Reference no: EM13225041

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 (or "underwrite") 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.

1. 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?

2. 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?