LEMMA GIBRALTAR COLLAPSE MAY COST UK BODY £25M IN COMPENSATION

LEMMA GIBRALTAR COLLAPSE MAY COST UK BODY £25M IN COMPENSATION

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The Serious Fraud Office at Scotland Yard yesterday refused to confirm or deny “an interest” in the collapsed Gibraltar based insurance company Lemma Europe Insurance Company Limited.

It is alleged by media sources that Lemma has prompted some 800 claims and is estimated to cost the UK’s Financial Services Compensation Scheme some £25m, high enough to be one of the few cases singled out in the FSCS annual report. Just three years earlier the £1m paid out in relation to another insurance firm, Aldgate was highlighted.

Gibraltar firms chip in to the FSCS pot for compensation but a string of unrelated cases, some of them involving false bonds, have prompted the Gibraltar FSC to pressure locally based firms to meet more stringent standards not least in their auditing and justification of solvency levels. The estimated figure of £25m would mean the claim from Lemma would account for almost a third of the total claims made to the FSCS last year from collapsed insurance firms.

Lemma, which struggled for survival last year until the Supreme Court of Gibraltar found it bankrupt and ordered its provisional liquidation to proceed in December 2012, faces millions in claims, but initial investigations point to problems in the UK, not Gibraltar.

Last year the related Ukranian company, Lemma Ukraine, failed to bail out Lemma Europe but the case seems to be coming under increased scrutiny, including that of the Financial Services Commission in Gibraltar, as more details emerge that it had taken on a vast chunk of the “bottom end” of solicitors’ professional indemnity policies that were generally regarded as the very high risk end of the market.

Grant Thornton Gibraltar were appointed liquidators six months ago and their probe extends not only with Lemma but with the main conduits for its business including a firm called ‘Asset Underwriting’.

Lemma is registered in Gibraltar but provided domestic and commercial property and liability insurance in the UK. The firm had traded in the UK since January 2008 but the FSC removed its permissions in August 2012. The FSCS declared the firm in default in October 2012 and it says it has been working with the liquidators and their agents to manage the run-off of insurance claims against Lemma. “There are believed to be around 800 protected claims. The majority of these are solicitors’ professional indemnity claims. Current indications are that protected claims might cost in the region of £25m,” says the FSCS.

It was reported by the Chronicle last year that in 2009 -2010 Lemma Europe underwrote solicitors’ indemnity insurance but it was in February 2012 that the management advised its board that claims in this area had been £9m higher than expected.

That issue and the non-obtaining of funds to cover this appear to have set off the rapid spiral into a solvency crisis.

One major issue that emerged was just how Lemma came to be taking on almost one sixth of the UK’s total solicitors’ PI insurance. And also the fact that this was sold in UK by a UK Financial Conduct Authority (formerly FSA) licensed company.

Meanwhile, underwriting agency Asset France has gone into liquidation after its ultimate parent, Ukranian insurer Lemma, decided to pull its funding, www.insurancetimes.co.uk reported recently.

Insurance Times said it understands the agency was used by brokers in the United Kingdom and internationally.

FSC calls for tighter controls

 

At the end of May this year the Financial Services Commission Insurance Supervisor Michael Oliver wrote to all companies involved in insurance setting out the standards it expects companies to meet. This follows a similar drive, after the Hill Insurance collapse, to press for more stringent auditing.

The areas highlighted by Mr Oliver include: capital adequacy and whether the firms’ capital position is adequate to support the level of current and anticipated business activity given the exposure to risks; whether the firm has in place the necessary processes and policies to ensure that the appropriate level of reserves and provisions are maintained and that it is able to evaluate their adequacy and that they are maintained on an ongoing basis, in essence the FSC wants more independent validation of a firms information and justification if the firm strays from actuarial advice; risk management standards and controls and; corporate governance generally so as to establish that the firm is actually following procedures, not just paying lip service to them.