Case Study Equitable Life

The notion that a large, old and well-established firm means a "good risk" took a bit of a knock after the Queen's bank (Barings) of England went down after the Leeson disaster. History repeats itself when we are faced with a respected company founded in the 18th century facing a struggle for survival. It seems to have been a case of damage by acting in a risk-ignorant and not by intention or criminal act. Damage limitation provided by the UK life insurance company Equitable Life shows us where risk management often comes in after a risk hazard surfaces, not before.

1. The damage from the mis-selling scandal was quite severe, many funds found culpable of selling inappropriate pensions to the public.

2. Most funds were enamoured of the guaranteed annual repayment whereby the funds essentially bet that they could assure the policy-holder of a fixed amount each year upon retirement.

The stock-market slump threatened their ability to pay out to customers, plus it jeopardised the capital adequacy base.

The new management went on a damage-limitation exercise. This eventually succeeded in keeping the company afloat, despite hard knocks to its former prestige. It is a process of reputation risk recovery, which could not have been conducted by a low-level risk management exercise. In this case, top management:

• recognised the hazards;

• evaluated the impact of the risks;

• allocated vast resources to damage control;

• set about retrieving reputation and clients' trust;

• put in procedures to limit further similar damage in the future.

A better use of communication and efficient PR could have triumphed over mechanistic risk management. Equitable Life was under such financial pressure that it dropped 50 000 pensioners from its schemes. Pay-outs fall, the number of lives insured decreases and the number of satisfied policy-holders has shrivelled to almost zero. If only they had known beforehand. Equitable Life struggles on, but survives. We can just regret that these damage-limitation measures were not done before, but post facto (see Figure 2.4).13

13 Financial Times, 16 November 2002.

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