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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
Lloyd’s is one of the major specialist insurance markets in the world and is regulated both by the UK Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA).
For 330 years, Lloyd’s has never failed to pay a valid insurance claim. This has been achieved by building a Central Fund of pooled reserves which stand as a guarantee behind each of the trading units at Lloyd’s (known as syndicates) which is there to protect policyholders and to ensure all valid claims can be paid. The total value of the Central Fund (£2.0bn), together with the Society’s contributions (£145m), subordinated debt and securities (£793m) and the callable layer (£963m) is £3.94bn as at 31st December 2017. These central assets are the third link in the Society’s chain of security and can be used to meet any valid claim that cannot be met by the first two links, being syndicate level assets (£51.1bn) and members’ funds at Lloyd’s (£24.6bn).
For 2018, the Lloyd’s market is likely to underwrite gross premium income of approximately £25bn (net of acquisition costs) which makes it one of the larger insurance providers in the world. Lloyd’s ratings as at 31st December 2017 were: A.M. Best ‘A’ (Excellent), Standard and Poor’s ‘A+’ (Strong) and Fitch ‘AA-‘ (Very Strong).
Lloyd’s is not an insurance company but a market composed of different managing agents that operate a total of 95 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 full tenancy syndicates and ten Limited Tenancy Syndicates (including Special Purpose Arrangements) open to third party capital. There may well be more syndicates seeking third party capital in the 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 markets. To participate within the market, syndicates are given a licence to trade by the Performance Management Directorate of Lloyd’s, which is reviewed annually.
The principal purpose of the Performance Management Direcotrate (PMD) is to protect the Central Guarantee Fund and to monitor and improve the performance of Lloyd’s syndicates. Its role is to review and approve business plans, set guidelines for the levels of risk taken, ensure a competent standard of underwriting across all syndicates in the market and, particularly, to improve the performance of the bottom quartile syndicates.
To date, it has been very successful in this endeavour, evident in the years 2010 and 2011 when the worldwide insurance market, including Lloyd’s, witnessed a very high level of international (ex USA) catastrophe losses and more recently in 2017 where current forecasts suggest a containable market loss despite a record level of insured catastrophe losses both in the USA and elsewhere.
In 2016 Tom Bolt stepped down as the Director of Performance Management and was succeeded by Jon Hancock (ex RSA Insurance Group).
Lloyd’s offers a unique investment that has the capability of producing high returns. The main benefits of Lloyd’s membership now include:
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. 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. For limited members, this liability is limited to the total Funds at Lloyd’s in place plus any pipeline profits, the value of capacity and funds held in the Limited Liability Vehicle (LLV).
The capital value of syndicate capacity can go up and down and so there is a risk of capital loss as well as underwriting loss.
Lloyd’s has produced the following educational videos which you may find useful as an introduction to the Lloyd’s market.
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.