Excess Insurance Company Ltd & Ors, Re

On an application to sanction an insurance business transfer scheme, the court must decide whether the scheme is fair in all the circumstances. It need not be satisfied that the scheme is the best scheme available, or improve provisions which could have been drafted differently. The court should compare policyholders’ contractual rights and reasonable expectations before the scheme with their likely position afterwards. For general insurance transfers, the relevant question is whether there is any material adverse effect, addressing real rather than fanciful risks. The court gives close attention to the independent expert’s assessment and the regulators’ views, while retaining an independent discretion. A replacement protection may be fair even where it changes the route by which policyholders obtain recovery, provided their overall security is not materially worsened.

The claimants sought an order under section 111(1) of the Financial Services and Markets Act 2000 sanctioning the transfer of UK general insurance business in run-off from Excess Insurance Company Limited, Hartford Fire Insurance Company’s UK branch and Aviva Insurance Limited to Hartford Financial Products International Limited.

The scheme would exclude a 1991 parent-company guarantee benefiting certain Excess policyholders, but would provide additional capital and adverse development cover from Hartford Fire. Two US policyholders objected, contending that removal of the guarantee would reduce their security and that the reinsurance protection was inadequate. The central issue was whether the scheme was fair and whether policyholders would suffer any material adverse effect.

1. The court approved the scheme under section 111(3) of the Financial Services and Markets Act 2000. The statutory conditions, certificates and authorisations had been satisfied.
2. The governing approach was that the court must consider whether the scheme as a whole was fair between the different classes affected. It was not required to determine whether a better scheme could have been devised or to amend commercially designed provisions which were fair overall. The court should compare policyholders’ pre-scheme contractual rights and reasonable expectations with their likely post-scheme position.
3. For a general insurance transfer, the principles applicable to long-term business required adaptation. The court focused on whether any policyholder group faced a material adverse effect, meaning a real rather than fanciful risk. The independent expert’s actuarial assessment and the regulators’ views were important, but the court retained its own discretion.
4. The 1991 guarantee created substantial uncertainty. It might not qualify as a deed, might operate only as an offer accepted by some policyholders, and might not benefit all existing policyholders. Even assuming that it was fully enforceable and widely applicable, the adverse development cover and additional capital provided at least slightly better protection. The fact that policyholders would enforce the reinsurance indirectly through HFPI did not materially reduce their prospects of recovery.
5. The court also held that disclosure of significant material relied upon by an independent expert is generally important in sanction proceedings. The legal advice supplied to the expert had been disclosed during the hearing, and no further alteration to the reinsurance terms was required. The scheme was fair and was sanctioned with immediate effect.