A Lloyd’s investigation found that Equity’s first big mistake was engaging in increasingly risky reserving practices; its second was keeping them quiet

The results of the Lloyd’s investigation into Equity Syndicate Management’s reserving provide insurers with a clear example of what can go wrong when claims reserving practices are not scrutinised by external auditors, actuaries and the board of directors.

The Lloyd’s investigation found that Equity had in some cases chosen to forgo its previous practice of only releasing reserves after three years, when claims development was more certain. Instead, it had opted to release reserves sooner in the three-year cycle, when claims development was less certain and thus releasing reserves more risky.

Lloyd’s also noticed that reserve releases were generally greater when Syndicate 218’s results were expected to be worse, indicating that the company’s reserve releases was driven by a desire to prop up results rather than actuarial prudence.

A further indication of this was that the new reserve reviews were given a target figure or level of intensity, rather than being based on what should prudently be released.

The key point for Lloyd’s, though, was not that these anomalies took place, but that the company had failed to keep adequate written records of the reserve reviews, and that external auditors, actuaries and the board were not informed of them.

In short, Equity was employing increasingly risky and questionable reserving practices, and wasn’t telling anyone what it was doing, rendering any external forces powerless to step in and stop it.

Lloyd’s also found that the board was kept in the dark about the true reason for rising bodily injury claims – it had been told that the increasing level of claims had been caused by changes to the internal claims-handling process.

Today’s censure from Lloyd’s has focused only on Equity Syndicate Management, and not the individuals involved.

But, as a key interface between the management team and directors at the time, former IAG UK chief executive Neil Utley can expect some tough questions from the FSA under its section 166 investigation and also the Lloyd’s Disciplinary Board, which he faces later this month.

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