|Lloyd's of London has often claimed that its unique structure and complexity make self-regulation the only efficient and sensible means of overseeing its insurance and reinsurance market. The truth is that Lloyd's basic business plan, or structure, while it is unique, is not really all that complex. It appears complicated, but that is often because the arcane terms Lloyd's and Lloyd's syndicates use to refer to various aspects of their operations, and/or the people involved, are ambiguous at best, and at worst completely misleading. This "glossary" will help clarify some of Lloyd's terminology, concepts, functioning, and structure.|
Each of the following terms is a link to its definition or explanation in the glossary. Click on the term to understand the actual meaning of these arcane terms used by Lloyd's.
"Despite their title, the panel auditors were not in fact charged with carrying out an audit [of a syndicate's underwriting] at all. Their duty was described by Lord Cromer: 'The main function of the auditor is to provide a certificate to the Committee of Lloyd's that the Name [emphasis added] has sufficient funds at Lloyd's to meet his obligations.'" ('A View of the Room', by Ian Hay Davison, CEO of Lloyd's 1982-1985, p. 53)
Lloyd's submits the total of these certifications of the Names' funds yearly to the British Department of Trade and Industry. On that basis, the Dept. of Trade and Industry certifies Lloyd's solvency to do business for the coming year.
"Agents, underwriters, Names. . . were all under the misapprehension that the work done by the panel auditors [on syndicate accounts] was an audit, in the commonly accepted sense of that word: an independent opinion on the veracity of a set of accounts. But it was not [emphasis added] . . . The accounts of an underwriting syndicate, and the determination of its profits, depend upon how much reserve is necessary to close the accounts. The figure for this closing reserve is provided by the underwriter in the form of the ["premium" for] reinsurance to close. . . [The "auditors"] did not consider it part of their duty to audit the reinsurance to close, yet the result of the syndicate for the year of account was wholly dependent on this one figure." ('A View of the Room', by Ian Hay Davison, CEO of Lloyd's 1982-1985, pp. 53-54)
The "result of the syndicate for the year" was its profit or loss. In theory, the "closing reserve", aka the "premium" paid for the "reinsurance to close" provides the reinsuring successor syndicate reserves with which to meet its liability to pay claims against the closing syndicate's underwriting (see "Reinsurance to Close", below). The managing agent determining the appropriate closing reserve was operating under ever-present pressure to show his Names a profit each year. Failure to audit that figure meant there was no safeguard at all against the agent's natural temptation to fudge the next year's reserves in favor of this year's profits.
"They were not charged with performing an audit to normal auditing standards, and although they clearly had knowledge of some of the matters that were going on. . . they did not see it as their duty to draw the Names' attention to what was happening." ('A View of the Room', by Ian Hay Davison, CEO of Lloyd's 1982-1985,, p. 54)
The syndicate accounts consisted of Names' funds at Lloyd's, and premiums paid by policyholders to those Names who were their underwriters. The panel auditors were employed by "Lloyd's". Absent the duty to perform up to normal auditing standards, however, the auditors felt little or no obligation (duty of care) to report "up to standard" either. The Names-- and policyholders too-- were left in the dark.
Before the Lloyd's Act 1982:
A specific provision of the charter that governed how the Society of Lloyd's operated. A byelaw could only be amended by a majority vote of the Names in attendance at Lloyd's annual meeting.
After the Lloyd's Act 1982:
A change in the contractual rights of the Names' underwriting agreement with Lloyd's, unilaterally enacted by the Council of Lloyd's.
The entity known as Lloyd's does not underwrite insurance policies. Voluntary associations of members of Lloyd's, called syndicates, the affairs of which associations are managed by agencies approved by Lloyd's, do the underwriting. Thus, the public relations hype about the "chain of security" behind a "Lloyd's" policy notwithstanding, the organization called Lloyd's itself has no liability whatsoever to pay claims against any insurance policy written by any syndicate. All Lloyd's contributes to the much-vaunted "chain of security" is their contractual authority to demand that other people (Names) pay obligations Lloyd's ruling Council deems appropriate. (In other words: The only thing Lloyd's contributes is supposed control over "other people's money".)
This document appoints Citibank New York, NY, as the trustee of Lloyd's American Trust Fund, and then relieves Citibank of so many of the duties of a trustee that Citibank's only remaining responsibility is to run the Lloyd's American Trust Fund as a checking account for Lloyd's dollar-denominated business world-wide.
These are the deposits, consisting of premiums paid for dollar-denominated insurance policies, at Citibank out of which Lloyd's arbitrarily writes checks to pay claims and other obligations owed to policyholders and Names. Despite specious representations made by Lloyd's to the media and to courts, the money is not an "asset" of Lloyd's. The trust money belongs either to Lloyd's policyholders, to pay claims, or Names, as profits if premiums collected exceed claims paid.
