Background
IRB-Brasil Resseguros S.A. and Community Reinsurance Corporation Limited applied under Part VII of the Financial Services and Markets Act 2000 for approval of a scheme transferring the business of IRB’s UK branch to Community Re. The transferring portfolio comprised historic non-life reinsurance, principally marine, aviation, property and casualty business written between 1974 and 1983. It was in run-off, with approximately 38,066 policies relating to 830 policyholders and, as of 31 December 2023, approximately US$32.84 million in gross and net claims reserves, including incurred-but-not-reported claims.
The portfolio was fully reinsured by Carrick Re Limited under a loss portfolio transfer reinsurance agreement and was administered by Carrick UK Services Limited, which would continue administering it after the transfer. The scheme was intended to place legal liability for the transferred policies with Community Re while allowing IRB to de-authorise and close its UK branch. One policyholder subject to UK sanctions was excluded from the scheme, so the transfer ultimately did not encompass every remaining UK-branch policy.
TIG Insurance Company initially objected, raising concerns about reserves, Community Re’s capital, and claims-handling service. TIG later resolved its disputes with IRB and withdrew the objection. The independent expert, Simon Sheaf, nevertheless considered the issues raised, including uncertainties associated with historic asbestos liabilities and a particular large loss. His stress testing included scenarios involving significant deterioration in Community Re’s reserves, and he maintained his conclusion that the scheme was not expected materially to disadvantage policyholders or transferring reinsurers.
The Court’s Holding
Mr Justice Mellor sanctioned the scheme under section 111(1) of FSMA 2000 and made ancillary orders under section 112. Applying the Court of Appeal’s guidance on Part VII transfers, he treated the central question as whether the scheme posed a real or significant, rather than fanciful or insignificant, risk of material adverse effects on policyholders or other stakeholders.
The court found the independent expert’s reports clear, cogent and convincing. They supported the conclusions that the transfer would not materially impair the security of policyholder benefits and would not adversely affect service standards or corporate governance. The court also placed substantial weight on the PRA’s and FCA’s detailed reports: neither regulator objected, and the FCA considered the scheme to fall within the range of fair and reasonable schemes available to the companies.
Community Re had the necessary authorisation to conduct the transferred business, and the PRA had certified that it would possess the required solvency margin after the transfer. The court also waived the relatively minor respects in which full compliance with the earlier notification directions had not been possible, finding that the remedial measures adequately addressed the notification issues.
Key Takeaways
- For a Part VII transfer of general insurance business, the principal inquiry is whether the scheme creates a real and significant risk of material adverse effects on policyholder security, service, or governance.
- The court gives full weight to sound opinions from the independent expert and regulators but must scrutinise their reasoning rather than treat the sanction application as a formality.
- Historic and uncertain liabilities, including asbestos exposure, did not prevent approval where the independent expert found that professionally supportable estimates and sufficiently severe stress scenarios could still be applied.
Why It Matters
The decision illustrates the evidential scrutiny applied when legacy reinsurance liabilities move from a large overseas insurer’s UK branch to a smaller specialist run-off insurer. A difference in the parties’ size or balance sheets is not itself decisive; the question is whether the transfer creates a material, non-theoretical risk to affected stakeholders.
It also shows the importance of keeping distinct the transferee that assumes legal liability and the separate reinsurer carrying the portfolio under a loss portfolio transfer agreement. Here, Community Re became responsible to transferring policyholders, while Carrick Re Limited was the entity providing the portfolio’s full reinsurance under the LPTA.