HM Treasury (“HMT”) issued a consultation paper in March 2010 to seek views on proposals to strengthen the administration regime applicable to insurers. The proposals set out in the consultation paper have been compiled as part of wider work carried out by HMT to reflect on lessons learnt during the financial crises. Their main objectives behind these proposals are to seek, in the event an insurer goes into administration, to provide greater certainty and clarity surrounding the procedures and process for policyholders and administrators, to ensure continuity of protection and benefits without significant delay, to secure business continuity and to promote overall market confidence.
HMT’s proposals are as follows:
- Valuing insurance contracts upon an administration of insurer: At present, the Insurance (Winding Up) Rules 2001 (the “Winding Up Rules”) prescribe rules for valuing insurance contracts in the event an insurer is wound up or goes into liquidation. Where an insurer becomes subject to administration (rather than liquidation), it is unclear what rules an administrator will use to value that insurer’s insurance contracts. To provide greater clarity and certainty, HMT are proposing that administrators should be required to use the valuation methodology set out in the Winding Up Rules.
- Duty of administrator to assist the FSCS: The UK Financial Services Compensation Scheme (the “FSCS”) seeks to protect policyholders where an insurer is unable to pay claims. At present, the administrator has no formal duty to provide any assistance to the FSCS. As a consequence, HMT are proposing that an administrator of an insurer shall have a duty to provide assistance to the FSCS to enable the FSCS to administer the compensation scheme and to secure continuity of contracts of long-term and general insurance contracts.
HMT has also undertaken a review of relevant tax law which seeks to address any unintended tax charges which may arise as a result of FSCS intervention.
- Continuity of long-term insurance contracts: A liquidator of an insurer is obliged to carry out the insurer’s long-term insurance contracts with a view to transferring part or all of that long-term business to another insurer. There is, currently, no equivalent duty imposed on the administrator of an insurer. HMT are proposing that administrators should be required to maintain long-term insurance contracts.
HMT are also asking whether an insurer in administration should be permitted to enter into new contracts where these relate to existing policyholders and arrangements.
- Power to agree to variations of in force contracts: A liquidator of an insurer may vary existing insurance contracts if their terms are “unreasonably burdensome” for the insurer. HMT are suggesting giving the same powers to an administrator of an insurer.
- Appointment of special manager: A liquidator of an insurer is, currently, able to apply to court for the appointment of a special manager who can then provide the liquidator with particular commercial or managerial expertise. HMT are proposing conferring a similar right on an administrator of an insurer.
- Power of the courts to reduce the value of long-term insurance contracts: HMT are proposing to give courts the power to reduce the value of long-term insurance contracts of an insurer in administration. The courts, currently, have such a power in relation to an insurer in liquidation. It is envisaged that the administrator, the Financial Services Authority or the special manager would be able to apply to court to appoint an independent actuary to investigate the insurer’s long-term business and to report back on whether any such reduction in value is needed.
The consultation closes on 25 June 2010.
For further information, please contact:
Edward Chan (edward.chan@linklaters.com, (+44) 7456 4320).
