6: Operation of the London market

Chapter section
A The London market
B Lloyd’s
C London company market
D London market brokers
E Protection and Indemnity Clubs
F London market reform initiatives

Learning objectives
After studying this chapter, you should be able to:

j outline the London market and its importance in the global insurance and reinsurance market;
j list the parties involved;
j outline the role of their respective market associations; and
j understand the Market reform process in London.

Chapter 6

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 Lloyd’s and London Market Introductory Test

A The London market

Insurance in London began well over 300 years ago and gained prominence in the 19th century,
reflecting Britain’s then dominant role in shipping and shipbuilding. For most of this period,
the marine insurance industry was dominated by Lloyd’s, but a flourishing company sector also
developed and later expanded to embrace emerging aviation and energy markets.

The London market is the world’s leading market for internationally traded insurance and
reinsurance business, comprising insurance and reinsurance companies, Lloyd’s syndicates,
Protection and Indemnity (P&I) clubs (see section E below) and brokers. Its business is
primarily general insurance (non-life) and reinsurance, with an increasing emphasis on high-
exposure risks. The market’s gross annual premium exceeded £22bn in 2004.

An important competitive strength of the London market lies in the number, diversity and
expertise of the competing insurers, based in close proximity, primarily within the Square Mile.
Brokers can find the capacity and expertise required for underwriting virtually any type of risk
and the market enjoys an enviable reputation for being able to accept particularly complex risks,
which are difficult to place elsewhere.

London is largely a subscription market, where two or more insurers, be they insurance
companies, Lloyd’s syndicates or both will underwrite varying proportions of a risk according
to their expertise, prominence and risk appetite in the various classes of business. Brokers
control most of the business placed in the market. A key strength of the London market is the
presence of highly skilled ‘lead’ underwriters whose judgments on rates and terms are followed
by other insurers in London and, indeed, other markets across the globe. Brokers know the
strengths, specialisms and reputations of the underwriters and can readily tap the combined
underwriting capacity for all sectors of the market. Similarly, buyers can meet insurers and
market information is spread rapidly among all participants. The London market also contains
an unrivalled pool of service providers, for example, leading law firms, IT support and
professional bodies. Combined, these attributes contribute to the market’s enviable reputation
for innovation, expertise and security.

Subscription markets are discussed in more detail in chapter 9.

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 6: Operation of the London market

B Lloyd’s
Lloyd’s is the world’s leading specialist insurance marketplace.

B1 History of Lloyd’s
In the seventeenth century, insurance of ships and cargoes was often underwritten by merchants
who were willing to carry part of the risk of a voyage in return for part of the premium.
Commerce of various types, including insurance, was transacted among the merchants who
met at various coffee houses around the City of London. One of them, owned by Edward Lloyd,
was situated near the River Thames and was frequented by merchants, shipowners and others
having an interest in maritime ventures.

Lloyd’s Coffee House was situated in Tower Street and was in existence by 1688, although
the original date of opening is uncertain. Edward Lloyd encouraged the merchants, or
‘underwriters’ (they signed their names at the foot of the insurance contracts), because it
brought extra business to his coffee house. He supplied shipping information and published
a news sheet in 1696, called ‘Lloyd’s News’. This was superseded some years after his death by
‘Lloyd’s List’ which is London’s oldest newspaper.

Lloyd’s Coffee House prospered and Lloyd’s developed as a market place for insurance provided
by individuals. In 1771 a committee was formed which took the running of Lloyd’s out of the
hands of the coffee house owner and into the hands of the insurance fraternity.

B2 Operation of the Lloyd’s Market

Lloyd’s is not an insurance company but a Society of members.

Members of Lloyd’s, or ‘capital providers’ as they are often known, accept insurance business
through syndicates on a separate basis for their own profit and loss (in other words,
members of Lloyd’s are not jointly responsible for each other’s losses). The membership of

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Lloyd’s is currently made up of corporate capital providers, some of which may be insurance
or reinsurance companies, individuals (mainly underwriting on an incorporated basis as
Namecos) and Scottish Limited Partnerships. As from 1 January 2003 Lloyd’s no longer admits
individual members to write on an unlimited liability basis. Those already admitted prior to
this date are permitted to continue to trade on an unlimited liability basis. Individual members,
or ‘Names’ as they are often known, tend to support a number of syndicates, whereas some
corporate members only underwrite through a single syndicate.

