Lloyd's of London - Examination of the Worlds Insurance Specialist - Case Study Example

Running Header: LLOYD’S OF LONDON Lloyd’s of London: A Research Examination of the World’s Insurance Specialist BY YOU YOUR SCHOOL INFO HERE HERE Lloyd’s of London Introduction Lloyd’s of London has been established as an insurance specialist organization with headquarters in the financial district of London, England. Lloyd’s, unlike other insurance providers in the region, is not established as a tangible company, rather it is a corporate entity governing an insurance marketplace. As a marketplace, members are involved in the group serving as syndicates (associations) by which to insure a variety of risks in this market. Lloyd’s operates under a subscription model, where multiple syndicates each assume a share of an identical risk, with business being conducted in person between different underwriters and established, authorized brokers to conduct negotiations and transactions. The group consists of nearly 100 different syndicates and 57 agents managing transactions, with brokers serving as facilitating bodies when transferring risks between underwriters and different policyholders (Lloyds, 2015). This research endeavor explores the history and formation of Lloyd’s of London, with an emphasis on investigating the different insurance varieties offered by the group, its international expansion strategies, contemporary strategies and future prospects for the group to 2025. Lloyd’s has a rich and diverse history in the United Kingdom. The group’s long-standing competence as a specialist in the insurance marketplace, and its reputation for expertise, provide many positive opportunities for growth and profitability well beyond 2025. Early History of Lloyd’s – Foundation of the Group Lloyd’s of London was founded in approximately 1688 by Edward Lloyd who was the owner of Lloyd’s Coffee House on Tower Street in London. This popular coffee establishment was a meeting and socialization forum for many ship owners and sailors and an organization where merchants and sailors could discuss relevant news in the shipping industry (Duguid, 2014). Edward Lloyd began to realize that the insurance business was becoming a lucrative venture and began insuring slave ships and slaves themselves, as well as other activities that were associated with routine hazards related to the merchant shipping industry (Duguid). Early History of Lloyd’s – Structural Development Edward Lloyd was highly innovative in developing the structure of the group by building a network of liaisons in different regional ports and international locations who would regularly report to Lloyd’s on different shipping vessel movements and relevant maritime knowledge, further establishing a renowned brand reputation in London and abroad (Flower and Jones, 1987). All of these reports were compiled into a weekly newspaper for the maritime industry that was distributed throughout the London region to facilitate knowledge and decision-making regarding insurance policies (Flower and Jones). By the 20th Century, the volume of syndicates involved in this industry was deemed, by English government, to be insufficient for the level of market capitalization in this industry and the volume of risks that were being underwritten. The government began to push for Lloyd’s to expand its membership to different participants, non-market members, both from Britain and from other international locations as a means of reducing the burdens associated with high capitalization obligations in this market. This had led to the contemporary structure consisting of a corporate governance team, brokers and underwriters that facilitate the risk transfer process and ensure compliance to the plethora of legal requirements enacted in the 20th Century to regulate this marketplace. Early History of Lloyd’s – Development of Insurance Programs Over the next 100 years, Lloyd’s built a reputation for quality in the insurance marketplace, becoming the predominant name in insurance in the shipping industry. Lloyd’s, being a market success in the 18th Century, began building revenues that sustained the ability to provide insurance against thievery, fire and many other non-shipping-related hazards. Lloyd’s began to take on such a large volume of international business that it required brokers to facilitate the many insurance transactions that were making Lloyd’s such a renowned name in global insurance. The firm began seeking local and international insurance underwriters in order to create custom-made insurance policies and, originally, underwriters absorbed risks personally, but eventually this strategy was unsustainable which led to the formation of syndicates who would spread risks as mutual organizations (Duguid). In the 20th Century, Lloyd’s began to make other insurance policies available in the marketplace, including automobile, general liability insurance and insurances protecting commercial property. After the San Francisco earthquake of 1906, Lloyd’s built substantial confidence from clients when a renowned Lloyd’s underwriter, Cuthbert Heath, sent a telegram informing that all claims associated with the earthquake be paid completely in full, regardless of the terms listed on their policies (Duguid). This brought much more interest for many business stakeholders to utilize Lloyd’s for their diverse insurance needs. Specialized and Special Insurance – Marine Cargo The specialty line of insurance coverage is a segment of this marketplace where more challenging risks are underwritten. Usually, this segment maintains areas that sustain higher risk levels and liabilities, which requires significant specialization of brokers and underwriters to create appropriate insurance coverages. Insurers providing specialized lines of insurance work closely