Analysis of the Lloyds Insurance Market - Case Study Example

Analysis of the Lloyds insurance market Name Instructor Institution Date Analysis of the Lloyds insurance market Introduction Lloyds is known to be one of the specialists that deals with insurance and reinsurance market. Its operation has traced back since 1688. Its operation has taken over 100 countries making it to be the fifth largest global reinsurer, and the second largest global insurer. Occasionally, it has been known to offer insurance services on various emerging issues such as complex risks, and unusual happenings. This has made Lloyds to insure a variety of industrial companies which has made it to enjoy better financial security and superb ratings. Essentially, Lloyds is known to be one of the most progressive and innovative insurance industry. Its operation is described by around one hundred and eighty brokers and fifty five managing. As James (2007) itemizes, it is widely defined by its aspect of serving the insurance market rather than the company making it to suffice well as a convention point for a variety of agents to pool risk. Consequently, the entity of Lloyd can be traced back in the seventeenth century to Edward Lloyd, who was believed to be a coffee owner. During this period, the wealthy merchants expressed their mutualisism aspect by identifying the risk of loss of the ship that would occur. Originally, Lloyd was believed to be a marine market. However, due to its noble ideas, non marine policies were introduced towards the end of nineteenth century as part of their mission. According to Beeman (2005), the management of Lloyd established various policies that covered the era of the UK chief taster, Gennaro Pelliccia up to various aspects of the real estates. Some of its services include, insuring investments in politically unstable countries and climatically dangerous areas. Conspicuously, the Lloyds insurance policies were backed by the so called, ` Names’. These are believed to be some of the wealthy British investors who had their names written off in the face of each policy. Their role was to participate in the one year venture syndicate that would insure mainly the maritime risks. They participated in one-year venture syndicates to insure risks, mainly the maritime risks. This made them to earn some part of the profits or they would otherwise pay their share of the losses as stipulated by the prevailing conditions. This mode of operation deemed successful in the maritime business. As time went by, Lloyd operations became more complex as it also explored into non-maritime business. This made the situation to be difficult for the syndicates to stay on and had to close their business after three years. Their mitigation, strategies included; reinsuring the remaining syndicates from the next year account. Additionally, they provided the worded policies that had no monetary boundaries in insuring so as to gain the US insurance market. This proposition has a positive impact in its competitive advantage over the US insurers who had established. Apparently, by the 1960’s and 1970’s, the effects of pollution, asbestosis and health hazards had turned out to have daunting effects. As noted by Beeman (2005), this led to huge loses being experienced due to the lawsuits that were being filed. The so called `names’ faced their personal liability as the original policies did not have the monetary limits. The companies turned to their insurers who in turn had to face their reinsurers who were mostly Lloyds’ syndicates. In early 1970’s, the British upper-middle class, Australian, Canadian and South African citizens were allowed to be members of the `Names’. This led to an increase in the number of syndicates who reinsured other syndicates. While the new syndicates showed good profits and attracted new members, its market presumed a slow growth. Unexpectedly, it was indicating means in which the excess capital could be recycled. Another challenge that led to the systematic collapse of Lloyd was the direction of the new specialist reinsurance syndicate as a result of the underlying market losses. Operation The structure of Lloyds lies in the statutory Lloyd’s act that was set up in 1982. The main players are the member agents, managing agents, syndicates and the corporation of the Lloyd’s. As stated by Beeman (2005), the nineteen members offer guidance to the members who are involved in the selection of the syndicates and also offering administrative functions. There are approximately one hundred and fifty five main syndicates who are operational. Moreover, Lloyd Corporation offers, regulatory structures that governs the rules of operation of the markets, finance infrastructure for the market to participate, financial reporting and global authorization. In order for a business to be considered as a Lloyd’s market, it has to be channeled through the insurance brokers who have the permission to acquire the Lloyds certification. The market operates by means of the syndicates as the members are the main risk bearers of the entities in the market. They form an annual syndicate as they pledge an unlimited liability. Moreover, the members have to deposit capital the capital to the Lloyd’s in the form of assets so as they can be held as trust instruments. This capital is not utilized in the daily operation of the syndicates. As stipulated in the Lloyd’s act of 1982, the business mode of operation is self regulatory. This is accompanied by majority of the insurance policies basing many syndicates as opposed to the single syndicate. Indubitably, majority of the operation and the guiding policies relies to the outside insurers which are known as the company markets. Due to the hefty payouts that were experienced in 1980’s and 