Ian Marshall: I think that's very good, I've not heard anybody who doesn't think BAIC was a good thing.
Mike Walker: I'd certainly say that it's been a good thing. I don't necessarily agree with everything that the judge said, but I think that some of the issues raised have been helpful.
Lee Brandon: As you said, when people see the scheme today, and they see the scheme document, all the arguments raised in BAIC have been addressed. The one negative thing about BAIC, and I'll agree schemes are an evolving process, is I think there are probably some policyholders who perhaps have genuine concerns about the cover. Lewison said that these people paid a fair premium. They patently didn't, but the reality is insurers often recover for a premium and why should they give it up if they've genuine concerns in a few cases. But there's no doubt we've seen in trying to promote these schemes, and people have said it to us, they're basically using the tactic whereby they say, "You pay us well over the odds to go away otherwise we'll run your scheme down". And that's the negative side. If a scheme's going to be fair, it needs to be fair to all the parties.
Martin Rebisz: I don't know whether it's fair to generalise about the motivation that policyholders have to argue that they want their cover to remain in place. Why should that always be a stance driven by tactics and a wish to get more money out of the scheme company? It's not doing justice to what the positions are on the part of policyholders. It's a fair position to say, "We concluded this deal many years ago on the assumption that there would be continuity. We don't have a situation here where solvency is a major issue. Why on earth would I want to give up my cover?"
Tore Kalmeborg: I totally agree, because as an insured, I cannot assess my future. I bought an occurrence based policy because I want it to be there forever. I don't have any claims, I don't have an IBNR, but I might have. How can I ever be fairly treated in the scheme?"
Paul Taylor: Don't ever write it without finality. The issue just goes round and round and round. If the insurance industry is going to issue occurrence based liability contracts, then it cannot be certain about the scope of the coverage and the quantum. It's inflicting on itself the potential for damage; it's taking on risk beyond that which is prudent.
Martin Rebisz: Especially if you have a scheme of arrangement that does not offer any form of compensation, let alone reasonable compensation for determination of long-tail coverage. I mean what would you expect from a policyholder?
Paul Taylor: On a slightly different issue, I don't think we should categorise opposition to schemes as being a US issue. It's not that, it is policyholder creditors that are based in the US which are focussed on this opposition. There are UK policyholder groups that are focussed on this issue and have the same concerns. But the reason I make the distinction is that in the work I do internationally with US regulators, more than a small number of them are looking at the problem of finality in the US. Now, I'm not talking Rhode Island here, which was done for political and economic reasons, but there are major US state commissioners who are looking at the problem of finality. I know of at least one state where there is a report under commission to study finality from the insurance market, and the types of discussion that they're having are very similar to schemes of arrangement. So in terms of the popularity on this side of the Atlantic not being mirrored on the other, there is a clear desire by the industry and by regulators to come up with a finality solution in the US, because there aren't any.
Lee Brandon: I would say for balance, there are a lot of US policyholders who favour schemes and are voting for them. On a scheme with which PRO are currently involved, we've had a lot of positive feedback already from the US with people saying "we like this and it's friendly, we'll vote for it". I think its types of policyholders rather than jurisdiction. With BAIC one US law firm in particular organised to form a lobby, but it was UK creditors who opposed another recent scheme.
I think Paul is right, it is policyholders with pure IBNR which feel they may need the cover, who may object regardless of location.
Nick Bentley: And the other issue is, I've never seen anybody object to an insolvent scheme, because they recognise they get good value from an insolvent company which isn't going to be drained by expenses from the service providers. There are companies whose capital is so thin, keeping them in run-off, even though they're solvent, may be better in the policyholders' interests.
Ian Marshall: What we have here in the UK is a lead over the rest of the world in my opinion. We've developed this exit route, it's been proven to work, it's expanding and we're miles ahead of everybody else. Why would we want to do something to cloud that, to tarnish it, to diminish it, and let somebody else come in?
Nick Bentley: And it's been exported, there are schemes now in Australia.
