What it means
The market began in a coffee house in the seventeenth century, where merchants and ship owners met to arrange cover for voyages. Today it is a regulated marketplace where brokers present risks to underwriters.
Those underwriters work for syndicates, which are groups of capital providers whose money stands behind the policies written. A key feature is that no single insurer sits at the centre.
Each syndicate is run by a managing agent and backed by members, who supply the capital. In the past many members were individuals known as Names who had unlimited personal liability, but today most capital comes from companies with limited liability.
Lloyd's uses a chain of security to reassure policyholders. Syndicate assets come first, then the members' own funds held at Lloyd's, and finally a central fund run by the market that can pay valid claims if a member cannot.
This layered structure is one reason buyers trust the market despite its many separate participants. Businesses use Lloyd's to place risks that standard insurers may avoid or price poorly, such as cyber attacks, political risk, marine cargo, aviation and specialist liability.
Its syndicates also reinsure other insurers, meaning they take on part of those insurers' risks. Lloyd's is supervised by the UK's financial regulators, and its trading is governed by its own rules.
Performance of a syndicate is usually judged by the combined ratio, which compares claims and costs with premiums earned. A ratio below 100% means an underwriting profit, before investment income is added.
Because syndicates earn interest on premiums held before claims are paid, a combined ratio slightly above 100% can still produce an overall profit.
In practice
Real-world examples.
Example
A shipping company needs cover for a $200,000,000 vessel carrying chemicals. Its broker takes the risk to Lloyd's, where several syndicates each agree to take a share of the policy. The ship owner receives one policy backed by many underwriters. Each syndicate is liable only for its own agreed share.
Example
A technology firm wants cyber insurance of $25,000,000 after a rival suffered a ransomware attack. A Lloyd's syndicate with specialist expertise agrees to write the risk. The firm accepts a higher deductible in return for a lower premium. The syndicate also asks for evidence of the firm's security controls before it agrees.
Example
A concert promoter buys event cancellation insurance for a large festival. The cover is placed at Lloyd's because the risk is unusual and difficult to price using standard models. The promoter pays a premium of $450,000 for cover of $15,000,000, which is 3% of the sum insured. The premium reflects the weather and attendance risks.
Formula
Calculation
Combined ratio = (Incurred claims + Operating expenses) / Earned premium
A syndicate earns $100,000,000 in premiums in a year. Claims incurred are $62,000,000 and expenses, including broker commission and running costs, are $33,000,000. The combined ratio is ($62,000,000 + $33,000,000) / $100,000,000 = 95%. The underwriting profit is $100,000,000 - $95,000,000 = $5,000,000, before any investment income.Case study
Seen in the real world.
Tidewater Re Syndicate 4411 is an illustrative, fictional syndicate at Lloyd's with $200,000,000 of capacity, which is the total premium it plans to write in a year. It specialises in marine cargo and has done well for five years, with combined ratios between 88% and 96%.
A severe storm season then damages ports and ships, and claims push the combined ratio to 118% for the year. The managing agent reviews the pricing of each class of business, raises rates and reduces exposure to the worst-hit ports.
Members backing the syndicate bear the loss, but policyholders are paid in full because the syndicate's assets and members' funds cover the claims. The illustrative story shows why a market with several layers of capital is attractive to buyers of cover. The next year, the syndicate's rates were higher and its capacity was oversubscribed by members.
Watch out
Common mistakes.
- Thinking Lloyd's is a single insurance company, when it is a market made up of many syndicates.
- Assuming all Lloyd's backers carry unlimited personal liability, which was true of many individual Names in the past but is rare for today's corporate members.
- Believing that Lloyd's only insures famous or exotic risks, when it also writes ordinary commercial and specialty business alongside the headline cases.
Questions
People also ask.
Can you buy a policy directly from Lloyd's?
Usually no, since policies are placed through authorised brokers who work with syndicates on the buyer's behalf.
Who is responsible if a syndicate cannot pay a claim?
The chain of security applies, which means the members' funds and then the central fund can be called on to meet valid claims.
Why does Lloyd's exist when large insurers are available?
It allows many capital providers to share large, complex risks and brings together specialist underwriting knowledge in one market.
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