The approach to communication with policyholders
10.1. Regulations made under the FSMA require a communication regarding the proposed transfer to be sent to every policyholder of the parties to the Scheme unless the Court waives this requirement. However, consideration may be given to 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. The companies intend to comply with this guidance.
10.2. The companies’ approach to communicating the proposed Scheme to affected policyholders is outlined in Section 5, and explained further below.
10.3. SJE has more than ten thousand policyholders, although the level of data that is held on them varies by the nature of the customer relationship.
10.4. Measured by Technical Provisions (net of reinsurance), the portfolio that is transferring into BHII has an expected value of zero. Therefore, there is a minimal expected impact on the SJE balance sheet (net of reinsurance) as a result of the transfer.
10.5. From a policyholder perspective, SJE believe that those policyholders who are not transferring (numbering approximately 11,200 and these are associated with approximately 54,900 policies) will see no change in the way in which they interact with the company. As such SJE considers that any such communication to these policyholders would incur a disproportionate cost relative to the effect of the Scheme.
10.6. Accordingly, SJE does not intend to notify any of its policyholders (save for the policyholders transferring to BHII) of the proposed transfer.
10.7. For the transferring policyholders (SJE has identified 10,284 insureds), SJE plans to communicate with all such policyholders as follows:
10.7.1. Of the identified insureds (10,284 in total) 5,961 insureds have policies which are regarded by SJE as "fully developed" (i.e. (a) are within a policy line in respect of which SJE's internal actuarial reserving analysis has not estimated that further claims will develop; or (b) are in a policy line to which SJE's internal actuarial reserving analysis has allocated zero IBNR/case reserves or the amount of case reserves/IBNR is negligible relevant to the amount of business written) which means that it is highly unlikely that such insureds will have a claim in the future. Accordingly, SJE intends to exclude insureds under fully developed policies from the notification process on the basis that such insureds will be unaffected by the Scheme.
10.7.2. Of the balance of 4,323 insureds, SJE has identified duplicate records for 795 insureds. After deducting these duplicates, there is a balance of 3,528 insureds that have or may in the future have claims under policies forming part of the Transferring Business. SJE therefore proposes to limit its communication to these 3,528 insureds. Of these 3,528 insureds, SJE proposes to notify 2,179 (approximately 62%) directly; and the remaining 1,349 insureds (approximately 38%) indirectly.
10.7.3. The 2,179 insureds to whom SJE proposes to send direct notices comprise:
(a) 784 insureds under two group medical malpractice policies (described as: SIGO (1) – a group
information for the insureds), and is required by contract to contact the insured via the broker, but the broker is no longer in business, having become insolvent (or for one solvent broker where in the light of a dispute, SJE proposes to send the notices direct to the insureds);
(d) 712 insureds with Broker Policies, where SJE is the Lead Insurer, and there are no contractual restrictions preventing direct contact with the insured.
10.7.4. The 1,349 insureds to whom SJE proposes to send indirect notices comprise:
(a) 1 insured under the SIGO (1) policy, for whom contact details are not available, in respect of whom SJE intends to send notice to SIGO, who purchased the cover on behalf of the individual insureds;
(b) 1,241 insureds with policies concluded under co-insurance arrangements where SJE is a Following Insurer (and therefore does not have address information for the insureds), in respect of whom notice will be sent to the Lead Insurer; proposes to notify the law firm representing the insured(s) or the settlement agent, as appropriate.
This category is not included in SJE’s electric systems (and thus not counted in the 1,349 insureds identified in paragraph 10.7.4 above) but this category will be notified indirectly.
10.8. For the policyholders of BHII, the company plans to communicate with those policyholders in the following three broad lines/categories:
10.8.1. BHII Framework business (approximately 2,000 policies/855 policyholders). In respect of this category of insurance business BHII proposes to send notice of the application to all brokers of record for this line of business. In the majority of cases (numbering 560 out of 855 policyholders) BHII does not have addresses for the underlying policyholders – the addresses are retained by the brokers. The day-to-day relationship with the policyholders is via the brokers. BHII therefore proposes to communicate with the brokers and ask that they send the circular onto their policyholders. Further, BHII will cooperate with the brokers and address any additional requests for copies of the circular they may require.
