Insurance industry fears grow over Independent's £200m rescue rights

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The insurance industry is watching the situation at Independent Insurance with increasing alarm, with many companies fearing that they will have to bail out the beleaguered insurer if it goes under.

The concern in the industry comes amid doubts whether the company will be able to solve its financial problems through the planned £200m rights issue.

Independent Insurance insists it has received a positive reception for the capital raising from investors so far. But sceptics say the question marks that hang over exactly what has gone wrong at the company, which suspended its shares on Monday, will make investors unwilling to pour in more cash.

The problems at Independent Insurance could adversely affect its rivals, as they belong to the Policyholder Protection Board, which levies money from the industry to pay compensation to customers of a company that goes into liquidation. Privately, some insurers are assessing what damage will be done to their own balance sheets if this happens at Independent Insurance.

One senior executive at a rival firm said: "We in the 'sensible' industry are rather depressed, as if everything goes wrong there will be a big bill, which we will have to fund. There will also be lots of angry clients and investors blaming the whole insurance industry."

Independent addressed mounting speculation about its financial health Friday when it confirmed that it was trying to drum up support for a rights issue. The company said it needed the extra capital to fund new business, but it also surprised the market by suggesting some of the money could be used to replace reinsurance contracts it took out in March for a premium of £110m. Independent, which has said it could unwind these contracts, originally took them out to cover mounting costs from no-win, no-fee claims.