Society of Lloyd's, Re (Part VII of the Financial Services and Markets Act 2000)

The court may sanction a Part VII insurance business transfer scheme where the statutory requirements are met and the scheme is fair as a whole. It must balance the likely prejudice to policyholders if the scheme is refused against any potential prejudice caused by implementation. The court need not identify the perfect scheme or improve commercially reasonable provisions chosen by the directors.

The ancillary power in section 112(1)(d) of the Financial Services and Markets Act 2000 is broad. It permits provisions necessary to secure the scheme’s full and effective implementation, including converting related reinsurance into retrocession where the underlying risk is materially unchanged and the arrangement preserves policyholder security.

The Society of Lloyd’s and Lloyd’s Insurance Company S.A. applied for sanction of an insurance business transfer scheme under Part VII of the Financial Services and Markets Act 2000. The scheme transferred qualifying European Economic Area policies written through Lloyd’s between 1993 and 2020 to Lloyd’s Insurance Company S.A. in response to the expected loss of passporting rights following Brexit.

The scheme also provided for reinsurance of the transferred liabilities back to relevant Lloyd’s members, conversion of existing outward reinsurance into retrocession, and continued administration by Lloyd’s managing agents. The court considered compliance with the statutory and regulatory requirements, the effect on transferring and non-transferring policyholders, existing policyholders of the transferee, and reinsurers.

1. The scheme was sanctioned. The court was satisfied that the requirements of Part VII, the Transfer Regulations, the independent expert reporting requirements, and the necessary regulatory certificates had been met. The Prudential Regulation Authority and Financial Conduct Authority did not oppose the scheme.
2. Section 112(1)(d). The power to make provision for incidental, consequential and supplementary matters necessary to secure that a scheme is fully and effectively carried out is deliberately broad. It is not confined to provisions strictly necessary to transfer the insurance policies themselves. It may encompass arrangements forming part of the scheme’s overall structure and necessary to preserve policyholder security.
3. The conversion of existing outward reinsurance into retrocession fell within section 112(1)(d). Under Charter Reinsurance v Fagan and WASA International Insurance v Lexington Insurance, reinsurance remains directed to the underlying insured risk rather than merely indemnifying the insurer’s liability. Retrocession is simply reinsurance of a reinsurer. The proposed conversion therefore made no material change to the underlying risk or, in many cases, the parties. Even where the cedent changed, the transaction remained materially the same type of transfer as that upheld in WASA International (UK) Insurance Co Ltd v WASA International Insurance Co Ltd (Sweden) and Re Copenhagen Reinsurance Co (UK) Ltd.
4. The court’s discretion under section 111(3) required consideration of fairness between the interests of affected classes. The principles summarised in Re AXA Equity & Law Life Assurance Society plc and AXA Sun Life plc applied. In a Brexit scheme, the court had to balance the substantial prejudice likely to result from refusal against possible prejudice under the scheme. There might be no perfect solution, and the court’s role was not to devise the best possible scheme where the proposed scheme was fair.
5. The scheme was economically neutral in design, preserved policyholder security through the Lloyd’s chain of security and reinsurance, and was unlikely to cause material adverse effects to transferring policyholders, non-transferring policyholders, existing policyholders of Lloyd’s Insurance Company S.A., or reinsurers. The policy-splitting mechanism was permissible in principle, consistently with Re AIG Europe Limited.
6. The decision in Barclays Bank plc was distinguishable. That case concerned an unconnected business whose transfer was commercially desirable but not necessary to the effective implementation of the Part VII scheme. Here, the existing outward reinsurance had a close factual connection with the transferred policies and was necessary to the scheme’s intended operation.

First instance decision. The court sanctioned the scheme and made the requested ancillary orders.