Lloyd’s of London // An Expert Guide to the World's Oldest and Largest Insurance Market
Lloyd's is a market of members, not an insurance company. As the oldest continuously active insurance marketplace in the world, Lloyd's has retained some unusual structures and practices that differ from other insurance providers today. Lloyd’s is the world’s specialist insurance and reinsurance market, but how does it work? We are joined by India Cornett and Kate Tongue of Argenta Private Capital to share a comprehensive overview of this unique asset class.
the history of Lloyd’s of london
Lloyd’s of London is a marketplace that dates back to 1680s. Originating at Edward Lloyd’s coffee house it specialised in shipping information and was popular with shipowners and captains returning from overseas voyages. Lloyd's began renting out ‘boxes’ (tables) where businessmen took the opportunity to sell insurance to shipowners in the event their ships did not return.
Lloyd’s is a unique market in this way and to this day, many of its business transactions are done face-to-face with brokers bringing business to the market. They meet underwriters who sell certainty to insureds by taking the risk away from them for a price and offering the guarantee to pay all valid claims.
Lloyd’s is a truly international business and is licensed to write insurance business in 80 territories and reinsurance in over 200. It is nonetheless heavily biased towards the largest insurance buying economies in the world; the USA and Canada. The industry covers some large and well known classes of business such as US Property insurance and Reinsurance, Cyber, some specialist areas like energy, aviation, shipping, terrorism, professional indemnity and property insurance and a host of smaller classes of business as well as.
Lloyd’s has always had individual investors who are attracted to some of the compelling benefits associated with investing in the industry, which will be covered in more detail later on. At present there are over 2000 private investors who are currently underwriting £4.8bn.
Investors are no longer allowed to set up vehicles to underwrite as unlimited names, meaning the maximum amount at risk is the value of the investment. Lloyd’s is regulated by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
Who are the key players?
Let’s start with policyholders. Policyholders are those seeking insurance cover. Their business enters the market via brokers and it’s up to the brokers to source the insurance cover for the policyholders.
The brokers will often take policies needing insurance cover into the Lloyd’s building and will then physically queue up at the boxes (desks) of the underwriters to source relevant insurance.
The underwriters work on behalf of syndicates. A syndicate is an annual venture formed by a member or multiple members of Lloyd’s, and it is a syndicate(s) that will enter into a contract offering insurance cover in return for a premium. Should a catastrophe occur, all valid claims will be paid out from the syndicate(s) to the policyholders.
Part of the capital that is used to support this underwriting is the investment pledged by private investors, otherwise known as Lloyd’s members. In return for pledging capital, Lloyd’s investors receive a share of the underlying results of the syndicates they support.
The only way for private individuals to invest in Lloyd’s is through a capital adviser, known as a Members’ Agent – such as Argenta Private Capital. A Members’ Agent will manage its clients’ investments (underwriting) at Lloyd’s in a similar way that investment managers do with their clients. We consult with our clients over their risk appetite and expected return profile and build a portfolio of syndicates that meets their needs.
what are some of the benefits of investing at Lloyd’s?
As many of us are aware, inheritance tax can be a burden to families. At present, for an estate worth more than £325k, the inheritance tax rate is a weighty 40%. This large bill will normally be paid out of an estate, upon the sale of a property or the redemption of investments. While inheritance tax is not the largest source of revenue for the government, around £7.5 billion of receipts have been collected in 2023 to 2024, a significant amount of money.
Capital providers are deemed to be underwriting, through their participation in a Lloyd’s syndicate or syndicates and as such the investment is treated as a trade for inheritance tax purposes and qualifies for business relief. What this means for our clients is that they can pass on their Lloyd’s investments to their heirs free from inheritance tax. We work with new investors and existing clients to ensure their investment in Lloyd’s is structured in a tax-efficient manner, allowing for the unburdened passing of wealth to the next generation.
The importance of diversifying a portfolio is spoken about more and more frequently, particularly given the volatility of certain markets. The low correlation that the Lloyd’s market has with traditional asset classes is a key benefit associated with investing at Lloyd’s. For example, during the recession of 2008 – a notoriously bad period for the global economy – UK equities reached a low of nearly -30% and the commercial property sector reached losses of -27.6%[1]. In this same year, Lloyd’s made a profit of 17.7%.[2]
[1] Source: Asset Class performance, LSEG.
[2]Lloyd’s performance, Argenta Private Capital advised private clients’ Capacity and Return on Funds at Lloyd’s net of costs and assuming standard fee terms. Return on FAL assumes FTSE all share annual return of 5.07% from 2005-2022
how does reinsurance work?
