Independent Insurance: Who is to blame?

The insurance industry is no stranger to scandal.

In 2004 the broker world was rocked after then New York attorney general Eliot Spitzer lashed out at kickbacks and opaque practices.

US scandals Enron and Worldcom have set D&O premiums in the UK soaring and led to a revamp of regulatory practices on both sides of the Atlantic.

But in the face of this week's fraud convictions against Michael Bright and his cronies in the landmark Independent Insurance trial some have questioned whether lessons from the past have really been learned.

The finger of blame has been pointed at the regulator.

It’s been argued the collapse of the once beloved Independent didn’t come out of the blue and that there was some tell-tale signs that trouble was brewing beneath the surface including a suppressed damning report which highlighted concerns a year before the company went under.

Legal Risk’s Frank Maher said at the risk of appearing wise after the event there were small warning signs that things may not been what they appeared.

Independent had long been a broker favourite for its lavish parties and Wembley Stadium events and so when some major brokers opted against recommending the company for the Insurer of Year award, some alarm bells sounded, said Maher. At times, he said, things just seemed too good to be true.

And it turns out they were.

On Tuesday, the company's former chief executive Michael Bright, 63, and former directors Dennis Lomas, 56 and Philip Condon, 48, were all convicted of conspiracy to defraud in what has been described as one of the UK’s worst financial disasters.

The three were found guilty of defrauding fellow directors, financial advisers and investors about the company’s ailing health in order to protect their reputations, jobs and salaries.

The jury heard that the Bright, Condon and Lomas had conspired to defraud fellow directors, financial advisers and investors about the company’s ailing health, in order to protect their reputations, jobs and salaries.

The company’s accounts for the year 2000 should have shown a loss of £180m rather than a £22m profit.

By 2001 it went into liquidation and had insufficient funds to meet incoming claims from policyholders. About 1,000 employees lost their jobs and liquidators Pricewaterhousecoopers began chasing down brokers to return unearned commission.

Some brokers have signed on to a compromise agreement with PWC to pay back the commission while others have refused and have had legal action taken against them. PWC said there are still several outstanding cases that it is currently chasing.

Andrew Paddick, director general of the Institute of Insurance Brokers, questions how it ever got to that point. He said: “I had suspicions a long time ago. Things just didn’t add up.”

Paddick said the FSA was not proactive enough in the case and blames a trail of bureaucracy for allowing Independent to embroil itself in scandal.

Hugh Price, head of business litigation for Hugh James, said the FSA isl likely to go over the case with a fine-tooth comb.

He said: “There will definitely be lessons to be learned from this.”

Jonathan Chidwick, a partner with Stephensons law firm, said: “A prosecution of this magnitude undoubtedly calls for a closer look at how insurance companies are regulated. Perhaps it needs to be reviewed and changes made because clearly something has gone wrong.”

The FSA says it has already conducted its own investigation into the case and planned to release its findings at the conclusion of the criminal proceedings. Although the watchdog refuses to discuss its investigation, it will be interesting to see if it addresses any of its own potential shortcomings in the situation.

Although few in the industry are likely to call for stricter regulation, it’s clear something went wrong. How that will be addressed remains to be seen.