Chapter 15: Portfolio Transfers Flashcards
Companies can use portfolio transfers to seek to exist from either (3)
- single lines of business
- a group of different lines of business
- complete portfolios
5 Possible reasons for companies seeking to exit from business
- the business requires a disproportionate amount of senior management time and/or capital for its size
- the business was purchased as part of a larger acquisition, but was not the reason for undertaking the transaction
- the business has been, or is expected to be, loss making or not sufficiently profitable
- the company may have become insolvent and forced by its regulator to cease writing new business
- a combination of these
Run-off to exhaustion
The company ceases to write any new business or renewals in the lines being exited, but continues to retain responsibility for administering and paying the claims for the historical business.
- business functions (e.g. claims handling) have to be maintained
- as the level of underwritten business decreases over time this strategy becomes expensive to administer
- outsourcing certain administrative functions to specialist run-off providers can reduce these costs
- this exist strategy is often used as an interim solution while alternative exist strategies are considered.
Reinsurance (as an exist strategy_
All future claims that may arise from historical business is reinsured.
- the insurer can allow the reinsurer to administer and settle all future claims, in which case a binder agreement will be required
- level of risk transfer achieved depends on the specific terms of reinsurance (lower limits, caps at upper limits, aggregate constraints, etc.)
- if the reinsurer defaults, the ultimate responsibility of paying claims still lies with the insurer
- the insurer will still need to include the business in its regulatory reporting
If the business is reinsured, the parties will negotiate the reinsurance premium and it is likely to depend on (8)
- the estimated cost of the liabilities, given the precise structure of the reinsurance
- the uncertainty around this estimated cost
- anticipated future investment return
- cost of ongoing administration
- the capital required to support the liabilities
- the financial strength of the reinsurer
- the required return on capital (or profit loading)
- the availability of such reinsurance in the market
Scheme for the transfer of insurance business
Complete transfer.
Part V of Section 36 of the STIA 1998
A successful substitution requires an agreement between 3 parties
- policyholder
- new insurer
- old insurer
4 Steps to initiate a transfer
- Apply for the Registrar’s approval
- The Registrar determines whether information submitted is sufficient
- The Registrar indicates whether he is satisfied
- Within a period of 60 days after the transfer, the public officers fill in Annexure 6 stating that the transfer was done as per the Registrar’s approval.
2 insurers will negotiate the amount payable for the substitutions, considering (5)
- the valuation of the ultimate liabilities
- the uncertainty surrounding the valuation
- capital implications
- reinsurance requirements
- return on equity required
- administering costs or savings for each party
Sale of business:
Selling whole comapnies
- Achieves complete finality for the insurer.
- Not very flexible
- On some occasions the seller will have to retain certain liabilities, such as claims arising from a historical event with great uncertainty.
- Buyers may find this strategy appealing as it affords a quick entry to a market (all FSB requirements, etc. will already be in place).
Sale of business:
Selling other assets
- An example of this would be selling reinsurance assets
- Typically done when reinsurance recoveries are uncertain. As a result, the asset is sold for much less than the expected recovery.
- The short-term insurer will have to seek the Registrar’s approval before it can allow its assets to be held by another person.
Typical considerations when deciding on methods and bases for valuing the liabilities would be (7)
- negotiating strength
- the initiator of the deal
- risk appetite
- the uncertainty, length of tail, etc.
- the views of regulators
- recommendations of oversight persons/bodies e.g. FSB, independent experts, Lloyd’s
- the opinions of reinsurers (possibly)
4 Possible exist strategies
- run-off to exhaustion
- reinsurance
- scheme for the transfer of insurance business (substitution)
- sale of the business
What are the potential downsides to outsourcing functions of the insurer?
QUESTION 1
Why is it important to obtain policyholder consent for a transfer?
QUESTION 2
Steps to initiate a transfer:
Apply for the Registrar’s approval
Various annexures need to be completed.
