The Insurers Who ALWAYS Paid Out: The Lloyds of London Story Part I

Pushkin. Too quick? No, it was perfect. Pushkin. Stop. You got it. Robert Smith. Robert Smith. What's the painting? Robert Smith. Yes, sir. Get excited. I'm going to tell you about the stories of the Lloyds of London. Yes. We're going 300 and plus years. We're going from Edward Lloyd the man selling coffee for a penny a cup in the 1680s into the 20th century when Lloyds ensured Bruce Springsteen's voice and nuclear power plants and satellites all the way up to the moment when Lloyds almost took down the global economy with it. It's too much for one show. So we're doing two. I'm Jacob Goldstein. I'm Robert Smith and this is Business Today is the first of two episodes about Lloyds of London. One for each L. Nice. It's the llama of insurance. The Lloyds story includes but is not limited to the Enlightenment, coffee, war, prediction markets, earthquakes, the Titanic asbestos, Pink Floyd, and the Queen Consort of England. May she reign forever. Also. What? There's more? I wrote a click baity headline for our nerds. The way Lloyds used unlimited liability will shock you. Like, like, like. Subscribe, smash that subscribe button. Robert, before we get into the Lloyds story, let's talk about insurance for a minute. As we have talked about insurance on many occasions over many years. I love insurance. I love insurance because it has all of the global forces of economics, all of the incentives, the risk. It all boils down to one industry that writes in very small type. The smallest. The finest of print. The finest of print. And really, I think it's not overstating it to say insurance is a way of thinking about the world, right? It's a worldview and it says the world is not fundamentally random and chaotic, right? It's fundamentally predictable, given enough data, enough numbers, right? The insurer says to you, show me one million people, give me some basic information about who they are, how old they are, etc. And I can tell you to a pretty good approximation, how many of them will die next year? And more than that, if an economy is going to grow, if the world is going to grow, people have to take risks and that's scary. You know, you have a lot of hope, a lot of optimism. You need someone in the room to say, I did the math. This is exactly what the risk is and I can take some of that risk from you. Yeah, and truly, you couldn't have the modern world without it, right? You couldn't have container ships without insurance. You couldn't have satellites. You couldn't have a concert at a stadium. None of that would happen if you didn't have insurance. And clearly, I'm going to say clearly, the most interesting story in the history of insurance is the story of Lloyd's. Ready? Here we go. Buckle up. As they say on the AI podcast, it starts in the late 1600s in London and at the time, London's hottest clubs were coffee houses. Coffee was new to London at the time, England just been there for a few decades. And you know, it's this very exciting moment, right? It's the enlightenment. It's the moment when ideas are starting to spread and to grow. And coffee is really central to that. Coffee and ideas, they go together. In fact, they called coffee houses penny universities because for a penny you could go to the coffee house, get jacked on caffeine and learn from the people around you. And different coffee houses kind of then as now, but I think even more, had different sort of intellectual specialties like the clergy hung out at the coffee house near St. Paul's. There was one on Exchange Street where the brokers hung out. That actually ultimately became the London Stock Exchange. There was another one where the guys from the Royal Society, including Isaac Newton, was like inventing calculus hung out. And then down by the Thames, by the river, by the customs house, there was Edward Lloyd's Coffee House. Which was a place where captains could go, right? And people who worked on ships. Yes, yes, naturally they just went there because that's the coffee house in the neighborhood. Edward Lloyd was a, you know, he was not a merchant, he was not a shipping guy, he was the son of a knitter, framework knitter, decided to get into the coffee business in the 1680s. And because of the location of his shop, it became this central hub for shipping. And it did well. And a few years after he opened the shop, he moved up to Lombard Street, which is kind of like the Wall Street of London. So now he's at the nexus of shipping and finance, which is a good nexus to be at in London for any time from 1680 to, let's say 1914, right? It's what is going to build the British economy. Finance plus shipping. And Lloyd's is right there. And it's exactly what you need for the birth of insurance. Information and money coming together. Yeah, and the information piece is really central. And Edward Lloyd saw it, right? He wasn't an insurance guy, but he understood that that's what people were coming for. His coffee house was just a room, you know, 40 feet by 50 feet, sand on the floor, big tables. But Lloyd started consciously adding information to the mix. He actually started publishing just a