Corporate and restructuring

In this chapter of our Annual Insurance Review 2018, we look at the main developments in 2017 and expected issues in 2018 with regards to corporate and restructuring.

Key developments in 2017

2017 has seen a great deal of restructuring activity in the insurance market. Some of this has been fuelled by the threat of Brexit on the horizon – most notably, insurers are earnestly preparing for insurance business transfers under Part VII of the Financial Services and Markets Act to beat not only the Brexit clock but also a potential regulatory bottleneck.

The Part VII transfer process requires the involvement of the UK regulators, the courts and an independent expert – getting these three in tow with little under 18 months to go is certainly going to be a challenge.

To assist practitioners and insurer applicants, the Financial Conduct Authority (FCA) published in May 2017 a consultation paper and draft guidance on its approach to the review of Part VII transfers. Final guidance was expected in autumn 2017; watch out for updates in 2018. The FCA takes an active role in the Part VII transfer process, offering views to the court that can impact on whether the transfer is sanctioned. By offering guidance, the FCA therefore intends to particularly help reduce the time and cost required to undertake a Part VII transfer.

In addition to Brexit-fuelled activity, we have seen a continued trend of private equity-backed consolidation and acquisition, particularly in the broker space. It must be noted that the weaker pound has almost certainly helped drive some of this business.

What to look out for in 2018

We expect more of the same in 2018 in the restructuring and mergers and acquisitions space. As well as implementing and managing the regulatory changes required under the Senior Managers and Certification Regime (SM&CR), the Insurance Distribution Directive (IDD) and the General Data Protection Regulation(GDPR), the regulators will also need to oversee a potential record number of Part VII transfers. On top of this, the regulators will also need to consider more generally the issue of Brexit and transition.

The new insurance-linked securities (ILS) regime came into force early in December 2017, with the extent of its effects expected to be seen throughout 2018. ILS transactions offer tradable securities that have a value linked to insured loss events. This allows insurers and reinsurers to reduce their risk by passing it on to the capital market investors who invest in the ILS, effectively providing reinsurance. Investors in return receive sums linked to the (re)insurer’s income and profits.

The ILS transaction structure often involves a middleman company that acts as the issuer of the ILS to investors. These companies are known as insurance special purpose vehicles (ISPVs). The danger when one ISPV is used to issue different ILS under multiple ILS transactions is that there can be a blurring of the lines between the different sets of securities, with all assets of the ISPV available to satisfy liabilities from all ILS issued.

Recognising this and other potential problems with the way ILS transactions are currently handled, and with London the largest commercial re/insurance market in the world, the government has taken a more hands-on legislative approach. A significant aspect of the new laws is the introduction of a new company structure: protected cell companies (PCCs), which will bring the UK more level with ISPV structures in other jurisdictions with strong ILS markets.

In line with European Solvency II legislation, the UK regime will ensure through PCCs that, where one ISPV is used for multiple ILS transactions, the lines between the different transactions will not be blurred. This strict separation of ILS transactions will be achieved through PCCs being one entity, with one core legal personality, but within which sit separate ring-fenced cells, each with its own distinct assets available to satisfy liabilities only in relation to its own ILS transaction. This significant change to company law promises to be an interesting area of activity in 2018.

Download our full Annual Insurance Review 2018 for more insights.