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ABSTRACT
This article considers the downfall of Equitable Life Assurance Society in the United Kingdom, founded in 1762 and the first life insurer to operate on an actuarial basis. Its failure to manage the risks implicit in guaranteed annuity options led to a financial crisis, and it ceased to write new business in 2000. We analyze the Society's risk management practices, and find that they were inconsistent with its strategy, which highlighted customer focus. It lacked the discipline to balance short-term advantage to customers with the long-term needs of the organization. We also highlight the use of participating policies, and the way in which they were used to transfer risk to policyholders. Finally, we draw some lessons for other life insurers from Equitable Life's experience.
INTRODUCTION
The year 1762 saw the foundation of the Equitable Life Assurance Society in the United Kingdom, the first insurer in the world to establish life insurance on an actuarial basis (Ogborn, 1962). Unlike many life insurers in the early days, it survived and prospered; in 1997, it was the fourth largest life insurer in the United Kingdom.1 Then, following a court case it lost in 2000, severe financial problems led to the Society putting itself up for sale and, failing to find anyone willing to buy it, it closed its doors to further new business and outsourced its administration to a bank. A new board was elected in 2001, and the firm is now a shadow of its former self, its assets of £15,637 million at the end of 2004 being only 46 percent of their end-2000 value.
The Society's fragile financial position has affected its policyholders, some of whom have seen the pensions they receive from the Society cut by 30 percent. Equitable Life is a mutual, and there are no shareholders to help. The high profile problems led to a number of reports: the Treasury Select Committee (2001), the Corley Committee of the actuarial profession (2001), the Baird report (2001), the Parliamentary Ombudsman (2003), and Lord Penrose (2004), whose report was commissioned by the U.K. government. There is outstanding disciplinary action against some of the accountants and actuaries involved. Also awaited is a further report from the Parliamentary Ombudsman, who has been investigating whether the...