Lloyd's of London, American-Style
THE ``Lloyd's of London concept'' - providing insurance for hard-to-insure customers through a centralized clearing house - is finally starting to take root in the United States. Lloyd's, a British insurance exchange for some 300 underwriting syndicates, has been around for more than three centuries.
In the US, by contrast, insurance underwriting has tended to be highly dispersed, with brokers or companies operating largely independently of each other. Several hundred firms specialize in high-risk insurance: underwriting excess coverage, providing reinsurance coverage (i.e., insuring the insurers), or directly insuring unique ventures.
During the late 1970s and early '80s, three centralized insurance exchanges started up in the US, based on the Lloyd's concept. Two, in New York and Miami, failed, largely from writing too many policies at discount prices during an industry price war.
The surviving exchange, the Illinois Insurance Exchange in Chicago, is now poised for substantial growth, officials of the exchange say.
The Illinois Insurance Exchange is a central clearing house comprising 12 syndicates, each of which writes its own policies. Last year, these syndicates wrote slightly over $200 million worth of gross premiums, below its high watermark of $286 million in 1986. Since the inception of the exchange in 1980, the exchange has written over $1 billion in total gross premimums.
The Illinois exchange has been approved to underwrite policies in 42 states in the US. It also writes policies abroad. Policies cover such issues as a satellite system, a manufacturer making retina-related products, AIDS-related liability for blood banks, railroad and transit systems, and medical-related ventures.
If the US economy were to go into a recession, and the insurance industry were to contract, then the Illinois exchange could possibly experience new underwriting growth, says Paul Wish, an official of A. M. Best Company, an insurance information and rating organization based in Oldwick, N.J.
That could also occur, insurance brokers say, if British companies specializing in unusual or hard-to-place risks were to contract, as now seems to be occurring. One major high-risk insurer in Britain is considered to be in a precarious financial position.
And even the venerable LLoyd's, which writes over $9 billion of premiums annually, has faced an unusual number of claims during the past year or so. Officials of Lloyd's have said that they may post a loss for the year 1989, the first loss since 1966. Lloyd's announces its yearly financial results three years late, in case of delayed claims.
A. M. Best Company does not rate the Illinois Insurance Exchange, since Best likes a fairly extensive track record for its analysis. But Best may begin rating syndicates on the Illinois Exchange in the next year or so, Mr. Wish says.
The Illinois exchange is now courting additional underwriting syndicates and investors, in part to be ready for added underwriting in case the insurance industry contracts during the next year or so, says James M. Skelton, president and chief executive officer of the Illinois Insurance Exchange.
Currently, says Mr. Skelton, the Exchange requires a capitalization of $5 million for a syndicate to underwrite policies.
Last year, the Exchange posted a profit of $18.3 million, returning an average 37 percent on the investment monies provided by individuals. Exchange officials point out that it is hard to equal such returns from alternative investments, such as bank certificates of deposit, or stocks or bonds. On the other hand, if a syndicate faced excessive claims, the investor could lose his or her entire investment.
Individuals can invest as little as $30,000 on the exchange. And they can use a letter of credit for up to 75 percent of the investment. On $30,000, that would mean that only $7,500 would actually have to be put up front in cash.