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D Lloyd’s

In this section, we will examine the structure and main features of the Lloyd’s market. Lloyd’s, as an
2 institution, is not an insurer. Instead it is an organisation providing facilities for the placing of risks in its
Chapter Syndicates are the groups of private individuals or corporate members who actually carry the risks (they
own market.
provide the financial backing). Each syndicate employs a managing agent and it is their responsibility to
appoint the underwriter who may accept risks on behalf of the syndicate. Managing agents are
companies specifically established to manage one or more syndicates on behalf of the members that
provide the capital. Lloyd’s managing agents are dual-regulated which means they have to be approved
by the Prudential Regulatory Authority (PRA) to carry on PRA-regulated activities and any business
conduct activities are regulated by the Financial Conduct Authority (FCA).
By allocating capital support to each syndicate each year, the members govern the amount of business
that each syndicate can underwrite each year – the syndicate capacity.
A members’ agent advises their clients (corporate and individual members) on the advantages and
disadvantages of investing in the Lloyd’s market, syndicate selection and performance, reserve
requirements and compliance issues. They also act as a communication channel between the member
and the various managing agents running the syndicates in which the member has invested, receiving
the regular reports on the profits (or not) made by the syndicate.

D1 Transacting insurance at Lloyd’s

The procedures and practices within the Lloyd’s market have in the past been quite different from those
of any other insurer. They are built on years of tradition and still rely to a large extent on personal
contact. However, as we shall see, Lloyd’s has changed certain aspects of its more traditional rules. In
particular, it has changed the way in which business may be transacted by those who are not Lloyd’s
brokers.
Lloyd’s is housed in a modern, purpose-built building in the centre of the City of London. Underwriters
and their staff sit at desks, still referred to as ‘boxes’ reflecting the original style of furnishing, and
Lloyd’s brokers approach them there to negotiate their contracts.
Most risks are not placed using a proposal form but using a Market Reform Contract (still known in the
market as a ‘slip’) and there is a strict set of rules in place regarding the nature and content of this
document. Much of the business at Lloyd’s is still conducted by face-to-face negotiation.

For those transactions that involve a broker, the broker will obtain a quotation from an underwriter who
is a recognised ‘leader’ in a particular class of business. The underwriter will indicate the percentage
share that they will accept and the terms that apply. Subsequently, the broker will approach other
underwriters and will ‘fill’ the slip by obtaining signatures for the shares that they are each willing to
accept. This process is known as ‘scratching a slip’ – a term derived from the type of pen originally used
for the purpose. This is how the term ‘underwriter’ developed: from the custom of writing successive
shares underneath each other. In this way a number of syndicates can accept a share of the same risk.
This is called ‘writing a line’, each share being a line. Lloyd’s is known as a subscription market because
of this practice of sharing risks.
Once the slip is fully placed (in other words, the percentages accepted by each underwriter total the
amount of cover required, usually 100%) the policy will be prepared, then checked and signed. This is
carried out centrally for Lloyd’s. The organisation that carries out these functions is called Xchanging.
The broker collects the premium and submits this to Lloyd’s, less the agreed commission (also known as
brokerage).
Not every risk placed in Lloyd’s requires the support of more than one underwriter. Motor insurance is a
good example of a class of business where the insurance will be placed with a single underwriter, who
accepts the whole of the risk. For this type of business there also tends to be a standard policy wording
which will be sent to every customer without having to be specially prepared and signed.

D2 Lloyd’s business plan: limited and unlimited liability

The actual risk carriers at Lloyd’s were originally all individuals, called ‘Names’. Names were people who,
having demonstrated a certain level of financial wealth, provided capacity for insuring risks. They did so
by guaranteeing their shares of losses up to the full extent of their own personal fortune. This was and is
a very onerous commitment. Following some unprofitable years, the Lloyd’s Business Plan in 1993
brought about a number of major changes in the way Lloyd’s operates.