The Reinsurance Market and its Role in the Lloyd’s of London

In London’s financial district there is a massive building home to a famous financial market that handles risk unlike any other place in the world. The Lloyd’s of London insurance and reinsurance market has no limit on what can be insured. Insurance policies taken out at Lloyd’s include Brooke Shield’s and Tina Turner’s legs, Rolling Stones guitarist Keith Richards’ fingers, and singer Celine Dion’s vocal cords. Therefore, if Keith Richards ever broke a finger and could no longer play the tune to “Jumpin Jack Flash” or if Celine Dion’s vocal cords were ever damaged and she could no longer sing “My Heart Will Go On,” he or she would be paid millions of dollars in insurance. It seems kind of ridiculous that someone would actually take these insurance claims and that insurance agencies would take on this risk, however, at Lloyd’s of London it is all about risk and reward. Lloyd’s does not just handle insurance though, but also another form of risk management that many people do not know about, reinsurance. Every day people use insurance as a form of risk management to limit the risk they face. To control risk, people take out many types of other insurance including auto home, health, life, and property insurance to only name a few. Insurance agencies accumulate millions of dollars of risk that if not handled appropriately can result in devastating loses. But, what if an insurance company wants insurance or they realize they have taken on too much risk? There must be a way for insurance agencies to protect themselves from the potentially crippling risk they have put on themselves. The answer is reinsurance, ‘insurance for insurance agencies.’ Insurance agencies can transfer the risk they have accumulated by going to the reinsurance market. This paper will look at how the reinsurance market is