Bringing finality to pool run-offs can be very complex but John Winter believes there are solutions
The challenge: To find a more effective way to bring finality to pool run-offs. Using closure initiatives involving solvent schemes to bring finality to discontinued books have fast become a feature of the re/insurance landscape. However, rather less progress has been made with underwriting pools due to the additional complexities inherent where a number of underwriting partners are involved in a business.
Key issues include:
- pool participants may have underwritten only a small percentage of the total risk, so reducing the interest of policyholders in individual schemes bringing finality to a small element of the overall risk;
- frequently, the share of the pool risks written by individual participants will have changed from year to year;
- participants may not have been actively involved in the management of pool liabilities and so do not have the information required to individually exit from a pool; and
- on the reinsurance side, pools frequently purchased cover as a group, so creating issues for an individual participant seeking to bring finality to a slice of the overall risk.
Prior to the advent of the Aviation & General Insurance Group Pool (A&G) initiative, what pool closure mechanisms there had been tended to tackle these issues by creating a number of identical schemes of arrangement, one for each participant. However, while this brought finality, the process could be cumbersome for policyholders.
The solution: To consolidate all liabilities into one entity and re-establish the negotiating power of the pool.
The A&G closure initiative was ground breaking in that it used a combination of acquisition and Business Transfers under Part VII of the Financial Services and Markets Act (Part VII FSMA) - a process by which a defined set of liabilities are transferred from one authorised insurer to another - to bring all the liabilities into one entity.
The Part VII FSMA process is highly regulated and requires the approval of both the High Court and the Financial Services Authority (FSA). Its main steps are:
- the liabilities to be transferred must be defined in a complete and unambiguous manner. This is not always as simple as it first appears, and may be complicated by common practices in the market such as fronting arrangements;
- an FSA approved independent expert is appointed to assess the impact of the proposed transfer on all the policyholders of the insurer planning to make a transfer, not just those directly affected by the transfer;
- the independent expert recommends the level of capital that needs to be transferred with the liabilities to ensure the protection of all relevant policyholders;
- the insurer planning to make the transfer is required to give formal notice to all interested parties, including policyholders of all insurers involved - ie, those of the insurer transferring the business and those of the insurer receiving the transfer. This process includes both writing to policyholders and advertising throughout the European Economic Area in accordance with the regulatory requirements of each member state. In addition, the UK High Court must approve the nature and means by which notice is given; and
- about three months after notice has been given, a hearing is held at the High Court to allow any objections (including those of the FSA), to be heard. If deemed appropriate, High Court sanction is granted and the transfer becomes effective.
In experienced hands, Part VII FSMA business transfers can now be achieved in four to six months.
The time imperative: The importance of Ruxley's policyholder finality programme.
Gathering all liabilities into one insurer was only the first, albeit very important, stage, in the A&G closure initiative.
Achieving finality in an appropriately timely manner is fundamental to the success of any such initiative as this brings the benefits of delivering considerable savings in terms of legal and administrative expenses, so directly benefiting policyholders by releasing monies to fund payment in full of claims.
Accordingly, Ruxley has developed its policyholder finality programme concept which delivers swift finality by taking a no nonsense approach and so creating a virtuous circle for policyholders.
- 'No quibble' claims settlement - reasonable claims estimates are paid without question and in full. This pragmatic approach to contentious claims delivers major savings by avoiding litigation. Market estimates indicate that on average at least 10% of claims costs are legal fees, and in the case of APH liabilities this can rise to 20% plus.
- Speed of resolution - the claims ethos means the settlement process can be completed promptly, so saving years of operating expenses that would otherwise have been funded from the finite pot of monies held in the run-off entity.
- Solvency - the combined savings from the claims ethos and speed of settlement releases monies to fund solvent run-off and payment in full.
The resources required for implementation: Making theory work in practice.
The A&G closure initiative also clearly underlines the vital importance of having high levels of the right specialist expertise in order to turn the concept into reality.
What is all too often under-appreciated when looking at closure initiatives is that solvent schemes of arrangement are simply the mechanism which provides the legal and regulatory framework for such a project.
What makes them work - ie, delivers the core objective of a fair, transparent and timely route to finality - is having the right team in place to drive the necessary, and often highly detailed, processes at all levels.
As the schematic and key highlight boxes illustrate, the activity involved in completing the A&G closure initiative was immense, and in broad outline involved:
- widespread policyholder consultation and communication at all stages of the process;
- significant investment of time and resource in tracking down missing policyholder details - the equivalent of one person working full time for nine months was spent on this alone ; and
- high levels of expertise in transferring, collating and standardising records in order to enable immediate recall of all relevant information regarding each policyholder.
Reflecting this, Ruxley estimates the A&G process required more than 17,000 man hours from its expert, and therefore highly time efficient, team. The result: true finality on a complex book of business
The A&G closure initiative is now being completed, so removing just one of the London Market's many unresolved run-offs and creating a new template for ways to tackle the closure of discontinued books of pools business.
- John Winter is chief executive of Ruxley Ventures.