(Re)insurance is a cyclical business; losses and the availability of capital drive the rates underwriters can charge when they take on a risk – you will have noticed that your insurances are particularly costly at present, as we are in what we call a ‘hard market’. Where insurers can charge more for taking on risk, returns for investors are expected to be higher, with 2024 forecast returns to be north of 25%[1] return on capital. It's worth noting that the Lloyd’s accounting is done on a three year basis. 2024’s anticipated profit will not be distributed until 2027. The three year period allows underwriters certainty over the level of claims arising in that year. The reason for this is rooted in the rich history of Lloyd’s – if a ship hadn’t returned after three years, it was almost certain that it wasn’t going to. This also explains why the market frequently talks about ‘forecast’ results.
We’ve referenced the fact that (re)insurance is a cyclical business and thus, like any other investment, has years which are more profitable for investors and others that are less so. Over a 15 year period from 2009 to 2024, clients have enjoyed average annualised returns for investors in excess of 11%, (2022 forecast), with 2023 forecast to produce returns in excess of 20%.[1] Our client directors advise our clients on their investments in the a number of ways, making sure that their investments are protected when the market is forecasting a period of loss.
[1] Source: Private Capital advised private clients’.2022 and 2023 are all based on Managing Agent’s forecasts as at Q2 2024. 2024 forecasts are based on APCL Research forecasts as at Q2 2024. These are forecasts and will be subject to change.
HOW DOES AN INVESTMENT AT LLOYDS DIFFER FROM OTHERS?
Investing at Lloyd’s is unique, whereby investors pledge their assets to act as a back-stop for the underwriters in case claims and expenses exceed premiums. Those assets can continue to generate returns for the investors and can be in a variety of different forms such as cash, bonds, gilts and equity investments. These assets are called Funds at Lloyd’s (FAL). The FAL portfolio that an investor provides can remain under their existing investment manager, with the investor retaining the beneficial ownership of the funds, so effectively your assets are working twice for you.
An investment at Lloyd’s can be considered an intergenerational investment; a number of different members of a family can be involved in a vehicle and share a common interest in the Lloyd’s investment. As a specialist insurance adviser, we understand that it’s our responsibility to diffuse the interest in Lloyd’s of London onto the next generation of potential successors and future generations. During a client’s investment journey we take a special interest in developing relationships with their potential successors and family members, through a high level of educational and interesting engagement via in-person meetings and online events.
How might this asset class sit as part of someone’s overall investment portfolio?
We would typically see a Lloyd’s portfolio sitting alongside other alternatives within a well-diversified investment portfolio. As mentioned above, Lloyd’s typically has very low correlation to other more traditional asset classes. Investors can use their existing investment portfolio as collateral to support their underwriting; Lloyd’s is extremely flexible in allowing a broad range of capital to be used as Funds at Lloyd’s.
What are the typical behaviours of this type of asset class?
An investment in Lloyd’s is bespoke to the individual’s risk appetite and situation. Syndicate returns can be significant – however, due to the cyclical nature of the Lloyd’s market, these returns can be offset by periods of no return.
An investment at Lloyd’s should be considered a long-term investment. Potential investors should be looking to invest for a minimum of five years and view the investment as an ongoing opportunity. Lloyd’s has a three year accounting basis and returns are not generated immediately. Investors should appreciate that benefits are typically drawn over a longer period of time, due to the cyclical nature of both the broader insurance industry and the Lloyd’s market.
Investors should be looking to commit a minimum of £1 million, which may be a combination of cash and already owned assets. This provides sufficient capital to access the market on a meaningful scale and achieve the desired risk exposure.
The total amount that an investor chooses to invest at Lloyd’s should not represent more than 15% of their overall net wealth. Diversification is typically recommended to ensure that the investment risk is managed, and an investment at Lloyd’s is no different. Argenta advises that the investment amount is diversified across a number of syndicates to spread the risk.
Investors should be able to respond to events such as a cash call to pay claims in the event of a sizeable loss. If significant, investors may be asked to increase their collateral at short notice, or be prepared to walk away from the investment and lose part or all of the invested amount. There is no obligation to increase collateral, but often the best returns are seen after a significant loss so it is worth having additional funds available to add should the investor choose to.
tell us about your role as a members’ agent
Potential investors looking to take advantage of one or more of the benefits of underwriting at Lloyd’s come to us, either directly or via an introducer. As a capital adviser otherwise known as a members’ agent, we start by setting up an initial meeting to explain the proposition and outline the different aspects of the investment. As the meetings progress, we go into more depth offering advice on vehicle structuring and composition of the portfolio of syndicates to meet an investors risk appetite and investment strategy.
APCL is a business driven by valued relationships; once onboarded, each investor is assigned a client director with whom they can build a strong relationship. The client director will advise the client on all aspects of their underwriting investment, deliver marketing messages and performance updates, set out new opportunities, and guide the client through the underwriting cycles. Our ultimate objective at APCL is to try to maximise a client’s return on capital during hard markets, and minimise losses during softer periods.
