Getting out of the rabbit hole – Run-off insurance in Guernsey
The current tough insurance market has encouraged many new entrants into the insurance industry over the past few years. As a leading international insurance domicile, Guernsey has benefited. In 2021, 65 new insurance entities were licensed and the figures for 2022 are expected to be equally encouraging.
Any dog owner whose dog has ever gotten stuck in a rabbit hole will appreciate the aphorism, “Never get into something you don’t know how to get out of”. Like a rabbit hole, exiting the insurance industry tends to be less straightforward than entering it.
For this reason, specialist run-off insurers offer exit solutions to insurers who have stopped writing new business. These liquidating carriers may assume liability for the policies written by these insurers or acquire the companies themselves, thereby assuming liability for all business written by them.
Runoff is big business. PWC estimates global runoff reserves to be approximately US$864 billion1. Guernsey is home to a number of these run-off specialists2 and its legislative framework offers a variety of tools to help end-of-life insurers.
In the absence of new premium income, the key to a successful run-off is managing outgoing costs. For this reason, it makes sense to streamline acquired companies and lines of business into one consolidated liquidation insurance vehicle. Guernsey is an ideal location for this vehicle:
- Never having been a member of the European Union (EU), Guernsey insurers are not subject to the restrictive capital requirements of Solvency II;
- the Guernsey Financial Services Commission (GFSC) does not exercise group supervision over the European subsidiaries of an insurer licensed in Guernsey;
- Guernsey’s vibrant insurance industry makes it a useful source of new business for liquidation specialists.
Additionally, it is simple to merge a newly acquired insurer with an existing consolidator in Guernsey. The merging process simply requires:
- a resolution of the board of directors of both companies;
- 28-day written notice to creditors of both companies;
- declarations of compliance and solvency of the boards of directors of the two companies; and
- GFSC Consent.
The process can usually be completed in about 3 months.
The Guernsey merger legislation not only allows two Guernsey companies to merge with each other, but also allows Guernsey companies to merge with foreign companies.
Using this process, Carey Olsen has advised on mergers with entities in France, Switzerland, Luxembourg, Cayman Islands, Bermuda and Vermont (among others).
This process can be used for both life and general insurers. The company resulting from the merger automatically succeeds to all of the assets and liabilities of the target. Therefore, the merger does not constitute a transfer of insurance contracts and may therefore be a faster and more cost-effective alternative to a court-approved long-term business transfer scheme (see below).
More detailed information on the merge process can be found here.
Purchase by merger
The Guernsey merger regime can also be used to effect an acquisition of a target company (in Guernsey or elsewhere) by merger.
This can be particularly useful when the target company is a captive insurer. A captive insures the risks to which its shareholder is exposed. However, following the acquisition of the captive by the run-off vehicle, its shareholder will have changed and it will no longer insure its shareholder. This change may result in increased capital requirements for the former captive and increased regulatory costs. Given the focus of run-off specialists on cost minimization, it is best to avoid these increased costs. However, structuring the acquisition as a merger under the Guernsey merger regime avoids these additional costs as the target is absorbed directly into the existing liquidation vehicle upon acquisition.
Mobile phone companies
Many licensed insurers operating in Guernsey are protected cells rather than stand-alone companies. Although it is not possible to directly merge a protected cell with a company, a protected cell can be transformed into a company and then merged, as above.
Run-off transactions often involve the purchase of business volume by the consolidated run-off vehicle rather than the purchase of a company’s stock. Such novations or portfolio transfers are commonplace in Guernsey and local service providers are experienced in documenting such transactions. GFSC consent is required although this rarely takes more than a few weeks.
Long-term business transfer schemes
Like many other financial services jurisdictions, the Guernsey court has the power to order the transfer of a life assurance business from one insurance company to another. Quite often, these transfers involve companies operating in multiple jurisdictions. Carey Olsen has advised on many of these so-called Part VII transfers.
Guernsey company law allows schemes of arrangement to be used to effect a wide range of corporate restructurings, including reorganization agreements between a company and its policyholders, reinsurers, creditors and shareholders. Please see the following link to our experience with arrangement diagrams.