Re Royal & Sun Alliance Insurance plc

The court considered an application under Part VII of the Financial Services and Markets Act 2000 for the sanction of a scheme to transfer general insurance business written in the Republic of Ireland to an Irish subsidiary. The judge explained that transfers of general business are governed by protection against material adverse effects on policyholders rather than the fairness inquiries typical of with-profits transfers, and that the court must give close attention to the independent actuary's report and the Financial Services Authority's views.

The independent expert and the FSA concluded there was no material adverse effect on policyholders, subject to addressing differences between UK risk‑based capital supervision (Pillar I and Pillar II/ICA) and the Irish minimum solvency regime (Solvency I). To close that gap the applicant gave an enforceable undertaking restricting dividend payments by the transferee until 1 January 2012 unless its available capital exceeded 115% of its ICA, which the court accepted as sufficient protection. The court therefore sanctioned the transfer.

The applicants (RSAI and subsidiaries) applied for court sanction of a Part VII transfer of the general insurance business carried on in the Republic of Ireland to a newly recapitalised Irish subsidiary. The Irish portfolio comprised predominantly property, motor and liability business, was short‑tail in nature and involved some 600,000 policyholders.

The principal issues before the court were (i) the proper approach to the sanction of a transfer of general insurance business, (ii) whether the proposed transferee would have sufficient capital and security for transferring policyholders given differences between UK and Irish solvency regulation, and (iii) whether any additional protections were required to prevent material adverse effects on transferring policyholders, particularly in the event of a future sale of the Irish subsidiary.

The court set out the governing approach: for general business the inquiry focuses on whether there is a realistic, material risk that policyholders’ claims will not be met rather than on the fairness and reasonable expectations analysis applicable to with‑profits business. The statutory process requires an independent expert (an actuary) approved by the FSA and consultation with the FSA, whose views the court must closely consider.

The independent expert prepared full and supplemental reports, concluding that post‑transfer the transferring policyholders would not be materially adversely affected. He examined asset backing, projected solvency cover and also applied an ICA‑type test to the transferee’s projections. The FSA noted substantive differences between the UK risk‑based ICA/Pillar II approach and the Irish Solvency I minimum capital requirement, but concluded it did not object to the scheme because group supervision by the FSA, projected post‑transfer capital ratios (c.2.5x MCR), the short‑tail nature of the business and additional safeguards were sufficient.

Because the expert had relied in part on letters of representation about dividend policy, and because sale of the Irish subsidiary would remove group supervision and those representations, the applicant offered an enforceable court undertaking preventing the transferee from paying dividends or distributions until after 31 December 2011 unless, after payment, available capital would remain at least 115% of its ICA calculated under FSA rules. The court accepted that such an undertaking, combined with the other factors in the reports, adequately addressed the regulatory gap and protected transferring policyholders. The court therefore sanctioned the transfer. The judgment also noted there were no objectors but treated that as neither decisive nor surprising in a large general insurance transfer.

This was a first instance application and the court sanctioned the Part VII transfer. The judge held that, for general insurance business, the court's concern is whether a transfer causes a material adverse effect on policyholders; the independent expert's reports and the FSA's analysis showed no such material adverse effect once an enforceable undertaking restricting dividends until 1 January 2012 (maintaining at least 115% of ICA) was provided. On that basis the scheme was approved.