Checks and Balances Assure That Lloyd’s of London Investors Know of the Risks

I was very disappointed to read your recent article concerning Lloyd’s of London (“Lloyd’s of London Under Fire,” Jan. 9, 1995) and find it disturbing that such a respected newspaper would publish a piece with little reference to the position of Lloyd’s itself. I am also amazed that no attempt appears to have been made by your reporter to speak directly to anyone at Lloyd’s. I assure you that had such an effort been made, there would have been a full and prompt response. The allegations made in this article are untrue.

Becoming a member of Lloyd’s is not easy. The checks and balances built into the procedure are rigorous, and have been vetted by the U.S. Securities and Exchange Commission. Individuals who wish to become members of Lloyd’s are required to satisfy stringent net worth requirements. They must read a comprehensive introductory guide, which begins with an unambiguous warning: “Insurance is a risk business and therefore both profits and losses can be made.”

Potential investors are required to travel to London from wherever they live in the world to appear before a panel of senior Lloyd’s representatives, who inform them in no uncertain terms of the risks involved with the investment they are considering: specifically, that they are entering into an agreement involving unlimited liability. Applicants are asked to affirm that they comprehend this principle.

In total, six months must elapse between the time an investor applies for membership and when he or she commences underwriting. At any point during this period, the investor can decide not to join Lloyd’s, having incurred no obligations whatsoever. Few other investments offer such a grace period.

All investment opportunities carry some risk, and insurance is certainly no exception, as the recent earthquake in Japan so tragically reminds us. For members of Lloyd’s to expect to collect profits in good years without sharing in the burden of losses when times get tough is unreasonable.

The chairman of Lloyd’s, David Rowland, and I sympathize with the financial difficulties that many members of the society have endured, and we have introduced a number of measures to alleviate those problems. Ultimately, however, Lloyd’s is obligated to collect money from its investors in order to pay the claims of its policyholders.

Investors in any undertaking need to ask themselves two basic questions: Do I understand the risk I’m taking? And can I absorb that risk?

Members of Lloyd’s must, by definition, have answered affirmatively to both questions, and in so doing have agreed to abide by the benefits or consequences of their decision.

PETER MIDDLETON

Chief Executive Officer, Lloyd’s of London