Insurers will have to come out of the closet

COMMENT: 'With between 80 and 100 active life companies, the UK sector still presents an absurdly fragmented picture by international standards'
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The Independent Online
There is scarcely an industry in the land that has not been affected by the present worldwide urge to merge, cut costs, rationalise and empire- build. One of the few which has so far largely escaped the trend is the insurance sector. It is hard to explain why, for this is an industry that cries out for it as no other. The potential for cost-cutting mergers is seemingly endless, as is the scope for modernisation. But if the industry's deeply conservative roots have so far held it back, things look like changing fast. Insurance companies are in the process of being rudely awakened. Their world, for so long dependable and closeted to the point that it had become hidebound, is being torn apart by competitive forces, regulatory pressures and changing investment patterns.

The days when the good old British insurance company could open for business at the beginning of January each year, wait for the premiums to flood in, invest the money and pay out the claims, are gone forever. In the life sector, tax changes, attractive alternative saving vehicles, enhanced competition from banks and building societies, the rising cost of regulation training and expensive new information technology is forcing a big rethink. Most of the large mutuals, accepting that they cannot continue as they are, are taking expert advice about where to go.

With between 80 to 100 active life companies, the sector still presents an absurdly fragmented picture by international standards. The pressure for mergers and de-mutualisation, and in some cases of takeover by the big composite insurers, is becoming hard to resist.

Even among the general insurers, reeling from their competitive drubbing at the hands of the direct insurers, Britain is remarkable for its lack of companies big enough to punch at a world-class level. This is well known to be a source of concern in the DTI. Next to such giants as Allianz in Germany, Axa in France, ING in the Netherlands or AIG in the US, the British companies, comparatively weak, look ripe for consolidation. Expect action here, with the more aggressive players, Sun Alliance and Commercial Union, likely to lead the way.

Opinions are divided within the industry about the economies to be gained from merger. There is also the problem, as with the building societies, of management egos. Nobody seems prepared, yet, to give way to their rival. But that could all change if one of the big foreign companies enters the fray, a move that is long overdue.

When a US default becomes thinkable

So far, the battle over the US budget has tended to prove the theory that if you are going to owe money, it is better to owe a lot than a little. In most cases, the threat of default, even as in this case when made for political purposes, would have lenders running for the receivers. In the case of the US, the world's largest borrower, it has to date provoked only nervous laughter. In part, that is because financial markets haven't taken the threat seriously, unable to think the unthinkable.

Until yesterday that is; few are yet prepared to believe it will actually happen, but the perceived risk certainly seems to be rising. President Clinton has said he will veto the increase in the debt ceiling passed by Congress because of the unacceptable spending cuts that Congressmen have linked to it. The Treasury will be able to dip into other government funds, but the timetable for an agreement before it is forced to default is horrifyingly tight.

Budget impasses are nothing new to Washington. Since 1982 there have been 25 increases in the debt ceiling, and several temporary closures of government. However, there is an important political difference this time. Previously it was a Republican President clashing with a Democrat- dominated Congress. As Democrats, they were always philosophically sympathetic to voting through increases in the size of government. The Republican Congress confronting President Clinton wants to roll back government.

Even so, there is some justification for the markets' remarkably sanguine view. The benefits of cutting the budget deficit - for US bonds and the economy - might outweigh the costs of a temporary debt default. Markets have also focused more on the content of the administration and congressional budgets, which are quite close, and less on the political posturing that is steadily driving a wedge between the two sides.

Nonetheless, this is no reason for the politicians to believe they might actually get away with using the nuclear option - default. The markets are ultimately more powerful than the policy-makers and the coming week on Wall Street could be every bit as turbulent as events on Capitol Hill. Markets need to deliver a short and sharp message to Mr Clinton, on the one hand, and Messrs Dole and Gingrich on the other - that a default in the world's biggest bond market really is unthinkable - and their mood is to do just that.

Steel fist may call for a velvet glove

It is hard to believe, but a small steel company employing 300 people on an island in Cork Harbour is causing as big a state aid row in Brussels as the massive and controversial subsidies for Iberia, the Spanish airline. British Steel, the Department of Trade and Industry, the Irish government and Karel van Mierts, the European competition commissioner, have been wrangling over it all year.

This week the Luxembourg government helped Tim Eggar, the industry minister, block approval from the council of ministers of a pounds 27m aid package for the plant. The aid is for knocking the operation into shape ahead of its takeover by Ispat, the Indian steel company. The Indian intervention has been the Irish government's main hope of persuading Brussels to approve what prima facie was illegal state aid to keep the plant open. Normally, a takeover counts as good evidence that a plant has a future and that subsidies are more than unemployment pay by another name.

No such luck. With British Steel weighing in with threats to close a plant at Shelton in Staffordshire, apparently hit hard by competition from Irish Steel, the British government's resolve has been stiffened. Irish Steel may be a tiny plant making basic products, but it takes only a small amount of extra production in a glutted market to tip prices downward. It hardly needs saying that the Irish want to raise output.

British Steel clearly has right on its side; it is an unsubsidised commercial company. The rest of Europe is gradually being weaned away from government subsidy, too. Sadly, the political reality is that Ireland has only one steel plant and an unemployment problem. High politics are also involved, with the issue in danger of becoming muddled with sensitivities over the Northern Ireland peace negotiations. Mr Eggar cannot afford to be seen as the man who closed the plant. Compromise is not what this little saga calls for, but it may be what Mr Eggar has to accept.