Independent Insurance bosses found guilty and sentenced to 14 yrs in total.

mattymoo

Wednesday 24th October 2007: 10:48

Former Independent Insurance chairman and managing director Michael Bright was sentenced to seven years for his role in the collapse of Independent Insurance this morning.


At Southwark Crown Court former finance director Dennis Lomas, who was also found guilty yesterday of two counts of conspiracy to defraud, was sentenced to four years, and deputy managing director Philip Condon, who was guilty of one charge, three years.
All sentences are half suspended.

Source - www.theindietrial.co.uk (free registration needed).

Indie: a potted history

Tuesday 23rd October 2007: 16:39
The Serious Fraud Office has published its version of the collapse of Independent Insurance following today's guilty verdicts against the three former directors. It follows below:

The company that became Independent Insurance Company Limited (“IIC”) was incorporated in 1986. Shortly afterwards it acquired the UK business of a US insurance company, Allstate International Inc, a company that was originally founded in 1904.
Independent Insurance Group Limited (“IIG”) was listed on the London Stock Exchange in November 1993. It grew its market share during the 1990’s becoming the ninth largest insurance company in the UK.
At the year end 2000 there were over 230 million IIG shares in issue which at that time were worth just under £4 a share giving a total market value in excess of £900m.
On 6 March 2001 IIG published its last report and annual accounts covering the calendar year 2000. Conceding that it had been a difficult year the report stated that the group had made profits of £22.2m during the year and would pay a dividend of £13.4m. The accounts suggested that the net assets of IIG at the end of 2000 had been in excess of £300m. The outlook was said to be “positive”.
On 17 and 19 June 2001, respectively IIC and IIG entered into provisional liquidation following the suspension of the trading in IIG shares. It was one of the worst commercial disasters to occur in recent years in the UK.
Over 1000 employees lost their jobs. Thousands of shareholders lost the value of their investments.
By September 2007 the Financial Services Compensation Scheme, which pays claims by holders of compulsory insurance policies in situations where insurance companies fail, had paid out over £366m to people who had insurance policies with IIC.
There were many reasons for the collapse of IIC the majority of which were not the subject of an investigation by the SFO. The SFO investigation and prosecution focused on two specific areas. These areas were the withholding of claims data from IIC’s external actuaries, Watson Wyatt, and the non disclosure of certain reinsurance contracts.
The prosecution alleged that the defendants told lies about these two areas. While IIG may have been doomed before these alleged lies, the lies were important for two reasons.
• Firstly they prevented the truth about the financial state of the company coming out earlier meaning unprofitable trading continued.
• Secondly when the lies emerged they destroyed the credibility of the company making it impossible to rescue the situation.
These two areas formed the basis of two separate conspiracy offences within the indictment. The prosecution alleged that the object of both conspiracies was to mislead people about the financial condition of the company. The prosecution case in respect of these two areas was as follows.
WITHHELD DATA: Insurance companies must make provision in their accounts for the payment of claims; it is one of the responsibilities of directors of insurance companies to ensure that sufficient funds are held in the company’s reserves to pay valid claims made on issued insurance policies. Insurance company reserves are made up of different components.
One element is case estimates. These are based on the calculations that the insurance company makes of the amount it may need to settle claims already notified by the year end.
Another component is something known as IBNR “incurred but not reported”. There is an additional component called IBNER which means “incurred but not enough reported”. IBNR is an estimate of the remaining claims that are anticipated in addition to those already notified that relate to business already written and earned prior to the accounting date.
In 1993 IIC appointed Watson Wyatt as external consulting actuaries to assist in advising the company on technical reserving issues including the calculation of IBNR. Watson Wyatt conducted an annual exercise across the company’s accounting information to advise the company on the amount of reserves they required and to confirm that they held sufficient reserves.
Their certificate on the adequacy of reserves was part of the published accounts of the company each year. It was relied on by the market. In order to conduct this actuarial process IIC provided Watson Wyatt with a variety of information about the claims received and paid during the year. The allegations in this part of the case relate to data that should have been provided to Watson Wyatt but was not.
During the course of the indictment period it was alleged that through a variety of methods claims data was kept off the central computing systems at IIC which the auditors and actuaries relied on to provide them with information about claims.
Essentially it was alleged that the defendants caused case estimates either to be artificially understated or left off the system altogether so that they were not visible to Watson Wyatt. There were three principal methods by which this occurred.
Whiteboard data: Insurance companies sometimes use a whiteboard within the claims department. This is a method of recording large claims that come into the company in respect of which it is not practicable to quantify an appropriate reserve. This might be because it is not immediately possible to quantify the potential cost of the claim or because there is insufficient evidence to form a view about whether liability will attach to the insurer. Once a claim is quantified, or liability is confirmed, then the claim can be input into the main computing system.
The prosecution alleged that this system was abused at IIC with claims remaining on the whiteboard for considerable periods of time after they were quantified. The existence and extent of these whiteboard claims was known to the defendants but not disclosed to Watson Wyatt.
Reserve lists: Within IIC lists were kept of increases of reserves that the claims staff believed were appropriate. These were circulated to senior management to seek approval for their input onto the computing system. Again the existence of these reserve lists was known to defendants but not to Watson Wyatt. Delegated Authorities IIC delegated authority to handle claims to people outside the company. This is not unusual in the insurance industry. So that IIC could take account of these claims in fixing the level of its reserves the delegated authorities would submit their case reserve estimates to IIC on lists called bordereaux. In the normal course of events these figures would be entered into the company’s computing system.
A time came at IIC where a significant volume of claims listed on bordereaux had not been entered onto the company’s computing system for the full amount on the bordereaux. Again this was known to the defendants but not disclosed to Watson Wyatt. Watson Wyatt sought annual assurance from the defendants that they had been provided with full data about the company’s case estimates and processes. They repeatedly received this confirmation.
By the end of 2000 the value of case estimates in the three categories withheld from the computing system and unknown to Watson Wyatt totalled at least £50m. In May 2001 the extent of the claims estimates not on the system was revealed to Watson Wyatt. The effect of this was that Watson Wyatt’s calculations and advice on IBNR and IBNER were fatally flawed. As such they were unable to certify that the company’s reserves were adequate to meet the future cost of claims and they threatened to withdraw their actuarial certificate. Their immediate reaction was that at least £100m would need to be added to the total reserves.
Expert actuaries instructed by the prosecution and the defence estimated that the potential increase in reserves required for the year end December 2000 as a result of the revelation of the withheld data was in the range of £110 to £250m.
Reinsurance: Insurance companies manage risk by insuring themselves and effectively laying off some of their risk by way of reinsurance. There are different types of reinsurance arrangements. In some circumstances reinsurance can have a positive effect on the balance sheet of an insurance company’s accounts. IIC had for a number of years had a close relationship with a group of reinsurance companies controlled in the US by the ERC group. The group included companies called LURECO and IRECO.
IIC was assisted in its dealings with these reinsurance companies by a firm of consultant brokers in reinsurance called Aon Risk Consultants. In February 2000 a contract was negotiated which provided £50m cover to IIG for £20m premium. It was described as a “sleep easy”, necessary because Watson Wyatt were concerned about the level of reserves in the London Market account.
In the latter quarter of 2000 it was realised that in fact this reinsurance cover was not going to be enough. Negotiations commenced for further cover. The additional cover sought was considerable. Without the additional cover the 2000 accounts would have shown a significant loss. The ERC group agreed to provide the necessary cover and three contracts were proposed. In effect these contracts acted for the benefit of IIG. They were referred to during the trial as “the good contracts”. They were signed by IRECO on 5 March 2001. They had to be in place by this date because the contracts needed to be reflected in the 2000 accounts. They effectively improved the position of the company for the purpose of the 2000 accounts by £100m, changing a potential loss to a profit.
When Watson Wyatt and KPMG, the company’s auditors, saw the good contracts they wondered why ERC would enter into what appeared to be one sided and loss making agreements. They required formal confirmation from IIC that there were no undisclosed side agreements. This was duly provided by Bright.
In fact Bright had signed a number of additional contracts on 2 March 2001 These contracts were for the benefit of ERC and had the effect of providing security to ERC, they were “bad contracts” as far as IIC were concerned. They included two addenda that reduced the benefit to IIC of two of the good contracts and a contract which wrapped up the whole package of reinsurance contracts providing effectively that if ERC lost any money though the arrangements with IIC they would be repaid.
The 2000 accounts disclosed the existence of the good contracts with their consequent improvement of the company’s profit and loss account and balance sheet but did not refer to the bad contracts.
Apart from the defendants the prosecution alleged that no member of the IIC or IIG board or audit committee was aware of the bad contracts.
It was alleged by the prosecution that Bright and Lomas were fully involved in the negotiations for the reinsurance cover and knew that the bad contracts had to be signed in order for the good contracts to be provided. In this part of the case the prosecution alleged that Condon must have been aware of the reinsurance negotiations and the fact that the ERC group were no longer content to provide the reinsurance required without binding contracts to protect their own position.
Following the publication of the accounts on 6 March 2001 the bad contracts started to come to light.
The defendants denied all the allegations.