Aviva International Insurance Ltd, Re

This is an application under Part VII of the Financial Services and Markets Act 2000 for the transfer of insurance business. There is before me an application for directions. The sanction hearing is intended to be held on 5^th October with the object that the transfer will have an effective date of 14^th November. The businesses in question are very substantial and compliance with the formal requirements of Part VII entails a long-lead time if that intended timetable is to be adhered to.

The companies which are party to the scheme are all controlled through a single Aviva plc group management structure. Aviva carries out its general insurance business using a number of licensed insurance companies. The origin of many of these insurance companies lies in their being component parts of the Commercial Union General Accident and Norwich Union Groups, out of which Aviva itself was formed. Thus, in management terms the Group is operated as a single whole.

As regards the relevant risks with which I am concerned, the Group is also operated effectively as an economic whole, because of the existence of a mutual deed of guarantee, whereby each participating company agrees to make available its excess capital in support of the liabilities of the other participating companies.

However, what is out of kilter with this management and economic whole is the legal structure. What is intended by the scheme is to reorganise the legal structure to bring it into line with the other features of the business. It is intended to transfer the general insurance business of some of the subsidiaries to a single operating company, Aviva Insurance Limited. It is intended to transfer a particular tranche of business (called “the London Market business”, all of which is itself reinsured with the National Indemnity Company) into the Ocean Marine Insurance Company thereby simplifying the legal structure and enabling fuller compliance with the impending Solvency 2 capital requirements. Accordingly, the legal structure will be aligned with the operational model, which is already integrated for all practical purposes and which uses common systems and processes, but is obliged at present to operate through separated subsidiaries.

The London Market business itself has been in run-off since about the year 2000. The general insurance business is, of course, current. The general insurance business is distributed in a variety of ways. There are policies which are bought directly from scheme companies. The characteristic of such policies is, of course, that a policyholder has made the choice to buy from a scheme company. There are policies relating to health business, sold either directly by a scheme company or through an intermediary, but the nature of which is such that it is clear that the policy has been issued by a member of the Aviva Group and that is known to the policyholder. There is thirdly a batch of broker business. This itself is divisible into two categories. There is business (called in the evidence, “non-scheme broker business”) placed by intermediaries, where the policyholder's buying decision is not wholly influenced by the fact that the policy is underwritten by Aviva, but where the policyholder is clearly aware that they are buying an Aviva product. That is because the policy will either bear an Aviva branding or be dual branded with the brand of Aviva and of the relevant broker. The second category of broker business is called in the evidence, “scheme brokers”. This is intermediated business where the policyholder's decision is probably based on the broker's recognised expertise in a particular product line or where the business is generated with a specific group of policyholders (for example, the owners of vintage cars) and the fact that a member of the Aviva Group underwrites the policy is perhaps of lesser interest. In these cases the branding of the broker is prominent in both types of policy document, because the broker brands the policy as his own. The final major distribution channel is through corporate partners, such as High Street banks or building societies or unions. Here the relationship is generally between the policyholder and the corporate partner, with a relationship with Aviva either being not apparent or not at all prominent. Some of these products will be co-branded, but some of them will be what are called white label products, where the policy is prominently issued by the partner with only the slightest mention of Aviva as underwriter.

The nature of that business and the relationship with the policyholders is important for the question I have to decide on this hearing. As part of the transfer process Aviva and the Group companies must, of course, comply with the Financial Services and Markets Act 2000 (Control of Business Transfers)( Requirements on Applicants) Regulations 2001. These set out the advertisements which must be placed and the notice which must be given that an application to effect the transfer is to be made. Regulation 3.2(b) requires that a notice stating that the application has been made must be sent to every policyholder of the parties. The word 'policyholder' as used in the Regulation, has an extremely wide meaning. It includes not only the person who for the time being is the legal holder of the policy, but also any person to whom under the policy a sum is due, a periodic payment is payable or any other benefit is to be provided or to whom such a sum, payment or benefit is contingently due. It is a requirement which, if strictly read, is almost impossible of complete compliance. Fortunately, Regulation 4(2) says that that requirement may be waived by the court in such circumstances and subject to such conditions as the court considers appropriate.

It is recognised that the discretion there conferred on the court is unfettered, but the requirement to send to each policyholder a notice stating that an application for transfer has been made is not a purely formal hurdle. It has an underlying purpose. The effect of the transfer will be to change the insurance obligations. The point of a notice stating that an application has been made being sent to each policyholder is so that each affected policyholder can participate, if they so choose, in the transfer process, either by making written representations or by appearing at the sanction hearing to express any objection.

The exercise of the power of waiver must therefore involve a consideration of the extent to which that purpose can still be fulfilled by alternative arrangements. Floyd J has, in two decisions: Re Direct Line Insurance [2011] EWHC 1482 and [2011] EWHC 1667, endorsed the approach advocated by Counsel that amongst the factors which may be relevant to the exercise of the power to waive specific compliance are: the impossibility of contacting policyholders; the practicality of contacting policyholders; the utility of contacting policyholders; the availability of other information channels through which notice of the application can be made available; the proportionality of strict compliance and the impact of collateral commercial concerns. I agree with that list and it seems to me that one may add “the object of the transfer itself and its likely impact upon policyholders”. These factors are not themselves to be treated as formal requirements. The list cannot be regarded as exhaustive nor can it be thought that equal weight is to be attached to each relevant factor in every circumstance. The whole process is very fact-sensitive. However, I agree that, for example, in general the wider the degree of advertisement that can be given to a scheme the less important it is to see that individual policyholders are notified in strict compliance with the 2001 Regulations.

