Insurance Lloyd's Faces The Void Carrie Coolidge, 07.12.02, 7:25 PM ET NEW YORK - Trying to avoid the fate of the shilling, House of Lords hereditary seats and polite soccer matches, moneylosing Lloyd's of London is struggling to change with the times. But its proposed overhaul has prompted internal feuding that threatens the 314-year-old insurance market's very existence anyway. At issue is the special status of Lloyd's traditional investors, individuals called the Names. Newcomers to the place, corporate investors who now put up most of Lloyd's capital, want to end the Names' privileges that allow them to muck things up the way they did a decade ago. The corporate crowd has a strong argument, considering that they bailed Lloyd's out of its early-1990s financial crisis brought on when the then- Names-dominated system proved too weak to muster needed cash. Outwardly these reforms, up for a membership vote in September, are to streamline the market's fusty operations. Everyone knows that the real target is the Names. If the reform vote fails, huge insurers are talking about quitting. Every time Names can't come up with additional capital when big claims hit--policyholders do business with syndicates backed by the Names or by corporate investors, not with Lloyd's overall--everyone else gets tapped to make up the difference. Oh, The Things Lloyd's Insures Jamie Lee Curtis The actress' famed legs got covered, at least by a policy. Bruce Springsteen Ditto the Boss' arena-filling voice. Falling Satellites If one drops from the skies and hits a policyholder, Lloyd's pays up. Sports The Olympics and soccer's World Cup are covered. So are many individual athletes. The Big Top Ringling Bros. and Barnum & Bailey Circus is insured in case death-defying acts go wrong. Croc Attack Lloyd's reinsures against crocodile bites in Australia. "If Lloyd's doesn't fix itself," says an executive with a corporate insurer, "and if the negatives outweigh the positives, we will pull out. And that will be the end of Lloyd's." A corporate exodus would be fatal for Lloyd's: The Names simply lack the capital to go it alone in a world where monster claims can hit, as happened ten years ago. Who will win the vote? You'd think the corporate insurers, such as Ace, XL, American International Group and St. Paul Cos., which now control 80% of Lloyd's capital, would have this locked up. You'd be wrong. Every member gets one vote, so the 14,000 Names outnumber the insurers by 17-to-1. The little old lady in Surrey has the same number of votes as St. Paul: one. Lloyd's corporate-backing top management, which is pushing the reforms, hopes to convince the Names that a yes vote is vital for the market's survival. "The only human institution that rejects progress is the cemetery," says Saxon Riley, Lloyd's sage 62-year-old chairman. The nightmare scenario is that Lloyd's departure from the scene would harm global insurance capacity. The organization is the world's second-largest underwriter after Japan's Tokio Marine & Fire Insurance--83% of the companies on the Dow Jones Industrial Average have coverage with Lloyd's--and is one of the largest reinsurers, with 5% of that worldwide market. Lloyd's isn't a company but rather a marketplace where brokers representing insurance buyers go shopping for coverage among dozens of providers, whether corporate carriers such as Ace and AIG, or underwriting syndicates that the Names fund. They do face-to-face business on a vast trading-floor expanse. This one-stop system lets buyers take out policies more quickly than visiting disparate insurers all over the map. A second advantage: Lloyd's is an enormous repository of underwriting experts, specializing in insuring against everything from terrorism to pollution to satellite failures. Lloyd's has provided policies for rocker Bruce Springsteen's voice and actress Jamie Lee Curtis' legs. Another plus is its vast international reach. Lloyd's is licensed to do business in 60 nations, thus allowing customers to skirt the ponderous permit process to insure a plant in the likes of India. The exchange has played a prominent role in insurance ever since posh customers of Edward Lloyd's coffeehouse by the Thames began striking deals there in the late 1600s to underwrite shipping policies. As long as a ship didn't sink, these early Names made out handsomely from the premiums. Today Lloyd's is an odd amalgam of old and new. Headquarters now is a modern (1985) 12-story glass-skinned structure in London's financial district, the City. Inside a soaring atrium that looks borrowed from an upscale mall, brokers and underwriters in suits buzz about a profusion of computers. Nevertheless, significant transactions are still recorded in a large book with a quill pen. And when a major disaster occurs, such as the events of Sept. 11, Lloyd's ceremoniously rings a bell from the Lutine, a ship that sank in 1799 with a cargo of gold bullion. One procedure unchanged since Edward Lloyd's day is the Names' unlimited liability. These private investors pledge to make good on claims, no matter what, a lucrative if risky arrangement for the Names, who are betting they can cover claims. That system is what got Lloyd's into trouble a decade ago--and it's what the reforms seek to end. http://www.forbes.com/2002/07/12/0712lloyds.html