Fallout From Independent’s Collapse Continues,Regulators Questioned

What did you know, and when did you know it?” Those questions from the Watergate era are increasingly being asked of the U.K.’s Financial Services Authority, which oversees the country’s insurance industry, in the wake of the spectacular meltdown of Independent Insurance Co. Ltd. after it went into liquidation in June.

Both the size of the losses and the swiftness of the collapse have raised serious questions. Independent’s most recent audit showed liabilities of $1.83 billion, and assets of $2.39 billion. It was Britain’s 171st largest company, and a fast-growing insurer with 500,000 private policyholders and 100,000 commercial policies in force.

In January, it announced larger than expected losses, but as recently as April the company said it had had a good first quarter. In May, it announced that it expected to make a $211-million rights offering to shore up its capital base. Its actuary, Watson Wyatt, expressed “reservations” about its liability account; the rights offering never materialized; Independent’s shares were suspended from trading on the London Stock Exchange; and three weeks later, a midnight court order put the company into liquidation.

The sudden collapse shocked the London insurance community, but subsequent revelations unearthed by the liquidators, Pricewaterhouse Coopers, have raised even more questions. At least $87.2 million in claims were apparently never recorded on Independent’s books. London’s serious fraud office announced it had launched an investigation.

Several questionable reinsurance contracts were revealed. Apparently founder and ex-chairman Michael Bright concluded at least three rollover deals with Ireco, a Dublin-based subsidiary of GE Capital, to cover unexpected losses; but the cost of the coverage and the restrictions on payment further constricted Independent’s finances. Ironically, PricewaterhouseCoopers has indicated the reinsurance agreements may be the most valuable asset Independent has left, even though they are widely blamed for helping push the company over the edge.

Bright owes the Hong Kong and Shanghai Bank $6.02 million on a loan secured by his shares in Independent. HSBC has filed suit to try and recover the funds.

While Independent’s private policyholders are largely protected from loss via the Policyholder Protection Board—which can levy up to 1 percent on all insurers’ premiums to satisfy claimants from a bankrupt company—many commercial policyholders aren’t covered. Other companies, mainly Royal & SunAlliance, have either bought or accepted portions of Independent’s business, but creditors and shareholders are waiting to see what PricewaterhouseCoopers reports.

The FSA has come under increasing criticism for its failure to start an investigation until it was too late. The most recent controversy flared when France’s Commission de Contrôle des Assurance (CCA) Chairman Jacques Delmas-Marsalet charged that the FSA had ignored warnings from French regulators about the shaky condition of Independent’s French subsidiaries late last year. The warnings were also contained in a formal report in January, along with evidence that Independent was attempting to hide large losses in France.

The charges echoed those made by London’s financial community and some Members of Parliament who have called for a full inquiry of the way the agency handled audits of Independent’s accounts. It apparently relied on statements by KPMG, the company’s own auditors, rather than conducting a separate investigation.

U.S. regulators would likely have made sure that such serious problems “surfaced” earlier than the FSA did, and the MPs pressing for an investigation may demand a tougher U.S. style regulation of Britain’s insurance industry.

Topics London