Indie trial: Directors warned about future cost of reinsurance

Independent’s reinsurance advisors warned the company’s directors about the potential danger posed by costly reinsurance deals, said a key prosecution witness at Southwark Crown Court today.

The prosecution contends that in the early part of 2000, concerns over Independent’s financial position prompted Michael Bright and Dennis Lomas to look for ways to extend the company’s reinsurance cover.

The directors asked Terry Masters, managing director of Aon Risk Consultants, to negotiate “top-up” reinsurance deals. This resulted in Independent’s reinsurer ERC proposing a suite of contracts.

Masters, who took the stand on Wednesday, said the two companies had a mutual understanding. Under the terms of their arrangement, if ERC was exposed to losses Independent was prepared to continue doing business until the money was recouped—something the prosecution has referred to as “payback.”

Facing questions from prosecutor Andrew Baillie QC, Masters explained the exact nature of the arrangement. ERC proposed three contracts designed to cover general liability for Independent’s London and provincial businesses. In return ERC requested a commission based on the proceeds from Independent’s profitable commercial property business. And most notably, another contract bound Independent to underwrite reinsurance for ERC.

Masters said this created a circular argument where any losses as part of the deal with ERC would be relayed straight back onto Independent.

“Did this state of negotiation cause you some concern,” asked Baillie.

“I was concerned that with the minimum premiums proposed…a considerable amount of the future profits of Independent would go to ERC,” said Masters.

“I was concerned that with the minimum premiums proposed…a considerable amount of the future profits of Independent would go to [reinsurers] ERC.

Terry Masters, managing director, Aon Risk Consulting

Asked if he had passed on his concerns, Masters said he had in discussions with Lomas and Bright.

Earlier in the day, Lomas’ defence counsel Mukel Chawla QC had the opportunity to cross examine Elizabeth Holloway, a risk analyst who worked for Independent as part of Masters’ team at Aon.

During the questioning it emerged that following the collapse of Independent the Serious Fraud Office had asked Holloway to collate information on the firm.

Chawla asked if Holloway had ever heard Masters warn Lomas that he may be mortgaging the future of the company. “No,” she replied.

The three former directors of Independent Insurance Group—Michael Bright, Philip Condon and Dennis Lomas—are charged with conspiracy to defraud. They deny the charges.

Condon was absent from court today due to an illness.

The trial continues.