(Middlesex: Penguin Books; 1986)
In 1601, when Oliver Cromwell was barely out of swaddling cloths and the Great Fire of London farther still in the future, the Queen in Parliament issued an act “for the hearing and determining of causes arising from policies of assurance.” Based on a theory of maritime insurance reaching back into the ancient actuarial impulses of mariners, recorded in the Code of Hammurabi, further developed on Rhodes, and pleasingly rendered in the language of the Elizabethan Parliamentary Draughtsman:
“And whereas it has been tyme out of mynde an usage amongste merchantes, both of this realm and of forraine nacyons, when they make any great adventure (speciallie into remote parts) to give some consideracion of money to other persons (which commonlie are in noe small number) to have from them assurance made of their goodes, merchandizes, ships and other things adventured...which course of dealinge is commonlie termed a policie of assurance; by means of which policie of assurance it comethe to passe that upon the losse or perishinge of any shippe there followeth not the undoinge of any man, but the losse lighteth rather easilie upon many, than heavilie upon fewe...”
A permissive phrasing perhaps necessary to obviate the normal restriction on usury by Christians; it was almost certainly a response to attempts to monopolise the insurance market as early as 1575. This pragmatic concern by legislators for encouraging the managing of risk in transporting goods and commodities by sea dates at least to the Byzantine Emperor Justinian, who exempted ‘nautical usury’ from the general limitation of interest at six percent, and was a familiar element of the economics of the Hanseatic League from about the fourteenth century.
The genealogy of marine insurance in northern Europe is inextricable from certain peculiarities of the socio-political foment of the epoch: specifically the rise of Protestantism and mercantilism. Protestantism, in its dismissal of the transnational legation offered by Catholicism, required (and then engendered) a new political reality, patriotism and chauvinism. A liberal dose of this political penchant, mixed with the mercantilist theory of competition and scarcity yielded a proliferation of state-based joint-venture corporations which busied themselves obtaining and trading the most important possible shares of whatever commodity was in fashion, be it even tulips. In Revolutionary Protestant England, where panem et circenses were eschewed in favour of iconoclasm and limewash, coffee became a locus of available delights, the beverage of choice for the merchant classes, who inevitably congregated to enjoy the “soote colour” liquid. The coffee-house culture that resulted was particular to London, and so popular that Lord Macaulay remarked “that the coffee house was the Londoner’s home, and that those who wished to find a gentleman commonly asked, not whether he lived in Fleet Street or Chancery Lane, but whether he frequented the Grecian or the Rainbow.” In a city of some 750 000, in about fifty years, the number of coffee houses grew from the first one in 1652 to well over 500. Why is this important to the development of Lloyd’s? It was within these coffee-houses that various subcultures flourished: the great poet Dryden held court in one such establishment, though there were many other literary houses, as well as political houses, and ones frequented by merchants of various persuasions.
The first written mention of Lloyd’s came from the London Gazette in 1689: a man who had been robbed of some valuables listed as a place where return of the stolen property could be made in exchange for a reward, “Mr Edward Lloyd’s Coffee-House in Tower-street.” Lloyd’s Coffee House, opened around 1687 achieved renown rapidly, moving premises in 1691 to Lombard Street, an area known then and now for banking. It was on these premises that the commercial possibilities of Lloyd’s came into its own, with auctions for ships, wine, brandy, books, and more. But despite Lloyd’s attempts to popularise his establishment among mariners, producing a shipping news-sheet, marine insurance does not seem to have been traded at Lloyd’s until the mid-eighteenth century, by which time Lloyd himself was long dead.
This history is fascinating on its own, and worth tracing. Mr Hodgson evocatively covers all the salient historical points, providing a wealth of detail and history that informs the formation of the Lloyd’s market. It is necessary to the story he will tell; though the historical survey is brief in relation to the length of the book, it is detailed, and related in such a way as to consistently point toward the future of Lloyd’s whilst also avoiding the treacherous historical rhetoric of inevitability. He explains in detail the function of the Lloyd’s insurance market as it developed in market share and in sophistication. One of the more pleasing historical chapters deals with the bell recovered from The Lutine, which sank off the Dutch coast in 1799 on its way to deliver ‘the cavalry of St George,’ that is gold pieces sent to subsidise the efforts of Britain’s allies against Napoleon; from the time of the recovery of the 80-pound bell in 1857, it was wrung out at Lloyd’s whenever a ship was reported sunk, or twice in the event of good news. The effect of the Lloyd’s Acts of Parliament are briefly treated, as a major thread of Hodgson’s research is the perennial constitutional threat to Lloyd’s posed by the possibility of further legislation by Parliament in the early 80’s, following the scandals on which this books is based; in the event, such an act, The Lloyd’s Act 1982, was passed, and did in fact cause massive constitutional reorganisation of the businesses involved in the market.