with brokers that maintain expertise and knowledge in creating relevant insurance lines in the specialty segment. Many claims in this segment represent substantial significance if a claim is issued, which requires careful analysis of risk potential and governing contract language to ensure that risk is minimized for the client and Lloyd’s of London. In this specialty segment, Lloyd’s facilitates risk transfer in marine cargo insurance which addresses a plethora of liabilities in maritime cargo movements. This insurance covers clients from losses incurred as a result of tangible damages that occur with cargo and associated liabilities during the period where cargo is being physically moved at sea and also for a period not to exceed two months while the material is sitting in storage (Lloyds, 2015). The specific risk location is determined, in most instances, by the region where the insured client maintains its business operations. If the insurance contract is relevant for insuring more than just a single business, and the insured clients operate their businesses internationally, it is necessary for the contract to recognize multiple risk locations. Marine cargo insurance is provided to clients only in a licensed center, unlike the surplus line of insurance which supplies clients insurance coverage available in the unlicensed marketplace. In the surplus line segment, when risk has been rejected by a minimum of three different licensed insurers in the marketplace, the insurance can be given under surplus lines at the group (Lloyds, 2015). Marine cargo insurance is subject to so many different jurisdictions for regulatory and taxation controls that this type of risk must maintain contract language that is complex in recognizing tax liabilities and risk location factors to ensure fair coverage and claims payments sufficient for the underwriter and the policyholder. Specialized and Special Insurance – Insurance for Human Risks To illustrate the diversity (and peculiarity) of Lloyd’s, the group even provides insurance policies that insure human risks, such as celebrity body parts. Going as far back as the early 1900s, Lloyd’s has provided insurance policies in this fashion. The famous American singer, David Lee Roth, obtained a $1 million insurance policy facilitated by Lloyd’s that would protect the rocker’s sperm (Brown, 2008). This custom-tailored insurance policy protected Roth in the event of a paternity suit, if engaged with intercourse with a fascinated groupie. The famous host of Entertainment Tonight, Mary Hart, also took out a Lloyd’s insurance policy, who had $1 million in protection associated with her legs. Mariah Carey, the famous American popular music singer, followed suit and maintained $1 million in protection in the event of issues with her legs (Brown). Tom Jones, renowned as a Vegas crooner, took out a $7 million policy that would protect him in the event of damage to his chest hair (Brown). This type of insurance provided to the aforementioned celebrities (and a plethora of others including Dolly Parton and Jennifer Love Hewitt) is available in the surplus insurance segment at Lloyd’s of London. Not only does the celebrity have to pay a premium for this type of custom-tailored policy, but it can be substantially difficult to find underwriters willing to absorb these high-cost risks. Specialized and Special Insurance – Non-Human Risks Lloyd’s also facilitates provision of insurance protecting livestock in the event of mortality or sickness (Lloyds, 2015). Laws in many international regions see livestock as being mobile property, therefore if routinely moved, the contract recognizes provisions for multiple risk regions. In most instances, when livestock’s movement is inconsistent or uncertain, coverage will be granted in the place where the policyholder’s business operations are situated. The group also provides aviation insurance, covering a plethora of different liabilities. These include physical damage to the aircraft’s hull, cargo movements in air transport, personal accident protection for various aircraft crew, and even liabilities associated with space travel (Lloyds, 2015). Risk locations for aviation are determined by the tangible location (operations) of the aircraft, the legal jurisdiction in the region where the aircraft is currently registered, or the physical residence of the policyholder. Most insurance contracts cover cargo similarly to that of the maritime industry, providing coverage associated with liabilities while the cargo is being physically transported and for a maximum of 60 days while in storage. The group even facilitates risk transfer of policies associated with trade credit. This type of insurance covers a business in the event that its customers fail to make payment on their debts to a commercial enterprise (Lloyds, 2015). There are also policies available that provide coverage for firms that have scheduled and coordinated an event, but witnessed it cancelled due to weather, failure of a party to appear, or physical damage of the specific venue hosting the event. It is clear that Lloyd’s facilitates the provision of very diverse insurance policies. International Expansion – The West and Africa Lloyd’s has built such a powerful, world-recognized brand name (and substantial revenues) that it has allowed the business to expand outside of the United Kingdom. In the year 2011, Lloyd’s reported that over £23.4 billion in premiums were facilitated throughout the Lloyd’s marketplace. In 2012, this rose to £25.5 billion of contracted premiums and the business boasted profitability of £2.8 billion this year (Lloyds, 2011). In 2011, the group experienced a net loss of £516 million which was the product of many natural disasters throughout the world, however not the norm for this organization. Lloyd’s, with