Ian Marshall: It's also imported. It does result in business coming in, which I suppose legally has some link to the UK, which increases the run-off market here.
Nick Bentley: When you've got an ability to scheme things and get finality, you couple that with Part VII ability framework as well which can move between jurisdictions in the EU and elsewhere, you've actually got the tools in a structured place in the UK which don't exist anywhere else, which means you can actually move liabilities into the UK and then have a solution to those that belong here.
Ian Marshall: Absolutely, that combination gives the London market a clear lead over any other jurisdiction.
Martin Rebisz: If used in appropriate circumstances.
Ian Marshall: That's why the market should be making sure that it always has in mind the appropriate scheme in the appropriate circumstances, and that's why I come back to why I was disappointed at how schemes were developing pre BAIC, and why I think what happened in BAIC is probably a) inevitable and b) a good thing.
Tore Kalmeborg: What do you think, Paul? Because what Ian is actually saying is true, companies are now moving run-offs to the UK because of the scheme regime which is here, which of course means that you as a regulator are going to get more and more run-offs, which aren't, strictly speaking (but possibly legally speaking) UK-related. A problem or just more work?
Paul Taylor: It's a very difficult question to answer. But again, I have to give you a sort of standard answer. I've got no opinion on this Tore. If business is being carried on here, legally carried on here, then we have a duty to regulate it, and we will regulate it with the full regulatory toolkit that we deploy.
Paul Howick: I think also the point's got to be made that, well, we know what the market's attitude is in general to the FSA. I'm not just saying this because Paul's here, but I get the sense that there is a genuine feeling that the FSA's approach to run-off and reinsurance generally is highly developed, and they work very closely with the market. And my sense is, and I hope I'm not speaking out of place, that the market actually has confidence in the ability and the resources of the regulator.
Paul Taylor: Could you get this down word for word? (Laughter).
Paul Howick: The very first section of the Financial Services Market Act says "The purpose of this Act is to have a usable system of regulation which will keep...", and I forget the exact words, but to keep the UK financial industry at the forefront of the world market. And I think that must never be lost sight of, that it's very important for the market and the regulator to work together to move things forward, not as a means of obstructing the market moving forward.
Nick Bentley: I think there's a good trade-off between having the ability to get certainty through schemes in the UK, but also having the expense of being a highly-regulated environment. And you've got to be able to meet that expense for doing it. I think actually more regulation - and I can't believe I'm going to say this - a strong regulation would be good for the market, because it will weed out abusers of the systems and processes, and you should do that. What I fear is that Bermuda, and the capital out there, will be a platform for run-offs to be set up and they won't be using the same methods to get certainty and drive down and get the terms quicker at the expense of policyholders to the advantage of capital.
Martin Rebisz: In the context of schemes, I think it's important to remember that in addition to the role that the FSA plays, at the end of the day the final say is with the courts.
Paul Taylor: Absolutely, for schemes of arrangement, it is a court-driven process. The FSA examines all schemes from the point of view of making sure there's no detriment to policyholders in the construction of schemes, but in the end the legal basis is the UK courts.
Martin Rebisz: And from the creditor's perspective, having been in quite a few UK court sessions in relation to schemes, there are high quality judges and very in-depth analysis of the relevant issues. And policyholders should take comfort from that and perhaps ought to be educated a little better as well in the marketing of some of the tools that are used, because that would probably serve our purpose better.
tore kalmeborg: We've talked a lot about schemes in the UK, but there is also the rest of the world out there, which is not necessarily au fait with the English legal systems or US legal systems for that matter. What about issues such as language aspects here or the fact that scheme documentation is produced in English and posted and advertised in English magazines and so on. What do the Spanish or Argentine or any other policyholders and creditors do with this and can they be fairly treated?