- who requested the transfer and the effective date
- who the affected policyholders are
- what the policy conditions are and the details of any differences
- agree that policyholders have been given information in order to make an informed decision
- agree that policyholder consent have been or will be sought
- interim arrangements with respect to benefits while transfer is being completed
- list of assets and their fair value to be transferred
- auditor certificate
Transfer:
What happens if client consent was not sought or if less than 100% of affected policyholders gave consent for the transfer
Then the transfer will be done as per Section 36 (1) which means that the Registrar will decide on behalf of the policyholders.
Reasons for effecting a Part V transfer (3)
- Achieving finality
- Cost savings and capital releases
- In mergers and acquisitions
Reasons for effecting a Part V transfer:
Achieving finality
After the transfer has been completed, the transferor has no remaining exposure to the transferred business, while at the same time cover for the policyholder is maintained.
Reasons for effecting a Part V transfer:
Cost savings and capital releases
Many insurers have a large number of different insurance companies within their group (often as a result of previous mergers and acquisitions or other historical reasons).
By undertaking one, or a number of, Part V transfers these legacy liabilities within the companies can be transferred into a single company.
This can reduce both management time and administration costs. The resultant cost savings can be significant.
Reasons for effecting a Part V transfer:
Mergers & Acquisitions
This is when a transfer of business is done but simultaneously the shares of the transferor insurer will also be obtained by the transferee or a related company of the transferee.
Part V transfers can be used:
- prior to an acquisition, where an insurer transfers similar portfolios of business into one entity ready to be sold, or transfers a portfolio out of a company to enable a sale of the remaining business to progress
- after an acquisition, by combining the new subsidiaries to achieve cost savings or a release of capital as discussed above
- as an alternative way of acquiring a portfolio (or a combination of portfolios at the same time) rather than purchasing the entire company
Main parties involved in any Part V transfer
- the transferor company
- transferee company that is receiving the business
- policyholders
- auditors
- actuaries
- FSB
- any expert the FSB feels is necessary
Additional methods of transferring portfolios in the UK notes
- commutations
(cancellation of the right to make any more claims in respect of either future or past periods of cover) - schemes of arrangement
(effectively group commutations) - insurance business transfers
(transfer without policyholder agreement)
Comparing: sale / portfolio transfer / reinsurance
Advantages of a portfolio transfer to the transferring insurer
- A one-off payment will transfer the liability
- The original insurer will stay operations and future products can still be sold
- No further policy administration
- No further capital requirement to service the portfolio
Comparing: sale / portfolio transfer / reinsurance
Disadvantages of a portfolio transfer to the transferring insurer
- Policyholder consent needs to be obtained
- The process is time consuming & admin intensive
- Approval is required from the registrar
- The insurer may be left with expensive staff / overheads and one fewer portfolio to manage
- The cost of the portfolio transfer could be very highe
- Reputational risk if the other insurer doesn’t pay claims
- Assets may need to be realized at unfavourable or tax inefficient times
Comparing: sale / portfolio transfer / reinsurance
Advantages of reinsurance to the transferring insurer
- The insurer will still be operational and future products can be sold
- Reinsurance should allow a lower level of capital to be held
- Lower concentration risk
- Simplest and easiest method of transferring the liabilities
- Can still benefit from interest on reserves
- No policyholder / regulatory consent will be required
Comparing: sale / portfolio transfer / reinsurance
Disadvantages of reinsurance to the transferring insurer
- The insurer will still need to run off the underlying policies
- All court cases and claims will still be brought against and managed by the insurer
- The insurer is liable in the case of reinsurer default
- The required reinsurance products may not be available or the cost may be prohibitive
- The required reinsurance capacity may not be available locally and will have to be placed in the international market.
- Depending on the reinsurance, there may be gaps in cover
Comparing: sale / portfolio transfer / reinsurance
Advantages of SALE to the transferring insurer
- The insurer will have no further liabilities to worry about
- The admin of managing the product will no longer be required
- The insurer is no longer required to hold any regulatory capital
Comparing: sale / portfolio transfer / reinsurance
Disadvantages of SALE to the transferring insurer
- Complicated
- Requires both regulatory and competition commission approval
- Finding a buyer may prove difficult
