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IN the following chapters it is proposed to deal with the books of account incident to the business of underwriting, and although there are many corporate bodies and associations in different parts of the United Kingdom and abroad formed for the purpose of promoting and fostering marine insurance, this book will be confined to Lloyd's, as being the oldest and most famous of these, and the one where the largest proportion of the world's underwriting business is carried on. At the same time, the system of bookkeeping which will be advocated will be equally applicable (subject to adjustment in respect of particular local customs) both to underwriters who are members of the above various bodies, and to those, usually called outside underwriters, who have no official connection therewith.
It may be well in passing to briefly indicate the origin and growth of this ancient association, as it will enable the reader more clearly to perceive the methods by which business is carried on there to-day. The early underwriters were wealthy individual merchants, bankers, money-lenders, and others, who
soon recognised the truth of the maxim that "Union is strength," and the advantage to be obtained from associating themselves together for their mutual protection and benefit. They recognised that, in order to make hazardous business of this nature consistently profitable, it was necessary for each individual to "write " a large number of small risks, rather than confine himself to a few of greater magnitude, in order to allow the law of average proper scope for its action. Accordingly an Association of Underwriters was formed, and the practice of spreading the risk in each particular instance over as many individual members as chose to write a portion of it came generally into vogue. These first made their headquarters in Cornhill, but early in the eighteenth century removed to a coffee-house kept by a Mr. Edward Lloyd, in Abchurch Lane, Lombard Street. Thus, by the familiar association of ideas, it can readily be seen how the Corporation of Underwriters first received the name which has since become famous throughout the length and breadth of the civilised world.
An underwriter is one who for a consideration, termed a premium, undertakes to indemnify against loss in the event of any of certain contingencies arising.
In order to carry on business with the official sanction of Lloyd's, it is necessary for an underwriter to become a member of that body, and to qualify for that distinction in accordance with the rules of the Corporation. At the present time these necessitate that he should be introduced by means of an application signed by six members, and that his financial stability should be proved to the satisfaction of the Committee. He will be required to place on deposit with the Committee a sum of money, at least £5,000. This is now practically a sine quâ non, and though only a practice, comparatively speaking, of recent
years, is a notable necessity in a business of hazard such as Marine Insurance, and of specially greater consequence under the conditions now in vogue, which have produced within the last forty years or so new contingencies which have to be met. This deposit is invested in approved securities, and the interest thereon is received by the underwriter, the principal being retained under the control of the Committee during the period of his continuance in business, in order that it may be available to satisfy the liabilities that must arise on the cessation of the same. This fund cannot be hypothecated for any other purpose until these claims have been met. It is to be noted, however, that in the event of winding-up, only liabilities on Marine and Transport risks have a charge upon it, those incurred on "contingency risks" not being specifically secured. The term "contingency risks includes all risks other than those above mentioned-such as stationary Fire risks and Guarantee risks.
Although many underwriters carry on business themselves, it may be said that the majority prefer to employ an agent, who is termed an Underwriting Agent. The reason for this custom is obvious. The underwriter may be a merchant in London, or a gentleman in the country, possessed of capital, which he is desirous of employing in this way, but possibly unfamiliar with the intricacies and technicalities of the business, and it is therefore necessary that he should be able to employ one who is thoroughly equipped in these respects to act for him.
Distinction between Underwriter and Agent.—
It is very important that the distinction between these two individuals should be understood, as the agent is frequently confused with, or taken for, the underwriter. The former incurs
no personal liability in respect of business transacted on behalf of his principals other than the usual obligations existing between principal and agent. The chief of these, of course, is to account; and since an agent will frequently act for several principals, it is extremely important that he should keep proper books of account. It often happens, however, that an underwriter while "writing" for himself also acts as agent for other underwriters, but the respective transactions undertaken in this dual capacity must be kept perfectly distinct.
This is a technical expression, signifying the principals on whose behalf the agent acts. The latter's remuneration usually takes the form of a fixed salary from each name, together with a percentage, ranging from 15 to 20 or 25 of the divisible profits made by them respectively. This may cover the whole or a portion of the office expenses, or be entirely exclusive of them, according to agreement between the parties.
The insurance broker is the party who acts as an intermediary between the merchant who desires to have his ship or goods insured and the underwriter who may be desirous of accepting the risk. Consequently, it follows that the underwriter is dependent upon the broker for the introduction of business. For this the broker charges the underwriter a commission of 5 per cent. on the gross premium, which is termed “brokerage.” This, however, must not be confused with the additional 10 per cent. "discount," which will be fully dealt with in the following chapter.
METHOD OF BUSINESS.
Broker and Underwriter.
As indicated in the previous chapter, the broker is the party through whom business is introduced to the underwriter, he himself having previously been approached by the merchant who desires to effect an insurance. The broker places before the underwriter an abstract of the risk on a slip of paper, known technically as a "slip." (The word "underwriter” used here must be understood to also include underwriting agent. This will equally apply to subsequent passages, unless the contrary is specifically stated.) The underwriter, if he decides to take the risk, puts down on the "slip" the sum he intends to "write," say £100, at a premium agreed between himself and the broker, say 20s. The broker, having obtained the underwriter's signature (usually an initial only) to the "slip," makes out the Policy, or legal instrument, which he subsequently brings to the underwriter to sign. When this is signed, the transaction becomes complete, the signature of the underwriter on the "slip" having only constituted a provisional insurance. The broker, having thus obtained completion of the policy, takes it away, and either sends it to his principal, the assured, or retains it carefully on behalf of the party whom it may