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a special supplement to

Schemes of arrangement

Actuarial & InsuranceManagement Solutions

Solutions for DiscontinuedInsurance Business

PricewaterhouseCoopers’ Actuarial & InsuranceManagement Solutions (AIMS) practice is a globalpractice of more than 450 consultants, providing life andnon-life actuarial and insurance advisory services. With aproven track record across five continents and practicesin 14 countries, AIMS offers the global presence,resources and expertise to meet its clients’ most criticalneeds. Our actuaries regularly provide advice to both theinsurance industry and broader financial servicesproviders.

As part of the world’s largest professional services firm,AIMS can also call on the global expertise of auditors,tax advisers, corporate finance and discontinuedinsurance business specialists who specialise in theinsurance sector.

Our non-life practice is the UK’s largest practice of itskind. We support our discontinued insurance businesspractice in the development and implementation of run-off strategies and exit solutions. We evaluate creditors’liabilities, including those for complex and long-tailedclaims, and develop sophisticated approaches toallocating funds to insureds in an equitable manner inthe context of solvent and insolvent schemes ofarrangements.

PricewaterhouseCoopers’ Solutions for DiscontinuedInsurance Business team comprises 140 insuranceexperts dedicated to dealing with issues facingdiscontinued insurance business. The team has anextensive range of specialists with expertise inrestructuring.

They include qualified chartered insurance practitioners,accountants, restructuring practitioners and specialistsin risk management, treasury and businessmanagement.

This team has a broad range of experience, includingboard level strategic management, claims run-offmanagement, collections, underwriting, riskmanagement, investigations and finance.

The team can also draw on the strength of officesaround the world including dedicated staff in the US andBermuda. The team’s credentials include cross-borderassignments in the US, Continental Europe, Australia,Far East and Middle East.

Unless otherwise indicated, PricewaterhouseCoopersrefers to PricewaterhouseCoopers LLP a limited liabilitypartnership incorporated in England.PricewaterhouseCoopers LLP is a member firm ofPricewaterhouseCoopers International Limited.

commentThere are fundamental changes in objectives when a company enters run-off, whether solvent or insolvent.In the confusion that regularly occurs during this transition, it is all too easy to lose sight of these changes,and for the company to carry on as before. The resulting misuse of company resources, loss of significantpersonnel, and diminishing morale can jeopardise the long term chances of achieving a favourable run-off.The challenge for companies entering run-off is to implement these significant changes as rapidly andpainlessly as possible.

Given that most finality solutions for insolvent companies ultimately involve a scheme of arrangement, andthat an increasing number of solvent run-offs are also looking towards solvent schemes of arrangement as ameans of achieving finality, it is clearly important for the culture change accompanying a decision to allowthe run-off to get to a position where a scheme is feasible within the shortest possible timeframe.

One of the main ideas to get over, to both management and staff, is that being in run-off isn’t that bad.Providing new objectives are embraced on day one, enormous value can be provided to creditors in relationto an insolvent estate and to shareholders in relation to solvent run-offs. Not least among the advantages toshareholders is the release of capital that can accompany a successful finality solution such as a solventscheme.

Neil Bruce, PwC

2

PricewaterhouseCoopers

run off business special supplement

PricewaterhouseCoopers (www.pwc.com) is the world’s largest professional services organisation. Drawing on the knowledgeand skills of more than 125,000 people in 142 countries, we build relationships by providing services based on quality andintegrity.

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ISSN 1477-7568 Printed by Newnorth Print© B D Communications (London) LLPAll rights reserved. No part of this publication may bereproduced, stored in any retrieval system or transmittedin any form – electronic, mechanical, photocopying orotherwise – without the prior permission of the publisher.Every care has been taken to ensure that the informationin this publication is accurate, but the publisher cannotaccept and hereby disclaims any liability to any party forloss or damage caused by any errors or omissions.

Editors:Derek AustinTel: +44 (0)1908 660836Fax: +44 (0)1908 660856Email: [email protected]

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Published by:B D Communications (London) LLP153 Simpson, Milton Keynes MK6 3AHwww.runoffbusiness.com

a special supplement to Run Off Business magazine autumn 2003

Schemes of arrangement is a specialsupplement sponsored and written by:

Gary BrayTel: +44 (0)207 583 5000 [email protected] BruceTel: +44 (0)207 583 5000 [email protected] de YoungTel: +44 (0)207 583 5000 [email protected] DuffinTel: +44 (0)207 583 5000 [email protected] Gardner-BrownTel: +44 (0)207 583 5000 [email protected] Gayner Tel: +44 (0)207 583 5000 [email protected] GillTel: +44 (0)207 583 5000 [email protected] GorayaTel: +44 (0)207 583 5000 [email protected]

Schemes of arrangement

Contributors:

3

IntroductionWhat is a scheme? 4

Alternative exit optionsMaking an exit 8

StakeholdersManaging expectations 11

TimeframesWhen is the right time to scheme? 12How long do schemes take? 13

Life marketLife restructuring 14

Portfolios and poolsA rescue from the pool 15

Lloyd’sExiting Lime St 16

World applicationsGlobal schemes 17Closure for captives 18

ReservingChange of focus 20

Valuing liabilitiesValue judgement 21

Taxation issuesThe tax implications 23

Information technologyThe impact of IT 24

TablesInsolvent schemes of arrangement 26Solvent schemes of arrangement 27

Mark JonesTel: +44 (0)207 583 5000 [email protected] PugsleyTel: +44 (0)207 583 5000 [email protected] RackhamTel: +44 (0)207 583 5000 [email protected] RothseidTel: +44 (0)1 267 330 2024 [email protected] WardTel: +44 (0)1 267 330 2027 [email protected] WatfordTel: +44 (0)207 583 5000 [email protected] WhitcombeTel: +44 (0)207 583 5000 [email protected]

Gary Bray and Baljit Goraya explain what exactly

s425 schemes are and how they are evolving in the

solvent and insolvent markets

What isa scheme?

For a number of years now,schemes of arrangement(schemes) have been used

extensively when dealing with theunique issues arising in connectionwith insolvent insurance or reinsur-ance companies. The emergence ofschemes as the primary tool of insol-vency practitioners in the insuranceindustry reflects their distinctive fea-tures and inherent flexibility, whichhave enabled the run-off of insolventinsurance businesses to be specifical-ly tailored to the precise circum-stances of each case. In particular,schemes are usually more beneficialto creditors compared to other insol-vency procedures such as liquidationor company voluntary arrange-ments, typically resulting in earlierpayments to creditors than mightotherwise be the case.

In recent years, there have been anincreasing number of solvent insur-ance and reinsurance companiesentering run-off, or placing specificbooks of business into run-off, bothin the UK and overseas. This trendhas been accelerated by increasing

4

Introduction


"

commercial pressures arising fromadverse claims development, poorinvestment returns and increasedoperating costs — particularly forlong tail business — and the increas-ing need to focus on the optimumuse of scarce capital. This is a combi-nation of circumstances and pres-sures that seems set to remain a fea-ture of the landscape for theforeseeable future.

In these conditions, solvent insur-ance companies have increasinglyused schemes as a mechanism foreffecting planned exits from the mar-ket or from specific sectors of it,enabling capital to be released and re-deployed in pursuit of key, or at leastmore pressing, strategic objectives.Schemes have continuously evolvedand been adapted to address theinevitable peculiarities and specificchallenges or issues of each particularsituation. This has frequently under-lined the basic flexibility of schemesand their applicability in varied cir-cumstances, as is demonstrated by thenumber and diversity of schemes thathave been implemented in recentyears (see pages 14 – 19 and 26).

What is a scheme of arrangement?

A scheme is a compromise orarrangement under English law (sec-tion 425 of the Companies Act,1985) between a company and itscreditors or any class of them, whichbecomes legally binding on all credi-tors or any class of them if the neces-sary majority of creditors or class ofthem vote in favour of the schemeand the English High Court approvesit. In practical terms, a scheme iseffectively a ‘deal’ between a compa-ny and its creditors. It is similar, inmany respects, to a plan of reorgani-sation in the US.

There are few statutory require-ments for a scheme and generally itcan be written on any basis that willattract adequate support from poli-cyholders and other creditors, pro-viding great flexibility for insolvencypractitioners, shareholders anddirectors seeking to devise and

implement an exit strategy which isfair and commercially acceptable toall stakeholders involved.

Naturally, there are many partieswith a legitimate interest in the termsof any scheme. Such stakeholdersinclude shareholders, policyholders,service providers, employees, rein-surers and regulators – the flexibilityof schemes allows a ‘deal’ to be for-mulated that strikes an acceptablebalance between the needs of each.Accordingly, each stakeholder mustbe carefully considered and, whereappropriate, consulted during thepromotion and implementation of ascheme to ensure that all perspectivesare considered and all parties satisfiedwith the final outcome (see page 12).

Schemes designed for insolventinsurance companies fall broadly

into two types: those which carry outan orderly run-off, paying a propor-tion of claims as they are agreed(‘run-off’ schemes) and those whichintroduce a wholesale estimation ofall present and future claims (effec-tively a ‘mass commutation’ with allpolicyholders) with a view to makinga final payment to creditors and ter-minating the run-off (‘estimation’,‘crystallisation’ or ‘cut-off’ schemes).

Schemes for solvent insurancecompanies obviously fall into the lat-ter category and such wholesale esti-mation of claims is, in practice,implemented either on a claims sub-mission or claims allocation basis.Under the latter approach, policy-holders are provided with a value fortheir claims based on an actuariallydetermined estimation methodology.In contrast, under a claims submis-sion approach creditors are invited tosubmit claims (including contingentor future claims), together with sup-porting evidence, which are agreed,possibly within a stated actuarial

framework and possibly with theinvolvement, if agreement cannot bereached in the normal course, of anindependent adjudicator.

