Investors at Lloyd’s provide capital to syndicates and special purpose arrangements (SPAs). In return they receive a share of the profits or losses in proportion to their commitment.

The Lloyd’s market

Lloyd’s is not an insurance company, but the world’s leading specialist insurance market. It comprises several managing agents that operate a total of 98 syndicates and Special Purpose Arrangements.

Investors at Lloyd’s provide capital for these syndicates. At the start of 2021, there were 19 full tenancy syndicates and 16 Limited Tenancy Syndicates (including Special Purpose Arrangements) open to third-party capital. More syndicates may choose private third-party capital in the future. Each syndicate has different areas of expertise and transacts a wide variety of insurance business on behalf of its capital providers.

For 2021, the Lloyd’s market is likely to underwrite gross premium income of approximately £41bn which makes it one of the largest providers of insurance in the world.

Capital providers receive a share of the profits or losses that accrue from the underwriting business of these syndicates and SPAs in proportion to their commitment.

Lloyd’s has an extensive network of overseas licences that gives syndicates direct access to a broad spectrum of overseas insurance markets.

For over 300 years, Lloyd’s has never failed to pay a valid insurance claim. This is supported by a Central Fund of pooled reserves which stand as a guarantee behind each of the syndicates. Thanks to Lloyd’s unique capital structure, it has the following credit ratings: Standard and Poor’s A+ (Strong), Fitch AA- (Very Strong), A.M. Best A (Excellent) and Kroll Bond Rating Agency AA-.

The Lloyd’s Performance Management Directorate

The PMD was set-up in 2003 to ensure that the Corporation of Lloyd’s undertook an active commercial role in managing market performance. To participate within the market, syndicates are given a licence to trade by the PMD, which is reviewed annually.

The principal purposes of the PMD are to:

  • Protect the Central Guarantee Fund
  • Monitor and improve the long-term performance of Lloyd’s syndicates
  • Raise standards across the Lloyd’s market

As such, its responsibilities include:

  • Reviewing, challenging and approving business plans
  • Setting guidelines for the levels of risk to be taken
  • Ensuring a competent standard of underwriting across all syndicates in the market
  • Improving the performance of the bottom quartile syndicates

Advantages

The main benefits of Lloyd’s membership are:

  • Limited liability
  • Direct access to underwriting returns
  • An opportunity for capital gains
  • Low correlation with other asset classes
  • Double use of assets and some leverage
  • Tax planning opportunities (including pension and inheritance tax benefits for UK residents).

 

Risks

Prospective members should note that underwriting at Lloyd’s involves a significant degree of risk. Members are exposed to the risk of underwriting losses, both from current underwriting and prior years.

In the event that claims reserves prove inadequate, members remain liable for losses until the liability of all syndicates participated upon have been closed by means of reinsurance. Even then, in the event of failure of the reinsurance to close (RITC) contract, the ultimate liability remains with the member.

For a limited liability vehicle, the liability is limited to the total funds at Lloyd’s, the value of syndicate capacity, funds held in the Limited Liability Vehicle (LLV) and pipeline profits.

The capital value of syndicate capacity can go up and down and so there is a risk of mark-to-market capital losses as well as underwriting losses.

Further information published by Lloyd’s.

Like most trades, the insurance industry – and the Lloyd’s market in particular – uses its own jargon and acronyms. You may therefore find Lloyd’s Glossary to be of use on occasion.

The Lloyds Glossary (external link)

How the Lloyd’s market works

Lloyd’s Brokers

Lloyd’s Underwriters

The corporation

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Investing at Lloyd’s

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