The Relevance of Lloyd’s
Would baseball be the same without Babe Ruth? Or New York City without Manhattan or Thanksgiving without turkey? Of course not. The same can be said for the world of insurance without Lloyd’s.
Imagine if you will, someone comes up to you and says,”I am sending a wooden sailing vessel from Canary Wharf in London to Kolkata in India. It is a journey of 11,500 miles making a 192-day, round-trip voyage at a speed of five miles per hour. The satellite global positioning system is not operating and hostile pirates line the route. If the vessel disappears, we may never know what happened. How much would you charge to insure it?
This kind of decision 300 years ago was the start of modern insurance. Ten shipowners agreed around a coffee table that each would accept 10 percent of the risk of loss of each other’s vessels. Ten ships depart. Nine come back with riches that are shared. Except for the loss of life, it doesn’t matter whose ship never returned or what happened to it.
Cyber risk management is like watching the departure of a sailing vessel with limited navigation or communication capabilities. A loss can occur with a breach of the walls of computer or communications systems. It can happen through doorways penetrated by hackers, mischief by rogue employees or careless actions by authorized system users.
What can go wrong? Everything. When can it go wrong? Immediately or never. How much of a loss will occur? No one knows.
An argument can made that we need a modern Lloyd’s to act as the focal point for cyber risk avoidance, reduction and transfer.
In such an environment, we can reflect about Lloyd’s morphing from a coffee house to a powerful global marketplace for insurance. Information about a loss would make its way back to London where details were shared to help reduce future loss. This worked so well that Lloyd’s established agencies in foreign ports, building an expansive information-sharing network further reducing losses even as its syndicates reimbursed them.
Another feature of Lloyd’s was the presence of speculators — parties who sought profits from accepting unpredictable possibility of loss. Insurance agreements were backed by the entire personal wealth of thousands of individuals who could lose everything following a catastrophe. As recently as the ’90s, dozens of Lloyd’s “Names,” as they were known, were forced into bankruptcy as they failed to meet their commitments to the insurance syndicates where they were members.
An argument can made that we need a modern Lloyd’s to act as the focal point for cyber risk avoidance, reduction and transfer. It can act as a clearinghouse where risk managers, brokers, and carriers can quietly exchange confidential information and encourage all parties to enhance electronic systems to reduce loss. It can bring in the capital markets where speculators are willing to accept the possibility of extreme loss of unpredictable nature.
Risk managers should be encouraged to visit Lloyd’s and have this discussion, as I did in October. Just remember one thing — if you are a male, you must wear a tie. Don’t worry about a jacket. Lloyd’s has a room full of them for visitors who do not need a guarantee that one will match their tie and pants.
Tradition dies hard at the totally electronic, paperless, computerized Lloyd’s of today, even as the genius of its past and present may help meet tomorrow’s cyber risk needs.