First Alternative Insurance Company Ltd v Esure Insurance Ltd

This was a Part 8 claim for the court's sanction of an insurance business transfer scheme under the Financial Services and Markets Act 2000. The court considered the requirements of section 111 (whether the necessary certificates and authorities had been obtained and whether it was appropriate to sanction the scheme), the independent expert requirement under section 109, and ancillary orders under section 112. The independent expert, approved by the Financial Services Authority, concluded that First Alternative's technical provisions were reasonable, that the transfer would improve the security of First Alternative policyholders and would reduce but not materially adversely affect Esure policyholders, and that Esure's post-transfer capital materially exceeded the level required by ICA/ICG standards. The Chancellor examined a particular concern about the aggregate £65 million being returned to shareholders (suggesting overcapitalisation or underestimation of security requirements), applied the reasoning in Re Alba Life Limited concerning the insufficiency of certain FSA letters alone to allay judicial concerns, reviewed the independent expert's detailed ICA/ICG analysis, concluded that the return reflected overcapitalisation rather than inadequate protection of policyholders, and held that policyholder security remained in excess of the FSA-prescribed standard. Having satisfied himself on the statutory matters, the court sanctioned the scheme.

This Part 8 application sought the court's sanction for the transfer of general (primarily motor) insurance policies from First Alternative Insurance Company Limited to Esure Insurance Limited and for ancillary orders under section 112 of the Financial Services and Markets Act 2000. The companies are related entities within joint ventures and proposed to combine their motor insurance businesses into Esure, wind up First Alternative and return surplus capital to members.

Key procedural and factual points:

• Nature of the claim: sanction of an insurance business transfer scheme and ancillary orders.
• Statutory framework and issues: whether the requisite certificates and authorities had been obtained under section 111, and whether it was appropriate to sanction the scheme; independent expert appointed under section 109.
• Independent expert: Mr Peter Copeman, approved by the FSA, reported that First Alternative's technical provisions were reasonable, that First Alternative policyholders' security would be improved by the transfer, and that Esure's security would be reduced but the post-transfer capital remained materially in excess of the level of confidence prescribed by the FSA (ICA/ICG standard).
• Regulatory engagement: the Financial Services Authority approved the form of the notices and the independent expert, and later informed the court it had no objection and attached a certificate under paragraph 2 of schedule 12.
• Objectors: two individual correspondences raised concerns about underwriting changes and possible price increases; neither resulted in a hearing appearance.

The court identified a particular difficulty: the scheme would result in about £65 million being returned to shareholders (roughly £54 million shareholders' funds and £11 million consideration for goodwill). This raised the question whether the companies were overcapitalised or whether security for policy obligations had been underestimated. The Chancellor noted that FSA letters alone were insufficient to resolve that concern (invoking the approach in Re Alba Life Limited) and thus scrutinised the independent expert's detailed analysis of Individual Capital Assessments (ICAs), Individual Capital Guidance (ICG) and Enhanced Capital Requirement (ECR). The independent expert had reviewed the combined entity ICA and modelling, concluded the assumptions and methodology were appropriate and that post-transfer capital materially exceeded required levels. The court inferred that the likely explanation for the surplus was overcapitalisation rather than inadequate policyholder security. On that basis the Chancellor concluded that sufficient provision had been made for liabilities, that policyholder security met the FSA-prescribed standard, and that it was appropriate to sanction the scheme. The court therefore made the sanction order in the form of the draft with discussed amendments.

The court sanctioned the insurance business transfer scheme. The Chancellor concluded that statutory requirements under section 111 had been met, the independent expert's report (under section 109) established that policyholder security would be adequate post-transfer, and the apparent return of £65 million to shareholders reflected overcapitalisation rather than insufficient provision for policy liabilities; accordingly the scheme was appropriate to sanction.