Avast, Ye Mateys: There’s Insurance Fraud Ahead

The Yemeni coast guard patrols the Gulf of Aden off the coast of Yemen (AP Photo/Mohammed al-Qadhi)

Bloomberg’s Kit Chellel and Matthew Campbell have done yeoman’s work uncovering the details of the (alleged) hijacking of the commercial shipping vessel Brillante Virtuoso off the coast of Yemen in 2011. There are enormous, multi-million dollar ships. Pirates. Murder. Email hacking. Tug boats. Rally racers. Veiled courtroom threats. There is little that is not fascinating in the convoluted, dangerous story, not least this peek into the byzantine machinations of Lloyd’s of London’s risk insurance.

Anytime a commercial vessel is lost, the incident is recorded with a quill pen in a leatherbound book at Lloyd’s, a London institution that blends age-old ritual with modern finance. Contrary to common belief, Lloyd’s isn’t an insurer, or even a company in the usual sense of the word. Since its origins in a 17th century coffeehouse popular with traders who funded sea voyages, Lloyd’s has evolved into something like a stock exchange for risk, where actual insurers come to buy and sell exposure. These companies form syndicates and get insurance of their own from even larger re-insurers, who are re-re-insured in turn. These layers constitute one of the world’s most essential and least understood markets, where premiums alone generate about $40 billion a year. Anything that might be lost or cause a loss, from Bruce Springsteen’s voice to a Virgin Galactic spacecraft, can be insured via Lloyd’s, but shipping remains at its core. Some 80 to 100 major vessels are lost each year, and the Brillante was one of the largest of 2011.

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