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The life of Equitable

For a long time, Equitable Life traded on its venerable history. As a national institution it was as hidebound as the tomes on the shelves of the lawyers who have bought its policies.

According to Cornelius Walford, the Victorian biographer of the once eminent and recently disgraced institution: “The history of the Equitable is the history of life assurance in the country. If that be not strictly true, it is yet much nearer the truth than the uninformed could imagine.”

Comments of this nature not only indicate the height from which the Equitable has fallen but also perhaps underwrite the arrogance of the management as it led the institution into its present predicament and humiliation.

The life office started of in the 18th Century as the Society for Equitable Assurances on Lives and Survivorships, and was the idea of James Dodson, a Fellow of the Royal Society and a teacher of maths.

The story – probably apocryphal – has Dodson being refused cover by the Amicable Society, as he was one year over their age limit of 45. This led him to reconsider the basis of assurance and, under the influence of a new generation of Enlightenment mathematicians such as Edmund Halley and Abraham de Moivre,he developed a radically new model.

To garner support and funds for his project, Dodson placed a notice in the press, setting out the basis of his new concept: “It is proposed to insure lives either for a single year or for a number of years certain or for the whole life on premiums proportionate to the several years of the insured (provided the same be not less than eight nor greater than which 67) premiums will be in the most cases be cheaper than usually paid, in some cases not a half of them and the risk is proposed to be borne by the whole body as in the Hand-in-Hand and Union Fire Office.”

With this was born actuarial science – the very name actuary was given its present meaning by the Equitable. The word “equitable” started in contradistinction to the “inequity” of the tontine constructions of existing assurance.

Dodson died before he could see the fruits of his labours. Perhaps unsurprisingly, the creation of the Society was resisted by existing life companies (Royal Exchange and London Assurance in addition to the Amicable) who opposed a petition to the Privy Council for the Society to be granted a charter.

For observers of the present crisis engulfing the Equitable, the wording of the Attorney General and Solicitor General&#39s refusal to grant the charter in 1761 will have a somewhat familiar ring: “It appears to us altogether uncertain whether this project will or can succeed in the manner it is proposed; and if the success is uncertain the fund for supporting it, which is to arise from the profits of the undertaking, will be precarious.”

It was only in 1765 that it was enrolled; though the Equitable has always given 1762 as the year in which it was established.

Not only did the Equitable pull in the punters, but so effective was the new model that the Society found funds very quickly built up as a result of over payment of premiums. This led members to petition for a redistribution of the surplus that accrued. So reversionary bonuses essentially arose out of the fact that the society&#39s new “scientific” approach was even more successful than initially envisaged.

Initially distributions were carried out on an ad hoc basis. But in response to the continuing pressure from members, it was decided that the distributions should be carried out every 10 years. Much debate took place about the need for adequate reserves, and it was agreed that two-thirds should go back to members and the remaining third be reserved.

This “reserved third” led to the Society developing an enviable financial strength. This, hand in hand with restricted membership, enabled other societies to copy the Equitable&#39s template and become successful in their own right. Not only its actuarial model, but its name was imitated by many others in the burgeoning Victorian insurance industry, both in this country and abroad.

The Society assumed it present moniker – the Equitable Life Assurance Society – when it was finally incorporated in 1893. Six years later, it was decided that bonuses should be declared every five years rather than 10.

The Equitable is also a fascinating source for the social and medical history of this country. In 1821 the Society listed the causes of deaths that it paid out on. An eighth died of apoplexy, something that may be affecting present policyholders, though hopefully not fatally. Gout and consumption are some of the more predictable presences on the list. Others are more quaint and include “lethargy”, “visitation of god” and “decay of nature”. And fevers were subdivided into general, bilious, nervous, inflammatory and putrid.

Life assurance was slowly overtaken by pensions as the life office&#39s mainstay, and the Equit-able launched it first pension policies in 1902.

The Society trumpeted its policy of never paying commission to intermediaries, which in part contributed to its position as a market leader. For instance, the Houses of Parliament AVC scheme was placed with the Equitable. But beneath the staid surface disaster was looming.

The problem that has brought the Equitable to its knees relates to guaranteed annuity rate options offered in the high interest climate of the 60s and 70s. These returned to haunt the company when annuity rates collapsed in 1993, making these guarantees very expensive indeed. It transpired that Equitable had insufficient reserves, a situation that pitted the interests of policyholders who had the guarantees against those who do not.

The Equitable&#39s crest of arms has a pelican on it as an emblem of mutuality, which is fabled as feeding its young with its own lifeblood. Now members were left with a similar cannibalistic choice.

To settle the issue, it was agreed that a test case be brought to the High Court in the name of a Mr Alan Hyman. To the Equitable&#39s – and it transpires, the regulator&#39s – surprise, it lost its case, and the House of Lords upheld the decision that the Society fulfil meet its contractual obligations and meet the guarantees.

As Equitable had not the funds to meet these liabilities, on December 8, 2000 it was forced to close new business and put itself up for sale. After potential suitors shied away, it was left to the Halifax to step in with a partial rescue package, though Equitable will not reopen to new business.

A laboriously thrashed-out compromise, approved by the Courts, has after much breath holding seen policyholders exchange their right to guarantees or to sue the Society in return to uplifts to their policies.

However, the once mighty fund remains closed and consigned to history.

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