Paul Howick: Well we have a Spanish office which is advising in relation to a UK scheme of arrangement, and I think what has emerged from that are the quite fundamental differences between different jurisdictions and perhaps, in some respects, the failure of what is a London market-centred operation to address some really quite serious issues of foreign policyholders. And I think that is an issue. Now, I don't think it's an issue which we cannot address, but it's certainly a major factor, and it's possibly, if I can use the word, a "deal-breaking" factor if it's not taken into account. So it's very important, to put it at its most general, that when you're embarking on a scheme or whatever it might be and you're using in essence UK machinery to do it, that the potential risks that that machinery may fall over the hurdles of a foreign jurisdiction is an important factor and has to be taken into account at a very early stage.
Lee Brandon: Is it a big issue? Because the other thing is that in most of these schemes, the policy wording is almost universally English I think.
Paul Howick: Well I can't obviously name names or be specific, but in this instance it's a UK entity which issues policies through a local office, and those policies or some of those policies were governed by local law, and that's where the issue arises. If you have a situation where you have, let's say English law contracts, it's less of a problem. But the nature of the beast has to be understood, and I think that, certainly in this case, enough homework may not have been done.
Ian Marshall: But I think it's that type of situation, where we're taking the sort of typical British approach that everybody speaks English and so we'll issue all the documents in English and we'll assume that they can read them. Hopefully it will happen that as schemes continue to develop at some point consideration will have to be given to issuing documents in languages other than English.
Paul Taylor: Consideration is already being given to that. I think we're over-cooking this point. When we ask questions about schemes, we want to know where the policyholders are located, and if there was a material block of policyholders in Spain or another jurisdiction, we and the court may be looking to have the creditors' meeting held in that territory. You can also have more than one creditors' meeting, and you would address that issue. So I don't think that issue has been overlooked... One of the questions we ask scheme promoters is that if there is a population of policies in another territory, have you contacted the local regulators?
Martin Rebisz: What is also an issue is that foreign companies can do schemes in the UK on the basis of the sufficient jurisdiction law, and there are a number that have been done and are in the pipeline. And it's therefore not always a given that policyholders have their policies in English, in fact there are many in those circumstances that won't have their policies in English. So I think it is important to recognise that and to give it, in the appropriate circumstances, the attention that it deserves.
Paul Taylor: I would think it does get the attention it deserves. I'm not going on a deliberate defensive there, Martin, but I think both we and the court, and the court in particular, pays great attention to the communication risk with creditors, and I think it's been very effective in doing so. And scheme promoters are aware of these issues now and are dealing with them.
Tore Kalmeborg: As you said, I think we may be over-cooking that one now. Just as a follow on from what Nick was saying before about the regulatory environment in the UK, it is at the forefront in my experience, we're dealing in several jurisdictions in Europe. The regulatory machine in the UK is very detailed and meticulous compared to other places that I know of in Europe. Is that something which is conducive to a good run-off market, or is it a hindrance for doing business? And let's forget that Paul is here right now.
Nick Bentley: We talked earlier about the best way to run a run-off is to have a specialist dedicated team. We have got an advantage in having a run-off unit within the FSA dedicated to this area.
Paul Taylor: I think this is the point I'd like to make. We've had run-offs being regulated as a dedicated discipline within the regulator since 1995, and I think a point that we like to repeat and repeat, is that we consider that we regulate run-offs to at least the same standard as live companies, which is possibly not true in other jurisdictions, and in certain cases where risks present themselves in run-off, we dedicate additional resource compared to the live market.
Nick Bentley: And it's interesting reading the documentation that there's no distinction between ongoing and run-off.
Paul Taylor: The only distinction between ongoing and run-off is where there are additional requirements for companies in run-off.
Lee Brandon: I don't know if you've found it in other jurisdictions, but the one thing here with the regulator is you actually have a constructive dialogue, it's very much proactive, and you go and talk to them. Is that true elsewhere?
Martin Rebisz: In the situations that I've been involved in, yes, we've had very good, very early and very constructive discussions with the Dutch regulator. I have experience of a few other jurisdictions as well and know that in the US, for instance, they are very interested in the UK situation and are following very closely what Paul in his capacity as regulator for the UK run-off business is doing, and are trying to learn lessons from that.
