Solvent schemes offer real boost to market as it combats legacy issues

Key to the success of solvent schemes is their ability to just as easily cope with anything from small internal tidying-up operations for large corporations (Osiris) to full corporate reconstructions such as our current scheme, Aviation & General (A&G).

There is nothing special or unorthodox about schemes of arrangement. They are used in many public company transactions to restructure debt or equity and to effect acquisitions, including those outside the insurance company arena. Section 425 of the UK's Companies Act 1985 sets out the legal mechanism for schemes and provides a clear, but prescriptive, legal framework for their implementation. But the use of the scheme mechanism is highly flexible, which is one of the reasons why schemes are a viable solution in so many different corporate restructuring scenarios.

Regulation

Day-to-day regulation of insurance solvent schemes of arrangement comes under the jurisdiction of the Financial Services Authority (FSA).

Schemes also have to be approved by a policyholder vote and by the courts - a process that means there are a number of opportunities for interested parties to register concerns and, if appropriate, prevent schemes from being sanctioned.

What little negative feedback there has been falls broadly around two issues:
? Ensuring all policies to be schemed are adequately described in the scheme documentation
? Ensuring all policyholders receive the documentation

The first issue is a matter of proper scheme drafting and wording and is reviewed by the FSA. As is standard, Ruxley's proposed schemes are closely examined by the FSA before being circulated to policyholders. The FSA not only checks the appropriateness and inclusiveness of the proposed scheme but also satisfies itself regarding the clarity and transparency of the wording.

As part of Ruxley's regulatory relationship with the FSA we are required to report on progress to date, including any policyholder feedback about concerns or issues that need to be addressed in the final scheme design. This information is fed into the FSA's database for use generally when approving schemes.

Any proposed scheme then still has to be approved by policyholders and by the courts (including, when appropriate, the US courts).

Safety net

This combination of an FSA and court safety net is an equally valid counter to any other potential concerns, including those of transparency over advisers' remuneration and the sufficiency or otherwise of powers given to independent claims adjudicators.

Despite such details being approved by policyholders when they vote to approve a scheme, concerns have also been raised over the supposed lack of ability of creditors to decide who should act as the insolvency practitioner if a scheme should fail. But schemes also contain provisions enabling creditors to appoint an alternative if the current incumbent is not to their liking.

In addition, queries have been raised over "revert to run-off" clauses, which enable the scheme process to be terminated in response to a major change in circumstances. Such comments ignore two points:
? First, this is a backstop for use in exceptional circumstances (to date the clause has never been implemented in any of the 27 solvent schemes where they have been included).
? Second, even were the clause to be implemented, policyholders would be no worse off than they were prior to the scheme being created.

Time bars - or rather instituting apparently unreasonably short notice periods until time bars are imposed - have been another area of criticism. But again such comments ignore how a solvent scheme operates in practice.

On paper the notice period for the submission of claims is typically 90 days and, depending on special circumstances such as there being a small number and value of policyholders, can be as low as 60 days.