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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.

Ditto Independent.

I remember having lunch three years ago with Nigel Webb, who for a long

time was Equitable&#39s only spokes-man. His explanation for the company&#39s

success was not so much it was mutual nor that it paid no commission

(always a disingenuous argument when its salespeople were incentivised in

other ways).

He said it was more efficient, with much lower exp-ense ratios than any

other insurer. That stemmed from its salespeople&#39s 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&#39s 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&#39s 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&#39 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&#39s case, higher bonuses. In

Independent&#39s, 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&#39s commercial interest to be cautious and chuck money at its

reserves. Crucial figures such as returns on capital can be flattered by

taking risks.

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&#39 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&#39s 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


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