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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 not an insurance company, but the world’s leading specialist insurance market. It comprises different managing agents that operate a total of 84 syndicates and 15 Special Purpose Arrangements. Investors in the market provide capital for these syndicates. At the start of 2020, there were 20 full tenancy syndicates and 12 Limited Tenancy Syndicates (including Special Purpose Arrangements) open to third-party capital. More syndicates will access 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. Every investor chooses those syndicates upon which they wish to participate.
For 2020, 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.
Capital providers receive a share of the profits or losses that accrue from the underwriting business of these syndicates in proportion to their commitment. Lloyd’s has a sought after network of overseas business licences that gives syndicates direct access to virtually all overseas markets.
For over 300 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 syndicates. Thanks to Lloyd’s unique capital structure, it has the following credit ratings: A.M. Best ‘A’ (Excellent), Standard and Poor’s ‘A+’ (Strong) and Fitch ‘AA-‘ (Very Strong).
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:
As such, its responsibilities include:
The main benefits of Lloyd’s membership now include:
Prospective investors 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, investors 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 contract, the ultimate liability remains with the investor. For limited liability investors, 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.
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.