Life Assurance Society

The Equitable Life Assurance Society of the UK: Near Death Encounter

In the early years of this millennium UK-based Equitable Life Assurance Society shocked the entire life insurance industry when their actions almost led to their own demise. In a nutshell, the company was promising more money to its policy holders than what they actually had; and they were doing this for almost 20 years. By the year 2001, the corporation had overstated the value of their customers� policies by a whopping �4.4B. Here�s a look of some of the things they did wrong.

Too Smooth, Too Long

In the life insurance industry there is a process that is known as smoothing. This allows insurance companies to allocate more value (mostly through bonuses) to customers� policies than the underlying assets the company actually hold. There was nothing wrong when the Equitable Life Assurance Society took this approach; what critics are saying is that they relied on this process too much, for too long a time. Smoothing is supposed to be a temporary solution mostly implemented when the market is good so as to create some sort of headway once the market turns sour. Equitable however, smoothed their way through almost 2 decades and thus, wreaked havoc within and among their policy holders.

Maximum Distribution

Another misstep in Equitable�s disastrous journey was their implementation of a controversial policy they called �maximum distribution.� They distributed the maximum amount of money to policy holders during the good years and held very little back during the rainy days. In theory, the company should have cut down the stated value of the policy of their customers once the market started to fall. However instead of letting the values go down, Equitable took all sorts of measures to keep them up. Because of this, a gap opened up and grew between the value promised to the policy holders and what the company could in fact deliver.

Devastating Secrets

In the case of Equitable Life Assurance Society there were a lot of things that went wrong. However, one of the biggest causes of their downfall was their executives� failure to communicate with the board and with their policy holders. This could not have been more apparent in the case of former chief executive Roy Ranson. This man formulated the corporation�s guaranteed annuities policy which was later ruled by the House of Lords as illegal. Ranson put the policy into practice in 1983 and only told the board about it 10 years later. It was only in 1995 that many policy holders were made aware of this shambolic policy which incurred such comments on Ranson�s actions as �without significant control by his colleagues, his board, the auditor or the regulator�. GP