Should insurance companies be trusted?

A look back in history at the way that one of the UK’s biggest asbestos claims handlers dealt with their liabilities gives us a clue.

The Iron Trades, a mutual association was founded in 1898 and could write insurance business only for customers who were members of that mutual organisation. In the 1940s, the association created a new subsidiary that it used to write business to non-members called the Iron Trades Mutual Insurance Company Ltd.

In the late 1980s the Iron Trades group was restructured and it decided that all the group’s insurance business should in future be written in a subsidiary company. In 1997 all the association’s assets and liabilities, including ownership of the subsidiary insurance company, were transferred from the association to a new company, Iron Trades Holdings.

In early 2000, Iron Trades Mutual Insurance Company was sold to Australian company QBE International Insurance Ltd. As part of the deal, the name Iron Trades was sold to QBE and Iron Trades Holdings Ltd, left containing all the historic liabilities, became known as Chester Street Insurance Holdings Ltd. QBE had sailed away with a company containing all the new business leaving the old liabilities behind in Chester Street.

The Iron Trades had traditionally insured some of the UK’s biggest businesses and dirtiest industries, heavy manufacturing and shipbuilding. They had a very high exposure to asbestos litigation. They held the employers liability insurance for more than 2,000 firms, many companies long since closed. With the long latency of asbestos disease the renamed Chester Street faced a mounting tide of asbestos claims and no income from writing new business. It was a vehicle that was doomed to failure.

The Financial Services Authority, supposedly safeguarding the consumer, had approved this company restructuring and the deal went through in February 2000. This was somewhat surprising as the Iron Trades Holdings’ own auditor, Ernst and Young, had stated only two months after the deal had gone through in their annual report: “Considerable uncertainty exists as to whether the undertaking can continue as a going concern.”

No doubt the FSA were swayed by assurances given them by the board of the Iron Trades. In any event within a year Chester Street had collapsed with assets of only £30 million against liabilities of £250 million.

Employers are required to take out insurance under the Employers’ Liability (Compulsory Insurance) Act 1969. The insurance is a policy of indemnity and does not affect the fact that employers remain liable for any claim brought against them by a former employee. The insolvency of the insurer does not affect the liability of the employer and the company remain financially liable for claims made against them.

In the event of an insolvent insurer and an employer that no longer exists then the FSA through the FSCS will act as insurer of last resort in respect of these employers’ liability claims, although not in respect of public liability claims.

In other words tax payers pick up the costs of these claims.

Insurers have been allowed to restructure to offload their increasing liability for asbestos claims onto the employer who has already paid their past premiums for that risk or, onto the FSA who had approved the restructure.

Robert Hardy, the former chief executive of Iron Trades, saw his income rise from £204,000 in 1998 to £668,000 the following year. He was congratulated on his “outstanding achievement” as he left the firm shortly before the collapse of Chester Street that he had overseen.

It is highly unfortunate that a government driven to continue with a reform agenda continues to place reliance on information and assurances given by an industry that has repeatedly demonstrated its own self-interest over all else.