October 28, 2014 Articles

Insurance 101: Decoding the Secrets of the London Market

Understanding the history and unique terminology of Lloyd’s of London

by Anna Torres

Understanding the Lloyd's of London insurance market requires historical context. Lloyd's of London is not an insurance company. Technically, Lloyd's of London is a place, a building where insurance transactions take place. The building which currently houses the Lloyd's of London insurance market was completed in 1986. Its ultramodern architecture was designed by Lord Richard Rogers and to this day elicits strong feelings of like or dislike. But this is merely the most recent home of the Lloyd's market.

In the London of the 1680's coffee houses had become quite popular. Each coffee house had its own personality and attracted its specific clientele—politicians, financiers, doctors, publishers, scientists. One of these coffee houses, owned by Edward Lloyd, located on Tower Street, attracted marine types: sailors, shipping merchants, and shipowners.

By then the insurance industry in London was roughly 20 years old, having begun after the Great Fire of London in 1666. Inevitably Lloyd's coffee house became the place where shipowners and merchants would go to arrange insurance for the ships and cargo. The owner of the ship or cargo would write the details on the "slip" and the merchant willing to accept the risk would write his name "under" the details - hence the term "underwriter." Often more than one merchant would agree to underwrite a certain percentage of the risk, limiting the exposure of each of the underwriters subscribing to the risk. A group of underwriters agreeing to insure a risk became a "syndicate" (or what we in the U.S. call a "pool"). Eventually more than just shipping risks began to be insured at Lloyd's. And today, the London insurance market is known for offering coverage for unusual or complicated risks all over the world.

The following are some of the terms related to the business of insurance at Lloyd's of London:

Broker: A broker acts as a middleman between the policyholder and the insurers. They often have specialized knowledge of specific types of risks. They bring the proposed risk to one or more underwriters until they obtain commitments to cover 100% of the risk.

Underwriter: The individual with expertise to evaluate a potential risk and make a decision on whether to accept it or not.

Box: A desk or desks and benches in the underwriting room where underwriters sit and where brokers come to bring their risks for the underwriters' consideration.

Lead Underwriter: The underwriter of the syndicate or company which sets the terms for the insurance contract where more than one syndicate or company subscribes to the policy. The lead underwriter generally has primary responsibility for handling the claims under that policy.

Following Underwriter: An underwriter who agrees to accept a percentage of a risk on the basis of the terms set by the lead underwriter.

Certain Underwriters at Lloyd's, London: The term used to refer to the group of syndicates and/or companies which together insure 100 percent of the risk in a given insurance policy. Sometimes followed by “subscribing to certificate number xyz.”

The Underwriting Room: The room where brokers meet with underwriters.

Slip: A placing slip is a document created by a broker containing the details of a particular risk. Once the underwriters have agreed to quote the risk the terms are memorialized in a signing slip.

Members: They are the actual insurers who earn the profit from the premiums or suffer the monetary loss from the claims. They may be an individual or a company. If there is not enough money in the syndicate's premium pool, they bear the ultimate responsibility of paying on claims.

Names: A member who is an individual (as opposed to a company).

Syndicate: A group of members.

Managing Agent: A company which organizes syndicates, employs underwriters, collects premiums, employs claims professionals, and pays claims. The managing agent is paid a management fee by the syndicate and may receive part of the syndicate's profit.

Coverholder: A company or individual authorized by a managing agent to enter into insurance contracts on behalf of the syndicates or companies managed by that managing agent. Typically coverholders may be located in a particular geographic location and have expertise in that area or in a specific type of business.

Binding Agreement: The contract between the managing agent and the coverholder which sets forth the scope of the coverholder's authority.

Third Party Administrator: A company contracted to handle assisting and payment of claims on behalf of a syndicate(s).

There is, indeed, a Corporation of Lloyd's. The corporation essentially supports and promotes the insurance market. It provides space and facilities and acts in a rulemaking capacity to license and set standards for the market. It does not, however, underwrite any risks or enter into any contracts of insurance.

While in recent years the London market has sought to modernize its business operations, particularly with the incorporation of computerized processes, much of the business of insurance is still done as it was in the days of Edward Lloyd. Brokers walk from their offices to the boxes at Lloyds and shop their risks to the various underwriters who sit at the boxes. Similarly, claims decisions are also often made by visiting each of the underwriters in person to discuss the claim. It is a personal process built on relationships and trust in the expertise and experience of its participants. The London market has seen many changes in 300 years, but its unique character retains the rich cultural history upon which it was built.

Keywords: insurance, coverage, litigation, Lloyd’s, Lloyd’s of London

Anna Torres is with Powers, Mcnalis, Torres, Teebagy & Luongo, West Palm Beach, Florida.

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