’s index of reinsurers saw their combined ratio lift to 100 from 89.8, where Lloyd’s managed to keep theirs under the psychologically critical break-even point.

I’d add that the first six months were a tough time for international catastrophes. So far this year, Lloyd’s has been hit by:

  • Chilean earthquake: $1.4 billion
  • Deepwater Horizon oil rig disaster: $300 million to $600 million.
  • Winter weather in Europe and the United States: $100 million.

It’s not clear from what I’ve read whether those losses are gross or net of reinsurance, but $2 billion (£1.33 billion) of claims looks like about 10 points on the loss ratio. And 2009 was a light year for catastrophes. So the disasters almost bridge the difference in 2010 vs. 2009 results. Continue reading

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London vs. Bermuda: Right brain vs. left

Via Business Insurance, some stories are just too interesting….

At Monte Carlo this week, the Insurance Intellectual Capital Initiative released a study comparing underwriting at the Lloyd’s and Bermuda markets. (The organization is a bunch of Lloyd’s-related companies that want to mesmerize me personally, and maybe accomplish something tangible.)

Here’s the nut:

Continue reading

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