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In order to conduct this actuarial process IIC provided Watson Wyatt with a variety of information about the claims received and paid during the year. During the course of the indictment period it was alleged that through a variety of methods claims data was kept off the central computing systems at IIC which the auditors and actuaries relied on to provide them with information about claims. Essentially it was alleged that the defendants caused case estimates either to be artificially understated or left off the system altogether so that they were not visible to Watson Wyatt.

Whiteboard data

Insurance companies sometimes use a whiteboard within the claims department. This is a method of recording large claims that come into the company in respect of which it is not practicable to quantify an appropriate reserve. This might be because it is not immediately possible to quantify the potential cost of the claim or because there is insufficient evidence to form a view about whether liability will attach to the insurer.

Once a claim is quantified, or liability is confirmed, then the claim can be input into the main computing system. The prosecution alleged that this system was abused at IIC with claims remaining on the whiteboard for considerable periods of time after they were quantified. The existence and extent of these whiteboard claims was known to the defendants but not disclosed to Watson Wyatt.

Within IIC lists were kept of increases of reserves that the claims staff believed were appropriate. These were circulated to senior management to seek approval for their input onto the computing system. Again the existence of these reserve lists was known to defendants but not to Watson Wyatt.

IIC delegated authority to handle claims to people outside the company. This is not unusual in the insurance industry. So that IIC could take account of these claims in fixing the level of its reserves the delegated authorities would submit their case reserve estimates to IIC on lists called bordereaux.

In the normal course of events these figures would be entered into the company's computing system. A time came at IIC where a significant volume of claims listed on bordereaux had not been entered onto the company's computing system for the full amount on the bordereaux. Again this was known to the defendants but not disclosed to Watson Wyatt.

Watson Wyatt sought annual assurance from the defendants that they had been provided with full data about the company's case estimates and processes. They repeatedly received this confirmation.

Fatally flawed

By the end of 2000 the value of case estimates in the three categories withheld from the computing system and unknown to Watson Wyatt totalled at least £50 million.

In May 2001 the extent of the claims estimates not on the system was revealed to Watson Wyatt. The effect of this was that Watson Wyatt's calculations and advice on the insurance firm's IBNR and IBNER were fatally flawed. As such they were unable to certify that the company's reserves were adequate to meet the future cost of claims and they threatened to withdraw their actuarial certificate. Their immediate reaction was that at least £100 million would need to be added to the total reserves.

Expert actuaries instructed by the prosecution and the defence estimated that the potential increase in reserves required for the year end December 2000 as a result of the revelation of the withheld data was in the range of £110 to £250 million.

Reinsurance

Insurance companies manage risk by insuring themselves and effectively laying off some of their risk by way of reinsurance. There are different types of reinsurance arrangements. In some circumstances reinsurance can have a positive effect on the balance sheet of an insurance company's accounts.

IIC had for a number of years had a close relationship with a group of reinsurance companies controlled in the US by the ERC group. The group included companies called LURECO and IRECO. IIC was assisted in its dealings with these reinsurance companies by a firm of consultant brokers in reinsurance called AON Risk Consultants.