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Lloyd's: welfare for the wealthy

The Lloyd's insurance market in the City of London has long provided easy pickings for Britain's rich. Phil Murphy explains how the system works - and why it is in trouble today

How do the rich stay rich? How do the wealthy in British society remain part of that exclusive club? The 300-year old Lloyd's insurance market has played a big part.

Among the most famous and profitable of the City of London's activities, Lloyd's is renowned for its worldwide business in underwriting insurance risks. Anything from a jumbo jet to a footballer's leg can be insured at Lloyd's. What is less well known is the way this underwriting business has for a long time effectively underwritten the fortunes of Britain's rich and famous.

For capitalists, one of the nice things about the insurance business is that you don't need much capital in the first place. Apart from a plush office, a few telephones and some embossed headed stationery, you only need to be able to convince the people or companies you are providing with an insurance policy that you could pay up in the event of things going wrong. If you pull off this confidence trick then you simply rake in the premiums, and, if you set the premiums high enough, you should make enough to pay out the odd insurance claim. And it's not really that risky a business; if you take on something you think is too big a risk, you can always spread the danger by reinsuring with another company.

Insiders and outsiders

Lloyd's is different from a normal insurance company in that its capital doesn't come from shareholders but from its own members - known as underwriters - and from wealthy outsiders - known as 'names'. Without going into its quaint 'coffee house' customs, the way Lloyd's works is that a client who wants to insure, say, an oil platform, goes to one of Lloyd's authorised broking firms. The broker then finds a Lloyd's underwriter prepared to accept the business for a set premium. The underwriters don't accept risks as individuals but club together in one of about 300 syndicates, to spread the costs. These syndicates are bolstered by bringing in the wealthy outsiders - the names - to join them.

The list of Lloyd's names reads like a who's who of the higher echelons of British society, accompanied by the sort of celebrities who appear at Tory Party rallies. The names range from politicians to actresses, from sportsmen to the owners of industry, from TV personalities to royalty. It is one way the wealthy look after their own.

Join the club

From time to time someone from a more humble background would be let in to add a touch of sparkle; the message is that anyone can make it (so long as you have got the money and connections). Edward Heath, Tony Jacklin, Prince Michael of Kent, Lord Denham, Dame Shirley Porter, Susan Hampshire, the Duke of Norfolk, Freddie Laker, Lester Piggott, Rocco Forte, the Duke of Marlborough, Henry Cooper and the late Robert Maxwell are among those who made it into this cosy and lucrative club.

The way the rich make their extra money at Lloyd's is about as simple as placing a large bet. The big difference is that you are almost certain to win. And you don't even have to place all of your stake money. Of course to become a name and join this exclusive money-making club, you need to be rich and famous in the first place. You have to be introduced to the Lloyd's Committee by an existing member. You also have to demonstrate a 'show of wealth' of at least £250 000 in realisable assets. And the more wealth you can show, the bigger the policies you can be involved in underwriting and the fatter the premiums you can share.

One-way bet

Most of the time it's like being the sleeping partner in some scam. You don't need to, and aren't expected to, take any interest in the business - that is run by the professionals, the insiders, to whom you pay 'expenses'. You are simply given your cut when the deal is completed.

Being a name at Lloyd's is even more attractive than benefiting from a one-way bet, because you only have to put on about a quarter of your stake. Most of the wealth you 'show' you can hang on to. So while you are using it to make your underwriting profit, it is simultaneously available for you to invest and make money with elsewhere. And if you use some of your existing stocks and shares as part of your deposit with Lloyd's, the income from them still accrues to you. So even with the deposit, it is more like using a safe-deposit box that pays interest than making a risky investment.

In most years then, everybody has appeared to win. The client is happy by having his risk insured. Lloyd's full-timers, the underwriters, make money by investing the capital at their disposal; they also invest their premium income and make profits when the premiums exceed the insurance claims; they also have tax privileges, in that any losses can be carried forward to offset profits in future years. Other insiders, like the various underwriting and members' agents, also earn juicy fees for their services. And for the names, the cheques from Lloyd's just keep dropping through the letter box. (The only losers are you and me who pay the higher prices charged for goods to cover the suppliers' insurance premiums.)

New names

During the eighties the Lloyd's gravy train seemed to be making more money than ever for those privileged enough to be on board. Like the rest of the City, the famous insurance market suffered a spate of scandals in the eighties. But at the time, the tarnishing of Lloyd's reputation seemed to do little real harm. The government's backing for 'self-regulation' at Lloyd's has ensured that the biggest frauds have been covered up. And the scandals didn't stop more than 15 000 eager new names signing up in the eighties.

Today, however, Lloyd's seems to have hit a dramatic slump. Last year Lloyd's reported its first loss for many years - half a billion pounds on its 1988 dealings (its accounts are always done this way, three years in arrears, supposedly to allow for dealing with late claims). More big losses are expected for 1989, 1990 and possibly 1991, totalling around £5 billion.

The names are upset. Nobody thought they could lose money by joining Lloyd's. Yet, in the event of losses by their syndicates, the names officially have unlimited liability. They are expected to sell everything to pay their share, above and beyond what they originally 'showed' when they joined the club in happier times.