little newsletter we would call it today. It had two sections here. I wrote them down. Say, read the names of the sections. Okay, the sections are number one, ships arrived at and departed from several ports of England as I have account of them in London. One. Domestic news. An account of what English shipping and foreign ships for England I hear of in foreign ports. Two, foreign. And I love that both of them are like, I don't know, it's what I heard. It's gossip. It's just what we think ships are coming. A few decades later, it morphs into something called Lloyd's List. Which is in fact still published today. You can go to Lloyd's List.com here. Do it. I'm pulling it up. And not surprisingly, it's all about the Middle East. Just brought me up a dismiss. I don't want to register. Fallout will ripple across globe amidst straight of Hormuz doomsday scenario. So this is a version of an account of what English shipping and foreign ships for England I hear of in foreign ports. So Lloyd's is bringing the information into the coffee house. The merchants are there. The sailors are there. He actually starts having auctions at the coffee house. And the particular way they do it is pretty delightful. They called them candle auctions. So say they were auctioning a ship, which was a thing they would auction off there. They would light a candle. The bidding would begin. And it would continue until the candle burned all the way down and out. Which is drama that I love. Like presumably everybody's looking at the candle, you know when it's going to end. And they're trying to decide to come in at the last minute with a slightly higher bid right before the candle goes You wonder if somebody makes the bid and it's like pfft pfft pfft pfft pfft So Lloyd's is just a coffee house where these people are hanging out where there's information and organically insurance starts happening there. You know, a ship owner wants to protect himself against loss. If the ship gets captured by pirates. He tells his coffee mates, oh I have this great opportunity but you know, I don't know if I lose this ship, I lose everything, I'm probably not going to take this tremendous financial opportunity and someone comes in and says, well I can help ensure your ship for you. Yes. I can share the risk. Yes. And insurance is a thing by this point. They're not inventing it at Lloyd's. And the way it basically works is someone with a ship down on a piece of paper, you know, the value of the ship or the cargo, the nature of the voyage that's basically it, right? Like what is it, how much is it worth and we'll take that piece of paper around to the tables at Lloyd's where these, you know, financiers merchants are hanging out and the merchants who want to ensure part of the risk will write their name underneath the slip, you know, at the bottom of the description. And often they'll share it. So like one merchant will be like, yeah, I'll take 10% you know, it's like a thousand pounds worth of stuff, I'll ensure a hundred pounds of it for some price. And so these guys, these merchants writing their name underneath the description come to be known as under writers. Isn't that nice? That is great. Or from the Italian sub-scribers. No. Love that one, yeah. Yeah. I'm not going to be a bad guy or something. That they may have been using in Italy already, right? This is not a new system. And in fact, in fact, insuring ships more generally is truly ancient. As far as I can tell the first kind of insurance was for shipping. It's been around for thousands of years by the time Lloyd's gets going. The earliest insurance we know of comes from the Code of Hammurabi. No. 1750 B.C. Babylonian legal code. This is the oldest we've gone, I think, so far. The one to beat. The one to beat. The one to beat. And that insurance was something known as bottomry. And the way it worked was, someone, say, Coloma Merchant, could borrow money to fund a sea voyage. So you borrow the money, whatever, you buy your stuff, you hire your crew. If the ship is lost, you don't have to pay back the money. But if it returns successfully, then you pay it back with interest. And that interest is effectively a premium. It's what the insurance premium is. And it makes sense, it makes sense that insurance should start with ships. Because ships have really the two things you want for an insurance market. One, something that's so valuable that you'd be totally screwed if it was lost. And two, it's facing a risk that is fundamentally quantifiable. There are lots of ships going on similar voyages. So you can even before there's mathematical probability invented, people have a rough sense of the probability of loss. So if you multiply the value times the probability of loss, that tells you basically how much you should charge for your premium. That's what you need for an insurance market. And I'm going to add a third one, which is there is a definable outcome. The ship arrives or it does not. And then your contract can be exercised. Yes, you don't need a bunch of lawyers saying there is a ship where there is not a ship. Although that will emerge later. Yes. So Edward Lloyd sets up shop becomes the hub of the marine