Paul Taylor: It's certainly true we are regularly approached by overseas regulators for information about how we go about regulating run-offs.
Nick Bentley: There is a variance. I was pleased to see recently that APRA [The Australian Prudential Regulation Authority] seemed to recognise that the pendulum might be swinging back towards the middle.
Paul Taylor: I read the same article.
Martin Rebisz: When we approached APRA in the context of the ING scheme, the problem was that no scheme had ever been done in Australia at that particular point in time. So yes, what can you expect? There are concerns, there's a lack of experience, and it takes time of course for the regulator to catch up. And I have no issue if they want to get to the bottom of what it is that you're trying to achieve.
Paul Taylor: I commend you, that is the appropriate way to deal with the regulator, to work with them.
Tore Kalmeborg: So what we have really said here is that we have an excellent regulator, and a dedicated run-off situation on the regulation side. There is a resource pool in London which is huge, compared to any other market, and there's a legal environment here which is attractive for our business with the potential for Part VIIs, the potential for scheming and so on. So do you think this is the way London will retain its lead position in the run-off market? Will this be the international centre for run-off excellence?
Steve McCann: I hope not, because that would be a tacit recognition that the UK environment produces more run-off. I'm aligning that comment with what I was saying earlier about overseas outsourcing. I think the people that have grown up in the environment in which the risks have been underwritten, in which the claims have been handled, are probably as well skilled as any to bring those portfolios to a conclusion. So London as the world centre? Great that we can export some expertise occasionally, but as to drawing it into us, I would certainly remain to be convinced.
Lee Brandon: Presumably it would be limited ultimately by how much overseas business does have sufficient connection to the UK for it to actually be regarded as UK business. I can certainly see the approaches and the standards that we have here in the London market being utilised elsewhere, but whether you could continue to bring all the world's problems back into the UK, I'm not sure.
Paul Taylor: I don't think you can. You can only bring it in where there is a strong and significant connection, because a local regulator is not going to allow the transfer of liability, unless there's a mechanism the equivalent of Part VII in the EU.
Paul Howick: Which begs the wider question of the importance of retaining London as the centre of international reinsurance business, and the Law Commission is looking at fundamental reform of insurance contract law at the moment. The Insurance Contract Act is 100 years old this year and I know that one of the driving forces there is to reform the law in such a way that it retains the UK and London in particular at the centre. Because there are pressures from Bermuda and elsewhere where, in the eyes of many, business can be done more easily in a more modern way than under the UK contract laws. So I think it's essential that the live business coming into the market stays within the UK. The skillsets here and the very fact that we're all sitting round the table, and probably haven't travelled more than a mile or so from our offices, says a lot for that concentration of skills.
Nick Bentley: It depends where the future inventory's going to be created from. If it's going to be created out in Bermuda, over the next four or five years, there'll be a significant development of run-off in Bermuda. Whether you can get that back into the UK...
Ian Marshall: That's the challenge isn't it? There's an industry built up here, and the norm is to keep that market, expand that market, and that's why I would think it's a good thing that an extended business outside the UK does have some connection and is imported here through an exit. I would slightly disagree with Steve, I think that's a positive thing. There's obviously a limit, because not every block of business has a link to the UK. And I think the other reason that it's a positive thing is that if you are a new capital provider, it should be an attraction that if you go into London and in a few years time you want to do something different there is a proven way to exit the market. And London is the clear leader, the skills exist, the regulation exists, the support of the regulator exists. I think those two go hand-in-hand, the expansion of the live market together with expanding the expertise and reputation of the run-off market.
Tore Kalmeborg: Do you think the service providers might go outside London and do exactly what they've learned to do here? There are different legal environments and other aspects of course, but nevertheless there is a world market out there?
Lee Brandon: Well, we're currently doing that, so absolutely. We've got offices overseas, in the US, and we do much more work in Continental Europe, and we fully expect that to continue.
Ian Marshall: As do we. We started our process back in 1990, and we continue to do that in new markets such as South America.
