In two new "supervisory statements" published on April 25, the UK's Prudential Regulation Authority (PRA) has confirmed it intends to take a tougher approach to solvent schemes of arrangement than under the previous Financial Services Authority (FSA) regime and has outlined a new, cautious approach to attempts by non-life insurance firms in run-off to pay capital to their shareholders.
For run-off insurers, the aim of solvent schemes of arrangement (which require Court approval and majority creditor approval) is generally to bring finality or certainty to "long-tail" liabilities that would otherwise take many years to expire as a result of incurred but not reported claims. These schemes can be controversial because minority policyholders can be out-voted and prevented from making further claims on their policy.
The FSA's view on such solvent schemes from 2007 was they must ensure that policyholders are no worse off than in a solvent run-off.
The PRA's September consultation paper said the PRA would oppose such solvent schemes other than where there were "compelling" reasons to support them. This appeared to imply a rebuttable presumption - or prejudice - against such schemes.
A separate September consultation paper suggested the PRA will scrutinise proposals by non-life firms in run-off to pay capital to shareholders very carefully, requiring an independent review where the capital buffer is less than twice the firm's own independent capital assessment (ICA) or where the size of the extraction is significant.
The PRA has now listened to feedback and removed this presumption – it will consider each such scheme on its merits, depending on "all facts and circumstances".
Nevertheless, the PRA has confirmed it still expects insurers to "ensure ...an appropriate degree of continuity of cover" for dissenting policyholders, effectively giving policyholders the ability either to retain the same cover or perhaps obtain equivalent cover with an alternative insurer.
This may make such schemes less attractive for insurers - the whole objective of such schemes is to end the obligation of the company to provide such cover in return for providing policyholders with immediate benefits.
By contrast, the PRA's paper on extraction of capital from general insurance firms in run-off has not really changed since its September consultation paper.
Although the PRA has softened the language it used in its September consultation papers following criticism from the industry, those hoping for a u-turn will be disappointed.
As first published in Insurance Day on 1 May 2014
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