insurance business in London. And sells a lot of coffee. Sells out so much coffee. And I want to be clear because this is one of the most interesting things about Lloyd's. Lloyd's itself never becomes an insurance company. It's a marketplace, right? It's a place where people selling insurance and people buying insurance come together. Like think of a stock exchange, but for insurance. That's what it is and what it always will be. Edward Lloyd died in 1713. Coffee house passed down through sort of family, through various owners. And over the years, over the decades in the 1700s, something really interesting happened to the insurance market at Lloyd's. And that is it went from being this useful service insurance to being a market for rampant speculation. Almost like this happens anytime there's a market, but go on. Yes. Yes. Which is kind of reassuring, right? Everybody's like, oh the world today. No, in fact in the 1700s at Lloyd's people start taking out insurance policies on voyages where they have no financial stake. They're just sitting there like, oh that guy's ship. It's finished. I saw a drunk captain. I got I'm taking out insurance on that guy. They even start taking out life insurance policies on random people. Like some guy on trial for treason they'll basically be betting that he's found guilty. And they invented calcium poly market. Yes, prediction markets, right? Yes. We call this prediction markets today. And interestingly, everybody is like, oh this because the world is so bad today. Everything is so financialized now. No, the world has been kind of gross and financialized for 300 years. Actually more. We recently did a prediction market story and it actually goes back even farther. There are people who argue that what was happening in the coffee shop may have some positive effects. If someone knows the captain is drunk, goes and takes out a policy on him, you're at least sharing information. That is information and that's what you're in the coffee shop for. So that's the pro prediction markets argument. That's fair. There are lots of people today and then who say it's just gross and bad and not doing what insurance is doing. And crucially at Lloyd's some of the underwriters, some of the people who are doing their business there hated this prediction market thing and decided to get out and create what would become the Lloyd's we know. That is after the break. Hi, I'm Willa Paskin, the host of Decoderang, Slate's podcast about cracking cultural mysteries. On Decoderang we dive down rabbit holes and obsessively explore questions hiding in plain sight. Like why has slow dancing gone out of style? And when did we all become obsessed with hydration? And where did the word mullet, you know, to describe a hairstyle come from? That's Decoderang, named one of the best podcasts of 2023 by the New York Times. Listen to new episodes every two weeks and make sure to follow us so you never miss one. So it's the 1760s and some of the underwriters at Lloyd's think the whole prediction markets thing, I didn't call it that then is a bad look. And not just in a, you know, these degenerate gamblers are making us look bad kind of way, because of the nature of insurance, right? In a normal business you pay your money, you look at the merchandise, it's fine, you walk away and that's the end of it. But insurance is not like that. In insurance you pay your money and then you go away for a month, six months, a year. And if your ship sinks you come back and then you have this giant claim. It's a relationship, you have to be able to find the underwriter after something goes wrong. You have to trust, you have to trust that they're going to be around and they will give you the money. And so, you know reputation always has some value in business. But in insurance reputation is profoundly important. And so in 1769 a bunch of underwriters who are worried about their reputation decide to separate themselves from the gamblers at Lloyd's and break away to a new coffee house. They leave Lloyd's they set up a new coffee shop that they call New Lloyd's. Wow. 3L, so they're first in the phone book. LL, AAA Lloyd's insurance. It's like rays, remember rays pizza in New York? Yeah. It was original rays. There still is. Famous original rays maybe, famous rays. I don't know. The old Lloyd's actually kind of atrophies appeared. So New Lloyd's just becomes Lloyd's. And by the way the sort of prediction market type gambling that actually gets banned by law. And then a couple years after that initial split 79, I believe it's 79 of these merchants and underwriters who've gone to start New Lloyd's they take an even more important step. They decide like we're not just a bunch of people who happen to work in the same room in the same coffee shop. We are something more than that. We're not exactly a company. We don't work for some boss. But we are what? We're an association where they come to be known later as the society of Lloyd's. And so they create a set of rules that they all agreed to abide by. And they actually have a leader who emerges at this time not a boss because they don't have a boss, but a guy who's clearly kind of bringing them