In the instant case a substantial body of evidence has been filed demonstrating that considerable thought and care has been given as to how a substantial body of policyholders may be effectively informed that there is an application to the court for the transfer of their policies to another company -that notwithstanding that for most people this will simply be a transfer from one Aviva company to another. say for “most”, because some of the policies originate a long while ago with separate companies bearing ancient names and have been transferred to Aviva through successive mergers of business.

What is proposed is that in relation to direct general business and direct and intermediated health business, there is to be notification directly by the relevant scheme company to every policyholder where address details are held. The form of the communication is not to be simply a formal notice in the same form as that which is published in compliance with the 2001 Regulations, but is to be an informal but informative letter, setting out the purpose behind the transfer, its effect upon the policyholder and giving details of where further information can be obtained, either by accessing the website or through a telephone helpline.

In relation to “non-scheme broker business” considerable work has been undertaken to consult with those brokers as to (a) the extent to which they are prepared to share the customer data which they hold with the relevant scheme companies to enable the scheme companies to make direct contact with the policyholder, and (b) the extent to which the brokers would wish to keep that information relating to their own clients to themselves and will themselves undertake the obligation to send information letters to policyholders.

As at 17th June some 68% of these brokers have responded to Aviva's enquiries, 52.3% requesting that Aviva undertake the relevant policyholder mailing, some 14.2% indicating that they would wish to do it themselves and some 2% indicating that they did not consider that their clients ought to be contacted at all (no doubt bearing in mind the largely technical nature of this transfer).

So far as the “scheme brokers” are concerned, the same work has been undertaken. 95% of these brokers responded, 59% have asked Aviva to undertake the mailing and 41% wish to mail their own client groups themselves. One broker has indicated that it does not consider communication with the customer is necessary.

In relation to those brokers who have said that they will undertake the mailing themselves, Aviva has no power to enforce that promise beyond the fact that there will be an ongoing commercial relationship between Aviva and the broker and the service provided by the broker will no doubt be a factor in the way that ongoing business is undertaken. But since the relevant contact details are held by the brokers and since Aviva itself has no ability to force the brokers to part with that information, it is sensible for Aviva to rest upon the brokers' promises.

So far as corporate partners are concerned the same work has been undertaken. All of those are either opting to mail their customers themselves or are opting in to the process by which Aviva will notify customers on their behalf, apart from those who do not intend to contact their customers at all. That is not surprising, since many of the customers of the corporate partners will not be aware that it is Aviva that is underwriting the insurance policy which they have taken out.

Apart from policyholders there is, of course, another class, namely current claimants. These are people who will already be in a direct relationship and direct contact with the relevant Aviva company, either themselves or through a claims handler. Here it is intended that the claimants will be written to as holders of policies in force under one or other of the processes which I have already outlined. It is commendable that steps are being taken to see that policyholders are not inundated with notifications when they fall into two or more categories, for example, being a claimant who has effected his insurance through a non-scheme broker who intends to contact the client directly.

I have been taken in detail through the mechanics of the notification process. There are some six million notifications which will be sent out under the processes indicated. I am satisfied that coupled with the formal and informal advertisements, which is proposed concurrently to place that the objective of regulation 3(2)(b) will be achieved by these alternative means.

An independent expert has already expressed a view (relevant to the forthcoming sanction hearing) that no policyholder is adversely affected by the intended transfer, both because of the existing management structure and because of the existing underlying economic reality of mutuality between the transferring and transferee companies.

For the reasons, which are summarised in paragraph 9.51 of the witness statement of Mr Abrahams, I consider it is appropriate to sanction the waivers sought. In brief, first, there is no material prejudice to any class of policyholder arising from the intended scheme having regard to its purpose and objects. Secondly, it is not possible strictly to comply with the requirements of the Regulation, because of the state of the records built up over the years, particularly in relation to policies which have themselves been transferred into the relevant Aviva transferring company. Thirdly, I accept that as a consequence of the age of many of the policies, even where records do exist, it cannot be guaranteed they are up-to-date in all cases. Fourthly, I am satisfied that Aviva itself does not have access to much of the relevant customer data, which would be held by intermediaries. Lastly, because the policies which form the subject matter of the transfer are themselves in general short-term annually renewable policies where any policyholder is able to place his business with an alternative provider with ease, if he is dissatisfied by a transfer, which has proceeded with his being unaware that it is taking place (notwithstanding the intended advertising campaigns and program of notification).

I can deal much more shortly with the second group of business, that relating to the London market business. Here the policies are almost entirely in run-off. They are managed by a separate entity, Resolution, which has prepared its own database, a database which is recognised not to be current and complete, because of the age of some of the data. These policies being in run-off and concerning long-tail liabilities the principal concern must be with the claimants under those policies. There appear to be, upon investigation, some 7,600 claimants. Of those 47% represent 99% of the outstanding reserves. The question accordingly, is to what extent it is necessary or indeed proportionate to take steps to notify the remaining body of claimants whose claims represent 1% of the reserves. Such a task would take between five and six weeks simply to collate the underlying data. I agree with the submission that it would be disproportionate to undertake that work, having regard (a) to the underlying nature of the transfer (b) that this is business which is already the subject of the NICO indemnity and will continue to be so and (c) having regard to the other processes which are in place for advertisement and informal notification.

I therefore intend in relation to the London market business also to approve the waiver of Regulation 3(2)(b) of the 2001 Regulations and in the circumstances I will make an order in the form sought.