Sompo Japan Insurance Inc

Under Part 7 of the Financial Services and Markets Act 2000, sanction of an insurance business transfer scheme remains a real judicial discretion, even where the independent expert and regulator support it and no objector appears. The central question is whether the scheme is fair between affected classes, particularly whether transferring policyholders suffer a material reduction in security or an unfair transfer of value. A reduction in security is not necessarily unfair if the resulting level remains satisfactory by reference to the regulatory benchmark and the benefit to another class comes from additional resources rather than the transferring policyholders’ assets. The court may rely on an independent expert’s carefully reviewed analysis, including appropriate reliance on other professional work.

Sompo Japan Insurance Inc applied under Part 7 of the Financial Services and Markets Act 2000 for sanction of a scheme transferring a loss-making run-off reinsurance book to Transfercom Ltd. The scheme would substitute Transfercom for Sompo as reinsurer and included additional reinsurance and security arrangements provided by NICO.

Four policyholders initially objected. Three withdrew their objections, and AXA Corporate Solutions Assurance, the remaining objector, did not appear at the sanction hearing. The issues were whether the scheme was fair to transferring policyholders, whether their security would be materially reduced, whether benefits to Transfercom’s existing policyholders were obtained at their expense, and whether concerns about legal effectiveness for policies governed by non-English law justified refusal of sanction.

1. The scheme was sanctioned. The court’s discretion under section 111(3) of the Financial Services and Markets Act 2000 was not a rubber-stamp exercise. The court had to decide whether sanction was appropriate in all the circumstances, having regard to the substitution of an insurer not chosen by the policyholders.
2. The governing principle was fairness between the different classes affected by the scheme. The principal concern was the transferring policyholders’ security. Their confidence level would reduce from 99.88% to 99.6% over the anticipated two-year run-off period. That reduction was not material, and 99.6% remained a satisfactory level of security, substantially exceeding the applicable regulatory benchmark.
3. The increase in security for Transfercom’s existing policyholders was not obtained at the expense of the transferring policyholders. It resulted from NICO’s additional contributions, including the increased limit under the existing reinsurance and the ratings trigger endorsement. The shorter-tailed transferred business would in practice have access to Transfercom’s free capital before the existing business.
4. The court was entitled to rely on the independent expert’s evidence. In complex insurance matters, it was acceptable for the expert, after sufficient review, to rely on analytical work undertaken by other qualified professionals. The expert had adequately addressed the objections concerning reserves, reinsurance quality, independence, future regulatory requirements, administration, concentration risk and possible United States sanctions issues.
5. The possibility that the scheme might be ineffective for policies governed by non-English law did not justify refusal. Where the scheme remained effective for a sufficient proportion of policies, it was not acting in vain. In this case, any ineffective transfer would leave the relevant policyholder with Sompo’s reinsurance, while the new NICO reinsurance limit would not be reduced. The potential ineffectiveness therefore increased, rather than reduced, security for those policyholders.

The scheme was accordingly sanctioned under the formal order already made on 8 February 2011.