The world famous insurance company Lloyd\'s of London got its start in London in
ID: 1177266 • Letter: T
Question
The world famous insurance company Lloyd's of London got its start in London in the 1600s. Ship owners would come to Edward Lloyd's coffeehouse to find someone to insure (orunderwrite) their ships and cargo for a fee. Coffeehouse customers----merchants and ship owners themselves----who agreed to insure ships would make payments from their personal funds if a ship was lost at sea. By the late 1700s, each underwriter would recruit investors known as "Names" and use the funds raised to back insurance policies sold to a wide variety of clients.
By the 1980s, 34,000 people around the world had invested in Lloyd's as Names. A series of disasters in the 1980s and 1990s-----such as earthquakes and oil spills----resulted in huge payments made on Lloyd's insurance policies. It had become clear that Lloyd's was not a corporation and the Names did not have the limited liability that a corporation's stockholders have. Many Names lost far more than they had invested. Some of those who invested in Lloyd's had the financial resources to absorb their losses, but others did not. Tragically, as many as thirty Names may have committed suicide as a result of their losses. By 2011, only about 700 Names remained invested in Lloyd's. New rules allow insurance companies to underwrite Lloyd's policies for the first time and Names now provide less than 15 percent of Lloyd's funds.
a. What characteristic of Lloyd's of London's business organization was responsible for the financial losses suffered by the Names who had invested in Lloyd's?
b. In the early 2000s, corporations such as Enron and WorldCom suffered severe losses after it was discovered that executives of the firms had falsified financial statements to deceive investors. How were the losses suffered by Enron and WorldCom stockholders different from the losses suffered by Lloyd's of London's Names?
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Explanation / Answer
a). The characteristic of Lloyd that it was an insurance company and for that reason it had to make huge payments to the many companies which were effected by a series of disasters in the 1980s and 1990s%u2014such as earthquakes and oil spills.
b). The losses suffered by Enron and WorldCom stockholders is different from the losses suffered by Lloyd%u2019s of London%u2019s Names in the sense that in the former, it did cheat the shareholders by giving false projection of its financial statements. But in the later case, the losses was because of the nautre's doom which and that it was sudden happening that led the insurance company to pay off more than what it had.The case of insurance company was similar to the situation as, in a bank system, all of a sudden, if all its depositors demand to withdraw their total money, in that case, bank won't have enough fund to give as it has invested those money on loans.
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