Reviews involving auditors, external assurance and internal audit, outline extent of financial and control issues at RSA's Irish division
THERE HAS BEEN some small mercy for insurer RSA following combined reviews of its Irish operation by PwC, KPMG and its internal auditors – the £72m in financial irregularities discover in December are isolated, and no worse than originally feared.
PwC were called in to review the insurer’s financial controls and processes by the RSA executive, following the discovery of more than £70m in financial and claims irregularities in its Ireland division.
The review of RSA’s controls – group-wide – were found to be “appropriate” by PwC, although some enhancements will be taken on board by the insurer. Additional assurance testing by new auditors KPMG, and its internal audit division, found the irregularities to be “isolated” to Ireland.
RSA executive chairman Martin Scicluna (pictured) said the board was now “confident that the financial and claims irregularities were isolated to Ireland and do not reflect the quality of our control framework elsewhere in the world”.
The problems in its Irish division related to “independent controls not operating effectively”, RSA told the stock exchange in a statement.
Controls within the Irish finance function failed to operate effectively, allowing “inappropriate accounting” for net earned premium and pipeline earnings. “A local programme of remediation has already begun and we continue to work with the Irish regulator, the Central Bank of Ireland,” said RSA.
PwC concluded that there were “no obvious indicators” relating to the Irish issues that were ignored at either group or regional level, but external auditors or independent reserve reviews had failed to flag up the issues. “Neither external audit, or independent reserve review during 2013 and prior years identified the specific issues that have led to the reported losses in our Irish business.”
Deloitte was replaced by KPMG as external auditors from February 2013, and the previous incumbent has come under the investor spotlight for its role, according to reports. Deloitte has previously said that it would not be appropriate to comment on the detail behind RSA’s recent statements, but that it was “committed to delivering the highest quality audit services”.
The review backed RSA board in finding that “inappropriate collaboration” relating to claims irregularities saw a “small number” of senior executives in Ireland undermining control effectiveness. A review of electronic documents of circa 60 individuals was made during the process. “Specifically, this evidence suggests that certain individuals acted in such a way as to intentionally circumvent parts of the existing control framework.”
The large claim reserving policy was circumvented, with financial records not reflecting the financial position of the business and reports made to the group and regional managers were “inaccurate and potentially misleading”.
A further £128m of losses were confirmed after a review of the Irish business’ internal reserves. This saw reserve strengthening primarily required for adverse bodily injury claim trends.
Auditors KPMG, and RSA’s internal audit function, were involved in “extensive” work to establish that the Irish problems were not replicated elsewhere. KPMG’s work saw them run the rule over 29 territories, which was effectively an early commencement, and “deepening” of its work to support the year-end audit, testing balance sheet items and income recognition. The problems were not repeated elsewhere.
Internal audit looked into the effectiveness of controls over large loss case reserving. It found no evidence of the suppression of, or delays in adjusting, large claims reserves.
BOX 1 – ‘Deliberate collaboration’
New RSA executive chairman Martin Scicluna (pictured), a former Deloitte chairman, said that the issues that had arisen in its Irish business were “completely unacceptable and I have made it my personal priority to ensure that this never happens again”.
“Our investigations have confirmed that the claims irregularities in Ireland were, in large part, the result of deliberate collaboration between a small number of executives there. These actions do not reflect the culture, ethos and values of our business that have served us well. We acknowledge that there are lessons to be learnt and we are tightening elements of our control and financial framework in response to these events.”
Following an internal disciplinary process, RSA Ireland CFO Rory O’Connor and the RSA Ireland claims director Peter Burke were dismissed for their roles in relation to large loss and claims accounting irregularities. The dismissals were confirmed at the end of the appeal process. The disciplinaries ran parallel and independent of the PwC review.
BOX 2 – £200m losses
During Q4 2013, RSA announced a total of £200m of losses within RSA Insurance Ireland. These losses comprise:
£72m arising from irregularities within the claims and finance functions, as announced previously on 8 November 20132. These losses were the focus of the PwC investigation and comprise:
£37m from inappropriate collaboration on large loss and claims accounting; and
£35m primarily from inappropriate accounting for net earned premiums and pipeline earnings.
£128m from the completion of the internal reserve review of the Irish Business, announced on 13 December 2013. These losses comprise:
£62m relating to reserve strengthening for business written in 2013, of which c.80% is due to adverse bodily injury claims trends; and
£66m relating to reserve strengthening for business written in previous years, of which 70% is due to adverse bodily injury claims trends.