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The U.K. insurance regulator is expected to comment soon on responses it received during a public comment period on a mechanism used by solvent insurance companies to dispose of books of business.
Solvent schemes of arrangement have been used by companies to exit books of business and provide policyholders with estimated values for incurred but not reported claims, but have been opposed by some policyholder groups.
The Prudential Regulation Authority, which took over regulation of the U.K. insurance industry from the now-defunct Financial Services Authority on April 1, 2013, in the fall called for comments from interested parties on a draft supervisory statement it issued on solvent schemes of arrangement.
In that draft supervisory statement, the London-based regulator said it believed solvent schemes of arrangement were “unlikely to be compatible with its statutory objectives” and that it would be unlikely to approve such plans “unless compelling reasons exist to take a different approach in order to secure an appropriate degree of policyholder protection and unless alternative safeguards are put in place to provide continuity of cover for dissenting policyholders.”
Interested parties were given until the end of October to give feedback, and a response from the regulator is expected soon, sources said.
While proposals for solvent schemes are approved or disallowed by law courts and not the regulator, insurers proposing such plans would not wish to fall afoul of the regulator, sources said.
Policyholders likely will be encouraged by the PRA's approach to solvent schemes of arrangement, said Richard Mattick, of counsel at law firm Covington & Burling L.L.P. in London.
The PRA appears to be saying that policyholders are always best served by a preservation of their coverage, he said.
In previous instances, notably the solvent scheme of arrangement proposed by Scottish Lion Insurance Co. Ltd., policyholders have voiced fears that solvent schemes potentially may result in their claims being undervalued.
In the case of Scottish Lion, a London market insurer and reinsurer that stopped underwriting in 1994 and went into runoff although it was still solvent, the company proposed a scheme of arrangement that was approved by votes representing 75% of values of outstanding claims, but it was opposed by five U.S. policyholders.
Those policyholders argued that the occurrence-based coverage they had bought from Scottish Lion was a valuable and irreplaceable asset that they would rather retain asset than surrender for an estimated value of incurred but not reported claims.
A Scottish court allowed the policyholders to challenge the proposed scheme, but that decision was overturned on appeal in 2010.
While the Prudential Regulation Authority appears to have signaled that solvent schemes will need to be considered on their merits, such plans likely will be able to proceed if they give “continuity of cover” for policyholders, said Geraldine Quirk, a partner in the corporate insurance team at Clyde & Co. L.L.P. in London.
Insurers wishing to propose solvent schemes likely will require further clarification from the regulator on its stance, she said.
In a briefing note, law firm Freshfields Bruckhaus Deringer L.L.P. in London said that while solvent schemes occasionally may result in policyholders receiving less for their claims than they otherwise would have, in some cases the reverse is true.
And in some instances, policyholders may receive a payout when no claim ever would have occurred, it said.
Companies that may have been considering proposing solvent schemes of arrangement may reconsider if the Prudential Regulation Authority decides that it does not believe such plans are consistent with its objectives, even though it is a court, rather than the regulator, that rules on the fairness of such plans, the firm added.
Law firm Herbert Smith Freehills L.L.P. in a briefing note said that, if the regulator decides it is not favorable to solvent schemes of arrangement, then fewer such schemes likely will be proposed.
A solvent scheme of arrangement is a mechanism that a U.K.-incorporated company, or any company with sufficient connection to the United Kingdom, can use.