together making them something more than a bunch of people who happen to work in the same room. Like this guy is he's going to say he's the first key figure in the history of Lloyd's, but I guess Lloyd was the first key figure. So he's the second key figure. His name is John Julius Angerstein. His name was my name too and whatever you go out. John Julius Angerstein was born in St. Petersburg, Russia moved to London as a teenager, started hanging out at Lloyd's doing a little underwriting on the side as people did. And John Julius Angerstein was very good at pricing risk which is the essential skill for an underwriter. Do we know why? Was he better at math? Don't know. Don't know. Just know that he kept getting it right to the point where the policies he wrote became known as Julians. Oh, gold standard. Yeah, like a brand. And everybody else was eager to like get in on them. You know, underwriters would share risk. So he actually started this thing at Lloyd's where there would be a lead underwriter. The first person who underwrote it would set the premium and everybody else would just be in or out. Yeah, if John Julius is your lead underwriter, you're like, this is easy money. This is easy money. He knows how to price risk. Yeah. And Lloyd's is rising in stature now and they decide you know, coffee house isn't going to do it. And so they all put up 100 pounds to find a new location and they move to the Royal Exchange. Not a stock exchange but kind of a commercial building. Queen Elizabeth had opened it a couple hundred years before this and this is where Lloyd's becomes you know, the Lloyd's of London that we know. The place where everybody goes to ensure a ship or the goods on a ship. You had to bring your own coffee. You had to, I don't know if you had to bring your own coffee. There might have been a kitchen there. Don't know about that. Okay. And now Lloyd's is high brow. It has become high brow. Angerstein is friends with Nelson the naval hero with Pitt the prime minister. He collects Renaissance paintings. In fact, after he dies, a bunch of his paintings become like the nucleus of the national gallery in London. And he has John Julius Angerstein has this one moment that is his like signature moment. And it comes in 1799 when there's a financial crisis in Hamburg what is not yet Germany and London bankers want to step in to prevent the crisis from spreading. There's no central banks really yet at this point. And so the bankers get together a bunch of gold and silver that they're going to lend to the bankers in Hamburg to try and stop the crisis there. The gold and silver is loaded onto a ship called HMS Loutine that had been won from the French earlier. Fun. It's a ship loaded with gold and silver setting out on the high seas. Setting out on the high seas. We know what's going to happen and we know what's going to happen first. What's going to happen first is there's one place you go before your ship full of gold and silver leaves port. Yes. Loids to buy insurance for all that gold and silver. John Julius Angerstein is the lead underwriter. The ship set sail. Riding low in the water. It's filled with gold and silver. And it does hit a storm off the coast of the Netherlands. Crashes into a sand bank. It sinks. Captain Lancelot Skinner goes down with the ship of more than 200 people on board. Only one survives. And a few weeks later John Julius Angerstein and the other underwriters pay the claim in full. That is brand management. That is brand management. Now you have a ship full of gold and silver and it's not like out in the middle of the ocean. It's, you know, off the coast of the Netherlands. You can see it. And so of course people are always going out there being like, I want some of that gold. And occasionally they manage to, you know, get a little bit. There's no great recovery. But they get the ship's bell. The ship's bell, you know, it's kind of cool. It's not a fortune, but it's cool. And they send the bell back to Lloyd's. And Lloyd's puts the bell in the middle of the room, the underwriting room. And is this a reminder to like always get the price of insurance right? It is a reminder and a reminder that Lloyd's pays its claims. But they do also give it a functional role. And that was this. When news came in about an overdue ship that had been insured by Lloyd's, they would ring the bell. One ring meant the ship had sunk. Two rings meant it had arrived safely. So you can imagine the drama, right? Like they ring it once and everybody pauses. Baw. Ah! Huzzah. And they really feel the huzzah because it means they don't have to pay the claim. Not that they're not good people. But I think it's also important because it is really showing us how Lloyd's is self-mythologizing. As you said, managing their brand, we would say today. It's Lloyd's consciously creating the legend of Lloyd's. And in fact, Lloyd's is unique. I mean, there are you know, the kinds of insurance companies that are familiar to us today by this point. But Lloyd's, this market where these underwriters are working side by side, not working for an insurance company is unique. And it's kind of amazing that not only does it work, but