Expert Commentary

"Lloyd's of London: The Early Days"

By the midpoint of the 17th century, insurance was increasingly a focus of the English middle-class business community. Their mobile cash and credit resources challenged the status quo. The emergence of coffeehouses became a dynamic process. They not only posed a challenge to the landed nobility's financial power, but they created opportunities for revolutionary business practices.


Risk and Insurance History
September 2007

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.


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