Lloyd's: A Tale of Two Ships

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A brief history of Life Insurance dating back to the Roman Empire, 100 B.C.

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While Lloyd's gets a lot of it's attention for insuring the "body parts" of actors, actresses, athletes, and musicians, they have a strong presence in the fields of reinsurance and maritime risks.

After all, they brought together the team of investors and insurers who jointly insured the Titanic one hundred years ago.  See article below.  And yes they did pay out.

Large risks such as these take specialized care.

About 100 years later, another ship made the news.  A cruise runs aground off Italy.  Once again, we're looking at a very big claim to pay, paid by more than one insurer or syndicate.

That my students, is why we have reinsurance as a way to "spread" around the risk among multiple insurers when the risk is "too big", and surplus lines insurers who handle the risks that the admitted insurers may not be able to cover due to the type of risk.

Illustration of Lloyd's circa 1688

As urban legend goes, correct me if I'm wrong, Lloyd's started as a coffeehouse in the 1600's.  With no media to speak of, if a cargo shipper, a ship owner, or a ship builder wanted the "news" they would congregate someone and meet with like minded people.

Sounds like a good excuse to hang out at a bar or coffeehouse.

As time went on Lloyd's of London became the place to meet, and strike deals.  Shared business ventures.  Creation of investor syndicates.  Insurance agreements.  Long story short, it evolved away from coffee and into insurance.  300+ years later, it's big business.

reprint from rogerbickmore.com

On Markets Not Turning

December 17, 2012

The marine hull market lacking clear direction after Costa Concordia

Half-forgotten now, given the subsequent Diamond Jubilee and Olympics hullaballoo, but back in April we commemorated the centenary of the RMS Titanic hitting an iceberg in the North Atlantic. Lloyd’s association with the disaster is well known; the market insured the “unsinkable” vessel for £1m and paid out all claims in full within thirty days of the tragedy. Lloyd’s still enjoys a preeminent position when it comes to covering ships but just at the moment there are a few grim faces on the ground floor of the underwriting room where the mariners congregate.

The year had hardly got going before Captain Schettino’s ill-fated sail-past salute to the island of Giglio led to the sinking of his cruise liner Costa Concordia, presenting hull underwriters with their highest ever loss, $500m for the ship and at least as much again for third party claims and removing the wreck. Super-storm Sandy in October smashed into $650m of pleasure craft across the US East Coast and then this month the car carrier Baltic Sea ended up on the bed of the North Sea, coming second-best in a collision with a Dutch container ship, leading to a claim of $60m potentially according to Insurance Insider.

The shipping industry has been struggling since the financial crisis hit in 2008. Freight rates remain low, many vessels are laid up, certainly working less, and the dire economic situation in Europe must be tempting many ship-owners to cut corners on risk management. Hull underwriting results were already poor so the huge claims of 2012 should be scaring people away from the sector. Yet whilst a few fringe players may well withdraw, especially those in Continental Europe whose security has been downgraded, leading specialist intermediary FP Marine is unconvinced that a major rate hardening will happen any time soon. In their recent briefing they suggest any upward pressure on hull premiums will be suppressed due to the significant volume of capacity introduced over the last couple of years by a number of new entrants like WR Berkley, Argo and Barbican.

Broker bravado possibly but the way that business is now placed at Lloyd’s may also offer a more fundamental reason why the transition from bear to bull market is so laboured. 100 years ago the Titanic policy was written by over 50 syndicates and 12 companies but in the modern age capacity is concentrated in fewer hands;  over 50% of the Costa Concordia risk was carried by just 5 insurers. Where once a major loss would cause universal misery across all underwriters who as a herd would then claw back from all clients in higher premiums the cash they paid out; nowadays the market reaction is subtler. The “miss factor” means that there are plenty of underwriters ducking or semi-avoiding the mega claims. Post-loss and with unimpaired results these fortunate free-loaders can expand their share of specialist areas like marine hull, snatch a bit of payback and dampen average pricing pressures just at the point where they are poised to respond.

There is much to admire about the way that larger more autonomous trading entities have been encouraged by Lloyd’s since the reforms of the late 1990s but with it the dilution of the mass subscription market may have unintentionally inhibited or at least altered how the pricing cycle functions in response to major losses such as Costa Concordia.

end of article