Ministers may save troubled insurance firm: The MMI affair: concern grows over councils' protection

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Government ministers are considering intervening to prevent the ailing Municipal Mutual Insurance company from going bust owing large debts to local authorities, sources said last night.

The Department of Environment is concerned about reports that a deal to save MMI - Britain's ninth largest general insurance group, which covers nine out of ten local authorities in the UK - was on the brink of collapse, leaving councils without cover and liable for enormous claims.

Although they emphasised that talk of a government bail-out was 'premature', ministerial sources said they were keeping 'a very close eye on it'.

Stuart Bell, Labour's trade and industry spokesman, yesterday demanded to know why the DTI had failed to act, despite being consulted in January on the 'serious state' of the company.

'How have the DTI allowed MMI to continue to trade? Someone at the DTI has taken a decision that has the potential to put thousands of policies at risk - I want to know who?

'What is needed, although we are at a late stage, is for reassurance and support from the DTI, for local authorities and individual policy holders alike, all of whom deserve more from the government department responsible for their interests.'

Confusion surrounded the fate of a rescue package from Eurosafe, a nine-company consortium led by the French insurers GMF. GMF, based in Paris, continued to insist yesterday it was no longer interested in acquiring the stricken British company, despite claims by Brian Wright, MMI's chief executive, that talks were continuing.

MMI and its advisers could not explain the confusion. UBS Phillips & Drew, MMI's financial adviser, admitted it was 'pretty mystified' by the denials of interest. An MMI spokesman blamed the contradictory statements on an internal communications breakdown within GMF.

A GMF spokeswoman pointed out that its president, Jean-Louis Petriat, was also president of Eurosafe, which was party to an original rescue deal in July.

She suggested other members of Eurosafe might proceed with the deal without GMF's involvement, but insurance experts said it was difficult to see how Mr Petriat could advise others to pursue a deal his own company had rejected. GMF was the driving force behind Eurosafe and was regarded as the leading partner.

Local authority associations will meet Mr Wright, and other board members in London today to clarify the merger situation. They also want to know what MMI's financial situation is and what the company's plans are.

The collapse of the Eurosafe deal would almost certainly force the Department of Trade and Industry to order MMI to close for new business. No other rescue seems likely. The DTI received a mute response when in May it asked British insurers, including Commercial Union and Norwich Union, whether they were interested in taking over MMI.

If MMI was to become insolvent, council policy-holders might receive payment of only part of their claims. Individual policy-holders would be covered by the Policyholders' Protection Act.

Some councils are concerned that MMI has recently sought another review of its finances from KPMG Peat Marwick, the accountants. One source within the councils' associations said: 'The nightmare scenario is the company goes into liquidation and as from that moment lots of authorities up and down the country are without cover.'

District councils were facing the worst exposure. The largest county councils, such as Hampshire, were big enough to carry their own insurance cover. Some district council treasurers said they had already reduced the number of policies with MMI since the company had indicated it was in trouble at the start of the year.

Others are exploring new insurance cover with MMI's competitors before their policies come up for renewal.