it comes to dominate marine insurance in this company that's going to be the most important marine power on the planet. So there is this one other part of the Lloyd's story that was not mythologized, that was not told, that was basically ignored for a long time. But it's been getting a lot more attention recently. And that is the slave trade. In this era, we're talking about, you know, late 1700s into the early 1800s was the peak of the trans-Atlantic slave trade. And underwriters at Lloyd's did sell insurance, both on the ships and on the lives of the enslaved people themselves. And a few years ago, Lloyd's commissioned an academic study of this history. They're like, you know, we don't want to ignore it anymore. We want to talk about it. They formally apologized for their role in the slave trade. And there were some people who said, that's fine, it's good that you're doing this. But really, what you should do is give back the money you made from insuring slave ships. And they did make money off this. They did make money off it. But of course, Lloyd's has not given back any of that money. We'll be back in just a minute. Bung. Music . Hi, I'm Willa Paskin, the host of Decoderang, Slate's podcast about cracking cultural mysteries. On Decoderang, we dive down rabbit holes and obsessively explore questions hiding in plain sight. Like, why has slow dancing gone out of style? And when did we all become obsessed with hydration? And where did the word mullet, you know, to describe a hairstyle come from? That's Decoderang, named one of the best podcasts of 2023 by the New York Times. Listen to new episodes every two weeks and make sure to follow us so you never miss one. Music We're back. Bung. Bung. It's the late 1800s. And the next big thing is about to happen at Lloyd's. And that is going beyond shipping, going into what they call the non-marine business. And there is a guy, there is one underwriter who really takes the lead here and his name, most British name ever, Cuthbert Eden Heath. Cuthbert Eden Heath. Son of an admiral, of course, starts working at Lloyd's at age 18, becomes an underwriter at 21. And his first big moment comes in 1889 when he's 30 years old and there is an epidemic of burglaries in London. Burglaries. So back then burglars actually did wear the black masks and the striped shirt. They have a big sack. Of course, it would be a dollar sign, it would be the L, right? It would be the pound sign. They had a big sack filled with candlesticks. And then people would wake up and they'd be wearing the little cap and they'd be like, Martha. We've been robbed. Burgled. Burgled. So at the time you could buy fire insurance on your house that had actually been around for a few hundred years but there was no insurance policy that would cover burglary. And one day in 1889 a broker says to Cuthbert Heath everybody's afraid of burglary right now could you write an insurance policy that covers that? And Heath's answer is famous. He says, why not? Why not? This becomes his motto. Why not? How did he know how to price that? They had 200 years of marine information. You said how important information is. But how do you figure out when something new is happening like this burglary? So Cuthbert Heath had a more nerdy motto than why not, which I really like. And that is, any risk is insurable at the right price. At the right price. What this is telling us is he understood this issue that you're raising. He understood that insurance is fundamentally about data. And he was really a data guy. In a lot of ways he starts selling all kinds of insurance policy and his big breakthrough is combining that why not attitude. Swashbuckling, sure I'll sell this, I'll sell that with this very nerdy dedication to data. So like for example people wanted catastrophe insurance basically in the Caribbean where Americans periodically sweep through and wipe everything out. Why not? Heath says, and he studies 100 years of historical hurricane maps to get the data. There's a smallpox outbreak in London and people want smallpox insurance and he says okay, I'll sell you smallpox insurance and if you get vaccinated you get 75% off because he understood how profoundly vaccination reduces risk. Is this also the rise of a fear about things that are rare in the world because we have a lot more newspapers and communication. You're learning about a lot more bad things that can happen in the world like a spate of burglaries. That's an interesting question. I mean maybe that or maybe it's more of a belief in probability, right? I feel like if you go back a fair bit of time people didn't think of the world as probabilistic. They thought of it as God's will that something will happen or won't happen. And so the notion that you could insure against risks would have been odd. Maybe it's also there's more people with money. The world is becoming more financialized, right? By this point the industrial revolution in England has happened. Wages have risen so people have money for things like insurance. These could all be reasons it's happening. You have a house full of candlesticks. You want to get the fire insurance or the burglarie insurance. That's right. If