Many of us working in the insurance sector have followed the Prudential-Rothesay case with great interest. Had the Court of Appeal upheld the original judgment, Part VII transfer scheme applications' predictability would have been much reduced. As these applications are costly for insurers, the decision could have significantly impacted the UK insurance market's dynamic.
Let's take a look at key considerations from the appeal ruling judgement from the actuarial perspective and touch on some of the long-term implications for insurers:
Actuaries may be interested in the discussion of the relative capital positions of the two parties, which has implications for the communication of technical matters.
The Court considered the Solvency II Solvency Capital Ratio (SCR), and what it tells us about the future security of a company. Over the course of the appeal, it became apparent that SCR was not fully understood by all parties interested in the transfer.
Indeed, the appeal judgement viewed the interpreted meaning of SCR in the original hearing as contributing to error in the original judgement 1. The appeal judgement emphasised the central role of the SCR, as the level of capital insurers must hold under regulation, in the consideration of a Part VII transfer.
In the wider insurance landscape, the regulator is keen to ensure that all technical communications are clear for the customer. The judgement may increase the focus on how technical matters are communicated, which is vital to the Part VII process.
Regulators, independent experts, and insurers may look for ways to better communicate these matters in customer communication material. For example, the way the relative capital positions are explained in the customer booklet or within the Independent Expert’s report.
Some industry speculation suggested a successful appeal would reduce the Court’s role in transfer cases to that of a rubber stamp. This came up in the representations made to the appeal. The judgement addresses this directly, supporting the position of earlier judgements that the discretion is 'unfettered and genuine' 2.
However, the appeal judgement went on to clarify how the Court could exercise that discretion. In particular, the discretion is real, and the process is not a 'rubber stamp' but "as in the exercise of all discretions, the Court must take into account and give proper weight to matters that ought to be considered, and ignore matters that ought not properly to be taken into account." The predictability this creates will be helpful to firms.
For actuaries and their teams, the clarification, once again, emphasises the importance of effectively communicating technical matters. In its judgement, the Court described its approach towards sanctioning Part VII applications. This information is valuable for actuaries and paints a clearer picture of how courts will use their input in future.
The emphasis placed on each transfer's specific circumstances and the absence of any comprehensive list of factors 3 here is also not characteristic of a 'rubber-stamp'.
The appeal court considered the interaction between the exercise of the court’s discretion and the independent expert and the regulators' views. In exercising its discretion, the court draws on the independent expert’s opinion and the view of the regulators. The judgement clarifies that although the Court may look beyond the matters considered by the independent expert, dismissing any input from the independent expert or regulators should be for "significant and appropriate reasons" 4.
The central question is, of course, whether or not a scheme will have a material adverse impact on policyholders and this appeal judgement provides guidance on what constitutes a ‘material adverse impact’. This will be helpful to actuaries and others preparing these schemes.
Material is clarified to mean "real or significant, as opposed to fanciful or insignificant". There are two key clarifications as to what this does not include:
1 Non-contractual support potentially available to parties to a transaction is described as irrelevant 5, and evaluation under Solvency II metrics and continued regulation as "necessary and generally sufficient". This removes the uncertainty that existed, even before the original judgement in this case, as to the role of such considerations in assessing "material adverse impact".
2 The judgement supported the view from the Scottish Equitable transfer that subjective factors are not relevant. As such, no weight should have been given to the fact that policyholders chose Prudential on the basis of its age, venerability or reputation, or that they assumed that Prudential would always provide their annuity.
Related to this is the policyholders' right to object. Though real to the customers, the objections presented were not relevant. This raises the question of whether there is a need for better policyholder guidance on objections and the Court process.
The judgement describes some subjective factors as having been factors customers reasonably considered when choosing their annuity provider. This may impact the way things like age and venerability are referred to in customer-facing more widely as part of meeting the general requirements in relation to ‘policyholders’ reasonable expectations’.
Overall, the appeal judgement has restored a welcome level of predictability for the industry and a useful source of information for those involved in Part VII transfers.
To discuss what the ruling means for Part VII transfers in more detail, contact Simon Perry.
1 Appeal judgement paragraph 99
2 Ibid 78
3 Ibid 79
4 Ibid 82
5 Ibid 104