The UK Government has launched a consultation on a series of proposed amendments to existing insolvency arrangements for insurance companies. The amendments include clarifications and enhancements to the court’s powers under section 377 of the Financial Services and Markets Act 2000 to order a reduction of the value of an insurer’s contracts (a ‘write-down’). The proposed amendments also introduce new provisions to help reduce business disruption and losses for insurers in distress as well as a change to the protection provided by the Financial Services Compensation Scheme.
The Government has identified areas where the insolvency arrangements for insurance companies could be made more robust.
The amendments proposed are:
- A clarification of which interested parties can apply to court to exercise the power to write down the value of an insurer’s contracts.
- Clarifying that such a write-down can extend to all unsecured creditors.
- Enabling the write-down procedure to be exercised earlier than the proved insolvency of an insurer.
- Allowing for a subsequent ‘write-up’ of written-down liabilities.
- The creation of a ‘write-down manager’ as an officer of the court.
- The introduction of a moratorium on certain contractual termination rights in both service contracts and financial contracts held with insurers upon application to the court for administration, a write-down or winding-up.
- For life insurance policies only, the introduction of a stay (suspension) on policyholder surrender rights upon application to the court for administration, a write-down or winding up.
- A change to the operation of the Financial Services Compensation Scheme in the event of a write-down under section 377 Financial Services and Markets Act 2000 to ensure protected policyholders are not financially worse off under such a write-down.
The proposals will apply to all insurers currently within scope of section 377 of the Financial Services and Markets Act 2000. However the stay on policyholder surrender rights will apply only to UK-authorised insurers with life insurance policies. The proposals will not apply to Lloyd’s.
The consultation closes on 13 August 2021.