HFW Insurance & Reinsurance Bulletin - November 2009

FROM AVIVA, WITH PROFITS By kapil Dhir and Andrew Carpenter

On 18 September 2009 the Court sanctioned a transfer of insurance business concerning the affairs of the Commercial Union Life Assurance Company Limited ("CULAC"), CGNU Life Assurance Limited ("CGNU"), Norwich Union Life (RBS) Limited ("NUL") and Aviva Life & Pensions UK Limited ("Aviva"). This has been a controversial case involving a long running dispute between Aviva and its "with-profits" policyholders regarding the payout from Aviva's "inherited estate" as it completed its reattribution process.

With-profits are savings schemes often sold as part of a pension or mortgage scheme. The funds invest in a broad range of assets and seek to provide a steady annual return, holding back some money in good years so that they can continue to pay out bonuses in the bad years.

Following the merger in 2000 between Commercial General Union plc and Norwich Union plc, the merged group, Aviva, engaged in a programme of rationalisation of its corporate structure. It proposed that the whole of the long-term insurance business carried on by CGNU, CULAC and NUL should be transferred under the provisions of Part VII of the Financial Services and Markets Act 2000 ("FSMA") to Aviva.

Policyholders contended that they ought to have had a much bigger slice of the inherited estate - the money which had built up in the CGNU and CULAC with profits funds - but instead, the Financial Services Authority ("FSA") had, they said, allowed Aviva to plunder the estate for the benefit of its shareholders. As a part of the transfer process FSMA requires that the Court must be satisfied that "in all the circumstances of the case it is appropriate to sanction the scheme". Norris J noted: "This does not require me to be satisfied that no better scheme could be devised; nor does it require me to assess whether the present schemes might be improved by further negotiation." He was satisfied with the conclusions of the independent expert that the security and benefit expectations of policyholders would not be materially adversely affected by the transfer. In addition, the FSA (which was represented at the hearing) was satisfied that the scheme was "within the range of reasonable and fair schemes available to Aviva to achieve its objectives, and that the transfers comprised in it are unlikely materially adversely to affect the interests of policyholders and other affected persons".

In the judgment, the FSA's Treating Customers Fairly regime ("TCF") was given plenty of airtime. Principle 6 of its principles for businesses states that "a firm must pay due regard to the interests of its customers and treat them fairly". Indeed, TCF is recognised by the FSA as being "central to the delivery of our retail regulatory agenda" and "a key part of our move to more principles-based regulation". S.20 of the FSA's Conduct of Business Sourcebook requires a firm to give careful consideration to its operating practices to ensure that they do not lead to an unfair benefit to shareholders and lays down rules addressing situations where the risk of unfair treatment of policyholders is particularly acute, such as the cumulative effect of the annual decisions concerning the ascertainment of profit and the level of distributable profit to be attributed to policies.

Norris J concluded that the inherited estate is part of the working capital of and belongs to the company, not the policyholders. Policyholders have the right to participate in any annual profits that are...