A person who has agreed to maintain the appearance of, but has by trust deed agreed not to actually perform as, the fiduciary of Lloyd's policyholders and Names.
The liability for a current-year syndicate at Lloyd's to pay claims against policies written by syndicates that operated and closed in prior years. A current Lloyd's "syndicate-year" (see below) assumed these liabilities by "reinsuring to close" its predecessor, which had reinsured its predecessor, which had reinsured its predecessor, which had done the same, all the way back to the first year the syndicate began operations. This tail of old obligations assumed by the current "year" of a longstanding syndicate could, and in some cases did, stretch back 50 years and more.
See "Underwriting Member", below.
An agent, chosen by Lloyd's, to manage the business and financial affairs at Lloyd's of those individuals who become members of Lloyd's. In actuality, a members' agent was an agent of Lloyd's, since these agents were ultimately subject to Lloyd's determination of what was in the best interests of said members. The layer of bureaucracy at Lloyd's known as members' agents was originated in 1971, coincident with the time when non-UK subjects and women were permitted to become Names at Lloyd's.
"Name" is the vernacular or slang term for a member of the Society of Lloyd's. See "Underwriting Member", below.
A term coined in the early 20th century to denote what was already standard business practice at Lloyd's: i.e. using newly invested money to pay obligations generated by those who had invested at some point in the past.
" The accounts of an underwriting syndicate, and the determination of its profits, depend upon how much reserve is necessary to close the accounts. The figure for this closing reserve is provided by the underwriter in the form of the reinsurance to close." [Emphasis added] ('A View of the Room', Ian Hay Davison, p. 53)
Lloyd's "reinsurance to close" is thus not really reinsurance at all. It is in fact the transfer of the entire portfolio, or "book of business", of a closing Lloyd's syndicate to one of its two open successor syndicates. The "premium" received by the successor syndicate is in fact the reserves to pay future claims against the liabilities it has assumed for all policies written by its predecessor. Those "policies written" include the closing syndicate's "reinsurance to close" its own predecessor. That predecessor in turn had "reinsured to close" the preceding syndicate, and so on, back to the first year the syndicate name and number was originated by a managing agency. Often, 50 years or more of liabilities were accumulated via this process.
A "runoff policy" is the precise equivalent of "reinsurance to close", except that it is an inter-syndicate instead of intra-syndicate transaction. For a "premium" paid, a syndicate run by one managing agency assumes some or all liability on the past policies underwritten by a closing syndicate run by another agency. Again: this includes the closing syndicate's liabilities that were accumulated by its predecessor syndicate year(s) of account. These "old" liabilities were still "alive" and susceptible to claims due to the reinsurance to close process.
The overseeing of Lloyd's insurance market by Lloyd's Committee and then Council.
Oversight (Webster): a careless mistake or omission; the act of overlooking something.
In theory, each Lloyd's Name is "several" in the legal sense of that term-- i.e., severed from any and every one else. The Name is supposedly not liable for anyone else's share of any underwriting risk or liability. "Reinsurance to close", however, makes a joke of this concept. The Name's share in a syndicate's "reinsurance to close" its predecessor in fact makes that Name liable to pay his pro rata share of any losses currently generated by any and all past underwriting by his "underwriting ancestors" in previous syndicate-years of account. All of these liabilities are included in the portfolio transferred to a syndicate via reinsurance to close!
Lloyd's creation of a central fund to cover losses that current Names may be incapable of paying also exposes a Name to liabilities incurred by his contemporaries, but to a far lesser extent-- unless you remember to include his contemporaries' exposure under their "reinsurances to close". By virtue of the latter example, a Name was actually jointly and severally liable for excessive losses occurring anywhere in the constellation of Lloyd's syndicates both past and present.
The supposed "several liability" of the Name is used by Lloyd's as justification for calling Names "sole traders", underwriting only on their own behalf. This was essential to Lloyd's recruitment efforts, and as problems developed has been central to Lloyd's legal defenses.
A Lloyd's syndicate is not a legal entity. A syndicate has a manager and is designated by a name and number assigned to an amount of premium that may be written in a given year by an "active underwriter" of a particular managing agency for a particular temporary association or grouping of Names. The syndicate manager publishes a list of the subscribing "Names" and what pro rata share of policies the various Names have agreed to "underwrite". Each Lloyd's syndicate is technically "in business" for one year, but then remains "open" two more years for claims to develop, and finally closes at the end of the third year, by "purchasing reinsurance to close" from its succeeding year of account or from another syndicate.
The calendar year during which a Lloyd's managing agent actively writes new business for a particular association of Names, usually designated by the agency name, number, and the calendar year, such as: "Outhwaite 317, (of) 1981."
An "underwriting member" is a person, commonly called a "Name", who has: