However, a proposed fine of €120,000 has been cancelled after the regulator decided that he does not have the means to pay it.
The regulation that he breached requires insurers to keep enough technical reserves to underwrite their liabilities. RSAII was previously fined in 2018 for breaching this rule, after admitting that there had been a significant shortfall in reserves for 17 large loss claims in September 2013.
The Central Bank has found that, for some large-loss claims, Smith as chief executive oversaw a process whereby claims handlers were stopped or delayed from recording their recommended estimates on the company database.
Because the claims estimates were understated to the tune of €29.3m, the reserves did not reflect the insurer’s estimated liability, which created a risk the RSAII might not be able to pay out on them.
The under-reserving led to RSAII needed a big cash injection from its UK parent company in 2013. The Central Bank said its investigation did not find evidence of any actual loss by policyholders.
“Maintaining sufficient reserves to meet underwriting liabilities is the cornerstone of conducting business in all insurance entities,” the bank said. “The period of disqualification imposed on Mr Smith reflects the seriousness of the breach he participated in and shows that where senior executives break the rules and put policyholders at risk, they will be held accountable.”
Legal limits have been placed on the Central Bank’s powers to penalise offenders. It is not allowed to impose a fine that would be likely to make a person bankrupt.
In this case, the regulator said that it believed Smith should be fined €120,000. But as part of a settlement process, he provided information about his financial circumstances, and the Central Bank said, having analysed them, it had decided that a fine could not be imposed.
Colm Kincaid, deputy governor of the Central Bank, said: “Since the period to which today’s announcement relates, Ireland has enhanced the statutory framework for the accountability of senior individuals in financial services firms through the Central Bank (Individual Accountability Framework) Act 2023. These enhancements support the ultimate goals of better outcomes for consumers and a more sustainable financial system by driving higher standards of behaviour for individuals in financial services firms.”
Smith was chief executive of RSAII from 2009 until he resigned in late 2013. The investigation, launched the following year, found he frequently attended meetings with senior managers, where no minutes were kept, to discuss recommended increases to reserves for large claims.
Smith frequently did not approve the recommendations, so reserves for some large loss claims ended up lower than they should have been.
As an example, a claim relating to a serious motor accident had a recommended reserve claim estimate of €2.7m, but was recorded on the database at just €20,001. This under-reserving contributed to an artificial inflation of the firm’s reported profits.
In 2018, the Central Bank imposed a fine of €5m on RSAII, reduced to €3.5 with the application of a settlement discount.
The Central Bank said the total external costs incurred in relation to the running of the inquiry are €697,662.92.