Equitas excels but it's not over yet
HEN insurance companies pay people who claim they have been exposed to asbestos but show no sign of illness, they create a limitless supply of those willing to sue. That is the problem of asbestosis.
Today's results from Equitas, the insurance company that is clearing up and settling the policies written by Lloyd's syndicates before 1992 - roughly half of which by value relate to that problem - again carry the scars of an earlier foolish willingness to settle claims where there was no sign of injury.
Far from resolving the problem as the insurers hoped it would, it created an industry. Lawyers have grown fat scouring the US for people for whom they could mount claims. As a result, an additional £295m is today added to Equitas reserves, bringing to £4bn the total set aside to meet such claims.
Even in this age of big numbers that is an astonishing sum - almost four times the profits made by Lloyd's in its best-ever year.
Equitas is probably the world leader in dealing with asbestos and the fact that it is yet again increasing its provisions is a gloomy signal for the rest of the insurance industry-which normally follows its lead. But there are some signs of hope.
Equitas has in recent years pushed the argument that paying compensation to people who cannot demonstrate illness runs the risk of leaving no money for those with genuine claims, and encouragingly there have been signs that the point is beginning to be grasped in the US.
Though efforts to get an acceptable reform of Federal law seem to have run out of time before the November Presidential election, there has been some tort reform in the key states of Ohio and Mississippi, which gives some reason to hope that the American mood is changing.
That said, the history of asbestos litigation is peppered with such hopes, so it would be rash to set too much store by them at this early stage.
Looking resolutely for the positives, it also seems that, despite the occasionally scary headlines, other countries are not adopting the American culture of litigation so asbestosis claims are unlikely to spiral out of control in other markets. Nor are the other hitherto-hidden liabilities - such as pollution and silica - with the potential to explode like asbestos has.
So, the increased provision aside, the company has had a good year. It has weathered the storms of dollar weakness and changing interest rates to deliver a slight improvement in its solvency margin to 9.8%.
When Equitas started nine years ago it had a margin of 5.6%. The outlook for the current year is more of the same.
Equitas' strategy is to aggregate the amounts of money it thinks it is owed by, and owes, to one counterparty, and rather than negotiate thousands of individual settlements it seeks to negotiate a blanket payment so that one lump sum transfer settles the lot.
It brings certainty, saves a fortune on administration and pursuing claims and produces cash that can be invested.
Before Equitas, such deals were virtually unknown in the London market. Today, they account for the bulk of the giant strides the business has made in resolving 65% of the claims it inherited when it was created. It is a sobering thought, however, that despite these successes, asbestos continues to account for 55% of what is left.
Equitas has had a very good year but it is not out of the woods yet.
WHEN the London Clearing House merged with Clearnet, its opposite number in France, a few months ago, one of the things that made the deal possible was an elaborate fudge concerning which regulatory regime the combined entity would fall under.
Though the organisation would be one, it was decreed that the French regulator would basically regulate the French bit and Britain's Financial Services Authority* would set the rules for LCH.
What is interesting is that while the principle was straightforward, the detail is proving elusive and it appears that the memorandum of understanding between the French and British regulators has still not been signed.
All manner of things have turned out to be stumbling blocks. The French are worried, for example, about the amount of risk LCH would be allowed to take on - which is pretty fundamental. The FSA, meanwhile, is maintaining the stance it has always held - it does not want the intricacies of regulation to damage London's standing and effectiveness as a financial centre.
The result overall - or lack of result - shows just how difficult it is to weld together a single market in the face of conflicting national interests.
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