Spring 2006
run off business
run off business
(Spring 2008) Time to reconsider reinsurance(Oct 2007) High court sanctions Ruxley acquisition of Generali unit(Oct 2007) Ruxley in landmark reinsurance-funded acquisition(Apr 2007) Ruxley in Generali run-off talks(Autumn 2006) Part VII business transfers - adding flexibility to the run-off equation(Spring 2006) Why we need a scheme monitor(Spring 2006) BAIC and after(Feb 2006) Solvent Schemes of Arrangement Conference(Nov 2005) Scheming for solvency(Oct 2005) A wake-up call(Sept 2005) Time To Wake Up(Sept 2005) Free Audio Conference: Rating the Raters(Aug/Sept 2005) Air Your Views(Aug 2005) Ruling could curtail solvent runoff schemes(March 2005) Tackling The Pools(Spring 2005) Selling like hot cakes(Spring 2005) The scheming solution(28/02/05) Influx of capital can impact premiums(Feb 05) Bringing finality to underwriting pools(Winter 04) Dangerous waters(04/11/04) Solvent schemes offer real boost(01/09/04) Buying Run-off(05/07/04) Run-off moves to another level(03/02/04) Run-off on a positive note(2004) 2003 A year of innovation(Winter 03) Ruxley buys Aviation & General(06/10/03) Ruxley takes whole of A&G(04/07/03) End of asbestos saga?(03/07/03) Ruxley closes APH book(Summer 03) Vulture Culture?
There is no doubt that if policyholders and cedants wish to continue to benefit from a healthy insurance and reinsurance sector the question of legacy cannot be left unaddressed or - despite the perception issues caused by the BAIC sanction failure - that a well structured scheme can bring real benefits to policyholders, cedants and risk carriers alike.
This reflects the fact that schemes are simply a corporate mechanism designed to facilitate consensual changes to corporate structures whether mergers, acquisitions and re-structuring initiatives including reorganisation of debt and capital or early closure of discontinued business.
The legal framework is provided by section 425 of the Companies Act 1985 which sets out various procedures to ensure the fairness of the process and requires schemes to be sanctioned by the UK Courts. To allow such transactions to move forward the Act provides for the view of the majority of creditors, (over 50% in number and 75% by value) to be binding on a company and all its scheme creditors once a scheme is approved.
But it is also clear that those wishing to propose schemes need to think carefully about mechanisms which will give policyholders confidence that the necessary checks and balance are in place to ensure their interests receive as much attention as those proposing schemes. In other words, that they are not only fair, but seen to be fair.
With this is mind, since early last year Ruxley has been working on the concept of introducing a 'Scheme Monitor' to the insurance scheme of arrangement whose role it would be to provide policyholders and cedants with independent, external oversight of a scheme's development from its conception through to Court Sanction.
The initial thinking for this concept came out of a benchmarking exercise against best practice in the public company arena where schemes have been a widely employed, trusted, easily understood and well tested mechanism for decades - which Ruxley carried out in early 2005.
Two key points emerged from the research which may help to explain why schemes have achieved a very different reputation in the run-off arena to that of the corporate sector.
The first involves implementation and the second, the technical challenges inherent in applying schemes to solvent insurance run-offs.
In the mainstream corporate sector, considerable consultation is carried out to ensure schemes are only pursued if widespread support exists as no one would consider going to the considerable expense of formally making proposals to policyholders without having a clear idea of whether those proposals would be acceptable.
This approach also means the final format of any proposal is more likely to be genuinely consensual or democratic - as it will have been structured and drafted with the concerns of shareholders in mind.
More significant, however, is the technical issue.
Schemes for insurance entities are fundamentally more complex due to the need to apportion votes by total claims value, including IBNR, rather than simply being able to use each individual's shareholdings as a measure for the apportionment process.
Accordingly, the consultation and analysis process prior to a scheme being proposed should be designed to drive the critical transition from traditional claims data ie information centred on individual claims to data which focuses on the overall voting strength of each policyholder and cedant.
