Wake-up call for the insurers

AT THE crack of dawn on Thursday at Queen Elizabeth Hall, Lloyd's of London chief executive Nick Prettejohn delivered the keynote speech to this year's Chartered Insurance Institute conference.

If his audience was half asleep when he started, they woke up pretty quickly because what followed was one of the most comprehensive blasts at the sustained incompetence of the insurance industry over decades, as witnessed by its chronic inability to make a profit.

It has not made an actual underwriting profit since the 1970s. In the good and bad times of the 1990s it always earned a return on capital which was lower than its cost and a return on equity which was almost always lower than that which businesses in other sectors earned.

Prettejohn was talking about insurance but it applies to others too. 'History strongly suggests,' he said, 'that the pursuit of growth as an end in itself destroys economic value. The naked pursuit of market share has destroyed significant shareholder value in many industries.'

Looking closely at the variables that Lloyd's hoped might predict businesses likely to be accident prone, or at least to have inconsistent performance, it found one of the most powerful was growth. So healthy scepticism about growth is vital - but a willingness to shrink when market conditions are adverse is even more critical.

An earlier analysis of the European insurance industry quoted some time ago by the FSA's Sir Howard Davies at another forum makes broadly the same points.

His theme was that management failure was the key cause of business failure, and this took four principal forms - firms straying outside their field of expertise or following the herd; objectives at odds with prudent risk management; a lack of integrity or autonomy among the executives and inappropriate pressure for short-term results.

None of this may be particularly new but it needs saying because however much it is acknowledged in times of recession and temperance, it tends to get forgotten again when things brighten up - as they now appear to be doing.

Striking point

YESTERDAY, before the result of the strike ballot at Royal Mail was known, Britain's industrialists could paint a gloomy picture of the months ahead. The postal workers' union would strike, causing regular days of disruption and maximum inconvenience in a row that could drag on for months.

Admittedly there were some optimists who said that if they did strike for days at a time no-one would notice, given that postal delays are so common and post regularly takes several days to go almost no distance at all. Nor would they miss the daily deliveries at home because almost all private mail these days is either junk or bills, neither of which make the postman the popular figure of years gone by.

It might be a different story for business, however, though even those utilities that send out bills on a regular basis now collect a substantial portion of their money by direct debit so would be less affected than one might imagine.

Older heads who recall the weekslong postal strike of the early 1970s remember that people did adjust thanks to the telephone and that the union was eventually defeated - and that was before efficient faxes and email. But in contrast if the strike actions were ultimately to prove successful either because the Royal Mail could not afford to go on any more or the Government lost its nerve and put pressure on for a settlement, it would tell all the other new-style (or should one say old-style?) union leaders and their members that militancy pays. That would open the doors to a winter of industrial disputes and a step back firmly in the direction of the dark ages of British management.

The significance of the No vote is that employees have changed. When Brian Souter of Stagecoach was fighting the dispute on South West Trains he made the point strongly that the economic balance had tilted in the 30 years since Britain was synonymous with industrial unrest.

This was not simply a matter of legislation to make strikes harder to organise. The key factor was that employees have a much bigger economic stake in society now - in particular they are home owners with mortgages that have to be paid.

The fact that they are probably sitting on a healthy profit on the house makes it all the more reason to keep up the payments and that requires a regular income - not one devastated by strike days. They understand this, and the corollary that the only way to sort out disputes is by negotiation. It is just the union leaders who appear to have forgotten or not to have learned that.

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