Founded in 1686, Lloyd’s of London is one of the oldest and most misunderstood insurance entities in the world. In fact, many wrongfully assume it is an insurance company that only handles extreme risks or reinsurance. Even individuals with a deep understanding of the industry have similar misconceptions, which makes it difficult for organizations to understand how to secure the best coverage possible through Lloyd’s of London.
This Coverage Insights is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.
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This Coverage Insights provides an overview of Lloyd’s of London, including what it is and how it works.
What Is Lloyd’s of London?
When it began in the 17th century, Lloyd’s (as it is commonly known) was a coffeehouse where ship captains and vessel owners met to buy or sell what is now considered ocean cargo insurance.
Since then, it has grown to become one of the largest and most recognizable insurance marketplaces in the world. And this is a key distinction, as Lloyd’s is not an insurance company, but rather a central hub where underwriters provide a wide range of specialty insurance products to brokers working on behalf of their clients.
Specifically, the Lloyd’s marketplace insures complex and specialized risks across a variety of industries and insurance lines, including:
Lloyd’s of London insures people, businesses and communities in over 200 countries and territories worldwide. In total, the Lloyd’s of London marketplace covers more than 60 lines of insurance and reinsurance.
When individuals refer to Lloyd’s of London, they’re either referencing the insurance marketplace itself or the Corporation of Lloyd’s, which is responsible for ensuring the marketplace runs smoothly.
How the Marketplace Works
The Lloyd’s marketplace is comprised of five key stakeholders—insurance buyers, brokers, syndicates, managing agents and coverholders. The way these parties interact with one another shape the way the Lloyd’s marketplace operates and how coverage is placed.
Policyholders include businesses, organizations, other insurers and individuals from around the world who seek to mitigate the impact of potential risks. Policyholders may access the Lloyd’s market via a broker, coverholder or service company.
As a policyholder, it’s important to understand how you fit into the Lloyd’s of London marketplace. While it’s true you can often secure the policies you need from local insurers, you may have unique or complex exposures traditional insurers are unable or unwilling to underwrite.
In these instances, your insurance broker can help your firm obtain the coverage it needs from the Lloyd’s of London marketplace. This typically involves contacting a surplus line broker with access to the marketplace or locating a Lloyd’s of London broker who can obtain coverage on your behalf.
The majority of insurance bought and sold in the Lloyd’s of London marketplace is done so with the assistance of a broker. Specifically, as it relates to the marketplace, insurance brokers act as the direct line of communication between insurance buyers and syndicates.
These brokers have to meet a number of standards in order to conduct business in the marketplace. Not only are they responsible for complying with any relevant national regulations, they must also be accredited by the Corporation of Lloyd’s.
Many Lloyd’s of London brokers are located in London itself and may conduct their business through a subsidiary company. It should be noted that insurance buyers won’t be able to work with a Lloyd’s of London broker directly, and will typically have to work through a local broker or agent.
In the Lloyd’s of London marketplace, syndicates function similarly to insurance companies and are comprised of one or more members (e.g., individual underwriters or corporations). These entities group together to assume risks and pay out claims using financial capital provided by its members.
Every syndicate has insurance coverages they specialize in, such as commercial property, general liability or commercial auto. Syndicates operate on what’s known as a subscription model when assuming risk. Under this model, syndicates typically assume a percentage of the risk. This could be a large portion of the total risk (e.g., 50%), or a small portion (e.g., 1%)—it really depends on the syndicates involved and their appetite for risk.
By spreading out the risk, Lloyd’s of London syndicates are able to offer broad and diverse coverage for many different types of risks.
Syndicates are, technically, set up on an annual basis. In practice, they usually operate from year to year with members having the right, but not the obligation, to participate in syndicates the following year. This continuity of capital backing the syndicates means they function like permanent insurance operations.
Managing agents have a number of responsibilities in the Lloyd’s of London marketplace. Above all, these parties work on behalf of syndicates, managing their day-to-day business. Additionally, managing agents may:
- Hire and supervise underwriters, claims adjusters, accountants and other essential staff.
- Work with more than one syndicate at a time.
- Serve as a member of a syndicate, providing capital.
- Select and oversee coverholders.
While the majority of business in the Lloyd’s of London marketplace underwritten by syndicates comes from brokers, some may be generated by coverholders. Coverholders are companies that, on behalf of the members of a syndicate, enter into contracts of insurance or issue insurance documentation.
In general, coverholders operate under authority granted to them by managing agents. While the scope of this authority can vary, coverholders may be able to issue insurance binders and certificates of insurance. In some cases, coverholders have the authority to collect premiums or settle claims.
It should be noted that coverholders may be referred to as service companies in certain instances. A service company is effectively a Lloyd’s of London-approved coverholder that is owned by a subsidiary of either a managing agent or its holding company.
Through the use of coverholders, managing agents are able to operate worldwide without ever having to establish a local office. For instance, a U.K. managing agent could authorize a U.S. coverholder to bind insurance coverage for local policyholders.
Putting It All Together
There are many parities at play in the Lloyd’s of London marketplace. However, the process of securing the appropriate coverage through the marketplace is relatively straightforward and involves the following steps:
- An insurance buyer requests coverage.
- Brokers, coverholders or service companies place the insurance buyer’s risks.
- Syndicates write the insurance risks using capital provided by Lloyd’s of London members or managing agents.
- Managing agents oversee and manage syndicates throughout the process.
It’s important to note that, while Lloyd’s of London specializes in complex and nontraditional risks, they don’t necessarily assume any and all risks automatically. Furthermore, while Lloyd’s of London does handle more niche risks, they do cover traditional exposures (e.g., property damage from wind and hail) as well, particularly for businesses categorized under excess and surplus lines.
Why Lloyd’s of London?
Lloyd’s of London is a great option for businesses that need specialty coverage. In fact, Lloyd’s of London has the ability to develop custom policies for hard-to-place risks that aren’t easily categorized in the standard insurance market.
Furthermore, the Lloyd’s of London marketplace is well-regulated, trustworthy and highly rated by insurance carrier rating agencies like A.M. Best, Standard & Poor’s and Fitch. Overall, Lloyd’s of London offers global licenses, promotional and regulatory support, and performance oversight ̶ all of which is backed by a $4.8 billion fund for claims payments.
However, Lloyd’s marketplace may not be a perfect fit for all businesses. As such, it’s important to review your policies with your trusted insurance broker at TPG Insurance Services to ensure you have the right coverage when you need it most. Please feel free to get in touch with us by calling 909.466.7876 today for more information. Also, ask us about our Excess/Umbrella Liability Insurance and see what else we have to offer!