In this way, schemes can provide aframework for an insurance compa-ny in run-off to accelerate the agree-ment and settlement of policyhold-ers’ and other creditors’ claims and,ultimately, to achieve finality, theholy grail of run-off.

What are the benefits of ascheme?

Although there are a number ofalternative strategies available to aninsurance company seeking to exit amarket (see page nine), these do notnecessarily provide the benefitsafforded by schemes, the mainadvantages of which are typically:

● Finality. Any doubt a policyholderor creditor may have with regard tothe solvency of a company, andwhether its insurance protection willperform, can be removed by ascheme. Similarly, schemes can pro-vide reinsurers with a means ofachieving certainty and finality.

● Flexibility. A scheme can bedesigned to deal with the specific cir-cumstances of each case and the par-ticular needs of the stakeholders.

● Early payment. A scheme willprovide a mechanism for estimatingand agreeing all present and futureclaims against a company allowingcreditors to receive payment earlierthan would be likely if the companywere to run-off its business in thenormal course.

● Run-off costs. Some of the costs ofthe run-off, which may otherwise beincurred in the normal course formany years, and which can thereforebe significant, can be avoided by ascheme. This saving can in turn pro-vide financial benefits to stakeholders.

‘The flexibility of schemes allows a 'deal' to be

formulated that strikes an acceptable balance

between the needs of each stakeholder’

5

Introduction


● Shareholder equity. Residualshareholder value, if any, can berealised at the earliest opportunitythrough a scheme.

In addition to these generic bene-fits, individual schemes can be tai-lored to address specific issues. Forexample, some recent schemes haveincluded a mechanism to safeguardagainst an unexpected influx of a highvolume of unsupported claims. Thismechanism allows a company torevert to a conventional run-off as thebest course of action for dealing withsuch a scenario. A solvent schememay also be designed so as moreactively to involve or engage reinsur-ers by adopting a phased votingprocess. This provides policyholdersand creditors with a greater level ofdirect influence and allows the needs

of shareholders, creditors and rein-surers to be carefully balanced by,amongst other things, encouragingcommercial negotiations and mutually acceptable commutationagreements.

Do schemes have any disadvan-tages?

It would be disingenuous to suggestthat schemes are perfect in all cir-cumstances – they are not. However,the disadvantages are worth noting,not only for the sake of balance, butalso to highlight that they can usual-ly be managed without fundamen-tally undermining the basic appeal ofschemes. In our experience, themain potential disadvantagesencountered are:

● Estimation. It is an unavoidablefact that some policyholders or cred-itors may ultimately receive more orless than the amount they wouldhave received had the companybeen run-off in the traditional man-

ner. However, schemes are designedin such a way so as to ensure, so faras is practicably possible, that theestimation or claims agreementprocess is both reasonable and fair.

● Finality. In order to providefinality, a scheme introduces a bardate by which creditors must submittheir claims. Any creditor failing tosubmit a claim by this date may notreceive payment under the scheme.However, a company will seek toensure that the scheme is broughtto the attention of all creditors,indeed this is also supplemented byvarious legal safeguards, for exam-ple, the obligation to advertise thescheme widely and in appropriatepublications.

● Excluded policies. For either legal,technical or commercial reasons,schemes may not be suitable for alltypes of business. For example, poli-cies that provide protection for com-pulsory insurance, like employers’liability or third party motor liability,which could be eligible for compen-sation from the Financial ServicesCompensation Scheme in the eventof an insurance company’s default,are currently excluded from schemes.

● Safety for policyholders. In a run-off scheme for an insolvent insur-ance company, there might be risksfor those creditors whose claimsmature in the future, if too muchcash were to be paid out early in thescheme. However, initial dividendlevels are usually set cautiously insuch schemes, so that no creditorsshould be prejudiced.

● Loss of liquidators’ remedies. UnderUK insolvency law, there are certaincourses of action available to a liq-uidator if there has been any wrong-ful or fraudulent trading by a direc-tor, the company has given apreference or the company has beenparty to any transaction at anundervalue. These remedies are notavailable to an insolvent companysubject to a scheme outside of a liq-uidation. However, the recent intro-duction of the administrationprocess for insolvent insurance com-

‘Some recent schemes have included a

safeguard against an unexpected influx of a

high volume of unsupported claims’

6

Introduction


panies may change the positionexcept in relation to wrongful orfraudulent trading, thereby reducingthe extent of this potential disadvan-tage. In practice, before promoting ascheme, appropriate investigationswould be undertaken to ensure thatthe loss of any such powers wouldnot result in the loss of materialrecoveries.

A constantly evolving toolSchemes are continuing to evolve inresponse to the increasingly variedchallenges and circumstances beingencountered in the marketplace. Thisdynamic environment has resulted inthe development of innovative, effi-cient and effective solutions for com-plex books of business, which addressthe unique difficulties or circum-stances facing each company.

This is best illustrated by the fol-lowing list of situations whereschemes can be applied:

● Portfolios. Schemes are sufficient-ly flexible to allow them to beapplied to discrete portfolios, such asdiscontinued business or third partybusiness for captives.

● Pools. The application of schemesto portfolios rather than the whole ofa company is particularly usefulwhen dealing with involvements inunderwriting pools. A scheme canbring finality to a pool and can alsobe designed in such a way so as toallow the pool members and theirpolicyholders formally to agree waysof simplifying existing complexarrangements and relationshipscommonly observed in pools (seepage 15).

● Overseas companies. Schemes canbe applied to foreign companies withUK branches and any other compa-ny incorporated outside Englandprovided that there is ‘sufficient con-nection’ with England. In addition,schemes can generally be imple-mented in countries where the legis-lation stems from UK law, such asBermuda, Hong Kong, Singaporeand Australia (see page 17).

● Lloyd’s. The concept of schemescan be extended to Lloyd’s syndicatesand corporate capital vehicles. This isan area where there are potentiallyvery significant development oppor-tunities (see page 16).

● Life companies. Schemes can beapplied to life companies in order toprovide certainty in relation to theunknown element and longevity ofcertain types of life policies (seepage 14).

● Captives, P&I clubs and mutuals.Schemes can be applied to captivesand the concept can also be extend-ed to P&I clubs and mutuals (seepage 18).

● US legislative changes. An oppor-tunity is now available for a solventscheme solution in the US. In 2002,Rhode Island became the first stateto enact a statute that allows a sol-vent company in run-off to reach acourt supervised agreement with allof its creditors to accelerate the com-pletion of a run-off.

● Contingent schemes. A companymay face uncertainty regarding itsultimate solvency. A contingentscheme can provide an effective

means of dealing with such a con-cern. A two part scheme can beeffected where the company oper-ates its normal run-off within a sol-vent scheme until such time as it isdetermined that there are insuffi-cient assets to meet liabilities, includ-ing future liabilities. The schemeincludes a trigger mechanism where-by the company will then pay a pro-portion of claims, thus providingscheme creditors with a seamlessprocess from a solvent scheme to aninsolvent scheme.

● E-schemes. In appropriate cir-cumstances, a company can publishand promote a scheme via a securewebsite, which can also be utilised to

receive and agree claims, offering theprospect of significant cost savings,operational efficiencies and flexibledata collection. Given the typical sizeof scheme documents, particularly inlarger cases with many thousands ofpolicyholders and potential creditors,this can also provide significant envi-ronmental benefits!

As this demonstrates, schemeshave proved to be flexible and adapt-able in the myriad of circumstancesthat can be and are found in theinsurance world — which is whymore and more high profile compa-nies are using schemes as a viableand effective means of achievingfinality. Recent schemes have dealtwith tens of millions of insurance lia-bilities and are progressively playinga part in dealing with the enormousamount of long tail liabilities ema-nating from all over the world, notleast the US. With a carefullyplanned and managed exit, a schemecan be implemented early on in thelife of a run-off, although the precisestrategy and timing will be depen-dent on the particular circumstancesof the business. ●

‘Schemes have proved to be flexible and

adaptable in the myriad of circumstances that

can be and are found in the insurance world’

7

Introduction


Research indicates that theworldwide total for liabilitiesin run-off is in excess of $300

billion, with more entities enteringrun-off each year. There are a num-ber of exit strategies to choose fromand the exit route chosen will often

depend on the objectives of the keystakeholder, the shareholder. Thoseobjectives may not be complimenta-ry, for example, to maximise valueand also to exit in a short time spanand so the shareholder will need toprioritise the importance of eachobjective to reach an acceptable levelof compromise.

There are six main available exitoptions (as shown in Figure 1) and ashareholder should consider carefullyeach option against its objectives.

a) Run-off to expiryb) Aggressive commutationc) Scheme of arrangement d) Portfolio transfer

In assessing the potential of the scheme of arrangement

route to finality it is important to be aware of the range of

alternative options available. Kevin Gill and Emma

Pugsley review the current choice of exit routes

Exit options and ‘improvement’

Figure 1

Decision toenter run-off

Improvement

Solvent exit

Run-off

Scheme

Portfolio transfer

Reinsurance

Sale

Aggressivecommutation

Claims

Collections

Commutations

Reviews

Risk Management

ITStrategic

review

8

Alternative exit options


Making an exit

e) Reinsurancef) Sale

Each option is briefly describedand considered below. Any companyseeking to exit the market will needto explore and consider each optionin detail. In particular each can havedifferent tax implications, whichmay alter the merits of the solution(see page 23).

a) Run-off to expiry

The run-off of insurance business cantake many years, especially in thecase of asbestos losses which couldtake over 50 years to mature.Continuing a properly managed run-off to expiry means that only validclaims are settled to policyholders,ensuring that policyholders get theactual benefits of their policies. Thisalso ensures that the reinsuranceasset is fully and properly utilisedreacting appropriately to each inwardclaim. Cash outflow can be managedon an orderly basis and techniquesadopted to minimise outflow whichmay be necessary in some cases.

