Insurance firm to halt pay-outs

MUNICIPAL Mutual Insurance was yesterday forced to stop paying claims by local authority and personal customers and to stop taking on new business.

The shutdown order was issued by the Department of Trade and Industry and is likely to cost local authorities millions of pounds. It will also delay many thousands of payments on household and motor insurance claims by private customers.

The Government braced itself for appeals by local authorities for help in meeting claims for compensation, but refused to make any firm commitments last night.

It could lead to higher council tax bills to offset the losses. The Government will be reluctant to offer a simple bail-out unless there is hard evidence of a crisis.

The failed insurer is to remain in existence as a company but it will ask the local authorities which are its main customers to help finance a restructuring, by accepting a reduction in the amount they are paid on claims as well as higher premiums.

Sources close to the company suggested that it will be able to meet a higher proportion of outstanding claims by local authorities than feared at first.

MMI is also hawking its consumer business, including household and motor insurance, around other insurance companies in the hope of transferring policyholders to them.

In the meantime the company's one million household and motor policies remain in force. The DTI said claims would remain valid despite the moratorium.

Prime Health, a separately capitalised subsidiary in the health insurance business, will continue to accept renewals and new business while a buyer is sought. Another subsidiary, Prosperity Life Assurance, will continue to renew existing policies but will not issue new ones.

MMI is not being put into receivership because it is still financially solvent under the terms of the Companies Act. Hopes remained yesterday of salvaging something from the wreckage.

But MMI has failed to meet a separate set of solvency criteria under insurance legislation. The DTI agreed to allow the firm to continue taking business while the rescue talks were under way.

Brian Wright, MMI group chief executive, said 'We have been negotiating with the French group GMF to seek a satisfactory solution. Unfortunately it is now clear that this will not be possible and discussions have now been broken off.'

About one third of MMI's business is with private customers and the rest is commercial, with 85 per cent of that from local authorities or police authorities. The firm has premium income of pounds 500m and 2,500 staff. A spokesman refused to say how many jobs would be threatened by the decision to stop taking new business because it depended on the discussions taking place.