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One of my most read blog articles from last year was one which was less to do with any abilities I may or may not have with the written word, but more to do with the fact an insurance company had gone to the wall. It was the first such company to do so and was of probably some embarrassment to the new UK insurance regulator the Prudential Regulation Authority (PRA) since this happened on what might be termed a probationary period for them too. The insurance company in question is /was Millburn Insurance. Exact figures are to come out but rumours have been circulating since June last year that there was well over €1,000,000 in unpaid claims pertaining to “motorsport” and race teams – although I would anticipate the figure will be much higher.

The last time insurance impacted so heavily and negatively on the world of motorsport was around 2001 when the Independent Insurance Company collapsed. Michael Bright, the former chief executive was sentenced to seven years in jail for his part in the collapse of the company he founded with the Judge (Geoffrey Rivlin) describing Bright as the "architect and driving force" in covering up the company's perilous state of finances and said he "corrupted a lot of people along the way". Bright was disqualified from being a company director for 12 years and the Finance Director Dennis Lomas, 56, was given four years and ex-deputy managing director Philip Condon, 58, received a three-year sentence after they too were convicted of conspiring to defraud fellow "directors, employees, actuaries, auditors, reinsurers, shareholders, policyholders and others by dishonestly withholding claims data".

At its peak, it was a darling of the stock market, worth over £900m and Britain's ninth largest insurer. Its 2000 accounts showed it had made profits of £22m but the SFO alleged that these should have recorded a loss of "at least £180m". The SFO at that time described Independent's collapse as "one of the worst commercial disasters to occur in recent years in the UK".

New heights in insurance fraud ??

What precisely went wrong I am not party to, but all insurance companies have to pass tests of solvency. This is measured in different ways with insurance companies beyond just cash in the bank. Insurance companies survive on their own Re-insurance and in the case of the Independent their re-insurance was done with an Irish based insurer, who allegedly had Re-insurance with a company called the Independent. Net effect – there was no re-insurance and no solvency, made worse by the fact that all insurers have “open” years to allow for losses still so come in and honest insurers “reserve” for this at realistic rates. With the Independent outstanding claims simply tended to be reserved at £1 – just to keep files open on the system.

This fooled the auditors and regulators at the time into effectively over stating the formal “rating” of the Independent. The whole thing about the Independent was ultimately it was a charade – but it was a charade that masqueraded with a “rating” so the fact that they also wrote business endlessly at well below market rates only exasperated the situation further.

So wind the clock forward to 2013 and the collapse of Millburn Insurance. Who knows what is going to come out of the woodwork here. Begbies Traynor – the official administrators are held with high regards for their thoroughness in such matters (and are unlikely to leave any stone unturned), have been quoted as saying "Over the coming weeks we will be working hard to assess the company's financial position and agree the best course of action. It is a highly unusual event for an insurance company to find itself in administration; this is the first we have seen for almost five years" - insurance companies are not in the habit of just disappearing like this.

So are there similarities with the collapse of the Independent? It is too early to say of course, but the final facts will of course come out in time. Inevitably the story will go beyond what cash the company had and maybe there is a re-insurance question to be answered here too. I don’t think any of the directors came from the Independent so the final story will be different, just as planes crash for different reasons. The other key difference is that Millburn – although very established was “unrated” by any credit rating agencies. There are plenty of insurers that are unrated – indeed my own company Everitt Boles Motorsport Insurance Management had a fantastic relationship with Templeton Insurance in Isle of Man for seven years – but a changing tide of regulation made trading between us more complex, but Millburn was City based.

They accepted many different classes of insurance – including motorsport and the similarity here is NOT “motorsport” but like the Independent they underwrote motorsport business far too cheaply. In this particular case it was volatile On-Track crash insurance. There are race teams who have yet to see any money from claims that will this year be almost two years old. Inevitably some have been in contact and I have been horrified to understand not just the volume of business that was being written but the price it was being written at – and this was on the most volatile On Track insurance. Brokers who used Millburn would have fully understood just how under-priced the business was – especially if they were persuading or guiding Millburn on the rating.

Find your trusting insurer in London's East End

I confess I don’t understand why more teams did not ask more questions at the time about their insurers. A cursory internet check would have revealed at that time that Millburn had no website, were based opposite a car park in London’s East End, just round the corner from a brothel (this latter bit is what I gather from reliable sources you understand!!) . I have to be careful what I say – my first office was not far away either – but that was back in 1998, in 2012 regulation has consumed the world of insurance with transparency being a fundamental of the business even I could not find very much about Millburn. They did not go to great lengths to be found.

So Greeks and big wooden horses? We can make all the analogies we like, legally “let the buyer beware”, we are all told “if it is too good to be true – it probably is”.

Questions to ask of your On Track Insurance Broker