Tore Kalmeborg: This will of course inevitably lead to a certain amount of growth and consolidation as well amongst the service providers. But will that in itself also create other problems, because you have a significant conflict of interests if you start to run a lot of different run-offs, because you're going to go against each other. How are we dealing with that?
Lee Brandon: Any service provider who has more than one client has the potential for conflict. The importance is to recognise it, put a clear structure in place and a clear methodology of dealing with it, and be open and transparent with clients and talk to them. And in practice, it has never been an issue.
Martin Rebisz: I was going to refer to what was probably one of the biggest opportunities for potential conflicts of interest, which was Equitas. Right from the start this was recognised and mechanisms were put in place to deal with that, and I think that's worked very well.
Robin Erswell: I think these fire break mechanisms worked very effectively, and I think there's a clear distinction between what business fell into Equitas in 1992 and prior, and what fell into the ongoing market. I don't think that's posed any problems.
Martin Rebisz: Yes, but there are lots of issues between the syndicates, and over time I have dealt with quite a few of your colleagues and I've always seen that work very well, and be handled very professionally and ethically.
Robin Erswell: And transparently.
Martin Rebisz: Yes.
Steve McCann: But then scale does matter, doesn't it? With a larger organisation you can handle conflicts of interest better so consolidation doesn't hinder you.
Tore Kalmeborg: In summary, everyone seems to agree that the run-off market will continue to grow until we find a way of not writing stupid contracts. But that growth is actually quite positive from a London perspective in particular now, due to the fact that London maintains a unique position in terms of the resources and experience and everything else available here.
Steve McCann: Could I just raise one other issue? It's how run-offs, once they move to a service provider, tend to stick there. There seems to be an incredible friction which stops run-offs actually moving. When do we see outsourced run-offs being retendered?
Lee Brandon: It is very measurable and you have to ask, "Is your service provider actually delivering against your objectives?", and there's very clear measurement. And you need to report, and liaise with your client, so it's a very transparent process, and if you're not moving to achieve their objectives, then I think a lot of providers won't keep the business. There are a number which have moved, and we've benefited from that.
Mike Walker: One of the ways we have addressed that is with rolling contracts, ensuring that the correct run-off is done in phases, and making sure that you've matched the requisite measures with the service provider to those phases. What we've also found is that whilst you may not necessarily re-tender the core of the run-off, at various phases there may be a requirement to bring in additional service providers to handle certain aspects because of the phase you've reached. For example, acceleration - you may want to keep your core service provider focussed on key issues whilst not wishing to lose sight of other issues, so bring other service providers in to help deal with those.
Nick Bentley: The reality in my experience is that there are some good service providers and some appalling service providers, and some people will use the ones they want for the reasons they want, and what we've got to get to is a standard. There are companies out there with nine-month backlogs of claims files just to get seen, after you've got the broker to deliver it. It's not acceptable. We need to start taking sanctions against those sorts of people, and it's not necessarily the service providers, because people buy that service knowing what they are going to get, that's the issue - if we're going to develop this market in London that's what we need to assess. I think the other thing we haven't mentioned is brokers. When I see the results of the increased premium being fed through in the market as a percentage of the brokerage I do wish we could claw back some of those profits that they're going to be reporting this year from last year, to get them to provide a service which those policyholders in the past in the US thought they were getting coverage for those policies, then certainly the brokerage that was spent many years was for a service that just wasn't being provided.
Paul Taylor: Well it is another issue, and it's an issue that needs to be determined in terms of business agreements with brokers when the business is written.
Ian Marshall: It needs a fundamental change into the way people think of what services a broker should be providing, and that has been around for several years. Unless there is a change in the requirement for what the brokers provide by changing the way they are remunerated up front, I can't see how it is going to happen. But I think that it should have happened years ago and it is not happening fast enough.
Paul Howick: I think that's one of the issues that the Law Commission is looking at, the whole basis of the agency structure and the peculiar way it works.
Tore Kalmeborg: Okay, well once again thank you very much everyone.