Why is it difficult and more expensive to get insurance for unique risks? Since premiums are likely to be high for specialty insurance, why would companies and individuals purchase that insurance?

Insurance traditionally spreads the risk of financial loss across a large number of individuals or companies, each of whom faces a similar type of risk. Individuals and businesses may also face financial losses that are unique. A group of investors in a new movie may lose millions of dollars if production problems occur. An athlete’s career and earnings will be lost if he or she suffers a major injury. The cargo of a large ship, a major entertainment event that is dependent on good weather, or a fundraiser that offers a large prize for a difficult accomplishment such as a hole-in-one at a golf tournament each presents a possible but reasonably unique risk for the investors or event planners. Those unique risks are difficult to insure and have resulted in the growth of the specialty risk market.

Lloyd’s (also known as Lloyd’s of London) is the largest source of specialty risk insurance in the world. Surprisingly, Lloyd’s is not an insurance company or even an actual company by itself. Instead it is a market where companies and wealthy individuals invest money to insure unique risks. Insurance is provided through syndicates or groups of investors who pool their money to insure specific categories of risk.

Today Lloyd’s has 64 syndicates which specialize in areas such as aviation, catastrophes, and professional risks.