Border crossing

Currently, Part VII of the Financial Services and Markets Act 2000 (FSMA) provides virtually the only mechanism for the transfer of insurance business across borders in Europe. Alternatives, such as the EU Directive on Cross-Border Mergers, are expected to be introduced in the not too distant future.

However, our expectation is that the popularity of the Part VII process will continue, not least because of its application to individual books of business, as well as to the whole business of a company (the Cross-Border Mergers Directive applies only to the mergers of whole companies).

Under the EU direct insurance directives, each member state must provide a mechanism by which a locally incorporated insurer can transfer a portfolio of insurance policies that it has written to a transferee located anywhere in the European Economic Area (EEA).

In the UK, the Part VII process requires the preparation of a report by an independent expert on the effect of the transfer on policyholders and an application to a court for approval of the transfer.

In essence, the benefit of the Part VII transfer mechanism is that it allows one insurer to transfer insurance policies to another without having to obtain the consent of each transferring insured (which would be required in the absence of this statutory procedure).

The Part VII process has a number of applications, including the sale of blocks of insurance business, the domiciliation of overseas branches and intragroup reorganisations.

A statutory mechanism for the transfer of insurance business has existed in UK law for some time (the predecessor to Part VII of the FSMA being s. 49 and Schedule 2C to the Insurance Companies Act 1982).

Part VII of the FSMA, however, made several developments on the previous law which have contributed significantly to the ability of insurers to transfer insurance business.

Probably the most important development was the courts' new power to approve the transfer of outwards reinsurance. Under previous law, it had been necessary to obtain counterparty consent to the transfer of each and every reinsurance contract, a significant barrier to the transfer of the underlying business.

The position of reinsurers is protected under Part VII of the FSMA by the fact that any person with an interest in a transfer is entitled to be heard in a court. Recent Part VII transfers have also demonstrated that a court has the power to split both insurance and outwards reinsurance contracts so that part of a contract effectively transfers to the transferee and part remains with the transferor.

A further development related to the notification of policyholders. Under previous law, a statement setting out the terms of the transfer and a summary of the independent experts' report had to be sent to policyholders.

Although it was possible to get a court dispensation from this requirement, in practice, applicants used to play safe and produced relatively long policyholder circulars, adding to the cost of the process.

Under Part VII of the FSMA, only a notice stating that application has been made to court for approval of the transfer must be sent to policyholders. The result has been much more concise policyholder communications, sometimes as little as one or two pages, with more detailed information available on request.

Currently, there is no European requirement for a statutory transfer mechanism for reinsurance business. This means that EEA member states can choose whether or not to provide a transfer mechanism. The UK has provided a mechanism through Part VII of the FSMA and many reinsurance business transfers have resulted.

This will change on 10 December 2007, the date by which member states are obliged to implement the Reinsurance Directive. Under this Directive, member states will be required to put in place a transfer mechanism permitting local reinsurers to transfer reinsurance business anywhere in the EEA.

Individual member states obviously do not have to wait until the end of 2007 to implement the directive. Germany, for example, is proposing to introduce a transfer mechanism for reinsurance this autumn. In the meantime, Part VII offers a transfer route, not only for UK incorporated reinsurers, but also for those incorporated in member states or outside the EEA that have a UK branch. This is because business carried on by such a branch falls within the jurisdiction of the UK court. IT

' Charles Rix is a partner in Lovells' London office

Alternative mechanisms
The European Company Statute: from October 2004, it has been possible to merge companies incorporated in different member states into a single European Company or Societas Europaea. The European Company however has not proved popular despite its ability to re-domesticate between different EEA states.

The Cross-Border Mergers Directive: this must be implemented in member states by 15 December 2007 and will require each member state to allow for the merger of a locally incorporated company and a company from another member state. The success of the Directive will obviously depend on how it is implemented by member states.

A further draft Directive under consideration would require each member state to provide a process under which a locally incorporated company could re-domesticate to another member state by transferring its registered office from one country to another.

The European Commission is currently considering whether the proposed Directive is really needed - if the Commission decides to go ahead, it is likely to be at least four years before the Directive is implemented because of the European legislative process.