Certain of the Members at Lloyd's for any or All of the 1993 to 2020 (Inclusive) Years of Account, Represented by the Society of Lloyd's
| Jurisdiction | England & Wales |
| Judge | Mr Justice Snowden |
| Judgment Date | 30 November 2020 |
| Neutral Citation | [2020] EWHC 3266 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CR-2018-009677 |
| Date | 30 November 2020 |
[2020] EWHC 3266 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMPANIES COURT (ChD)
Royal Courts of Justice
Rolls Building, Fetter Lane, London
Mr Justice Snowden
Case No: CR-2018-009677
Martin Moore QC and Mary Stokes (instructed by Freshfields Bruckhaus Deringer LLP) for the Applicants
Tom Weitzman QC for the Prudential Regulation Authority
Charlotte Eborall for the Financial Conduct Authority
Hearing dates: 18 – 19 November 2020
Approved Judgment
A. INTRODUCTION
On 25 November 2020 I made an order on an application by The Society of Lloyd's (“Lloyd's”) and Lloyd's Insurance Company S.A. (“LIC”) sanctioning an insurance business transfer scheme (the “Scheme”) under section 111(1) in Part VII of the Financial Services and Markets Act 2000 (“Part VII” and “ FSMA”), together with ancillary orders under section 112(1) FSMA.
I indicated when making the order sanctioning the Scheme that I would give my reasons in writing, which I now do.
Lloyd's
Lloyd's is not an insurer and does not conduct insurance business itself, but simply admits members to the Lloyd's market who conduct business on their own account through groups of members (“Syndicates”) which are identified by a Syndicate number. The Syndicates have no separate legal personality. Thus, each member, former member and estate of a former member (a “Member”) is and remains severally liable for their own liabilities.
Lloyd's Syndicates are set up on an annual basis. In practice, they usually operate from year to year with active Members generally having the right, but not the obligation, to participate in the same numbered Syndicate the following year. The precise composition of the same numbered Syndicate may thus vary from year to year.
The “year of account” is the year (i) in which an insurance or reinsurance contract underwritten by the Members of a Syndicate is allocated for accounting purposes; and (ii) into which all premiums and claims arising in respect of that contract are payable. An “open” year of account is a year of account of a Syndicate which has not been closed by “reinsurance to close”. This is reinsurance which closes a year of account by reinsuring all the liabilities that attach to that year of account into an open year of account of the same or a different Syndicate in return for a premium. A “closed” year of account is a year of account of a Syndicate which has been “reinsured to close”.
The management of the business of Syndicates is conducted by “Managing Agents” who are given permission by Lloyd's to provide various services and advice to particular Syndicates. As part of their role, the Managing Agents may authorise other companies or partnerships who are not Members of Lloyd's to enter into contracts of insurance to be underwritten by the Members of the relevant Syndicate. These other companies or partnerships are known as “Coverholders”, and the authorities through which they operate are known as “Binding Authorities” or “Binders”.
In addition to any reinsurance which might be arranged for Members which provides indirect security of benefits for policyholders, the holders of all policies insured (or reinsured) at Lloyd's also benefit from the Lloyd's “chain of security”. This comprises three elements: (i) Members' working capital (all premiums received by the Members of a Lloyd's Syndicate are held on trust by the Managing Agents until the relevant year of account is closed and profits can be released); (ii) Members' capital deposited at Lloyd's (each Member must provide capital to Lloyd's which is held on trust by Lloyd's to support their underwriting); and (iii) Lloyd's central fund (Lloyd's central assets are available at the discretion of Lloyd's to meet any valid claim that cannot be met from the resources of any Member).
Following resolutions passed by the Council of Lloyd's on 20 September 2018, 17 September 2019 and 8 September 2020, and pursuant to The Financial Services and Markets Act (Control of Transfers of Business Done at Lloyd's) Order 2001 (SI 2001/3626) (“the Lloyd's Part VII Order”) Lloyd's has designed and co-ordinated the promotion of the Scheme and will act as transferor on behalf of the Members who have underwritten the relevant policies to be transferred.
Lloyd's Insurance Company S.A.