Members require authorisation from Lloyd’s to underwrite insurance. Each member has
a premium income limit that is allocated to one or more syndicates. The aggregate of the
premium limit that members allocate to a particular syndicate is known as the syndicate’s
capacity. The market had the capacity to accept insurance premiums of £15.95bn
(source: Lloyd’s) for the 2008 year of account.

There are 75 syndicates operating within the Lloyd’s market as at 1 January 2008.

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 Lloyd’s and London Market Introductory Test

B2A Managing agents

Each syndicate is managed by a managing agent. It is the responsibility of the managing
agent to employ the underwriting staff and manage the syndicate on the members’ behalf. The
managing agent must be a company specifically established for the purpose of managing a
syndicate, and it may not carry out any other function. A managing agent may be responsible
for more than one syndicate.

Together, the syndicates underwriting at Lloyd’s form one of the world’s largest sources of
insurance capacity as well as being a leading reinsurer. The market structure encourages
innovation, speed and better value, making it attractive to policyholders and participants alike.
Immediate access to decision-makers means that answers on whether a risk can be placed are
made quickly, enabling brokers to provide fast, good value solutions to their clients.

B2B Members’ agents

Members’ agents have the responsibility for bringing in suitable new members to join these
syndicates and, thus, increase their capacity to write business. They also act in all respects on
behalf of their members, except in the management of the syndicate, which is the responsibility
of the managing agency.

B3 Lloyd’s Market Association (LMA)

The Lloyd’s Market Association (LMA) represents underwriting businesses in the Lloyd’s
market.

The mission of the LMA is to provide a single voice for the Lloyd’s underwriting market and
a range of quality services that improve members’ profitability. All managing and members’
agents are subscribers and nearly all are actively involved in the Association’s work by providing
personnel to serve on the board, committees or panels.

The LMA continues to offer the full spread of representation, information and technical services
formerly offered by the separate associations. Two thirds of the LMA budget is deployed
on technical support for the marine, non-marine and aviation markets. The merger gives
underwriters a major voice on cross-market issues and on the strategic development of Lloyd’s
and the London insurance market.

Through the LMA the interests of Lloyd’s syndicates and managing agents are promoted
wherever decisions are made that affect the market. Its key partners are the London Market
Insurance Brokers Committee (LMBC) and the International Underwriting Association of
London (IUA) who share LMA’s commitment to enhancing the attraction and efficiency of the
London market.

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 6: Operation of the London market

C London company market

C1 History of the company market
The company market dates back to the mid 1800’s, when senior members of marine insurance
companies were meeting informally to discuss policy wordings and other matters of common
interest. These meetings would take place in the Jerusalem Coffee House and the Jamaica Wine
Rooms, close to the Royal Exchange.

The market gradually extended into the aviation and transport classes, and then into the
full range of non-marine business as more insurance companies were formed to meet the
commercial demands of an expanding industrial age. Overseas insurers also began to set up
offices in London because of its attraction as the world’s premier insurance centre.

C2 Operation of the company market

Today, the London company market is typically made up from:

• insurers focussed exclusively on London market business;

• specialist London market divisions of major UK composite insurers;
• London market divisions of major overseas/multinational insurers.

Each insurance company is a separate entity, participating in London market subscription

business alongside other companies and Lloyd’s syndicates as described in section A of this
chapter. Some companies trading in the London market may also insure the whole amount of a
risk because their size enables them to achieve sufficient spread. This is known as ‘100% business’.

