When members of the public choose whether to place their trust in one insurer or another, the age and reputation of the companies concerned are often uppermost in their minds. However, the Court of Appeal has ruled in a landmark case that such sentiments have no relevance when it comes to approving transfers of long-term policies between insurers.
The Prudential Assurance Company Limited sought judicial sanction of its scheme to transfer 370,000 of its in-payment annuity policies to Rothesay Life plc. Industry regulators had no objection to the scheme being approved under the Financial Services and Markets Act 2000. About 1,000 Prudential policyholders, however, did object and a judge refused to grant the approval sought.
Whilst acknowledging that Prudential and Rothesay enjoyed equivalent solvency capital requirement metrics, the judge noted that Rothesay did not have the same capital management policies or the backing of a large, well-resourced group with a reputational imperative to support it over the lifetime of the policies.
Policyholders, the judge also found, had reasonably relied on Prudential’s sales materials, which emphasised its venerable age and reputation. Policyholders testified that their choice of Prudential gave them peace of mind. Prudential was founded in 1848 and has a wide reputation as a secure and well-established business. Although Rothesay enjoys very substantial financial backing – it is part-owned by the Singaporean national wealth fund – it was only established in 2007.
Upholding Prudential’s challenge to the judge’s decision, the Court noted that regulators and an independent expert had measured the financial security provided by the two companies by analysing their likely resilience to a 1-in-200-year stress event. The expert reported that the chance that either insurer would require financial support from a parent company in the future was remote.
The Court noted that, unless contractually bound to do so, parent companies could not be required to provide financial support to their subsidiaries, for reputational reasons or otherwise. Parents of insurers were in any event always at liberty to sell their regulated subsidiaries to others with lesser resources.
The judge, the Court found, should have attached no weight to assertions made by policyholders that they chose Prudential on the basis of its age and reputation and that they reasonably assumed it would provide their annuities throughout their lengthy terms.
The sole relevant question was whether the scheme would have an adverse impact on policyholders. If their prospects of being paid their annuities were the same with or without the scheme, it was hard to see how the proposal would have any material adverse impact on the security of their policy benefits. Prudential’s application for approval of the scheme was sent back for rehearing by a different judge.
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