The approach to communication with policyholders
9.1 Regulations made under FSMA require a communication regarding the proposed transfer to be sent to every policyholder of the parties under the Scheme. However, this requirement may be waived at the discretion of the Court, which will give consideration to issues such as the practicality and costs of sending notices against the likely benefits for policyholders of receiving such communications. In order to comply with SUP 18.2.46G, the companies would be expected to notify the policyholders, or interested persons, at least six weeks before the date of the Court hearing at which the application to sanction the Scheme will be heard.
9.2 ELAS will publish a notice in a form approved by the PRA in the London Gazette, the Edinburgh Gazette, the Belfast Gazette and in three national newspapers in the UK, as well as in national newspapers in other EEA countries where a material number of transferring policyholders are resident.
9.3 ELAS has asked the PRA to provide notification of the proposed Scheme to the insurance regulators in all EEA states.
9.4 Policyholders and other interested parties will be able to obtain information from the ELAS and CLL websites which will contain documents regarding the Scheme including the full Scheme document, this report, a summary of the terms of the Scheme and this report, and the communications pack regarding the Scheme.
9.5 ELAS proposes to send the Policyholder Letter to all ELAS policyholders for which it has a valid address. For group pension policies this will be either to the Trustee for forwarding on to individual members, or directly to members where ELAS makes direct payments to them.
9.6 For transferring policies, the Explanatory Booklets will also be included which will include the formal notice of the transfer and a summary of my report. The Explanatory Booklets will include information on the options available to the policyholder if they have any concerns about the transfer. In addition, before the end of 2015, as noted in paragraph 6.61(i), ELAS will write to each unit-linked annuity policyholder with payments linked to any of the five funds which will incur higher fund charges.
9.7 ELAS intends to seek a waiver from the requirement to send the Explanatory Booklets to non-transferring policyholders. This is in line with feedback from ELAS policyholders that they only wanted to receive targeted mailings. Furthermore, in the view of ELAS management, the benefit of informing non-transferring policyholders does not justify the cost that the with-profits fund would have to bear.
9.8 CLL intends to seek a waiver from the requirement to notify all existing CLL policyholders on the grounds that they will not be materially affected by the Scheme, and therefore that any notification would be of limited value, but would incur significant costs. I note that the financial impact of the transfer on CLL is comparable to that from acquiring a relatively small amount of new business, which would not require any notification to policyholders.
9.9 I consider these to be valid reasons and am satisfied that the proposed approach to communication with policyholders is fair and reasonable.
Consideration of the combined impact of the Reassurance Arrangement and the Scheme
9.10 In preparing my report, I have considered the impact of the Scheme in isolation on the various categories of policies.
This approach assumes that the existing Reassurance Arrangement would continue in force in the absence of the Scheme, and that the status quo position for comparison is therefore with the reinsurance in place. I note that the Reassurance Arrangement does not cover the unit-linked annuities, nor new annuities written since March 2015.
9.11 An alternative approach would have been to have considered the combined impact of the Reassurance Arrangement and the Scheme, which would have assumed that the most likely course of action by either or both of ELAS and CLL would be to terminate the reinsurance if the Scheme is not approved. The terms of the Reassurance Arrangement specifically allow (but do not require) either party to terminate if the Scheme is not approved by 31 December 2016.
9.12 In the following paragraphs, I consider whether I would have reached any different conclusions had I taken this alternative approach.
9.13 For non-transferring ELAS policies, the effect of the Reassurance Arrangement is to reduce the risks and hence capital requirements in ELAS, and to accelerate the recognition of the value of the transferring policies. This is in line with ELAS’s strategy. The reinsurance has also contributed to the increase in the Capital Distribution Amount from 25% to 35% from April 2015. Therefore considering the combined impact of the Reassurance Arrangement and the Scheme would have presented a more compelling position compared to the one discussed in the rest of this report, and I would not have altered my conclusions in respect of these policies. For example the Pillar I solvency coverage ratio for ELAS as at 31 December 2014 would have increased from 204% to 294% as a result of the Reassurance Arrangement and Scheme combined, compared to an increase from 261% to 294% from the Scheme alone.
9.14 For transferring ELAS policies, other than the unit-linked annuities, the reduction in the Pillar I solvency coverage ratio would have been from 204% to 162% as a result of the Reassurance Arrangement and Scheme combined, compared to a reduction from 261% to 162% from the Scheme alone. The effect of the Reassurance Arrangement is to accentuate the difference in Pillar I solvency between ELAS and CLL. Consideration of the combined effect of the Reassurance Arrangement and Scheme on transferring ELAS policyholders would not alter the conclusions set out in Section 6 in respect of these policies.
9.15 For the transferring ELAS unit-linked annuities, which are not covered by the Reassurance Arrangement, there is by definition no change to the approach, since they are impacted by the Scheme in isolation and not at all by the Reassurance Arrangement.
