The PRA has also fined Millburn £2,863,066 for failing to carry out adequate due diligence in arranging its reinsurance and implementing appropriate systems and controls.
In late 2010, Millburn, a small general insurer, changed its business strategy so that it could be actively marketed for sale. As part of the change of strategy, Millburn entered into an agreement with a Managing General Agent to write business on its behalf. However, the agreement failed to include appropriate contractual restrictions on the type of the business that could be underwritten or requirements to supply basic information on that business. The information available to Millburn was therefore insufficient to gain insight into the business being written on its behalf and the risks it posed to the firm and its policyholders.
Millburn also arranged for all business written during this period to be reinsured by a single reinsurer, exposing it to the risk that the reinsurance might not perform as expected. When the reinsurer stopped paying claims, Millburn’s capital resources were insufficient to mitigate that non-payment, and in turn, Millburn became unable to pay its own policyholders.
This failing in systems and controls meant that Millburn did not know whether it was in compliance with even basic regulatory requirements, such as having adequate financial resources and insight into its major sources of risk.
Mr McIntosh, as CEO of Millburn, failed to give sufficient consideration to the risks resulting from Millburn's significant expansion in late 2010.
The investigation found that he failed to establish appropriate systems and controls at Millburn in order to monitor underwriting, technical provisions, capital, reinsurance and financial reporting. Mr McIntosh’s actions meant that Millburn’s policyholders did not receive the degree of protection to which they were entitled.
Mr McIntosh personally designed and implemented agreements and processes which were fundamentally flawed, and failed to improve them to the required standard despite some Board pressure to do so, according to the PRA findings.
Andrew Bailey, Deputy Governor for Prudential Regulation and CEO of the Prudential Regulation Authority, said:
"Insurance firms which are not well governed have the potential to cause significant losses to policyholders. It is therefore vital that they have robust systems and controls for understanding and managing risk. Millburn’s systems and controls were wholly inadequate, which is why we have taken the step of enforcing in this case. As CEO of Millburn, Mr McIntosh should have ensured that Millburn was fully aware of its sources of key risk, and that it had sufficient capital to mitigate those risks. He failed to do so. Senior managers can delegate their duties, but cannot delegate their responsibility. Mr McIntosh’s actions had a significant impact on both Millburn’s safety and soundness, and the interests of the firm’s policyholders. He fell a long way short of the standards the PRA expects from senior managers, which is why we have decided that a prohibition is warranted in this case."
