Recent changes to Part 7 transfers of insurance business

Out-Law Guide | 24 Jun 2008 | 12:38 pm | 4 min. read

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...

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 ([email protected] 020 7418 7306)

See:

See also: The Reinsurance Directive in the UK, an OUT-LAW Guide