Regulators to scrutinise insurers’ use of legal schemes

Regulators are pressing ahead with plans to scrutinise insurers’ use of contentious legal schemes that critics complain give them scope to dodge corporate policyholders’ claims.

Lawyers warned that insurers’ ability to hand back hundreds of millions of pounds in cash to shareholders could be undermined by the crackdown on court orders, which allow the companies to unwind historic policies.

Following criticism from the insurance industry, which complained that the regulator was being “hard and inflexible”, the Prudential Regulation Authority has pledged to take a case-by-case approach.

The regulator has now made clear that it does not intend to “prejudge all cases without first taking account of all relevant circumstances”. Some consultants argued this represented a back track by the regulator.

But the PRA remains sceptical about the so-called schemes of arrangements, which allow insurers to cancel coverage if three-quarters of policyholders agree.

The regulator has cautioned that the schemes may not be compatible with its aim to ensure insurance companies pay valid policyholders’ claims if and when they are due.

It was originally planning to scrutinise only non-life insurance policies, but has now extended its approach to life insurance.

Adam Bogdanor, partner at the law firm Berwin Leighton Paisner, said that the PRA had “softened the language” used in original consultation papers published last autumn.

However, he said the PRA’s approach may still “substantially reduce the attractiveness of such schemes”.

He added that the regulator had “confirmed a new, cautious approach to attempts by general insurance firms in run-off [those that have closed to new business] to pay excess capital to their shareholders”.

Courts have approved more than 250 schemes of arrangement by insurers, often to wind up policies that they wrote decades ago but under which they are still paying out claims for pollution or asbestos-related disease.

Policyholders receive cash upfront – typically tens of millions of pounds – to compensate for potential future claims.

However, lawyers who act for corporate policyholders warn that those who vote against such schemes can still have their coverage cancelled against their wishes.

Although the amount of cash policyholders receive is based on actuarial assessments critics say there can still be disputes about the settlement terms.

Several of the schemes have allowed insurers to return capital to shareholders, because by cancelling policies insurers no longer need to set aside assets to cover the expected liabilities.

Consultants said the PRA’s intervention would prompt insurers wanting to reduce their exposure to historic policies to consider alternatives such as disposing of historic books of business.

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