The Treasury is looking into ways to make the Part VII transfer process clearer for reinsurers.
The UK Treasury has launched an industry wide consultation into Part VII transfers, suggesting ways to clarify the existing rules for reinsurance. Industry has until 26 January to respond to the consultation which aims to clarify that reinsurance is transferable under Part VII and that reinsurers should be notified as part of the process. The Treasury also plans to remove the restriction on the ability of former members of the Lloyd's market to transfer their insurance business, in response to the recent Berkshire Hathaway and Equitas deal.
Although the first ever Part VII transfer, Wasa International (UK) Insurance, clarified the court's belief that reinsurance contracts could be transferred using the Part VII procedure, section 112(2) of the Financial Services Markets Act currently does not expressly refer to reinsurance. Instead, it refers to the court order to transfer “property or liabilities”. This has usually meant obtaining the consent of the relevant reinsurers to the proposed transfer.
Although the Treasury considers that reinsurance is “property”, it wishes to put it beyond doubt that a court has the power to transfer property, even if the consent of the reinsurer has not been obtained. There are some reinsurance contracts which expressly prohibit transfers being made. As proposed, Part VII is to be amended to put it beyond doubt that the court will be able to vary or override the terms of a reinsurance contract preventing transfer or assignment of a contract within a transfer scheme. The procedure will require that reinsurers be notified of the proposed transfer, although the court can waive this.
Pollyanna Deane, a partner at Berwin Leighton Paisner, said “The danger that a reinsurer's consent could be withheld, that the reinsurer might appear in court to object or that certain transferors are currently shut out of the process has prompted the Treasury to make this proposal with a view to increasing access to the Part VII procedure across the board. Reinsurers will need to consider their contracts, but should welcome the clarification of their position.”
Tim Page, a partner at Clifford Chance, predicted greater use of the tool, saying, “More people are recognising the value of Part VIIs in tidying up the market. It allows companies to sell an asset with great certainty and finality. Practitioners have become more comfortable with the idea.”