For many organisations, however, along drawn out run-off is not attrac-tive. There will be the continual riskof further claims deterioration,increased failure of reinsurers and theongoing costs of the run-off, whichwill get proportionally higher as theclaims liabilities tail off. Furthermorethe shareholders will be restricted inhow much capital they may removefrom the business and will face theprospect of having much of their cap-ital tied up for many years.

b) Aggressive commutation

An aggressive commutation strategyinvolves collapsing the run-off byundertaking a strategic programmeof commutations to remove inwardliabilities and exposures and tosecure value from the outwards rein-surance programme. There will beheavy reliance on the efficiency andeffectiveness of the commutationsteam to perform the commutationsin an accelerated timeframe. In addi-

tion, the systems and reporting facil-ities will need to be able to supportthe requirements of an intense pro-gramme of commutations, for exam-ple with the availability of a principalbased ledger.

Although this strategy can be effec-tive in reducing the size of the run-offand reducing the risk of inwardsdeterioration and reinsurer failure,unless commutations are performedwith each and every policyholder thetimescale to finality will be the sameas under option a), normal run-off toexpiry. This strategy is likely to beginwith a focus on the larger balances,and over time, as only the small bal-ances remain, this approach willcease to be cost effective. Followingan aggressive commutation strategy,it may be appropriate to implementan alternative exit strategy, such as ascheme, to bring about finality.

c) Scheme

A finality scheme is a global commu-tation with all creditors which usessection 425 of the Companies Act

1985 to effect a compromise withcreditors. Essentially a scheme is a dealthat is presented to all known andpotential creditors for their approvalthrough a meeting and vote of credi-tors. Once approved by the creditorsand sanctioned by the court, a schemebecomes binding on all creditors. Thepurpose of a finality scheme is to offera fair and transparent process to cred-itors to have their policies valued on aonce and for all basis.

A scheme can be completed in a rel-atively short timescale, thereby avoid-ing some of the disadvantages of along-term run off, realising any value

for the shareholder at an earlier stagethan might otherwise be possible. Akey issue with schemes, however, isthat they do not bind pure debtors,although this can be overcome bycareful management of reinsurers.

Schemes can be especially attrac-tive when used in combination withan accelerated commutation strategy.

d) Portfolio transfer

A portfolio transfer can be effectedunder Part VII of the FinancialServices and Markets Act, whichthrough a court driven processmoves the liabilities, and attachingproperty (reinsurance asset) toanother company.

This is a relatively quick process, sub-ject to finding a company to take onthe risks of the run-off at an agreeableprice, and achieves finality for thetransferor in respect of the liabilitiestransferred. However, the companyaccepting the portfolio will seek toprice the transfer commensurate to therisk transferred to give it an opportuni-ty of making a profit. This is likely to

reduce any value that the transferormight have obtained from the run-off.

e) Reinsurance

Obtaining a stop loss reinsurance ofrun-off business is another relativelyquick solution, following due dili-gence by the prospective carrier andnegotiation and agreement over theterms of the contract.

Depending on the type of businesswritten, the costs of this option maybe prohibitive, as the market for cer-tain business, eg. that containingasbestos, is very restricted. Whilstthis exit is intended to provide finan-

‘Following an aggressive commutation strategy,

it may be appropriate to implement an

alternative exit strategy, such as a scheme, to

bring about finality’

"

9



cial finality it does not give absolutefinality because most reinsurancepolicies are not unlimited and therisk of reinsurer failure remains,however slight. In addition,although the ceding company typi-cally gives up control of the run-off,it may retain an administrative bur-den as it monitors and accounts forthe stop-loss arrangement.

f) SaleThe market for run-off sales hasincreased dramatically in recent years,a trend which is set to continue asboth the supply of businesses in run-off and the number of specialist run-

off business acquirers grows. The saleoption can be very attractive, it canprovide the vendor with certainty andtrue finality since it passes over a com-pany in its entirety to the acquirer(subject to any warranties). Althoughthere can be a significant amount ofpreparation work required for a sale,involving the marshalling of relevantdocuments, this exit can be a relative-ly quick process, subject to finding abuyer willing to acquire the companyat an agreeable price and regulatoryconsent.

As with a portfolio transfer thecompany taking on the run-off willwant to ensure that it has adequate-ly valued the risks inherent in therun-off to give itself a reasonableopportunity of profit from the acqui-sition. This valuation is likely to be ata heavy discount to the net assetsshown in the balance sheet of thecompany being sold and the carryingvalue in the vendor’s balance sheet.

Managing the run-off:improvementA number of the exit options detailed

above will involve retaining the busi-ness for a period of time, dependingon the strategy that is adopted andthe time necessary to implement anexit solution. There are a number of‘improvement’ strategies that can beused to minimise the costs of theoperation, as per Figure 1.

The key areas for improvementand review will include:

a) Run-off managementb) Claims managementc) Collections and commutationsd) Third party relationships and

outsourcinge) IT

As indicated in Figure 1, an exitstrategy may be selected as theappropriate strategy following a peri-od of improvement.

a) Run-off management

Properly controlling discontinuedbusiness can minimise run-offoperating expenses and mitigatethe risk of underwriting deteriora-tion. It will be important to ensurethat any outsourcing contracts areproperly worded and there are ade-quate controls, procedures andmonitoring. Establishing an appro-priate strategy for the run-off willbe key to the success of the opera-tion, and may include a decisionregarding exit, its timings andmethod.

b) Claims managementAlthough claims represent around80 per cent of the total expenses ofan insurer, attention is often driventowards fixed and variable costreduction exercises, rather than onre-engineering the claims depart-ment and processes. Improvement in

this area could therefore have amaterial impact.

c) Collections and commutations

Two of the exit options detailedabove, aggressive commutation andcollection, for companies or portfo-lios with material amounts of rein-surance, will involve using the skillsand strategies involved in thisimprovement area. As standalonestrategies, however, they can bevery effective in improving theresults of an organisation, and withcareful planning can realise signifi-cant rewards. In some instances,effective strategy in this area canprepare the run-off for exit via ascheme.

d) Third party relationships and

outsourcing

Many insurers and reinsurers havetaken advantage of an opportunityto outsource all or elements of theirwork to third parties. Where prop-erly controlled these arrangementscan be very beneficial, allowing thecompany to focus on its key strate-gic areas. In some cases, however,these relationships can be financial-ly unsatisfying, and careful reviewand subsequent improvements inthese areas can be beneficial to thecompany.

e) IT

An effective IT strategy and appro-priate IT systems are important toolsfor the company, both for the peri-od preceding exit and in someinstances in assisting with the exitprocess. A good example of this is inthe development and implementa-tion of a principal based ledger. Theavailability of a system which canreport on this basis will be useful forproviding valuations for conductingad hoc commutations during therun-off period. It will additionallybe particularly important for anaggressive commutation strategy,and also for a scheme in determin-ing key creditors and debtors forstrategy purposes. ●

‘The sale option can be very attractive, it can

provide the vendor with certainty and true

finality since it passes over a company in its

entirety to the acquirer’

10



Each scheme will have many stakeholders. Clare Whitcombe explains

who they are and how their interests should be addressed

Throughout the life of a run-off, understanding stakehold-er perspectives and managing

stakeholder expectations is key toensuring things run smoothly. Thesestakeholders include: shareholders,directors, run-off managers, credi-tors, reinsurers, regulators and staffto name but a few, and it is critical tounderstand the needs and motiva-tions of each stakeholder when theexit strategy is being formulated.

Each stakeholder should be consid-ered during the planning, promotionand implementation phases of ascheme to ensure that all perspectivesare considered. Where there are con-flicting needs these must be carefullyconsidered and managed to ensurethat the deal presented balances theneeds of each stakeholder and is a fairsolution for everyone. Each schemewill generally involve the same typesof stakeholders but the motivationswill typically be different.

The process will start with discus-sions with the directors in order tounderstand the business issues andtheir expectations in relation to thescheme. Shareholders will obviouslyneed to approve any exit strategybefore it can be implemented andthey must understand the processincluding the risks and rewards.

We would usually start with a blanksheet of paper and shape out what thedeal looks like depending on the size,nature and complexity of the business.

Once we have a deal sketched out,soundings will be taken from keystakeholders to ensure that theirconcerns and needs are reflected andthe scheme will be shaped to reflect

these. The important thing toremember is that if any key stake-holder rejects the deal it will notwork, so fairness to all is imperative.

A key stakeholder is the regulator.As long as a scheme satisfies the ulti-mate requirement of fairness, theFinancial Services Authority (FSA, theUK regulator) will generally be sup-portive of a scheme. Even if the com-pany falls outside its jurisdiction, theFSA will need to be satisfied that UKcreditors are not adversely affected.Support from any relevant overseasregulator will, of course, also be vital.

Policyholders will want to knowhow much and when they can expectto receive payment under the scheme,and whether the claims agreementand adjudication processes are trans-parent and result in fairness. Takingearly soundings from key creditors isvital to ensure they understand andsupport the scheme proposals.

A scheme benefits reinsurers in thatit gives them certainty and finality, butif a company has a significant reinsur-ance programme it will need toembark on a carefully devised and exe-cuted strategy of pre-scheme commu-

tations or discussions with the mainreinsurers to ensure they understandthe scheme and to obtain their buy-in.

