Cuthbert Heath

In 1878, at the age of 18, Heath became a clerk at Henry Head & Co., a firm of brokers and underwriters at Lloyd's of London.[12][1][13][5] In 1880, at the age of 21, he was elected an underwriting member of Lloyd's,[1][12][14] with the backing of a £7,000 deposit provided by his father,[13][5][15][4] and he began underwriting for himself two years later, in 1882.[16][17]

Lloyd's at the time was a marine insurance-only insurer, so Heath was a marine underwriter at first. In 1885 he reinsured Hand in Hand Fire & Life Insurance Society's fire risks, thereby reviving fire insurance at Lloyd's, which had previously been discontinued due to high taxation rates.[4][18][9] He started Lloyd's first specifically non-marine syndicate at Lloyd's in 1885.[9][1] Heath thereafter became renowned for increasing, and innovating in, Lloyd's non-marine insurance business, which eventually resulted in changing the face of Lloyd's forever.[19][4]

Heath's innovations in the insurance industry began in the late 1880s. By 1889 someone insuring a house for fire had asked Heath if he could also insure it for burglary, which had never been done before.[20][21][22][4] Heath's reply was reportedly a now-famous "Why not?", which became his motto going forward;[23][24][25][26][1] his principle was "Any risk is insurable at the right price."[27] Around the same time he also began insuring the diamond market, resulting in his creating a "jeweller's block" policy for merchants that covered jewels in transit and on the premises,[4][28][24][29][9] and an "all risks" jewellery policy for consumers that covered loss or theft.[4][28][24][29]

In the late 1880s Heath also invented and offered insurance for loss of profits after a fire,[30][31][9][32][33] also known as business interruption insurance.[34][35] This controversial move created a major uproar, and he was summoned by the Chairman of Lloyd's Fire Offices Committee and asked why he was "ruining fire insurance".[36][37][24] Heath ignored the controversy.[31][24]

In 1890, in order to increase his business Heath established a firm of insurance brokers, C. E. Heath & Co., which became a substantial independent broking firm with considerable overseas business.[4][38][39] In 1890 Heath also wrote the first American risk ever in Lloyd's non-marine market.[40][41][42] In 1895 he wrote the first earthquake insurance policy in the U.S.[43][4] Heath also invented bankers' blanket bond insurance.[28][1][23][9]

Heath was the first Lloyd's underwriter to accumulate detailed probability-of-loss statistics, becoming a specialist in the risks he undertook.[44][45][46] In order to price catastrophe insurance, he initially collected maps of 100 years of hurricane paths in the West Indies, and made detailed notes in a little black rating book which acquired renown.[22][47][45][23][46] He did the same for earthquakes, paying to have maps created of past earthquakes in India, and finding records of past earthquakes in South America, China, and the West Indies.[22][44][47][45][24] He also lent his black book to competitors so they would not naively undercut his rates.[22]

In the 1890s Heath also developed credit risk insurance, with the stipulation that the insured had to bear some part of the risk in order to insure prudence and due diligence on the part of the creditor.[48][49][50][5][4] He established the "8 Principles of Credit Insurance", became the first Chairman of the Trade Indemnity Company, and founded the Credit Insurance Association.[48][5] He also pioneered employer's liability insurance[19][18] and workers' compensation insurance.[1][4][24][29]

In 1894, faced with a need for greater capacity for his non-marine insurance business, Heath established the Excess Insurance Company.[4][51][52] With an initial capitalisation of £5,000, it was used as a reinsurance backing for his syndicate.[51] The original stated purpose of the firm was "to write marine, fire and accident [liability] business and reinsurance".[51]

During the 1901–1902 smallpox epidemic in London, he pioneered smallpox insurance, reducing the premium by 75% if the individual was vaccinated.[27][29][43]

Prior to the 20th century Lloyd's only secured its marine insurance risks. In 1902 Heath finally persuaded Lloyd's to require security deposits for non-marine business as well; this was implemented in 1903.[4][19][1] Heath was also the first to introduce the idea of an audit at Lloyd's;[1] because of the dearth of security for non-marine risks, he required a strict audit of the members of his syndicate, beginning in 1903.[19][1][4][53][54]

