Reality: “Lloyds is not an insurance company like CNA, Chubb or Travelers,” says Hank Watkins, president of Lloyd's USA. “Lloyd's is a 325-year-old insurance marketplace, comprised today of 57 managing agents running 87 syndicates, where underwriters provide a wide range of specialty insurance products to brokers working on behalf of their clients.”

From its London headquarters, Watkins adds: “Lloyd's offers global licenses, A or better ratings, promotional and regulatory support and performance oversight, all supported by a $4.8 billion Central Fund [which] is available to pay the claims of any syndicate impacted by adverse claim activity.”

This Central Fund, to which every Lloyd's member makes an annual contribution, is accessed at the discretion of the Council of Lloyd's to meet any valid claim that cannot be met by the resources of any member. The fund has played a crucial role in repairing Lloyd's reputation, which was severely tarnished following massive losses in the late 1980s and early 1990s related to asbestos and pollution claims.

Watkins says that while brokers who've done business at Lloyd's over the years are aware of its unique aspects, those who haven't—and there are many in the small and midsized segment—often incorrectly conceive of as Lloyd's as a classic insurance carrier.

Misconception No. 2: Lloyd's only handles oversized and extreme risks

Reality: According to Mary Hughes, president of construction and energy at Lloyd's underwriter ProSight Specialty Insurance, “there is a commonly held belief that Lloyd's syndicates only insure very large or highly unusual types of risks,” such as offshore oil rigs or celebrity body parts.

In fact, notes David Wheal, managing director of North America for RFIB, a leading Lloyd's broker: “While Lloyd's can and does handle the more specialist risks, there is a strong appetite for mainstream business, albeit with an E&S flavor—that is where wind, quake, flood, hail, etc. are the significant perils. Without doubt, Lloyd's underwriters are way ahead of the curve when it comes to assessing and managing catastrophe exposures.”

When accessing Lloyd's, Hughes cautions: “From an Excess standpoint, the U.S. underwriter needs to understand and evaluate how the definitions, exclusions and conditions [in the Lloyd's form] will interact with the primary policy form. Areas of concern center around: application of limits and any potential sublimited coverages that could present a drop down exposure; exclusionary language, for example, asbestos or pollution; and definitions, for example, 'occurrence,' 'bodily injury' and 'pollution.'”

Hughes advises that these concerns can be addressed via utilizing a follow-form policy vs. a true umbrella form (assuming that the language in the primary policy form is acceptable). She also thinks that it's important to craft language that “either dovetails with the primary policy form or addresses any areas of concern.”

Misconception No. 3: Lloyd's only handles reinsurance

Reality: Lloyd's is indeed a major player in reinsurance, but globally, it accounts for only 38 percent of its total business, according to Lloyd's 2012 annual report (and just 27 percent of its business in the U.S. and Canada).

Misconception No. 4: Lloyd's is a small player in the U.S.

Reality: This is a major misconception as the U.S. (and Canada) account for the plurality of Lloyd's global business: 41 percent vs. 33 percent for the U.K. (18 percent) and Europe (15 percent) combined. And Lloyd's U.S. operation grew by $350 million in 2012, according to Watkins, thanks to both rate increases and an increase in new business. In 2012, Lloyd's members wrote $6.27 billion of E&S business in the U.S. and $4.92 billion of reinsurance business. Its E&S business alone would make Lloyd's the 14th-largest insurance player in the U.S. were its syndicates considered a single group, according to PC360's annual ranking of the Top 100 Insurers.

Misconception No. 5: Lloyd's will take any risk

Reality: “One of the misconceptions about Lloyd's is that it will write anything,” notes RFIB's Wheal. “The specialist nature of the Lloyd's market means that, more often than not, cover can be provided, particularly for types of risk that others are unwilling or unable to write. However, this does not necessarily mean that every conceivable risk can be underwritten at Lloyd's.”

Some additional Lowdown on Lloyd's:

• Among industry types that Lloyd's syndicates currently are targeting, according to Watkins: healthcare, health sciences, traditional and alternative energy, petrochemical and agriculture.
• Pension and hedge funds are gravitating towards Lloyd's syndicates in an effort to take advantage of the considerable risk management skills of these underwriters. Watkins said non-traditional provision of funds would help to take insurance and reinsurance capacity to a new high of $500 billion by year-end, if a mega-catastrophe (something far bigger than Hurricane Sandy) does not strike.
• The Lloyd's underwriter's knowledge, Watkins says, is the most important part of the Lloyd's package. “By virtue of the fact that a Lloyd's underwriter reviews submissions from every corner of the world, every day, a unique ability to rapidly assess and apply the syndicate's capacity toward a wide range of risks is developed early on one's career,” he says. “While underwriters may move between syndicates over the course of a career, they tend to remain underwriters, often in the class of insurance or reinsurance they were initially trained in. The outcome is the development of expertise and long-term relationships with brokers and policyholders that are unmatched in the general insurance industry.”