RSA Insurance Group has announced the outcome of reviews by PwC, KPMG and RSA’s Internal Audit function into the financial and claims irregularities totalling £72m identified in Ireland in November 2013.
Main points are:
-Independent review from PwC describes RSA Group Control Framework as appropriate in terms of structure and design.
-RSA has adopted PwC’s recommendations to enhance the operational effectiveness of Group-wide assurance processes and Irish financial controls.
-PwC’s work supports the Board’s view that inappropriate collaboration amongst a small number of senior executives in Ireland undermined control effectiveness over claims.
-Additional assurance testing from newly appointed external auditor KPMG and RSA Group Internal Audit confirms that the financial and claims irregularities were isolated to Ireland.
RSA also confirms the impact of financial and claims irregularities and the reserve review in Ireland at £72m and £128m respectively; totalling a combined £200m and that good progress is being made on the business review announced in December.
The PwC review has described the Group System of Governance, which includes the Control Framework, as appropriate in terms of structure and design for an international insurance group of RSA’s size and complexity, and elements of its design compare favourably across the market. The effectiveness of the framework as it related to Ireland was weakened due to independent controls not operating effectively.
The framework is built on the good market practice of three lines of defence, is designed to have multiple reinforcing layers, with a comprehensive network of policies, clear accountability including through self-certification, a framework of business controls and a range of additional assurance processes.
The PwC report identifies some weaknesses in the local implementation of the large loss claims policy and Financial Control Policies. The controls within the Irish finance function did not operate effectively allowing inappropriate accounting for Net Earned Premium and pipeline earnings. A local programme of remediation has already begun and RSA continue to work with the Irish regulator, the Central Bank of Ireland.
PwC concluded that there were no obvious indicators relating to the issues identified in the Irish business that were ignored, at either Regional or Group level, and neither external audit or independent reserve review during 2013 and prior years identified the specific issues that have led to the reported losses in RSA@s Irish business.
The PwC report makes a number of recommendations including conducting a review into the verification of policy adherence, enhancing the clarity of control standards and effectiveness of local implementation, and improving the balance of trust, integrity and accountability with challenge and independent verification.
These recommendations have already been incorporated into a refresh of assurance processes across the Group, many elements of which were already underway, and RSA will continue to engage with the UK Prudential Regulation Authority as this work progresses.
The PwC review of electronic documents of circa 60 individuals has identified documentary evidence that supports the Board’s view that there has been inappropriate collaboration involving a small number of senior executives in Ireland. Specifically, this evidence suggests that certain individuals acted in such a way as to intentionally circumvent parts of the existing Control Framework.
In particular the large claim reserving policy was circumvented. By so doing, financial records did not fully reflect the financial position of the business and reports made to Group and Regional Management were inaccurate and potentially misleading. This undermined the effectiveness of controls which placed significant reliance on senior management integrity.
In order to further establish that the financial irregularities encountered in Ireland have not occurred elsewhere, RSA commissioned extensive additional work from auditors KPMG and also its own Internal Audit department.
The KPMG work, which extended to 29 territories, was an early commencement and deepening of the work to support their year-end audit to test that certain balance sheet items, and income recognition, have not been inappropriately accounted for as occurred in Ireland. We have now received their report and on the basis of the findings, we are satisfied that these issues have not been repeated elsewhere in the Group.
Group Internal Audit was commissioned to examine the effectiveness of controls over Large Loss Case Reserving. That report, which covers 20 territories, has been received. It concludes that those controls are adequate and effective, and found no evidence of suppression of, or delays in adjusting, large claims reserves.
Martin Scicluna, RSA executive chairman, comments “The issues which emerged in our Irish business in 2013 were completely unacceptable and I have made it my personal priority to ensure that this never happens again. The Board is 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.
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.
The Board has always believed that the Group’s Control Framework is comprehensive and appropriate. The work undertaken by PwC, KPMG and our own internal audit team has been valuable in providing comfort to the Board, and we hope to our shareholders and regulators.”
The end of year Group reserve review is currently underway and we will report its findings as normal in our preliminary results in February.
Following his appointment as executive chairman on 13th December, Martin Scicluna commenced a review of the business with the objectives of improving the capital strength of the Group, optimising the Group’s business portfolio and delivering a sustainable dividend into the future. The review is ongoing.
During December 2013, the Group suffered further weather losses from an ice storm in Toronto on 20th December and severe flooding in the UK and Ireland over the Christmas period. It is too early to quantify losses from these events but they will impact the 2013 result.
Within the context of the overall 2013 results and the Board’s desire to improve RSA’s capital position, the impact of this further extreme weather in December 2013 will be taken into consideration in the Board's dividend decision in February.
The search for a new Group CEO is progressing.
Following an internal disciplinary process, the 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. Both dismissals were confirmed on WEdnesday following the completion of appeal processes. The disciplinary processes ran parallel to and independent of the PwC review.
Scicluna concluded “The underlying business continues to perform in line with our expectations and I am making good progress on the review of the Group. The Board and I remain confident that RSA will re-emerge as a stronger group during 2014.”
The Chartered Accountants Regulatory Board in Ireland and the Financial Reporting Council in the UK are liaising over RSA former auditor Deloitte's role and the Central Bank of Ireland has still to report.
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