10.8.2. Global Aerospace business (approximately 28,700 policies/8,500 policyholders). BHII was nominated by NICO to act as the "pool" member in 2004 and in respect of this category of policies BHII does not have address details on its systems. However, these policies were brokered and BHII proposes to send the notice of the application to all brokers and ask that they notify their policyholders. BHII will cooperate with the brokers and deal with any additional requests for copies of the circular they may require.
10.8.3. Delegated Authority business which is underwritten through brokers (where BHII estimate that there are approximately 50 open claims in respect of this line of business). The business comprises short-tail business and BHII’s statistical analysis indicates that the vast majority of policies (and which number approximately 80,000) are deemed to be "fully developed". However, there may be some policies under which a claim is still possible. As BHII does not have the address details of these policyholders, it proposes to send the notice of the application to all brokers of record in this category of business, and ask that they notify their clients who are policyholders who may potentially have claims. BHII will cooperate with the brokers and deal with any additional requests
as a result of the Scheme; and
10.9.2. There are no plans to change the policy administration or change the governance arrangements for any of BHII's policies. There is therefore no potential for the Scheme to have a direct impact on the servicing of BHIIL's policies.
10.10. SJE also plans to notify the two reinsurers (as well as NICO) protecting the SJE insurance business, and will also seek their express consent to the transfer of their reinsurances.
10.11. Finally for all interested parties, SJE will provide notification of the proposed Scheme through advertisements in: the London, Edinburgh and Belfast Gazettes; the Times and the Financial Times; the international edition of the Financial Times; and two national newspapers in Italy being Il Sole 24 Ore and Il Corriere della Sera.
10.12. I am satisfied that the proposed approach to communication with policyholders is both proportionate and reasonable.
The Effect of the Scheme on the Reinsurance Asset
10.13. Where reinsurance contracts to be transferred under the Scheme are not governed by UK law, there is a risk that reinsurers may challenge the Scheme and refuse to continue to meet their obligations under the reinsurance contracts. Although some EEA law-governed reinsurance contracts should transfer under the Scheme, others will not or might not do so.
10.14. The reinsurance asset (other than the NICO Agreement) associated with the Transferring Business was approximately £18.7 million, based on the external actuaries’ estimates as at 31 December 2011. In March 2012, SJE entered into a commutation agreement with SJII to commute the reinsurance asset associated with the liabilities to be transferred under the Scheme. This asset held with SJII accounted for £10.2 million of the £18.7 million booked as at 31 December 2011. Therefore, based on figures as at 31 December 2011, approximately £8.5 million of reinsurance asset will be subject to the Scheme.
10.15. This reinsurance asset (other than the NICO Agreement) is held with two external reinsurers, and I have seen the advice sought by SJE from its legal advisors that the reinsurance contracts are, on balance, likely to be governed by Italian law. Furthermore, I have seen the advice sought by SJE from its Italian legal advisers that the Scheme will be effective to transfer these agreements, as the Court Order sanctioning the Scheme would be recognised under relevant Italian laws enabling BHII to take proceedings in Italy against a reinsurer for the payment of a reinsurance claim. However, they do recommend that, as a cautious approach, SJE seek consents from the reinsures, which SJE intends to do. For the avoidance of doubt, as the NICO Agreement is governed by UK law, SJE need only notify NICO of the Scheme.
10.16. Any reinsurance bad debt on the local Italian branch business is covered under the NICO Agreement, albeit that this would erode the limit. The external actuaries’ estimates and estimates based on BHII’s methodology both as at 31 December 2011 show that, even on a gross basis, the likelihood of the NICO Agreement exhausting is remote. Therefore, even if the external reinsurance (other than the NICO Agreement) in respect of the transferring liabilities failed to transfer under the Scheme, the transferring policyholders and the existing policyholders of BHII, would not be materially adversely impacted given the €50 million increased limit to the NICO Agreement and the financial strength of NICO.
