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Investing in Lloyd’s

Lloyd's offers a unique investment that can produce high returns

Underwriting at Lloyd's involves a significant degree of risk
There is a risk of capital loss as well as underwriting loss

Membership of Lloyd’s is not suitable for all

Independent financial advice should be sought

What is Lloyd’s?

Lloyd’s is the largest specialist insurance market in the world and is regulated both by the UK Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA).

In the 17th century, London’s importance as a trade centre led to an increasing demand for ship and cargo insurance. Edward Lloyd’s coffee house became recognised as the place for obtaining marine insurance and this is where the Lloyd’s that we know today began. From those beginnings in a coffee house in 1688, Lloyd’s has been a pioneer in insurance and is a major contributor to the UK balance of trade.  The insurance industry, of which Lloyd’s is at the forefront, is one of the largest employers in the City of London.

Lloyd’s is not an insurance company but a market composed of different managing agents that operate a total of 100 syndicates for 2018. Investors in the market can provide capital to one or more of these syndicates. Each syndicate is an annual venture and investment is for one calendar year. The syndicate then reconstitutes itself for the following year. At the start of 2018, there were 21 syndicates open to third party capital plus 7 Special Purpose Arrangements and 4 Limited Tenancy Syndicates, but there may be more syndicates seeking third party capital in future. Each of these syndicates has different areas of expertise and transacts a wide variety of insurance business on behalf of its capital providers.

 Capital providers receive a share of the profits that accrue from the underwriting business of these syndicates in relation to the amount of capital provided or, in times of loss, are responsible for paying their share of the trading losses of these syndicates. The Lloyd’s market benefits from a unique system of overseas business licences that gives syndicates direct access to virtually all overseas territories.

In recent years, the Lloyd’s market has traded very profitably. There are now far fewer syndicates than there once were and the general level of underwriting professionalism is much higher than in the past. The establishment of the Franchise Performance Directorate in 2002, which has subsequently been re-named the Performance Management Directorate (PMD), has been critical. The principal purpose of the PMD is to monitor and improve the performance of Lloyd’s syndicates. 

The Advantages

Lloyd’s offers a unique investment that has the capability of producing high returns. The main benefits of membership include:-

  • Direct investment into a specialist insurance market with little correlation to other asset classes
  • Double use of assets
  • Limited liability investment
  • Tax planning opportunities, including pension and inheritance tax benefits for UK residents
  • The potential for both underwriting profits and capital gains

The Risks

Prospective members should note that underwriting at Lloyd’s involves a significant degree of risk and those investing in the market will be exposed to the risk of underwriting losses, both from current underwriting and from exposure to prior years in the event that claims reserves prove inadequate. Limited 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 reinsurer, the ultimate liability remains with the member. This liability is limited to the total Funds at Lloyd’s (FAL) in place plus any pipeline profits, the value of capacity and funds held in the Vehicle.

The capital value of capacity can go up and down and so there is a risk of capital loss as well as underwriting loss.

Videos and Glossary

Lloyd’s has produced the following educational videos which you may find useful as an introduction to the Lloyd’s market.

How the Lloyd’s Market Works

Lloyd’s Extraordinary History

Understanding Lloyd’s | The Lloyd’s Market

Understanding Lloyd’s | Lloyd’s Brokers

Understanding Lloyd’s | Lloyd’s Underwriters

Understanding Lloyd’s | The Corporation

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.