Outlook: Mendelsohn needs a miracle to survive this insurance job

Employers' liability; A Barb in the back

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Royal & Sun closes life arm, cuts dividend and axes 1,200 UK jobs

Walmsley gets top job at TV ratings board

Anyone who has reinsured their car or house in the last six months will be baffled at the horrible accident which befell Royal & SunAlliance in the first half of the year. Rocketing premiums have not translated into rising profits. Quite the reverse in fact. Royal's general insurance business suffered a one-third decline in profits and, for the group as a whole, the bottom line pre-tax loss is a grisly £319m when the decline in its investment portfolio is factored in.

But it is not just Royal's policyholders who are feeling the pain. Shareholders were treated to another savage cut (or rebasing as the company prefers to call it) in the dividend while the exit from life assurance means 1,200 job cuts among the workforce. To cap it all, Royal said it could not rule out a thumping and deeply discounted rights issue to shore up its finances. Not surprisingly, the shares slumped another 21 per cent, which was not just the work of short-sellers.

But is Bob Mendelsohn, Royal's urbane American chief executive, fazed by any of this? Not a bit of it. In fact he thinks the company turned in a positive performance in the face of a wickedly volatile market.

Mr Mendelsohn is clearly a born optimist. He needs to be that and more to believe Royal can pull off its transformation into a much bigger general insurer and raise the extra external funds this will require in today's bear market.

So far, fire sales of unwanted businesses have freed up more than £700m in capital, but there is no guarantee that this won't have to be pumped back into the life fund to recapitalise it if equity markets continue to fall. Even structured as an interest-bearing loan it still means that the capital will be tied up instead of being used to write more general insurance business.

The sharp rise in premiums makes this a good time to be a general insurer. But it won't last forever and in the meantime Royal isn't making quite as much hay as rivals like Aviva. It has a lot of nasty exposure to asbestos and the markets were also irked by a further unexpected £66m provision against 9/11 claims.

Over the cycle, Mr Mendelsohn's holy grail is to pay out just £3 more in claims and staff costs than he raises in premia and rely on investment returns to produce profits and pay dividends. It is something no other British insurer has achieved and a glance at Royal's underwriting results suggest Mr Mendelsohn will have to take some tough action to achieve his target.

The compensation culture which began in America and now infects the UK makes a lot of business not worth writing, other than at punitive rates which cripple the customer. Still, Mr Mendelsohn's compensation chugs along nicely at a million a year and, boy, does he need to earn it.

Employers' liability

One of the areas which has been giving Mr Mendelsohn a lot of grief is employers' liability insurance. The problem is acute in the US but it is getting worse here as well and although Royal has not stopped writing policies, the premiums charged are certainly going through the roof.

A householder can make a judgement about whether they want to ensure the contents of their home and for how much. But employers' liability insurance is a legal requirement for all businesses. Soaring premiums have made cover too expensive for some firms while others are unable to find insurers willing to offer insurance at any price. Some businesses have been forced to close and many others are operating illegally.

Indeed, the British Insurance Brokers Association trade body says that soon hundreds, if not thousands, of small businesses will be affected. Its list of companies going out of business ranges from scaffolders, metal fabricators and riding schools to small private mines and children's nurseries. And those choosing to trade illegally rather than shut are just as diverse, from couriers, coach operators and roofing contractors to cash and carry warehouses.

What seems certain is that the legislation covering this form of insurance, which dates back to 1972, needs extensive reworking. The business environment has changed markedly in the past 30 years, pushing up premiums and making some sectors too risky for insurers. The growing culture of litigation, encouraged by the emergence of "ambulance chasing" lawyers, has led to an increasing number of employees going to court over relatively minor incidents.

Record-breaking court awards have also made insurers wary when writing business. And a whole range of new liabilities, particularly those attracting massive payouts such as asbestosis and vibration white finger, have emerged since the legislation was drawn up.

But what is the solution? Insurers can't be forced to offer cheaper premiums – or even offer cover at all. The insurance brokers are lobbying for a "pool" system of insurance backed by government with a cap on liabilities. A similar system, known as Pool Re, was set up a decade ago, following a spate of IRA bombings, to offer insurance cover against the risk of terrorist attacks, with the Treasury acting as reinsurer of last resort. A "pool" also kept airlines flying after 11 September, when the cost to the industry of buying cover became unaffordable.

But in both these cases, the pool was created in response to a specific threat. If the Government was to do the same for something as generalised as employers' liability it would merely be fostering an even worse culture of compensation. It should resist the lobbying.

A Barb in the back

And so to a vicious little turf war in the world of television where the chairman of Barb (the Broadcasters Audience Research Bureau) seems to have got something bigger and sharper between the shoulder blades while he is away on holiday.

Nick Phillips, a former director of the Institute of Practitioners in Advertising, has been made the scapegoat for the botched introduction of Barb's new audience measuring panel and the associated hardware. His replacement looks like being the ex-Carlton and Capital Radio chief Nigel Walmsley but as he is also on hols there was no confirmation of that either.

Barb is jointly owned by the broadcasters on one side and the advertisers on the other. The data it collects is useful for all broadcasters but clearly is of most value to commercial stations because it shows who is watching what and when and so helps determine how much advertisers pay for airtime. There is no doubt that the new panel has been beset by problems. The regional coverage is patchy, there is confusion about which buttons to press and even now it is short of its 5,200-strong complement. If the BBC gets a rogue rating from Barb it might affect Greg Dyke's bonus. But for commercial broadcasters it means big bucks and Granada has already complained loudly about Barb's performance at its last results.

It is surely no coincidence then that an television executive looks like taking over from an adman. How much difference a new chairman will make is anyone's guess since the problems lie with the technology and a good proportion of them seem be have been ironed out at last. But at least it will give the ITV companies the comfort of knowing they have their own man on the inside. In these straitened times, they need ever crumb they can get their hands on.

m.harrison@independent.co.uk