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2 December 2005

Background

In January 2004, the FSA found that senior employees of Chiyoda Japan¹ and Chiyoda Europe² had engaged in misconduct involving the deception of regulators and auditors arising out of a number of linked alternative risk transfer transactions that the companies entered into in 1999, 2000 and 2001 ("the purported ART transactions"). They entered into stop loss contracts in 1999 and 2000 and a Loss Portfolio Transaction ("LPT") in 2001. These had as their objective the improper enhancement of Chiyoda Europe's profit and loss account. The FSA disciplined these individuals accordingly³.

The Brokers

The FSA has now investigated the roles of Robert George Phillips and Isabel Rawlence, who were employed at the material time by Benfield Limited. Benfield acted as brokers to Chiyoda Europe. Their involvement was limited to the 2001 LPT transaction only. The investigation considered the involvement of Mr Phillips and Miss Rawlence in the design and placement of the LPT in that year.

The Broker's conduct

With the benefit of hindsight and more recent focus on and awareness of the potential misuse of ART products Mr Phillips and Ms Rawlence now recognise that in participating in designing and placing the LPT their conduct did not meet an appropriate standard. They were involved in:

1. the inclusion of a supplemental payment intended to be paid over by the counterparty to another reinsurer as part of an otherwise legitimate LPT. This was not transparent and did not involve any transfer of risk.
2. exploring with Chiyoda Europe a quota share contract with a similar objective. (This was not ultimately pursued.)

They now appreciate that they failed adequately to question the conduct of senior individuals at Chiyoda Europe. They state that they had no knowledge of Chiyoda Europe’s wider deception or of the significance of the 1999 and 2000 transactions.

Undertakings

The FSA recognize that Mr Phillips is about to retire and that Ms Rawlence is not currently planning to return to work at Benfield following maternity leave. It has therefore discontinued its investigation against them and reached agreements as follows. Mr Phillips has agreed with the FSA to cease performing an FSA controlled function and not to perform any function in relation to any regulated activity carried on by an authorized person, exempt person or exempt professional firm for a period of 2 years from 1st December 2005. Ms Rawlence has agreed with the FSA not to perform any function in relation to any regulated activity carried on by an authorized person exempt person or exempt professional firm for a period of 2 years from the present date.

The FSA confirms that no investigation has been commenced in relation to Benfield or any Benfield Group Company.

Future standards and lessons learned

The FSA draws attention to the lessons to be learned in respect of ART by the reinsurance industry:

• the principle that a reinsurer must assume significant insurance risk, including both underwriting and timing risk is emphasised;
• it must be a realistic possibility that the reinsurer may realise a significant loss from the transaction;
• the commercial substance of the agreement and the overall relationship between the reinsured and the reinsurer, including all side-agreements and other contracts, must be evaluated as a whole so that a complete understanding of the contract and other contracts or related agreements is formed by both the reinsured and the insurance intermediary;
• that there be full and complete disclosure to auditors and regulators of the reinsurance agreement including all side-agreements, other contracts and informal understandings such as those known in the reinsurance industry as "handshakes".

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Footnotes

¹ Chiyoda Fire & Marine Insurance Company Ltd

² Chiyoda Fire & Marine Insurance Company ( Europe) Ltd

³ FSA Final Notice dated 29 January 2004 issued to Yoshiaki Yamazaki and others. Chiyoda Group merged with Dai Tokyo to form the Aioi subsequent to the misconduct described in the Final Notice.