9.16 For the CLL policies, the key issue to consider is whether looking at the combined impact of the Reassurance Arrangement, the Scheme and onward Retrocession would leave CLL in a materially less financially secure position compared to the situation prior to the reinsurance and Scheme. Essentially, this leads to a consideration of whether the price paid by CLL for the transferring business is reasonable, specifically when taken in conjunction with the actions of the CLL shareholder to hold capital in CLL. Or to put it another way, I need to consider whether the transferring assets, together with any CLL shareholder capital retained in CLL to support the transfer are sufficient to cover the liabilities and associated risks of the transferring business.
9.17 I have been provided with information on the amount of assets received under the Reassurance Arrangement and the estimated premium in respect of the unit linked annuities to assist in my assessment. I have compared the
“pre-Scheme, pre-Reassurance Arrangement” and “post-Scheme, post-Reassurance Arrangement and after the planned Retrocession” solvency positions under Solvency I Pillar I, Solvency I Pillar II and Solvency II. I am satisfied that, taken together, the Reassurance Arrangement and the Scheme are not expected to lead to a material change to the solvency coverage ratio. Furthermore, CLL is expected to continue to maintain compliance with its internal capital management policy.
9.18 Overall, I am satisfied that my conclusions would not have been different had I considered the combined impact of the reinsurance and the Scheme.
The costs of the Scheme
9.19 ELAS and CLL will each bear their own costs of the Scheme, other than for certain costs such as my Independent Expert fees, and Court fees and Counsel’s fees which will be shared equally between the parties, as will costs of advertising the Scheme. In CLL’s case, any costs will be met from shareholder resources.
9.20 I am satisfied that this is reasonable.
Reinsurance where ELAS or CLL is the cedant
9.21 Under the terms of the Scheme, there will be no change to the reinsurance contracts for which either ELAS or CLL is the cedant.
9.22 I am satisfied that the Scheme will not have a material effect on the reinsurers of the ELAS and CLL policies.
The preparedness for Solvency II
9.23 Both ELAS and CLL have projects underway to enable them to meet the requirements of Solvency II. As for all insurance companies across Europe, Solvency II presents a significant challenge both in terms of changes to
relatively recently. In particular, as noted elsewhere in this report, there are various aspects which require regulatory approval, and this approval process will continue throughout the remainder of 2015.
9.24 I anticipate being able to comment further on the preparedness for Solvency II for both companies in my Supplementary Report.
The future operation of the Scheme
9.25 If the Scheme is approved by the Court (and subject to any subsequent amendment of the Scheme, as considered below), the Directors of CLL are committed to implementing the Scheme as set out in the Scheme document (and reflected in this report).
9.26 At any time after the Court’s sanction of the Scheme, ELAS and CLL may jointly apply to the Court for sanction of any amendments to it, provided that prior notice is given to the PRA and FCA and a certificate obtained from an independent actuary regarding the impact of the proposed amendment on policyholders. However no application is required to be made to the Court in respect of either:
(i) a minor or technical amendment, subject to non-objection by the PRA and FCA, or
(ii) changes considered necessary to ensure the provisions of the Scheme operate in the intended manner in light of a regulatory change, subject to certification from an independent actuary in addition to non-objection by the PRA and FCA.
9.27 The various balance sheet figures for mathematical reserves and asset values requires to implement the Scheme will be calculated by the firms’ actuaries and accountants. The business being transferred consists of non-profit business and therefore the most important aspect is that CLL will continue to meet any guaranteed liabilities, including the annuities in payment, and that sufficient resources are put aside to enable this.
9.28 In my opinion the safeguards noted in section 9.26 are reasonable safeguards to ensure that, if approved by the Court, the Scheme will be operated as presented to the Court.
Tax
9.29 ELAS and CLL have jointly drafted the necessary tax clearances and these will be submitted shortly. ELAS and CLL expect to receive such clearances. If clearances are not received then the Scheme will not proceed. I will provide an update, if required, in my Supplementary Report.
9.30 ELAS and CLL do not expect there to be any adverse policyholder tax impacts for Transferring Policyholders. I will provide an update in my Supplementary Report if this changes.
Financial Services Compensation Scheme (“FSCS”) and Financial Ombudsman Service (“FOS”)
9.31 The FSCS provides compensation to individual holders of long-term insurance policies issued by UK insurers in the UK or another EEA state who are eligible for compensation under the FSCS in the event of the insurer’s default.
Compensation to eligible holders of annuities in payment is the full amount of the annuity, without limit.
Implementation of the Scheme will not adversely affect eligibility for compensation from the FSCS for either transferring or non-transferring policyholders.
9.32 The FOS is an independent public body that aims to resolve disputes between individuals and UK financial services companies, and may make compensation awards in favour of policyholders. Only holders of policies that constitute business carried on in the UK are permitted to bring complaints to the FOS. In circumstances where ELAS currently refers policyholders to the FOS, CLL will continue to do so following implementation of the Scheme.
9.33 Implementation of the Scheme will not adversely affect access to the FOS for either transferring or non-transferring policyholders.
9.34 For the avoidance of doubt, CLL will continue to offer FOS referral rights to both all Guernsey and Jersey policyholders.