LIC is a Belgian company which is a wholly-owned subsidiary of Lloyd's. It is based in Brussels, is authorised to act as an insurer (and reinsurer) by the National Bank of Belgium (“NBB”) and is regulated by the NBB and the Financial Services and Markets Authority of Belgium (the “Belgian FSMA”). LIC also has branches throughout the EEA and a branch in the UK.
In anticipation of Brexit, since 1 January 2019 (with some minor exceptions) LIC has been writing all new Lloyd's market EEA business from its establishment in Brussels, exercising its passporting rights in all EEA member states to do so. The risks under such new policies are, however, reinsured back to the relevant Members, and LIC outsources the management of such policies back to the relevant Managing Agents of the Syndicates which originated the business at Lloyd's. As at 31 December 2019, LIC had written approximately 800,000 policies representing gross premiums of €2.6 billion in this way, and the intention is that LIC will continue to write such new EEA business in the future.
The reason for the Scheme
The Scheme is driven entirely by Brexit. As a result of the United Kingdom's exit from the European Union, Members of Lloyd's will lose their passporting rights under the Solvency II Directive, which have previously enabled them to write and service policies and pay claims in the EEA without the need for separate authorisation in each EEA jurisdiction. Such passporting rights are expected to cease at the end of the Brexit transition period on 31 December 2020.
On 21 December 2017 the European Insurance and Occupational Pensions Authority (“EIOPA”) issued an opinion on service continuity in insurance in light of the withdrawal of the UK from the EU. One of the options suggested by EIOPA to ensure service continuity was the transfer of insurance contracts of UK undertakings with policyholders in the remaining 27 EU Member States to an insurance subsidiary established in an EU27 Member State.
The Scheme follows EIOPA's suggestion. In order to avoid the disruption of service that the loss of passporting rights would cause to EEA policyholders whose policies have not been written by LIC, the primary purpose of the Scheme is to transfer to LIC, with effect from 30 December 2020, those policies (in whole or in relevant part) which were underwritten at Lloyd's between 1993 and 2020 (inclusive) and which have a risk situated or a policyholder resident in the EEA (the “transferring policies”). The intention is that after the Scheme becomes effective, the transferring policies should be able to be serviced and paid by LIC without the Members breaching any legal or regulatory insurance authorisation requirements in the EEA after the end of the Brexit transition period.
Lloyd's estimates that the gross ultimate premium of the transferring policies will be approximately £34.8 billion and the gross liabilities will be about £4.1 billion at the date the Scheme becomes effective. The number of transferring policies is not known due to the fact that Lloyd's does not keep central records of individual policies written by Members. It is clear, however, that there are likely to be many hundreds of thousands of transferring policies.
So far as recognition of Part VII transfers in the EEA is concerned, the recommendation of EIOPA to the EU27 Member States on 19 February 2019 was as follows,
“Competent authorities should allow the finalisation of portfolio transfers from UK insurance undertakings to EU27 insurance undertakings, provided that it was initiated before the withdrawal date. For that purpose, competent authorities should co-operate closely with the supervisory authorities in the UK taking into account the requirements of Article 39 of the Solvency II Directive and the provisions of Section 4.2.1. of the Decision of the Board of Supervisors on the collaboration of the insurance supervisory authorities of the Member States of the European Economic Area of 30 January 2017 (EIOPA-BoS-17/014). Competent authorities should deem a portfolio transfer to be initiated in case the UK supervisory authorities have notified them about the initiation of the portfolio transfer and the UK insurance undertaking has paid the regulatory transaction fee to the supervisory authority(s) in the UK and appointed an independent expert for the transfer.”
The Scheme was initiated in accordance with the requirements of this recommendation, and all of the EU27 Member States have either complied or intend to comply with EIOPA's recommendation. That includes Belgium, whose regulators have not opposed the Scheme and have issued the necessary permissions and certificates to enable LIC to take on the transferring policies. It is therefore clear that the Scheme will achieve its principal purpose of enabling the transferring policies to be transferred and liabilities paid after 31 December 2020.
B. THE SCHEME IN OVERVIEW
The detailed design and...
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