Posts Tagged: insurance
Ask Not For Whom The Bell Tolls
January 21 2019
The best single essay on financial misbehaviour was written not by a journalist, academic or former trader, but by a novelist and 25 years ago: The Deficit Millionaires by Julian Barnes, that most pointillist and French of English writers. It is about Lloyds of London, the huge losses it suffered in the early 1990’s and how trusting Names slowly realised that their faith in a long-standing and well-established institution was utterly misplaced. Lloyds had been around for ever. It was part of the City’s furniture. And it was insurance, after all. How boring is that. How could anything possibly go wrong?
Well, with exquisite care and sympathy and the precision of a surgeon’s scalpel, Barnes shows us how. And the story is a surprisingly familiar one.
- A novel but complicated instrument designed to reduce risk but instead increasing it – the London Market Excess, or the spiral of reinsurance. “Making a turn” – in the spiral – “was the easiest way to make money” one underwriter said.”
- Greed – “If you are making a good living, if you have self-regulation, if you are outside exchange control, it’s human nature to get greedier and greedier and greedier”.
- The market’s rapid expansion in a short period of time. There was a near-ten-fold increase in the number of Names in 14 years, most of them trusting amateurs and all looking for insurance to underwrite.
- A lack of due diligence, a suspension of critical faculties, a lack of scepticism coupled with an all too human willingness to believe in the promises of a no risk investment, all wrapped up in a flattering appeal to vanity.
- A deeply cynical – and possibly fraudulent – approach by the professionals to those who joined (“If God had not meant them to be sheared, he would not have made them sheep.”)
- Relaxation of the rules and lax monitoring of those that existed.
- The undisclosed conflicts of interest – recruiters were paid a fee for each Name who joined.
- A lack of transparency – it was Lloyds insiders rather than external members who got onto the best managed, low risk and least spivvy syndicates, justified by the then Chief Executive thus – “In any activity, the professionals will know more than the others.”
- The breakdown of trust – what Barnes describes as the “tickle of fraud“, the realisation that the belief in “an honourable society, operating on trust, on shared values” was a chimera. Or as one Name put it more bluntly, “You know, trust, honour, and then to find in such an august body a bunch of craven crooks”.
- The realisation, far too late, that private warnings were given about some of the risks and unacceptable/criminal behaviour but these were ignored or not shared with those who ought to have been told.
- The turning of blind eyes to unacceptable/negligent and/or criminal behaviour by a remarkable cast of shameless rogues during the 1980’s, even when the latter were the subject of legal action.
- The failed institution’s repeated insistence that any problems were only the result of that well-worn old favourite: one or two rotten apples, despite one of those rotten apples being a Chairman of Lloyds.
- The determined focus by new management only on its new procedures and processes and business plans for the future in the hope that a veil would be cast over the past, without any unseemly digging into it.
- The eventual realisation by the institution that, as its deputy Chairman, put it, for the previous twenty years it had lacked “total integrity” and “strong government“.
Even the modern new building housing the salvaged and totemic Lutine Bell and built by a famous “name” architect is part of the story.
Barnes eloquently shows how an institution believed to be “the highest name of honesty“, seen as part of a certain sort of honourable Englishness, around for three hundred and five years, a stalwart of the City, selling its services around the world, as venerable as the Bank of England and thought to be as safe, came to be seen, harshly but accurately, as “a cesspit of dishonesty“.
If only this had been published more widely than in a US publication and, later, a book of essays. If only we had paid more attention. If only we had learnt the lessons that were there to be learnt.
Everything that went wrong in the run up to the near collapse of the Lloyds insurance market happened again two decades later and led to the financial crash 10 years ago, even with the benefit of external regulation and control. Indeed, pretty much the same things happened in the lead in to most financial scandals going back hundreds of years.
And, human nature being what it is, it’s a pretty safe bet that a version of all or some of these will happen the next time, may indeed be happening now. The same behaviours will once again come under the spotlight when the the next scandal becomes known, with its inevitable backing chorus.
Why didn’t anyone see?
Why did no-one ask the obvious questions?
Why did no-one listen to the warnings?
Why, oh why didn’t anyone act?
As Parliament’s Intelligence and Security Committee put it in a different context, “it has been striking how some the issues which arose in [2005 and 2013] have also been seen as having been a factor in 2017. We have previously made recommendations in these areas, yet they do not appear to have been acted on.”
Scepticism. Curiosity. Asking tough questions. Learning lessons from previous events. Their absence is a regular feature of many incidents of misconduct, many crises, both large and small.
But ultimately, in finance, as in other sectors, it is those old-fashioned concepts – trustworthiness, integrity, honourable dealing – which remain as essential in 2019, and years to come, as they have always been.