10.17. The increased limit of €250 million under the NICO Agreement post-transfer provides the policyholders of BHII, including the transferring policyholders of SJE, with greater security as explained in paragraphs 7.103 and 7.104 above.
associated reinsurance asset was €22.4 million, which, after the commutation with SJII as described in paragraph 10.13 above, amounted to about €10.2 million or £8.5 million).
10.20. The assets that will be transferred from SJE to BHII will comprise only the reinsurance assets of £8.5 million above and the NICO Agreement entered into with NICO in March 2012.
10.21. The Court has the power to order (and the Scheme provides for) the transfer of the relevant outwards reinsurance contracts (including the NICO Agreement) of SJE to BHII as part of the Scheme. On the basis that the relevant outwards reinsurance contracts of SJE are transferred to BHII as part of the Scheme the net (of reinsurance) position of BHII should not be adversely impacted as a result of the Scheme.
Operational Plans and Changes in Assets and Liabilities up to the Effective Date
10.22. The balance sheets show amounts as at 31 December 2011. I have chosen this date because it is the latest date for which audited financial information is available.
10.23. I expect that the current activities of SJE and BHII will continue between 31 December 2011 and the Effective Date (and, as appropriate, after the Effective Date). SJE and BHII will continue to write new and renewal business and the companies will continue to settle claims and reassess reserves in the light of experience. I do not consider that any material additional risk to any group of affected policyholders will emerge as a result of the continuation of normal business.
10.24. Further to considering the continuation of normal business, I have discussed separately with BHII and SJE the possibility of management actions that could affect the financial position of SJE and BHII (such as corporate restructuring or significant changes in new business strategy or operational plans). I have been informed that BHII has no planned activities that would have a material effect on the security of its policyholders, either for those that were policyholders as at 31 December 2011 or those that have become policyholders since then up to the Effective Date.
10.25. In the case of SJE, the company plans to write a new line of business. SJE has provided me with a document giving details of projections for their ICA over the next 3 years, incorporating the proposed new line of business, a small amount of which is forecast to be written in 2012. The ICA projection over the next 3 years (2012 – 2014) shows that a satisfactory level of excess capital is maintained throughout the 3 year projection period. I therefore do not believe this change in new business strategy up to the Effective Date will have a materially adverse effect on the security of its policyholders, either for those that were policyholders as at 31 December 2011 or those that have become policyholders since then up to the Effective Date.
10.26. I believe that it is unlikely that any events occurring between 31 December 2011 and the Effective Date would affect any conclusion that I reach based on my review as at 31 December 2011.
10.27. A short time before the final Court hearing, I will consider the extent to which the operational plans of BHII and/or SJE have altered (relative to the position at the date of this Report) and the actual changes in assets and liabilities (relative to the position as at 31 December 2011) and hence whether there have been any changes (including those associated with current economic conditions) that would affect my overall opinion, and will report on these as part of my supplementary/update report (see paragraph 1.24 above).
10.28. For the avoidance of doubt, it is intended that the statutory value of the liabilities transferred from SJE to BHII on the Effective Date under the Scheme will be matched by transferred (reinsurance) assets.
Solvency II
10.29. As described in Section 2, the regulatory solvency reporting requirements for EU insurers and reinsurers are
Conclusion
10.32. I am satisfied that SJE and BHII are both presently preparing to meet the requirements of Solvency II on its introduction. I do not believe the Scheme will impact in an adverse manner on the separate approaches of SJE and BHII to meeting and complying with Solvency II requirements.
The SJE and BHII Pension Schemes
10.33. The funding and operation of the SJE and BHII Group’s pension schemes will not be affected by the Scheme.
Tax
10.34. I am informed by BHII that the proposed Scheme is not expected to have tax implications that would affect the existing policyholders of BHII or the policyholders of the Transferring Business under the Scheme. For the policyholders of SJE remaining post-transfer there is not expected to be any tax implications since, all other things being equal, the Scheme has a neutral impact on the net financial position of SJE.