Aah – the smells of summer. The scent of flowers in bloom, steaks burning
on the barbecue, the smell of rotting compost and, for the second year
running, the stench as the corpse of a once respected insurance company
rapidly decomposes in the summer heat.
Last year, Equitable Life. This year, Independent Insurance. One a mutual
life insurer catering mostly for individuals. The other a listed general
insurer catering mostly for companies. Of course, the Serious Fraud Office
never took it upon itself to launch a criminal investigation into Equitable
But aside from that, the parallels are startling. Equit-able Life was the
darling of its sector. It beat its rivals hands down on value and attracted
more business per salesperson than any other life ins-urer. Its envious
competitors racked their brains to discover the secret of its success.
I remember having lunch three years ago with Nigel Webb, who for a long
time was Equitable's only spokes-man. His explanation for the company's
success was not so much it was mutual nor that it paid no commission
(always a disingenuous argument when its salespeople were incentivised in
He said it was more efficient, with much lower exp-ense ratios than any
other insurer. That stemmed from its salespeople's high business turnover,
its policy of maximum distribution and its customer base of “high-net-worth
Around the same time,I went to a lunch with Michael Bright and Garth
Ramsay, Independent's chief executive and chairman.
True to his reputation, “Brighty” was down to earth, joking around, a
refreshing break from the condescending attitude of some of his peers. All
Independent's competitors were making a loss on their underwriting and only
getting into profits because steep rises on the stockmarket kept bailing
them out. So how did Independent miraculously make an underwriting profit?
On commercial property insurance, Bright said, they made a point of being
proactive, checking clients' property for safety and fire risks, etc. He
also had a loyal base of general insurance brokers, carefully selected.
And, of course, Independent was more efficient than its rivals
But if either Equitable or Independent had been honest about their secret
of success, they would have added: “We are flying by the seat of our pants.”
They both attracted business by taking risks that more traditional
companies would never have dreamed of. Both held back less and gave out
more than their competitors. In Equitable's case, higher bonuses. In
Independent's, lower premiums for customers and higher dividends for
This worked a treat in attracting new business. But it also meant all the
effort went into growing the business and very little into shoring up the
Reserves were so sorely neglected that they were bound to get caught out
by the unexpected. For Equitable, it was guaranteed annuity rates. For
Independent, it was soaring compensation claims for personal injury.
Both companies tried first to ignore, then to wriggle out of their
respective crises, in the process misleading their customers.
Equitable told its customers that guaranteed annuity rates would never
seriously hurt its finances. Independent told the stockmarket (and its
corporate brokers) that if they just gave it £180m everything would be
One difference. Equitable never, as far as we know, tried to hide its
liabilities. Indepen-dent failed to record tens of millions of pounds of
claims on its books.
Do all these parallels matter? But for one fact, they might simply be an
interesting lesson in what can go wrong with an insurance company. They
show how, in terms of satisfying customers and shareholders, it is not in
an insurer's commercial interest to be cautious and chuck money at its
reserves. Crucial figures such as returns on capital can be flattered by
That has long been the case, and it is why there is a system of
“prudential supervision”, where the Insurance Directorate (once under the
DTI, then the Treasury, now the FSA, but with the same people in charge) is
supposed to ensure that insurers have enough financial strength. Strong
enough to mitigate their clients' risks rather than add to them.
The crucial fact, and the most important parallel between Independent and
Equit-able, is that the whole system of prudential supervision failed in
its objective of protecting an insurer's customers. The auditors failed to
justify their giant fees. A few lone voices who gave early warnings were
ignored or dismissed by the authorities.
In both cases, advisers and brokers displayed astounding naivete by
throwing business at the companies without following the maxim “if it looks
too good to be true, it prob-ably is”.
Both cases demonstrate unequivocally that in their accounting, insurers
have far too much discretion to manipulate the truth. It gives weak
companies plenty of rope to hang themselves.
Most of all, the Insurance Directorate, either through a lack of
alertness, a lack of astuteness, wishful thinking or a lack of willingness
to rock the boat, utterly failed to justify its existence.
Andrew Verity is personal finance correspondent for the BBC