On 19 July 2017, the court hearing In the Matter of Colbourne Insurance Company Ltd and In the Matter of NRG Victory Reinsurance Ltd sanctioned a scheme to transfer the insurance and reinsurance business of an insurance company in run-off and which could not meet its capital requirements, to another insurance company that was very well capitalised. In reaching its decision, the court considered that the scheme was unlikely to materially affect policyholders and that no objections had been received.
The applicant insurance companies had applied for an order under the Financial Services and Markets Act 2000 s. 111(1) to sanction a scheme to transfer Colbourne’s insurance and reinsurance business to NRG. Colbourne’s business was marine hull and cargo insurance. It had been in run-off since 1991, was technically insolvent and relied entirely on support from its ultimate parent company, which company was under no obligation to give or continue that support. NRG’s business now involved handling predominantly asbestos and pollution claims. It had significant claims reserves and had been granted a variation of its permission to be able to accept Colbourne’s business.
The independent expert considered that NRG would be well capitalised after as well as before the proposed scheme, and that the scheme would result in substantial improvement in the security for transferring policyholders. NRG was already involved in handling Colbourne’s claims, as a member of a group that was the ultimate 100% reinsurer of another reinsurance company, and therefore claims handling service levels were unlikely to be affected. No objections were received from the FCA or PRA, and the Institute Of London Underwriters had only raised an issue about the continuance of a guarantee given by Colbourne’s insolvent parent company.
The court held that provided the technical requirements were met, it was necessary to consider all the circumstances in order to decide whether or not to sanction the scheme. It was necessary for the court to consider whether the scheme was unfair to any affected policyholders, and in so doing had to determine what the contractual rights and reasonable expectations of policyholders were before the scheme and then compare them with what the position would be if the scheme was given effect. Provided that the scheme as a whole was fair, the fact that some policyholders might be adversely affected did not mean that the scheme should be rejected.
Central to the decision in this case were the two compelling reports produced by the independent expert. His views, that the proposed scheme did not give rise to any material adverse impact to the reasonable expectations, security of, contractual rights or service levels experienced by any group of policyholders, in addition to the facts that the regulators did not object, that the scheme had been fully explained to policyholders and the statutory requirements had been met, and that the scheme gave effect to a reasonable commercial objective, resulted in the sanctioning of the scheme by the court.