After receiving nine written responses to the “Amendments to the Insolvency Arrangements for Insurers” consultation, which ran from May to August 2021, HM Treasury has now released the summary of responses, as well as the government’s response, to the issues raised in the submissions.
“It is important that the UK regulatory authorities have the requisite tools to manage the failure of an insurer in an orderly way and, in doing so, provide protection to policyholders,” stated HM Treasury. “As such, the government has put forward proposals to pre-emptively amend the current insolvency arrangements for insurers. This will ensure they remain effective, up-to-date, and consistent with best practice.
“With the exception of proposal IV, which will only apply to life insurers, these proposals will apply to all insurers with a Part 4A permission to effect or carry out contracts of insurance as principal. However, the association of underwriters known as Lloyd’s of London would not be in scope. This is because separate legislation provides for the specific restructuring and winding-up procedures available to Lloyd’s of London.”
The proposals are expanding and clarifying the court’s existing power under the Financial Services and Markets Act 2000 to order a reduction of the value of an insurer’s contracts; the creation of a new position of a ‘write-down manager’; the introduction of a moratorium on certain contractual termination rights in both service contracts and financial contracts held with insurers; for life insurance policies, the introduction of a stay or suspension on policyholder surrender rights; and a change to the operation of the Financial Services Compensation Scheme (FSCS) in the event of a write-down to ensure protected policyholders are not financially worse off.
In its consultation, the government asked 24 questions. Responses were submitted by the Association of British Insurers, University of Aberdeen’s Centre for Commercial Law, City of London Law Society Insolvency Law Committee, Freshfields Bruckhaus Deringer LLP, International Underwriting Association of London, Interpath Advisory, Mazars LLP, PricewaterhouseCoopers LLP, and Teneo Restructuring.
Part of HM Treasury’s response reads: “The government agrees with respondents that the role and qualifications of a write-down manager will need to be set out in suitable detail, and anticipates that this will be set through a combination of legislation and PRA (Prudential Regulation Authority) policy.
“The government agrees with respondents that having a write-down manager in place to monitor a write-down, and provide oversight to the court, is important. As such, the government will ensure that a write-down is not able to proceed without a write-down manager in post. The government expects that the private sector will normally be able to provide a suitable write-down manager candidate without delay.”
“However,” continued HM Treasury, “to remove the risk that a lack of suitable candidates prevents the use of a write-down, the government is also proposing that the PRA be able to propose a member of its staff as a write-down manager of last resort. A PRA staff member would still need to be appointed by the court in the same way as a private sector appointee, with the same appropriateness tests applied, and the PRA’s existing statutory immunity would be extended to expressly apply to such a person.”
Meanwhile the government does not expect FSCS funding costs to increase as a result of the proposals.
“While new FSCS ‘top-up payments’ will be introduced in a write-down scenario, it is important to note that FSCS compensation would also be triggered in the event of insurer insolvency, the likely counterfactual absent a write-down,” it was highlighted in the 35-page document published on Thursday.
“The government does not expect the cost to the FSCS of providing ‘top-up payments’ to generally be higher than the cost of paying compensation in insolvency, particularly given that the FSCS will be able to make recoveries if the insurer’s financial position later recovers sufficiently to allow for a (full or partial) reversal of the write-down.”
HM Treasury added: “Moreover, by reducing value destruction and the extent of losses for policyholders, a write-down may in fact reduce the level of funds which the FSCS is required to provide. Importantly, the same individual compensation limits will apply following a write-down as would apply in insolvency, meaning that policyholders will not receive more from the FSCS than they would currently if their insurer were to fail.”
The government, which will continue to consult with the relevant bodies, intends to legislate for the proposals when Parliamentary time allows.