considerable profitability and capital availability, has determined that South Africa would be a lucrative market for international expansion. Underwriters in this nation have achieved licensing under South Africa’s Short-Term Insurance Act of 1998 that allows for transactions associated with all aspects of insurance varieties except for funeral and medical expenses insurance (Lloyds, 2015). South Africa represents the largest market for Lloyd’s in Africa, with premiums totaling £180 million (in the year 2013) that encompasses direct insurance policies and the re-insurance segment. South African policy segments which dominate the market include property, liability and transportation which is represented by 69 percent of the total African insurance business (Lloyds). Personal accident insurance, credit insurance and motor are also provided in this market. Nearly all insurance policyholders in Africa are commercial customers. South African government mandates that all sea freight maintains a certificate of insurance (SACCG, 2011). Furthermore, the government is seeking new insurance reform strategies to regulate various commercial activity, therefore the South African environment will likely provide many new opportunities for growth and profitability under an international expansion model. It is likely that with new government-imposed reforms, more commercial customers will be seeking insurance policies to comply with changing regulatory circumstances. Lloyd’s also maintains presence in North America, including Canada and the United States. The business’ first office was opened in Montreal, Canada, in 1932. Canada represents a lucrative market, however the country government imposes many sanctions on underwriters and policy writers in this market. Some risks being processed in this market are subject to daily screening activities to ensure compliance to Canadian insurance law. These screenings apply to a plethora of segments including energy, aviation, property and personal accident (to name only a few). Canada represents a lucrative opportunity, despite heavy regulation, as the country maintains a GDP of over $1.4 trillion and maintains millions of businesses in a free market economy in need of insurance coverage with substantial diversity. International Expansion – The East and Australasia Lloyd’s also recognizes lucrative opportunities for conducting business in Australia and New Zealand. Under the Australian Insurance Act of 1973, Lloyd’s is licensed to write insurance policies in virtually all segments. Since entering the Australian market, the group has witnessed policy premiums transacted rising from $260 million to $2 billion in just a 10 year period (Lloyds, 2015). Though Lloyd’s has been insuring various Australian risks for nearly 150 years, it has only been in the last 20 years that Lloyd’s has maintained an operational market directly in Australia and now the firm boasts insurance of 67 percent of the country’s largest businesses (Lloyds). Lloyd’s must recognize the tremendous growth opportunities in Australasia, as the group has created detailed market intelligence reports for this region that assess opportunities and challenges, benchmarking standards, and premium trends in this market compared to other international locations (Lloyds, 2015). The business has also established offices in Hong Kong, China, Singapore and India (Arnold, 2015). Lloyd’s recognizes that emerging markets will contribute substantially to Lloyd’s revenue growth once new businesses are developed and new trade opportunities opened for developing economies in the East. This broad national expansion into Eastern nations is also an effort to block new market entrants, ensuring that Lloyd’s maintains dominance in the insurance industry. Contemporary Strategies – 2014 to 2016 The main strategy for Lloyd’s to 2016 is to create a more efficient market oversight system. Risk management and performance management require renewed emphasis to ensure a better supervisory role for Lloyd’s in this marketplace (Lloyds, 2014). Increasing supervisory transparency is yet another strategy for enhancing reputation and building relationships with various managing agents. The company is also working with Turkish government and legislators in Indonesia to allow Lloyd’s to conduct insurance trading activities in these emerging nations (Lloyds, 2014). The business is working on conducting feasibility studies in Asia, seeking options for market entry in Mexico and Colombia, and engage in market development activities to establish an office presence in Dubai. The goal is to prepare for an increased emphasis on international expansion by 2016, conducting the framework for various entry strategies in economies where there is robust economic and commercial growth in recent years. Contemporary Strategies – Vision 2025 Project Lloyd’s has a very aggressive vision of having a presence in virtually all international markets by 2025 (Lloyds, 2015). The goal is, by 2025, to outperform all global competition in this marketplace and seek building relationships with larger brokers to increase ease of access to Lloyd’s services for a variety of international customers. The business seeks, also, to improve its recruitment to include more diversity that is representative of the group’s capital and its geographic basis. All of this is underpinned with ongoing risk management activity improvements and creating a marketplace where innovation and entrepreneurship are encouraged to thrive and maintain robustness (Lloyds). With efficient procurement of relevant technologies, Lloyd’s intends to improve its distribution methodologies by 2025. Prospective Future of Lloyd’s of London There is ample evidence that international markets, especially emerging economies, represent numerous opportunities for Lloyd’s