Rothesay Assurance Ltd, Re

When approving an insurance business transfer scheme, the court must assess whether implementation creates a real, rather than fanciful, risk to policyholders’ security and reasonable benefit expectations. Policyholders have no entitlement to a particular level of capital exceeding mandatory regulatory requirements. The relevant question is whether the scheme creates a material risk to the transferee’s solvency and therefore to policyholder security. The court is entitled to attach considerable weight to an independent expert’s carefully reasoned assessment, supported by the regulators, while retaining its own discretion. A reduction in excess-capital cover does not itself establish material adverse effects where the transferee remains strongly capitalised and the scheme does not materially alter governance, management or risk controls.

Rothesay Assurance Limited sought approval under Financial Services and Markets Act 2000 for a scheme transferring its whole long-term insurance business to Rothesay Life Limited, its parent and fellow group company. The scheme was intended to simplify the corporate structure, reduce costs and diversify risk.

Policyholders objected principally that they would lose their first call on Rothesay Assurance’s excess assets, experience dilution among a larger policyholder group, and face increased longevity, capital and regulatory risks. The independent expert considered that the scheme would not materially adversely affect policyholder security, benefit expectations or service standards. The Prudential Regulation Authority and Financial Conduct Authority did not object. The central issue was whether the alleged changes disclosed a material adverse effect or a real risk to policyholders’ position.

1. Approval granted. The court approved the insurance business transfer scheme under sections 107 and 111 of the Financial Services and Markets Act 2000.
2. The court’s task was to exercise its statutory discretion by assessing the effect of the scheme on policyholders, including their security, reasonable benefit expectations and service standards. The relevant concern was the prospect of real, rather than fanciful, risks to their position.
3. There was no principled basis for treating any particular level of excess capital above regulatory requirements as protected. Policyholders had no entitlement to a particular level of surplus or to the maintenance of an existing capital-cover ratio. Regulatory capital requirements themselves incorporated a substantial margin of safety and represented a practical level of policyholder security.
4. The critical question was whether the transfer created a material risk to the solvency of Rothesay Life and therefore to the security of the transferring policies. Rothesay Life would remain in a strong capital position under both the existing regime and Solvency II. Its internal capital policy, regulatory oversight, governance and management arrangements would remain materially unchanged.
5. The loss of Rothesay Assurance policyholders’ first call on its surplus assets was a potential worsening of security, but did not produce a material adverse effect in the circumstances. The increased absolute excess capital, strong post-transfer capital coverage, reinsurance protection against longevity risk and continuing regulatory supervision were significant safeguards.
6. The independent expert’s report was not binding, but his independence and careful consideration of policyholder concerns entitled it to great respect. The court found no sufficient reason to reject his conclusion, which was supported by both regulators.

First instance decision. No prior appellate decision is stated in the judgment.