In the late 1680s, merchants and others who wrote insurance as a sideline
were gathering at Edward Lloyd's Coffee House. They actively worked to attract
seafarers and Lloyd's soon became a commercial center. In addition to auctioning
various items, Lloyd's was particularly hospitable to shipping interests.
When Edward Lloyd died in 1712, son-in-law William Newton succeeded him.
The Coffeehouse subsequently passed through many hands. Although Marine underwriters
gathered there in the early 1700s, it is not clear when it became a true insurance
marketplace. The best evidence suggests that Lloyd's developed gradually as
it provided increasingly comprehensive world shipping news.
The Growth of Maritime Business
British maritime trade grew significantly from 1690 to 1720. This, in turn,
greatly expanded the need for insurance. In 1717, promoters sought government
charters for two marine insurance companies—the Royal Exchange Assurance Corporation
and the London Assurance. Their strategic goal was to eliminate competing corporations,
groups, or partnerships from marine insurance.
For several years, the companies' ambitions were thwarted until they made
a strategic adjustment. In time-honored fashion, they offered King George I
a bribe. The King's influence prevailed and charters were granted under the
existing 1720 Bubble Act. The legislation had been passed in response to the
"South Sea Bubble." This man-made disaster involved the catastrophic failure
of a stock company organized to monopolize Britain's South Sea trade. When its
shares became disastrously over-inflated, the company's collapse caused financial
panic throughout the country.
Royal Exchange and London Assurance also hoped to take over most marine insurance
handled by individual underwriters. In a classic case of unintended consequences,
under the 1720 legislation, individuals actually received competitive protection
from other insurance organizations. Ironically, the chartered companies wrote
mostly fire insurance and for years left the marine insurance market to individuals.
Individuals of Dubious Character
By the 1750s, Lloyd's had gained considerable visibility and prominence.
Unfortunately, it gradually became infiltrated by persons of dubious character,
particularly inveterate gamblers. Gambling was so rampant that when newspapers
published names of prominent people who were seriously ill, bets were placed
at Lloyd's on the anticipated dates of their death. Reacting against such practices,
79 merchant underwriters broke away in 1769, and 2 years later formed a "New
Lloyd's Coffee House" that became know as the "real Lloyd's."
The first Lloyd's Committee was established in 1771 to create and monitor
a sometimes problematic self-regulating code of behavior. Now a society, Lloyd's
consisted of a group of independent men allied by mutual interests. It relocated
to the Royal Exchange Building in 1774 where it provided Lloyd's first true
underwriting room and where it remained for 50 years. John Julius Augerstein,
later called "the Father of Lloyd's," became chairman in 1795 and subsequently
initiated many additional organizational changes and efficiencies.
The Question of "Reinsurance"
London's fledgling insurance business faced catastrophic losses like those
of today's insurers—but with a crucial difference. There was no "reinsurance"
to spread risks among insurers. Various reinsurance methods have come and gone
over the centuries; however, the principle remains the same: to spread the risk
among insurers.
Although not widely known today, reinsurance actually was illegal in Britain
between 1745 and 1864. At that time, the ruling powers believed that reinsurance
facilitated gambling by enticing those so inclined to wager. The ban's fallacy
became obvious as early as 1780, when French and Spanish fleets captured 55
of 63 vessels traveling in a consolidated convoy of troopships and merchant
vessels. The ships belonged to the East India and West India companies. Their
capture generated an unprecedented £1.5 million loss and caused many Lloyd's
underwriters to default on their obligations.
Early Lloyd's Professionalism
Lloyd's became more cohesive and professional over time. In 1800, its underwriting
room was restricted to merchants, underwriters, insurance brokers, and bankers—all
of whom needed to be recommended by two or more members. A £15 subscription
fee helped control chaotic overcrowding and eliminate "undesirables."