Recently, APCL has embarked on a transformation programme to fully integrate the Argenta Tax & Corporate Services arm, which provides tax, accounting and company secretarial services, making APCL the only agency to offer a full suite of services in-house. This new structure provides clients with access to a larger network of expertise, a broader range of solutions and more ways to stay one step ahead and in control of their invested wealth. Under this structure, APCL clients now have access to end-to-end, market-leading research, analysis and investment advice alongside specialist tax and accounting services – making investing at Lloyd’s much easier for our clients, especially as Argenta progresses towards more automated processes including client on-boarding.
[1] 2024 forecasts are based on APCL Research forecasts as at Q2 2024These are forecasts and will be subject to change.
[1] Source: Private Capital advised private clients’.2022 and 2023 are all based on Managing Agent’s forecasts as at Q2 2024.
2024 forecasts are based on APCL Research forecasts as at Q2 2024. These are forecasts and will be subject to change.
WHO ARE YOUR TYPICAL clients?
The majority of our clients by number are the 500 HNW and UHNW individuals – many of them have been with us for many years, using their Lloyd’s investment as a tax efficient mechanism to pass wealth onto future generations. Some of our newer clients have found their way to us via their bankers, wealth managers and advisers, and are often financially astute professionals, with high annual income or individuals who have exited their business and are looking to diversify their investment portfolios.
What are some of the misconceptions or myths within the insurance industry?
The first misconception is that we are affiliated with Lloyds Bank – we are nothing to do with Lloyds Bank! Similarly, Lloyd’s is not an insurance company, and investing in a portfolio of Lloyd’s syndicates via a corporate member provides access to the purest form of underwriting - there is low stock market contagion.
Many people we talk to about a Lloyd’s investment still see Lloyd’s as a sort of ‘member’s club’ whereby you join as an unlimited Name. They remember the 80s and 90s when many investors unfortunately lost everything. Things have significantly changed since then with new investors only being able to join in a Limited Liability Vehicle, meaning that the maximum amount at stake is what they put into the vehicle. Like many other asset classes, Lloyd’s is now a highly regulated industry; the businesses that manage the syndicates are regulated by the FCA and PRA.
[1] Private Capital advised private clients’.2022 and 2023 are all based on Managing Agent’s forecasts as at Q2 2024.2024 forecasts are based on APCL Research forecasts as at Q2 2024. These are forecasts and will be subject to change.
There are a number of other areas that require clarification and they are as follows:
1) Volatility. Many people believe Lloyd’s returns are very volatile. However, our clients have enjoyed average annualised returns in excess of 11% over the last 15 years from 2009 to 2024, with 2023 and 2024 forecast to produce returns in excess of 25%.5APCL Lloyd’s is a cyclical market, however our job as a members’ agent is to advise our clients on their underwriting decisions and help manage volatility so that returns can still be made across the cycle.
2) The complexity of the market. Lloyd’s has often been associated with being a complex market and hard to understand. We have made a conscious effort to simplify our written communications, video clips and other literature to help people fully understand the investment and to make the nature of the industry more inclusive. Additionally, we are introducing new products to cater for the different needs of potential clients and investors such as lower capital requirements and creating a more passive investment option.
3) The risk associated with the market. Lloyd’s should be considered to be a high risk investment. To mitigate risk, Lloyd’s has introduced certain measures including robust capital requirements; each syndicate is required to calculate its Solvency Capital Requirement (SCR) for the prospective underwriting year. In essence, the SCR is a monetary amount which has been calculated), and should be sufficient to cover a 1 in 500-year loss, to reflect the potential of uncertainty in the overall forecast result of the syndicate. This SCR calculation is to provide protection against member concerns over losing capital due to the occurrence of an extreme event.
Jargon Buster
Syndicate: An annual venture formed on behalf of a member or group of members of Lloyd’s on whose behalf insurance is accepted by a Managing Agent. A syndicate trades for a single underwriting year. Each underwriting year usually remains open for a three year period.
Underwriter: The individual with authority to accept insurance or reinsurance risk on behalf of the members of the syndicate
Broker: A Lloyd’s broker acts on behalf of the insured or reinsured to negotiate insurance for them.
FAL: Funds at Lloyd’s. The capital pledged to support an underwriting portfolio.
About the Authors
Kate Tongue is an Executive Director at Argenta Private Capital Limited (APCL), with her remit covering business development, tax and corporate services. Kate has over 15 years’ experience in providing a variety of tax advisory, tax audit and tax compliance services to the financial services sector. Kate joined Argenta in 2019 as Head of Corporate Tax and uses her knowledge and experience to advise new and existing clients on tax efficient structuring and extraction of profits.
India Cornett is a Business Development Manager at Argenta and works on all things related to business development, marketing and communications. Overall, the objective in this department is to maintain and develop both old and new relationships with intermediaries, as well as potential investors. Both Kate and India are responsible for making the Lloyd’s market more accessible by explaining the product and investment opportunity to those who are less familiar with it.
Argenta Private Capital Limited, 70 Gracechurch Street, London, EC3V 0XL
Kate.Tongue@argentagroup.com | 020 7825 7231
India.Cornett@argentagroup.com | 020 3887 7596