Companies based and owned in the UK, together with UK subsidiaries of major US insurers
operating in the London market, are regulated by the FSA. Occasionally, the London market
operation of an overseas insurer will instead be governed under the regime of its overseas
parent, and those that are authorised in another European State can operate in the UK under

Chapter 6
principles of the European Union single market (this is more fully explained in the chapter 5
Regulation and chapter 8 Intermediaries and the London market). However, their participation
in subscription business will often result in indirect operational compliance with FSA
requirements, even if there are no direct reporting obligations, e.g. contract certainty.

The London company market is centred on the City of London, with insurers’ offices in close
proximity to each other, Lloyd’s, and the City offices of the major London market brokers. In
1993, the London Underwriting Centre was opened at 3 Mincing Lane, where many London
company insurers have chosen to locate their offices – or at least have an underwriting presence
– with the obvious advantage of easy access for brokers to the wealth of underwriting expertise.

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 Lloyd’s and London Market Introductory Test

C3 International Underwriting Association of London (IUA)

The IUA is the acknowledged market association for the London company market. As the
world’s largest representative organisation for international and wholesale insurance and
reinsurance companies, it exists to protect and strengthen the business environment for its
member companies operating in or through London. Formed on 31 December 1998, the
IUA brought together the representative bodies for the marine and non-marine sectors of the
London company insurance market. Previously these were the Institute of London Underwriters
(ILU) and the London International Insurance and Reinsurance Market Association (LIRMA)
respectively.

The ILU’s history in the marine, aviation and transport insurance markets dates back to 1884.
A proposal was first made to establish a formal representative underwriting association in July
1882 and two years later the new ILU took up offices in the Royal Exchange Buildings. LIRMA
was formed in 1991 from the merger of previous insurance associations established in the 1960s
and 1970s to support non-marine insurance business and reinsurance.

All IUA activity is based on a business plan approved by the elected Board, which is drawn
entirely from its member companies. Currently, this focuses on five key priorities:

1. Making the market more efficient.

2. FSA relationships and helping members to comply.
3. Technical and statistical services for underwriting and claims practitioners.
4. Liaising with brokers.
5. Representing members’ Interests in London and internationally.

In 2008, the IUA had 68 London market member companies, representing the vast majority of
the London company market capacity and writing premium income in excess of £12bn, broadly
equivalent to that of Lloyd’s.

D London market brokers

Business is brought to the London market by firms of brokers, which bring business on behalf
of clients, other brokers and intermediaries worldwide. Regulated by the FSA, these brokers use
their specialist knowledge to negotiate competitive terms and conditions for clients, using the
wealth of underwriting resource and expertise offered by the London market.

D1 Lloyd’s accredited brokers

Lloyd’s operates an additional accreditation process for brokers seeking access to the Lloyd’s
market (see also chapter 8) and they must satisfy all relevant regulatory requirements, as also
discussed in chapter 8. Lloyd’s performs a careful assessment of all applicant brokers, affirming
their reputation and financial standing and investigating the character and suitability of officers
and employees before making the decision to accredit.

Firms receive provisional accreditation for three years before becoming entitled to use the term
‘Lloyd’s broker’. As at 1 February 2008, there were 176 accredited Lloyd’s brokers. It is possible
for any insurance broker to gain access to the expertise and resources of Lloyd’s by making
contact with an accredited Lloyd’s broker.

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 6: Operation of the London market

D2 British Insurance Brokers’ Association (BIBA)

BIBA was founded in 1977 to represent independent insurance brokers and today, it is the
largest broker organisation in the UK. A principal aim of BIBA is to raise the standards of
insurance broking in the United Kingdom with the intention of ensuring that new enhanced
means of protecting consumer interests are made effective.

D3 London Market Insurance Brokers’ Committee (LMBC)

The London Market Insurance Brokers’ Committee is an autonomous committee of BIBA. It is
the direct successor of Lloyd’s Insurance Brokers’ Association, which was formed in 1910.

While the LMBC is, in fact, one of the regional committees of BIBA, in so far as matters
affecting the interests of members of the Lloyd’s Region of BIBA (i.e. Lloyd’s brokers) are
concerned, it is autonomous. It, therefore, continues to represent Lloyd’s brokers on, inter alia,
all matters peculiar to their relationship in the Lloyd’s community.

