www.reactionsnet.com Reactions September 2012 15

LegaL anaLysis

Now that Solvency II is looming large on the horizon, and (re)insurers are taking a long hard look at their business in the light of the new capital requirements, portfolio transfers are becoming increasingly popular as insurers seek to rationalise their business in advance of implementation of the new regime. The use of the UK Part VII transfer procedure has increased exponentially over the past three years. The number of cross-border transfers has also increased significantly, as (re)insurers seek to reorganise their groups by eliminating subsidiaries, operating on passported basis, rather than having an authorised carrier in each European Economic Area (EEA) state.

The European insurance and reinsurance directives specifically provide for cross border transfers of business throughout the EEA. Provisions in the directives require each member state to have a procedure in place for transferring portfolios of (re)insurance business underwritten by (re)insurers whose head office is in that state to a transferee located elsewhere in the EEA. The only condition in the case of a transfer by a pure reinsurer is that the reinsurer’s home state regulator confirms that the transferee will have the necessary margin of solvency, taking the transfer into account. For transfers by insurers, there are additional requirements to consult regulators in EEA states where risks included in the transfer are located, or where a branch through which business included in the transfer was written is located. On the foundation of these high level requirements, each member state has constructed its own procedure, with the result that the scope of and requirements for transfer processes differ quite considerably from one member state to another.

The UK process is typically laborious, involving lengthy discussions with and deliberations by the FSA; a report by an independent expert; a report by the FSA; prior notification of policyholders of both parties and of reinsurers of the business whose contracts are transferring; and two court applications. From the point of view of looking after the interests of policyholders (if only these were interested,

which they frequently are not), this is a pretty Rolls Royce approach. It contrasts with the procedure in some other states where only the approval of the regulator is required (subject to meeting the minimum requirements of the directives already referred to) and notification of policyholders is only required once the transfer has taken place and is a fait accompli. Generally, there is a right to cancel the policy within a certain period after the transfer (singularly unhelpful in the context of a transfer of a run-off portfolio).

The UK process does offer some advantages for the parties to the transfer. The procedure provides for a genuine transfer of a business – not only the liabilities under the inwards contracts, but any other assets or liabilities associated with the business, including crucially the benefit of outwards reinsurances, without the consent of the counterparty. In keeping with the European principle of home state regulation, however, the UK process is broadly only available to (re)insurers with a head office in the UK, or a head office outside the EEA and an authorised branch in the UK. Other EEA (re)insurers would need to use the process in their home member state. In most other EEA states, the transfer process will not capture associated assets, so for books that are heavily reinsured, the idea of a portfolio transfer may be a non-starter.

One way of dealing with this is cross-border merger under the 2005 cross-border mergers directive. This should now have been implemented into national legislation in all EEA states, and permits companies in different EEA states to merge. The effect of a cross border merger is to transfer all the assets and liabilities of the absorbed entity(ies) into the new entity created by

the merger, so the procedure would capture all outwards reinsurances. It does not solve the problem where only a discrete portfolio rather than all business underwritten by an entity is to be disposed of. In the UK, a cross-border merger is not available as an alternative to a portfolio transfer: if a UK insurer is to be absorbed, the merger would have to be combined with a portfolio transfer in order to be valid. The same approach is taken in some other EEA states. Where the portfolio transfer process is itself comparatively light touch, though, this is less of an issue.

Cross border transfers, including those involving risks or branches in other EEA states, necessarily involve more than one EEA regulator. The degree of involvement required under European directives is relatively light, and regulators have signed up to a protocol setting out how they will cooperate with each other on a cross border transfer. This should guarantee a smooth process where each regulator’s responsibilities are clearly delineated. However, it is not uncommon to be brought up short by requirements from a regulator that appear to be neither within the letter nor the spirit of the EU rules. Examples include attempts to regulate the solvency position of a transferee in another EEA state post transfer; and to insist on a local transfer procedure being used as well as that in the home member state of the transferor. No doubt these issues will be ironed out as cross border transfers become more common. However, the parties should always discuss proposals with their respective regulators at an early stage. Whatever the legislation (and the advice of lawyers) may tell you about the allocation of responsibilities, in practice, it ain’t necessarily so. l

Moving business around Europe

Geraldine Quirk is a partner at Clyde & Co LLP

Cross border transfers, including those involving risks or branches in other EEA states, necessarily involve more than one EEA regulator. The degree of involvement required under European directives is relatively light, and regulators have signed up to a protocol setting out how they will cooperate with each other on a cross border transfer.