Royal Sun Alliance Insurance Plc & Ors

When sanctioning a transfer of general insurance business under Financial Services and Markets Act 2000 Part VII, the court’s central concern is whether policyholders face a material adverse effect, particularly a real rather than fanciful increase in the risk that claims will not be paid.

The court must critically evaluate the financial strength of the transferor and transferee before and after the scheme, giving close attention to the independent expert’s report and the regulator’s views. Considerations concerning fairness and reasonable expectations in with-profits business cannot simply be transferred to general insurance business. An enforceable undertaking concerning capital and distributions may satisfactorily close a protection gap created by differing regulatory regimes.

RSAI Insurance Plc sought sanction for a Part VII transfer of its Irish branch general insurance business, together with business formerly written in Ireland by nine subsidiaries, to a wholly owned Irish subsidiary. Approximately 600,000 policyholders were affected, principally in property, motor and liability classes.

The statutory requirements had been satisfied. The independent expert supported the scheme, while the Financial Services Authority raised and addressed concerns concerning the less risk-sensitive Irish capital regime, the possible payment of dividends, and the possibility that the transferee might later be sold. The central issue was whether the transfer would materially adversely affect transferring, remaining, or existing policyholders.

The scheme was sanctioned.

1. The court has an absolute discretion under Part VII, but must give due recognition to the commercial judgment of the applicant’s directors. Its task is to determine whether any group of affected policyholders will suffer a material adverse effect. The court should compare the relevant position before and after the transfer, with close attention to the independent expert’s report and the FSA’s informed views.
2. For general insurance business, the principal concern is the ability of the transferee to meet valid claims. The fairness-based approach applicable to with-profits business, illustrated by Re London Life Association Limited and Re Axa Equity and Law Life Assurance Society Plc [2001] 1AER Commercial 1010, requires qualification in this context. Reasonable expectations may remain relevant where they concern matters such as service levels.
3. The court is concerned with real risks, not theoretical or fanciful risks. The differing United Kingdom and Irish solvency regimes did not itself create a material adverse effect. The FSA’s continuing group-capital supervision, the transferee’s projected capital, the short-tail nature of much of the business, regulatory supervision in Ireland, and the independent expert’s conclusions were important safeguards.
4. The court accepted an enforceable undertaking preventing dividends or other distributions before 31 December 2011 where the transferee’s available capital would be below 115 per cent of its individual capital assessment, unless the court consented. This addressed the risk that a sale of the Irish subsidiary would remove the principal protection relied upon by the FSA and made the undertaking binding irrespective of ownership.
5. The absence of objectors was not a significant factor. In general insurance transfers, policyholders may reasonably rely on the statutory responsibilities of the independent expert, regulator and applicant. The scheme was therefore sanctioned, with liberty to apply concerning any future request for consent to distributions.