Through numerous technical sub-committees, the LMBC for Lloyd’s brokers (and BIBA for all
member insurance brokers) provides a service on a very wide range of matters.

E Protection and Indemnity Clubs

P&I clubs are mutual associations. Originally formed as trade associations, these associations
protect shipowners in respect of risks not covered in the commercial marine insurance market. This
would generally include protection relating to loss of life and personal injury to seamen, passengers
and third parties, indemnity relating to damage to cargo by negligence of the crew and various
other liabilities such as those relating to collisions, pollution, groundings and wreck removal.

The shipowners who are members of the club make contributions based upon the tonnage of
their vessels at the beginning of the year. If claims are significant a further contribution or ‘call’
may be required.

Chapter 6
The provision of mutualised insurance is not confined to the marine market and a number of
such insurers are available for classes of business such as professional indemnity, for example,
Bar Mutual.

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 Lloyd’s and London Market Introductory Test

F London market reform initiatives

The Market Reform Group (MRG) was established to drive a programme of process reform and
modernisation initiatives across the London market. This is a strategic group made up of senior
representatives from the Lloyd’s, company market and broking communities, driving each
work stream through separate project boards which are supported by the jointly funded Market
Reform Programme Office.

The market associations (LMA, IUA, and LMBC) are increasingly working together to support
and promote reform initiatives that will bring benefit to the London market as a whole. With
extensive involvement from their member practitioners on the various project boards, the
Associations have a major role in delivering the efficiency improvements, cost reductions and
increased professional standards to help ensure that London retains its premier position in the
world insurance markets.

Good examples of recent projects, which, by definition, can often have lengthy implementation
cycles, are changes to the premium accounting and settlement processes to replace paperwork
with electronic messaging and speed up cash movements, the revision of placing and
underwriting processes to facilitate contract certainty, and the introduction of electronic claims
repositories to streamline claims agreement and settlement procedures.

Electronic claims files are now being used throughout the Lloyd’s market and increasingly
within the company market.

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Glossary of terms
British Insurance Brokers’
Association (BIBA)
Electronic Claims Files (ECF)
International Underwriting
Association of London (IUA)
Lloyd’s Market Association
(LMA)
London Market Insurance
Brokers’ Committee (LMBC)
Lloyd’s managing agents
Lloyd’s members’ agents
Lloyd’s syndicates
Members of Lloyd’s
Protection and Indemnity
Clubs
© The Chartered Insurance Institute 2008 LLMIT/February 2008
6: Operation of the London market
BIBA represents independent insurance brokers.
Claims handling process which combines the use of CLASS together
with documents held in a central repository to move the claims review
and agreement process away from the paper basis into an electronic
environment.
The market association for the London company market.
The LMA represents underwriting businesses in the Lloyd’s market.
LMBC represents Lloyd’s brokers.
The managing agent employs the underwriting staff and manages
the syndicate on the members’ behalf. The managing agent must be a
company specifically established for the purpose of managing a syndicate,
and it may not carry out any other function. A managing agent may be
responsible for more than one syndicate.
Member’s agents have the responsibility for bringing in suitable new
members to join syndicates and provide a range of services for members.
Lloyd’s members conduct their insurance business in syndicates, each of
which is managed by a managing agent.
Members of Lloyd’s, or ‘capital providers’ as they are often known, accept
insurance business through syndicates on a separate basis for their
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own profit and loss (in other words, members of Lloyd’s are not jointly
responsible for each other’s losses). The membership of Lloyd’s is currently
made up of corporate capital which can be provided by insurance or
reinsurance companies through dedicated vehicles, individuals who will
write in a limited liability capacity and Scottish Limited Partnerships.
Individual members, or ‘Names’ as they are often known, tend to support a
number of syndicates, whereas some corporate members only underwrite
through a single syndicate.
P&I clubs are mutual associations, which protect shipowners in respect
of risks not covered in the marine insurance market. Risks and losses are
pooled by the members of the club
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