Can we talk about the Insure Group Managers (IGM) Scandal

The now defunct Insure Group Managers (IGM) is alleged to have misappropriated premiums collected on behalf of insurance companies and invested them in high risk and ill-advised ventures that ultimately failed and caused them to lose hundreds of millions of Rands owed to South African insurance companies. There are a series of failings and red flags to unpack but below are a few of my thoughts on all that went wrong.

 1. Third Party Oversight Failure - The insurance regulations and in turn the contracts between IMG and the parties who had outsourced their processes required premiums collected on their behalf to be held for a maximum of 45 days in liquid assets before being paid over. A robust third-party oversight process should have included periodic review of where and how the funds were being held to ensure that the requirement and terms were being met instead of funds being invested in high risk and illiquid assets as was the case. Outsourcing of processes to third parties does not exempt the outsourcing party from the associated risk and responsibility and this case illustrates why effective third party oversight management is an important part of risk management, and when exercised properly exposes non-compliance issues early.

2. Systemic Risk - This was introduced by the fact that a single provider serviced so many players in the industry. It is only due to the capital buffers of the bigger players that this did not result in a total collapse of the system. Small insurer Lion of Africa closed its doors due to the R28 million owed to it by IMG and had other players been similarly affected it would have been a disaster from the industry. The regulator's mandate is to maintain the integrity and stability of the financial markets and given the systemic risk posed by IMG in the insurance industry the Regulator should have identified this risk and exercised a higher level of oversight over the management and operations of IMG.

3. Conflict of Interest – One of the two directors described as the driving forces in the misappropriation activity, held the position of Director of Strategy and Compliance. The compliance function needs to be independent from the business to be effective in managing compliance risk and to ensure adequate checks and balances are in place. "The fox can not guard the hen house" because the business interest and profit motive could, as was the case here, be prioritise over compliance responsibilities.

4. Fit & Proper Requirements – Both implicated directors have been debarred for 5 years from financial services (which they are appealing) due to lack of ethics and integrity and therefore failing to meet the fit and proper requirements. It may be time to reimagine how integrity and ethics are assessed and evaluated on an ongoing basis. Relying on the individual to self-disclose matters relating to their honesty and integrity is overly optimistic approach to honesty. It may be worth considering third party character verification e.g. from a Professional Body or previous employer. There is no full proof method but scandals such as these keep proving that self-disclosure alone is not working.

5. Lack of Serious Consequences - Curatorship and debarment hardly seem like sufficient consequences for the damage caused, however after the Steinhoff scandal and the lack of personal accountability for those involved I am not optimistic about further action. These precedents of "getting away with it" will only embolden others to see how much they can get away with before they are disbarred. My sincere hope is that I am proved wrong.