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Insolvency

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

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Insolvency

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  1. Insolvency Tom Crossland

  2. The road to ruin

  3. Definitions • Financial Services & Markets Act - IPRU(INS) • Companies Act • Insolvency Act • Balance sheet • Cash flow

  4. 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]

  5. 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’

  6. Causes of failure • Underwriting risk: • premiums • catastrophe • growing too fast • run-off • Asset risks: • overvalued; • reinsurance failure • Fraud

  7. Warning signs

  8. Warning signs • Quality/attitude of management • Rapid growth • Significant change in business • Unidentifiable competitive advantage • Low ratings

  9. Warning signs • Underlying data and not views of management • Key long term trends • Comparison with similar companies • Generally the market does not “lie”

  10. The new route Administration

  11. 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

  12. 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

  13. 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

  14. Administration Administration • 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

  15. Administration Administration • No requirement to pay funds into the ISA • Antecedant transactions can be challenged • Survival of the company • Perception • Payment of creditors

  16. Administration Administration • No need for a run-off scheme • No enforcement of security (collateral for letters of credit) • Set off from date of administration

  17. Administration Administration • Watch out for: • Enterprise Bill • European Directives

  18. The end of the road

  19. 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

  20. 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

  21. EU Directive • Home state rule • Information in home language • Who gets priority? • How is priority given?

  22. Who gets priority now? Insolvent insurer Employees 1st Policyholders Insurers Compensation 2nd

  23. Who will get priority? Insolvent insurer Employees 1st Policyholders 2nd Insurers Compensation 3rd

  24. How will priority be given? • Two possible methods • administrative costs and consultation • Ring fencing • long term business • composites • with profits funds

  25. Practical effects • Credit ratings • Restructuring • Transitional issues • Lloyd’s • UK branches of EU companies

  26. Drive carefully

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