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now we're not actually insurance company
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Lloyds of London we're in Insurance
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Market Market we're the largest
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Insurance Market in the world we're
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actually the only Insurance Market in
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the world if you want to Ure a very
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unusual risk you come into the Lloyd's
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Market you go to one underwriter to get
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a bit of a policy go to another
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underwriter to get another bit of the
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policy put them together and you have a
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policy that will cover the risk that
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you're wanting to ensure now inside the
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Lloyd's Marketplace we actually have 50
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companies operating companies that are
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corporate entities in their own right
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that are either listed on the London
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Stock Exchange or quite often are a
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subsidiary of an overseas entity such as
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a liberty in Boston or an ace in Bermuda
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or whatever but we've got these 50
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companies operating inside the Lloyd's
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marketplace with their Underwriters
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actually sitting inside the Lloyd's
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building so it is a market we have over
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5,000 Brokers wandering into our
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building every day with suit cases like
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this one sometimes actually my only prop
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for today full of information about a
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risk that they might might want to
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actually cover and you say why would you
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need so much information well we need so
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much information cu the risks that we
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cover are so complex so for instance I
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have been sitting on a box where um the
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underwriter was uh covering the Sultan
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of oman's private fleet of aircraft he's
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got a few trip 7s a few 747s few Gulf
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streams and Etc and to actually cover
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that risk the underwriter wanted to know
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the age of every airplane where it was
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serviced the uh um
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destinations that the airplane would go
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to the surface of the runways then he
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wanted to know about the crew and the
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age of the crew and where they were
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trained and it was an enormous amount of
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information the underwriter actually
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required to be able to underwrite that
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risk when the um Underwriters actually
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write an insurance policy however what
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they issue is a Lloyd's policy and that
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is quite a unique structure we're a
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mutual market and so anyone operating
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inside the Lloyd's Marketplace even
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though they might work for their own
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company they will work for their own
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company the policy they issue is a
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Lloyd's policy and therefore it has
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Lloyd's security behind it and Lloyd
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security is very important because we
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have never defaulted on a claim we've
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paid all our claims in the 321 years
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that we've been operating that has been
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a challenge for us because in certain
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periods in our history it's been quite
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difficult to find the funds to pay those
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claims and I'll share some of those
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experiences with you um what sort of
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things do we uh ensure apart from uh
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what was her name Dion's vocal cord um
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Ugly Betty smile have you seen Ugly
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Betty on television well we cover her
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smile for the uh for the older people in
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the audience uh Betty grable's legs
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we've ensured her legs we actually do a
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lot of legs American footballers legs uh
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European soccer players kneecaps so
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Beckham's kneecaps Ronaldo's kneecaps so
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we do a lot of body parts someone's
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chest hair we actually ured their chest
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hair um I I don't know what the claim
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would have looked like on that chest air
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claim but you know give some modities we
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we've insured a coffee Taster's uh
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tongue for $5 million and we've insured
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a wine Taster's nose for tulip wines for
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$10 million that's the uh the odd stuff
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but it is important because frankly if
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you are an American football player and
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you break your leg and you're unable to
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play a again you've got faced with loss
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of earnings you're faced with
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Rehabilitation and so the insurance
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policy is very important because that
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kicks in to start to enable that person
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to get back into training or whatever
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and rehabilitate and if necessary pay
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for loss of earnings so these are quite
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important policies but we also do other
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stuff I mean we were the first uh
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insurer to offer insurance for Aviation
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1911 was the first uh commercial flight
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and we insured that flight we also
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insured the first commercial space
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flight in 2004 we Ure oil rigs we ensure
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Bridges we ensure buildings we ensure
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workers workers comp we provide d o
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cover directors and officers liability
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we provide terrorism cover we ensure
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against political risk a very large uh
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and Vari varied um range of activities
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that we get get involved in basically I
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suppose what we do is ensure things
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other people that can't or won't
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ensure and I'd just like to share with
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you two crises that Lloyds has weathered
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two storms that Lloyds has weathered
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that are very relevant very pertinent to
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the uh economic crisis that we find
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ourselves faced with today um they're
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quite well documented but let me spend a
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few minutes just sharing them with you
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the first crisis we had to weather was
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it back in the '90s and in the middle of
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the '90s so around about
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9394 Lloyd suddenly found itself faced
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with enormous losses we were faced with
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34,000 people who invested in Lloyds and
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we're faced with
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uh ruinous claims that they were having
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to pay these $15 billion worth of claims
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as a result of the problems that uh uh
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we' found ourselves faced with so was an
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extraordinary period um in our history
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where were these $15 billion worth of
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claims coming from a variety of things
