Global Regulation, Local Solutions Emerging Themes 2020 - Page 27



SUPERVISION
370k
EMERGING THEMES 2020
Annuity
policies
£508bn
Prudential
Group
£37bn
Rothesay
£12bn
CONCLUSION
THE PROPOSED TRANSFER
The proposed transfer involved around 370,000
annuity policies with estimated liabilities of
£12 billion. There were to be no changes to
policy terms, and the policies would continue
to be administered (at least initially) by the
existing service provider.
VALUE OF THE INDEPENDENT EXPERT
AND REGULATORS’ CONCLUSIONS
While it has always been clear that Court
approval for a Part VII transfer is not a rubber
stamp, it is highly unusual for a transfer to fail if,
as in this case, neither the Independent Expert
nor the regulators identify any issues with it.
Mr Justice Snowden felt that the Independent
Expert’s and the regulators’ analyses were
limited to actuarial and Solvency II regulatory
principles, and the Court should take account
of broader questions.
THE COURT’S APPROACH
In line with earlier cases, Mr Justice Snowden’s
stated approach was to strike a balance
between the parties’ commercial rationale
and policyholder interests. However, some
of the factors he took into account were not
obviously directly relevant to the impact of
the transfer on policyholders. These included:
X
Policyholders originally chose PAC for its
age and established reputation. Rothesay,
a relative newcomer, did not share those
attributes
X
It was reasonable for policyholders to assume
from PAC’s literature that it would not seek to
transfer their policies
X
PAC had already achieved its commercial
objective of releasing regulatory capital to
support a proposed demerger through a
pre-transfer reinsurance with Rothesay.
26/
Mr Justice Snowden was also influenced by
the relative size of the parties – the Prudential
Group has assets of £508 billion, compared
to Rothesay’s post transfer asset base of £37
billion – and the fact that annuity policies
may provide the only source of income for
a policyholder.
IS LACK OF ADVERSE IMPACT
NO LONGER ENOUGH?
The Court’s approach to date has always
been to determine whether the transfer will
have a material adverse effect on policyholders
and to have regard to real, not fanciful, risks.
Mr Justice Snowden however was influenced
by the fact that PAC had qualities (longevity
and reputation) not shared by Rothesay;
and by the impact on policyholders if Rothesay
should fail, even though the Independent
Expert considered the risk remote.
The Court’s approach to date has always
been to determine whether the transfer
will have a material adverse effect on
policyholders and to have regard to real,
not fanciful, risks
The judge’s approach seemed to be that if
the transferor would be better able to withstand
a shock than the transferee, the transfer
ought not to be sanctioned. This differs from
the previous approach that if the transferee
is financially strong, it should not matter that
the transferor has more assets. Mr Justice
Snowden acknowledged his view might have
been different if PAC’s commercial purpose
for the transfer was different; the transfer was
proposed to policyholders on different terms;
or, if there was less disparity between the
transferor and transferee in the characteristics
policyholders consider important when
selecting an annuity provider.
If Mr Justice Snowden’s approach is correct,
an insurer would need to find a counterparty
that is not just financially strong, but has
the same financial strength, longevity and
reputation as the transferor. This significantly
reduces the pool of potential acquirers. It could
also make it difficult for a specialist run-off
acquirer to take on even a relatively small book
from a substantial live underwriter. This could
have the effect of almost entirely undermining
the purpose of Part VII transfers.
The judge’s approach
seemed to be that if the
transferor would be better
able to withstand a shock
than the transferee, the
transfer ought not to be
sanctioned
Just two months after the Rothesay
decision, in October 2019 Mr Justice
Morgan sanctioned “without
hesitation” a Part VII transfer of
insurance business in Re Canada
Life Ltd. The Rothesay decision in
his view was clearly distinguishable.
There were proper commercial
reasons for the transfer. Canada
Life wanted to divest itself of a
non-core business, and was
disposing of it to a specialist
provider actively focused on that
business. Mr Justice Morgan held
that was likely to be of real benefit
to policyholders.
If a clear benefit to policyholders
can be shown, Rothesay should
not be an issue, but simply showing
that there is no financial prejudice
to policyholders may no longer
be sufficient.
ANTHONY LENNOX
Partner,
London
OLIVER SAUNDERS
Senior Associate,
London
/27

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