Alternatively, a scheme can bestructured so that they are able toparticipate. Reinsurers are asked toindicate what sums they are willingto pay and creditors can be given theopportunity to decide whether suchoffers are satisfactory or not. If sumspledged by reinsurers are insufficient,in the eyes of the creditors, they canvote to reject a scheme which seeksto crystallise all liabilities and chooseinstead to return to the run-off. In

this way, creditors retain a degree ofcontrol.

Staff usually have vital experienceand knowledge in relation to thebusiness and will be key in the plan-ning and implementation of ascheme. Staff retention and bonusprogrammes can be designed toensure that the risk of loss of key staffis minimised and motivation is main-tained. Given the increased populari-ty of schemes, staff have the addedbenefit of gaining valuable and prac-tical first hand experience of imple-menting these exit strategies. ●

Managing expectations

Businessin run-off

Regulator

Cedants/Policyholder

Guarantor

Staff

Shareholders

Reinsurers

11

Stakeholders


When is the righttime to scheme?

Neil Gayner examines the various factors involved in choosing when to

initiate a scheme

Early schemes were contemplat-ed only for very old run-offs inorder to release any surplus

capital and bring finality and certain-ty. Market perception of schemes isnow maturing. Schemes are nowseen as the end phase of an integrat-ed and focused strategy for discontin-ued business. As a result, sharehold-ers are asking at what point in theimplementation of the strategyshould a scheme be developed?

Unfortunately, there is no simpleanswer to the question. In fact, itgenerates a number of further ques-tions starting with the overall share-holder objectives. Are these to max-imise return to the shareholder,preserve corporate reputation, min-imise risk or possibly a host of other,sometimes conflicting, objectives?

Other factors to be taken intoaccount on timing of the schemeinclude:

● The classes and type of businessin the portfolio and the ability actuar-ially to estimate ultimate outcomes ata contract level. How mature is thebook? Are there still in-force policies?

● The nature of the run-off to date.How aggressive has it been? Havesome of the largest and most volatileexposures been commuted?

● The policyholder/cedant base – isit dominated by a small number or isit fairly evenly spread? If the former,

what is their likely attitude to thescheme?

● Are there any ‘show-stoppers’ inthe portfolio that need to be excludedfrom the scheme or dealt with first?For example, a scheme includingemployers’ liability on a losses occur-ring basis would probably meet resis-tance from the FSA, and personal linesbusiness, whilst capable of estimatingas a class, may not lend itself to a fairIBNR allocation at policyholder level.

● The reinsurance programme –how heavily reinsured is the portfo-lio, with what types of reinsurance,how much set-off is there, are there‘difficult’ reinsurers and what is thequality of the security?

● What is the solvency and reputa-tion of the company being schemed?

● Are shareholders prepared topay a premium for certainty?

● How much current litigation isthere?

● Are there major unresolvedmarket issues? For example, it willcurrently be difficult to crystalliseWorld Trade Center property lossesuntil the number of losses issue hasbeen finally resolved.

In our experience, having beeninvolved in the majority of schemesto date, we have found:

● Most reinsurers will pay on thebasis of crystallised liabilities if theybelieve the process to be fair.

● Reinsurers generally welcomefinality and certainty. The key mes-sage is consult with key reinsurers inadvance of implementing the scheme.

● Most cedants will be happy toachieve finality on fair terms, espe-cially if the scheme includes pay-ment of a premium, possibly in theform of reserves undiscounted fortime value of money, or, if there isany doubt about the long termclaims paying ability of the companybeing schemed. Again, the key mes-sage is to consult with key cedantsand gain their support before thescheme meeting takes place.

● It is important to consult with,and consider attitudes and concernsof, other key stakeholders, includingregulators and staff.

● Schemes can deal with active lit-igation or unresolved market issuesthrough provision of a parkingmechanism.

In conclusion, there is no singleanswer to the question of when is theright time to implement a scheme;the answer depends both on the keyobjectives of the shareholders andthe characteristics of the portfolio.However, the single most importantfactor is probably the nature of theliabilities, and the answer is as soonas the portfolio is sufficiently maturefor reasonable actuarial estimates tobe developed at cedant level. ●

12

Timeframes


Andy Ward explains the timescales involved in schemes

How long do schemes take?One of the major advantages

of schemes of arrangement istheir flexibility in that the

provisions and timescales of a schememay be drafted to suit the particularcircumstances of the company in ques-tion. Consequently, because of theunique circumstances of each schemecompany there is no set timeframefor the completion of a scheme,although there are fundamentalstages common to each scheme.

In broad terms, the two main typesof scheme are:

● An insolvent reserving scheme● A crystallisation scheme for an

insolvent or solvent companyReserving schemes are generally

used where there are long tail liabili-ties and/or considerable uncertaintywithin the company’s data. Thereserving scheme will make regularsmall value dividend payments tocreditors with agreed claims, whilstreserving cash for payment of othercreditors’ claims which will not mate-rialise until some time in the future.

Crystallisation or estimationschemes seek to establish the compa-ny’s ultimate liabilities in early course– largely through the adoption of actu-arial techniques – and hence acceler-ate the closure of the run-off. Thereare of course fundamental featureswhich are common to all of theschemes and the key stages for an esti-mation scheme are shown in Table 1.

The the process of drafting thescheme and distributing the docu-ments to creditors is common toboth schemes and typically wouldtake between three and six months,depending upon the legal complexi-ties involved in the scheme drafting.

It is often stated that schemes todayare essentially in a boilerplate formatand can be produced very quickly.Whilst this is true to a certain extent,and the number and variety ofschemes already produced assists indrafting, each new scheme companyhas its own idiosyncrasies which willneed to be catered for within thedrafting process.

Once the scheme has been draftedand distributed to creditors, atimetable will be set for the remain-der of the scheme and will initiallyprovide a period for creditors to con-sider the merits of the scheme and toreturn proxy forms voting for oragainst the proposal. Once more, atypical timeframe for the return ofproxy forms will be in the order ofthree months – a period which allowsdomestic and international creditors

a reasonable amount of time to con-sider the position and cast their vote.The deadline for proxy form voteswill be quickly followed – usuallywithin one week – by a meeting ofscheme creditors to vote on the pro-posal. Creditors may attend in personat the scheme meeting or proxy voteswill be included in the voting process.

Assuming the scheme is voted forby the requisite majority of creditorsattending the scheme meeting inperson or by proxy, then the schemewill normally be ratified by the courtin the relevant jurisdiction withinone week. On receipt of courtapproval the scheme becomes effec-tive and will follow the timetable setout in the document.

The next important timing issuefor an estimation scheme the bar date for the filing of claims. This is a key date that will be determined by a number of factors:

● Where the scheme involves asophisticated actuarial estimation ofliabilities, then the bar date may bein the region of six to nine monthsto allow creditors to spend moretime in evaluating their policies andreviewing the actuarial projections.

● Where data quality may be poor orwhere a company is small and has rel-atively few remaining creditors, then asubmission style scheme may be usedwhere creditors send in their claims foradjudication by the company and itsscheme advisers. Typically the bar datesmay be as short as three months.

Following the agreement of claims itis generally a short time – a month ortwo – before payments can be made tocreditors. Once payments have clearedthen the scheme may be terminated. ●

13

Timeframes


Scheme meeting

Court sanction

Scheme effective date

Bar date

Payment

Clause agreementand adjudication

Scheme termination

Distribute scheme

Proxy form return

Scheme drafting➧➧

➧ ➧

➧ ➧

➧ ➧

➧

Schemes of arrangement can also be used in the restructuring of life

assurers. Nigel Rackham considers the issues and potential solutions

for troubled life companies and the implications of applying a scheme

Many life companies are fac-ing serious business issues,which are in some cases

threatening the solvency of the com-pany. Some examples of these are:

● Erosion of capital due to fallingasset values which are not matchedto policyholder obligations becauseof guaranteed benefit terms.

● Exposure to other guaranteedbenefits (for example guaranteedannuity options) due to falls in interest rates and improved mortality.

● Continued threat to solvencythrough asset volatility on a weak-ened capital base.

● Pressure on margins from stake-holder type products, possibly soldby new entrants to the market withcheap and flexible product distribu-tion and/or critical mass.

● Costs arising from mistakes ofthe past, in particular mis-selling.

● Because of capital strain market-wide it is difficult to find reinsuranceat an acceptable price for mortalityrisk and it is also hard to find a pur-chaser for an ailing fund.

In turn the impact on policyholdershas been significant:

● The fund may have closed tonew business, lower (or no) bonusesdeclared, charges increased andpenalties imposed on early surrender.

● An exit from volatile asset class-es whilst protecting solvency givespolicyholders little opportunity forupside, indeed they may be lockedinto values at what may prove to bethe bottom of the market.

● Solvency concerns mean policy-

holders do not have the security theythought they were buying into.

Depending upon the circum-stances there are a number of mea-sures which can be taken to stabiliseor strengthen a fund. Some involve acapital injection (or pseudo-capitalsuch as a contingent loan or financialreinsurance). Some element of riskreduction can be achieved by truerisk transferring reinsurance but thisis likely to be costly due to the lack ofappetite for some life risks in themarket. It is also possible to usederivative contracts to hedge somemarket risks, albeit again at a cost.

There are also restructuring solu-tions amending policy terms whichimprove the position of the fundwhilst policyholders are not justdealt with fairly but can share in thebenefits. For example:

● Removing certain future guaran-teed benefits and providing suitablecompensation. This may find favourwith policyholders whilst removingthe reserving and capital require-ments on the fund. This is the solu-tion achieved by Equitable Life.