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we were faced with a bit of a perfect
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storm um asbestos I'm sure you're all
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familiar with asbestos asbestosis loyds
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uh wrote a lot of the policies here in
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the US back in the 60s 50s and 60s
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providing cover to workers for asbestos
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the problem we faced though is we wrote
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those policies in the 60s and the claims
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didn't come through until the ' 80s and
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'90s how can you write a risk how can
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you price a risk in the 60s where you
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don't pay out the claim until the '90s
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pricing was completely shot to Pieces so
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the claims coming from asbestos were far
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greater than any of the premiums would
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ever taken in for those policies and it
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wasn't just asbestos we were also faced
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with claim coming from Piper Alpha an
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oil rig that uh um exploded Exon Valdes
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that leaked oil up in Alaska hurcan
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Andrew
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1992 um and probably quite a few other
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things lead paint we having to deal with
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the environmental problem of lead paint
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and uh lead paint poisoning people how
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we dealt with that problem in the '90s
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was very simple we took well it required
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a lot of effort But ultimately it was a
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simple solution and the solution was
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really sort of based on the good bank
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bad Bank model and we took the decision
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along with the support of government to
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take all those liabilities that $15
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billion worth of claims put all the
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assets we had against those liabilities
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and put them off into a completely
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separate vehicle and that vehicle was
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called equitas so we sold the building
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we sold Lloyd's list of publisher we
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sold Lloyd's Register we sold absolutely
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everything except for the silver if you
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come into the ly's building today you'll
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still see we kept the silver that's the
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one thing we kept we we sold everything
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to put it into this vehicle called
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equitas so we had some assets that we
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could put against those liabilities now
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you would have thought we would have
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leared from that experience said let's
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do things a little bit differently the
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only thing that we did differently going
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forward was to move from an unlimited
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liability basis to a limited liability
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basis uh prior to um this this issue
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anyone participating in Lloyds providing
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Capital would do it on an unlimited
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liability basis so if you had a claim
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you paid it and if the claim just grew
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and grew you continued to pay and pay
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and what happened to these 34,000 people
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that were providing Capital they were
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faced with ruin and a lot of suicides
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and the such like as a result of having
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to meet those liabilities so we took the
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decision to say right stop no more
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unlimited liability you can only write
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on a limited liability basis but we
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didn't change anything else I'm sure
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you've heard that story before when you
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look at what the banks are doing at the
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moment nothing else changed so of course
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we were then faced with our second storm
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and that storm happened in 2001 the
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tragic events of uh the World Trade
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Center where we found ourselves being
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the largest insurer of the World Trade
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Center and we ended up with liabilities
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claims coming out of the World Trade
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Center of 11 billion out of the total
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$40 billion claim so less than eight
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years later one day after the World
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Trade Center sitting in a room 24 hours
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after the event you had the same people
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sitting there saying we're about to go
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bankrupt we can't pay this 11 billion
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quite extraordinary that so soon after
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the problems of the '90s we were faced
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with a similar problem the problem we
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had um with the World Trade Center was a
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simple liquidity problem a funding
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problem the US authorities wanted us to
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fund our liabil growth here in the US
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and we didn't have the cash and so we
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had to Scrabble around strike a few
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deals and finally we were able to come
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to an arrangement whereby we would cut a
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little bit of slack a few days here and
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there there and we're able to then find
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the cash to fund those liabilities from
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the World Trade
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Center Lloyd said hold on we're going to
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have to completely overhaul the way this
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Market is operated and so we Chang
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management of businesses we Chang the
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governance of Lloyds and we put in a
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completely new structure and the
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structure we put in um I would call it
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the McDonald's of Lloyds we put in a
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franchise structure uh very similar to
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McDonald's there's nothing new in this
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world you know if you go to uh the
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McDonald's in Tokyo and ask for a Big
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Mac and large fries you know what's
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exactly going to be in that Big Mac
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where the girkin is going to be and how
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many fries you're going to get in your
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your bucket of fries just as if you go
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to um McDonald's here and Philadelphia
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and ask for Big Mac and Fries you'll get
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exactly the same so what's his name
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Ronald McDonald he's able to impose
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standards across the whole of the
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McDonald's franchise and get everyone to
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do the same thing and that's exactly
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what we had to do in Lloyds we said
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right we're going to operate a franchise
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model whereby anyone who wants to write
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business inside the Lloyd's Market does
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it according to the standards we set and
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they have to meet those standards and
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the standards are very clearly around
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risk management and around Capital
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setting um if I talk about risk
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management because that was the real
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lesson that we learned from the World
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Trade Center we've now introduced a very
