Although much of the Court of Appeal’s judgment builds on previous court judgments, there are nonetheless a number of points to consider, including the need to take a more bespoke approach to insurance business transfers, starting with the identification of the nature of the business being transferred and the reasons for the transfer. The Court of Appeal commented that it had detected a tendency on the part of those presenting Part VII applications, which had been accepted by the Court, to treat the judgments of Hoffmann J. in London Life and Evans-Lombe J. in AXA as if they were comprehensive statements of the factors to be taken into account in all insurance business transfers. A more tailored approach will be required in future.
Whilst the judgment of Mr Justice Trower sanctioning the transfer from Prudential to Rothesay on 24 November probably dwelt on the issues in rather more detail than might normally be expected (justifiably in the circumstances), it can probably be seen as a template for future court judgments, at least for transfers of annuity businesses. The judgment in particular provides a good example of the scrutiny to which the Court will subject the Independent Expert’s report. Although the Court should only depart from the recommendations of the expert and the non-objections of the Regulators if it has significant and appropriate reasons for doing so, it will nonetheless consider the Independent Expert’s report carefully.
One issue which received careful consideration by Mr Justice Trower was the matching adjustment. This was because of objections made by Dr Buckner, a former employee of the PRA, and an academic, Professor Dowd. Dr Buckner in particular had (according to the judge) been engaged in a campaign against the use of the matching adjustment in the insurance industry, and had made similar objections on another Part VII transfer.
Both Prudential and Rothesay make significant use of the matching adjustment – the nature of Rothesay’s business however is such that it uses the matching adjustment for a much larger proportion of its business than Prudential. Dr Buckner argued that the matching adjustment had the effect of artificially creating capital, drew the Court’s attention to criticism of the matching adjustment from a number of academics and practitioners and argued that there was significantly greater uncertainty in relation to the insolvency risk of Rothesay compared to Prudential.
The judge did not agree with Dr Buckner’s views and said that the sanction hearing was in any event not the right place for reaching a view on the question of whether the matching adjustment was flawed as a matter of principle. The ongoing Solvency II review, under which the matching adjustment is being considered, also made no difference – the judge did not believe that this indicated any fundamental concern by Regulators that the matching adjustment was inherently flawed. More importantly, Mr Justice Trower stated that the principle of matching adjustment had been given statutory effect in the UK by Solvency II. The Court must apply the regulatory regime as it exists: it was very difficult to see how the Court could properly conclude that a material adverse effect would be caused by an insurance business transfer where the matters relied on as constituting the adverse effect do no more than reflect the proper and lawful application of rules for calculating solvency.
Authored by Charles Rix.
