Docking the reinsurance tail: first solvent schemes of arrangement with Australian liabilities

The first solvent schemes of arrangement for Australian reinsurance liabilities have received Federal Court approval.

Under the schemes, NRG London Reinsurance Company Ltd and NRG Victory Australia Ltd will be able to accelerate payment of future liabilities under their now-discontinued reinsurance businesses. This will allow them to truncate the otherwise lengthy run-off period for their reinsurance businesses.

These are the second and third solvent schemes of arrangement in Australia, but this is the first time schemes have covered Australian liabilities. As with the first scheme (MMIA in 2002), Clayton Utz was the adviser to the reinsurers.

How the schemes work

Both companies have stopped writing reinsurance business and are now in run-off. In order to reduce the administrative costs of administering their books over a number of years, they proposed solvent schemes of arrangement under section 411 of the Corporations Act.

Under the schemes, cedants with both present and future reinsurance claims will submit estimates of those claims to the relevant scheme company, which will then negotiate a payment for each claim or, if agreement is not possible, submit the claim for adjudication.

In order to put the schemes into place, it was necessary to comply with section 411 of the Corporations Act. That requires (in order):

• a court order for a meeting of the cedants;
• a resolution passed by a majority in number of the cedants representing not less than 75% in value of the claims of cedants, present and voting in favour of each scheme;
• an application to the court for approval of each scheme.

The cedants met on 15 August and approved each of the schemes by the necessary majority. The schemes then went to the Federal Court, which approved the schemes the next day.

Paving the way for future solvent schemes of arrangement

Solvent schemes of arrangement are very common in the UK. However, until this decision by the Federal Court, there had never been a scheme that dealt with Australian insurance or reinsurance liabilities.

There are a number of reasons for this. These include the fact that insurance run-off is a relatively longstanding and major industry in the UK (worth tens of billions of dollars) and the fact that Australian schemes require APRA's consent.

It is understood that APRA's concerns focus on, among other things, a differentiation between insurance and reinsurance run-off (with the latter raising less concerns, given the "sophisticated" nature of cedants) and the length of time that a book has been in run-off.

For those reasons, an important part of the schemes planning process involved extensive discussions with APRA (as well as with ASIC, the primary regulator under the Corporations Act).

The schemes clearly pave the way for other Australian solvent schemes of arrangement. However, it must be remembered that the types of reinsurance covered by a run-off will vary considerably from reinsurer to reinsurer. It is therefore important to ensure that each scheme is tailored to the requirements of all the relevant parties (the reinsurer, the cedants, APRA and ASIC).

Having advised on both groundbreaking solvent run-off schemes in Australia, Clayton Utz is uniquely placed to assist with the development of future schemes.

Disclaimer
Clayton Utz News Alert is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states.