● Ring-fencing existing policyterms but offering more flexiblealternatives for future premiums.

● A wholesale conversion fromwith-profits to unit-linked funds.

The latter two options more closelyalign risk and reward. Policyholderscan choose a more flexible invest-ment vehicle, offering upside oppor-tunity, whilst also accepting the mar-ket risk. The fund has reduced riskand hence reduced capital require-

ment and can share this benefit withpolicyholders. Reducing widely dif-fering policy terms within a groupmay make the business administra-tively easier to manage as well.

There are a number of issueswhich have to be addressed whichcan be complex. For example tax,both for the company and for policy-holders, can be a particular stickingpoint (see page 23). The regulatorwould also need to be involved.

Pros and cons of a schemeIt is possible to achieve some level ofrestructuring of policy terms througha portfolio transfer providing thecourt is satisfied that the restructur-ing is necessary. Although a transferto a third party may not be possiblesome intra-group restructuring maybe possible. This does not need poli-cyholder consent although policy-holders still need to be circularisedand can be heard at the court hearingnecessary to sanction the transfer.

An apparently easy solution is toseek individual agreement from poli-cyholders to a change in terms. Inpractice, agreeing the documentationand dealing with policyholder queriesmay make the process as complex asa scheme solution. The major draw-back is that inertia and a lack of poli-cyholder understanding may makethe take-up rate of any option low. Asolution through a scheme ofarrangement offers the beauty ofbinding all the affected policyholdersonce the requisite majority isobtained. ●

14

Life companies


Life restructuring

One aspect of a scheme’s flexi-bility is that only the definedliabilities of the portfolios are

dealt with. For example, some liabil-ities might be valued through a cut-off scheme, whilst other liabilities areleft to run-off normally. In addition,a scheme can define which assetssupport the scheme liabilities, pro-viding a company with the ability toringfence liabilities of discontinuedbusiness.

The ability to limit a scheme to adefined portion of a company’s liabil-ities is particularly useful for dealingwith business written throughunderwriter or broker pools, provid-ing participants with a facility forexiting one of the most problematicareas of run-off. Pools were regular-ly used for many decades to provideinsurers and reinsurers with thechance to become involved in writ-ing books of business in geographiesand/or classes of business that wouldotherwise not have been available tothem. A further attraction of poolarrangements was the opportunityto share in overhead costs, a prospectthat was particularly inviting whenentering new areas of business.

As pools evolved they becamemore complicated: for example,underwriting participants came and

went over time, underwriting yearswere ‘closed’ by reinsuring intoother underwriting years andfronting on behalf of other partici-pants became commonplace. Thepopularity of pools and underwritingagencies has now declined and agreat number are now in run-off.Furthermore, a number of poolsnow contain one or more membersthat are insolvent, compounding thecomplications of pools and bringingits own difficulties.

A scheme can be tailored to dealwith the particular circumstancesand issues facing the participants of apool and is particularly useful forsimplifying and streamlining thelegal construction of the pool to thebenefit of the pool participants andpool creditors.

Whilst an individual pool membercan implement a scheme for its ownportfolio in a pool, it can be muchmore powerful and straightforward ifall pool members seek a scheme exit.This is what the surviving membersof the Dunedin underwriting poolchose to do, with each effecting ascheme for their participation in thatpool, resulting in the first solventscheme for a whole pool in the UK.

This scheme also demonstrated theflexibility of schemes as it allowed

the pool members and creditors for-mally to agree ways of simplifyingthe complex arrangements and rela-tionships that had built up duringthe life of the pool. The pool origi-nally consisted of five companies,but one was subsequently dissolvedwith the four remaining participantsagreeing between themselves toshare that member’s pool liabilities.The scheme formalised this sharingarrangement with the pool creditors,enabling all of the pool liabilities tobe dealt with in one scheme.

An important issue for the mem-bers of the Dunedin pool was foreach member to retain the severalliability that each enjoyed in relationto their original participations, sothat each did not become responsiblefor another member’s liabilities. Thescheme provided that each memberwas severally liable for its ‘schemedefined’ participation and was notjointly liable for other members’ liabilities.

Schemes can be drafted to bringfurther benefits to the participantsand creditors by catering for theimpact of any of the pool membersbecoming insolvent, thereby avoid-ing some of the problems and thehiatus surrounding the onset ofinsolvency of a pool member. ●

15

Portfolios and pools


The flexibility of schemes means they can be applied

to discrete portfolios of business. They are also useful

when confronting the complexities of pools, say

Diana Gardner-Brown and Emma Pugsley

A rescuefrom the pool

Schemes may also be applied within the Lloyd’s market

to hasten finality, explains Kevin Gill

Exiting Lime StThe Lloyd’s of London market is

faced with the same run-offissues as the company market.

It has to face and manage theprospect of deteriorating losses, therisk of reinsurance security failureand the ongoing overhead costs ofperforming the run-off. Traditionally,the Lloyd’s market has dealt with itsrun-offs and open-year exposuresthrough a mixture of reinsurance toclose (RITC), commutations and run-off to expiry. More recently it hasbeen able to take advantage of theportfolio transfer options provided byPart VII of the FSMA 2000 to transferrun-off business out of the Lloyd’smarket.

Nevertheless, there are approxi-mately 70 syndicates in run-off, andit would seem that the current exitroutes are not providing the capitalproviders at Lloyd’s with the desiredexit and finality that could benefitthe market. Many regard the tradi-tional closure route of RITC as beingtoo expensive, giving away profits toa reinsurer that could be retained forthe current capital providers. Is therenow an opportunity for a scheme ofarrangement to provide finality andcertainty to Lloyd’s run-offs?

A solvent scheme is no more than adeal whereby an underwriter seeks toarrive at a fair value with its creditors(policyholders) for its current andfuture liabilities and to settle those lia-bilities in full at an earlier stage thanwould be possible in a run-off. The

benefits that a scheme provides to theunderwriter and policyholder are nodifferent than those derived fromschemes in the company market.

Distinguishing featuresThere are two distinguishable fea-tures between the Lloyd’s marketand the company market.

The first is its capital providers. TheLloyd’s market is characterised bypart of its capital being provided byindividuals, rather than companies.

The second is the Lloyd’s franchise.The capital providers and managingagents work under the name ofLloyd’s and their actions affect notonly their own fortunes, but alsothat of the Lloyd’s market. How dothese two features affect the abilityto implement a scheme?

Since a scheme is a Companies Actmechanism that allows companies tocome to an arrangement or compro-mise with its creditors, where a cor-porate vehicle provides the capitalon a syndicate then technically it willbe able to use a scheme to come to acompromise with its creditors (ie. thepolicyholders). However, part ofLloyd’s capital is provided by naturalnames and schemes are not availablefor individuals. To deal with this,natural names’ liabilities need to betransferred from the natural namesinto a corporate body. That companycan then implement a scheme. Oneway to move the names’ liabilitieswould be by way of a business trans-

fer under Part VII of the FSMA 2000,although there are other ways ofachieving a similar result.

With the Lloyd’s brand being afranchise, any company promoting ascheme in the Lloyd’s market willneed to be mindful of the other stake-holders benefiting from Lloyd’s’ rep-utation. It will be important to dem-onstrate that solvent schemes at leastuphold the reputation of Lloyd's,given the fundamental importanceof Lloyd's never having failed to paya claim in full. A solvent scheme canprovide clear financial benefits to themarket and in addition it also pre-serves and indeed can enhance Byensuring that the fair value of pre-sent and future claims are paid infull, Lloyd's can demonstrate positivesteps to bring finality to its run-offbusiness. A scheme allows policy-holders to be paid in full at an earli-er stage than would otherwise benormal, providing policyholderswith certainty and value from theirpolicies in an expeditious fashion.

With run-off managers now seek-ing proactively to manage their run-offs to provide value and benefit totheir clients, the shareholders of anunderwriter, they are exploring andimplementing schemes to bring clo-sure to run-offs. This enthusiasm hasextended to the Lloyd’s market, witha number now showing interest inwhether a scheme can be used tobring finality and certainty to a run-off within Lloyd’s. ●

16

Lloyd’s


Although solvent schemes in the UK are governed by UK

legislation it is not only UK-domiciled companies that can

benefit from them. Mark Jones and Andy Rothseid

examine the wider geographic applications of section 425

of the Companies Act

Globalschemes

"

Many commonwealth andex-commonwealth coun-tries originally built their

own corporate legislative structurearound that of England. This meansthat corporate legislation in coun-tries such as Bermuda, Hong Kong,Singapore, Gibraltar and Australiainclude provisions that are very sim-ilar to that of section 425, and there-fore schemes, both solvent and insol-vent, can be implemented in thesecommonwealth and ex-common-wealth countries.

There are several precedents forschemes for insurance companiesdomiciled in these countries. Two ofthe very early solvent schemes,namely for Scottish and Common-wealth Insurance Company Limited(now dissolved) and Trent InsuranceCompany Limited, were based onsection 99 of the Companies Act inBermuda. The solvent scheme forRamus Insurance Company Limitedwas also based on the same law inBermuda. The level of insurance op-erations in run-off in Bermuda wouldsuggest that additional Bermudian

solvent schemes are likely to follow.As far as other countries are concern-ed, a scheme for three Hong Kongsubsidiaries of the insolvent HIHInsurance Group was implementedlast year based on section 166 of theHong Kong Companies Ordinance(the first scheme for an insurancebusiness based in Hong Kong).

Foreign companiesPricewaterhouseCoopers recentlyadvised on a particularly innovativeapplication of UK legislation in orderto implement solvent schemes for fivesubsidiaries of the ING Group. Thisapplication involved, surprisingly fora solvent scheme, the Insolvency Actin England.