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structured and disciplined approach to
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the risks that businesses are allowed to
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write in the Lloyd's Marketplace so we
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look at two things so if you're company
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a that is writing risks inside Lloyds we
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look at the risks that you're writing
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and then we look at how your risks plus
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everyone else's risks adds up together
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what the aggregate exposure is to ensure
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that firstly the capital you have is
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sufficient to support your business but
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secondly that the capital the market has
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is sufficient to support the risks
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across the whole market so it's a very
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dis disciplined approach to risk
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management and it's a very disciplined
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approach to uh Capital setting we have
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other standards around claims around
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business processing and the such like
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but the imposition of Standards on our
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Market has been a life-changing
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experience for us and the the use of a
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very discipline risk management approach
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Linked In with capital setting has been
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uh life-changing for us how life
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changing well 2001 was the World Trade
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Center 2005 Katrina Rita Wilmer bigger
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than the World Trade Center the losses
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from the World Trade Center were 40
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billion the losses from Katrina Rita
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Wilmer were $60 billion and our share of
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Katrina Rita wmer was $16 billion just
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to remind you our share of the World
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Trade Center was $ 11
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billion when uh we had the World Trade
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Center and we looked at the results for
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the market at the end of the year the
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market loss in total was5 billion which
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is why we were close to bankrupt coming
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out of 2005 I took over in 2006 just on
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the back of paying out $16 billion for
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Katrina rmer and the loss for the
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overall Market was $160
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million so it's complete reversal in
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fortunes and that was a direct result of
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our approach to to risk management um
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that's the sort of potted history of
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Lloyds and where we've got to how how is
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that serving us uh in today's crisis
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because we seem to have a lot of Crisis
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literally every 3 or four years in the
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Lloyd's market and the most recent one
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yes is a subprime crisis the the
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recession the economic crisis that we
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now found ourselves in in 2009 well as a
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result of all the changes that we have
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instigated over recent years we've
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actually weathered the recent storm
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pretty well um I'm reminded when talking
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about the recent storm of AIG I'm not
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here to knock a government own
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competitor uncomfortable though it may
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be to have a competitor that's owned by
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the government but when talking to
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someone about AIG they said to me the
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problem with AIG is when you look at
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their balance sheet on the left side of
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the balance sheet nothing is right and
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on the right side of the balance sheet
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nothing is left okay that's that that
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was yeah you're absolutely right we must
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never mix up both sides of the balance
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sheet so the way we Lloyds have
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weathered the storm is to keep the two
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separate and by the two separate I mean
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the liability
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that the risks we write we keep in one
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bucket and manage those and the assets
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the capital that we have to offset
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against those risks we keep in a
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completely separate bucket now the
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assets we have in the Lloyd's Market
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roughly $60 billion at the moment to
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support the risks that we write to
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support the $33 billion worth of Premium
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that we write every year that 60 billion
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we manage very very conser
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conservatively so over the past two
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years our EXP exposure to equities and
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exotic instruments and Structured
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Products has been less than 5% so
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looking at our 60 billion we've got
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roughly a third in corporate bonds third
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in government bonds and a third in cash
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what that means is we don't make
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spectacular returns from our assets but
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we also don't make spectacular losses
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and that's very important because those
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assets are there to support the
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liabilities where we do want to take
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risk so we don't take risks with our
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assets and we do take risks on the
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liability side but when taking risk on
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the liability side we're actually now
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quite selective and when we don't like a
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risk we don't write it and that also is
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a very important lesson if you don't
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like the risk you don't like the
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business don't do it and particularly if
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you don't understand it certainly don't
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do it so in the past in Lloyds we used
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to write a lot of financial institution
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business and we provided a lot of cover
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to two great names Enron and Worldcom
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and as a result of that we paid out some
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pretty large claims but also as a result
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of that we took a conscious decision to
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scale back our exposure to financial to
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financial institutions because we were
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just uncomfortable with that type of
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risk we didn't really understand it that
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well so if you don't understand it that
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well don't do it so we scaled it right
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back to the extent that now with the
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subprime problem with the Madoff problem
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with the Stamford problem we find very
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little exposure to those institutions
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those organizations and Alo also to
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subprime claims so all the problems
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arising out of the financial crisis we
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will be able to deal with as uh business
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as usual so it's quite an important uh
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lesson for us don't mix up assets and
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liabilities be selective on your risks
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and when you don't understand it you
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don't like it just don't do it walk away
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[Music]
