Vol 5 (2008) - Issue 2

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Solvent Schemes of Arrangement in the Australian Reinsurance Industry

Solvent schemes – also known as 'cut off' or 'valuation' schemes – involve a court approved process by which insurers which have written contracts with reinsurers
approve the company settling all of their outstanding or future claims by one payment. They have become prevalent amongst UK insurance and reinsurance companies as a way to accelerate the payment of longtail liabilities.

For reinsurers, solvent schemes can bring an early end to run-off and the epatriation of capital much sooner than if claims are allowed to mature in the ordinary course. This typically occurs where there is both a mature book of business and a clear surplus of assets over liabilities after payment of all liabilities. For cedants, solvent schemes allow them to have their future potential claims valued and paid in full sooner than in the ordinary course.

There have only been a few instances of solvent schemes implemented in Australia. This is explicable by the relatively small amount of mature long tail reinsurance business written by Australian reinsurance companies. However, their support in Australia suggests they are considered advantageous by both cedants
and reinsurers. This article considers the nature and processes involved in solvent schemes for reinsurance companies, and the advantages and disadvantages of these schemes for reinsurers and their cedants.

The purpose of a solvent scheme of arrangement

Run-off exists where a reinsurance company has ceased to accept new insurance or reinsurance risks for the entire business or a division of the business, but claims remain unresolved and there are prospects of future claims being made. In the ordinary course of events, these claims are discharged as and when they arise, potentially over an extended period of time.

For a reinsurer that is no longer seeking new business, it is clearly undesirable to prolong the existence of such claims. Solvent schemes can accelerate the payment of these current and future claims and facilitate the
winding up of inoperative businesses or bring an end to inoperative books of business in discrete divisions.

There have been only three instances of approved solvent schemes in Australia to date – those implemented on behalf of Mercantile Mutual Insurance (Aust) Ltd
('MMIA'), NRG London Reinsurance Co Ltd ('NRG London') and NRG Victory Aust Ltd ('NRG Victory').In each instance, the reinsurers used a solvent scheme as a way of accelerating the payment of claims under existing reinsurance policies that had been made but not yet finalised, or were expected to be made in the future.

Mercantile Mutual Insurance (Aust) Ltd (MMIA)

The first solvent scheme approved in Australia was the MMIA scheme, which was approved by the Federal Court of Australia in Re Mercantile Mutual Insurance
(Aust) Ltd (2002) 43 ACSR 676.

MMIA was an insurance company that as at 2002 had discontinued writing new reinsurance business. At that time MMIA was an Australian based division of the international financial services group ING, and prior to 2002 operated in both the general insurance and reinsurance markets.

MMIA and a number of other entities in the ING group decided to streamline their business, by removing books of business that were no longer active and were in run-off. For MMIA, the scheme was designed to apply only to claimants who stemmed from the discontinued non-Australian international reinsurance business emanating mainly from the London market, and discontinued inward reinsurance business. This allowed MMIA to bring an end to the inoperative segments of their business, and redirect funds and management into existing areas of business.