Under section 221 of theInsolvency Act, any company incor-porated and domiciled outsideEngland may be wound up inEngland, provided that there is ‘suf-ficient connection’ with England.

A most important legislative link isthen made. If there is jurisdiction fora foreign company to be wound upin England, then there is jurisdiction

for the court in England to allow fora section 425 scheme to be imple-mented in England for that foreigncompany.

What is considered to be sufficientconnection with England for thepurposes of winding up a foreigncompany has become more settledover time. It has always been consid-ered as ‘sufficient’ if the companyhas carried on business in England,whether it is based in England or car-ried on the business through abranch in England. Therefore themost obvious application here wouldbe for a foreign company wishing toimplement a solvent scheme for itsUK branch that operated in theLondon market.

However, the solvent schemesimplemented for the five subsidiariesof the ING Group mentioned abovefurther clarified the position. Four ofthe ING companies were Dutch andone Australian, and all wrote busi-ness in the London market in theperiod from the 1950s to 1984, inone case into the 1990s. As a result,the policyholders, cedants and rein-

17

World applications


surers of all five companies includedparties that were based in England.For each of the five companies theproportions that these parties basedin England bore to those elsewherewere not insignificant, and thereforeall five companies could potentiallybe wound up in England under sec-

tion 221 of the Insolvency Act.Therefore all had sufficient connec-tion with England, and hence sol-vent schemes under section 425were possible. Furthermore, three ofthe companies had continuing busi-ness that they wished to be excludedfrom the schemes. The schemes for

these companies were successfullyimplemented on 20 December 2002.

A section 425 scheme will bind allcreditors of a company who aresubject to the jurisdiction of theEnglish courts. It should be noted,however, that a scheme will not beenforceable against a creditor out-side England, except to the extentthat such creditor takes part andreceives dividends under thescheme.

This means that a section 425scheme will not on its own be suffi-cient to prevent a non-Englishcreditor from obtaining judgementin any proper non-English jurisdic-tion and then enforcing such judge-ment against the assets of the com-pany anywhere in the worldoutside England. However, this canbe mitigated by the companyobtaining further protection fromthe courts of other countries wherecreditors and/or assets are based.This involves applying to the courtsof the relevant countries to seektheir recognition of the scheme.

Many of the schemes that havebeen implemented to date haveinvolved the company obtaining apermanent injunction in the USunder section 304 of the USBankruptcy Code. This has providedprotection from parties potentiallyseeking to take action that are eithersubject to US jurisdiction or are seek-ing to take action in the US.

Therefore where a foreign compa-ny has sold its insurance and/or rein-surance products into England, forexample through the London mar-ket, whether or not it has a branchbased in England, provided that theproportion of its policyholders,cedants and reinsurers based inEngland compared to those basedelsewhere are significant, and there-fore that company is capable of beingwound up in England, then a section425 scheme could be implementedin England for that company.Additional protection in other juris-dictions can also be sought if deemednecessary.

18

World applications


Closure for captives

The last few years has seen a steady growth in captive insurance companyformations of around five per cent per annum, with the four most populardomiciles being Bermuda, Cayman, Guernsey and Vermont. Surprisingly,despite numerous new captives being licensed each year, the total numberof captives has remained around 4500 over the last few years, due to anequivalent number entering run-off or, worse still, liquidation.

The ever changing corporate environment has fuelled the captive run-offmarket: mergers, acquisitions, sale of companies with captives, change ofdomicile or a change in business strategy can result in captives no longerbeing needed to support the new venture or its strategic direction. Theconsolidation of risk management programmes of numerous captiveswithin a group of companies can also result in redundant captives.

The tax benefits available to captives are also reducing (with the USCongress considering actions to close the ‘Bermuda tax loophole’). UKparent companies with overseas captives are affected by the controlledforeign company rules attributing income from subsidiaries in low taxjurisdictions to UK taxable profits.

This myriad of changes has created a new and growing run-off market,but little headway has been made to address this issue.

Achieving finalityDespite the increase in popularity of schemes within the run-off insurancemarket, until very recently this exit mechanism has not been mirrored inthe captive market as a tool for achieving finality. In 2003, Ford becamethe first company to successfully promote and complete a scheme forthird party business written by its captive Transcon, further demonstratingthe wide application of schemes and paving the way for increasedrecognition and acceptance of schemes in this market.

The diverse and flexible nature of schemes allows companies to achievefinality for the company as a whole or for a portfolio of the company’sbusiness, making this a highly attractive exit option for captives withrun-off business.

The numerous advantages resulting from use of a scheme also extendto captives. Substantial savings in run-off costs, which would otherwise beincurred in the normal course for many years, can be made. Finality is alsoachieved, therefore removing any doubt regarding the solvency of thecaptive. A scheme provides a mechanism for crystallising present andfuture claims against the captive, creating certainty and facilitating earlierpayments to creditors, thus resulting in the earliest possible release to aparent company of any residual value from a captive’s business in run-off.

Baljit Goraya

Rhode Island In 2002, Rhode Island became thefirst US state to enact legislation toallow a solvent insurance or reinsur-ance company in run-off to reach acourt-supervised agreement, knownas a ‘commutation plan’, with all ofits creditors in order to bring finalityand certainty to its run-off.

The legislation itself is very similarto section 425 in the UK. In fact, itwould appear that the legislatorsmodelled the legislation on section425 in the UK and section 99 inBermuda in their drafting.

In order to implement a RhodeIsland court-supervised commuta-tion plan, a company must :

● Have property and casualty lia-bilities.

● Be domiciled in Rhode Island.● Have ceased underwriting new

business.● Be renewing business only as

required by law or contract.

If a company meets all four ofthese requirements then it mayapply to the Superior Court for anorder implementing a commutationplan. Before making such an applica-tion to the court, the companywould review the plan with theRhode Island Department ofBusiness Regulation (theDepartment), and its compliancewith regulations issued by theDepartment, in order to ensure itssupport.

As with UK solvent schemes, acommutation plan does not imposeany obligation on the company’sreinsurers. Therefore, the company

proposing a commutation planwould be wise to seek to reachagreements with its reinsurers priorto proposing such a plan.

If the company meets all the con-ditions imposed on it, and obtainsapproval from the Superior Courtthen notice will be sent to all inter-ested parties and, as with UK

schemes, all creditors will be giventhe opportunity to vote on the planat a creditors’ meeting.

Creditors, policyholders, reinsurersand guarantee associations may filecomments or objections with thecourt. Therefore, it is important thatthe company has taken soundingsfrom all the key parties and reactedaccordingly in drafting the plan. Inorder to be implemented, the planmust first obtain the approval of 50per cent in number representing 75per cent in value of liabilities of allcreditors or class thereof voting.Once this is achieved the court will

then enter an implementation order,subject to the comments and objec-tions made to it by creditors and pol-icyholders, making the commutationplan effective.

Once payments have been made toall creditors under the plan, applica-tion will be made to the court for itto enter an order of dissolution,releasing the company from any fur-ther liabilities, and allowing the com-pany to release its capital to its share-holders.

A foreign company (foreign to

Rhode Island that is) wishing to imple-ment a commutation plan would haveto redomesticate to Rhode Island.Depending on the particular state (orcountry) involved, the companywould have to obtain approval fromboth its current state (or country) ofdomicile and Rhode Island. In orderto accomplish this it would need tosatisfy the Department, and possiblyits current domestic regulator, that it,among other things, had sufficientreserves to meet its liabilities.

This statute certainly represents anew level of innovation in the USinsurance run-off market, and is aninnovative and proactive measure toaddress the problems posed by aninsurance business in run-off. At thetime of writing, two companies inrun-off have applied for redomesti-cation to Rhode Island. When theredomestication has been effected,those companies will be the first eli-gible to take advantage of the newstatute. It is likely that a number ofother companies are also now con-sidering the Rhode Island statutoryprocess.

ConclusionRedomestication in order to takeadvantage of scheme-like legislation,such as that found in the UK, com-monwealth and ex-commonwealthcountries and the US, is likely to

become more popular. In fact coun-tries like Gibraltar, which also hasscheme legislation similar to that ofEngland, and states like Rhode Islandpositively encourage it.

It would appear that as more andmore companies take advantage ofscheme legislation, their adviserscome up with innovative ways ofdoing so, and the benefits of schemesbecome more apparent to the insur-ance industry, it is likely thatschemes or commutation plans willtake off within the next few years. ●

19

World applications


‘Redomestication in order to take advantage of

scheme-like legislation, such as that found in

the UK, commonwealth and ex-commonwealth

countries and the US, is likely to become more

popular’

‘This statute certainly represents a new level of

innovation in the US insurance market’

ready for major commutations aswell as preparing the way for differ-ent types of finality option. It alsohelps identify commutation areaswhere quick wins can be made, suchas where large offsetting balancescould be dealt with to reduce under-lying uncertainty.

Commutations become one of themost important operations withinthe company. They can be used tocreate inwards cashflow, which isvery important, as premium income

can no longer be relied upon.Effective commutation of outwardsreinsurance can also prepare the wayfor an efficient scheme process inthat it can eliminate the major netdebtors who are not bound by ascheme (solvent or insolvent). It canalso ease the mechanics of the crys-tallisation process if a significant

Neil Bruce stresses the importance of taking a completely different

approach to the reserving function in setting up schemes and the value

added benefits that can be reaped

The reserving function willnormally be part of thefinance function or a separate

actuarial function providing all kindsof statistical, planning, reserving andunderwriting support. The change inobjectives faced by the reservingfunction following the decision toenter run-off is profound and repre-sents a major change in culture forthose involved. The difference ofemphasis required is made clear inthe accompanying table.