1990’s, Lloyd experienced massive losses in the UK’s corporate history. These were attributed by the effects of asbestos related health and the natural disasters that took place. In order to combat such effects, Lloyd formed the Asbestos working party whose aim was to come up with strategies of dealing with ever growing asbestos issues. In 1982, Lloyds formalized the implementation of the Private Act, which was to provide immunity from lawsuits. This act would allow the Council of Lloyd make changes to various by laws without necessarily depending on the majority votes. As stipulated by James (2007), the effects of September 11 attacks had massive negative effects to the transportation industry that posed a challenge to the Lloyds Corporation. It is estimated that approximately the company had claim of approximately eleven billion out of the total forty billion dollars that were being claimed. This was attributed by the fact that, Lloyd was the major insurer of the world trade centre (James, 2007). The major historical weaknesses that accompanied Lloyd’s market were; absence of transparency that resulted due to idiosyncratic reporting, over concentration of the exposure and limited diversification and the disparate performance that was evident across the syndicates. Inappropriate capital requirements were a source of conflicts experienced between the self-regulation and market forces. This emanated from the fact that, the Lloyd’s market did not all members to acquire adequate liquid assets. This meant that, they did not have any other means of taking extraordinary level of risk. Previously, while Lloyds had insured the World trade center, there was no actual policy which had been printed beyond the term sheet. In order to counteract this effect, it was imminent for Lloyd to create a new management structure that would attract any person who was interested in the Lloyd’s market in accordance to the set policies. Inherently, there were major catastrophic impacts that were felt in the first half of 2011. This was a culmination of disasters such as the occurrence of tsunami in Japan, floods in Australia and earthquakes in New Zealand. This made the corporation to lay off a total of £6.7 billion to cover up the compensations. These trend required critical mitigation strategies in order to survive the world market. After thorough investigations, Lloyds embraced creating strategic programs that would evaluate the feasibility of the appropriate levels following all the reserves from its liabilities since 1992 and its prior years. As stipulated by Beeman (2005, p.93.) the program spun off pre-1993 business into a new structure that was termed as the Equitas. This meant that the liabilities would be discounted and centralized. This was accomplished by unloading the company assets such as the land mark in London. This resulted into consolidated management costs which enabled them to negotiate the potential liabilities that would counter the parties. Secondly, there was a formulation of the market settlement that enabled Lloyd to settle outstanding litigation with its members. This was achieved by establishing a settlement fund after a thorough negotiation between the market participants and the members. Most members unanimously agreed the proposal and the settlement issues were implemented. Finally, there was the adoption of reforms to Lloyd’s mode of governance, regulation and operation. For instance, the emerging companies were limited from outward re-insurance and amendments of the company’s articles of association till they were approved by the UK department of trade and ministry. Indubitably, the market accrued losses is approximated to sum up to £1.4 billion. This has been attributed as one of the biggest losses since 1990. On the other hand, the few catastrophes experienced in 2000, saw the market project losses of £694 million. However, these figures have changed in recent years. Despite the fact that the company operated in a difficult market environment in 2010, Lloyds produced a profit before tax of £2.2 billion as noted by Beeman (2005, p.43.). As James (2007) stipulates, it also had record volume central assets at approximately £2.4 billion and an investment return that amounts to £1.3 billion. In order to keep track on the records, the members’ agents are required to report annually to Lloyd’s, to give details of all assets held on behalf of their members as of December 31st of the preceding year. The report entails personal reserve funds, the Lloyd’s deposit and any assets provided after December 31st but before solvency clearance date. The agents have a role of monitoring the syndicates’ performance throughout the year by using their records as well as, the premiums and claim data. Loss development schedules maintained by individual underwriting year-of-account enable them to track results over time for each year of account. Lloyd’s regulatory board publishes rules for the valuation of assets and liabilities annually (James, 2007). Conclusion In conclusion, despite the numerous challenges faced by Lloyd, its mitigation strategies have seen positive impacts towards its growth. They have managed to keep proper business mix, investment strategy and changing the capital structure. All these have seen the rehabilitation of Lloyd’s market performance. It is reported to be in good shape financially, with record central assets of £2.47 as of last year. Ward, Lloyd’s CEO confirms of better mitigation strategies that would combat the ever changing world market so as to overcome the unpredicted challenges. References Beeman, M., 2005. Lloyd’s London an outline. London: Kessinger publishing, pp.23-97. James, J., 2007. Lloyd's and the London insurance. London: City Business Series. Read More