How it came to be that the 1982 Act was necessary is the greater part of the story Mr Hodgson sets out to tell. It is a labyrinthine sort of tale, involving insurance, reinsurance, and the strange rules that apply in Lloyd’s insurance policies historically (i.e. ‘reinsurance to close,’ the standard three-year delay in closing insurance contracts on any given year) and the newer problems, inter alia ‘long-tail’ insurance policies, for e.g. asbestos and resultant claims for asbestosis and mesothelioma which may not be claimed for ten or twenty years. In addition, Lloyd’s in the 60’s, 70’s and 80’s found itself mired in scandal after scandal perpetrated by individuals demonstrating behaviour which, if a DSM-IV manual were to hand, might accurately be described as sociopathy. Because my understanding of the intricacies of these facets of insurance is limited, I shall have to confine my comments to my impressions from the stories and the scandals.
Before continuing, it is worth briefly noting the way in which Lloyd’s works as a market. It is characterised by unlimited liability for the people who accept the risks of issuing policies. While it is underwriters in the The Room who sign the brokers’ slips, specifying the percentage risk that they are willing to undertake, they do so representing anonymous persons called Names who are organised into Syndicates, discrete numbered aggregations of Names. When a claim is made against a policy, usually there is sufficient funds in the kitty set aside from premiums paid on policies to pay out the losses, but when that is not the case, the unlimited liability nature of the business means that the Names can be taken for everything they’ve got should that prove necessary. The spread of risk at Lloyd’s however tends to be of such sophistication, backed up by comprehensive reinsurance policies, that it is rare that Names suffer much personal loss, and certainly not on a regular basis. This allows Lloyd’s to pay out losses faithfully, which in turn draws the business of brokers. As a San Franciscan, one of my favourite example of this is when the great non-marine insurance underwriter Cuthbert Heath wrote in a telegram, following the 1906 earthquake in my town, “Pay all our policy-holders in full irrespective of the terms of their policies.”
Lloyd's subsciption room as drawn by Thomas Rowlandson and Augustus Pugin for Thomas Rowlandson's ''Microcosm of London'' (1808-11)
The changing tides of history broke over the bow of the good ship Lloyd’s before the scandals that would change the nature of the market unfolded. VLCC’s, ‘very large crude carriers, and LNG (‘liquid natural gas’) transports, provided the first great harrowing of the sanguinity of Lloyd’s underwriters. The crude oil supertankers started blowing up with a regularity alarming even to the deep pockets of Lloyd’s Syndicates from 1969 or so. The volatility of LNG caused the implementation of double-hulls with balsa insulation in all vessels transporting the stuff, but as shortcuts were taken to economise on the cost of the insulation, using polyurethane sprayed in situ instead. In 1979, these chickens came home to roost, with many explosions and a body count usually reserved for armed conflict. These are the types of losses which Lloyd’s is designed to take in its stride, which form the basis of its business as claims lead to more policies to write: one old underwriter put it this way, “Keep those claims under control! But keep them coming!”
The scandals that rocked Lloyd’s in the 70’s turn in large part on the self-governance of that institution, and the risk to it of losing that privilege. The reason it risked this possible outcome is that it’s governing body ignored the Fundamental Rules of Lloyd’s, including for example, that no underwriting should in principle take place outside the Room, or by anyone not permitted to underwrite there. In practice, there were some ways for policies to be written outside of the Room, which had the effect of growing Lloyd’s share of the American insurance market, a particularly lucrative one. When this was done fraudulently however, it led to major losses, which the Names refused to pay on the principle that the governing body, in their attempts to protect the reputation of Lloyd’s, had in effect ratified the fraud; the losses were in large part paid out of Lloyd’s own funds, which should never have been allowed to happen. Mr. Hodgson’s book ends with the passage of the Lloyd’s Act 1982 which caused immediate divestment of the erstwhile combined broker/underwriter firms, putatively cleaning up the conflicts of interest. Insufficient time transpired between the 1982 Act and the publishing of the book for Hodgson to weigh in conclusively on its effect, and regrettably I am insufficiently expert at this stage to be able to comment; I shall be looking into it.
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