Is the news of Drake's liquidation the beginning of an FSA clamp-down? An indication of market conditions? Or nothing more sinister than a spring-cleaning exercise? Alaric Nightingale examines the detritus....
For 18 months the Financial Services Authority (FSA) has held the whip hand over insurers, possessing the power to put them out of business.
Last week, for the first time, the market regulator exploited its power to devastating effect – telling Drake Insurance to cease underwriting.
Deloitte & Touche has been appointed provisional liquidators, and the future looks black for the insurer.
Immediately the news was announced, hundreds of brokers and intermediaries scrambled to find alternative insurers.
One of Drake's biggest intermediary partners, Endsleigh, which has a £16m private motor scheme, claimed to have found a new carrier on the very same afternoon.
But the news has caused deep unease in the market. The first questions most people have asked are: did this happen because of a new FSA clamp-down, and will other insurers soon follow Drake to the liquidators' door?
Deborah Fowler, spokeswoman for the FSA, said that there has been no change of stance at the regulatory body.
"We are not getting tough on insurers. We worked with Drake for several months to see if there was a way of getting through it, but it became clear that it wasn't going to work out."
Still the questions are manifold and suspicions remain that the Drake case was indicative of market malaise. Several other insurers' names have been bandied about as being on the sick list. Time will tell whether this is opportunist insurers seeking to cast aspersions on their rivals, or if a major problem exists.
Passing the book
Insurance Times understands that Drake's major shareholder, John Head III, an American, offered to cut a deal with the FSA, whereby he would provide more financial backing, but with certain strings attached.
The FSA refused that particular offer, and the rest is history. It is understood that Head was not happy about the FSA's stringent solvency requirements.
Now Deloitte & Touche has been appointed as provisional liquidator and most in the market are wondering who – if indeed anyone – will take over the book.
There seems to be two possibilities. One is that a company will take over the business and be granted the right by Drake (or the liquidators) to offer policyholders renewals.
Drake had 200,000 private car policyholders and worked through a network of 2,000 brokers. On the face of it, taking over the entire book must seem attractive, but since the business was clearly losing so much money, it may transpire that there will be no takers.
The second, more likely alternative is that the book will go into run-off.
Should that happen, Kiln subsidiary Link is being widely tipped as favourite to administer the account.
Link chairman Andrew Fleming-Williams says: "We are certainly in contact with them about managing the run-off of the business, but it is a rapid-moving situation and no decisions have been taken as yet."
It is also possible that Drake will manage its own run-off, but Fleming-Williams has words of warning against this route.
"It is always difficult to run a book off to any sort of level of competence with the existing management. As the book gets older, the job gets less demanding and it is often hard to keep management," he says.
And what of account holders?
The other major issue is the brokers and intermediaries who held large accounts with Drake.
Within four hours (and apparently without prior knowledge of Drake's demise) Endsleigh had managed to place its £16m scheme with another insurer.
A well placed source suggests that the AA had a £10m book placed with Drake; Anglia plc was Drake's third biggest account with £6m; Hill House Hammond was fourth (£5m), while Swintons and Budget both had £2m books of business.
With a little luck, these larger brokers and intermediaries will have the resources and negotiating strength to place their entire schemes elsewhere with little disruption to policyholders.
If the above figures are correct, then that leaves approximately £9m spread throughout the rest of the intermediary market.
A big sum, but by no means staggering, and if the FSA and capital providers have not changed their tack, then Drake's departure from the market will not prove too disruptive for brokers, intermediaries and policyholders.