Insurance is a risk too far

So the big private equity groups, the new-style corporate raiders, discoverers of value and fearless deal-makers are risk-takers, are they? Well at least that's how they're positioning themselves in the wake of criticism from the GMB union that seems to have caught them flat-footed.

After years of quietly making huge killings by buying unloved public companies, gearing them up and then selling them on, often to the same kind of investors they bought them from, the private equity raiders are hitting back.

Permira's king deal-maker Damon Buffini is telling anyone who will listen that, far from hard-headed asset strippers, private equity operators actually create wealth and support jobs by taking decisions that publicity-shy public institutions are afraid to face for fear of how their City masters might react.

Another well-known private equity kingpin is telling his friends in the US that he finds this new debate about his industry in the UK demented and insane.

The question is: if private equity is so good at managing risk, why doesn't it get more involved in insurance?

The two sectors are not strangers. Some of the new start-ups in Bermuda after 9/11 got going with private equity money.

In the UK, Xchanging, which famously handles the jumbo jets' worth of documents that go from Lime Street to Lloyd's depot in Chatham, is backed by private equity.

Resolution Life and Pearl, the two leading consolidators of the closed with-profits funds businesses, have private investors.

In the US, Warren Buffett is well-known for his love of insurers' stable cashflows.

So why are insurers are strangely absent in the lists of large public companies that are supposedly the targets of public-to-private buy-outs?

Are Alliance Boots, J Sainsbury or Debenhams really that much more cash-generative than insurers?

Why are the private equity guys not beating down the doors at Prudential, Royal & SunAlliance or Friends Provident?

The answer has probably more to do with blowing the idea of private equity operators as seasoned risk-takers than anything else.

Private equity guys know all about short-term risks in borrowing heavily, exposing themselves to short and medium-term economic trends and gambling on heavily-incentivised management.

But they have not shown much aptitude in dealing with long-tail liabilities, actuarial models and long-term risks.

As one insurance chief executive said to me recently in explaining the private equity's comparative lack of interest in his sector: "They haven't got a clue about our business. They just don't understand it."

Perhaps he's right and many in the industry will issue sighs of relief at that.

But if the Sage of Omaha can make money out of insurance, don't bet against a private equity firm turning its attention to underwriting models when all the gems on the high street have been snapped up. Then we'll see who the real risk-takers are. IT

Andrew Cave is the former associate City editor of The Daily Telegraph