On 18 April 1906 a major earthquake hit San Francisco, and the resulting fires destroyed over 80% of the city, killed thousands of people, and left half of the population homeless.[55] Misled by local propaganda as to earthquake likelihood, few residents of San Francisco had bought earthquake insurance, but they had bought fire insurance.[56][57] In the wake of the devastating fires following the earthquake, many insurance companies fought paying their policyholders, often by quibbling over causality (since the insurance was not for earthquakes), or paying only 75% of the amounts due.[56][58][24] This led to many lawsuits from policyholders.[56][24][59][60] At least 14 insurers went bankrupt, and some insurers – mostly German and Austrian – simply disappeared and denied all coverage.[56][58][24][60][23]

Heath and his syndicate had insured aggressively in San Francisco, covering about 20% of the total policyholders there.[61] Nevertheless he immediately cabled his San Francisco agent a now-legendary instruction:

Pay all of our policyholders in full, irrespective of the terms of their policies.[23][62][63]

Lloyd's paid out a staggering $50 million, the equivalent of more than $1 billion in 2010 currency.[63][64][65][55] Heath's action, however, cemented Lloyd's reputation in the U.S. as an insurer that promptly and fully paid all valid claims,[64][27][23][63][58] and led to a great increase in Lloyd's business there[64][27] and eventually elsewhere as well.[64][63][58][66] The United States soon became Lloyd's largest market.[67][62]

The catastrophe came at a difficult time for the insurance industry, as the preceding years had left many insurers reeling from several other costly disasters, including the 1903 Chicago fire in the Iroquois Theatre which killed 600 people, the 1904 fire on the steamship General Slocum in Manhattan's East River which killed 1,021 people, and the 1904 Great Baltimore Fire which caused losses of $90 million.[43][68] Additionally, a few months after the San Francisco earthquake and fires there were further catastrophic earthquakes and fires in Valparaiso, Chile and in Kingston, Jamaica.[69]

By 1907 Heath therefore devised excess-of-loss reinsurance, to provide insurers with the protection they needed against catastrophe losses like the San Francisco claims.[69][70][19][71][72] These reinsurance policies paid out only when the loss was above a certain threshold, and put a cap on payments;[73][51] they also involved layering and retrocession, thereby inventing vertical reinsurance.[9][1][51]

An additional consequence of the San Francisco earthquake and fire was that in 1908 Lloyd's as a whole adopted Heath's model of a strict and compulsory annual audit of all members' accounts.[4][19][54][1] All underwriters were required to provide certificates of solvency from approved auditors, and premiums were held in trust accounts for the payment of claims.[1][53] These practices became the cornerstone of Lloyd's solidity for the rest of the 20th century.[4][53]

Heath sold the first Lloyd's auto insurance policy in 1907, for American drivers and their cars.[43][24] In 1912 he sold the first fleet coverage, to a meat-packing company in Chicago.[24]

In 1911 he was elected to Lloyd's Committee, its governing body, and served on it through 1915.[4][16] Also in 1911, non-marine insurance at Lloyd's, which he had initiated and so greatly expanded, was given official legal recognition and status, via the Parliamentary Lloyd's Act of 1911.[28][53] In December 1911 The Times wrote of him, summarizing his achievements:

Mr Heath is head of CE Heath and Co, brokers and underwriters, and a director of the Excess Insurance Company, the Fine Arts and General Insurance Company, and of John Broadwood & Sons. He was the pioneer of Lloyd's fire business, and practically all the miscellaneous classes of insurance. While he has been a leader in what may be decided as the most hazardous risks, he has consistently pressed for safeguarding further the financial security of Lloyd's members.[1][74]

During the First World War (1914–1918), Heath engaged in a considerable number of civilian service activities, including donating his mansion for use as a military hospital, for which he was awarded an OBE.[8] Business-wise, in 1915, following Zeppelin attacks on London, he estimated the number of Zeppelins, the frequency of attacks, the number of bombs each Zeppelin could carry, the damage area of an explosion, and how much of London was built up as opposed to open spaces.[75][27][9] After calculating his risks he offered bomb insurance through the end of the war, raising and lowering his premiums with the intensity of the attacks.[75][27]

In 1919 Heath ventured into aviation insurance,[76][4] and started the British Aviation Insurance Association.[77] Also by 1919, he was noted as "the leader among the Lloyd's underwriters", with his finger on the pulse of the insurance public.[78]

During the 1920s Heath withdrew from daily business at Lloyd's, but his syndicate continued to lead the non-marine market.[4] By the 1930s his annual income was estimated to be £60,000, and his syndicate was underwriting for 300 members.[4]