Not surprisingly the number of names has started to plummet: more than 10 000 have quit since 1988, down to just over 20 000. But quitting doesn't cancel past losses. Going to court might do, and at least it postpones the day of reckoning. So today more than 1000 names are involved in legal action alleging negligence by their agents or by Lloyd's itself.

The official line from Lloyd's is that you are bound to get runs of bad luck from time to time. They argue that global warming has caused adverse weather conditions and a series of storms and hurricanes since 1987. This combined with a number of major industrial disasters - explosions on the Piper Alpha oil platform in the North Sea in 1988, followed by another at a Philips Petroleum plant in Pasadena in 1989--have resulted in an abnormal series of hefty insurance claims.

The names, say Lloyd's, should stop crying and just accept that you sometimes have to take the rough with the smooth. After all, insurance is all about risk. Things will even themselves out in the future through better fortune and, failing that, higher premiums. (Look at what's happened to your car or house insurance premiums this year to get an idea of which way things are going.)

In fact, the problems now facing Lloyd's go a lot further than a bit of bad luck. They reflect the severity of the wider problems facing British capitalists in the current slump.

In modern times, the provision of financial services has been the one area in which Britain can still seriously claim to be an economic world leader. Insurance, banking, share dealing, accountancy and investment services are just about all that remain for the British establishment to be proud of in an economy which once led the world in everything from steel production to machine tools, from cotton to shipbuilding.

Altogether financial services account for about one fifth of national output. Without their proceeds Britain would fall even further down the international league table, well behind France and Italy, and be exposed as an economic has-been.

Within the financial sector centred on the City, insurance has long been the biggest earner. Since the Second World War insurance has usually accounted for about half of total City earnings from overseas. And within the insurance sector, Lloyd's has often made more from underwriting overseas business than all the other insurance companies in Britain put together. In 1987, Lloyd's made nearly £2 billion for the British balance of payments.

Tougher and tougher

But even Lloyd's, the last jewel in the crown of British capitalism, is finding the global going tougher and tougher.

Lloyd's did well out of the world economic expansion of the eighties. That 'boom' was really a credit-fuelled binge of speculation which produced mountains of paper financial assets, but far less investment in real up-to-date plant and technology. The financial sector thrived on the back of this phoney boom. Lloyd's not only benefited through its insurance business, it also made money from its own speculative investments in the markets. So in the bad year of 1988, Lloyd's was able to make almost £1 billion from investment income to offset its underwriting losses. That escape option has now been closed by the slump.

Stiff competition

On top of this, the City of London - and within it, Lloyd's - is today facing stiffer competition from other financial centres: New York, Tokyo and the European centres in Amsterdam, Zurich, Paris and especially Frankfurt. Over the past 15 years, London's share of the world insurance market has fallen from a half to about a fifth. London is still the world leader, but its position is under threat as never before.

The double pressures of slump and foreign competition have created the circumstances in which Lloyd's names are no longer guaranteed to get richer quick.

Encouraged by the British government, Lloyd's sought to expand capacity in the eighties to withstand the burgeoning competition. The old boy network for recruiting names became more of a new boy network, as many more names were brought in to provide extra capital and credibility in world markets. But all the time premiums were being squeezed to remain competitive, so if there was to be a run of claims, Lloyd's was going to be hit hard.

Since that run arrived, the new names have been in trouble. Many of the eighties nouveaux riches recruited by Lloyd's were themselves beneficiaries of the phoney boom, rich on paper but lacking substance. So, when the losses hit Lloyd's, they had much less to back them up than the more established class of wealthy.

Profit and loss

The higher insurance premiums we have to pay will no doubt boost Lloyd's coffers again. But the generalised slowdown in economic activity means harder times for the world's insurers - and even fiercer competition for the old firm, Lloyd's. So are the days when Lloyd's operated as a benevolent fund for the rich finally over?

Not quite. For a start, the Lloyd's insiders are still doing very nicely, thank you. In 1988, despite the accounting loss, they still made over a third of a billion pounds in expenses from the names. Profit or loss, they still earn their fees and commissions.

Even when Lloyd's declares a loss, it isn't distributed evenly across the syndicates. The vast majority of syndicates made money in 1988; the losses were concentrated in a small number of 'dustbin' syndicates which specialised in reinsuring other syndicates' losses from the big disasters and catastrophes. And, surprise, surprise, the insiders are mainly involved in the profit-making syndicates, while outside names have been encouraged by the professionals to concentrate in what became the loss-making syndicates.

The insiders' approach of looking after Number One has its chauvinist overtones too; foreigners and non-English speaking investors have borne a disproportionate level of losses since 1988.

The crisis among the new names at Lloyd's demonstrates that today there is less scope than ever for outsiders to join the money-making club at the heart of British capitalism - an ironic insight into the age of the 'classless society'.

Bail out

Now a government-backed rescue of Lloyd's is a possibility. Michael Heseltine, the new supremo at the Department of Trade and Industry, may give the nod to Lloyd's to change its centuries-old custom and allow corporate as well as individual membership. This would help to build up funds in the present crisis and extend Lloyd's survival chances into the future. The government may even allow a retrospective bail-out of the outsider names who have lost so much since 1988. The Lloyd's affair is another example of the dependency culture, in which the state acts as a guarantor for the rich when the going gets tough.
Reproduced from Living Marxism issue 44, June 1992

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