Inquiry could cost Lloyd's over pounds 1bn: SFO threatens 'time and distance' policies

A CONTROVERSIAL form of insurance business, worth more than pounds 1bn to the Lloyd's of London insurance market, may be forced to end as a result of an investigation by the Serious Fraud Office.

Last week the SFO announced that it was carrying out its first full-scale investigation into the affairs of the Gooda Walker underwriting agency, where more than pounds 900m worth of losses have hit 3,000 underwriting members. It is the SFO's first big inquiry into Lloyd's since the office was formed in the late 1980s.

At the heart of the investigation is how an arcane form of insurance called 'time and distance' may have been used to massage the profits of a group of syndicates with the alleged intention of luring unsuspecting new investors to join the syndicates, which were managed by Gooda Walker.

For Lloyd's, the SFO's investigation could prove damaging in many ways. While officials are worried that the interest of the City of London's main policing authority in the conduct of its affairs will discourage future new investment when new capital is needed, its ways of doing business may also be challenged.

The SFO is concerned that the time and distance policies, widely used within the Lloyd's market, can give rise to financial abuse.

Professionals in Lloyd's claim that time and distance policies are designed to smooth out the cash-flow trends of underwriting syndicates at Lloyd's. Syndicates often pay a premium to an insurer outside the country with an agreement that an amount of money shall be returned to the syndicate at a future date.

The amount of money returned is broadly equivalent to the premium and the insurer accepting the business receives a commission for holding the money.

In the early 1980s, this form of 'banking' insurance brought down the wrath of the Inland Revenue on Lloyd's. Lloyd's was engaged in wholesale tax avoidance and evasion schemes. Money, in the form of so-called 'insurance policies', was placed offshore. Tax relief was claimed on the premiums paid. But, in some cases, the money was never returned to the syndicates and was retained by the managers of the syndicates.

There is no suggestion that abuses that took place in the early 1980s have taken place in the Gooda Walker case. But the Inland Revenue has already examined time and distance policies as part of its earlier investigations in the 1980s. As a result of that earlier investigation the entire Lloyd's market was forced to pay out pounds 43.5m to clear up past tax problems with the Inland Revenue.

Lloyd's will argue that time and distance policies are a necessary part of its programme for reserving for large losses. In the past the Revenue has argued that reserving has been mis-described as reinsurance and a whole framework of dubious arrangements had been set up to conceal the truth. Income had been shifted from a period of high tax rates to one of low tax rates.

Littlejohn Frazer, Lloyd's auditors, have told investigators carrying out work on behalf of the Gooda Walker members: 'Syndicates have used time and distance policies to a very considerable extent over many years, some involving indemnity values of hundreds of millions of pounds, and in doing so have increased profits or reduced losses accordingly.'