beyond the year 2015. Lloyd’s maintains a well-respected brand reputation throughout the world and is becoming the foremost risk transfer agent in the world in the insurance industry. This gives it considerable competitive advantages over smaller competition in this industry. Hence, with worldwide brand recognition and confidence with underwriters, brokers and customers, prospects for long-term growth for Lloyd’s are substantially positive. To illustrate, in Australasia, the premiums written by Lloyd’s increased 769 percent in just 10 years. At this current rate of growth, which maintains a mean (average) of 76.9 percent each year, Figure 1 illustrates the potential growth opportunities for Lloyd’s in this particular region. Figure 1: Expected Value of Lloyd’s Investment in Australasia At a growth rate of approximately 77 percent annually, between 2005 and 2015 in Australasia, substantial profitability will likely be achieved in this particular region. This is, of course, dependent on the growth in commercial business and trade in this region and local GDP. In 2014, Australia witnessed a GDP growth rate of 3.5 percent and, between 1990 and 2015, the value of its currency against the U.S. dollar grew substantially. All economic indicators reflect that this is a high growth market that is likely to support continued commercial and economic growth, creating new demand opportunities for the facilitation of insurance in a variety of different sectors. It would be nearly impossible to calculate expected value for the entire international market as there is simply not enough data available illustrating whether licensing success and market development in many emerging economies will be successful as part of Lloyd’s 2025 vision strategies. Many of these markets are subject to unique regulatory environments, taxation and monetary policy, which all have impact on existing businesses and future businesses that will likely require insurance coverages. However, many countries are seeking new opportunities to expand their global trade initiatives and develop supply chain partnerships to support many different developing industries. Hence, the growth opportunity for Lloyd’s are significant and it is likely that the group will achieve its competitive outperformance objectives over the next 10 years. Conclusion As illustrated, Lloyd’s of London maintains a very diverse portfolio of insurance coverage that applies to commercial and non-commercial policyholders. It is a business with over 300 years of operating experience in the insurance marketplace, giving it brand-related advantages compared to other competing enterprises in this sector. Lloyd’s not only provides valuable services to many individuals in need of insurance coverage (mandated by regulations or personal ambitions for protection), but creates a unique identity in the international market for being an innovator in customer-tailored insurance contracts (such as offering high-dollar celebrity body part coverages). Growth opportunities for Lloyd’s are likely guaranteed if the group continues to work against its long-term growth objectives and maintain a presence in profitable emerging and developing markets. References Arnold, Tom. (2015). Lloyd’s of London Targets Foreign Investors for New Business. Reuters. Retrieved from http://www.reuters.com/article/2015/03/11/us-lloyds-of-london- investment-idUSKBN0M71MZ20150311 Brown, Adam T. (2008). The Six Strangest Tales of Celebrity Body Part Insurance. Cracked Magazine. Retrieved from http://www.cracked.com/article_15887_the-6-strangest-tales- celebrity-body-part-insurance.html Duguid, Andrew. (2014). On the Brink: How a Crisis Transformed Lloyd’s of London. New York: Palgrave MacMillan. Flower, Raymond & Jones, Michael W. (1987). Lloyd’s of London: An Illustrated History. St. Helier: Informa Publications. Lloyds. (2015). The Lloyd’s Market. Retrieved from http://www.lloyds.com/lloyds/about- us/what-is-lloyds/the-lloyds-market Lloyds. (2015). Marine. Retrieved from http://www.lloyds.com/The-Market/Tools-and- Resources/Tools-E-Services/Risk-Locator/Risk-Locator-Class-of Business/Marine#Marine%20cargo Lloyds. (2015). Types of Risk Lloyd’s Covers. Retrieved from http://www.lloyds.com/Lloyds/Offices/Americas/US-homepage/Placing-Risk/risks- Lloyds-underwrites Lloyds. (2015). Livestock. Retrieved from http://www.lloyds.com/the-market/tools-and- resources/tools-e-services/risk-locator/risk-locator-class-of-business/livestock Lloyds. (2015). Aviation. Retrieved from http://www.lloyds.com/the-market/tools-and- resources/tools-e-services/risk-locator/risk-locator-class-of-business/aviation Lloyds. (2015). Financial Loss. Retrieved from http://www.lloyds.com/the-market/tools-and- resources/tools-e-services/risk-locator/risk-locator-class-of-business/financial-loss Lloyds. (2015). Lloyd’s Vision 2025 – To be a Global Center for Specialist Insurance and Reinsurance. Retrieved from http://www.lloyds.com/lloyds/about-us/strategy/vision-2025 Lloyds. (2015). Australia: Information on Lloyd’s in Australia. Retrieved from http://www.lloyds.com/Lloyds/Offices/Australasia/Australia Lloyds. (2015). Lloyd’s in South Africa. Retrieved from http://www.lloyds.com/lloyds/offices/africa/south-africa/lloyds-in-south-africa Lloyds. (2014). Lloyd’s Strategy 2014 to 2016. Retrieved from www.lloyds.com/~/media/files/lloyds/about%20lloyds/strategy/lloydsstrategy20142016.p df Lloyds. (2011). Annual Report 2011. Retrieved from http://www.lloyds.com/lloyds/investor- relations/financial-performance/financial-results/2012-annual-report SACCG. (2011). Doing Business in South Africa – 2011 Country Commercial Guides for U.S. Companies, South Africa Country Commercial Guide. Retrieved from http://export.gov/southafrica/build/groups/public/@bg_za/documents/webcontent/bg_za_ 034197.pdf Read More