Introduction
Under Division 3A Part III of the Insurance Act 1973 (Cth) (the Act) a general insurer may transfer insurance business to another general insurer upon confirmation by the Federal Court of the relevant scheme. To do so the Act provides that an insurer must:
- provide a copy of the scheme and actuarial report to APRA;
- obtain APRA's approval before the step outlined at (d) below is taken;
- obtain APRA's approval of its notice of intention to make the application;
- publish a notice of intention to make the application;
- give to every affected policyholder a Scheme Summary; and
- make a copy of the scheme available for public inspection.
The Act provides the Court with a discretion to dispense with these requirements. The cases below provide guidance to insurers as to in what circumstances the Court may exercise this discretion
Background facts
Sompo Japan Insurance Inc. (Sompo), applied to the Federal Court on two occasions for confirmation of various aspects of a scheme pursuant to which the insurance business of the Australian branch of Nipponkoa Insurance Company Limited (Nipponkoa) would be transferred to Sompo.
Both Sompo and Nipponkoa are companies incorporated in Japan and registered as foreign companies under the Corporations Act 2001 (Cth). Both companies have been authorised by APRA to carry on insurance business in Australia. Both companies are wholly-owned subsidiaries of NKSJ Holdings, Inc., a company listed on the Tokyo Stock Exchange.
In Australia, Sompo wished to acquire Nipponkoa's insurance business on terms taking effect from 1 July 2014, with Sompo indemnifying Nipponkoa from any claims arising from their existing contracts in exchange for payments settling Nipponkoa's net liabilities and the shareholders of Sompo and Nipponkoa funding the costs in relation to the scheme.
Nipponkoa's policy records were maintained by Allianz, acting as managing agent of Nipponkoa, in a computer system called "Polisy". This computer system was first established when Allianz received policyholder data from Nipponkoa's previous managing agent, CGU, in around May 2010.
Due to an incompatibility in the format of the information provided by CGU, and the need for manual entering of that information, Allianz decided to limit the transfer of information to policies current as at 1 April 2010, and expired policies on which claims had been made. In addition, marine cargo insurance issued by Nippon Express, an agent for Nipponkoa, had only been recorded in hard copy form unless a claim was subsequently made on the policy.
The consolidated information on the Polisy system was used by Sompo to draft a list of policyholders to be informed of the proposed scheme.
Application of Sompo Japan Insurance Inc. under the Insurance Act 1973 (Cth) [2014] FCA 396
In April this year , Sompo applied to the Federal Court for relief from the obligation under the Act to provide a Scheme summary to every affected policyholder.
Sompo presented evidence that the process of synthesising and adding the information which was currently not already in the Polisy system would be expensive and time-consuming. According to Sompo, 98% of claims made under the relevant policies were made within 3 years. Based on this evidence, Sompo submitted that the vast majority of potential claimants would be captured by the Polisy system and there was no need to review the extensive records provided by CGU.
Justice Yates accepted Sompo's submissions, finding that the analysis of the trends in reporting patterns and retention rates demonstrated that the consolidated Polisy policyholders list was an accurate representation of "most affected policyholders" of the Sompo scheme.
Application of Sompo Japan Insurance Inc. under the Insurance Act 1973 (Cth) (No 2) [2014] FCA 677 (26 June 2014)
On 26 June 2014, Sompo applied to the Federal Court for the general confirmation of the Scheme required by the Act.
APRA also appeared on the application, pursuant to its right to do so under section 17E of the Act. APRA supported confirmation of the Scheme and, given the imminent merger of Nipponkoa and Sompo in Japan, urged the court to confirm the scheme in order to give certainty to policyholders attempting to enforce their policies.
Sompo also adduced actuarial evidence which suggested that, based on the solvency ratio of Sompo compared to others in the industry, Sompo would be able to provide a sustainable level of financial security to policyholders after the transfer, and that the administration of the policies would continue to be performed by Allianz and would remain largely unchanged. Sompo also adduced evidence that of the policyholders who had been informed of the proposed scheme, none had objected to it.
Based on this evidence, Sompo submitted that policyholders would not be disadvantaged by the proposed scheme. Sompo further submitted that due to the Japanese merger proceeding in any event, policyholders would technically fall under the Sompo's ownership regardless of the decision of the court.
The court approved the scheme on the basis that no policyholder would be significantly disadvantaged by the transfer of the business. In making this determination, the court stated that it took great comfort from the approach of APRA. In particular, the court pointed to APRA's submissions that given the complicated international intra-group transaction and the impending merger of the two companies overseas, policyholders would be significantly disadvantaged if clarity was not given by the court in relation to the true ownership of the scheme in Australia
Conclusion
The decisions encouragingly show that the Court will be prepared to take a pragmatic and corporate-minded approach to the strict requirements under the Act relating to transfer of insurance business. However, to persuade the Court to do so, the decisions suggest that it is advisable for insurers to present strong actuarial evidence in support for the application, and to also garner the support of the regulator.
