Insurance Business
(i) Schemes of arrangement
Although insolvent, insurance companies often still retain significant assets so that, by amount, the largest recoveries are received in the insurance sub-scheme.
It is common practice to avoid a liquidation, and utilise the scheme of arrangement mechanism under Section 425 of the Companies Act 1985 to facilitate a distribution of assets to policyholder creditors. Usually, schemes of arrangement are put in place several years after the date of insolvency.
Often, the scheme of arrangement proceeds on a "reserving" basis whereby a certain percentage, increased over time, is paid in respect of agreed claims. The reserving scheme may then be followed by a cut-off/estimation scheme, by which outstanding claims are valued for the purpose of a final distribution, enabling the estate to be closed earlier than would otherwise be the case. Some estates have moved straight into an estimation scheme of arrangement (without a reserving scheme).
FSCS is usually involved in the negotiation and agreement of the scheme of arrangement document and will carry out a "costs test" (with the assistance of external accountants) and (where relevant) a review of any actuarial estimation methodology (with the assistance of external actuaries). The "costs test" requires FSCS to be satisfied that the cost of compensation under the scheme of arrangement will be less than if the company was in liquidation.
FSCS's detailed participation in the scheme of arrangement is often required if, as well as providing for the payment of distributions by way of recoveries, the scheme deals with the process of compensating protected policyholders.
For most insurance estates (and all with any significant number of protected policyholders), FSCS's representatives are members of the creditor committees. This enables FSCS to monitor and contribute to the management of the estate. The creditor committees are asked to review significant decisions, for example as to dividend levels, reinsurance commutations, litigation against third parties and fees.
(ii) Third party recoveries
In addition to the recoveries from the companies, FSCS investigates the potential for third party recoveries.
For example, in connection with one estate, FSCS has set up a recoveries programme to identify potential recoveries from third parties e.g. where FSCS has protected a policyholder for employer's liability or road traffic claims, FSCS may seek to recover from any third party responsible for the injury or damage. The initial identification of recoveries cases is carried out by the estate run-off manager who seeks to collect the recovery at the first instance. If unsuccessful, cases are referred to FSCS to determine whether to abandon or pursue the claim. FSCS has instructed a firm of solicitors under a contingency fee agreement ("CFA") for these third party recoveries.