The types of action within thereserving function that will prepare acompany for finality include the fol-lowing:

The reserving process in run-offwill change its focus from a class ofbusiness or overall level to a focus onreserving at a policy or creditor level.This has advantages in terms of being

analysis of outwards reinsurance andthen set-off is made redundant.

The identification of accurate pay-ment patterns becomes increasinglyimportant, given that forced realisa-tions of investments may have a pro-found effect on the ability of thecompany to meet its eventual liabili-ties. Payment patterns are also one ofthe key assumptions in identifyingan acceptable range of commutationvalues for any transaction.

As well as identifying best esti-mates of future liabilities, the reserv-ing function needs to be able to pro-duce high or ‘worst plausible’estimates of reserves in order to aidin commutation discussions and ulti-mately be able to make a proposal topolicyholders that will reward themadequately for taking liabilities backon to their balance sheets. This caninvolve detailed analyses of risk ver-sus reward and can lead to strains orreleases from company balancesheets according to different externalconditions (such as the prevailinglevel of interest rates).

In summary, the reserving func-tion has to completely change itsfocus as a result of entering run-off.It does, however, have a one-offopportunity to add more value to thecompany than ever before by beinginvolved in practical commercial val-uations and negotiations and, partic-ularly, to prepare a company for afinality option such as a solventscheme. Actuaries seldom have somuch opportunity to create value. ●

20

Reserving


Change of focus

Ongoing company

• Reserving at the class ofbusiness level

• Shareholder return• Underwriting support• Brokers ensure relationships

with company• Absolute level of reserves• Best estimate reserves

(mean)• Market perception of the

security of the company

Run-off

• Reserving at the policy level• Policyholder security and equity between

creditors• Claims management and commutation

activity• Company must ensure relationships

with brokers, insureds and reinsurers• Relative level of reserves (insolvent) but

also absolute level of reserves (solvent)• Best estimate and worst plausible

reserves (mean and volatility)• Market desire to commute with the

company

"

There are two main methods ofvaluing ultimate claims liabili-ties in a crystallisation

scheme. The first approach is ‘claimsallocation’, whereby creditors agreedata with the scheme administratorswhich is then passed to the schemeactuary to apply an actuarialmethodology that has been pre-approved by scheme creditors as partof the resolution to close the scheme.This is often referred to as a ‘we tellyou’ approach, as the scheme actu-ary sets the final claim amount,although the creditor does have theopportunity to agree the data to beused.

The second approach is ‘claimssubmission’, in which each schemecreditor is asked to estimate theirown claim amount and submit thisfor review by the scheme actuary,together with sufficient support inthe form of policy level analysis andactuarial analysis to permit assess-ment of their claim. In contrast tothe ‘we tell you’ design of the claimsallocation approach, claims submis-sion is often described as a ‘you tellus’ approach.

Claims allocation The main advantage of a claims allo-cation process for an insolvent estateis that it can deal effectively withlarge volumes of claims in a mannerthat provides at least rough justice toall concerned. Whilst it is appreciatedthat actuarial techniques do not

always produce a fair solution toevery individual creditor, the advan-tage of applying uniform actuarialapproaches to all creditors givessome comfort that creditors will be

treated objectively and fairly, or atleast that the overall process will notbe subject to bias.

The allocation approach can dealequally well with 100,000 creditors or1000 creditors and, in consequence, isless likely to be subject to delays as aresult of unforeseen problems. It alsoplaces the burden of estimation andallocation on the scheme actuarywith little burden on creditors them-selves, other than agreeing that thedata used by the scheme actuary iscorrect.

This, however, is in itself one of themain criticisms of the allocationapproach, namely that creditors’views on IBNR are not considereddirectly by the scheme actuary, who is

entitled to disregard their views. Thereis a difficult balance to draw in thisrespect, which also needs to recognisethe size and complexity of the schemeitself and whether a submissionapproach is a viable alternative.

A further common criticism of theallocation approach is that it maygive money to potential creditorswho are uninterested in the crystalli-sation process and who have playedno part in supporting the orderlywind-up of the business. This criti-cism is less valid in that it is possible

21

Valuing liabilities


Value judgement

Claims allocation

Advantages• Objective and fair• Efficient, effective and timely• Less onerous from creditors’

standpoint• Deals effectively with large

volumes of claims

Disadvantages• Creditor views on IBNR not

taken into account• Perception that amounts are

agreed with disinterested creditors

Claims submission

Advantages• Only option where data is poor• Deals with creditors who want

to participate• Creditor views on IBNR are

taken into account

Disadvantages• Can be a problem for

unsophisticated creditors • Can be confrontational• Process may be longer,

especially if large numbers ofclaims submissions received

One of the key decisions to be made when organising a scheme of

arrangement is how claims liabilities are to be valued. Nick Watford

compares and discusses two of the main approaches

to operate an allocation scheme thatonly allocates liabilities to creditorswho have previously signed up tothe process and positively declaredthat they want to receive a dividend.It is also possible to run an allocationapproach that ignores minimal allo-cations of, for example, less than $50and puts these allocated amountsback into the overall pot.

Claims submissionThe claims submission approach isvery different to the allocationapproach in that the initial onus is allon the creditor to produce a claimssubmission, including allowances forIBNR. This needs to be done accord-ing to agreed estimation approachesbut, in practice, it is still common forsome creditors to ignore the generalprinciples laid down and, in somecases, to come up with ludicrousclaims — for example, claiming forfull policy limits on non-APH policieswhere there is virtually no possibilityof future claims arising.

The scheme actuary can usuallydeal with these types of claims easilybut there is still a significant amountof work to do in agreeing all claimswith individual creditors. Thisprocess may become confrontationaland can lead to a further actuarial orclaims adjudicator being involved inthe process as a whole. There is alsothe potential for contentious legalissues to arise that will require thescheme actuary to seek legal adviceto help resolve each case. In an allo-cation situation these issues will usu-ally be dealt with up front andappropriate legal judgments will befactored into the scheme actuary’sassumptions, rather than being dealtwith on a claim-by-claim basis.

This difficulty in agreeing claimson an individual submission basiscan lead to significant delays in theprocess. A crucial factor in decidingwhether a claims submissionapproach is appropriate is the num-ber of claims submissions that areexpected and the number where dis-agreement in the amounts claimed is

likely to result in a prolonged processof agreement. More than any otherfactor, this can dictate whether ornot a claims submission process islikely to be a practical solution. Thereis therefore an inherent ‘gamble’taken in deciding upon a submissionscheme in that the creditor responsemay be significantly greater thananticipated.

There are, of course, someinstances where a claims submissionapproach is the only alternative,notwithstanding the delays that canoccur. Where the insolvent companyhas little or no historical informationof its own, it can be almost impossi-ble for the scheme actuary to followa claims allocation approach andclaims submission may be the onlypractical alternative.

A claims submission approach canalso be very effective where the in-house claims department has a verygood understanding of the insuredpopulation and their expected futureclaim amounts, for example whereIBNR is small or where the substan-tial IBNRs that will arise are relative-ly easy to estimate, such as for someasbestos assureds where policy limitsare very likely to be exhausted.

SummaryIn deciding which is the rightapproach to take, the key issue mustbe which approach is most appropri-ate in reaching a fair and equitableanswer for creditors and, of course,in minimising expenses so as toimprove overall dividends. It is nogood coming up with a sophisticatedmethod that is equitable to all credi-tors if the actuarial fees necessary toreach this position eat up a large sliceof the remaining distributable assets!

In some situations it is conceivablethat a combination of elements fromthe two approaches may be used tothe overall benefit of the schemecreditors.

Application to solvent schemesThe rapid increase in the popularityof schemes of arrangement for sol-

vent companies begs the question asto how liabilities are divided upbetween policyholders in a solventscheme. In this respect, the main dri-vers described above are equallyapplicable to a solvent scheme as toan insolvent scheme. There are,however, some very important dif-ferences as follows:

The same emphasis is not so rele-vant to a solvent scheme. Here, it isimportant that the overall estimationis reasonably correct in the first placeas, if it is not, then one or other ofthe company’s shareholders or thepolicyholders may be severely disad-vantaged in the crystallisationprocess.

It is also important that risk comesinto the equation. For a creditor in asolvent scheme, they are bringinguncertain liabilities back on to theirbalance sheet and would normallyexpect to receive more than a dis-counted best estimate of their liabili-ties (otherwise why else would theyagree to it?). There is therefore areward that often needs to be paid bythe parent company to the creditorsin a solvent scheme to recognise thistransfer of risk. In some situations,however, such as where creditorsmay perceive there to be a significantrisk of future insolvency, the equa-tion may change to also reflect cred-it risk.

In recent times, the simple use ofan undiscounted liability (to be paidnow) has sometimes been consid-ered to be sufficient recompense forthe risk being accepted by creditorsin this situation. This approach maynow be out of date with investmentincome levels being low and insur-ance companies in run-off normallybeing bought for a discount to netassets. This leads to a conclusionthat some premium over undis-counted reserves may be appropri-ate, the size of this premium natu-rally being dependent on theparent’s desire for finality and thecreditors’ own capacity to bear riskand their attitude towards any creditrisk. ●

22

Valuing liabilities


There are four rules which anywise insurance business orscheme administrator should

attend to: maximise tax assets(attributes) before entering into ascheme; set up/preserve the most taxefficient structure for the scheme;maximise tax benefits of being in ascheme; minimise tax costs of exit.

The same rules apply to both sol-vent and insolvent schemes, thoughthe details may diverge.

