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Tips for minimising costs on Part VII transfers

11 May 2020. Published by Neil Brown, Partner

The Covid-19 crisis might cause insurers to seek to free up capital by disposing of portfolios of legacy business. This blog sets out some tips for carrying out Part VII transfers whilst under increasing costs constraints.

The Covid-19 crisis is causing many insurers to look at ways of strengthening their balance sheets.  In addition to the flurry of insurer rights issues which have been announced in recent days, it is possible insurers will also look to free up capital by disposing of legacy or run-off business.  Such legacy transactions are often structured by way of a Part VII transfer – a regulator approved court process for transferring insurance liabilities from one insurer to another.

However, Part VII transfers are notoriously slow and expensive, taking up to 18 months or more to complete.  Some, but not all, of the capital benefit of a Part VII disposal can be achieved by using an up-front reinsurance agreement.  But that still leaves the problem of how to carry out the subsequent Part VII transfer in an economic environment where companies are generally looking to preserve cash and reduce discretionary spending.  This blog sets out some tips for minimising costs on a Part VII transfer.

Front-load the actuarial analysis – the actuarial workstream is at the heart of any Part VII transfer.  It is crucial that a Part VII transfer will "not materially adversely affect policyholders" – the actuarial analysis which justifies that conclusion will drive all other aspects of the Part VII, including how it is structured legally and how it is communicated to regulators, policyholders and other interested parties.  The actuarial work can be complex, with room for differences of professional opinion between different actuaries – getting the actuarial issues worked out early and clearly will help avoid issues and inefficiencies later on in the process.

Make it easy for the regulators to say yes – the PRA and FCA are resource constrained even at the best of times. The current crisis will have done nothing to improve their capacity to process Part VII applications.  Given that regulatory review is the main reason for the length of time needed to complete a Part VII transfer, doing everything you can to make the regulatory process smooth and simple will be one of the most important factors in reducing timelines and, therefore, costs.  Early engagement with the regulators is crucial, so as to make sure that they understand the rationale for the transfer and are on-board.  Following that, it will be helpful to both submit documents for review as early as possible and to anticipate questions or concerns that the regulators might have.  Which takes us to….

Anticipate objections or possible weaknesses – all Part VII transfers are subject to both regulatory scrutiny and the possibility of policyholder objection at court.  Anticipating in advance the grounds of possible challenge will help to make the regulatory approval process smoother and more efficient, with less back and forth question and answer shortly before the court filing deadlines.  As a minimum, applicants should make sure that all of the requirements in the PRA and FCA guidelines have been complied with before documents are submitted to regulators.  Having ready answers to the objections and other gripes that policyholders might raise will help to avoid issues becoming blown out of proportion and simplify the documents which need to be provided to the regulators and the court in the run up to the final court hearing.

Get the communications right – the communications with policyholders and other interested parties can be expensive, owing to the cost of printing and advertising.  So it is worthwhile investing the time in developing a really solid communications approach plan which the PRA and FCA are happy with – but which avoids the temptation of over-promising at the directions hearing stage.  Scoping out grounds for waivers from the requirement to send hard copy communications packs to all policyholders can help to save a lot of cost.

Effective project management – a Part VII transfer involves lots of moving parts with input from various different work functions over a long period time (e.g. actuarial, regulatory, legal, policyholder communications, etc).  Given the length of time involved, most people will not be working on a Part VI transfer full time and will need to fit it around other work commitments.  This creates a recipe for missed deadlines and general slippage which can have knock-on effects down the line, and lead to an inefficient process.  Having effective and strong project management can be crucial in keeping the process on track, and the costs under control.