The Applicability Of Solvent Schemes Of Arrangement To German Portfolios

Solvent schemes of arrangement have emerged in the last five or so years as a uniquely powerful procedure to achieve rapid and legally binding closure of insurance and reinsurance companies. What had previously been thought of as an impossible objective has been achieved at an ever-increasing rate in common law jurisdictions such as England, Scotland, Ireland, Bermuda, Australia and New Zealand. Although such schemes emanate from the UK they affect insurers, reinsurers and policyholders all around the world. It was estimated in February 2007 that of the 80 solvent schemes that had been implemented up to that date, 52% related to non-UK businesses with 33% of them specifically relating to Continental European insurance and reinsurance business.1 This is especially significant for Germany as it is considered to have the largest volume of business in run-off in Continental Europe, almost double that of any other country in Continental Europe.2

Some of the promoters of solvent schemes of arrangement have been German companies who have successfully closed down their subsidiaries or portfolios in common law jurisdictions. An example is AXA Colonia which in 2005 closed down a number of reinsurance portfolios in its Irish subsidiary.

Under a solvent scheme creditors accept a lump sum payment which reflects the amount of their paid losses, notified outstanding claims and incurred but not reported claims (IBNR). They do so in return for surrendering their right to continued cover. Provided the strict procedures are adhered to and court sanction is given, all creditors of the company implementing the scheme will be bound, whether they voted for or against or did not vote at all in support of the scheme.

A scheme of arrangement has been a feature of English company law for many years and is found in very similar terms in a number of earlier incarnations. It is currently found in Section 425 of the Companies Act 1985 (Section 425). It will shortly be found in Part 26 of the new Companies Act 2006.

In view of the fact that creditors' rights under their contracts will be varied by the scheme, the procedure laid down by Section 425 contains several checks and balances. It is a court driven process. There are two court hearings: 1) The convening hearing where the court gives directions for one or more meeting(s) of creditors to be convened to consider the scheme and if thought fit approve it. The number of meetings depends on the number of classes of creditors which there are. 2) The sanction hearing which is held after the meeting(s) convened in 1) has been held and the scheme has been approved by the necessarymajorities. At this hearing the court will decide whether in all the circumstances the scheme is fair and ought to be sanctioned.

The necessary majorities are 75% in value and a simple majority of those present in person or by proxy and voting at each of the creditors' meetings convened.

It is not commercially realistic to characterise solvent schemes of arrangement as a threat to German primary insurance companies. The current and future reinsurance assets represented by companies in or likely to enter a Solvent Scheme of Arrangement constitute a very small percentage of the total asset base of allmajor German insurance companies. Theymay represent a minor irritation but are unlikely to have, in the future, a material impact on German insurance companies' solvency.

From a commercial perspective solvent schemes of arrangement, provide an early payment of current and future actuarially estimated liabilities, offering an alternate and definitive prospect for German cedants rather than the uncertainties associated with a run-off spanning several decades.

Some of the entities that are promoting solvent schemes of arrangement are in a precarious financial situation. If these entities were forced to run-off their business over a twenty or thirty year time span, there is a very good chance that they could become insolvent. Commercially, German primary insurers who are creditors of such companies could benefit...

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