Quartet were dishonest in operation of reinsurance binder
The FSA has banned four individuals for dishonest behaviour in the reinsurance market
John Hubert Whitcombe, Jeffrey Ronald Butler, Nicholas Brown and Christopher Reginald Colin Henton have been banned for their dishonest involvement in reinsurance business that funnelled very significant losses into Sphere Drake Insurance.
Henton and Whitcombe were underwriters and Brown and Butler were brokers. Working together in the 1990s they wrote reinsurance business under a binding authority granted by Sphere Drake.
They deliberately did not disclose that the business being passed to Sphere Drake was "gross loss making business" that would inevitably result in losses for Sphere Drake, according to the FSA. Sphere Drake received claims in excess of $250m as a result of 112 contracts passed to it via the firms for which the four men worked.
All four were defendants in a court case brought by Sphere Drake in 2003. Findings of dishonesty were made against the four and Justice Thomas also found that they had given untruthful evidence during the course of the trial.
FSA Director of Enforcement, Margaret Cole, said: "Not only were the four men found to have engaged in dishonest business practices, they were also found to have been untruthful in court. Hiding the true nature of the business passed to Sphere Drake led to the firm suffering heavy losses on the business that it wrote.
"Based on the findings of the court, we have banned the four. Their behaviour both in their work and the subsequent trial has fallen a long way short of the standards that we expect of FSA approved persons."
The business in which the men were involved entailed placing business with a reinsurer for a premium that was far lower than the expected losses. The premium was sufficient to pay for the reinsurer's own reinsurance cover (retrocession), pay a small portion of each loss and make a small profit. As the business was passed from reinsurer to reinsurer in this way it created a spiral of losses. Justice Thomas described the practice as "pass the parcel" or "Russian roulette by proxy".
When heavy losses arose in the underlying business (US Workers' Compensation Insurance), some reinsurers, such as Sphere Drake, found themselves facing far greater losses than they had expected. Mr Justice Thomas said that the market trading in losses was one "in which no rational and honest person would participate".
The FSA launched this enforcement action after it took on the regulation of insurance brokers in January 2005.