you have a mud hut it's not so high on your list. Let me give you a couple more Cuthbert Heath great moments in insurance. Greatest hits. World War I, everybody's terrified that German zeppelins are going to float over the channel and bomb London. And so Heath does some math he's like why could sell you insurance and gets that and he's like well let's see you know here's about how many airship attacks Germany could mount here's how many bombs a zeppelin can carry here's how much damage each bomb can do. But obviously this is not a data rich project there's not hundreds of years of data so he's like okay that's an estimate I'm going to multiply that by six give myself some wiggle room and that's the premium. Absolutely. The most famous kind of insurance that Heath sold was earthquake insurance and to figure out how to price earthquake insurance he did a few things he paid people in India he dropped maps of historic earthquakes he gathered data from South America from North America he created this handwritten earthquake book that I think Lloyd still has in the vault. So he knows the sort of average damage that it does how often it might happen. Aware right earthquakes as we know are not randomly distributed around the globe and there is a big moment for Cuthbert Heath you can guess it right he's working in the late 1800s early 1900s selling earthquake insurance it's a moment we've already talked about on the show we have 1906 the San Francisco earthquake we've referred to it because it disrupted the railroads disrupted financial markets usually. Led to the panic of 1907 yeah so you know the earthquake itself lasted for one minute or so did a lot of damage but things got much worse over the next couple of days after that because of the fires right fire started the pipes were broken and fires just consumed the city in the end something like 80% of San Francisco was destroyed 28,000 buildings were destroyed so it's a total catastrophe it's a profound human tragedy and from the point of view of an insurance company it's a rather complicated situation because some buildings had earthquake insurance but not fire insurance some had fire insurance but not earthquake and if there's an earthquake and then your house gets burned down by a fire is it covered if you don't have fire insurance? Yeah I remember after Hurricane Katrina you might have had hurricane insurance but not flood insurance and this is kind of why people hate insurance companies right? You pay your premium year after year you think you're insured on certain things. The bad thing happens and then you go to the insurer and they say oh look actually on page 11 it says blah blah blah sorry we're not going to give you any money. So this is happening in San Francisco after the earthquake people are arguing with their insurers many of them are not paying claims or paying some of the claims and as this is happening Cuthbert Heath sends a telegram to his agent in San Francisco I wrote it here read it the telegram said pay all our policy holders in full irrespective of the terms of their policies irrespective of the terms he's saying don't read the fine print just pay just give people money to rebuild their houses to rebuild the city of San Francisco we do not see this kind of telegram very often today. No it says do not pay our policy holders. Irrespective of the terms of their policies and you know it's great that he did this and it was great for Lloyds. Sure sure we talked about reputation as everything and at this moment this probably sealed the fame of Lloyds not just among ship owners and building owners but worldwide. Yes people suddenly knew all around the world that Lloyds paid its claims next time on business history part two of the story of Lloyds one free shell in the 20th century Lloyds goes bananas. They ensure rock stars voices they ensure nuclear power plants they ensure satellites they ensure everything that moves they ensure lots of things that don't move and eventually all that insuring bankrupt some of the richest people in England also some people who weren't that rich it almost takes down Lloyds and almost blows up the global economy. BONG BONG BONG BONG Today's show was produced by Gabriel Hunter Chang and engineered by Sarah Bruggeer our video editor is Matt Nielsen Yes we have videos on YouTube Our showrunner and editor is Ryan Dilley I'm Jacob Goldstein and I'm Robert Smith and you can email us at businesshistory at pushkin.fm Thanks to everybody who's been emailing we love them we talk about the emails we're excited about them so please keep it up Thanks for listening The Wired Newsroom is known for award-winning reporting on how technology shapes our world on Wired's Uncanny Valley we take that curiosity even further Each week journalists from Wired break down the biggest stories in tech while speaking directly with the people building challenging and reshaping the future Is the AI boom sustainable? How do you protect your privacy in an age of constant surveillance? Uncanny Valley tackles the questions driving today's tech debates and lighting up your group chats Listen to new episodes every Thursday wherever you get your podcasts