KPMG and Sayers were reprimanded by an Accountants’ Joint Disciplinary Tribunal for their work on the 2000 audit of Independent Insurance Group, when they accepted that loss could be turned to profit by using stop loss insurance which was too good to be true. KPMG was also ordered to pay costs of £1.15 million.

Stop loss insurance 

Independent was a publicly quoted general insurance company. By its nature, insurance involves the acceptance of risks and the receipt of premiums in year one, with the claims arising from the risks not likely to be paid until future years.

In computing the amount of provision which needs to be made against such claims (the provision reduces the amount of profit), insurance companies look at both historical and current data.

During 1999, claims from insurance written by Independent in 1997 and earlier years increased in value. In order to protect itself from further deterioration in its position, Independent purchased “stop loss” insurance.

One of the effects of stop loss is to enable the amount of provision to be smaller. It therefore has a beneficial effect on profit.

During 2000, claims for past years continued to increase. In January 2001, KPMG, the auditor of Independent, was informed that further stop loss was being sought to extend the cover put in place in 1999.

The effect of this was that for a premium of £77 million, Independent would be able to turn a LOSS of £105 million into a PROFIT of £22 million.

Risk passed on

The Tribunal pointed out that this was too good to be true. The company underwriting the stop loss insurance appeared certain to lose money. It gave rise to an obvious suspicion that there may be more to the stop loss insurance than KPMG was being told.

Sayers, the KPMG audit engagement partner, was advised by the KPMG concurring partner to confirm the stop loss terms directly with the reinsurers.

For some reason - no record of his thinking was made by him - Sayers decided not to do this. Independent’s reporting actuaries Watson Wyatt told Sayers that they “did not understand why the reinsurers were writing these contracts when they appeared to be obviously loss making”.

The nature and validity of the stop loss insurance were fundamental to the audit. It subsequently turned out that Independent had agreed to pledge £141 million as a condition of obtaining the stop loss.

There were other agreements which limited the liability of the reinsurers and sought to pass on the risk from the reinsurer to a subsidiary of Independent.

In addition, a different stop loss contract required the payment of a premium of £1.6 billion over four years. This completely changed the situation: the chief executive resigned and Independent went into liquidation.

Criminal investigation 

KPMG was fined £495,000 and Sayers was ordered to pay £5,000. Both were reprimanded and KPMG was ordered to pay costs of £1.15 million.

The Serious Fraud Office conducted a criminal investigation into Independent. On 23 October 2007 at Southwark Crown Court, Michael Bright, the former chief executive of Independent, Philip Condon, the former deputy managing director, and Dennis Lomas FCA, the former finance director, were all found guilty of serious offences of fraud arising from their involvement in Independent.

Bright was sentenced to seven years imprisonment and disqualified from being a company director for 12 years.

Lomas was sentenced to four years imprisonment and disqualified from being a company director for 10 years and Condon was sentenced to three years imprisonment and also disqualified from being a company director for 10 years.

Related articles

• Independent Insurance bosses jailed

Related links

• KPMG
• Accountants’ Joint Disciplinary Scheme