The Money

That’s where the money was.

The reply is attributed to Willie Sutton, the famous American bank robber, when he was asked why he robbed banks.

The classic banking model is straightforward: you place assets in a house of trust, which in turn provides you with safety and a small reward. In practice, you lend the bank money at a low interest rate.

The bank then loans that money to someone else, charging a higher interest, and pockets the difference. Central to this model is the concept that the bank lends to trustworthy parties—it can afford only a few defaults, both from the commercial and confidence perspectives.

All bank deposits are liabilities, i.e. money it owes its account holders, whereas all it has lent out is actually an asset. Banking and insurance are intimately connected—they are in fact two sides of the same coin.

The insurer receives small premiums, just as the bank receives small deposits. Those premiums allow an insurer to repay a few large claims, just as a bank lends large sums of money.

You take out a home loan, so you need to take out life insurance. Chances are you have a mortgage in the same bank where you keep your cash. Chances are your insurance company and the bank may well be part of the same financial group.

Two or three hundred years ago, insurance underwriting was a wonderful business to get into—you needed three things: spare cash, a reasonable appetite for risk, and a sound capacity to evaluate it.

You built up a book, put your money to work, and received a good income—once in a while you took a hit. And after a while, you could easily take out your original stake, the premium volume alone drives the business.

There’s one place in the world where you can see all this happening, and it’s called Lloyd’s of London. The Lloyd’s Market is unique because it’s a club, rather than a company. The members of that club form syndicates, and those syndicates take on insurance risks.

As in any traditional gentlemen’s club in London, you can only gain entry as a member, or as a guest of one. In all fairness, Lloyd’s now admits both men and women: my straw poll suggested at best fifteen percent ladies.

The Lloyd's Market trading floor. The chairs where the brokers sit and present their case to the underwriter are at the side of the main desks.

The Lloyd’s Market trading floor. The benches where the brokers sit and present their case to the underwriter are at the side of the main desks.

Despite the fact that computers, and computer models, play a key part in the insurance business today, just as they do in so many other sectors of the economy, the trading floor at Lloyd’s is a living testimony of bygone days.

Ever since underwriters gathered in Edward Lloyd’s coffeehouse in the late seventeenth century, the business model evolved, with brokers pitching their case on behalf of policyholders, and underwriters combining into syndicates to share risk.

Much of that risk historically relates to shipping, and this is a market that matured through the Napoleonic wars, and all the European wars of the last two centuries. Had it been in existence in the days of The India Road, it would undoubtedly have provided terms to the carracks returning to Lisbon with their holds full of nutmeg, cloves, and paradise pepper.

The Lutine bell, a central feature of the ground floor, would be rung once to advise of a ship’s loss; the bell no longer rings for this purpose–nowdays, it’s been replaced by a digital bell.

But the loss of each vessel is still recorded on a ledger, keeping track of the maritime fleet that sails the planet.

Lloyd's entry for the loss of the Cheng Lu, in October 2013.

Lloyd’s entry for the loss of the Cheng Lu, in October 2013.

The Market has bad years and good years: in 2011, the worst year on record, it lost eight hundred-fifty million dollars, largely due to natural disasters in various parts of the world.

2012 was a boom year, with a profit of over two and a half billion dollars. And so it goes. These days, the ‘Names’, wealthy individuals that collateralize risk, correspond to less than 14% of the overall funding—much of the capital needed to operate this gigantic market is now provided by companies.

Uncle Winston contemplates the Market from the elevated pedestal of the eleventh floor boardroom.

Uncle Winston contemplates the Market from the elevated pedestal of the eleventh floor boardroom.

It’s a rare privilege to see all this from the inside, and even more unusual to go into the upper floors of the building, and see the paintings hanging in the boardroom. Winston Churchill is a prominent feature, much to my delight.

Churchill is looking solemn, as befits a man who struggled with money problems all his life. The picture was painted in 1958, around the time the queen inaugurated the new headquarters.

By then, the Market was already an old lady, having protected generations of ships and cargoes. It has secured sail, steam, and nuclear power, and insured everything from slaves to spaceships.

Atmos Fear and The India Road. Quick links for smartphones.

Atmos Fear and The India Road. Quick links for smartphones.

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