Rule 1 – Maximise the scheme’stax assetsAs the purpose of a crystallisationscheme is to release balance sheetliabilities, if the liabilities releasedexceed tax losses brought forward,scheme profits may be subject to tax(but see Rule 3 for the exception).

The same conclusion can alsoapply to insolvent schemes if the bal-ance sheet residual liabilities are tobe released in order to ensure mem-bers voluntary liquidation (MVL)exit and the tax losses brought for-ward are not sufficient to cover theliabilities released.

The tax losses entering into ascheme may be less than the net lia-bilities on the scheme’s books for avariety of reasons:

● In surrendering its losses as grouprelief to another member of the group,a company may already have given upsome of its historic tax losses.

● As the run-off was never expect-ed to turn to profit there may havebeen an agreement with theRevenue to disallow some historiclosses to achieve simplification of thecompany’s tax affairs.

● A poor trail of correspondencemeans tax losses may be forgone.

● Losses have been previously dis-allowed by means of the discountinglegislation

Therefore, before entering into ascheme a company should assess thelevel of its tax losses (including a duediligence of the loss trail) and consid-er opportunities for enhancing thescheme pool by:

● Acquiring losses through s107FA 2000 planning (either from acompany or a portfolio transfer).

● Taking advantage of proposedchanges to the discounting legisla-tion (which mean that companiessubject to solvent schemes may beable to disclaim tax losses in thefuture).

● Obtaining value for losses whichare surplus, by group relief or disposal.

● Seeking to reduce the level oftax profits arising in the scheme (seeRule 3).

Rule 2 – Tax efficient structureThe best tax structure very muchdepends on the specific circumstancesof the scheme. However, carefuldrafting of the scheme documents isrequired to ensure a scheme does notinvolve putting the scheme assets intrust, giving rise to such tax complica-tions as: forfeiture of all brought for-ward tax losses; capital gains liabili-ties; inheritance tax issues.

For a solvent scheme, the best struc-ture will be the one that gives rise tothe least tax on exit. Where a compa-ny is purchased at a net discount theremay be significant profits/capital gainson exit. However, the inherent uncer-

tainty in insurance accounting can beused to the advantage of shareholdertax planning. For this reason the timeto set up tax efficient share structuresis before the scheme is implemented.

Rule 3 – Tax benefits of schemeThis is where the exception to themaxim ‘tax follows the accounts’ canmake a real difference. FA 1994 intro-duced new legislation (amending s94TA 1988) to assist with businessrecovery, whereby profits resultingfrom releases of debts with creditorsthat take place within a scheme ofarrangement (CA 1985) or voluntaryarrangement (IA 1986) are exemptfrom tax. This law applies equally toinsolvent and solvent schemes andcan generate considerable tax savings.

Rule 4 – ExitsAs noted above, for insolventschemes it may be that the MVLroute is considered the preferableexit strategy. However, to do this youneed to be satisfied that the balanceof unpaid liabilities can be releasedwithout suffering further tax. Inaddition, unclaimed dividends maybe held on trust suffering tax at 34per cent. These issues will need to beresolved on the scheme’s closure.

For solvent schemes the tax savingopportunities can be more immediate:if all has gone well the company couldbe sitting on a pool of cash to distrib-ute to shareholders. The hybrid natureof a scheme may not apply on capitalexits. It is therefore important to givedue attention to tax opportunities atRule 2 and a tax efficient structure tominimise tax leakage. ●

23

Taxation issues


Rewards can be reaped by considering the tax implications of a scheme

of arrangement sooner rather than later, advises Simon de Young

The tax implications

Paul Duffin assesses the importance of implementing effective IT

systems and processes when running a scheme

The impact of IT A s with any process affecting a

run-off, the more flexible theIT systems are the quicker

and less painful the scheme processwill be. In essence, a scheme is aglobal commutation and the samebasic rules apply to this commuta-tion as to any other. If you have goodquality information to back-up yournumbers and flexible IT systems thatenable you to present the informa-tion in a variety of formats, then youare in a stronger position to drivethrough the process quickly and effi-ciently.

One of the main advantages of ascheme is the flexibility that youcan build into the process. This flex-ibility means that deficiencies indata or systems can be catered forand dealt with in an appropriatemanner. However, if both the sys-tems and data are good then moreoptions are left open and thescheme is less restricted in itsdesign.

There are a number of key ques-tions that will need to be answeredand the flexibility inherent in the ITsystems will, to some extent, deter-mine the best route forward in anygiven circumstance:

● Who are you going to circularise?● What information are you going

to circularise?

● How are you going to circularisethe information?

● What responses are you expect-ing from the recipients?

● How will you deal with thereturns when they come?

The remainder of this article willfocus on two of these areas: theinformation that is to be circularisedand how that information is to becircularised.

Information to be circularisedTypically, the scheme process isabout agreeing a claim figure at afixed point in time, often at policylevel, with each of the principals thatdid business with the company. Thisclaim figure is made up of three dis-tinct elements:

● Unsettled claims and premiums● Outstanding losses● IBNRs

The timing of when this informa-tion is shared with the principal willvary from scheme to scheme. Theagreement of the unsettled elementof the claim should be a matter offactual discussion between thescheme company and principal.

The other two elements are a littlemore subjective. In order to assist theevaluation of future claims, policy

information held on the company’scomputer system will be circulatedfor verification by the principal.Typically, this will confirm informa-tion about the type of business thatthe policy covered and the extent ofthe financial exposure on the policy.

One method that can be used toevaluate the future claims is to allo-cate a proportion of the actuariallyevaluated IBNR to each policy orpolicy/loss based on factors that arethought to be significant for the typeof business written. The advantagesof this approach include:

● It is equitable to all creditorswhether they are large or small.

● The allocation is based on amethodology that has been agreed asfair as part of the scheme and there-fore cannot be disputed if this is theline that the scheme administratorswant to take.

● It handles high volumes of poli-cies at relatively low cost, as policiesdo not need to be dealt with andanalysed individually.

Once the IBNR has been allocatedto policy level then a very valuablepiece of information has becomeavailable to the run-off. If the sys-tems are flexible enough then itshould now be possible to view thecompany’s ultimate debtors and

24

Information technology


‘A cost benefit exercise should demonstrate

whether it would be cheaper to process the

returns via a more automated route ’

creditors. This enables credit controldepartments to focus on companiesthat will be the target debtors of thecompany with some very powerfulinformation to back up any commu-tation discussions. The split of thebalances between inwards and out-wards business, the split betweenpaids, outstandings and IBNR, aswell as the split of these figures bytypes of business, all provide poten-tially invaluable negotiation tools.

With ultimate level debtor creditorinformation available to the run-offit also becomes more practical tobegin to model various run-off sce-narios. Which companies should beapproached first for commutations?Based on a given collections andcommutations strategy, what are thecash flows for the company going tobe for the next few years? When isthe optimum time to consider ascheme as a closure mechanism?How and when will maximum valuebe extracted from the run-off? IfIBNR estimates change as a result ofexternal influences or a further datacleansing exercise then what is theimpact of this new information onthe run-off strategy?

By having the ultimate balancesavailable at principal level soonerrather than later, the managers ofthe run-off are better placed to makeinformed decisions about the futurestrategy for the run-off and theappropriate exit strategy, scheme orotherwise.

How to circularise theinformation?Historically, paper has been sent outas the main means of communicat-ing with principals. With the increas-ing use of the internet as a seriousbusiness tool in recent years it hasnow become a more acceptablemeans of inter-company communi-cation and some recent schemeshave taken advantage of this. Thereare a number of factors that need tobe considered before deciding on themost appropriate means of commu-nicating in a given scenario:

● How many principals are goingto be contacted?

● What is the mix of principalsbetween individuals, non-insurancecompanies and insurance compa-nies?

● What is the expected level ofresponse?

● What are the skills and experi-ence of the team that will deal withthe returns? How easy will it be toincrease staff numbers, if required, todeal with peak periods?

If the number of creditors to be cir-cularised is very small then a papercircularisation may well be the mosteffective means of communication.As the numbers increase, all otherfactors being equal, the advantagesof an electronic solution begin to addup.

Once the returned data is availablein an electronic format then it is eas-ier to analyse the returns via anautomated or partially automatedprocess. For large circularisations thesavings here can be great, as thenumber of staff required to deal withthe returns can be significant. If the

changes that are being made to thedata are below the level deemed tobe material then an automated sys-tem could allow them to beprocessed with little or no furtherchecking, allowing staff to concen-trate on the higher value items.

In many instances there may be alarge number of staff available toprocess returns. The mindset ofmany organisations is that the cost ofusing these staff to process returns isnil, as they are there anyway. Whilepotentially in the interests of thestaff, this may not be in the bestinterests of all of the other stake-holders. A cost benefit exerciseshould demonstrate whether itwould be cheaper to process thereturns via a more automated routeand use fewer staff, freeing up peo-ple to perform more valuable tasks.

Knowing the full range of circular-isation options available to a particu-lar scheme, their relative strengthsand weaknesses and the typical costof each of the options, allows theteam to be in the best position tomake the right decision for any givenscheme. ●

25

Information technology


www.runoffbusiness.com

Contact details

If you have any questions in relation to Schemes of Arrangement, please contact one of the following:

at Plumtree Court, London, EC4A 4HT, England.Telephone number: +44 (0) 20 7583 5000Facsimile number: +44 (0) 20 7822 4652

You can also look up our web site: www.pwc.com/discontinuedinsuranceAlternatively, email your questions to us at [email protected]

Dan Schwarzmann+44 (0) 20 7804 5067

Paul Evans+44 (0) 20 7804 5633

Mark Batten+44 (0) 20 7804 5635

Nigel Rackham+44 (0) 20 7212 6270

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