Anthony Hilton: When is a riot not a riot? Police and insurers will have to fight this one out
A law dating back to the 1800s says the police, rather than insurers, have to pick up the bill
Saturday 21 January 2012
Normally in difficult economic times, insurance claims go through the roof. Businesses that struggle to shift stock have a convenient fire in the warehouse; individuals who fear being made redundant have a company medical that discovers a hitherto concealed illness; the weekend break in the sun gets spoiled by the theft of a camera.
But the head of one of our big insurance companies told me over lunch this week that this time it's different. While he would like to believe we have all become more honest since the last recession, he fears that it is more likely that we have just got smarter, so the frauds are harder to spot.
Right now though, it is not the villains who are his major worry; it is the police. At issue is a law dating back to the 1800s which says that when there is a riot, government or, more specifically, the local police, rather than the insurance companies, have to pick up the bill. In cases where insurance companies have already paid out, they should in due course get reimbursed by the authorities.
But these things are never simple because apparently there is no universally agreed definition of what constitutes a riot. Instead it appears that an unruly gathering of people becomes a riot only when the police say it is a riot.
That sounds a bit like pornography – hard to describe but you know it when you see it. So in this case, with so much CCTV around, it ought to be possible to rerun the footage and let the various parties agree where and when things got out of hand.
Unfortunately, much to the chagrin of my mole in the insurance industry, the police are wise to this. So far, they or their lawyers are sitting on all the footage, and show little inclination to hand it over. After all, if there was no riot, then they don't have to pay the bill. Perhaps all those fires were started not by rioters but by rogue arsonists.
It promises to be a lengthy affair, with the lawyers, if no one else, looking forward to a lucrative summer.
If only these captains were at the helm now...
Breakfast on Wednesday in the Wolseley with Sir Richard Lapthorne, chairman of Cable & Wireless Worldwide, who says that, as a bit of an outside interest, he will soon be taking the place of Sir Patrick Sheehy as a non-executive director of a company based in Canada. Sir Pat, now into his eighties, thinks it's time he slowed down a bit.
It is a name that may not mean much in the City of today but in the 1970s and 1980s Patrick Sheehy ran BAT Industries, the tobacco giant, and was one of the country's leading industrialists. He hailed from an age when captains of industry really were captains.
Corporate governance and political correctness mean you no longer get people like him at the helm of today's companies. There are now so many constituencies to be satisfied and management selection has become a process of such box-ticking rigour that anyone who is at all unconventional, eccentric or just larger than life never makes it on to the short list. Today's executives are a bland lot, great at mouthing business-school mantras, but rarely saying or doing anything genuinely unusual.
The risk of creating identikit executives, and indeed identikit boards, seems to me too be one of the great flaws in corporate governance, because the more alike people are the more they will lapse into groupthink.
Indeed, there is a famous psychology experiment where 10 people are individually shown five matches of the same length and a sixth that is noticeably shorter. Asked to pick the odd one out, they all choose the short one.
Ten people were then brought together as a board and asked the same question. However, what the majority did not know was that the first two people to be asked had been primed in advance by the researcher to give the wrong answer. The others were then asked their opinion in turn. Of the remaining eight, six followed the lead of the first two speakers and also gave the wrong answer. Only two correctly chose the short match.
The point of the experiment was to show that even when a correct answer is blindingly obvious, a majority of like-minded souls would prefer to be in the majority that is wrong, rather than alone and right. And that is probably a major reason why boards of middle-aged men in suits are so poor at avoiding corporate disasters.
It's really going to hurt when interest rates rise
Thursday was made a bit sombre by a publication from the McKinsey Institute that underlined how little progress the world had made so far in shedding its burden of debt. The lesson it has drawn from past crises is that growth is unlikely to resume until the mountain is brought under control. But the period while this is being done – the period of deleverage where banks and consumers draw in their horns – is almost always one of hardship and recession.
By coincidence, Sir Mervyn King, the Governor of the Bank of England, this week supplied some related figures to the Treasury Select Committee. These showed the progress we have made since the crisis broke in 2007 in getting the system back on to an even keel – and indeed the distance still to be travelled.
On the banking side, things looked quite cheerful – certainly more so than you got from McKinsey. The aggregate leverage ratio of banks in the 10 years to 2007 was 24.5, but in 2007 in isolation it soared to 35.6. It was now back down to 23.7. That suggests the banks have moved quite a distance in rebuilding their balance sheets. They are obviously not fully restored to health but they have made a lot more progress than they generally get credit for.
Unfortunately, the personal sector told a different story. According to the Bank, the household debt-to-income ratio in the 10 years after 1997 averaged 129 per cent. In 2007 alone, it was 169 per cent. The latest value the bank has, for last September, shows it has fallen back only to 153 per cent. That means personal-sector indebtedness is still way above the long-run average. We can live with that while interest rates are rock bottom but it means that any hike in rates – and they must surely begin their upward march in the not-too-distant future – would cause no end of pain in a lot of households.
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