The syndicates under “Lloyd’s” form the world’s largest insurance market. As its name implies, Lloyd’s is based in London. Unlike its competitors, however, Lloyd’s of London is not actually an insurance company. Rather, Lloyd’s is a corporate body, governed by the British Lloyd’s Act of 1871. This means that Lloyd’s is not a single insurance company, but instead Lloyd’s of London is the name of the corporate umbrella under which various subsidiaries (or “syndicates”) operate. These sub-companies are, basically, individual insurers carried by the Lloyd’s brand.
The differences between Lloyd’s and traditional insurance companies arguably revolve around their structures. Traditional insurance companies are individual entities—providing policies for a group of target customers. As a result, these policies show little variation between individual insureds. Lloyd’s, on the other hand, acts as an insurance stock exchange—a marketplace for buying and selling insurance on virtually any “risk.”
The term syndicate describes the foundation of the Lloyd’s of London model. Syndicates are groups of people or companies who, pursuant to various interests, are willing to collectively fund and write insurance. The individuals in these syndicates are called “members.”
Most business at Lloyd’s is placed through brokers in London and here in the United States. Similarly, prospective policyholders approach brokers and ask them to arrange an insurance contract at Lloyd’s. Brokers at Lloyd’s arrange these insurance contracts through its “slip system” typically.
Simply put, slips function as an insurance write up—explaining the details of the risk that the policyholder wants insured. Syndicates, then, use the slip to determine its attractiveness, and then decide to underwrite a portion of the slip. Ultimately, the syndicate chooses to be responsible for X percent of a given risk. In the event of a disability insurance claim at Lloyds. The members retain an equivalent X percent of the premium for assuming the risk. In the event there is no loss, the syndicate makes money as compensation for its assumption of the risk. In theory, one syndicate could assume 100 percent of a particular slip, and also 100 percent of the premiums. This is rarely done, however, for obvious fears of loss as opposed to profit. The following information from AmWins Group helps to explain this concept further and more precisely:
“When placing a risk within Lloyd’s, the broker can use one, two, or several Lloyd’s syndicates, depending on the requirements of the business. The first syndicate that agrees to write a risk is referred to as the ‘lead’ syndicate. When there is more than one syndicate participating on a risk, it is called a ‘subscription market,’ as the syndicates together subscribe to the contract document, or ‘slip.’ This slip historically contained all the coverage and contract conditions relating to the risk as well as deductibles, premiums, and other connected information about the policy. The policy wording is also included within the slip, which is the first document the claims department reaches for when advised of a new loss.”