Insolvency Tom Crossland. The road to ruin Definitions Financial Services & Markets Act - IPRU(INS)...
-
Upload
todd-wright -
Category
Documents
-
view
215 -
download
0
Transcript of Insolvency Tom Crossland. The road to ruin Definitions Financial Services & Markets Act - IPRU(INS)...
Insolvency
Tom Crossland
The road to ruin
Definitions
• Financial Services & Markets Act - IPRU(INS)
• Companies Act
• Insolvency Act
– Balance sheet
– Cash flow
Definitions
A company is deemed unable to pay its debts if:
it is proved to the satisfaction of the court that
it is unable to pay its debts as they fall due [or]
the value of the company’s assets is less than the
amount of its liabilities taking into account its
contingent and prospective liabilities.
[Section 123 Insolvency Act 1986]
Cash flow
• Consistently profitable non-life insurer
• Highly experienced management team
• Quoted company, doubled in size in five years
• Charismatic Chief Executive
• Analysts recommend a ‘buy’
Causes of failure
• Underwriting risk:
– premiums
– catastrophe
– growing too fast
– run-off
• Asset risks:
– overvalued;
– reinsurance failure
• Fraud
Warning signs
Warning signs
• Quality/attitude of management
• Rapid growth
• Significant change in business
• Unidentifiable competitive advantage
• Low ratings
• Underlying data and not views of management
• Key long term trends
• Comparison with similar companies
• Generally the market does not “lie”
Warning signs
Administration
The new route
The current route
• Provisional liquidation - why?
• Scheme of arrangement
– Companies Act procedure
– binds all policyholders and cedants if approved• by each class• 50% by number• 75% by value• court sanction required
The current route
• Two types of scheme:
– Run off: a payment percentage is set and claims paid as agreed
– Cut-off: all claims (agreed and IBNR) valued and residual funds distributed
The current route
• Important issues:
– Attitude of reinsurers
– Up front costs vs saving of run-off costs
– IT systems/records
– Legal disputes
– Trust funds
– Letters of credit and security
– Set off
– Staff
AdministrationAdministration
• Introduced for companies other than banks and insurance companies in 1985
• Rescue culture - carry on the business
• Possible outcomes:
– Company can survive
– Liquidation
– Scheme of arrangement
AdministrationAdministration
• No requirement to pay funds into the ISA
• Antecedant transactions can be challenged
• Survival of the company
• Perception
• Payment of creditors
AdministrationAdministration
• No need for a run-off scheme
• No enforcement of security (collateral for letters of credit)
• Set off from date of administration
AdministrationAdministration
• Watch out for:
– Enterprise Bill
– European Directives
The end of the road
Distributions
• Basic rule is equal distribution
• But compensation for personal policyholders
• Preference for employees
• Ring-fencing of long-term funds
• Schemes can apply to any part of a business with sufficient connection to the UK to be wound up
Distributions
• Insurers Winding up Rules 2001
– No initial actuarial valuation required
– More explicit recognition of IBNR, but non-life rules largely unchanged
– Basis of valuation changed from a modified net premium basis to a gross premium basis
– Unitised with profits valuation rules
– Policyholders’ reasonable expectations and interaction with compensation scheme rules
EU Directive
• Home state rule
• Information in home language
• Who gets priority?
• How is priority given?
Who gets priority now?
Insolvent insurer
InsurersPolicyholders
Employees
Compensation
Who will get priority?
Insolvent insurer
Insurers
Policyholders
Employees
Compensation
How will priority be given?
• Two possible methods
– administrative costs and consultation
• Ring fencing
– long term business
– composites
– with profits funds
Practical effects
• Credit ratings
• Restructuring
• Transitional issues
• Lloyd’s
• UK branches of EU companies
Drive carefully