British face LUI bill: Premiums may rise to meet US compensation

THE BRITISH insurance-buying public may end up footing the bulk of a billion-dollar bill to compensate US policyholders of the failed UK insurer London United Investments, following a mutiny among LUI's reinsurers - companies that shared the failed insurer's risks in return for a share of its premiums.

A reinsurers' revolt could have grave consequences for British insurance buyers. Many LUI policyholders are protected under a statutory UK compensation scheme, the Policyholders Protection Board, which is funded by a levy on British insurers. The Association of British Insurers has warned that premiums may have to rise to meet the levy.

The PPB has liabilities of about dollars 1bn (pounds 675m), but it hopes to recover more than dollars 400m, mostly from LUI's reinsurers. If they fail to pay, the ultimate charge on British insurers will have to rise.

Money payable by LUI's reinsurers accounts for three-quarters of the group's remaining assets, or dollars 2.8bn, according to the provisional liquidators, Coopers & Lybrand. Reinsurers' suspicions were sparked by a 316-page report on LUI published by the Department of Trade and Industry in September, which concluded that between 1970 and 1989 about pounds 40m was 'wrongfully diverted' into accounts in Liechtenstein and elsewhere.

The DTI inspectors found themselves stonewalled at various stages in their investigations and failed to find incontestable evidence of fraud. But they concluded that it was 'probable' that three LUI directors - Ronnie Driver, Henry Weavers and Peter Wilson - had 'derived some benefit' from the money. The Serious Fraud Office is continuing to investigate the matter.

Munich Re, LUI's biggest reinsurer, said its duty to pay claims was 'not in any way affected' by the DTI's findings. But other reinsurers are not so sure. Four are taking legal action to avoid paying claims, and 12 have hired Martin Rodney Smith, an investigative accountant, to scour the books of LUI in search of irregularities.

Mr Smith is looking for evidence of 'moral hazard' - widespread irregularities at LUI that would have deterred a prudential reinsurer from supporting the company. He identified a 'groundswell of opinion' among reinsurers that they must 'look much harder' at the way LUI was run before paying claims.

He said it was still too early to predict the full scale of any reinsurers' revolt. But he added: 'I've heard figures for individual reinsurers of up to dollars 50m quoted.' And he predicted the emergence of a 'huge hole' in the dollars 2.8bn reinsurance recoverables market, if reinsurers' suspicions prove justified.

BBC 2's Money Programme tonight reveals the extent of the revolt among LUI's reinsurers.