Recent changes to Part 7 transfers of insurance business
This guide is based on UK law and was last updated on 23rd
June 2008.
Amendments aimed at clarifying certain aspects of the Part 7
regime for the transfer of insurance business come into force on
30th June 2008.
Part 7 of the Financial Services and Markets Act 2000 sets out
the procedure for the transfer of business from one insurer to
another, culminating in court approval of the scheme.
Part 7 transfers have proved increasingly popular in recent
years, but there were concerns that uncertainties in the rules
might deter or at least delay future transactions. These amending
regulations are the last stage in a process that began with HM
Treasury's consultation paper of November 2006.
Transfers of property and liabilities
Under existing rules, the court has a wide discretion to order
transfers of "property and liabilities" relating to a Part 7
transfer scheme. There has, however, been some uncertainty as to
the scope of this power, particularly in relation to reinsurance
contracts taken out on risks being transferred.
The general view was that court had discretion to order the
transfer of reinsurance contracts. There were some first
instance court decisions supporting this view, but these did not
amount to a binding precedent. And there was still concern over the
position if the reinsurance contract specified that any transfer
must have the express consent of the reinsurer.
The amendments confirm, for the avoidance of any doubt, that the
court's power to order a transfer extends to contracts that include
provisions prohibiting transfer, or which require someone to
consent to a transfer. In effect, the court can override such
provisions.
The power will be exercised if the court considers a transfer to
be appropriate in all the circumstances. In this, it will be
assisted by the FSA, which will review the effect of the proposed
scheme on any reinsurance arrangements in its report to the
court.
The FSA is planning to consult on proposals to update the
Handbook guidance to reflect this and other amendments to the Part
7 process.
Notifying reinsurers
Supplementing this clarification of the court's powers is a new
provision that requires the applicant to notify directly all
reinsurers whose reinsurance contracts would be transferred (in
whole or in part) under the proposed scheme.
Where the reinsurance was placed though a broker appointed by
the reinsurer, notification can be made to that broker. And where
the cover is placed with more than one reinsurer, it can be made to
a person authorised to act on their behalf.
In many cases the new requirement reflects current good
practice. But the Treasury believes that putting it on a statutory
footing will ensure that reinsurers have ample time to raise
objections before the court and that those objections are given
proper consideration.
Some concerns have been raised about the practical difficulties
involved in cases where there are numerous overseas reinsurers who
may be difficult to identify or trace. The Treasury points out that
the court retains the same discretion to waive the notification
requirement for reinsurers as it does for policyholders.
Retrocessionaires, however, remain outside the new notification
requirements as their contractual relationship is with the
reinsurer, not the insurer. Reinsurers will need to consider
carefully the position regarding their own retrocession
arrangements when reviewing a proposal for transfer.
Former Lloyd's members
The amendments also remove a somewhat arbitrary provision that
barred former underwriting members of Lloyd's who resigned before
24th December 1996 from transferring insurance business.
Some reservations were expressed during the consultation about
the impact this might have on long-tail liability insurance
policyholders whose interests might be adversely affected by a
transfer. The majority of responses, however, supported the
proposal.
The Treasury denies that the amendment has been made solely to
remove a legal obstacle to the final stage of the Equitas/Berkshire
Hathaway deal, under which Equitas (the vehicle created to reinsure
and run-off Lloyd's pre-1993 liabilities) will transfer the
liabilities of reinsured Lloyd's names.
FSA reports
In June 2007, the FSA agreed to provide the court with a report
on each proposed Part 7 transfer, including whether or not the FSA
objects to the transfer going ahead.
The FSA has been carrying out an informal consultation on the
form of this report and the extent to which the independent expert,
transferor, transferee and policyholders would have an opportunity
to review it before it is filed at court. The results of that
process have not been published, but the FSA intends to carry out a
formal consultation later this year.
In practice, however, the FSA is issuing two reports to the
court: one before the directions hearing and the second report
before the final hearing. It appears that the FSA is allowing
applicants to see these reports before filing them at court,
although it is not yet clear to what extent the FSA will take on
board any comments the applicants may have.
Fees
As from 1st April 2008, the FSA started charging transferors an
application fee for Part 7 transfers.
Fee levels are currently £18,500 for life business and £10,000
for non-life. The difference reflects the fact that that a transfer
of life insurance business generally requires greater actuarial
input. If a transfer is mostly non-life business but involves an
element of life insurance, the £18,500 fee will apply.
The Reinsurance Directive Regulations
These introduced some changes to the Part 7 procedure as part of
the implementation of the Reinsurance Directive.
The Directive provides that a reinsurer's home state regulator
can authorise transfers of books of pure reinsurance business
within the EEA, provided the transferee's home state regulator
certifies that the transferee reinsurer will have the necessary
solvency margin after the transfer.
Part 7, however, requires all insurance and reinsurance business
transfers to be approved by the court in what can be a long and
costly process. The regulations, which came into force on 10th
December 2007, introduced a simpler alternative for pure
reinsurance business transfers from the UK into the EEA.
If all policyholders affected by the transfer consent to the
proposal, there is no need to obtain court sanction. Instead, the
transferring reinsurer simply needs a solvency certificate from the
transferee's regulator.
Contact: Bruno Geiringer (bruno.geiringer@pinsentmasons.com
020 7418 7306)
See:
See also: The Reinsurance Directive in
the UK, an OUT-LAW Guide
