Insurance? I'd rather play a game of roulette
City & Business
Sunday 05 May 1996
Clearing banks or estate agents or management consultants may be your bugbear; insurance companies are mine. Of course, I'm speaking as a customer. Shareholders, who have seen profits soar over the past couple of years, doubtless see insurers in a kindlier light.
Insurance companies love to hide behind actuarial gobbledegook. But one fact about the industry is incontrovertible and I like to repeat it to every insurance executive I meet: for every pound they are paid in premiums, they pay out only 70 pence in claims. A thumping 30 pence in the pound, plus the interest earned on that 30p, goes into the maw of the insurance company and its brokers.
Of course there has to be a charge for pooling premiums and paying out claims, but when it reaches 30 per cent of the money pooled, something has gone drastically wrong with the system.
Casinos work on exactly the same lines as insurance companies, yet they are models of efficiency and propriety by comparison. Roulette tables stand to pay out exactly as much as they take in 36 times out of 37. Only when the ball falls in the zero slot, on average once in every 37 spins of the wheel, does the casino scoop the pool. Insurers do the equivalent of scooping the pool once in every three spins.
There has to be a more efficient way of pooling risk. Insurance as it is presently structured is a monstrous racket. And the reality is worse even than I've described because of invented and inflated claims - fraud, which the cosy club of insurers does little to stamp out and in some cases positively encourages. I'm guessing, of course, but I'd hazard that honest policyholders are lucky to see more than 50 per cent of their premiums returned to them.
You might tolerate this rip-off if insurance companies handled your custom efficiently, quickly and politely. But their record here is atrocious. Maybe they do send out a kindly Mr Cheeryble at three in the morning when your house is struck by lightning - as their tiresome commercials insist - but when you simply want to renew your motor insurance, expect hassle.
For all this, the British are hooked on insurance. Much of it is compulsory, but not all. Last week, entrepreneurs Patsy Bloom and David Simpson walked into the sunset with pounds 32.5m after selling their company, which had successfully pioneered - wait for it - pet health insurance. For small risks, people would do much better to "self-insure" - simply take the occasional hit on the chin rather than fork out for repeated premiums. But they are irrationally reluctant to do so.
Royal's link-up with Sun Alliance is expected to trigger further consolidation in the industry, as Paul Rodgers reports on page 3. The big composite insurers - those combining general insurance with life assurance - are likely to get bigger. The takeover fever in the utility sector is mostly over. The investment bankers are seeking out their next flock of prey, and the sleepy unimaginative insurance sector looks enticing.
Will a bout of mergers do anything to improve the lot of policyholders? At first the Sun Alliance/Royal deal sounds quite promising. The marriage will create at least pounds 175m of cost savings a year by 1998, we are told. All kinds of duplicated costs can be cut. The combined operation will need only one head office, one investment department, one claims department and one team of IT experts. Moreover, it will have more clout when buying reinsurance. At first, those savings will be passed on to the shareholders, but if other insurers manage similar savings, competition should ensure that the improvements filter through in the form of lower premiums.
But look more closely at the expected cost savings and it is apparent that the bulk of savings could just as easily be made by each company continuing as an independent entity. Andrew Pitt, the insurance analyst at Salomon Brothers, reckons 70 per cent of the savings will not be the result of the merger, though the merged company may find the marriage a useful excuse as it wields the axe.
Absolute size does not guarantee lower unit costs. Insurance companies have grown ever bigger but there is little evidence they have become any more efficient. The one factor that has produced efficiency is the cutting out of the middleman: the broker. It is the arrival of telephone-based direct insurance groups such as Direct Line that is transforming the insurance business. There are huge costs to be taken out of insurance companies, but they don't need mergers to achieve them.
Mergers at best are likely to be a bit of a red herring. At worst, they will prove to be a recipe for management in-fighting, customer disruption and fatally overweening global ambitions.
The Halifax Building Society is heading for a confrontation over the way it plans to distribute its reserves when it finally floats on the stock market next year. Sharing out the mutuals' goodies has always been an arbitrary process: many long-standing customers have missed out, while opportunists opening an account at the last moment - the so-called carpetbaggers - cash in. The most blatantly unfair example was the Cheltenham & Gloucester's decision not to reward its borrowers, some of them customers of 25 years, when it sold itself to Lloyds Bank.
The latest casualties of the societies' capricious payout rules are members of company pension schemes that have money on deposit with the Halifax. More than 400 schemes deposit money with the Halifax, including Sainsbury's and the BBC's. Tens of thousands of pension scheme members are affected. Their deposits go back many years. They have contributed to the reserves of the society in a way that carpetbaggers have not. Yet because they are not deemed to be members of the society, they will receive nothing.
No doubt the appallingly drafted Building Societies Act makes life difficult. But there must be a way the Halifax can reward these neglected depositors. If not, they should have no hesitation but to take their custom elsewhere.
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