To do this, in addition to updating contact details and consolidating policyholder and cedant policy and claims information into one file, a number of exercises need to be undertaken including:
Collecting additional data regarding 'lost' and 'un-triggered' policies and impending claims; and
Reviewing records to ensure they are up-to-date and that other factors including market developments have been incorporated in the policyholder overview along with the actuarial best estimates for liabilities to each individual policyholder or cedant.
Such processes are not only essential to reaching an informed understanding with policyholders and cedants as to how their claims will be valued, but also to demonstrate that the most critical area of the process and the one that is potentially open to greatest abuse - the valuation of claims for voting, has been conducted openly and fairly.
Accordingly, it is critical that those proposing schemes find a mechanism which ensures that it is seen by all to be adequately protected hence the 'Scheme Monitor' concept.
The role of the Scheme Monitor would not only be to chair formal policyholder meetings but also to provide independent external oversight of the valuation of claims for voting on the scheme and to measure the responsiveness of scheme architecture to policyholder concerns and all before the scheme is put to the vote.
Unlike scheme advisers, Scheme Monitors would be completely separate from the day-to-day processes of developing and managing a proposed scheme and would be remunerated on a time and materials basis unrelated to a scheme's eventual success.
Its strength would lie in the Scheme Monitor's ultimate power to adjourn or postpone indefinitely a scheme vote if he or she were not satisfied with the terms of the proposed scheme or the conduct of creditor meetings.
Accordingly, one of the Scheme Monitor's functions would be to review the value of all votes cast to demonstrate that certain creditors were not pushing a scheme through by voting in favour in return for inflated valuations.
In order to be able to verify that all processes are conducted in a fair and transparent manner, access to a scheme proposer's records and staff would be a prerequisite of the role. So too would be having access to all information regarding pre-scheme commutations.
Similarly, the Scheme Monitor would be available to policyholders and cedants if they believe an issue has not been adequately addressed and in the event of unresolved issues with the scheme proposer for instance, in relation to the valuation of votes - such matters would be referred to the Scheme Monitor whose decision would be final.
The Scheme Monitor would also have a duty, in addition to policyholders' existing statutory rights to raise objections, to report to the Court on the conduct of a scheme and raise objections to the Court sanctioning a scheme if not satisfied.
These powers along with the qualifications of the proposed Scheme Monitor - would be both explicitly stated in the application to the Court which is required to convene the relevant creditors' meeting or meetings and in the Explanatory Statement within the scheme document so effectively positioning the Scheme Monitor as an officer of the Court.
In order to satisfy concerns about independence, some form of assessment of the suitability of potential candidates would also be a part of the pre-scheme proposal consultation process with creditors.
While the detailed application of the Scheme Monitor concept still needs to be established during consultation with interested parties including policyholders, cedants, regulators and the Courts, it is envisaged suitable candidates would be someone from outside the immediate run-off world but with extensive relevant knowledge and experience such as a retired US judge or similar. Such a highly respected industry expert would also have a professional reputation factor which would further reinforce the Scheme Monitor's independent position.
Interestingly, the recent BAIC ruling also served to highlight potential demand for such a move.
In his judgment, Mr Justice Lewison cited one of the objections as being that the process of the administration of the proposed scheme is shrouded in secrecy and cannot be effectively policed.
While he did not comment further on this point, feedback received by Ruxley in October last year and early this year during various meetings in the US with risk managers and their representatives indicates the Scheme Monitor concept could be helpful in addressing such concerns.
So where do we go from here?
Those proposing schemes must be prepared not only to invest considerable time, effort and resource in the necessary pre-consultation process, but also to consider enhancements such as the Scheme Monitor concept designed to answer current policyholder and cedant concerns about the checks and balances that exist on their behalf.
In other words, the solvent schemes of arrangement mechanism needs to be applied as professionally in our sector as it is in the public company arena something which undoubtedly can be achieved.