LV's sale to Bain is a sad moment for the mutual sector

Martin Shaw

Martin Shaw

I have always admired Liverpool Victoria (LV= as it is now known) as a strong and effective mutual, with values that put customers at the heart of how they run their business. 

It is not a given that those values will change, assuming the sale to Bain Capital goes ahead, but the rest of the mutual sector will mourn the demise of a stalwart of member ownership.

Like much of the mutual insurance sector, LV= sprung up during the industrial revolution, to meet the protection needs of the rapidly-emerging working class.

Established as a friendly society, it grew steadily over the years to be currently the second largest mutual insurer in the UK.  It attained that position by strong organic growth and targeted acquisition, but also as a by-product of demutualisations elsewhere.

As recently as 25 years ago, the majority of insurance premiums in the UK were paid to mutual organisations. After that we saw a rapid reduction in mutual market share, as many of the bigger mutual organisations joined the clamour to demutualise, or sell the business to a PLC (often based overseas). 

Mutual market share - currently 8 per cent of the UK insurance sector - will dip further, assuming the sale of LV= goes ahead. 

But it did not need to be that way: in other parts of Europe, like France and Germany, the mutual model is carefully preserved and market share remains robust.  Even in that bastion of the free market, the United States, mutuals account for around 35 per cent of the insurance market. 

Benign neglect by policymakers, and indifference by regulators lie behind the shrinkage of the sector. This has exacerbated the dash for cash: where managers of some mutuals eyed the opportunity to bring in new capital, to grow the business at a rate that would never have been sustainable as a mutual. 

Invariably, while the dash for cash increased the rewards for managers immeasurably, it did little to preserve the independent viability of the business. 

All but one of the demutualised insurers was sold on again to raise even more cash (Norwich Union - now Aviva - being the exception), demonstrating that the route to the PLC world is not paved with gold, even if the pockets of the managers are.

During the sale of a mutual, many promises are made to customers. In return for giving up their democratic ownership of the organisation, members are enticed by a financial reward, as well as expectations of a better run business. 

But those promises prove hollow in retrospect: on demutualisation, members of one mutual were awarded a bonus of £6,000, only to find that two years later the returns on their investment had plummeted by many times that amount. 

Others found that greater efficiency translated into cuts to customer service and a more confrontational approach to claims-handling.