A year on, the signs like those that presaged the fall of Independent should never be ignored again. Paul Spencer details how to avoid large-scale disasters
A year after Independent's collapse, the receiver and the legal process are still pursuing those who will be deemed responsible for the crash. So what went wrong?
To understand this, you need to look at how Independent grew. Michael Bright, entrepreneur and risk taker, saw a gap in the market.
The UK insurance market can be broken into London... and the rest. London is a highly competitive market with local big ticket insurance and London specialty lines. All the international business that cannot be written in its home market finds its way here. Surprisingly, Bright initially kept well away and found a gap in regional Britain.
This is a market that caters for small and medium-sized corporate Britain, driven by small to medium -sized brokers. Through cost inefficiency and complacency, the major UK underwriters controlling the market provided at best mediocre service at inflated prices. Bright filled this gap beautifully, providing a great service to brokers who were not used to being fawned on. He grew and grew in the liability sector, helped by some astute reinsurance buying.
The brokers loved it. The end clients got competition and the investors saw great returns. His competitors then helped Bright even more with a series of mergers, in each of which the customers, both broker and end customer were forgotten, good regional underwriters were discarded and good profitable regional business was taken for granted as they concentrated on London Market, international or overseas business. Independent had a field day.
So what changed? The competition finally woke up, put its regional business in order and started aggressively marketing to the smaller end. By now Independent was big and greedy. Entrepreneurs are good at growing businesses, but rarely good at managing them. The book was heavily weighted towards liability, so Independent aggressively bought property business at the wrong price. Its advantageous reinsurance ran out and it continued to price its liability book significantly below the competition, who were preparing their reserves for the effects of increased claims costs. It was clear it was only a question of when it would collapse.
So what can we learn? First, non-executive directors must challenge entrepreneurs more when the company gets to a size where management of existing business is as important as growth. A strong finance director with direct access to the non-executive chairmen of the company and the audit commitee is a minimum requirement.
Second, non-executives and investors should keep in touch with others in the sector. The competitors, brokers and reinsurers all knew Independent was going bust. People should have asked questions when they saw a company of that size being grown at such a rate.
Third, don't rely on the regulator or rating agencies. They will not pick up fraud or fast changes in markets coupled with terrorism.
The last lesson is for large established insurers. If you lose customer focus - end clients and brokers - if you don't provide a first class service at a competitive price, then beware. Should complacency set in, there are a lot of embryonic Brights out there who will not hesitate to grab your market.
Paul Spencer is a former chief executive of Royal & SunAlliance