Lloyd's prospered with the British economy. During the Napoleonic Wars, insurance
rates generated large profits. Prices of goods also moved upward, benefiting
underwriters. In 1811 Lloyd's was London's only marine insurance market. However,
with the 1812 battle of Waterloo, Lloyd's first golden age began a steep decline.
Hard Times at Lloyd's
By 1818, commodity prices and wartime premiums fell as competition heated
up from new, powerful insurers. Another body blow came when Lloyd's ostensible
monopoly on marine insurance was eliminated by decree in 1824, opening up such
underwriting to others. Interestingly, nearly all newly formed insurers wrote
fire and life insurance, not marine. Although a few strong companies wrote some
marine insurance and were competitive with Lloyd's, they were not vibrant enough
to constitute a serious threat.
For a time, Lloyd's went through a period of considerable difficulty. It
had 2,150 subscribers in 1814, but by 1843, membership had fallen to fewer than
1,000 and only 190 of these were professional underwriters. As the 1850s approached,
prospects were improving as the last vestiges of the Coffee House were disappearing.
Lloyd's Reorganizes
During the middle third of the century, Lloyd's established four subscriber
categories: underwriting members, nonunderwriting brokers, Merchants' Room subscribers,
and Captains' Room subscribers. Only underwriting members could sign Lloyd's
policies. Nonunderwriting brokers were annual subscribers. Merchants' Room subscribers
included merchants, bankers, and traders who were encouraged to make market
investments. Captains' Room subscribers were seafaring men who sometimes sold
ships and goods at auction.
However, changes would soon develop. The Captains' Room became a separate
club opened to others for an annual fee but was not successful. Likewise, the
Merchants' Room lasted only 10 years because of pressure for space. This left
just two member categories—underwriters and nonunderwriters; the latter group
ultimately declined to only a few.
By the 1860s, Lloyd's still remained a small institution providing facilities
for marine insurance transactions. It would take another decade before the foundation
was laid for building a much stronger organization. The Lloyd's Act of 1871
created its first detailed constitution sanctioned by Parliament and established
the Lloyd's Society as a legal entity. This, in essence, certified the economic
importance of insurance. The act defined the Committee of Lloyd's authority
and duties, delineated rules for underwriting members, addressed punishment
of members, and gave the Committee the right to grant Underwriting Room admission
to persons (called "associates") not engaged in the insurance business.
As a new century approached, Lloyd's improvements in organization and governance
paved the way for the decisive leadership of Henry Hozier, Frederick William
Marten, and Cuthbert Heath. These individuals of exceptional vision and perseverance
would lay the groundwork for Lloyd's 20th century emergence as a creative force
in almost every line of insurance.
Robert Moore
has worked with Jack Bogardus for a quarter of a century. Mr. Moore worked for
Alexander & Alexander from 1977 to 1995 and served as a senior vice president
of Alexander & Alexander Services Inc., as well as chairman and president of
A&A Government and Industry Affairs Inc. In 1985 he was elected president of
the National Association of Insurance Brokers, and from 1989 to 1993 he served
as chairman of that organization's Past Presidents' Advisory Council. He has
written and spoken extensively on corporate issues. As The Conference Board's
emerging issues coordinator, he identified and responded to the business community's
public policy concerns. He is coauthor of School for Soldiers: West Point and
the Profession of Arms, which was selected as a New York Times "Noteworthy Book."
Mr. Moore earned a bachelor's degree from Davidson College, a master's degree
from the University of North Carolina, and a doctorate from the University of
Wisconsin. Commissioned a U.S. Army officer, he taught at the Military Academy
at West Point and was an associate professor on the graduate faculty at the
University of Maryland. Jack Bogardus and Robert Moore are coauthors of the
award-winning Spreading the Risks: Insuring
the American Experience (2003) and the revised
edition (2005). He is president and senior editor of PMR Communications
Group in Vienna, VA and can be reached at 703-759-0233 and through the website
www.spreadingtherisks.com.