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There was a time not long ago when most of the best-known life assurance companies were mutuals — Scottish Widows, Norwich Union, Standard Life, Equitable Life, Scottish Amicable and a string of others dominated the industry.
But those days have gone, and now Royal London, reporting today, is the last of any real size — though there are still more than 50 dotted round the country.
In what was a difficult year for all insurance companies operating in the UK savings market, the group turned in a pretty reasonable performance. But even this cannot disguise the very basic challenges faced by the life mutual sector.
Its fundamental problem is that a mutual life office has little to no access to outside capital. It has to finance everything out of its internal resources and this can be a particular problem with what is known as new business strain.
This strain arises because selling long-term savings products costs money as all the set-up costs are incurred immediately while the revenues flow in over the following years and sometimes decades. The faster a business grows, the more money is needed from internal resources, which in the case of mutual insurance companies is the life fund.
The costs of new business therefore fall on the existing policyholders. If the business turns out to be quickly profitable, it may not be much of a problem, but generally speaking insurance takes years to pay back its start-up costs. If it is lossmaking in the long term, it clearly damages the policyholders' interests, as what would have been their money has been lost.
This leads one to the brutal conclusion that in today's market place, it is almost impossible for a life office to expand its business, or even stand still, without penalising existing shareholders. What management ought to do, if it was acting purely in the best interests of policyholders, is stop taking new business and go into run-off.
This conflict has been there for years, but partly as a result of the collapse of Equitable Life and various attempts to unlock the capital on life funds, the Financial Services Authority has begun to pay attention. Indeed, last October the insurance regulator wrote a discreet “dear CEO” letter to all the life mutuals. There was lots of waffle but the FSA's message was clear enough. Life offices were told that they must be able to demonstrate their new business would not damage existing policyholder interests, or they should go into run-off.
Now everyone knows that the governance and board quality in the mutual sector can be a bit soft, and anyway turkeys don't like voting for Christmas. So by and large, they did what most people would do when they receive a letter whose contents they do not like — they ignored it. The interesting thing is that the FSA has allowed them to get away with it. Having highlighted the problem, the regulator has failed to follow up with any concrete proposals that would allow the industry to address the problem.
Something needs to be done. We are talking about £80 billion of assets across the sector. Annual management charges are about 2%, which is £1.6 billion a year, spread between 57 societies, so one can see why they don't want to change. But the mutual sector badly needs an industrywide plan that would allow it to consolidate, strip out costs and crystallize and probably unitise the value in the funds so they can be run off in an orderly fashion.
It will not be easy, but it is surely better than trusting to fate. Having highlighted the problem, the FSA can't go back to sleep.
Sad truths behind Bolland's £15m M&S payout
There are surely two lessons to be drawn from the news that the former chief executive of Morrisons, Marc Bolland, is to get £15 million for agreeing to become chief executive of Marks & Spencer.
The first is that a significant chunk of this money is buying him out of rewards he had already earned at Morrisons but which have not yet been paid. This is the law of unintended consequences. Shareholders have pressed for bonuses paid over time to encourage long-term thinking. The unintended consequence is that successful executives accumulate multi-million-pound bonus pots which have to be bought out when they move. And if you think there is a fuss about Bolland, wait a couple of years till the bankers start poaching again, and chase after people who are at present being forced to defer bonuses worth millions. Those sums will be eye-watering — like the football transfer market.
The other thing it highlights is the dearth of intelligent planning for management succession in British business. It used to be the case that ensuring there was a choice of good internal candidates to take over from the chief executive was the prime responsibility of a board. That has fallen by the wayside with the disastrous results we now see. When there is no obvious internal successor boards panic. Under pressure from equally panicky shareholders they appoint headhunters who pretend to scour the world but in fact go for the highest profile and most expensive catch they can find, because they are on commission, and because it makes the board feel self-important to sign someone who has been in the headlines. Rival executives rub their hands and demand an equivalent rise from their boards. Pay across the sector goes up another notch. Little else is achieved.
